The Indian Contract Act 1872, Act No. 9 of 1872, governs the formation of agreements and contracts in India. While there are other laws governing specific types of contracts, like partnerships and contracts related to the sale of goods, the fundamental principles contained in the Indian Contract Act apply across.
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What is a contract?
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Contract (sections 2(h), 10)
A contract is an agreement that is enforceable by law (therefore, not all agreements are contracts, while all contracts are agreements). An agreement is enforceable by law when
- it is made by the free consent of parties
- consent (section 13) - when the parties agree upon the same thing in the same sense
- free consent (section 14) - when the consent is not caused by
- coercion (section 15) - committing or threatening to commit any act forbidden by the Indian Penal Code 1860, or unlawfully detaining or threatening to detain any property, with the intention of causing a person to enter into the agreement
- undue influence (section 16) - using the existing relation with the other party to dominate their will and thereby obtain an unfair advantage (for example, a parent's influence over their child, or a doctor's influence over their patient)
- fraud (section 17) - lying, concealing any fact, promising without intending to perform the promise, or committing any other act with the intent to deceive the other party to enter into the agreement
- misrepresentation (section 18) - causing another person to believe any information that is not true, without an intention to defraud (that is, when the person making the assertion also believes that the information is true)
- by parties who are competent to contract (sections 11, 12) - the parties must be of the age of majority, of sound mind (capable of understanding the contract and forming a rational judgement as to its effect), and not disqualified by law from contracting
- for a lawful consideration (section 23) - the consideration (or object) is lawful unless it
- is forbidden by law
- if permitted, would defeat any provision of law
- is fraudulent
- involves injury to another person or their property
- is regarded as immoral or opposed to public policy by a court
- with a lawful object (section 23) - besides the consideration exchanged by the parties, the ultimate objective of the contract should also be lawful - for example, while purchasing a knife for money would be lawful consideration, if the seller knows that the buyer intends to use the knife to kill someone, the object would not be lawful
- and is not expressly declared to be void
If any of these criteria are not met, the agreement may be either void or voidable.
Agreement (section 2(e))
- Every set of reciprocal promises
Reciprocal promises (section 2(f))
- Promises that form the consideration or part of the consideration for each other
Consideration (section 2(d))
- What the promisee, in exchange for the promise
- has done or abstained from doing
- does or abstains from doing
- promises to do or abstains from doing
Acceptance, Promise, and Proposal (sections 2(a), 2(b), 7, 8, 9)
- When one person (the "promisor") signifies their willingness to do or abstain from doing something, with a view to obtain the assent of another (the "promisee") to such act or abstinence, the promisor is said to have made a proposal. When the promisee signifies their assent to the proposal (either expressly, in words, or implicitly), it is called acceptance, and the proposal becomes a promise.
- The acceptance
- must be absolute and unqualified
- must be expressed in a reasonable manner or as specified by the promisor
- may be implied when the promisee performs the conditions mentioned by the promisor
For example,
- If one day, I decide that I want to buy an ice-cream. I can go to an ice-cream vendor and tell her that I want one scoop of choco-chip ice-cream.
- The ice-cream vendor then informs me that one scoop of that flavour of ice-cream costs 10 rupees.
- I tell the vendor that I will pay her 10 rupees for the scoop of choco-chip ice-cream --> This is an offer or proposal.
- I may instead have already given her the 10 rupees before (...has done or abstained from doing...) or may tell her that I will give it to her tomorrow (...promises to do or abstain from doing...).
- The vendor then accepts my proposal, and in turn, agrees to give me one scoop of the ice-cream in return for the 10 rupees.
- On her acceptance of my proposal, my proposal becomes a promise.
- At this point, because I have promised her 10 rupees, and she has promised me one scoop of choco-chip ice-cream, there are said to be a set of reciprocal promises.
- This set of reciprocal promises forms an agreement between the ice-cream vendor and me.
- Because there is a valid agreement, the promises are each referred to as the respective party's consideration for the agreement.
- Assuming the consent is free, and subject to the other provisions of the Contract Act, this agreement is a legally binding contract and both the ice-cream vendor and I are bound to perform our respective promises.
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