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Introduction and Definition : Contract Act

The Law of Contract constitutes the most important branch of mercantile or commercial law. It affects everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation of the civilized world. The law relating to contract is governed by the Indian Contract Act, 1872 .The preamble to the Act says that it is an Act “to define and amend certain parts of the law relating to contract”. It extends to the whole of India except the State of Jammu and Kashmir.

Although some provisions such as the provision for compensation for a breach of contract are regarded as being declaratory of the common law, several provisions in the Act override the common law principles. This has been emphasised by cases which have decided that:

  1. a promisor can dispense with or remit performance without any agreement;
  2. an owner of goods can make a pledge of goods by handing over to the pledgee the document of title to the goods;
  3. whether a contract has been frustrated must be decided on the basis of the provisions of the Act and not the common law rules as to frustration;
  4. the provisions relating to restitution apply to the government;
  5. the provisions of the Act, and not the common law rules as to accord and satisfaction, apply to the discharge of a contract by a third party;
  6. money paid under a mistake of law can also be recovered;
  7. there may be rules to interpret free consent; and
  8. the common law exceptions to the doctrine that a contract is void if it restrains trade cannot be applied because only statutory exceptions are applicable.

Scheme of the Act

The scheme of the Indian Contract Act 1872 (The Contract Act) is that it enacts in ss 1-75 provisions applicable in general to all contracts, and then deals separately with particular kinds of contract such as sale, guarantee, bailment, agency and partnership and the scheme necessarily posits that all these transactions are based on agreements.Partnership and sale of goods are no longer parts of the Contract Act as separate statutes have now been enacted dealing with these two subjects.

Definition and Essentials of Contract

All agreements are not contracts but all contracts are agreements

A Contract is an agreement enforceable by law. An agreement is enforceable by law, if it is made by the free consent of the parties who are competent to contract and the agreement is made with a lawful object and is for a lawful consideration, and is not hereby expressly declared to be void. The agreement which is not enforceable by law is not called contract. Eg. An agreement to sell a radio set may be a contract, but an agreement to go to see a movie may be a mere agreement not enforceable by law.

Agreement + Enforceability at law = Contract.

Definition of Agreement

According to S. 2 (e) “Every promise and every set of promises, forming the consideration for each other, is an agreement”. In an agreement there is a promise from both sides. Eg. A promises to deliver his watch to B and in return B Promises to pay a sum of Rs. 2,000 to A. There is said to be an agreement between A and B. A promise is the result of an offer by one person and its acceptance by the other. Section 2(b) of the Act, defines “promise” as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”

S.10 What agreements are contracts?

All agreements are contracts if they are made

Between Two persons

Free consent of parties Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent is free when it is not caused by mistake, misrepresentation, undue influence, fraud or coercion. When consent is caused by any of above said elements, the contract is voidable at the option of the party whose consent was so caused.

Competent to contract

Competent to contract means the legal ability of a person to enter into a valid contract. Every person is competent to contract who

  1. is of the age of majority according to the law to which he is subject and
  2. is of sound mind and
  3. is not otherwise disqualified from contracting by any law to which he is subject.

Lawful consideration and lawful object

An agreement where the object or the consideration is unlawful is void. Object or consideration is unlawful if it is forbidden by law, it defeats the provisions of law; or is fraudulent, or involves injury to the person or property of another; or is immoral; or is opposed to public policy. Besides the above said agreements, certain agreements have been expressly declared to be void by the Contract Act such as – wagering agreements, agreement with uncertain meaning, agreements where consideration is unlawful in part etc.

Are not hereby expressly declared to be void

The agreement entered into must not be which the law declares to be either illegal or void. An illegal agreement is an agreement expressly or impliedly prohibited by law. A void agreement is one without any legal effects.

Different types of agreements

Void Agreements

An agreement not enforceable by law is said to be void. For eg. an agreement by a minor has been held to be void. Section 24 to 30 of the Indian Contract Act, 1872, makes specific mention of agreements which are void. Those agreements include an agreement without consideration, an agreement, in restraint of marriage, and an agreement in restraint of trade.

Voidable Contracts

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, is a voidable contract. Thus, a voidable contract is one which could be avoided by one of the parties to the contract at his option. For eg, when the consent of the party to a contract has been obtained by coercion, undue influence, fraud and misrepresentation, the contract is voidable at the option of the party whose consent has been so obtained.

Difference between Void Agreement and Voidable Contract

  1. A voidable contract is voidable at the option of one of the parties thereto. But a void agreement cannot be enforced by any one of the parties thereto.
  2. The defect in the case of voidable contract is curable and may be condoned, whereas a void agreement is void ab initio, and its defects are not curable.
  3. A voidable contract does not become void unless the party at whose option it is voidable repudiates it. But a void agreement is void ab initio.
  4. A voidable contract implies a contract, in which the consent of one of the parties to contract is not free, whereas a void agreement denotes an agreement, which does not fulfill the essentials of a valid contract.
  5. In case of a voidable contract, a person is entitled to compensation for loss or damages suffered by him on account of the non-performance of contract. But in a void agreement, as it is unenforceable at law there does not arise any question of compensation due to the non- performance of the agreement.

Unlawful Agreements

There are certain agreements which are “unlawful” in the sense that the law forbid the very act, the doing of which is contemplated by the agreement. For eg, an agreement to commit a crime or a tort. To distinguish an unlawful agreement from other void agreement, it is stated that while in case of void agreement a collateral transaction may not also be avoid, but in case of an unlawful agreement, the collateral transaction is held to be void. For eg, A gives money to B to enable him to pay his wagering debt. The wager is the main transaction which is void, but loan given by A is subsidiary to it, which is not void and A can recover his money from B. On the other hand, where A gives loan to B to smuggle goods. Smuggling is the main transaction and loan is subsidiary to it. But, loan transaction is also said to be tainted with the same illegality and A will not be able to recover his money.

Important Points

  • Prior to this English law of contract was followed in India.
  • It has XI chapter.
  • Law of contract creates jus in personem and not in jus in rem.
  • The Indian Contract Act consists of the following two parts:
    • General principals of the Law of Contract.
    • Special kinds of contracts.
  • The general principals of the Law of Contract are contained in Sections 1 to 75 of the Indian Contract Act. These principles apply to all kinds of contracts irrespective of their nature.
  • Special contracts are contained in Sections 124 to 238 of the Indian Contract Act. These special contracts are Indemnity, Guarantee, Bailment, pledge and Agency.

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