Indian Contract Act 1872, MBA, BBA, Notes

 

Competent Party:

Every person is legally competent to contract if he fulfils the following three conditions:

He has attained the age of majority

He is of sound mind

He is not disqualified from contracting by any other law to which he is subject.

Minor :

Any person, who has not attained the age of majority prescribed by law, is known as minor. Section 3 of the Indian Majority Act prescribes the age limit for majority and says a minor is a person who has not completed eighteen years of age. But the same Act also mentions that in the following two cases a person attains majority only after he completes his age of twenty one years:

Where a Court has appointed guardian of a minor’s person or property or both (under the Guardians and Wards Act, 1890)

Where the minor’s property has been placed under the superintendence of a Court of wards

Person of unsound mind

A person is said to be of sound mind for the purpose of making a contract (a) if he is capable of understanding the contract at the time of making it, and (b) if he is capable of making a rational judgement as to the effect upon his interests.

Types of Persons of Unsound Mind and their Contracts:

1. Idiot
2. Lunatic
3. Delirious persons
4. Drunken or intoxicated persons
5. Hypnotised persons
6. Mental decay

Person disqualified by other laws

There are certain persons who are disqualified from contracting by the other laws of our country. They are as under:

1. Alien enemy
2. Foreign sovereigns, diplomatic staff etc.
3. Corporations and companies
4. Insolvents
5. Convicts

Section 2(d) of the Indian Contract act, 1872 defines Consideration as follows:

When, at the desire of the promisor ,the promisee or any other person has done or abstained from doing, or does or abstains from doing ,or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

Essential elements of a valid consideration

It must move at the desire of the promisor: Consideration must have been done at the desire or request of the promisor & not at the desire of a third Party or without the desire of the promisor 

It may move from the promise or any other person: An act constituting consideration may be done by the promise himself or any other person. Thus, it is immaterial who furnishes the consideration & therefore may move from the promisee or any other person. 

It must be of some value: The consideration need not be adequate to the promise but it must be of some value in the eye of the law.

It must be real & not illusory: A promise to put life into the B’s dead wife & B promises to pay Rs 10,000. This agreement is void because consideration is physically impossible to perform.

Must be Something other than the promisor Existing obligation: Consideration must be something which the promisor is not already bound to do because a promise to do what a promisor is already bound to do adds nothing to the existing obligation

It must not be illegal, immoral or opposed to public policy.

Meaning of Consent

Two or more persons are said to consent when they agree upon the same thing in the same sense at the same time. Sec. 14 describes the cases when the consent is not free. It lies down that consent is not free if it is caused by coercion, undue influence, fraud, misrepresentation, etc. if the consent is not free; the agreement is avoidable at the option of the party whose consent was not free.

COERCION: Coercion simply means forcing a person to enter in to a contract. Sec. 15 defines coercion as, “Committing or threatening to commit, any act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever with the intention of causing any person to enter into an agreement”.

The essential elements of coercion are

1. Committing or threatening to commit any act forbidden by Indian Penal Code.
2. Unlawful detaining or threatening to detain any property.
3. The act of coercion may be directed at any person and not necessarily at the other party to the agreement.
4. The act of coercion must be done with the object of inducing or compelling any person to enter into an agreement.

UNDUE INFLUENCE: It is kind of moral coercion. Sec. 16(1) defines undue influence as, “A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of other and uses that position to obtain an unfair advantage over the other”.

1. Where he holds a real or apparent authority over the other e.g., in the relationship between master and servant
2. Where he stands in fiduciary relation to the other It implies a relationship of mutual trust and confidence
3. Where a contract is made with a person whose mental capacity is affected by reason of age, illness, or mental or bodily distress
4. Any innocent or unintentional false statement or assertion of fact made by one party to the other during the course of negotiation of a contract is called a misrepresentation.

MISREPRESENTATION: As per Sec. 18, misrepresentation is a wrong statement of fact made innocently, i.e., without any intention to deceive the other party. It may be caused.

1. By positive statement.
2. By breach of duty.
3. By mistake regarding the subject matter of the agreement.

Essential of misrepresentation

1. There must be a representation or omission of a material fact.
2. The representation or omission of duty must be made with a view to inducing the other party to enter into contract.
3. The representation or omission of duty must have induced the party to enter into contract.
4. The representation must be wrong but the party making the representation should not know that it is wrong.

FRAUD: Fraud is the intentional misrepresentation or concealment of material facts of an agreement by a party to or by his agent with an intention to deceive and induce the other party to enter into an agreement.Sec. 17 defines fraud as, any of the following acts committed by a party to a contract (or with his convenience or by his agent) with intention to deceive another party thereto (or his agent) or to induce him to enter into the contract.

1. The suggestion that a fact is true when it is not true by a person who does not believe it be true.
2. The active concealment of the fact by a person having knowledge or belief of the fact.
3. A promise made without any intention to perform it.
4. Any other act fitted to deceive.
5. Any such act or omission as the law specifically declares to be fraudulent.

