Indian Contract Act is one of the most comprehensive commercial laws ever drafted that laid the principle foundation for the smooth transaction of commercial transactions. The scope and the ambit of the Act are so wide with the increasing number of the amendment and complex judicial decisions that to fully grasp the Act in its totality, the meaning of all the legal jargons used in Act needs to be crystal cleared.
Some of the most Important Definitions and Terms in the Indian Contract Act 1872 are as follows:-
It’s the starting point of the agreement. Every agreement starts with one party making an offer to another party to do or to abstain from doing a certain act or to provide a certain service. So when the desire to create legal obligations, one party communicates his desires to do or to abstain to from doing something in order to attain the consent for another party towards such act or abstinence.
It’s the second stage of the agreement after offer. In this stage when one person makes the offer to another person, the other person, if he desires, accepts the offer of the other party. The act of accepting the offer of the other party is called acceptance.
It means that offeree (or the person who accepts the offer) has agreed to all the terms and conditions of the offer as set by the offeror with free consent.
It arises after the offer has been accepted by the other party and both are willing to enter into the business transactions. The term ‘Agreement’ means a promise or set of promises is made by one party to another for the fulfilment of certain objectives in exchange of consideration is called agreement.
In simple terms, it means that when one party makes a proposal to others and the other accepts the proposal in exchange for certain consideration can be termed as agreement.
The two important things which have to be looked for to identify whether the proposal is a mere promise or agreement is agreement always include Promise + Consideration.
Now the contract is similar to that of agreement in a sense, it’s also an offeror accepted by the other party in exchange of consideration. Now the difference between contract and agreement is that contracts are the agreement is which are enforceable by law, that is that agreement which can be lawfully enforced by either party in case of default in terms of the agreement is called a contract.
There are certain agreements which are not enforceable like consent is given through coercion, illegal consideration or objective of the contract etc. So it can be said that all contracts are agreements but all agreements are not contract.
Privity to contract
It means that contract cannot confer rights or impose obligations to persons who are not a party to contract. The main objective of the principle is to ensure that only parties to contract can sue the other party or reap the benefit of the contract.
Privity to considerations
It means that consideration can be given either by the promisee or any other person related to the promisee. It essentially means that consideration can move from promisee or from some other person if the promisor has no objection.
Is an important part of the contract and if it’s obtained through coerced manner or any other manner but not given freely then the contract will be void. Consent means approving the offer of another party after thoroughly analysing the pro & cons of the offer.
Only the mutual and lawful consideration for the agreement should be enforceable by law. Consideration means anything given by one party in exchange for fulfilling other ends of the bargain. It means for example, that if A contracts B for repairing the house within a week for the amount of 10,000.
In this case, consideration for B is the monetary value which he shall be getting after fulfilling his end of the bargain, i.e. repairing of the house. Consideration should be lawful, which means ‘something given in return’ of the obligation performed by another party should be legal.
For example, if someone does any part of the contract and other pay that person in drugs or supplies him ammunitions, then the consideration of the contract is not lawful and will be deemed as an illegal contract.
The main purpose of entering into the contract is to fulfil some objective. Now the objective sought to be fulfilled should be legal as per the Act or else it shall be deemed as an illegal contract. For example, if a contract is entered to kill a certain person, or to kidnap a certain person, then such contracts have an unlawful objective and deemed to treat as illegal.
Invitation to offer
It’s an act before the offer in which one party induces the other to make him an offer to perform a certain act and when he makes an invitation to offer, the other person has the discretion to either accept or reject the offer.
But if he accepts the invitation to offer, he then makes the offer to that person and if he accepts it then the agreement is formed.
It’s an offer which is accepted through words that can be written or oral. Oral includes telephonic conversation or in person. A written offer may be also accomplished through advertisement or email.
This is an offer conducted through sign or acting. However, if the opposite party remains silent over the offer, the offer itself is not valid.
It’s determined in relation to whom the offer is made. If the offer is made to the public at large then is a general offer. And it can be accepted by anyone who fulfils the terms & condition of the offer.
In this case, the offer has been made to one particular person or one particular group of person. In this case, the offer has to accept by the same party against whom the proposal was given.
It’s an offer in which one party makes a certain offer and the other party makes the same offer though the latter is not aware the former has made the same offer. In these types of offer, both the person offers the same thing to each other.
