Year: 2020

Law of contracts in India defines Contract as an agreement enforceable by law which offers personal rights, and imposes personal obligations, which the law protects and enforces against the parties to the agreement. The general law of contract is based on the conception, which the parties have, by an agreement, created legal rights and obligations, which are purely personal in their nature and are only enforceable by action against the party in default.

Section 2(h) of the Indian Contract Act, 1872[2] defines a contract as “An agreement enforceable by law”. The word ‘agreement’ has been defined in Section 2(e) of the Act as ‘every promise and every set of promises, forming consideration for each other’

Contract law is the body of law that relates to making and enforcing agreements. A contract is an agreement that a party can turn to a court to enforce. Contract law is the area of law that governs making contracts, carrying them out and fashioning a fair remedy when there’s a breach.

Anyone who conducts business uses contract law. Both companies and consumers use contracts when they buy and sell goods, when they license products or activities, for employment agreements, for insurance agreements and more. Contracts make these transactions happen smoothly and without any misunderstandings. They allow parties to conduct their affairs confidently. Contracts help make sure that the parties to a transaction are clear on its terms.

Essentials of Valid Contract:

1. Offers and Acceptance
2. Legal Relationship
3. Lawful Consideration
4. Capacity of Parties
5. Free Consent
6. Lawful Objects
7. Writting and Registration
8. Certainity
9. Possibility of Performance
10. Not Expressly Declared Void

An agreement becomes enforceable by law when it fulfils essential conditions. These conditions may be called the essentials of a valid contract, which are as follows:

1. Offers and Acceptance

For an agreement there must be a lawful offer by one and lawful acceptance of that offer from the other party. The term lawful means that the offer and acceptance must satisfy the requirements of Contract Act. The offer must be made with the intention of creating legal relations otherwise, there will be no agreement.

Example:

A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B accepts this offer, there is an acceptance.

2. Legal Relationship

The parties to an agreement must create legal relationship. It arises when parties know that if one for the failure of a contract. Agreements of a social or domestic nature do not create legal relations and as such cannot give rise to a contract. It is presumed in commercial agreements that parties intend to create legal relations.

Example:

• A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses to pay. The son cannot recover as it is a social agreement and does not create legal relations.
• A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there is a contract as it creates legal-relationship between them.
• A husband promised to pay his wife a household allowance of 30 pounds every month. Later, the parties separated and the husband failed to pay. The wife used for allowance. Held that the wife was not entitled for the allowance as the agreement was social and did not create any legal obligations.

3. Lawful Consideration

The third essential of a valid contract is the presence of consideration. Consideration is “something in return.” It may be some benefit to the party. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is enforceable only when both the parties get something and give something. The something given or obtained is the price of the promise and is called consideration.

Example:

1. A agrees to sell his house to B for Rs.10 Lac is the consideration for A’s promise to sell the house, and A’s promise to sell the house is the consideration for B’s promise to pay Rs.10 Lac. These are lawful considerations.
2. A promise to obtain for B employment in the public service, and B promise to pay 10,000 rupees to A. the agreement is void, as the consideration for it is unlawful.

4. Capacity of Parties:

An agreement is enforceable only if it is entered into by parties who possess contractual capacity. It means that the parities to an agreement must be competent to contract. According to Section 11, in order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject. A contract by a person of unsound mind is void  ab-initio (from the beginning).

If one of the parties to the agreement suffers from minority, madness, drunkenness etc., the agreement is not enforceable at law, except in some cases.

Example:

1. M, a person of unsound mind, enters into an agreement with S to sell his house for Rs.2 lac. It is not a valid contract because M is not competent to contract.
2. A, aged 20 promises to sell his car to B for Rs.3 Lac. It is a valid contract because A is competent to contract.

5. Free Consent:

It is another essential of a valid contract. Consent means that the parties must have agreed upon the same thing in the same sense. For a valid contract it is necessary that the consent of parties to the contact must be free.

Example:

1. A compels B to enter into a contract on the point of pistol. It is not a valid contract as the consent of B is not free.