Proposal or offer

1. The entire process of entering into a contract begins with the proposal or an offer made by one party to another. The proposal must be accepted to enter into an agreement.
2. According to the Indian Contract Act 1872, proposal is defined in Section 2(a) as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.”

Features of a valid offer

The person making the offer/proposal is referred to as the “promisor” or the “offeror”. And the person who accepts an offer is referred to as “promisee” or the “acceptor”.

1. The offeror must express his willingness to do or abstain from doing an act. Only willingness is not adequate. Or just an urge to do something or not to do anything will not be an offer.
2. An offer can either be positive or negative. It can be a promise to do some act, and can also be a promise to abstain from doing any act/service. Both are valid offers.

The element of a valid offer

Here are some essentials which make the offer valid

1. There must be two parties 
2. There have to be at least two parties a person making the proposal and the other person agreeing to it. All the persons are included i.e., Legal persons as well as artificial persons.
3. Every proposal must be communicated
4. Communication of the proposal is mandatory. 
5. It must create Legal Relations
6. It must be certain and definite
7. The terms of the offer must be certain and clear in order to create a valid contract, it must not be ambiguous.
8. It may be specific or general

 The specific offer is an offer that is accepted by any specific or particular person or by any group to whom it is made. Whereas, the general offers are accepted by any person.

Classification of offer

Some types of offers can be based on the design, timing, purpose, etc. Let us look at the offer’s classification.

Express Offer 

An offer may be made by express words, spoken or written. This is known as Express offer. Example When ‘A’ says to ‘B’, “will you purchase my car for Rs 2, 00,000”?

Implied Offer  

An offer may be derived from the actions or circumstances of the parties.This are known as implied offer. Example There is an implied offer by the transport company to carry passengers for a certain fare when a transport company operates a bus on a particular route.

General Offer

A general offer is not made by any specified party. It is one that is made by the public at large. Any member of the public can, therefore, accept the offer and have the right to the rewards/consideration.

Example

‘A’ advertises in the newspaper that whosoever finds his missing son would be rewarded with 2 lakh. ‘B’ reads it and after finding the boy, he calls ‘A’ to inform about his missing son. Now ‘A’ is entitled to pay 2 lakh to ‘B’ for his reward.

 Specific Offer

It is the offer made to a specific person or group of persons and can be accepted by the same, not anyone else. Example ‘An’ offers to sell his house to ‘B’. Thus, a specific offer is made to a specific person, and only ‘B’ can accept the offer.

Acceptance

The Indian Contract Act 1872 defines acceptance in Section 2 (b) as “When the person to whom the proposal is made signifies his assent thereto, the offer is said to be accepted. Thus the proposal when accepted becomes a promise.” An offer can be revoked before it is accepted.

As specified in the definition, if the offer is accepted unconditionally by the offeree to whom the request is made, it will amount to acceptance. When the offer is accepted it becomes a promise.

Example

‘An’ offer to buy B’s house for rupees 40 lacks and ‘B’ accepts such an offer. Now, it has become a promise. When an offer is accepted and it becomes promise it also becomes irrevocable. No legal obligation created by an offer.

Types of Acceptance

1. Expressed Acceptance If the acceptance is written or oral, it becomes an Expressed Acceptance. Example ‘A’ offers to sell his phone to ‘B’ over an email. ‘B’ responds to that email saying he accepts the offer to buy.
2. Implied Acceptance

If the acceptance is shown by conduct, it thus becomes an implied acceptance. Example The Arts Museum holds an auction to sell a historical book to collect charity funds. In the media, they advertise the same. This says that a Mere Invitation to an Offer as per Indian Contract Act, 1872.

The invitees offer for the same. Offer is expressed orally, so the offer to buy is an Express Offer, but by striking the hammer thrice the final call is made by the auctioneer. This is called Implied Acceptance.

Conditional Acceptance

A conditional acceptance also referred to as an eligible acceptance, occurs when a person to whom an offer has been made tells the offeror that he or she is willing to accept the offer provided that certain changes are made to the condition of the offer. This form of acceptance operates as a counter-offer. The original offeror must consider a counter-offer before a contract can be established between the parties.

 

Legal Rules and Conditions for Acceptance

Acceptance must be absolute and unqualified 

The offeree’s approval cannot be conditional. For example, ‘A’ wants to sell her car to ‘B’ for Rs 2 lakh, ‘B’ can’t come back and says that she accepts the offer but will buy the same for Rs. 1 lakh.

Acceptance must be told to the offeror

If the acceptor just accepts the offer in his head and he does not mention the same to the offeror, it cannot be called an Acceptance, whether in an express manner or an implied manner.

Acceptance must be recommended in the following mode

Acceptance is sometimes required in a prescribed/specified communication mode.

In a reasonable amount of time, the acceptance is given

It’s very rare that an offer is always to get acceptance at any time and at all times. Therefore, the offer defines a time limit. If it does not, it should not be acknowledged forever.