Indian Contract Act 1872 : An Overview

Contracts have a vital role in our daily lives. People who take rented houses would agree with the house owner to agree. When we buy a car or a home, we agree. Knowingly or unknowingly, we enter into many Contracts as part of our lives. In India, the Indian Contract Act of 1872 governs contracts, agreements, agency and bailment.

One of the common doubts among people is understanding the difference between both contexts. Let us take the case of the rented house agreement. The rent agreement is also known as a rent contract. The words are commonly used reciprocally by everyone. What is the difference between a Contract and an Agreement?

A made a contract with B promising to give 1,00,000 if he robs a bank. Is that contract valid in the court of law? What about the job contract that failed to pay the promised salary? What about a contract that deals in the supply of drugs? In this article, let us know about contracts, agreements and their enforceability.

Table of Contents

• Indian Contract Act, 1872
• Agreement: Section 2(e)
• Contract: Section 2(h)
• Types of Contracts
• Differences between Contract and Agreement
• Consideration: section 2(d)
• Breach of Contract
• Penalty and charges for breaching of contracts in the Indian context
• Other remedies available for breach of contract
• Section 75: Party rightfully rescinding the contract, entitled to compensation
• Relevant Case Law
• Section 28: Agreements in Restraint of Legal Proceedings

Indian Contract Act, 1872

Before starting with a contract, let us know more about agreements. We make agreements for various reasons like a rented house, property sale, etc. For example, A agrees with C that if B dies, he will marry C. This agreement cannot be considered a valid agreement in a court of law. So, what is an Agreement? What is a Valid agreement?

Agreement: Section 2(e)

An Agreement is a promise made between two persons creating a mutual obligation enforceable by law. According to section 2(e) of the Indian Contract Act, 1872, ‘Every promise and every set of promises, forming the consideration for each other, is an agreement.

Following components are required to create an agreement:

• Two or more parties: Two or more parties are required to create an Agreement.
• Offer/ Proposal: According to section 2(a), When one person signifies to another his willingness to do or to abstain from doing anything, to obtain the assent of that other to such act or abstinence, he is said to make a Proposal
• Acceptance: According to section 2(b), When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
• Promise: According to section 2(b), A Proposal, when accepted, becomes a promise.
• Consideration: Consideration is something in return that has value in the eyes of the law. Section 2(d) provides for the definition for consideration.
• According to section 2(e), Every promise and every set of promises, forming the consideration for each other, is an Agreement.

Contract: Section 2(h)

An agreement enforceable by law is known as a contract. According to section 2(h), An agreement enforceable by law is a contract. The two constituents are agreement and enforceability by law.

Contract = Agreement + Enforceability by law

When an offer is made by creating a lawful obligation, it becomes an offer. An agreement becomes a contract when there is free consent by parties, lawful acceptance and consideration, lawful object and capacity of parties.

A entered into an agreement with his wife, B. If she stays with him, he will pay ten thousand rupees per month. This agreement is not a valid contract as it does not create any legal obligation.

Examples of agreements not becoming valid contracts

1. A hired B to kill C. They agreed on terms of money and conditions. The agreement is illegal and does not become a valid contract.
2. A promised to pay B that if the ship C sinks, he will pay 10,000 to B. This agreement is not a valid contract.
3. A promised B that she would bring down the sky and clouds. As the act is impossible to perform, it is not a valid contract.

Types of Contracts

There are different types of contracts. Here are the most popular types of Contracts in India.

• Valid Contract: An agreement enforceable by law is a valid contract.
• Void Contract: An agreement not enforceable in a court of law is a void contract.
• Voidable Contract: An agreement that is enforceable by law at the option of one or more of the parties thereto but not at the option of the other or others is a voidable contract.
• Unilateral and Bilateral Contracts: Bilateral contracts have the involvement of two parties. In unilateral contracts, the promise is to be made by one party only.
• Expressed and Implied Contracts: The terms and conditions get mentioned in Expressed contracts. In the case of Implied contracts, the terms and conditions get inferred from partie’s activities.

Differences between Contract and Agreement

• Section 2(e) of the Indian Contract Act, 1872 states that an agreement is “Every promise and every set of promises forming consideration for each other “. Section 2(h) states that a Contract is an agreement enforceable by law.
• A contract creates a legal obligation. However, an agreement may or may not create a legal obligation.
• An agreement is a Right in Personam, and a Contract is a right in Rem.
• An agreement has a wider scope compared to a Contract.
• Agreement = Offer + Acceptance. Contract = Agreement + Enforceability.
• All agreements are not contracts. However, all Contracts are not agreements.

Consideration: section 2(d)

Consideration in Latin means quid-pro-quo. In the legal aspect, it is “something in return”.

Section 2(d) of the Indian Contract Act, 1872:

When,

• At the desire of the promisor,
• Promisee or any other person,
• Has done or abstained from doing something, or Does or abstains from doing something, or Promises to do or abstained from doing something,
• Such act or abstinences of promise is called a consideration for the promise.”

Breach of Contract

Breach of contract violates the agreed terms and conditions of a binding contract. It includes late payment of agreed money, non-transfer of promised asset or property etc.

According to section 73 of the Indian Contract Act, “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it”.

Illustration: David contracts to sell and deliver 50 kilos of rice to James, at a certain price to be paid on delivery. David breaks his promise. James is entitled to receive compensation from David, the amount, if any, by which the contract price falls short of the price for which James might have obtained 50 kilos of rice at the time when the rice ought to have been delivered.

Section 73 of the Indian Contract Act 1872 also specifies that the damage is only payable if the breach has caused the loss. Compensation is not payable for any remote or indirect damage sustained by the breach. Non-performance of the contract must also get considered regarding the estimation of the damage caused. Remedies for breach of contract constitute a specific performance, award of damages and compensation.

Penalty and charges for breaching of contracts in the Indian context

The compensation awarded can not be more than mentioned in the contract. Section 74 of the Indian Contract Act, 1872 provides that the court will not allow more than fixed by the parties. The court may also award less than fixed by the parties. The suffering party receives compensation but not a penalty.

An exception to Section 74: The section states that if a party enters into a contract with any government for the performance of an act in the interest of the general public, the party shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Other remedies available for breach of contract

• The recession of contract: Cancellation of the contract
• Quantum Meruit: Reasonable sum payable
• Suit for specific performance
• Suit for injunction

Section 75: Party rightfully rescinding the contract, entitled to compensation

Section 75 of the Act states that “A person who rightfully rescinds a contract is entitled to consideration for any damage he has sustained through the non-fulfilment of the contract”.

Relevant Case Law

In the case of Hadley v. Baxendale, the court held that damages are limited to what arises from a breach. It must also be

reasonably considered by the parties at the time of contracting.

Section 28: Agreements in Restraint of Legal Proceedings

“Every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights is void to that extent.”

Section 28 states that an agreement is void if the party gets restricted from enforcing his rights in ordinary court proceedings or limits the time he may enforce the rights. An agreement is also void if it annihilates the right of any party or discharges any party from liability, under or in respect of any contract on the expiry of a specified period to restrict any party from enforcing his rights, is void to that extent.

The first paragraph of section 28 got replaced by a new paragraph in the Indian Contract Act of 1996. The new paragraph states that if any clause in the agreement bars a remedy and extinguishes the right, it will be void to that extent. It will make a visible change in the contract law.