Indian Contract Act 1872 – Meaning | Elements | Types

 

The Indian Contract Act, 1872, is a fundamental law in India that regulates contracts and agreements. It defines a contract as an agreement enforceable by law, requiring elements like offer, acceptance, consideration, and the intention to create legal obligations. The Act outlines essential components for a valid contract, including free consent, lawful consideration, competent parties, and legal purpose. It also addresses various types of contracts, such as void, voidable, and contingent contracts, and provides guidelines on the performance, breach, and termination of contracts, ensuring clarity and fairness in contractual relationships.

Table of Contents

1. History of Law of Contract in India
2. Law of Contracts
3. Definition of Contract
4. Essential Elements of a Valid Contract
5. Kinds of Contracts

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1. History of Law of Contract in India

The evolution of contract law in India before the enactment of the Indian Contract Act, 1872, can be traced through various historical periods.

1.1 Ancient and Medieval Times (Hindu Law)

There was no dedicated law pertaining specifically to contracts. Hindu law sources such as Vedas, Dharama shastras, Smritis, and Shrutis were referred to, providing descriptions similar to contractual principles. Contracts during the Mauryan period were bilateral transactions based on free consent.

Hindu law differed significantly from English law. It was derived from customs and interpretations of Vedas by Smritikaras. Certain individuals, such as minors, intoxicated persons, old individuals, or handicapped individuals, were considered unable to enter into a valid contract. There were also age classifications for contractual competence. According to Narada Smriti, someone of age upto 8 years is considered as an infant. Age from 8 years to 16 years is considered as boyhood and after 16 years the person is competent to enter into a contract.

1.2 Mughal Rule

Contracts were governed by the Mohammedan Law of Contract. The Arabic term ‘Aqd’ denoted a contract, ‘Ijab’ for proposal, and ‘Qabul’ for acceptance. Contract formation under Islamic law required express consent without formalities.

1.3 British Period

During the British period, English law was applied in the Presidency Towns  (Madras, Bombay, and Calcutta) under the Charter of 1726. In contracts involving individuals of different religions, the law of the defendant (i.e.; accused) was applicable. Outside the presidency towns, matters were resolved based on justice, equity, and good conscience.

1.4 Transition to Indian Contract Act, 1872

The Indian Contract Act replaced the application of English law in India. It has been implemented to provide a comprehensive and uniform framework for contractual relations.

This historical journey highlights the diverse influences on Indian contract law and sets the stage for the codification and consolidation of principles under the Indian Contract Act in 1872.

2. Law of Contracts

The Law of Contract, governed by the Indian Contract Act, 1872, is a fundamental aspect of mercantile law, significantly impacting trade, commerce, and industry. Established on April 25, 1872, and enforced on September 1, 1872, the Act aims to define and amend aspects of contract law. Indian Contract Act applies to the entire India, including Jammu and Kashmir.

2.1 Scheme of the Act

Indian Contract Act may be divided into two parts:

(a) General Principles of the law of contract (Secs. 1–75).

(b) Specific kinds of contracts, viz:

(i) Contracts of Indemnity and Guarantee (Secs. 124–147).

(ii) Contracts of Bailment and Pledge (Secs. 148–181).

(iii) Contracts of Agency (Secs. 182–238).

Sections 76–123 relating to Contracts of Sale of Goods were repealed in 1930 and a separate Act called the Sale of Goods Act was enacted. Similarly, sections 239–266 relating to partnership were repealed in 1932 when the Indian Partnership Act was passed.

2.2 Is It Different from Other Branches of Law?

In the dynamic business landscape, contracts play a crucial role in defining rights and duties. Unlike other branches of law, contract law does not impose numerous rights and duties that the law enforces; instead, it establishes limiting principles within which parties can create their own rights and duties. The Indian Contract Act, 1872, codifies legal principles governing contracts, identifying the elements of a valid contract and addressing various contractual relationships. Thus we can conclude that it is different from other branches of law.

This unit focuses on some basic elements of the contract.

3. Definition of Contract

Definition – [Sec. 2(h)] According to Section 2(h) of the Indian Contract Act:

“An Agreement enforceable by law is a contract”.

