MODULE: 3 CORPORATE REGULATIONS

INDIAN CONTRACT ACT-1872

Contract Definition
The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as
“An agreement enforceable by law”.
Salmond define: contract is an agreement creating and defining the obligation between the parties
Agreement definition
In section 2 (e), the Act defines the term agreement as “every promise and every set of promises,
forming the consideration for each other”.
Types of Contracts – Based on Validity
Valid Contracts
The Valid Contract as discussed in the topic on “Essentials of a Contract” is an agreement that is
legally binding and enforceable. It must qualify all the essentials of a contract.

Void Contract or Agreement

The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable”. This makes all those contracts that are not
enforceable by a court of law as void.

We have already stated examples of these kinds of contracts in the “Essentials of a Contract”.

Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A dies of
natural causes in 4 years. The contract is no longer valid and becomes void due to the non-
enforceability of the agreed terms.

Voidable Contract
These types of Contracts are defined in section 2(i) of the Act: “An agreement which is enforceable
by law at the option of one or more of the parties thereto, but not at the option of the other or others,
is a voidable contract.” This may seem difficult to wrap your head around but consider the
following example:

Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This
contract would be valid, the only problem is that person B is a minor and can’t legally enter
a contract.
So this contract is a valid contract from the point of view of A and a “voidable” contract from the
point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus
this is a voidable contract.

A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be
bound to the terms of the contract. For example, person A in the above example.

The other party is not bound and may choose to repudiate or accept the terms of the contract. If they
so choose to repudiate the contract, the contract becomes void. Otherwise, a voidable contract is a
valid contract.

Types of Contract – Based on Performance

Executed Contracts

A contract between two or more parties is said to be executed when the act or forbearance promised
in the contract has been performed by one, both or all parties. Basically, it means that whatever the
contract stipulated, has been carried out. Thus the contract has been executed.

Let us see an example of an executed contract. Alex goes to the local coffee shop and buys a cup of
coffee. The barista sells her the coffee in exchange for the cash payment. So it can be said that this
is an executed contract. Both parties have done their part of what the contract stipulates.

In most executed contracts the promises are made and then immediately completed. The buying of
goods and/or services usually falls under this category. There is no confusion about the date of
execution of the contract since in most cases it is instantaneous.

Executory Contracts

In an executory contract, the consideration is either the promise of performance or an obligation. In

such contracts, the consideration can only be performed sometime in the future, hence the name
executory contract. Here the promises of consideration simply cannot be performed immediately.

The best example of an executory contract is that of a lease. All the conditions of a lease cannot be
fulfilled immediately. They are performed over time. Similarly, say Alex decides to tutor some
students in Physics. They pay her Rs 2500/- at the start of the month. But here the contract isn’t
executed since Alex has to still carry out her promise. So such a contract is an executory contract.

Now even in executory contracts, there are two types, namely unilateral and bilateral contracts. Let
us take a look at both times.
Unilateral Contracts
As the name suggests these are one-sided contracts. It usually comes into existence when only one
party makes a promise, which is open and available to anyone who wishes to or can fulfil the said
promise. The contract will only be fulfilled once someone fulfils the promise.

Let us see an example. Alex lost his bag pack on the metro. So he decided to announce a reward of
Rs 1000/- to anyone who finds and returns his bag with all its contents. Here the is only one party to
the contract, namely Alex. If someone finds and returns his bag he is obligated to pay the reward.
This is a unilateral contract.

Bilateral Contracts
By contrast, a bilateral contract is one that has two parties. It is a traditional type of contract most
commonly known and occurring. Here both parties agree to the terms of the agreement and thus
enter into a contract. Hence it is also known as a reciprocal contract

In bilateral contracts, both parties have usually agreed to a time frame to carry out the said contract.
Say for example the contract of sale of a house. The buyer pays a down payment and agrees to pay
the balance at a future date. The seller gives possession of the house to the buyer and agrees to
deliver the title against the specified sale price. This is a bilateral contract.