6. Lawful Objects:

It is also necessary that agreement should be made for a lawful object. The object for which the agreement has been entered into must not be fraudulent, illegal, immoral, or opposed to public policy or must not imply injury to the person or property of another. Every agreement of which the object or consideration is unlawful is illegal and the therefore void.

Example:

A promise to pay B Rs.5 thousand if B beats C. The agreement is illegal as its object is unlawful.

7. Writing and Registration:

According to Contract Act, a contract may be oral or in writing. Although in practice, it is always in the interest of the parties that the contract should be made in writing so that it may be convenient to prove in the court. However, a verbal contract if proved in the court will not be considered invalid merely on the ground that it not in writing. It is essential for the validity of a contact that it must be in writing signed and attested by witness and registered if so required by the law.

Example:

1. A Verbally promises to sell his book to y for Rs.200 it is a valid contract because the law does not require it to be in writing.
2. A verbally promises to sell his house to B it is not a valid contract because the law requires that the contract of immovable property must be in writing.

8. Certainity:

According to Section 29 of the Contract Act, “Agreements the meaning of which are not certain or capable of being made certain are void.” In order to give rise to a valid contract the terms of the agreement, must not be vague or uncertain. For a valid contract, the terms and conditions of an agreement must be clear and certain.

Example:

1. A promised to sell 20 books to B. It is not clear which books A has promised to sell. The agreement is void because the terms are not clear.
2. A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil. The agreement is void because of it uncertainty.
3. O agreed to purchase a van from S on hire-purchase terms. The price was to be paid over two years. Held there was no contract as the terms were not certain about rate of interest and mode of payment.

9. Possibility of Performance:

The valid contract must be capable of performance section 56 lays down that. “An agreement to do an act impossible in itself is void.” If the act is legally or physically impossible to perform, the agreement cannot be enforced at law.

Example:

1. A agrees with B to discover treasure by magic, the agreement is not enforceable.
2. A agrees with B to put life into B’s dead brother. The agreement is void as it is impossible of performance.

10. Not Expressly Declared Void:

An agreement must not be one of those, which have been expressly declared to be void by the Act. Section 24-30 explains certain types of agreement, which have been expressly declared to be void. An agreement in restraint of trade and an agreement by way of wager have been expressly declared void.

Example:

A promise to close his business against the promise of B to pay him Rs.2 lac is a void agreement because it is restraint of trade.

Offer and Acceptance form the foundation of every contract. Under the Indian Contract Act, 1872, a contract comes into existence only when a lawful offer made by one party is lawfully accepted by another. Without offer and acceptance, there can be no agreement and hence no contract.

OFFER (PROPOSAL)

According to Section 2(a) of the Indian Contract Act, 1872,

“When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other person, he is said to make a proposal.”

The person making the offer is called the Offeror or Promisor, and the person to whom the offer is made is called the Offeree or Promisee.

An offer must show a clear intention to create legal relations and must be capable of being accepted.

Essential Elements of a Valid Offer

• Offer Must Be Made With an Intention to Create Legal Relationship

An offer must be made with the clear intention of creating a legal relationship between the parties. The offeror should intend that, upon acceptance, the agreement will be legally binding and enforceable in a court of law. Offers made in social, domestic, or moral contexts generally lack such intention and therefore do not constitute valid offers. For example, an invitation to dinner or a promise to give a gift out of affection does not create legal obligations. In commercial transactions, however, the presumption is that parties intend legal consequences. Without such intention, even if other elements are present, the offer cannot result in a valid contract under the Indian Contract Act, 1872.

• Offer Must Be Certain, Definite, and Not Vague

A valid offer must be clear, precise, and definite. The terms of the offer should not be ambiguous or uncertain. If the meaning of the offer cannot be clearly understood or is incapable of being made certain, it cannot be accepted and is therefore invalid. Essential terms such as subject matter, price, quantity, and nature of obligations should be clearly stated. For example, an offer stating “I will sell you some goods at a reasonable price” is vague and does not constitute a valid offer. Certainty ensures mutual understanding and avoids disputes between parties, making the offer legally enforceable.

