assignment of contract under indian contract act

India: Subcontracting v. Assignment

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to "sub-contract" or "assign" their rights and obligations to a third party depending upon the nature of the contract.

In common parlance, sub-contracting and assignment are used interchangeably, however, a significant difference lies between the two when one examines the terms from a legal stand point. This post aims to discuss the concept of Sub-Contracting and Assignment and explains the key difference between the two concepts.

Sub-Contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black's Law Dictionary, a sub-contract is "where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor ." 1 A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Sub-contracting is generally undertaken in complex projects where the contract has a prolonged life cycle or multiple components for completion of a project, for instance, infrastructure contracts, construction contracts, renewable energy contracts or certain information technology-related contracts. However, the rights and duties of the sub-contractor under the sub-contracting agreement are relatively similar to that of the principal contractor in the main agreement.

Furthermore, while drafting a contract, one must ensure to incorporate a clause on sub-contracting which clearly spells out that parties to the contract shall sub-contract the rights and obligations only after seeking prior written consent from the other party. The sub-contracting arrangement maybe two-fold, depending upon the nature of the main contract:

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor's agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments 2 upheld that in the absence of a back-to-back covenant in the main contract, " the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate" . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a "complete transfer of rights to receive benefits" accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of "rights" vis à vis assignment of "obligations". The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited 3 categorically distinguished between assignment of "rights" and "obligations". The court upheld that, " an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties" . Primarily, the court clarified that obtaining prior consent to assign "obligations" under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan 4 , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison 5 , the defendant's wife pledged to perform piano at a concert on a specific date. Due to "her illness", she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant's wife's good health and personal talent, and the defendant's wife's illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract's non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the "promisor's expertise" in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the "agreement to sell" in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

The apex court has time and again reiterated that the best policy is to unequivocally state the intent with respect to assignment in the agreement to avoid litigation in the future. The contracting parties must expressly specify the rights and obligations stemming from assignment under a contract. Any agreed limitation on such an assignment must be expressly laid down in the contract to avoid adverse consequences.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While "sub-contracting" is delegating or outsourcing the liabilities and obligations, "assignment" is literally transferring the obligations. It will be not fallacious to say that an "assignment" transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

1.Black's Law Dictionary 4th ed. (St. Paul: West, 1951).

2. 2006 SCC OnLine Mad 1107

3. MANU/SC/0428/1962

4. Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

5. (1871) LR 6 Ex 269

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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assignment of contract under indian contract act

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Sub-contracting and Assignment : Resolving the Legal Conundrum

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to “sub-contract” or “assign” their rights and obligations to a third party depending upon the nature of the contract.

Sub-contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black’s Law Dictionary, a sub-contract is “where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor .” [1] A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor’s agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments [2] upheld that in the absence of a back-to-back covenant in the main contract, “ the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate” . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party’s concurrence. Section 37 of the India Contract Act, 1872 (“ Contract Act ”) enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a “complete transfer of rights to receive benefits” accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of “rights” vis à vis assignment of “obligations”. The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited [3] categorically distinguished between assignment of “rights” and “obligations”. The court upheld that, “ an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties” . Primarily, the court clarified that obtaining prior consent to assign “obligations” under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan [4] , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison [5] , the defendant’s wife pledged to perform piano at a concert on a specific date. Due to “her illness”, she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant’s wife’s good health and personal talent, and the defendant’s wife’s illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract’s non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the “promisor’s expertise” in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the “agreement to sell” in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While “sub-contracting” is delegating or outsourcing the liabilities and obligations, “assignment” is literally transferring the obligations. It will be not fallacious to say that an “assignment” transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

Archana Balasubramanian (Partner), Vaishnavi Vyas (Associate)

[1] Black’s Law Dictionary 4th ed. (St. Paul: West, 1951).

[2] 2006 SCC OnLine Mad 1107

[3] MANU/SC/0428/1962

[4] Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

[5] (1871) LR 6 Ex 269

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Assignment of Contract

An agreement enforceable by law becomes a contract. A contract involves both rights and obligations because a contract is an agreement enforceable by law. An agreement involves promises from both sides, and thus, there is the creation of both rights and obligations. For instance, X promises to sell his car to Y, and Y promises to pay Rs. 5,00,000 for his car. This constitutes a valid contract between X and Y. Here, the right on the part of X is to get Rs. 5,00,000 as consideration for selling his car, and the obligation for X is to deliver the car to Y as consideration for Rs. 5,00,000 paid to X by Y for selling his car.

Similarly, the right on the part of Y is to get the car delivered as consideration for Rs. 5,00,000 paid, and the obligation for Y is to pay Rs. 5,00,000 as consideration for the vehicle. If either X or Y fails to discharge their responsibility, there will be a breach of contract. In this way, a contract leads to the creation of both rights and obligations for both parties.

Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z. In this case if Y asks Z to directly pay Rs. 1,000 to X, and if X accepts the same, there will be an assignment of Y’s right to Z. But, if in a similar situation, instead of transferring his ownership, Y would have transferred any of his obligations, then it would amount to novation. Section 37 of the Indian Contract Act, 1872, enables the parties to dispense the performance by way of the contract’s Assignment. Apart from conforming with the Indian Contract Act, 1872, there are exceptional circumstances where the contract assignment must be duly stamped in conformity with the provisions of the Indian Stamp Act, 1899.

The common law system did give effect to three kinds of transactions, viz., acknowledgment, novation, and power of attorney, which to some extent did work of an assignment. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. There are three parties involved in contracts of Assignment, namely, the assignor, assignee, and obligor. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment.

But if a contract between two parties relies entirely on the’ promisor’s skill or expertise, then such a contract cannot be assigned under any circumstances. This is because the ‘promisee’ has entered into the contract based on the’ promisor’s skill or expertise. The case of Robinson v Davison is important case law in this regard . In this case, the defendant’s wife promised to play piano on a particular at a concert. She was unable to discharge her liability, that is, to play piano at the concert because of her illness. In this case, it was held that the contract was directly dependent on the good health and the personal skill of the defendant’s wife, and the illness of his wife discharged the contract. It was also stated that the defendant could not be made liable to pay compensation for the non-performance of the contract. As the contract was based on the ‘promisor’s skill in the above case law, the wife could not assign her right/obligation to any third party.

Case Study: Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan Case

Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan is a recent judgment delivered by the Supreme Court of India on November 25, 2019, concerning the Assignment of rights and Interests in a contract. In this judgment, the Supreme Court reaffirmed that a party to a contract could not assign its liabilities or obligations without the consent of the other party.

The facts of the case are: The appeals to the Supreme Court resulted from the Gujrat High Court’s decision that had allowed the appeals of the respondent against the trial court’s decision. The dispute, in this case, is related to a property owned by the appellants (Vendor). The appellant has had formulated an agreement to sell in favor of some of the respondents in 1986 regarding the above-mentioned property. The respondents, who were the original vendees, had paid a part of the consideration part. The Original Vendees, in 1987, assigned the former’s rights in favor of Respondent 1 and executed an agreement in favor of Respondent 1. This led to several disputes, and subsequently, Respondent 1 filed suits against the Original Vendees and the vendor demanding specific performance of the agreement executed in 1987. The Respondent’s suits were dismissed by the trial courts stating that the Original Vendees could not have assigned their outstanding obligation of paying Vendor the remaining money to Respondent 1 without the consent of the Vendor. On the other hand, Gujrat High Court reversed the decision of the trial court and declared the Assignment of rights in favor of Respondent 1 as valid.

The Supreme Court in its judgment reaffirmed the view of the trial courts and stated that: “ It is further relevant to note that under the 1987 agreements, payment of the outstanding consideration amount is to be made to the original vendees, not the Appellants, and possession/ownership of the suit property is to be handed over by the original vendees. The 1987 agreements nowhere provide for the discharge of the original vendees’ pending obligations towards the Appellants by Respondent Nos. 1. Hence, we are inclined to accept the Appellants’ argument that the 1987 agreements were not a case of Assignment but appear to be independent/sovereign agreements for sale which were contingent and dependent on the execution and implementation of the 1986 agreement. Therefore, the only way Respondent Nos. 1 can seek specific performance of the 1986 agreement against the Appellants is by proving the Appellants’ knowledge of and consent to transfer the original vendees’ rights and liabilities Respondent Nos. 1.”

From the above discussion, it is clear that the Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment. The Assignment of obligations/liabilities is not possible in the case of contracts solely relying on the personal skill or expertise of the ‘promisor’.

The recent judgment of the Supreme Court in Kapilaben & Ors. v Ashok Kumar Jayantilal Seth, through POA Gopalbhai Manusudhan Case, also reaffirms that in case of transfer/assigning of outstanding obligations under the contract, the consent of the other party is a necessary condition to make the Assignment valid. Even though this judgment reaffirms the point upheld by law, it still suggests the parties to a contract consider the various complexities of contracts, the intent contract, the availability of the assignability clause in the written agreement, etc., before drafting a commercial contract.

References:

The Indian Contract Act, 1872, No. 2(h) (Indian).
Dr. R.K. Bangia, The Indian Contract Act, 2 (12 th Edition, 2005), Allahabad Law Agency, Haryana.
Krishnendu Kanungo & Pritisha Chakraborty , Assignment Of Rights And Its Practical Relevance In Financial Transactions: A Lender’s Perspective Manupatra, http://docs.manupatra.in/newsline/articles/Upload/E915DA6B-361C-493B-91D1-96D8EB703128.pdf (last accessed Mar. 12, 2021).
The Indian Contract Act, 1872, No. 37 (Indian)
Sir Oshley Roy Marshall, The Assignment of Choses in Action (Pitman Publishing 1950).
Krishnendu, supra note 3, at 1.
Khared & Co. Ltd. v Ramon & Co. Ltd., AIR 1962 SC 1810.
Krishnendu, supra note 3, at 2.
Robinson v Davison, (1871) L.R. Ex. 269.
BANGIA, supra note 1, at 255.
Ramesh Vaidyanathan & Aishini Mandal, Assignment Of Contractual Obligations – Is Consent Necessary Advayalegal (Dec. 6, 2019) https://www.advayalegal.com/blog/contractual-rights/ (last accessed Mar. 13, 2021).

Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a contract can sue on a contract in the following cases:

Family Settlement

Assignment of a contract.

Acknowledgement or Estoppel
A covenant running with the land
Contract through an agent
Essentials of a Contract

Let’s look at each of them in details:

If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.

Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of the estate in Ravi’s name, once he becomes 21 years old.

After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue upon the contract between Arjun and his father , even though he was not a party to it.

If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.

Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary.

Ritika was living in a Hindu Undivided Family (HUF). The family had made a provision for her marriage. Eventually, the family went through a partition and Ritika filed a suit to claim her marriage expenses. The Court held the case because Ritika was the beneficiary of the provision despite being a stranger to the contract.

What is a Contract?

If a contract is made for the benefit of a person, then he can sue upon the contract even though he is not a party to the agreement. It is important to note here that nominees of a life insurance policy do not have this right.

Acknowledgment or Estoppel

If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied.

Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the amount.

Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of the sale price, Pankaj was to be paid Rs 25,000 as his professional charges. Seema promised to pay Pankaj the amount before taking possession of the property. She made three payments of Rs 5,000 each and then stopped paying him. Pankaj filed a suit against Seema which was held by the Court because Seema had acknowledged her liability by conduct.

A Covenant Running with the Land

When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.

Peter owned a piece of land which he sold to John under a covenant that a certain part of the land will be maintained as a public park. John abided by the covenant and eventually sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.

Contract through an Agent

If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal).

Solved Example for You

Q1. Vidya purchases a property from Krishna. Rajiv is already living in the property on a three-year lease. As a part of the purchase agreement, Vidya takes over the lease. There are some leakages in the house that Krishna promises to fix, as a part of the contract. A few months go by and the leakages are still not fixed. Rajiv calls Vidya, the new owner, and she says that it is Krishna’s responsibility. Can Rajiv file a suit for repairs against Krishna?

Since there is no contract between Rajiv and Krishna about repairing the leakage, if he files a suit, it will probably be dismissed by the Court. Krishna had agreed to carry out the repairs in his purchase contract with Vidya. Hence, she can file a suit against Krishna to get the work done.

Rajiv, on the other hand, can sue Vidya for not performing her obligations according to the lease contract.

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Indian Contract Act 1872: Part I

Legal Rules Regarding Consideration
Agreements without Consideration
Types of Contract – Based on Performance
Proposal or Offer
What is a Contract according to Indian Contract Act?
Types of Contracts – Based on Validity
Types of Contract – Based on Formation

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Capacity and Competency to Contract under Indian Contract Act

Contract Act
January 31, 2021

As per Section 11, competency to contract for any person is as follows:- Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Section 10 of the Indian Contract Act provides that an agreement in order to be a contract, must satisfy the following conditions:

It must be made by free consent of the parties .
The parties must be competent to contract.
It must be made for a lawful consideration and with a lawful object.
It should not have been expressly declared as void by law .

Also, there must be consensus ad idem or identity of minds in the sense that parties have agreed about the subject matter of the contract at the same time and in the same sense, as evidenced by offer and acceptance(Section 13). It has been observed that the agreement must import an intention to create a legal relationship between the parties and that agreements relating to social matters are not enforceable by law. [1]

Competency to Contract under Indian Contract Act

As per Section 11, competency to contract for any person is as follows:-

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Age of majority

In India the age of majority is regulated by the Indian Majority Act (Act IX of 1875). Every person domiciled in India attains majority on the completion of 18 years of age. Except when a guardian of a minor’s person or property has been appointed by the court, in such case it is 21. [2]

Competency to Contract: Position of Minor’s Agreement

Effects of minor’s agreement.

1. No estoppel against minor: There can be no estoppel against a minor i.e., if a minor by misrepresenting his age induces another to contract with him, then also he cannot be made liable.

2. No liability in contract or in tort arising out of contract: A minor is incapable of giving consent, and the nature of the minor’s agreement is a nullity and cannot be enforced. [3]

3. Doctrine of Restitution: If an infant by misrepresenting his age, obtains property or goods, then he can be compelled to restore it, but only so long as the same is traceable in his possession, this is called the equitable Doctrine of Restitution. Where the infant has converted or sold the goods, he cannot make to repay the value of goods as that would lead to enforcing a void contract. When the infant has obtained the cash instead of goods, then in this case again the Doctrine of Restitution is not applied. [4]

In Mohori Bibee v. Dharmodas Ghosh [7] , a minor Dharmodas Ghosh mortgaged his immovable property to Brahmo Dutt a money lender to secure a loan of Rs. 20,000. The actual amount was not paid by the plaintiff as he paid Rs. 8000 only and refused to pay the rest amount. Minor’s mother said that his son is not liable to pay the sum as he was a minor. The privy council held that the minor contract is void and accordingly the Brahmo Dutt’s appeal was dismissed.

