Indian Contract Act: Formation of Contract

• The Indian Contract Act governs contracts in India.

Formation of Contract

• According to the Indian Contract Act, 1872 (ICA), a contract is an agreement enforceable by law
• Not all agreements are contracts; they must meet specific criteria.
• An agreement results from one party's proposal or offer and the other's acceptance.
• Essential components of a valid contract include:
  • Competent parties: Parties must be capable of entering a contract.
  • Lawful consideration and object: The agreement must have a legal purpose and exchange.
  • Free consent: Agreement must be free from coercion, undue influence, fraud, misrepresentation, and mistake.
  • Agreements must be in accordance with what is stated in law.
• Section 10 of the ICA states that all enforceable agreements are contracts.
• The reverse is not always true, as some agreements lack lawful consideration or object.
• Therefore, all contracts are agreements, but not all agreements are contracts.

Intention to Contract

• The case Balfour v. Balfour (1919, 5 KB 571) questioned an agreement between a husband and wife,.
• A husband promised to send £30 monthly to his wife in England; however, payments stopped due to misunderstandings.
• The court dismissed her action to recover arrears, stating the arrangement was a moral obligation, not a contract.
• Agreements creating legal obligations are contracts; those lacking this intention are not.

Offer / Proposal and Acceptance

• The initial stage in formulating a contract is made by an offer or proposal.
• An Offer means a person makes a willing gesture indicating they will do something or refrain from doing something.
• The offeror makes the offer, and the offeree receives it, with the intention to establish a legal relationship.
• Acceptance occurs when the offeree agrees or consents to the offer, whether verbally ('yes', 'ok') or online ('I agree').
• Once accepted, an offer becomes an agreement, also known as a promise.
• Offer + Acceptance = Agreement.
• Offers and acceptances must be clear and definitive.
• Ambiguous offers or acceptances are considered invalid.
• Communication of offer and acceptance is essential, including electronic forms or emails.
• An offer can be revoked or withdrawn before acceptance, and lapses by revocation or withdrawal.

General Offer

• The case Carlill v. Carbolic Smoke Ball Co. (1893, 1 QB 256) states that an offer is considered valid if it can be made to the world at large.
• With general offers, acceptance to the offeror does not need to be communicated.
• Fulfilling the offer's conditions is sufficient for acceptance, creating a contract.

Consideration

• Consideration is a key element and means 'something in return' for the offer.
• Contracts require consideration to be valid
• Can be in the form of an act or forbearance.
• An agreement lacking consideration is void because one party benefits without giving anything in return.
• Mutual consideration is essential, where each party gives and receives something.
• Exceptions to this rule include written and registered agreements based on natural love, which remain valid without consideration.
• Consideration should be real but need not be adequate; it can be past, present, or future but must not be illegal, immoral, or against public policy.

Capacity to Contract

• Section 10 of the ICA states parties must be competent to contract.
• Individuals not competent to contract:
  • Minors: Those under 18 years of age.
  • Persons of unsound mind.
  • Those disqualified by law, like alien enemies or foreign sovereigns.
• An amendment set the majority age at 18 for all cases through the Indian Majority Act.

Consent

• Consent is important when entering a contract.
• Consent is achieved when two people agree on the same thing in the same sense - known as consensus ad idem (Section 13).
• Consent should be voluntarily given, without coercion, undue influence, misrepresentation, fraud, or mistake.
• If consent is influenced by such factors, it is not free.
• For the individual whose consent is not free, it becomes voidable (avoid enforcement of contact).

Types of Contracts/Agreements

• The Indian Contract Act does not define the concept of validity or enforceability of a contract.
• Court judgments determine the enforceability of contracts based on their validity, and explain some key factors.
• The types of validity/enforceability are:
  • Valid
  • Voidable
  • Void
  • Illegal
  • Unenforceable

Void and Voidable Contracts

Contingent and Wagering Contracts

Illegal/Unlawful Agreements

• Section 10 ICA states that a contract must have lawful consideration and a lawful object.
• If the consideration or object involves actions or omissions prohibited by law, it results in an illegal contract.
• Agreements with unlawful or illegal objects or considerations cannot be enforced and are void (per sec. 24 ICA).
• However, a contract initially formed with a lawful object or consideration can become void if the object or consideration later becomes unlawful or illegal.

Discharge of Contract

• Mutual obligations create a contract.
• A contract ends when the parties' mutual obligations are fulfilled which means it is said to be discharged.
• Discharge means terminating the contractual relations.
• Discharge of a contract types:
  • Discharge by Performance: Parties fulfill their obligations and promises.
  • Discharge by Agreement or Consent: Parties do not perform their obligations, contract discharged by novation, rescission, alteration, merger, waiver, and remission.
    • Novation: A new contract replaces an old one.
      • Example: A owes money to B, who owes money to C. By agreement, B's debt to C and A's debt to B are cancelled as C accepts A as his debtor.
    • Rescission: Certain or all terms of a contract are cancelled.
      • Example: A and B change certain agreement terms for buying machine parts before the agreement ends.
    • Remission: Acceptance is made to a promise but not on the complete terms. -Example: A owes B Rs 5,000 but B accepts Rs 2,000 in full satisfaction.

Discharge of Contract (Continued)

• Merger: Terms are merged into another contract with consent.
• Discharge by Impossibility of Performance: Performance becomes impossible, with or without the parties' knowledge, potentially making the contract unenforceable.
• Supervening impossibility can take place if:
  • Destruction of the subject matter.
  • Death or incapacity.
  • Non-existence of state of things impacting the contract.
  • Outbreak of war.
  • Change or amendments in law.
• Discharge by Lapse of Time: If the contract is not performed within the specified time and the other party does not act within the allowed timeframe, they lose their remedy, and the contract is discharged.
• Discharge by Operation of Law: Contracts are discharged:
• Death of either party.
• Insolvency.
• Merger.
• Unauthorized alteration of terms.
• Discharge by Breach of Contract: Failure to perform obligations leading to contract breach entitles the injured party to compensation or damages from the breaching party (Section 73).

Remedies in Case of Breach

• A remedy aims to enforce contractual rights or provide sufficient compensation for non-performance through relief given by law.
• Available remedies are:
  • Damages.
  • Specific performance.
• Damages are the most common remedy, allowing the injured party to recover money compensation for losses.
• Covered under Section 73 ICA, the purpose of a contract is to enforce parties' rights, so the promisee can request specific obligations in breach events.