Thus Indian Contract Act consists of two elements.

(a) An agreement

(b) Legal obligation i.e. a duty enforceable by law.

Agreement – An agreement is defined in Section 2(e)

“Every promise and every set of promises, forming the consideration for each other is an agreement.”

What is Promise? Promise is defined as an accepted proposal, for section 2(b) says,

“A proposal, when, accepted becomes promise”.

Thus an agreement is an accepted proposal

OR

AGREEMENT = OFFER + ACCEPTANCE

The process of definition comes down to this:

An agreement comes into existence when one party makes a proposal or offer to the other party and that other party gives his acceptance thereto. Thus there should be exchange of promises. There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself. There should also be consensus-ad-idem i.e. both the parties must agree on the same thing in the same sense.

Legal Obligation – For an agreement to become a contract, it must give rise to a legal obligation i.e., a legal duty which is enforceable by law. The parties must have the intention to impose a duty on the promisor to fulfil the promise and bestow a right on the promisee to claim its fulfilment. This obligation must not be merely moral alone; it must be legal.

Illustration – A invites B to join his marriage party and B promises to do so. But B eventually fails to keep up his promise. In this case, there is a full-fledged agreement between A and B. But behind this agreement there is no intention on the part of the parties to impose a duty on the promisor and bestow a right on the promisee to claim the fulfilment of the contract. Therefore, the agreement is not enforceable by law.

3.1 All Contracts Are Agreements But All Agreements Are Not Contracts

Agreement is the genus of which contract is the species. An agreement is a wider term than a contract. It may be a legal agreement (i.e. enforceable by law) or a social agreement (i.e. not enforceable by law). Agreements relating to social matters like an agreement to go to movie together or a visit to a hotel do not create legal obligations between the parties and hence are not contracts. Only those agreements grow into contracts, which create legal obligations.

Distinction Between Agreement and Contract

Sr. No.	Agreement	Contract
1.	Agreement is a promise. Offer and acceptance together constitute an agreement.	Contract is an agreement enforceable by law.
2.	Agreement is a wider term. It is a genus. It includes legal as well as social agreement.	Contract is a specie of an agreement. It is a narrower term.
3.	Agreement may not create any legal obligation.	A contract necessarily creates a legal obligation.
4.	All agreements are not contracts.	All contracts are agreements.

3.2 Type of Legal Obligations Dealt With the Law of Contracts

Obligations that Arise from an Agreement

Obligations may arise from different sources. The law of contract deals only with such legal obligations which arise from agreements. Obligations which are not contractual in nature are outside the purview of the law contract. For example, obligation to observe traffic rules does not fall within the scope of the Contract Act. The other sources of obligations are – obligations under the trust law or the law of tort or the fundamental duties under the Constitution etc. They are outside the purview of the Contract law since they are not voluntarily created through an agreement.

3.3 Type of Rights Created by the Law of Contract

Contract Creates Right in Personam

“The law of contract creates ‘right in personam’ as against ‘right in rem’.”

Right in personam means a right available against a particular person.

Illustration – A buys TV from B for Rs. 20,000. B has a right to recover this amount. This right can be exercised only by B and only against A. This right of B is right in personam.

Right in Rem

Right in rem mean a right available against the whole world. If A is owner of house property he has the right of peaceful possession and enjoyment of the property against the whole world.

4. Essential Elements of a Valid Contract

4.1 General Rule (Sec. 10)

“All agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”.

4.2 Essential Elements or Essentials of a Valid Contract (Rem-enforceable Agreement)

• An offer or proposal by one party and an acceptance of that offer by another party resulting in an agreement.
• An intention to create legal relations or an intent to have legal consequence.
• Free consent between the parties.
• The parties to contract are legally capable of contracting.
• The object of the contract is legal and is not opposed to public policy.
• The agreement is supported by consideration.
• The agreement must not have been expressly declared to be void under the Act.
• The terms of the contract are certain.
• The agreement is capable of being performed, i.e. it is not impossible to perform the contract.
• Where agreement is required to be in writing under any law it must be in writing; and where both writing and registration are required by some Act or Law, the agreement must be in writing and registered.