An agreement entered into by a minor is altogether void

Contract with or by a minor is altogether void. The Indian Contract Act simply says that only a person who is a major jas the competency to contract. The main reason for holding a minor’s agreement void is that a minor is incapable of giving a promise imposing a legal obligation.

Minor can be a beneficiary

Though a minor does not have the competency to contract, nothing in the Contract Act prevents him from making the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void and can be sued upon by him. A minor cannot become a partner in a partnership firm. However, he may, with the consent of all partners, be admitted to the benefits of a partnership (Section 30 of the Indian Partnership Act, 1932).

Minor can always plead minority

A minor’s contract being void, any money advanced to a minor on a promissory note or otherwise cannot be recovered. Even when a minor procures a loan by falsely representing that he is full age, it will not stop him from pleading his minority in a suit to recover the amount and the suit will be dismissed.

But where a minor had fraudulently mortgaged and sold certain properties, the Court held that on the cancellation of the agreement at the instance of the minor the lender and purchaser must be compensated.

Ratification on attaining majority is not allowed

As a minor’s agreement is void he cannot validate it by ratification on attaining a majority. For instance, a minor borrows money and executes a promissory note. On attaining majority, he executes a fresh promissory note in substitution of the one executed as a minor.

The second promissory note is also void being without consideration. But a person who supplies necessaries of life to a minor or to one whom the minor is legally bound to support, according to his situation in life, is entitled to be reimbursed from the property of the minor not on the basis of any contract but on obligation resembling a contract. However, a minor’s property is liable for necessaries and no personal liability is incurred by him.

Contract by a guardian – how far enforceable

Though a minor’s agreement is void, his guardian can under certain circumstances enter into a valid contract on the minor’s behalf. Where the guardian makes a contract for the minor, which is within his competency to contract and which is for the benefit of the minor, there will be a valid contract which a minor can enforce. For instance, a guardian can make an enforceable contract of marriage for a minor.

But all contracts made by a guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power to bind the minor by a contract for the purchase of immovable property. But a contract entered into by a certified guardian (appointed by the court) of a minor, with the sanction of the court for the sale of the minor’s property, may be enforceable by either party to the contract.

Competency to Contract: Persons of unsound mind

The agreement with a person of unsound mind in India is void. According to Section 12 of the Indian Contract Act, a person is said to be of a sound mind if, at the time of making the contract, the person is able to understand the contract and is capable of making a rational decision considering the effects of the same.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Persons of unsound mind include an idiotic, lunatic and intoxicated person.

Sound Mind:

A person is said to be of sound mind for the purpose of making a contract if at the time when it is, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. Similar is the case with a person who is generally of sound mind but occasionally of unsound mind.

Contract by a person of unsound mind

A person of unsound mind too, under the Indian Contract Act, is incapable of entering into a contract. Although a contract by a person who is not of sound mind is void, such a person can enter into a valid contract during an interval of lucidity. The test of unsoundness of mind is whether or not the person is capable of understanding the business and of forming a rational judgment as to its effect upon his interest. Idiots, lunatics and drunken persons are examples of those having an unsound mind.

The presence or the absence of the capacity mentioned in this section at the time of the making the contract is in all cases a question of fact. Where a person is usually of sound mind, the burden of proving that he was of unsound mind at the time of execution of a document lies on him who challenges the validity of the contract.

Illustrations :

A patient in a lunatic asylum, who is at intervals of sound mind my contract during such intervals. The liability for necessaries of life supplied to person of unsound mind is the same as for minors (section 68).

Competency to Contract: Persons disqualified by law

Apart from minors and persons of unsound mind, there are also other persons such as Foreign sovereigns, convicts, alien enemies, insolvents and so on who are disqualified from contracting partly or wholly and do not have the competency to contract. Therefore, contracts by such persons are void.

Contract by disqualified persons

Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such a person are void. If by any provincial legislation, a person is declared disqualified proprietor, he do not competency to contract to enter into any contract in respect of the property.

Illustrations

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.

(c) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

(d) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

Section 64: Consequences of rescission of voidable contract

“When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.”

Section 2(i) defines a voidable contract as “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”. It means that a contract which can be terminated or continued only on the option of one party is a voidable contract.

Section 64 states that if a person on whose option the contract is voidable rescinds the contract, then he must restore the benefit he has received from the other party in the contract and the other party is not obliged to perform any promise it had promised to perform in the contract as a promisor.

Case Law: In Sinaya Pillai Vs Muniswami Iyyer , [5] it was postulated that; “This principle is acknowledged in section 64 of the Indian Contract Act and generally by the Indian Courts as Courts of Equity and good conscience.”

The Indian Contract Act only provides for the restoration received by the party rescinding the voidable contract, whereas under The Specific Relief Act, there is a provision for the payment of compensation to which the other party may require. This provision of The Specific Relief Act is more logical as compared to the provision in Section 64.

