Indian Contract Act, 1872

The Indian Contract Act, 1872 is the main law governing contracts in India. It lays down the rules under which agreements become legally enforceable. Section 2(h) defines a contract as an agreement enforceable by law. The Act applies to the entire country and regulates the formation, performance, and enforcement of contracts.

Development and Structure of the Act

The Act was passed on 25 April 1872 and came into force on 1 September 1872.
Originally, it consisted of 266 sections grouped into 11 chapters.

Its structure was:

  • Sections 1–75 – General Principles of Contract (Chapters 1–6)
  • Sections 76–123 – Contracts on Sale of Goods (Chapters 7–10)
  • Sections 239–266 – Contracts relating to Partnership (Chapter 11)

Later:

  • Sections on Sale of Goods were removed when the Sale of Goods Act, 1930 was enacted.
  • Sections on Partnership were replaced by the Indian Partnership Act, 1932.

Current division of the Act

  1. Part 1: General Principles of the Law of Contract (Sections 1–75)
  2. Part 2: Special Types of Contracts
    • Indemnity and Guarantee (Chapter 8)
    • Bailment and Pledge (Chapter 9)
    • Agency (Chapter 10)

Important Definitions (Section 2)

1. Offer (Section 2a)

An offer is a proposal made by one person, dependent on some act, promise, or abstinence in return.

2. Acceptance (Section 2b)

When the person to whom the offer is made agrees to it, the offer becomes accepted.

3. Promise (Section 2b)

An offer, when accepted, becomes a promise.

4. Promisor and Promisee (Section 2c)

The one who makes the proposal is the promisor.
The one who accepts it is the promisee.

5. Consideration (Section 2d)

Something done or promised to be done at the desire of the promisor. This is the “price” for the promise (quid pro quo).

6. Agreement (Section 2e)

Every set of promises that form consideration for each other.

7. Reciprocal Promises (Section 2f)

Promises that form the consideration for each other.

8. Void Agreement (Section 2g)

An agreement not enforceable by law.

9. Contract (Section 2h)

An agreement enforceable by law.

10. Voidable Contract (Section 2i)

A contract enforceable at the option of one party but not the other.

11. Void Contract (Section 2j)

A contract that later becomes unenforceable.

OFFER (PROPOSAL)

Section 2(a) defines offer as a proposal dependent on an act or promise in return.

Types of Offers

  1. Express Offer – made through spoken or written words.
  2. Implied Offer – inferred from conduct.
  3. General Offer – made to the public at large.
  4. Specific Offer – made to a particular person.
  5. Standing/Continuous Offer – kept open for a specific time.
  6. Cross Offer – when two identical offers are made at the same time without knowledge of each other.
  7. Counter Offer – when the offeree changes terms instead of accepting.

ACCEPTANCE

For acceptance to be valid:

  1. It must be absolute and unconditional.
  2. It must be communicated to the offeror.
  3. It must be in the required mode (if prescribed).
  4. It must be made within a reasonable time.
  5. Acceptance cannot precede an offer.
  6. It may be expressed through conduct.
  7. Mere silence is not acceptance, unless duty to speak exists.
  8. Acceptance must be clear and definite.

CONSIDERATION (Section 2d)

Consideration means “something in return.”

Essentials of Valid Consideration

  • Must move at the desire of the promisor.
  • Can move from promisee or any other person (stranger consideration valid in India).
  • Can be past, present, or future.
  • Must be real and not impossible.
  • Need not be adequate in value.
  • Must not be something the promisor is already bound to do.

Unlawful Consideration (Section 23)

Consideration is unlawful when it:

  • Is forbidden by law
  • Causes injury
  • Is immoral
  • Defeats provisions of law
  • Is fraudulent
  • Is opposed to public policy

Examples of agreements opposed to public policy:

  • Trading with an enemy
  • Stifling prosecution
  • Buying/selling public offices
  • Agreements restricting personal liberty
  • Marriage brokerage agreements

The Supreme Court can reject contracts opposed to public policy.

COMPETENT TO CONTRACT (Section 11)

A person is competent to contract if:

  1. He is not a minor (18 years or 21 years when a guardian is appointed).
  2. He is of sound mind while contracting.
  3. He is not disqualified by any law.

Persons disqualified include:

  • Alien enemy
  • Foreign sovereigns
  • Corporations (without authority)
  • Insolvents
  • Convicts
  • Pardanashin women (protected due to vulnerability)

FREE CONSENT (Sections 13–14)

Consent means agreeing on the same thing in the same sense.

Consent is not free if caused by:

1. Coercion (Section 15)

Using or threatening unlawful force.

2. Undue Influence (Section 16)

When one party dominates the will of another (e.g., doctor–patient, guru–disciple).

3. Fraud (Section 17)

Intentional deception.

4. Misrepresentation (Section 18)

Innocent misleading of facts.

5. Mistake of Fact (Section 20)

When both parties misunderstand a fact essential to the agreement.

AGENCY (Sections 201–210)

Agency means a relationship where one person (agent) acts on behalf of another (principal).

Ending of Agency

Agency ends by:

  1. Revocation by principal (except agency coupled with interest)
  2. Renunciation by agent
  3. Completion of business
  4. Insolvency of principal
  5. Death or insanity (except agency coupled with interest)

Termination is effective only when known to agent and third parties.