1. Parties to the Contract

A contract necessitates the involvement of at least two distinct parties—one extending the offer and the other acknowledging it. Such an agreement can be entered into by individuals or entities with legal standing, such as corporations or universities etc. It is crucial to emphasise that the identities of the contracting parties must be identifiable.

2. Intention to Create Legal Relations

There must be an intention among the parties that the agreements should be attended by legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate a contract. An agreement to dine at a friend’s house is not an agreement intended to create legal relations and therefore is not a contract.

Illustration – Mr & Mrs Balfour who were living in Ceylon went to England. Mrs Balfour fell ill. Mr Balfour had to come back to Ceylon to join his duties. However he promised to pay 30 pounds per month to his wife. On his failure to pay, Mrs Balfour sued him for the recovery of the amount. It was held that it was a domestic agreement and the husband never intended to create any legal relations out of it. (Balfour v. Balfour, 1919, 2 KB 571.)

In commercial agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends to create legal relationship, and hence is a contract, provided other requisites of a valid contract are present.

3. Writing and Registration

According to the Indian Contract Act, a contract may be oral or in writing. An oral contract is as much enforceable as a written contract. However, if any law prescribes that contracts should be in writing/registered then, this formality of writing and registration should be followed.

For example, in certain special cases the Indian Contract Act itself prescribes that the contract should be in writing or/and registered. Section 25 of the Contract Act requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered.

Similarly, certain other Acts also require writing or/and registration to make the agreement enforceable by law which must be complied with:

(i) An agreement for a sale of immovable property must be in writing and registered under the Transfer of Property Act, 1882 before they can be legally enforced.

(ii) Contract with the Government should be in writing. Article 299, Constitution of India.

4. Certainty

The terms of the contract should be certain and definite and not vague. Section 29 says

“Agreements, the meaning of which is not certain or capable of being made certain are void.”

Illustration – A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is not enforceable because it is vague and uncertain.

5. Possibility of Performance

Yet another essential feature of a valid contract is that it must be capable of performance. Section 56 lays down that

“An agreement to do an act impossible in itself is void.”

If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.

Illustration – A agrees with B to discover treasure by magic. The agreement is void due to impossibility.

6. Free Consent

The consent of the parties must be free i.e. the parties should enter into contract voluntarily and through free will. Section 14 lays down that consent is not free if it is caused by:

(a) coercion

(b) undue influence

(c) fraud

(d) misrepresentation

(e) mistake

7. Capacity of Parties

The parties to an agreement must be competent to contract; otherwise it cannot be enforced by a court of law. Every person is competent to contract who is:

(a) of the age of majority,

(b) of sound mind and

(c) is not disqualified from contracting by any law. (Sec. 11)

8. Lawful Consideration

Consideration means ‘something in return.’ An agreement is enforceable when each of the parties to it gives something and gets something in return.

Illustration – If A agrees to sell his house to B for Rs. 5 Lac, the consideration for A’s promise is Rs. 5 Lac and B’s promise is a house.

Thus consideration is the price paid by one party for the promise of the other. The payment of money is a common form of consideration. But it may also consist of an act, forbearance, and a promise to do or not to do something. Consideration must be real, valuable and lawful.

9. Lawful Object

The object of the agreement should be lawful. It should be authorised or sanctioned by law. The object of an agreement is unlawful if it is forbidden by law or is fraudulent or is immoral or opposed to public policy.

Illustration – “Supari” contract for unlawful recovery of money or a smuggling agreement is unlawful hence unenforceable.

10. Agreement Not Expressly Declared Void

The Indian Contract Act, 1872, has expressly declared certain agreements to be not enforceable at law, e.g. agreements in restraint of marriage, agreements in restraint of trade, wagering agreements etc. The parties to the agreement should ensure that their agreement do not fall in the category of these void agreements, otherwise the agreement will not be enforceable even if all the other essentials of valid contract are present.