For example: X has received a loan from Y on a voidable contract. It is not enough to only return the amount borrowed by X but he should also pay some interest to Y on account of the benefit obtained on such a transaction. It is suggested to amend Section 64 to bring it in line with the provisions of The Specific Relief Act but strangely the Law Commission recommended no change in it.

Section 33 in The Specific Relief Act, 1963

33. Power to require benefit to be restored or compensation to be made when an instrument is cancelled or is successfully resisted as being void or voidable.—

(1) On adjudging the cancellation of an instrument, the court may require the party to whom such relief is granted, to restore, so far as may be any benefit which he may have received from the other party and to make any compensation to him which justice may require.

(2) Where a defendant successfully resists any suit on the ground—

(a) that the instrument sought to be enforced against him in the suit is voidable, the court may if the defendant has received any benefit under the instrument from the other party, require him to restore, so far as may be, such benefit to that party or to make compensation for it;

(b) that the agreement sought to be enforced against him in the suit is void by reason of his not having been competency to contract under section 11 of the Indian Contract Act, 1872 (9 of 1872), the court may, if the defendant has received any benefit under the agreement from the other party, require him to restore, so far as may be, such benefit to that party, to the extent to which he or his estate has benefited thereby.

Section 65 of The Indian Contract Act, 1872

The obligation of the person who has received an advantage under a void agreement, or contract becomes void.

When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it. When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.”

Illustrations:

(a) A pays B 1,000 rupees, in consideration of B’s promising to marry C, A’s daughter. C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.”

Section 68: Claim for necessaries supplied to person incapable of contracting, or on his account

“If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of a such incapable person.” [6]

(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

(b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

Under section 68, any person would be entitled to reimbursement out of the minor’s estate for necessities supplied to him or to his family. Necessaries also include goods and services. If the minor had obtained payment fraudulently by concealment of age, he may be compelled to restore the payment, but he cannot be compelled for an identical sum, if any, as it would amount to enforcing a void contract.

Thus, for a valid contract, capacity to contract is an essential element and for that, Section 11 of the Contract Act defines the persons who are eligible for contract i.e. competent to contract or who can enter into the contract. A person incompetent to contract like a minor, unsound mind and persons disqualified by law are not eligible to contract and a contract with such type of person is unenforceable by law.

For more articles on Law of Contracts, Click Here.

For law notes, click here..

[1] Indian Contract Act, 1872 (No. 9 of 1872)

[2] The Majority Act, 1875 (No. 9 of 1875)

[3] Avtar Singh, Contract & Specific Relief, Page- 158, 12 th Edition, EBC Publishing (P) Ltd.

[4] https://indiankanoon.org/doc/1164247/

[5] 22. Mad. 289,291.

[6] https://indiankanoon.org/doc/1164247/

[7] (1903) 30 Cal 539 (Pc)

This article is contributed by Sunita Basak is a student at University of Engineering and Management, Kolkata.

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The Doctrine of Privity of Contract under Indian And English Law

Privity of contract:.

A third party cannot receive a benefit if he is not a party to that contract.
A third party cannot be liable under a contract if he is not a party to that contract.
A third party cannot enforce a contract if he is not a party to that contract.
A contract cannot impose an obligation (burden) on a third party without that party's consent.
Where a contract confers a benefit (right) on a third party, that party cannot enforce the contract
Central to the rules of privity of contract therefore is identifying the contracting parties
Denies 3rd party to enforce right.
Best to argue that the 3rd party is a party to the agreement.
Mr Coulls gives to O'Neil Construction the sole right to quarry 50 acres of his land.
O'Neil Construction agrees to pay 3d per ton for all stone quarried and sold, and a fixed minimum royalty of �12 per week for a period of 10 years with an option of another 10 years at the above basis. (consideration)
O'Neil Construction to pay all money connected with the Agreement to Mr. Coulls and his wife, Doris Coulls as joint tenants-(wanted to make it clear if I die my wife should inherit interest not children). The agreement was signed by Mr. and Mrs. Coulls and O'Neil Construction. (clearly endorsed agreement and was there at time agreement was made). After Mr. Coulls died, his 2 children from a previous marriage stood to benefit if the royalties were payable to Mr. Coulls' estate.

Aspects Of The Doctrine:

Burden aspect: Parties cannot impose liabilities or burdens upon a third party by their contract. There is a rational logic behind this rule how can we justify imposing any contractual obligation upon a person who is a stranger to a contract.
Benefit aspect: A stranger to a contract cannot take advantages arising out of the contract and he can't sue upon the contract. This is similar to the doctrine of consideration which says that a person, who is not a party to consideration, does not have any right to sue upon the contract. Actually, this aspect of privity has been subject to many criticisms.

Privity Of Contract: English Law:

Privity of contract: indian law:, essentials of privity of contract:.