Types of Contract – Based on Formation

Express Contract

The Section 9 of the Act defines what is meant by the term express: “Promises, express and implied
—In so far as the proposal or acceptance of any promise is made in words, the promise is said to be
express.”

This means that if a proposal or a promise is expressed by listing the terms in words – in writing or
orally is said to be an Express Contract as long as it gets acceptance from the other party.

The terms of the Express Contract are clearly stated either orally or in writing. So the main aspect of
the Express Contract is that the terms of the contract are expressed clearly. For example, consider
the following:

A person A sends a text from his phone to person B, proposing to sell their bike for a cost of Rs.
10,000/-. The person B calls the first person and agrees to the terms of the promise.

This is an Express Contract as the terms have been stated clearly in oral as well as written form.
Note that the communications could be entirely oral or written.
Implied Contracts

The second part of section 9 of the Act defines what is meant by an implied contract: “In so far as
such proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

Going by the definition we can say that a contract in which the terms of the agreement are not
expressed in written or oral form is an implied contract. Let us see an example to understand this.

For example, you board a rickshaw and the driver starts to drive. You tell the driver the address
where he has to drop you. The driver stops and you pay him.

As you can see this is a contract but did you and the driver express any of the terms in written and
oral form? No, the intent was implied by your conduct and thus there was an implied contract.

Quasi-Contract

They are not contracts in the sense that no agreements are made between any of the parties. In fact,
there is no contract prior to some court order. Let us first see an example and then we will get a
clear idea of what we mean by Quasi-Contract.

For example, a bank mistakenly transfers a large amount of money into your account. Now there is
no written or oral or any sort of agreement between you and the bank but the money doesn’t belong
to you.

You will have to return the money even if you don’t want to. The bank will approach the court and
the court will issue an order to return the money, which is becoming a quasi-contract.

So here we see that a quasi-contract is not agreed upon by the two parties but it comes into existence
by a court order. It is thus enforced by the law which also creates it. Most of the times the quasi-
contract is created to stop any of the parties from taking unfair advantage of the other.

Consider this example. You have a yard and you commission a person to build a small door for your
car. You come home one day to find out that the mansion has made a big door which is very
expensive. At the same time very good for the value of your property. Now, what would happen if
you both approach the court?

The courts usually enforce what is known as the “Quantum Merit” which means “as much as is
deserved.” Since the work was done also increased the value of your property, it would be immoral
if the worker doesn’t get paid for the extra work and materials. The payment might be lesser than
the normal cost but the quantum merit will apply. This is a quasi-contract.
ESSENTIALS OF A VALID CONTRACT

A contract that is not a valid contract will have many problems for the parties involved. For this
reason, we must be fully aware of the various elements of a valid contract. In other words, here we
shall ponder on all the ramifications of the definition of the contract as provided by The Indian
Contract Act, 1872.

1] Offer and acceptance

So you decide to sell your car to yourself! Let us say to avoid tax or some other sinister purpose.
Will that be possible? Can you have a contract with yourself? The answer is no, unfortunately. You
can’t get into a contract with yourself.

A Valid Contract must involve at least two parties identified by the contact. One of these parties will
make the proposal and the other is the party that shall eventually accept it. Both the parties must
have either what is known as a legal existence e.g. companies, schools, organizations, etc. or must
be natural persons.

For Example: In the case State of Gujarat vs Ramanlal S & Co. – A business partnership was
dissolved and assets were distributed among the partners as per the settlement. However, all
transactions that fall under a contract are liable for taxation by the office of the State Sales Tax
Officer. However, the court held that this transaction was not a sale because the parties involved
were business partners and thus joint owners. For a sale, we need a buyer (party one) and a seller
(party two) which must be different people.

2] Intention to create legal relationship

The parties that are subject to a contract must have clear intentions of creating a legal relationship
between them. What this means is those agreements that are not enforceable by the law e.g. social
or domestic agreements between relatives or neighbors are not enforceable in a court of law and
thus any such agreement can’t become a valid contract.

