Indian contract act 1872 – Essential elements

  • Offer
  • Proposal 
  • Acceptance
  • Agreement
  • Contract

We also explain about

  • Essential Elements of Contract  
  • Classifications of Contract

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Commercial or Mercantile Law

Law is Set of Rules, enacted by the Government, for administration of justice

This sentence contains 3 key words

  • Set of Rules
  • Enacted by the Government
  • Administration of Justice

So, look at the above 3 keywords, which defines the term Law .

  • What it is : Law  refers  pre-set of Rules
  • Authority : The Rules are Enacted by the Government, under Authority
  • Purpose :  The Rules are for Administration of Justice

Law is the system of rules, enacted and enforced by the government of the country, for regulating the actions of its people.  People who break the law, are taken to court of law.

Commercial Law / Mercantile Law

There are many disciplines of Law (like Civil law, Criminal law, Mercantile Law etc). We describe Mercantile Law. Mercantile Law regulates the rights and obligations arising out of commercial or mercantile transactions.

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Indian Contract Act – Applicability

In ordinary course, the term Contract means any agreement between two distinct persons. Businesses are often carried on the basis of contract. Unknowingly, we often make contracts in business dealings. Any business dealings, clearly stated, communicated, mutually agreed to and accepted by the parties, amounts to a contract, even though it may not be stipulated in writing, or in legal form. In very simple words, contract makes a ‘Give & Take’ type of relationship and confers associated rights & obligations to the parties to the contract.

X, showing his  car to Y, tells  ‘I offer to sell you this car at Rs 1 Lac on cash payment’. Y, after closely looking at the car and making some enquiries about the car from X, said, “Ok, I agree to buy the car at Rs 1 Lac. Come tomorrow with all papers and the Car, deliver the Car to me, and take a cheque for Rs 1 Lac.’ By these statements, both X and Y make a contract between them. Both of them now owe their responsibilities to perform their obligations under the contract. If any of them do not fulfill his obligations created under the contract, the aggrieved party has right to take legal recourse against  the other, and seek remedial measures under the law.

Indian Contract Act 1872

The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed by British India and is based on the principles of English Common Law. It deals with circumstances in which promises made by the parties to a contract shall be legally binding on them.

All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting parties.

Indian Contract Act of 1872, deals with the enforcement of these rights and duties on the parties.

This Act deals with laws of  matters of creation, performance, discharge and remedies (in case of breach of Contract) related to Contract

The Indian Contract Act, 1872 extends to

  • Whole of India (except Jammu & Kashmir)
  • It came into effect on 1st September, 1872 (s.1).

Contract Act does not enforce those contracts which are formed prior to 1st September, 1872.

Indian Contract Act 1872 contains 2 portions

  • General Principles : The laws relating to General Principles of Contract
  • Special Law :  Law relating to special contracts like Bailment, Pledge, Indemnity, Guarantee, Agency, etc.

Here, we will discuss about General Principle of Contract. These are applicable to all types of mercantile contracts. Special Contracts are discussed separately.

Before we discuss about Contract, there are certain pre requisites and steps of Contract. We discuss them first, before we discuss about the Term ‘Contract’, as that will help us to better understand the concept of Contract

Contract Act क्या  है ? सरल  हिंदी  में  समझे

Indian Contract Act – एक  नजर  में

Indian Contract Act – Applicability – Listen in English

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Indian Contract Act – Proposal and Agreement

Offer or Proposal is an expression of willingness by a Party, to make a business deal (contract) with the other party, asking his acceptance for the offer.

For example, X makes an offer to Y to sell his car to Y at Rs 1 lac. By his offer, X expresses his willingness to Y to sell his car  at Rs 1 Lac, seeking for Y’s acceptance of his offer. The intention of X making the offer is to make the deal with Y, if accepted by Y. Form the part of X, the offer made by him is final to close the  deal when accepted by Y.

  • Proposal : Proposal (orOffer) is the expression of willingness of a person to do (or not to do) with a view to get the assent of another party. The person making the proposal (or Offer) is called Offerer (or Proposer). The person, whom the proposal is made, is known as offeree (or Proposee)
  • Agreement :  Agreement is the result of acceptance (Promise) of the Proposal by the Offeree (or Proposee). After agreement, the Proposee (or the Offeree) becomes Acceptor (or Promisee). So, Agreement = Offer + Acceptance
  • Obligation : Obligation is the legal duty on part of the respective parties to do (or to abstain from) acts as per agreement.
  • Contract : Contract is a legal binding of that Agreement.