• Offer Must Be Communicated to the Offeree

For an offer to be valid, it must be properly communicated to the person to whom it is made. An offer which is not known to the offeree cannot be accepted, and therefore no contract can arise. Communication may be made orally, in writing, or by conduct, but it must bring the offer to the knowledge of the offeree. A person cannot accept an offer of which he is unaware. For example, if a reward is announced but a person performs the act without knowledge of the reward, he cannot claim it. Communication is essential to create consensus between parties.

• Offer Must Be Made With a View to Obtain Assent

An offer must be made with the objective of obtaining the consent of the offeree. A mere statement of intention, information, or invitation does not amount to an offer. For instance, a price list or advertisement is usually an invitation to offer, not an offer itself. The offeror must be willing to enter into a contract upon acceptance. If the communication lacks intent to receive acceptance, it cannot be considered a valid offer. This element distinguishes a genuine offer from preliminary negotiations or expressions of willingness that do not create legal obligations.

• Offer Must Not Contain a Term That Silence Amounts to Acceptance

A valid offer cannot impose a condition that silence shall be treated as acceptance. The offeree must positively signify acceptance through words or conduct. The offeror cannot force the offeree into a contract by stating that failure to respond will amount to acceptance. Such a condition is invalid under law. Acceptance must be voluntary and communicated. For example, stating “If I do not hear from you by tomorrow, I will assume you have accepted” does not create a binding obligation. This principle protects freedom of contract and consent.

• Offer May Be Express or Implied

An offer may be express or implied. An express offer is made by spoken or written words, such as a written proposal or verbal promise. An implied offer arises from the conduct or behavior of the parties or circumstances of the case. For example, when a bus stops at a bus stand, it implies an offer to carry passengers on payment of fare. Both express and implied offers are equally valid under the Indian Contract Act, provided they satisfy other essential elements. This flexibility allows contracts to arise in everyday commercial and social transactions.

• Offer Must Be Lawful

The offer must be lawful in nature. An offer to do something illegal, immoral, or opposed to public policy is not a valid offer. If the object of the offer is prohibited by law, acceptance of such an offer cannot result in a valid contract. For example, an offer to sell smuggled goods or to commit a crime is unlawful and void. Lawfulness ensures that contractual obligations are consistent with legal and social standards. An unlawful offer is void ab initio and unenforceable in a court of law.

• Offer Must Be Made by a Competent Person

The offer must be made by a person who is competent to contract under Section 11 of the Indian Contract Act. A person is competent if he has attained the age of majority, is of sound mind, and is not disqualified by law. An offer made by a minor or a person of unsound mind is not valid. Since competency is essential for contractual capacity, an offer lacking this element cannot result in a binding contract. This requirement protects vulnerable individuals and ensures informed decision-making in contractual relationships.

• Offer Must Be Distinguished From Invitation to Offer

A valid offer must be clearly distinguishable from an invitation to offer. An invitation to offer merely invites others to make offers and does not itself create legal obligations. Examples include advertisements, display of goods in shops, and auction notices. Acceptance of an invitation to offer does not result in a contract; rather, it leads to an offer. Only when that offer is accepted does a contract arise. Understanding this distinction is essential to determine the exact point at which a legally binding agreement comes into existence.

• Offer Must Remain Open Until Acceptance

For an offer to be valid, it must exist at the time of acceptance. If an offer is revoked, lapses due to expiry of time, is rejected, or is terminated by death or insanity of the offeror, it cannot be accepted. Acceptance after the termination of the offer is invalid. An offer must remain open and unrevoked to convert into a promise. This element ensures certainty and fairness in contractual dealings and protects parties from unexpected liabilities arising from outdated or withdrawn offers.

Communication of Offer (Section 4)

The communication of an offer is an essential requirement for the formation of a valid contract. An offer cannot be accepted unless it is properly communicated to the offeree. The rules relating to communication of offer are laid down under Section 4 of the Indian Contract Act, 1872. This section explains when the communication of an offer, acceptance, and revocation is complete. Understanding the communication of offer is crucial to determine the point of time when legal obligations begin.

Section 4 of the Indian Contract Act, 1872

According to Section 4,

“The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.”

Thus, the communication of an offer is complete only when the offeree becomes aware of the offer.