3] Case Specific Contracts

Some contracts have special conditions that if not observed would render them invalid or void. For
example, the Contract of Insurance is not a valid contract unless it is in the written form.

Similarly, in the case of contracts like contracts for immovable properties, registration of contract is
necessary under the law for these to be valid.

4] Certainty of Meaning
Consider this statement “I agree to pay Mr. X a desirable amount for his house at so and so
location”. Is this a valid contract even if all the parties agree to this term? Of course, it can’t be as
 “desirable amount” is not well defined and has no certainty of meaning. Thus we say that a valid
contract must have certainty of Meaning.

5] Possibility of Performance of an Agreement

Suppose two people decide to get into an agreement where a person A agrees to bring back the
person B’s dead relative back to life. Even when all the parties agree and all other conditions of a
contract are satisfied, this is not valid because bringing someone back from the dead is an
impossible task. Thus the agreement is not possible to be enforced and the contract is not valid.

6] Free Consent
Consent is crucial for an agreement and thus for a valid contract. If two people reach a similar
agreement in the same sense, they are said to consent to the promise. However, for a valid contract,
we must have free consent which means that the two parties must have reached consent without
either of them being influenced, coerced, misrepresented or tricked into it. In other words, we say
that if the consent of either of the parties is vitiated knowingly or by mistake, the contract between
the parties is no longer valid.

7] Competency of the Parties

Section 11 of the Indian Contract Act, 1872 is:

“Who are competent to contract — Every person is competent to contract who is (1) of the age of
majority according to the law to which he is subject, and who is (2) of sound mind and is (3) not
disqualified from contracting by any law to which he is subject.”

Let us see these qualifications in detail:

i. Refers to the fact that the person must be at least 18 years old or more.

ii. Means that the party or the person should be able to fully understand the terms or promises of
the contract at the time of the formulation of the contract.

iii. States that the party should not be disqualified by any other legal ramifications. For example,
if the person is a convict, a foreign sovereign, or an alien enemy, etc., they may not enter into
a contract.
8] Consideration
Quid Pro Quo means ‘something in return’ which means that the parties must accrue in the form of
some profit, rights, interest, etc. or seem to have some form of valuable “consideration”.
 For example, if you decide to sell your watch for Rs. 500 to your friend, then your promise to give
the rights to the watch to your friend is a consideration for your friend. Also, your friend’s promise
to pay Rs. 500 is a consideration for you.

9] Lawful Consideration
In Section 23 of the Act, the unlawful considerations are defined as all those which:

i. It is forbidden by law.

ii. Is of such a nature that, if permitted, it would defeat the provisions of any law, or is
fraudulent.

iii. involves or implies, injury to the person or property of another

iv. the Court regards it as immoral or opposed to public policy

These conditions will render the agreement illegal.

10. Legal formalities

1. It should be written format

2. It must be a proper witness

3. Signed by the notary

4. Address of the promisor and promise

Discharge of Contract:
The discharge of a contract is characterized as the end of an agreement or an arrangement made
by a couple of parties, which results in the failure in performing or playing out the obligations
referenced at the hour of making a contract with the acknowledgment of all the parties with free
consent. Subsequently, the commitments might be legal or contractual or performance, or even
operational.
Different methods by which a contract can be discharged are as follows:

Discharge of contract by breach of contract:

Breach of contract is concerned with the termination of the original contract due to the failure of
performing obligations by either or all of the parties, which discourages each of the other parties.
It relates to void or terminating the original contract completely. These breaches of contracts
may be either anticipatory or actual.

Discharge of contract by accord and satisfaction:

Accord is an executor contract that helps to perform the existing duties at present to avoid the
contractual discharge. On the other hand, based on the performance of the accord, the
satisfaction of a contract will be considered, and one doesn’t want to void the entire contract.