A contract has been entered into between two parties: The most important essential is that there has been a contract between 2 or more parties.
Parties must be competent and there should be a valid consideration: Competency of parties and the existence of consideration are prerequisites for applying this doctrine.
There has been a breach of contract by one party: Breach of contract by one Party is the essential requirement for the application of the doctrine of privity of contract.
Only parties to the contract can sue each other: Now after the breach, only Parties to a contract are entitled to sue against each other for the non-performance of a contract.

Role Of Consideration In Privity Of Contract:

Comparison between english law and indian law:, exception to the doctrine of privity of contract:.

A beneficiary under a contract: If a contract has been entered into 2 persons for the benefit of a third person not being a party, then in the event of failure by any party to perform his part, the third party can enforce his right against the others. This concept of a beneficiary under a contract has been highlighted in the case of Muhammad Rustam Ali Khan vs Husaini Begam [11]. Where the plaintiff, namely Husaini Begam, who was a Mohammedan lady, married the son of the defendant, namely Khwaja Muhammad Khan. As per Islamic customs, the plaintiff was to be given Rs. 500 as Kharch-i-Pandan. The agreement was enforced by the defendant at the time of marriage. The agreement was to be initiated after her reception into conjugal domicile, which started 6 years of their marriage. After 13 years of being together, the plaintiff abandoned her husband's home and stayed in Moradabad as a result of certain altercations. The husband Rustam Ali Khan never bought an action against his wife for the restoration of conjugal rights. The plaintiff sued the defendant for recuperation of Kharch-i-Pandan. Issues was: Whether The contract between Khwaja Mohammad Khan and Husaini Begum existed, as according to the rule of privity of contract, no stranger to contract can sue the parties in agreement to enforce the contract. Judgement: The plaintiff was allowed to enforce the contract. The court said that the rule of privity of contract does not apply to the said case, as the facts and circumstances of this case are different.
Conduct, Acknowledgement, or Admission: There can also be a situation in which although there may be no privity of contract between the two parties, but if one of them by his conduct or acknowledgment recognizes the right of the other, he may be liable on the basis of the law of estoppel ( Narayani Devi v. Tagore Commercial Corporation Ltd ). For eg., If A enters into a contract with B that A will pay Rs 5000 every month to B during his lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C. Now if A defaults C can sue to him, although not being directly a party to the contract.
Provision for maintenance or marriage: This type of provision is treated as an exception to the doctrine of privity of contract for protecting the rights of family members who not likely to get a specific share and also to give maximum effect to the will of the testator. For eg., If A gives his property in equal portions to his 3 sons with a condition that after his death all 3 of them will give Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to obey this.
Family Settlement: If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract. Peter promised Nancy's father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary.
Estoppels: A third party may be able to seek relief against a promisor on the basis of promissory estoppels principles. To succeed the third party would need to establish the elements of promissory estoppels. A person who is not a party to the contract can maintain a suit if he is authorized by a statute. Thus, under insurance acts, a stranger to the contract may recover from the insurance company in case of third-party risks are recovered by the insurance policy.
Agency: The rule here is that if one of the contracting parties contracts as an agent, then either the agent or the principal, but not both, can sue to enforce the contract. In our example, if B is C's agent then either B or C can enforce the contract against A. In these cases, it is immaterial as to whether A knew that B was C's agent. In terms of section 185 of the Act, no consideration is necessary to create an agency
Indian Contract Act, 1872
(1967; HC of A).
(1861)1 B & S 393.
[1914] UKHL 1 (1 July 1914).
AIR 1973 Cal. 401.
(1911) 30 IA 7.
[(1957) 61 Cal WN 78].
1995 AIR 2251, 1995 SCC (3) 250.
Bare Act, India Contract Act, 1872.
(1907) ILR 29 All 222.

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Breach of Contract under Indian Contract Act 1872: Explained

This article on ‘Breach of Contract under Indian Contract Act: All you need to know’ was written by Madiha Khan, an intern at Legal Upanishad.

Introduction

According to the Indian Contract Act, a contract is an agreement that is enforceable by law. There must be an offer and acceptance of that offer through the free consent of both parties. As it is known, all contracts are agreements but all agreements are not contracts. A contract is also known as a legally binding agreement. So, for there to be a breach of contract there must be a contract and not merely an agreement.

A breach occurs when one of the parties to a contract refuses to perform the obligations that were promised by them at the time of the making of the contract. A breach of contract can be either an actual breach or an anticipatory breach. Breach of contract usually comes under civil wrong. To file a case for breach of contract, it must be proven that a legally binding contract was in place and that it had been breached.

A bench of Justices SA Nazeer and Krishna Murari said the distinction between mere breach of contract and cheating, is a fine one. Generally, a breach of contract gives rise to only civil liability but in case there is intent to cheat the other party then an offense can be filed under Section 405 (Criminal breach of trust.) and 420 (cheating) of the Indian Penal Code, 1860. Section 39- Anticipatory breach talks about the refusal of a party to perform the promise wholly.

To claim damages the following questions need to be looked into – What is a contract? Whether the contract existed? Whether the contract was void-ab-initio? Whether the essentials of a valid contract were followed? Was there indeed a breach of contract?