There must be at least 2 parties to make an agreement

Ex. X says to Y, ‘I would sell you my Maruti Car to you at Rs 1 Lac’. Y says to X, ‘OK, I agree to Buy’

In this case, the statement of X  ‘I would sell you my Maruti Car to you at Rs 1 Lac’ is the proposal (or Offer) of X. Here X is the proposer (or offerer). The statement of Y, ‘OK, I agree to Buy’ is the Acceptance (promise) of Y. Here Y is the promisee (or Acceptor).

Proposal (प्रस्ताव ), और Agreement (समझौता) क्या  है – सरल  हिंदी  में  समझे

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Proposal and Agreement – Listen in English

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Indian Contract Act – Meaning of Contract

There are many disciplines of Law (like Civil law, Criminal law, Mercantile Law etc).

Contract is an Agreement, enforceable by Law (s.2(h))

Look at the following keywords of the above statement

  • Agreement : First, there must be an Offer by one party and acceptance of the Offer by another Party, to form an agreement. So, Agreement is pre requisite of Contract. Agreement may be oral or written.
  • Enforceable by Law: A Contract is an Agreement enforceable by Law. When the Agreement formed is valid as per law, and legally enforceable, it becomes a Contract.

So, a Contract may be expressed as

Contract = Agreement (Offer + Acceptance) + Legal Enforceability

Mode of Contract : A contract, whether spoken by word or written, are equally enforceable.

Contract (अनुबंध) क्या  है – सरल  हिंदी  में  समझे

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Meaning of Contract – Listen in English

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Indian Contract Act – Essential Elements of Valid Contact

We have defined what is Contract. A contract should have following essential elements. The term essential means, all of the following elements must be present and satisfied.

We will, very briefly, explain the essential elements, for understanding. In later classes, we will explain each of these terms in more details.

Contract  की  जरूरी  शर्ते – सरल  हिंदी  में  समझे

Essential Elements of Valid Contract – Listen in English

Offer & Acceptance: There must be a clear and unambiguous offer by one Party. The offer must be clearly understood and absolutely & unconditionally accepted by the other party to create an agreement.

The offer must be clear and accepted by the Party as it is, without any change. The acceptor must not attach any condition or stipulation as part of his acceptance.

Ex. A shows his car to B and asks, I offer you to sell this car at Rs.1 Lac (This becomes offer by A to B). B says Yes, I will buy (This becomes Acceptance by B of A’s offer). Now it constitutes a Contract.

  • Acceptance cannot precede Offer :  The offer must exist at the time of  acceptance

Ex. In a company, shares were allotted to a person who had not applied for them . Subsequently. he applied for shares being unaware of the previous allotment. It was held that the allotment of shares previous to the application was invalid.

  • Implied Acceptance by Conduct. Though normally the acceptance must be clearly stated and communicated. However, sometimes, acceptance may be implied by conduct.

Ex. A  offered to sell his car for `4,00,000. B, made a bank draft of` 4 lakh in favour of A and handed over to A. A accepted it. This constitutes expressed acceptance signified by the conduct of B.

Offer (प्रस्ताव ) और Acceptance (स्वीकृति ) सरल  हिंदी  में  समझे

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Offer and Acceptance – Listen in English

Legally binding Relationship: The contract must be intended to create a legally binding relationship between the parties,  Indented for legal enforcements. So, they make a valid contract

The agreement must be legally enforceable. Social, personal, family agreements are not intended to be legally enforceable. So, such agreements do not make any contract. On the other hand, commercial agreements are intended to be created for legal enforcement. So, all commercial agreements make a valid contract.

Any agreement not intended to create legal relationship do not create a contract.

Presumption of Legal Relationship

  • Personal Agreements : In personal agreements, there is a presumption that the parties do not intend to create legal relationship.
  • Commercial Agreements : In Commercial agreements, there is a presumption that the parties intend to create legal relationship

Ex. A invites B to a Dinner. B agrees to attend. This is not legally binding agreement. So, no Contract is formed. Consequently, A cannot take any action against B if B does not attend. Similarly, B cannot take any action if A fails to make arrangement for Dinner.

Ex. An agreement having a clause like ‘….shall not be subject to legal jurisdiction in any court of law …’ is not enforceable as there is no intention to create Legal Relationship.

Legally Binding (कानूनी ) relationship (सम्बन्ध ) – सरल  हिंदी  में  समझे

Legally binding Relationship – Listen in English

Lawful Consideration: Consideration means the benefit that the parties would accrue for which they intend to make the Contract.

Consideration is the benefit exchanged between the Parties. A contract is created to gain benefits out of the performance of Contract. So, Contract without consideration is like without purpose. Such contract is not valid in the eye of Law

The contract must involve some lawful consideration (benefit etc). No consideration, No contract.