Discharge of contract by the impossibility of performance:

In this case, the discharge of the contract happens without any interference from both of the
parties. Despite the fact that everything is acceptable at the place of pain, certain unexpected and
undetermined issues might occur, which decreases the chance of playing out or performing a
contract. This includes a downturn for the market, catastrophic events, absence of legitimate
reason, unfortunate episodes, and so on. In the Indian Contract Act, segment 59 plainly clarifies
that assuming any of the reasons might prompt the difficulty of execution, and it is prudent to
break the agreement.

Discharge of contract by lapse of time:

According to the Limitation Act 1963, it is indicated that in case if the agreement can’t be
performed within the predetermined period, it might influence the other party and lead to the
abrogation of the whole agreement. Then, at that point, it is treated as a contractual discharge of
the agreement by a time-lapse.

Discharge of contract by agreement:

If both of the individuals or parties in the agreement aren’t willing to proceed with the agreement
till the due date, then it is changed over to the next party, whether or not they might acknowledge
the discharge of the agreement or contract by the understanding will occur. However, it happens
in different circumstances. They are as follows:
A: Waiver: Waiver refers to the abandonment of right. In case any of the parties surrender their
rights from the contract, which affects the other party, then it leads to the discharge of the
contract by substitute agreement.
B: Alteration: It is another situation where the particulars of the agreement or contract will be
changed either partially or totally with the assent of the two parties. Be that as it may, the parties
will not change, and they can appreciate new advantages, possibly they may less or more than
the old agreement or contract.
C: Rescission: Here, both the parties agreed to modify certain rules and regulations in the
contract with mutual understanding. It may lead to the cancellation of all the rules or may cancel
partially.
D: Novation: Specifying the substitution of either a new contract in the place of the original
contract or new members in the place of the old one, whether it may be a single person or both
the parties, is known as novation, which is a part of the contractual discharge by substitution of
agreement.

Discharge of contract by performance:

The discharge of a contract occurs when both parties are refused to perform the obligations can
be referred to as discharge by performance.
REMEDIES FOR THE BREACH OF CONTRACT
Suit for Rescission
If one party breaches the contract, then the other party need not oblige to the contract. The
contract stands cancelled if the aggrieved party cancels it. The aggrieved party can file for the
damages. Generally, the suit for the damages accompanies the cancellation of the contract by the
aggrieved party. This suit is for obtaining the damages of the breach.

Suit for Injunction

A restraint order from the court is an injunction. The court has the power to restrain a person
from doing a certain act. If the defendant does something that he should not perform, then the
aggrieved party can file a suit for injunction. This shall be temporary or permanent.

Suit for Specific Performance

A remedy which is given by the court to both parties to perform according to the contract. This is
one of the most common suits. The aggrieved party will not receive adequate relief of the
monetary compensation.

Suit for Quantum Meruit (as much as earned)

Quantum Meruit for contracts means the reasonable value of services. If a person hires someone
and the contract is incomplete or un-performable, then the employer can sue the defendant for
the services and the value of improvements made. The law states that the employer has to pay the
employee an amount that he deserves for his services. If the employee is under an express
contract for a specific amount, then he cannot abandon the contract and suit for the Quantum
Meruit.
Suit for Damages
General Damages or Ordinary Damages: The damages that come naturally through a breach.
The aggrieved party must prove the damages and also the amount of the damages in the suit.

Liquidated Damages and Penalty: Some contract addresses the issue of breaching its
consequences and also its penalty. If such a contract breaks then the party causing the breach
should pay the stipulated amount mentioned in the contract to the other party. The amount is
reasonable compensation, and it should not exceed the amount given in the contract. The parties
should not have obstacles to make provisions of the liquidated damages.

Special Damages: The aggrieved party must prove the special loses to claim the special
damages.

Exemplary or Vindictive Damages: This claim is for the mental suffering or emotional

suffering, such suffering can also be due to the breach. Generally, the court takes care of such
damages.

Nominal Damages: A remedy is provided for the breach, which was not there in the actual. It
gives a small remedy, and it is more technical than the actual.