Essentials of a valid contract

Offer and acceptance – a party must make an offer and the other party must accept the offer.
Reciprocal promise – both parties intend to form a legally binding contract.
Consideration – there must be some sort of exchange either in monetary terms or in any other way.
Competent person – the parties must be legally able to enter into a contract, for instance, they shouldn’t be minors or a lunatic.
Consent – there must be free consent. Provisions for free consent are from sections 14 to 22.
Legality – the contract must be legal, i.e. it must not be illegal.
There must be the performance of the contract on time.

When is a contract breached?

A contract is breached when there is a violation of certain terms and conditions stated in the contract. There are various reasons a breach can occur, such as delay in payment, postponement in delivery of the assets, etc. If there is any breach, the Act also gives the remedies for breach of contract. Breach of contract can ensue for both written as well as oral contracts and the parties can resolve it through negotiations among themselves, through court, or through arbitration. The breach can be either wholly or partially in nature. At the beginning of the suit, the court will assess the nature of the breach.

Breach of Contract under Indian Contract Act

Types of breaches:

Anticipatory breach – When a party refuses to perform his part of the promise wholly before the performance of the contract, the other party can either, end the contract, i.e. terminate the contract or continue the contract. For instance, A enters into a contract with B for the supply of 5000 notebooks at Rs.60 each on or before the 1st of January 2023. B on 15th December 2022 refuses the delivery of goods to A, i.e. before the due date, this is known as anticipatory breach
Actual breach – Unlike the anticipatory breach, the actual breach happens at the time of the execution of the contract. It is either committed at the time of the performance of the contract, meaning on the due date, or during the performance of the contract, like not delivering the goods at the scheduled place. For instance, X enters into a contract with Y promising to deliver 100 bag packs on 1st September 2020. However on the date of delivery X fails to deliver the same, this is an actual breach.

Where can a suit for breach of contract be filed?

The suit for damages in case of breach of contract is filed at the place where the contract is made or at the place the breach occurred. It can also be filed according to the clause inserted in the breach section of the contract.

Remedies in case of breach

The primary purpose of remedies in cases where the breach is not of criminal nature is to restore the faultless party in the position they would have been in had there not been a breach. It is a way to reimburse the non-breaching party.

List remedies for breach of contract

The recession of Contract – a party can rescind the contract and refuse the performance thereof in case the other party to the contract does not fulfill his obligations. As per section 75, the party who rescinds the contract is entitled to receive compensation for such recession.
Sue for Damages – a party can claim compensation for loss suffered by them in the normal course of business, from the other party that has broken the promise. Under section 73 there are two types of damages, liquidated and unliquidated damages.
Sue for Specific Performance – in this the party who breached the contract will have to perform his obligation according to the contract. To avail this remedy a decree of specific performance is to be obtained from the court.
Injunction – an injunction is a court order to restrain a person from doing a certain act. This availed of stopping a party from doing something which he has promised to not do during the existence of the contract
Quantum Meruit – it means as much as earned. When a party is prevented from finishing his part of the contract by the other party, this remedy is applied to reimburse the party for the work he has done.

In Hadley v Baxendale , it held that the damages can only be claimed for all losses which can be foreseen in the usual course of business. But damages cannot be awarded for those losses that cannot be assumed generally. Thus, Hadley can’t be awarded damages for the loss of profit which Baxendale was not aware of.

The court cannot order specific performance in some cases. Such as:

When monetary compensation is sufficiently redressed
Where the execution or performance of the contract cannot be overseen by the court.
When personal services are contracted for,
When a minor is a party to the contract.

Suggestions

In case of leave and license agreement any party can give notice of one month or as per the conditions stated in the contract to terminate the contract to avoid breach of contract.

Going for arbitration is a quicker option than going through court proceedings if the contract has an arbitration clause.

Conclusion

Contracts are meant to be upheld the promise stated. Nevertheless, there are many cases of breach of contract and to mitigate these breaches remedies are provided to the contracting parties. These remedies usually aim to make the breacher perform the contract as was agreed by the parties at the time of entering the contract. It is paramount to thoroughly understand the terms and conditions of the contract to avoid breaching it.

“Indian Contract Act, 1872, JK Shah Classes, available at: https://www.jkshahclasses.com/announcement/IndianContractAct1872.pdf
“Remedies for Breach of Contract”, Toppr, available at: https://www.toppr.com/guides/business-laws-cs/indian-contract-act-1872/remedies-for-breach-of-contract/
“Hadley v Baxendale – 1854”, Law Teacher, available at: https://www.lawteacher.net/cases/hadley-v-baxendale.php

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Different types of Contracts under the Indian Contract Act

by Social Laws Today
April 5, 2023
7 minutes read
12 months ago

Advocate Shagun Rohilla has written this article explaining about Different types of contracts under the Indian Contract Act .

Table of Contents

Introduction

The Indian Contract Act, of 1872 governs the law of contracts in India. A contract is defined as an agreement between two or more parties that is enforceable by law and involves an offer made by one party , which the other party accepts. Both parties enter into a legal relationship agreeing to fulfil certain obligations. The Indian Contract Act recognizes several types of contracts that are commonly used in business transactions in India. This article will discuss the different types of contracts under the Indian Contract Act.