Revocation of Offer

Revocation of offer means the withdrawal or cancellation of an offer by the offeror before it is accepted by the offeree. The rules relating to revocation of offer are governed by Sections 4, 5, and 6 of the Indian Contract Act, 1872. Revocation plays an important role in determining whether a valid contract has come into existence.

Revocation of Offer under Section 5

According to Section 5 of the Indian Contract Act, 1872,
“A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.”

Thus, an offer can be revoked any time before acceptance is put into a course of transmission to the offeror.

ACCEPTANCE

Acceptance is the second essential element of a valid contract. An offer becomes a promise only when it is accepted. Without acceptance, no agreement can arise, and therefore no contract can be formed. The law relating to acceptance is governed by the Indian Contract Act, 1872.

Meaning of Acceptance

According to Section 2(b) of the Indian Contract Act, 1872:

“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.”

The person who accepts the offer is called the Acceptor or Promisee, and the person making the offer is known as the Offeror or Promisor. Acceptance converts a proposal into a promise, thereby creating contractual obligations between the parties.

Essentials of a Valid Acceptance

• Acceptance Must Be Absolute and Unconditional

Acceptance must be complete, final, and without any qualification. If the acceptor adds conditions or modifies the terms of the offer, it amounts to a counter-offer, not acceptance. A counter-offer destroys the original offer. For example, if A offers to sell goods for ₹10,000 and B agrees to buy them for ₹9,000, it is not acceptance. This rule ensures that both parties agree on the same terms and avoid ambiguity.

• Acceptance Must Be Communicated

Acceptance must be communicated to the offeror. Mere mental acceptance or silence does not amount to acceptance. Communication may be oral, written, or implied by conduct. For instance, if an offer is accepted but not communicated to the offeror, no contract arises. This requirement ensures certainty and mutual understanding between parties regarding their contractual obligations.

• Acceptance Must Be Given by the Offeree

Only the person to whom the offer is made can accept it. If a stranger to the offer accepts it, such acceptance is invalid. In case of a general offer, however, acceptance can be made by anyone who performs the conditions of the offer. This rule ensures that acceptance comes from the intended party and maintains the integrity of contractual relationships.

• Acceptance Must Be in the Prescribed Mode

If the offeror prescribes a specific mode of acceptance, the acceptance must be made in that manner. If no mode is prescribed, acceptance must be made in a reasonable and usual manner. If acceptance is not made in the prescribed mode, the offeror may reject it within a reasonable time. This rule promotes clarity and prevents disputes regarding the method of acceptance.

• Acceptance Must Be Given Within a Reasonable Time

Acceptance must be given while the offer is still in force. If the offer specifies a time limit, acceptance must be made within that time. If no time is mentioned, acceptance must be given within a reasonable time depending on the nature of the transaction. Acceptance after expiry of the offer is invalid. This ensures fairness and prevents delayed or outdated acceptances.

• Acceptance Must Be Made Before the Offer Is Revoked

An offer can be revoked at any time before acceptance. Therefore, acceptance must be made before the offer is withdrawn or revoked. Acceptance after revocation has no legal effect. This rule protects the offeror from being bound by an offer that he no longer intends to keep open.

• Acceptance May Be Express or Implied

Acceptance may be:

(a) Express Acceptance: Given by spoken or written words, such as signing a contract or sending a letter of acceptance.

(b) Implied Acceptance: Given by conduct or performance of conditions, such as boarding a bus or purchasing goods displayed in a shop.

Both forms of acceptance are valid under law provided they clearly indicate consent.

• Acceptance Must Be With Knowledge of the Offer

Acceptance must be made with full knowledge of the offer. A person cannot accept an offer of which he is unaware. For example, if a reward is announced and a person performs the act without knowing about the reward, he cannot claim it. Knowledge of the offer is essential to establish mutual consent.

Communication of Acceptance (Section 4)

• Communication of acceptance is complete as against the offeror when it is put into a course of transmission.

• Communication of acceptance is complete as against the acceptor when it comes to the knowledge of the offeror.

This rule determines the exact time when a contract is formed.

Revocation of Acceptance

According to the Indian Contract Act, acceptance may be revoked any time before the communication of acceptance is complete as against the acceptor, but not afterwards. This ensures balance between the rights of offeror and acceptor.