Ex. A saved B’s goods from fire without being asked by B. A cannot demand payment from B for the voluntary services not asked by B.

This is a case of voluntary service, without consideration for A. B might say to A, I have not asked you to save my goods.  It might be that B himself has set fire to the goods for some purpose. In a voluntary task, there is no offer, nor there is any consideration for the other party. In this case, there is no consideration for A. Without consideration, there is no Contract. So A cannot ask for any payment for his service.

Ex. A rendered some service to B on his request. Later B agreed to pay A for the service done. A can now recover the amount promised from B. Here the promise is made on past consideration.

In this case, B requested A to render service and then promised to pay. There is consideration for A as B agreed to pay. The agreed payment is consideration for B and the service obtained is Consideration for A.

Lawful Consideration (कानूनी  वैधता ) – सरल  हिंदी  में  समझे

Lawful Consideration – Listen in English

Capacity to Contract: Both the parties must be capable of entering the contract.

Person of sound mind and having attained Majority is capable to enter into a Contract. Agreement with person of unsound mind (Idiot), minor, insolvent, disqualified under certain law (like convicts, persons of alien enemy etc), is not valid, as such person is not competent to make Contract.

Parties to the Contract must be Major in age and must be competent to make contract as per Law.

Capacity to Contract (अनुबंध  करने  की  क्षमता  / अधिकार ) – सरल  हिंदी  में  समझे

Capacity to Contract – Listen in English

Free Consent: There must be genuine free consent of the parties. The parties must have free will to enter into contract, without anyone subjected to undue influence, coercion, fraud, misrepresentation, mistake etc.

The parties must make the contract on their free will, without any physical or mental pressure.

Ex. A, under threat to kill, is forced by B, to execute a promissory note of Rs 10,000 in B’s favour. A is not bound to pay as it was obtained against his free consent.

Free Consent (स्वेच्छा  / स्वतंत्र  सहमति) – सरल  हिंदी  में  समझे

Free Consent – Listen in English

Lawful Object: The object of the agreement must be lawful. Agreement with unlawful objects (immoral, opposed to public policy etc), are not enforceable.

The object (purpose) as well as the consideration (benefits exchanged) of the contract must be legal.

Ex. A promises to B to get unlawfully, an employment in Public Service Commission on payment of Rs.1,00,000 to him. B cannot enforce A to get the job, nor A can demand payment for securing the job to B, as the object of the contract is not lawful.

Lawful Object (वैध उद्देश्य) – सरल  हिंदी  में  समझे

Lawful Object – Listen in English

Certainty : An agreement must be certain and not vague or indefinite (s. 29).

All the terms of the contract must be clearly specified at the time of Contract

Ex. A says to B, I sell 100 kg of oil. This is not a valid contract. The object (oil) is not specified. The date of payment / delivery  is also not specified. The price is not specified. Such agreements are not enforceable.

Certainty (स्पस्ट  और  निश्चित) – सरल  हिंदी  में  समझे

Certainty – Listen in English

Statutory Rules: Statutory requirements, if any (e.g. in writing, stamped, registered etc), if any, under the respective law must be fulfilled. Though in general, oral or written contracts are equally enforceable, however, some rules require that written, adequately stamped document. In such cases, the statutory requirements must be followed to be enforceable in a court of law.

If there is any statutory rule or law in force, in relation to the nature of contract, such statutory rule or law  must be followed. Otherwise the contract may not be valid.

Ex. A says B, ‘I sell this house to you at Rs. 12 Lakhs’.  B agrees. The contract is not valid as Sale deed of immovable property requires to be written and registered as per rules. But otherwise, normally, an oral contract is valid and enforceable.

Statutory Rules (कानूनी  नियम) – सरल  हिंदी  में  समझे

Statutory Rules – Listen in English

Performance: The contract must not be impossible to perform (s. 56).

Ex: A says to B, he will pay Rs 5000 to B, if B’s son marries A’s Daughter. B’s son was dead. So, there is no contract

The objective of a contract is its performance. A contract is created to be performed. So, any contract which is impossible to perform, is not valid.

Performance of Contract (अनुबंध  का  निष्पादन) – सरल  हिंदी  में  समझे

Performance of Contract – Listen in English

Consensus : The parties should agree upon the same thing in the same sense (s.13). It means that the contracting parties must have similarity of understanding about the subject matter (referred as Consensus-ad-idem). There is a meeting of mind of similar thought.

Both the parties must clearly mean the context in the same way, without any doubt or confusion in the meaning & context in relation to the contract. Contact emanated from any basic misunderstanding is not valid, as it will be presumed that there is no valid agreement.