Is an offer in which the vendor allows the buyer to purchase specific goods or service at a predetermined price for a certain period and under set terms and conditions.
The offers which are kept open for acceptance for a long period of time is called continuous offer.
When one party makes an offer to another party and the other party without expressly accepting or declining the offer makes a new offer which is amended version of the original offer, this is called counter offer.
Revocation of offer
The acceptance of the offer can be revoked (means withdrawing the consent) any time before the communication of its acceptance is complete as against the proposer, but not afterwards as per section 5 of the Act.
Consensus Ad Idem
It means the terms of the contract are understood by both the parties in the same sense and at the same time. So if there is miscommunication in understanding the scope and the ambit of the contract then the contract will be deemed as void ab intio.
Void ab intio
It means that in case of a dispute regarding contract involving illegal objective or considerations, the law shall presume that there was no contract in the first place. So void ab intio means void from the beginning.
This type of contract is not void per se, but it depends on the party whose consent has been obtained illegally that whether he wants to go forward with the contract or abstain from fulfilling the obligations of the contract. So these types of contracts can become void if another party chooses to do so.
Are those contracts which have either illegal objective or illegal considerations or both. All illegal contracts are void, but all void contracts are not illegal.
These are the contracts which otherwise have both legal considerations and objectives, but due to the absence of legal technicalities, the contract can’t be enforced. For example, if the contract was drafted on Rs 100 stamp paper, where else it should have been drafted on Rs 10 stamp paper.
The capacity of parties
It means that parties to contract should be legally competent to contract with other parties. Now, in case if either party comes under the restriction clause of the Act which governs the competency to contract, then the contract shall be termed as void ab intio. Restriction to contract includes- insanity, minority, alien enemy and insolvent person.
In this type of contract, the obligation of one party is not imposed on another because of any agreement, but because of obligations imposed by law. There is no offer and acceptance so; actually, there will be no Contractual relations between the partners.
Are those contracts in which the objective of the contract are already carried out by one or both the parties. It means that whatever the aim of the contract, for which it was drafted, has already been carried out.
In these types of contracts, the consideration can only be performed sometime in future. It means that immediate consideration can’t be given for the fulfilment of the contract by other parties.
Unilateral Contracts or one-sided contracts are a type of contract where offeror makes a promise in exchange for an act or performance by another party. “Uni” means one—so unilateral contracts allow only one person to make a promise or agreement.
A unilateral contract is a contract agreement in which an offeror promises to pay after the occurrence of a specified act.
It’s the contract in which both the sides has to perform each side of its bargain. It’s the most common kind of contract, which is entered into in daily basis.
As per Section 15 of the Act, it means that forcing/threatening someone to do some act which is forbidden under the Indian Penal Code. For example, A aims his gun towards B and threatens to shoot B if he didn’t sign the contract. So, in this case, A using coercion on B to give consent for the contract.
As per section 16 of the Act, means when one party because of their subsisting relationship with each other influences the other party to enter the contract, which in the normal situation he won’t do, then the former party have given undue influence to the latter party.
Like if A and B are father and son, and A gives undue influence to B to sign a contract which in normal situation B won’t sign, then A using his subsisting father relationship with B influencing B to sign the contract, so A is giving undue influence to B.
As per section 17 of the Act, means when either party undertake kinds of the act with the intent to deceive or induce another party to enter into a contract. Like concealment of materials facts which would make the other party reconsider his decision to enter into contracts or any other kinds of deceiving activity.
As per section 18, where the representative believes that certain facts are true and informs the other party of the same, but had no intention to deceive the other party in entering the contract.
Frustration of contract
As per section 56 of the Act, the contract is deemed to be frustrated when due to any circumstances it becomes impossible to perform the objective of the contract.
Novation of contract
When parties to contract in mutual consent agree to substitute the existing contract with the new contract, which may include a change in parties or substitution of the new agreement.
When parties to contract agree that a certain amount of sum shall be payable in case of breach of contract, that sum is called liquidated damage.
When no such sum payable is mentioned in contact in case of breach of contract, then any amount as decided by the court shall be payable, then that amount is called Unliquidated damage.
Remission of performance
As per section 63 of the Act, it means acceptance of lesser performance than what was actually due under the contract.
Occurs when prior to the promised date of performance, the promisor absolutely repudiates the contract. It’s an announcement by the contracting party of his intention not to fulfil the contract and that he will no longer be bound by it.