Agent

A person who performs services for another person under an express or implied agreement and who is subject to the other’s control or right to control the manner and means of performing the services. The other person is called a principal. One may be an agent without receiving compensation for services. The agency agreement may be oral or written.

The person to whom a power of attorney is given. An agent has authority to act on behalf of the grantor, as specified by the grantor in a power of attorney document.

Agency Contracts

An agreement, express , or implied, by which one of the parties, called the principal, confides to the other, denominated the agent, the management of some business; to be transacted in his name, or on his account, and by which the agent assumes to do the business and to render an account of it. As a general rule, whatever a man do by himself, except in virtue of a delegated authority, he may do by an agent. Hence the maxim qui facit per alium facit per se.

When the agency is express, it is created either by deed, or in writing not by deed, or verbally without writing. When the agency is not express, it may be inferred from the relation of the parties and the nature of the employment without any proof of any express appointment.

The agency must be antecedently given, or subsequently adopted; and in the latter case there must be an act of recognition, or an acquiescence in the act of the agent, from which a recognition may be fairly implied.

Agency system is very popular in the current business scenario. There are two parties in the agency system one is the principal and another the agent. An agent is a person acting on behalf of his principal. It’s a connecting link between the principal and the third party. Herein we will discuss the creation of agency under Indian Contract Act, 1872.

Creation of Agency

A contract of agency may be express or implied. Consideration is not an essential element in agency contract. Agency contract may also arise by estoppel, necessity or ratification.

Types of an Agency Contract

1. Express Agency

 A contract of agency can be made orally or in writing. Example of a written contract of agency is the Power of Attorney that gives a right to an agency to act on behalf of his principal in accordance with the terms and conditions therein.

A power of attorney can be general or giving many powers to the agent or some special powers, giving authority to the agent for transacting a single act.

2. Implied Agency

Implied agency arises when there is any conduct, the situation of parties or is necessary for the case.

A. Agency by Estoppel (Section 237)

Estoppel arises when you are precluded from denying the truth of anything which you have represented as a fact, although it is not a fact.

Thus, where P allows third parties to believe that A is acting as his authorized agent, he will be estopped from denying the agency if such third-parties relying on it make a contract with an even when A had no authority at all.

B. Wife as Agent

Where a husband and wife are living together, we presume that the wife has her husband’s authority to pledge his credit for the purchase of necessaries of life suitable to their standard of living. But the husband will not be liable if he shows that:

(i) He had expressly warned the tradesman not to supply goods on credit to his wife; or

(ii) He had expressly forbidden the wife to use his credit; or

(iii) He already sufficiently supplies his wife with the articles in question; or

(iv) He supplies his wife with a sufficient allowance.

Similarly, where any person is held out by another as his agent, the third-party can hold that person liable for the acts of the ostensible agent, or the agent by holding out. Partners are each other’s agents for making contracts in the ordinary course of the partnership business.

C. Agency of Necessity (Sections 188 and 189):

In certain circumstances, a person who has been entrusted with another’s property may have to incur unauthorized expenses to protect or preserve it. This is called an agency of necessity.

For example, a sent a horse by railway. On its arrival at the destination, there was no one to receive it. The railway company, is bound to take reasonable steps to keep the horse alive, was an agent of the necessity of A.

A wife deserted by her husband and thus forced to live separate from him can pledge her husband’s credit to buy all necessaries of life according to the position of the husband even against his wishes.

D. Agency by Ratification (Sections 169-200):

Where a person not having any authority act as agent, or act beyond its authority, then the principal is not bound by the contract with the agent in respect of such authority. But the principal can ratify the agent’s transaction and accept liability. In this way, an agency by ratification arises.

This is ex post facto agency agency arising after the event. By this ratification, the contract is binding on principal as if the agent had been authorized before. Ratification will have an effect on the original contract and so the agency will have effect from original contract and not on ratification.

A sale of goods or property implies a transfer or passing of ownership to the buyer. The passing of property is an important aspect to help determine the liabilities and rights of both the buyer and the seller. Once a property is passed to the buyer, then the risk in the goods sold is that of the buyer and not the seller. This is true even if the goods are in the possession of the seller. Let us learn more about the passing of property in the Sale of Goods Act.