Ex. A had 2 cows, one black and another white.  A offered to sell a Cow to B at Rs 20000 and B accepted. A meant to sell the white cow, but B thought A offered to sell Black cow. Now there is no consensus-ad-idem. Both parties are not thinking of same things. Hence there is no contract between them.

Consensus (आपसी  सहमति) – सरल  हिंदी  में  समझे

Consensus – Listen in English

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Indian Contract Act – Classification of Contract

Contract may be classified in several ways.

Classification of Contract (अनुबंध  का श्रेणीविभाग) – सरल  हिंदी  में  समझे

Classification of Contract – Listen in English

Classification of Contract as per Formation

As per mode of Formation, Contract may be classified as follows

  • Express Contract: Contracts in which terms are specified and the respective parties expressly give their consent.  

Ex. A agrees to sell his Maruti 800 car to B at Rs.1,00,000. B agrees and pays 1,00,000 to A and asks A to deliver the car. It constitutes express Contract  as the terms are expressly stated by the Party & expressly accepted by the other Party.

  • Implied Contract:  There may not express Offer and express acceptance. But the offer and acceptance is inferred by the acts or conduct of the parties and accordingly a contract is formed between the Parties based on the acts or conduct of the parties.

Ex. A, a  mower comes to B’s lawn and starts mowing voluntarily. B watches and allows him to mow. On finishing the work, A asks B to pay mowing charges. B is obliged to pay reasonable charge, as an implied contract has been established by the conduct of A & B.

Ex. A passenger boards a public bus. The passenger is to pay the fare and the bus is to carry him to the destination. This is an Implied Contract.

Sometimes, a contract  with implied rights & obligations, without expressly agreed upon between the Parties, is called Tacit Contract. (the word Tacit means silent). A tacit contract is inferred by action or custom. For example, a passenger boarding a bus running on route.

Often there is a thin line of distinction between Implied and Tacit contract.

Implied means an obligation imposed. For example, X wrongly delivers goods to P, which were meant to be delivered to Q. Now P has an obligation to return the goods to Q though there is no contract between P & Q.

  • Quasi Contract: It is an obligation created by law regardless of agreement between the parties.

Ex. A supplies necessities to B, a lunatic. A is entitled to be reimbursed from B’s property.

Classification of Contract as per Formation – गठन  या  निर्माण  के  अनुसार अनुबंध  का श्रेणीविभाग – सरल  हिंदी  में  समझे

Classification of Contract as per Formation – Listen in English

Classification of Contract as per Performance

As per extent of execution (or state of performance), Contract may be classified as :

  • Executed Contract:. When a contract has been executed completely by both parties

Ex. A agrees to pay B Rs.200 for mowing his garden. B mows. A pays Rs.200 to B. This is an Executed contract as each party has performed their respective obligation.

  • Executory Contract:. A contract where some party to the contract has still to perform their obligations in future.

Ex. A agrees to sell B his maruti 800 car at Rs.1,00,000. This is an Executory Contract. A has to deliver the Car to B and B has to pay the price to A.

Ex. A agrees to sell Maruti 800 car to B at Rs.1 Lac and B pays the money immediately at the time of contract. This is executory contract as  A has yet to fulfill his obligation (to deliver the Car).

Classification of Contract as per Performance – निष्पादन  के  अनुसार अनुबंध  का श्रेणीविभाग – सरल  हिंदी  में  समझे

Classification of Contract as per Performance – Listen in English

Classification of Contract as per Obligation

As per obligation for performance, Contract may be classified as :

  • Unilateral Contract: . A contract in which one party has performed his obligation while the other party has yet to perform his obligation. Thus, an unilateral contract is a one-sided contract in which only one party has to perform his obligation. In such contracts, promise on one side is exchanged for an act on the other side.

Ex. A agrees to sell Maruti 800 car to B at Rs.1 Lac and B pays the money immediately at the time of contract. This is Unilateral contract as only A has to fulfill his obligation (to deliver the Car).

  • Bilateral Contract:. Contracts in which both the Parties are yet to fulfill their obligations.

Classification of Contract as per Obligation – जिम्मेदारी  के   अनुसार अनुबंध  का श्रेणीविभाग – सरल  हिंदी  में  समझे

Classification of Contract as per Obligation – Listen in English

Classification of Contract as per Legal enforceability

As per legal enforceability, Contract may be classified as :

  • Valid Contract: An agreement which satisfies all the essential legal  requirements  prescribed by law (as already explained), is called as a valid contract.
  • Void Contract:. A contract which ceases to be enforceable by law becomes void. A contract which is not enforceable at the time of formation is called Void Ab Initio. Since these cannot be enforced even at the time of formation, they cannot be called as Contract. These are called Void Agreements.

