Indian Contract Act, 1872

Indian Contract Act, 1872

1. Introduction

  • As a result of increasing complexities of business environment, innumerable contracts are entered into by the parties in the usual course of carrying on their business. ‘Contract’ is the most usual method of defining the rights and duties in a business transaction. 
  • The Indian Contract Act, 1872 codifies the legal principles that govern ‘contracts’. The Act basically identifies the ingredients of a legally enforceable valid contract in addition to dealing with certain special type of contractual relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent contracts etc. 

2. Meaning & Essential of Contract

  • Meaning - The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as “an agreement enforceable by law”. Means, The contract consists of two essential elements; 
  1. An agreement - every promise and every set of promises, forming the consideration for each other. In easy word can be said a proposal by one party which accepted by another party, but for consideration. (Note – Agreement can be written or oral, no doubt written are better but not always for say – buying veggies and fruit from street/mandi vendors) So Agreement = Off­er/Proposal + Acceptance 
  2. Enforceability by law - There must be an intention to create legal obligation, Mean agreement of social and domestic importance is not legal contract, for examples; A husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not a contract. ‘Swachata Pledge’ under bharat swachata abhiyan is not legal contarct. 
So, Contract = Accepted proposal/Agreement + Enforceability by law
Means all contracts are agreement, but all agreement are not contracts.
Essentials of Contract – Apart from above two elements, there are some other essentials of contract as well which are following;
  1. Must be Free Consent of parties - Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. 
  2. Lawful consideration - Consideration means ‘something in return’. It must be real (actual, either in cash or kind) and lawful. 
  3. Parties are competent - A person is considered competent if he is (a) 18 years of age (b) of sound mind (c) not disqualified from contracting by any law to which he is subject. 
  4. Legality of object - The basic object of contract should be legal. (Agreement of hwala, Supari are not considered contract under this act) 
  5. Agreements not expressly declared to be void by law. For example any agreement, which causes resistance in trade or marriage of any one, are expressly void in this act. 
  6. Certain - Means term of contract like type, quality, value, place, methods are to be certain. 
  7. Capable of Performance - Performance of terms of contract should be viable/possible also. 
  8. Fulfil the Legal formalities, where nature of agreement is such that it requires compliance of certain formalities. For example; Bank will accept pledge only in writing on stamp papers. 

3. Contract of Indemnity & Right of Indemnity holder

  • Contract of Indemnity (Section 124) - Contract by which one party (indemnifier) promises to save (making the loss good) the other (indemnity holder) from loss caused to him by the conduct of the promissory himself, or by the conduct (Suit – filed a case) of any other person. Example - General Insurance contracts (other than life insurance) 
  • Rights of indemnity holder (Section 125) – In simple words, in case of indemnity holder, if sued (means case filled against him) and such case is within the scope of authority of contract of Indemnity; then he can recover all the losses (in form of damages, cost or sum) from indemnifier as described follow; 
  1. All damages which he may be compelled to pay in suit. 
  2. All costs which he may be compelled to pay in bringing or defending any suit. 
  3. All sums which he has paid under the term of compromise of any suit. 
Note that, this section is not exhaustive; means does not set out all the reliefs which an indemnity holder may get. So he may exercise right for other equitable reliefs also.

4. Contract of Guarantee (Section 126)

  • Contract of guarantee is contract to perform the promise, or discharge the liability of a third person in case of his default.Example – Bank Guarantee, as Letter of credit 
  • There are three parties to contract of guarantee; 
  1. Surety – the person who gives the guarantee is called as the ‘surety’; 
  2. Principal debtor – the person in respect of whose default the guarantee is given is called the ‘principal debtor’; 
  3. Creditor – the person to whom the guarantee is given is called the ‘creditor’. 

5. Contract of Bailment (Section 148)

  • Contract of bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, by returned or otherwise disposed of according to the directions of the person delivering them. Example – Cloths given to tailor for stitching 
  • The bailment consists of 
  1. Bailor – the person delivering the goods, and 
  2. Bailee – the person to whom the goods are delivered. 

6. Contract of Pledge (Section 172)

  • Bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. A pledge is a bailment of moveable property by way of security. Example – ‘Activity of keeping gold’ as security in gold loan by muthoot, manappuram etc. 
  • The parties to pledge are; 
  1. Pawner – The bailor in this case is called as pawner; 
  2. Pawnee – the bailee in this is case as pawnee. 

7. Contract of Agency (Section 182)

  • Agent is a person employed to do any act for another or to represent another in dealing with the third person. The person for whom such act is done, or who is so represented is called the Principal. 
  • Test of Agency 
  1. Whether the person has the capacity to bind the principal and make him answerable to the third party. 
  2. Whether he can establish privity of contract between the principal and third parties. 
  • If the answer to these questions is in affirmative (Yes), then there is a relationship of agency. 
  • Thus, Agency' is a comprehensive word used to describe the relationship between one person and another, where the first mentioned person brings the second mentioned person into legal relation with others. The Rule of Agency is based on the maxim "Quit facit per alium, facit per se" i.e., he who acts through an agent is himself acting. 

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