MERCANTILE LAW CA POOJA SHARMA PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 CHAPTER 1- NATURE OF CONTRACT The law of contract is that branch of law which determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement of these rights and duties upon the parties. Indian Contract Act, 1872 came into effect from 1 st September, 1872. It extends to the whole of India except the state of Jammu and Kashmir. CONTRACT [SECTION 2(h)]: A contract is an agreement enforceable by law . Thus, CONTRACT = AGREEMENT (+) ENFORCEABILITY BY LAW All contracts are agreements but all agreements are not contracts AGREEMENT [SECTION 2(e)]: An agreement means, Every promise or every set of promises, forming consideration for each other . AGREEMENT = PROMISE(S) BY ONE PARTY (+) PROMISE(S) BY THE OTHER PARTY PROMISE [SECTION 2(b)]: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. PROMISE = PROPOSAL + ACCEPTANCE PROPOSAL/OFFER [SECTION 2(a)]: A person is said to make a proposal when he signifies to another his willingness to do or to abstain from doing anything with a view to obtaining assent of that other to such act or abstinence PROPOSAL = WILLINGNESS TO DO OR ABSTAIN FROM DOING (+) WILLINGNESS TO OBTAIN ASSENT OF THE OTHER PARTY TO SUCH ACT OR ABSTINENCE CONSIDERATION [SECTION 2(d)]: When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something, such cat or abstinence is called consideration . In other words, consideration is something in return. MERCANTILE LAW PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 ESSENTIAL ELEMENTS OF A VALID CONTRACT [Section 10]: According to Section 10, All agreements are contracts if they are made by free consent of parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void . The essential elements of a valid contract are: Agreement: To constitute a contract there must be an agreement. There must be two parties to an agreement, i.e. one party making an offer (offeror) and the other party accepting the offer (offeree). The terms of the offer must be definite and acceptance must be absolute and unconditional. The acceptance must be according to the mode prescribed and must be communicated to the offeror. Consensus-ad-idem (meeting of minds): To constitute a valid contract, there must be meeting of minds i.e. consensus-ad-idem. The parties should agree to the same thing in the same sense and at the same time. Intention to create legal relationship: When the two parties enter into an agreement, there must be an intention by both parties to legally bind the other as a result of such agreement. Thus, agreements of social or household nature are not contracts. Capacity of parties (competence): The parties to the agreement must be capable of CA POOJA SHARMA entering into a valid contract. According to Section 11, every person is competent to contract if he or she, 1. is of the age of majority; 2. is of sound mind; and 3. is not disqualified from contracting by any law to which he is subject. Lawful Consideration: An agreement to form a valid contract should be supported by consideration. Consideration means something in return (quid pro quo). It can be cash, kind, an act or abstinence. It can be past, present or future. However, consideration should be real and lawful. Free consent: To constitute a valid contract there must be free and genuine consent of the parties to the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. Lawful object: The object of the agreement must not be illegal or unlawful. Section 23: According to Section 23, the consideration or object of an agreement is lawful, unlessIt is forbidden by law; or Is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; or Involves or implies, injury to the person or property of another; or The court regards it as immoral, or opposed to public policy. Agreement not declared void or illegal: Agreements which have been expressly declared void or illegal by law are not enforceable at law; hence does not constitute a valid contract. Certainty and possibility of performance: The terms of agreement must be certain and not vague. If it is not possible to ascertain the meaning of the agreement, it is not enforceable at law. Also, agreements to do impossible acts cannot be enforced. MERCANTILE LAW CA POOJA SHARMA PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 Legal formalities: A contract may be oral or in writing. If, however, the law requires for a particular contract, it should comply with all the legal formalities as to writing, registration and attestation. TYPES OF CONTRACTS: CLASSIFICATION OF CONTRACTS On the basis of Validity On the basis of On the basis of Formation Performance 1. Valid contract 1. Express contract 1. Executed contract 2. Void contract 2. Implied contract 2. Executory contract 3. Voidable contract 3. Quasi Contracts 3. Unilateral contract 4. Void agreement 4. Bilateral contract Valid contract: An agreement which has all the essential elements of a contract is called a valid contract. A valid contract can be enforced by law. Voidable contract [Section 2(i)]: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party. Void contract [Section 2(j)]: A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void. Void agreement: An agreement not enforceable by law is said to be void. Such agreement does not confer any right to any of the parties to it. The agreement, in such a case, is void-ab-initio (from the very beginning). Such an agreement does not result in a contract at all. Unenforceable contracts: Where a contract is good in substance but because of some technical defect cannot be enforced by law is called unenforceable contract. These contracts are neither void nor voidable. Illegal agreement: An agreement is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of nay law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as MERCANTILE LAW CA POOJA SHARMA PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 immoral or opposed to public policy. These agreements are punishable by law. These are void-ab-initio. All illegal agreements are void agreements but all void agreements are not illegal. Express contract: Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time of formation, the contract is said to be express contract. Implied contract: An implied contract is one which is inferred from the acts or conduct of the parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise than in words, promise is said to be implied. Quasi contracts: A quasi contract is created by law. Thus, quasi contracts are strictly not contracts as there is no intention of parties to enter into a contract. It is legal obligation which is imposed on a party who is required to perform it. A quasi contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another. Executed contract: An executed contract is one in which both the parties have performed their respective obligation. Executory contract: An executory contract is one where one or both the parties to the contract have still to perform their obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed as executory contract. Unilateral contract: A unilateral contract is one in which only one party has to perform his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time o the contract or before the contract comes into existence. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known as contracts with executory consideration. MERCANTILE LAW CA POOJA SHARMA PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 CHAPTER-1 NATURE OF CONTRACT OBJECTIVE TYPE QUESTIONS Q1. Which one of the following is correct? (a) Indian Contract Act, 1882 (b) Indian Contract Act, 1972 (c) Indian Contract Act, 1872 (d) Indian Contract Act, 1888. Q2. An agreement consists of reciprocal promises between at least (a) Four parties (b) Six parties (c) Three parties (d) Two parties. Q3. Every contract is an agreement but every agreement is not a contract. This statement is (a) Wrong (b) Correct (c) Correct subject to certain exceptions (d) Partially correct. Q4. An Agreement is (a) Offer (b) Offer + Acceptance (c) Offer + Enforceability (d) Contract. Q5. A contract is(a) A promise to do something or abstain from doing something (b) A communication of intention to do something or abstain from doing something (c) A set of promise (d) An agreement enforceable by law. Q6. K owns a residential flat in Chennai. He is entitled to quiet possession and enjoyment of his property. This is called (a) Rights in Personam (b) Rights in Rem (c) Constitutional Right (d) There is no right at all. Q7. Valid Contracts (a) are made by free consent (b) are those where the parties to the contract are competent to enter into an agreement (c) have lawful consideration & lawful object (d) all of the above. Q8. Which one of the following is an essential element of a valid contract? (a) Consideration (b) Free Consent (c) Competent Parties (d) all the above. Q9. An agreement to commit a crime or a tort is(a) Void (b) Voidable (c) Valid (d) Unenforceable. Q10. L promises to give Rs.5,000 per month pocket money to his son M. If L does not give the pocket .money (a) M can sue his father . (b) M has no remedy against L (c) M can accept a lower pocket money (d) M has to give Rs.5,000 to his father. Q11. One of the clauses in an agreement was - "This, agreement shall not be legally enforceable, but binding in honor only". In such case, the agreement is (a) Invalid (b) Valid (c) Illegal (d) Voidable Q12. A void agreement is one which is(a) Enforceable at the option of one party. MERCANTILE LAW PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 (b) Enforceable at the option of both the parties. (c) Valid but not enforceable. (d) Not enforceable in a court of law. Q13. The Indian Contract Act applies to (a) whole of India (b) whole of India excluding Jammu and Kashmir (c) states notified by central Government from time to time. (d) States notified by the state Government from time to time. Q14. The term contract is defined in which of the following sections of Indian Contract Act, (a) Section 2 (a) (b) Section 2 (b) (c) Section 2 (e) (d) Section 2 (h) Q15. A proposal when accepted became a (a) promise CA POOJA SHARMA (b) offer (c) contract (d) acceptance Q16. A contract is (a) offer + acceptance (b) Agreement + Enforceability (c) Offer + Enforceability (d) Offer + legal obligations. Q17. The law of contract creates the right (a) just in rem (b) just in personam (c) consensus ad idem (d) none of these Q18. A just in personam means a right against (a) a specific person (b) the public at large (c) a specific thing (d) none of these Q19. A voidable agreement is enforceable by: (a) none of the parties (b) only one of the parties (c) one or more but not by the other or others (d) all the parties to the contract. Q20. An illegal agreement is: (a) void ab initio (b) becomes void (c) void ab initio as well as punishable (d) voidable Q23. An executoy contract is: (a) wholly unperformed (b) may be partially performed or wholly unperformed (c) wholly performed (d) none of the above Q24. Law of contract is: (a) the whole law of agreements (b) the whole law of obligations (c) neither the whole law of agreements nor the whole law of obligations (d) none of the above Q25. The transactions collateral to an illegal agreement are: (a) not affected in any manner (b) also illegal (c) voidable at the option of the plaintiff (d) void Q26. A contract: (a) may be void as originally entered into (b) may became void subsequent to its formation (c) cannot became void under any circumstances (d) may became void at the will of a party. MERCANTILE LAW CA POOJA SHARMA PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872 Q27. A contract may be: (a) express (b) implied (c) a or b (d) a and b Q28. An agreement with a minor is: (a) void (b) void ab initio (c) voidable (d) valid Q29. The object of an agreement must be (a) beneficial for the society (b) may be illegal (c) lawful (d) may be immoral Q30. Consideration may be: (a) present (b) past (c) present or past but not future (d) present, past or future Q31. An agreement enforceable by law under Indian Contract Act may be: (a) in writing (b) oral (c) a and b (d) a or b Q32. Which of these statements are true? (a) an agreement is a wider tern than contract (b) all agreements are contracts but all contracts are not agreements (c) all legal obligations are contracts (d) the Indian Contract Act applies to whole of India. Q33. In which of these situations a contract becomes void: (a) supervening impossibility of an act (b) contract contingent on happening of an uncertain event (c) in both the situations (d) in none of the situations Q34. Which of these obligations are imposed by the general law of land and not by the contractual agreements? (a) quasi contracts (b) judgment of the court (c) status obligations (d) in all the three situations Q35. Which of the following persons can enter into a valid contract? (a) minor (b) person of unsound mind (c) illiterate person (d) persons disqualified by nay law to which they are subject to Q36. State which of these statements are true (a) A proposal when accepted always becomes a contract (b) All kinds of obligations created between the parties form part of the contract (c) An agreement to agree in future is not a contract. (d) None of these. Q37. In a voidable contract: (a) parties are incompetent to contract (b) free consent of the parties is missing (c) consideration is inadequate (d) the object is expressly declared void by the act itself. Q38. Which of these is a source of Indian Contract Act? (a) American mercantile law (b) Vedas and Puranas (c) Law of merchants (d) English mercantile law Q39. MERCANTILE LAW CA POOJA SHARMA PH NO: 09811599587 THE INDIAN CONTRACT ACT, 1872