At the time of formation of contract, Void Contracts are initially valid. Subsequently, due to change in law or change in circumstances, if the contract become not enforceable, the contract becomes void.

X of India, made a contract with Y of Pakistan to buy some goods. later on, a war ensued between India and Pakistan. Now the contract become unenforceable, as trade between persons of enemy countries are not allowed.

  • Voidable Contract:  A contract which is enforceable by law at the option of one or more of the parties, but not at the option of the other, is a voidable contract.

Ex. X, under threat from Y, is forced to draw a promissory note in favour of Y. Such contract is voidable at the option of X.  X may refuse to honour the Promissory Note . A voidable contract is yet undecided. It may subsequently become valid (if accepted) or Void (if Rescinded)

  • Unenforceable Contract:  These Contracts fulfils all requirements except legal formalities. A contract which fulfils all the requirements of a contract except some technical requirement is called as an unenforceable contract.

If the legal formalities required by some other Act are not fulfilled (e.g., where an agreement is not made in writing or is not stamped or is not registered, when it is so required), the contact is said to be unenforceable contract.

When the defect is subsequently removed (i.e., legal formalities are fulfilled), the Contract  becomes enforceable and Valid

  • Illegal Contract : Illegal Contract contains objective which are forbidden by Law. So, they are void contract and cannot be enforced. Not only such illegal contract is void, but all contracts ancillary to such illegal contract also become tainted, and so become void.

Classification of Contract as per Legal Enforceability – कानूनी  वैधता  के  अनुसार अनुबंध  का श्रेणीविभाग – सरल  हिंदी  में  समझे

Classification of Contract as per Legal enforceability – Listen in English

Classification of Contract as per pre-conditions

As per pre-conditions, contract may be classified as :

  • Absolute Contract : These contracts are unconditional and not dependent on any pre condition.

Ex. X agrees to sell his Maruti car to B, at Rs 1 Lac. This is absolute contract

Absolute Contract are created to be performed

  • Contingent Contract : Contract  depending on happening of an unknown event.

Contingent Contract may not be performed.

Ex. X agrees to sell 10 MT of rice, if the ship coming from Taiwan reaches safely. The contract is valid, if the ship reaches safely, void if the ship sinks in its way.

Classification of Contract as per Certainty – निश्चितता  के  अनुसार अनुबंध  का श्रेणीविभाग – सरल  हिंदी  में  समझे

Classification of Contract as per Certainty

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Indian Contract Act – Agreements not Enforceable by Law

The following types of agreements cannot become contract, as they are not enforceable by Law

  • Social : e.g To attend the dinner of friend
  • Moral : e.g To take care of old parents
  • Domestic :  e.g Husband agreeing to give jewellery to wife
  • Religious : e.g To donate to a temple
  • Void : e.g To bring life to a dead person
  • Illegal : e.g To kill a  person

Agreements not enforceable by Law (कानूनन  अवैध   समझौता) – सरल  हिंदी  में  समझे

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Agreements not enforceable by Law – Listen in English

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Agreement vs Contract

Distinction between Agreement & Contract

All Contracts are Agreements because Agreement is pre requisite of Contract. But all Agreements are not Contracts. For example, normally agreements incorporating Social, religious & moral obligations are not contracts as there is no intention of creating a legal relationship.

Agreements not enforceable by law are not Contracts. The following are the salient distinction between Agreement & Contract:

  • Any promise with a valid consideration is an agreement, but is not a contract unless enforceable by law.
  • Agreement is a wider term than contract and covers a larger space.
  • Agreement may or may not satisfy all the essential elements of contract.
  • Agreements may or may not be enforceable by law but contracts are enforceable by law.
  • An Agreement does not give legal rights and obligations to the parties but Contracts give rights to the parties.

The law of contract is concerned only with only those agreements which contains all essentials elements of Contract, and where the parties have intention to create legal obligation. Thus the law of contract does not cover agreements such as social, political, religious and other agreements without legal intensions.

The Indian Contract Act enforces only those obligations which are agreed by the parties under a contract i.e. contractual obligation. Thus it is not concerned with obligations which arise by the statutes, torts or judgment of courts.

So, it can be said that law of contracts is not about whole of agreements nor it is about whole of obligations.

Difference between Agreement and Contract (समझौता  और  अनुबंध  का  अंतर) – सरल  हिंदी  में  समझे

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Difference between Agreement and Contract – Listen in English

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Contract under Indian Contract Act – Summary

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Basic Concepts of Contract : Multiple Choice Questions : Click here

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