The Indian Contract Act: Formation, Consent and Breach — Judicial Services

Weightage: The Indian Contract Act, 1872 is part of the Civil Law paper (roughly 20 to 30 of 100 marks in the Madhya Pradesh pattern) and a steady block of the Prelims. English cases are often cited beside Indian ones, so learn both. Sections quoted are those of the Act as it stands; confirm any amendment on the current text.

1. How contract questions are asked

A contract problem gives a short fact sheet, such as an advertisement, a minor, a threat or a breach, and asks whether there is a valid contract and what remedy follows. Answer in this order: formation, validity, performance, breach, remedy.

2. Section 10: the essentials

All agreements are contracts if made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared void. An agreement is a promise or set of promises forming consideration (Section 2(e)). A contract is an agreement enforceable by law (Section 2(h)). Learn the four related terms:

3. Offer and acceptance

• A proposal (Section 2(a)) is made when a person signifies willingness to do or abstain, to obtain assent.
• An invitation to treat, such as a display of goods or a price list, is not an offer (Pharmaceutical Society v. Boots; Harvey v. Facey).
• A general offer can be accepted by anyone who performs the conditions (Carlill v. Carbolic Smoke Ball Co., 1893).
• Acceptance must be absolute and unqualified (Section 7), and a counter-offer destroys the offer.
• Communication of acceptance is complete as against the proposer when put into course of transmission (Section 4).
• An offer can be revoked before acceptance (Section 5). A person cannot accept an offer unknown to them, as in Lalman Shukla v. Gauri Dutt (1913).

4. Consideration

Under Section 2(d), consideration is something done, abstained from, or promised at the desire of the promisor by the promisee or any other person. This differs from English law, where consideration must move from the promisee. Note the rules:

• It must be real, though adequacy is not examined (Section 25, Explanation 2).
• It may be past in Indian law, if it was done at the promisor's desire.
• A stranger to the contract can sue on it only in limited cases, because of the doctrine of privity.

Section 25 makes an agreement without consideration void, with three exceptions: a written and registered promise out of natural love and affection between near relations, a promise to compensate for something voluntarily done, and a written promise to pay a time-barred debt.

Promissory estoppel prevents a party from going back on a clear promise that the other party has acted on (Central London Property Trust v. High Trees; Motilal Padampat Sugar Mills v. State of U.P., 1979).

5. Capacity

A minor's agreement is void ab initio (Mohori Bibee v. Dharmodas Ghose, 1903, Privy Council), so it cannot be ratified and no relief by restitution is given against the minor for money advanced. A minor can still be a beneficiary of a contract. Section 11 and Section 12 govern age and soundness of mind.

6. Free consent

Consent is free when not caused by coercion, undue influence, fraud, misrepresentation or mistake (Section 14).

• Coercion (Section 15): committing or threatening an act forbidden by the Indian Penal Code (now the Bharatiya Nyaya Sanhita), or unlawful detaining of property. Voidable.
• Undue influence (Section 16): one party in a position to dominate the will of the other uses it to gain an unfair advantage.
• Fraud (Section 17): an intentional false statement, active concealment or a promise made without intention to perform.
• Misrepresentation (Section 18): an innocent false statement.
• Mistake (Sections 20 to 22): a bilateral mistake of fact about the essence of the contract makes it void, while a unilateral mistake generally does not.

A contract made by coercion, undue influence, fraud or misrepresentation is voidable at the option of the aggrieved party (Section 19 and 19A).

7. Void agreements

Section 23 makes an agreement void where its object or consideration is unlawful, fraudulent, injurious to person or property, immoral or opposed to public policy. The following are void by specific provisions:

• Section 26: agreements in restraint of marriage.
• Section 27: agreements in restraint of trade, with an exception for the sale of goodwill. Post-termination restraint on an employee is void, while restraint during employment may be valid (Niranjan Shankar Golikari v. Century Spinning, 1967).
• Section 28: agreements in restraint of legal proceedings, with exceptions such as arbitration.
• Section 29: agreements uncertain in meaning.
• Section 30: wagering agreements.

8. Performance and discharge

• Section 37: parties must perform or offer to perform.
• Sections 51 to 54: reciprocal promises.
• Section 55: where time is of the essence, failure makes the contract voidable.
• Section 56: an agreement to do an impossible act is void, and a contract that becomes impossible or unlawful becomes void, the doctrine of frustration (Satyabrata Ghose v. Mugneeram Bangur, 1954).
• Section 65: restitution on discovery that an agreement is void or becomes void.
• Section 70: obligation to pay for non-gratuitous benefit accepted.

9. Remedies: Sections 73 and 74

Section 73 gives compensation for loss that naturally arose in the usual course of things or that the parties knew was likely, as in Hadley v. Baxendale. Remote and indirect losses are not recoverable, and the injured party must mitigate the loss.

Section 74 deals with liquidated damages and penalties. The party is entitled to reasonable compensation not exceeding the amount named, whether or not actual loss is proved, but must show some legal injury (Fateh Chand v. Balkishan Dass, 1963; Kailash Nath Associates v. DDA, 2015). Indian law does not distinguish strictly between a penalty and a genuine pre-estimate.

10. Special contracts in brief

• Indemnity (Section 124): a promise to save another from loss.
• Guarantee (Sections 126 to 147): surety, principal debtor and creditor. A continuing guarantee extends to a series of transactions, and the surety is discharged by a material variation without consent.
• Bailment (Sections 148 to 171): delivery of goods for a purpose and return. The bailee must take reasonable care.
• Agency (Sections 182 to 238): a principal is bound by an agent's acts within authority.

11. A problem-answer pattern

A shop advertises that it will pay ₹1,000 to anyone who buys a heater and finds it defective within a month. A buyer claims. Answer: (1) A general offer can be accepted by performing the conditions (Carlill). (2) Acceptance by conduct; no notice needed. (3) Consideration is the purchase and use. (4) The buyer succeeds and may recover under Section 73.

Common traps judicial exams set here

• Treating a minor's agreement as voidable. It is void ab initio.
• Calling a display of goods an offer. It is an invitation to treat.
• Applying English privity rules to Indian consideration. Indian law allows consideration from any person.
• Saying only actual loss is recoverable under Section 74. Reasonable compensation is awarded up to the named sum.
• Treating a fraud contract as void. It is voidable.

Memory aids

• "Free consent, competent parties, lawful consideration, lawful object": Section 10.
• "Coercion, undue influence, fraud, misrepresentation, mistake": five vitiating factors.
• "73 loss, 74 named sum": damages.

Summary

A contract needs an offer and absolute acceptance, consideration, competent parties, free consent and a lawful object. A minor's agreement is void, and fraud, coercion, undue influence and misrepresentation make a contract voidable.

Sections 56, 73 and 74 govern frustration and damages, and the special contracts of indemnity, guarantee, bailment and agency have their own rules.

Exam protocol

• Answer in order: formation, validity, performance, breach, remedy.
• Cite the section and the case.
• State whether the result is void, voidable or valid.