5. Kinds of Contracts

On the Basis of Enforceability or Validity a Contract

(1) Valid Contracts

(2) Void Agreement

(3) Voidable Contract

(4) Void Contract

(5) Unenforceable Contract

(6) Illegal or Unlawful Agreement

On the Basis of Formation a Contract

(1) Express Contract

(2) Implied Contract

(3) Quasi-Contract

(4) E.com. Contract

On the basis of performance

(1) Executed Contract

(2) Executory Contract

(a) Unilateral Contract

(b) Bilateral Contracts

5.1 On the Basis of Validity

On the basis of enforceability or validity a contract can be classified under following:

5.1.1 Valid Contract

A valid contract is one which contains all the essential elements of a valid contract. It is an agreement which is binding and enforceable by law.

5.1.2 Void Agreement

“An agreement not enforceable by law is said to be void [Sec. 2(g)].

Features

• A void agreement does not give rise to any legal consequences. It is void ab-initio, i.e., from the very beginning. If any of the essentials of a valid contract, other than free consent, is missing, the agreement is void, i.e., it cannot be enforced at courts of law. For example, an agreement with a minor or an agreement without consideration.
• Certain agreements have been expressly declared as void by the Indian Contracts Act, in sections 11, 20, 23 to 30 and section 56.
• There cannot be restitution of benefit under a void agreement and if something has been paid it cannot be recovered. However, when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. (Sec. 65).

Illustration – A pays B Rs. 50,000 in consideration of B’s promising to sell his car to him. The car is destroyed in an accident at the time of the promise though neither party was aware of the fact. In this case the agreement is discovered to be void and B must repay A Rs. 50,000. It should be noted that when the agreement is known to be void, no restitution is allowed. Thus if A pays Rs. 10,000 to B to assault C, the money cannot be recovered.

5.1.3 Voidable Contract

An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” [Sec. 2(i)]

Features

• A voidable contract is enforceable at the option of one party.

Illustration – If X is forced to sign a contract the contract is voidable at the option of X. X may either rescind (avoid or repudiate) the contract or elect to be bound by it.

• A voidable contract continues to be good until it is avoided by the party entitled to do so.
• The aggrieved party must exercise his option of rejecting the contract

1. 1. within a reasonable time and
   2. before the rights of third parties intervene, otherwise the contract cannot be repudiated.

• The party rescinding avoidable contract shall if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received (Sec. 64)

The various circumstances in which a contract is voidable are depicted by the following chart:

Voidable Contract – Enforceable By One Party Loan

Voidable in Inception	Voidable By Subsequent Default
Consent caused by coercion, undue influence, fraud, misrepresentation (Secs. 14, 19A)	Where offer of performance is not accepted (Sec. 38) When one party prevents performance of reciprocal promise. (Sec. 53) When a party fails to perform at the time fixed, if time is essence of the contract (Sec. 55)

5.1.4 Void Contract

“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. [Section 2(j).]

Features

• The term void contract appears to be contradictory, but it is a nice way of describing a situation where a contract is valid in the beginning but becomes void subsequently. Note that a void contract becomes void. It is never void ab-initio.
• A void contract is one, which was valid when it was made but becomes void later on.

Illustration – A agrees to supply liquor to B but before he gives delivery, the Government declares total prohibition. The contract becomes void. A void contract is not void from its inception and its valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid.

• Restitution of Benefit Allowed When Contract Becomes Void – According to Section 65 when a contract becomes void, the party who received any advantage under such agreement, should restore it to the party from whom he received it.

Illustration – A takes an advance of Rs. 1,000 for singing at a concert for B. A is too ill to sing. A must refund to B the Rs. 1,000 paid in advance.

The reasons which transform a valid contract into a void contract as given in the Contract Act are as follows:

Supervening Impossibility – (Section 56) A Contract becomes void if it becomes impossible to perform, after it is made. A and B contracted to marry each other. Before the time fixed for the marriage A goes mad. In this case the contract becomes void due to subsequent impossibility.

Subsequent Illegality – (Section 56) A contract becomes void if it becomes illegal after it is made. A agrees to sell B 100 bags of wheat at Rs. 550 per bag. Before delivery, the government bans private trading in wheat. The contract becomes void due to subsequent illegality.