Passing of Property

There are four primary rules that govern the passing of property:

• Specific or Ascertained Goods
• Passing of Unascertained Goods
• Goods sent on approval or “on sale or return”
• Transfer of property in case of reservation of the right to disposal

In this article, we will be looking at the first two rules.

Passing of Ascertained Goods

Section 19

This is the first rule of the passing of property. It deals with the passing of specified goods and states that –Specific or ascertained goods pass when intended to pass. Section 19 of The Sale of Goods Act, 1930, has three sub-sections as follows:

• Sub-section (1): Imagine a contract for the sale of specific or ascertained goods with a clear mention of the time when the parties to the contract intend to transfer the property. In such cases, the property is transferred at the time mentioned in the contract.
• Sub-section (2): To understand the intention of the parties, the terms of the contract, the conduct of the parties, and the circumstances of the case are considered.
• Sub-section (3): Sections 20 to 24 of The Sale of Goods Act, 1930, contain rules to ascertain the intention of the parties. This intention is about the time at which the property in the goods will pass to the buyer.

Section 20

Section 20 relates to Specific goods in a deliverable state. It states that if the contract is unconditional for the sale of specific goods in a deliverable state, then the property in the goods passes to the buyer the moment the contract is made. This rule holds true even if the time of payment of price or delivery of the goods or both is postponed.

Example: Peter goes to an electronics store and buys a television set. He asks the shopkeeper to deliver it to his house. The shopkeeper agrees. The television immediately becomes the property of Peter.

Section 21

Speci­fic goods to be put into a deliverable state (Section 21) Imagine a contract for the sale of goods where the seller has to do something before the goods are ready for delivery. In such cases, the passing of property happens only after the seller does the things and informs the buyer.

Example: Peter buys a laptop from an electronics store and asks for a home delivery. The shopkeeper agrees to it. However, the laptop does not have a Windows operating system installed. The shopkeeper promises to install it and call Peter before making the delivery. In this case, the property transfers to Peter only after the shopkeeper has installed the OS making the laptop ready for delivery.

Section 22

Specific goods are in a deliverable state but the seller has to do something to ascertain the price Imagine a contract of sale of goods which are in a deliverable state but the seller has to do something like weight, measure, test, or perform any other act on the goods to ascertain the price. In such cases, the property does not pass until the seller does the act and informs the seller.

Example: Peter sells a carpet to John and agrees to lay it in John’s house as a part of the contract. He delivers the carpet and informs John that he will lay it the next day. That night the carpet gets stolen from John’s premises. In this case, John is not liable for the loss since the property had not passed to him. According to the terms of the contract, the carpet would be in a deliverable state only after it is laid.

Passing of Unascertained Goods

If there is a contract for the sale of unascertained goods, then the passing of the property of the goods to the buyer cannot happen unless the goods are ascertained. This is specified under Section 18 of The Sale of Goods Act, 1930.

Section 23

Further Section 23 lists two important rules for the passing of property of unascertained goods:

• Sale of unascertained goods by description: Imagine a contract for the sale of unascertained or future goods by description. If any goods of that description are appropriated to the contract either by the buyer or the seller with the consent of the other party, then the property of the goods passes to the buyer. The consent can be express or implied and given before or after the appropriation is made.
• Delivery to the carrier: If the seller delivers the goods to the buyer or a carrier or a bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, but does not reserve the right of disposal, then he is deemed to have unconditionally appropriated the goods to the contract.

Some Points to Remember about the Appropriation of Goods:

If goods are selected with the intention of using them in performing the contract, with the mutual consent of the buyer and the seller, then it is called appropriation of goods. Here are some essentials:

• A contract for the sale of unascertained or future goods exists
• The goods conform to the quality and description stated in the contract
• They are in a deliverable state
• The goods are unconditionally appropriated to the contract either by delivery to the buyer of his agent or the carrier.
• The appropriation is made by the buyer with the assent of the seller or the seller with the assent of the buyer.
• The assent can be express or implied
• The assent can be given before or after the appropriation.