Repudiation of a Voidable Contract – When a voidable contract is rescinded, the contract becomes void.

Subsequent Impossibility of Contingent Event (Sec. 32). A contingent contract to do or not to do something on the happening of an uncertain future event, becomes void, when the event becomes impossible.

The following are the points of differences between various types of contracts discussed above:

Void Agreement	Void Contract
It is void ab-initio	It is not void ab-initio. Initially a valid contract comes into existence but it becomes void and unenforceable later on due to reasons like impossibility of performance, illegality etc.
No restitution of benefit is allowed	When a contract becomes void, restitution of benefit is allowed under section 65.

The legal effect of void agreements and void contract is the same. Both cannot be enforced in a Court of Law. Note that a contract cannot be void ab-initio and only an agreement can be void ab-initio.

Void Agreement	Voidable Contract
It is void ab-initio	It is not void ab-initio. It becomes void and unenforceable only when the aggrieved party chooses to void it.
No contract comes into existence	Contract comes into existence and remains valid unless it is avoided.
No restitution of benefit is allowed	The party rescinding the contract shall restore the benefit, if he has received any, to the other party under section 64.
No question of compensation since a void agreement has no legal effect.	If a party rightfully avoids the contract it can claim compensation from other party for loss suffered by him on account of non-performance of contract.
A third party cannot acquire any title to the goods under a void agreement.	A third party acquires a valid title to the goods obtained under a voidable contract if it has been obtained in good faith for a value and before the contract is avoided.
A void contract is one which is valid when it is made but becomes void later on A void contract cannot be enforced A contract becomes void due to certain reasons like impossibility of performance, subsequent illegality etc.	A voidable contract is one which is enforceable by law at the option of one of the parties. A voidable contract can be enforced if the aggrieved party elects to carry out the contract. A contract becomes voidable, if consent is caused by coercion, undue influence, fraud and misrepresentation or failure to perform at the time fixed if time is essence of the contract.
Compensation is not payable except only when party knows beforehand about the impossibility of the performance	In a voidable contract the aggrieved party can claim damages.

5.1.5 Unenforceable Contract

An unenforceable contract is one, which suffers from some technical defect. It is valid in itself, but is not capable of being enforced in a court of law because of non-observance of some technical formalities such as insufficiency of stamp, want of registration, attestation etc. In some cases such contracts can be enforced if their technical defects are removed, for example, the defect of under-stamping can be removed by affixing the right value of stamps.

5.1.6 Illegal or Unlawful Agreement

An illegal agreement is one, which is contrary to law. According to section 23 an agreement is illegal and void if its object or consideration:

(a) is forbidden by law, or

(b) is of such a nature that, if permitted, it would defeat the provisions at any law, or

(c) is fraudulent, or

(d) involves or implies injury to the person or property of another, or

(e) the court regards it as immoral or opposed to public policy (Sec. 23).

An illegal agreement may attract punishment and prosecution under criminal law. An agreement which is collateral to an illegal agreement also becomes illegal. It is like a contagious disease and is fatal not only to the main contract but to collateral transactions as well.

Difference Between Void & Illegal Agreements

Scope – An illegal agreement is narrower in scope than a void agreement. All illegal agreements are void but all void agreements are not necessarily illegal. E.g. An agreement with a minor is void, but not illegal.

Collateral Transactions – When an agreement is illegal, other agreements which are incidental or collateral to it are also tainted with illegality, hence void.

Illustration – India and Pakistan are playing test match in Nagpur. X of Nagpur, agrees to pay Rs. 1 lac to Y, if India wins. The match is won by India and in order to pay Y, X borrows Rs. 1 lac from Z, who is aware of the purpose.

The agreement between X and Y is void being wagering (betting) agreement and it is also illegal in Maharashtra. The agreement between X and Z being collateral agreement is also void because the main agreement between X and Y is illegal.

Restitution – In the case of illegal agreement, no right/remedy is available to either party. Hence money paid under an illegal agreement cannot be recovered. Under section 65 if an agreement is discovered to be void any person who has received advantage/benefit must restore it or make compensation for it.