Different types of contracts under the Indian Contract Act

1) express contract:.

An express contract is a contract in which the terms and conditions of the contract are explicitly stated by the parties involved. The terms may be in writing or speaking. This type of contract is also known as a formal contract.

Advantages:

Clear terms and conditions: The express contract provides clear and explicit terms and conditions to the parties involved. This reduces the chances of misunderstandings and disputes between the parties involved.
Legal evidence: An express contract serves as legal evidence of the agreement between the parties. This can be helpful in case of any disputes or breach of contract.
Binding nature: An express contract is legally binding on both parties, and they are required to fulfil their obligations.

Disadvantages:

Time-consuming: Preparing an express contract can be time-consuming and expensive, especially if it requires legal assistance.
Strict terms and conditions: The terms and conditions of an express contract may be too rigid, which can limit the flexibility of the parties involved.
Requires mutual agreement: The parties must agree to the terms and conditions of the contract before it can be enforced.

The case of Satyabrata Ghose v. Mugneeram Bangur & Co is an example of an express contract in which the terms and conditions were explicitly stated by the parties involved. The Supreme Court held that the contract in question was valid. Since all the essential elements of a contract were present. The court also stated that the terms of the contract should be strictly followed, and any deviation from them would amount to a breach of contract.

2) Implied Contract:

An implied contract is a contract in which the terms and conditions of the contract are not explicitly stated by the parties involved but are inferred from their actions, conduct, or circumstances. For example, if a person enters a restaurant and orders food, an implied contract is formed between the person and the restaurant owner for the payment of the food.

Convenient and flexible: The parties do not need to draft a formal contract. The terms and conditions are inferred from their actions, making them more flexible and convenient.
Saves time and effort: An implied contract saves time and effort in drafting a formal contract.
Binding nature: An implied contract is also legally binding on both parties, and they are required to fulfil their obligations.
This may lead to misunderstandings: Since the terms and conditions are not explicitly stated, there may be different interpretations of the agreement, leading to misunderstandings.
Difficult to prove: It can be difficult to prove the existence of an implied contract in a court of law.
Limited terms and conditions: The terms and conditions of an implied contract may be limited, and it may not cover all aspects of the agreement.

The case of Mohori Bibee v. Dharmodas Ghose is an example of an implied contract in which the terms and conditions were inferred from the actions, conduct, or circumstances of the parties involved. The Supreme Court held that the contract in question was voidable since the minor involved in the contract was not competent to enter into a contract. However, the court also stated that the minor was liable to pay for the benefits received under the contract.

3) Quasi-Contract :

A quasi-contract is not an actual contract but is created by law to prevent injustice. In this type of contract, one party pays for a benefit received from the other party. For example, if a person pays for the repair of another person’s car without a prior agreement, the law implies a quasi-contractual obligation on the owner to pay for the repairs.

Prevents injustice: A quasi-contract prevents injustice by ensuring that the party who has received a benefit pays for it, even if there was no prior agreement.
Fairness: It promotes fairness in business transactions.
Lack of certainty: The party who has received the benefit may not have agreed to pay for it, leading to disputes between the parties involved.
Difficult to prove: It may be difficult to prove the existence of a quasi-contract in a court of law.

The case of Moses v. Macferlan is an example of a quasi-contract in which one party pays for a benefit received from the other party. The court held that even though there was no prior agreement between the parties involved, the plaintiff was entitled to recover the money paid to the defendant since it was for the defendant’s benefit. The court also stated that the law implies a quasi-contractual obligation on the defendant to pay for the benefit received.

4) Void Contract:

A void contract is a contract that has no legal effect from the beginning. Such a contract is considered null and void and cannot be enforced in a court of law. For example, a contract to commit a crime or to engage in fraudulent activities is a void contract.

Prevents illegal activities: A void contract ensures that contracts that are against public policy or morality are not enforceable. It protects the interests of the parties involved.
Not enforceable: A void contract is not enforceable in a court of law, and the parties cannot rely on the contract to claim their rights.
Loss of time and money: If parties have already performed their obligations under the void contract, it can lead to a loss of time and money.

The case of Balfour v. Balfour is an example of a void contract in which the agreement was not intended to create a legal relationship between the parties. The court held that the agreement in question was a domestic agreement and did not have the intention to create a legal relationship. Therefore, it was not enforceable in a court of law.

5) Voidable Contract:

A voidable contract is a valid contract, but one or both parties have the option to rescind or cancel it. The contract becomes voidable when one party is misled, threatened, or coerced into entering into the contract. For example, if a person enters into a contract with a minor, the contract is voidable at the option of the minor.

Provides protection: A voidable contract protects the party who is at a disadvantage in the contract.
Legal remedy: The party who is at a disadvantage can seek legal remedies if the other party does not fulfil their obligations.
Uncertainty: The contract can be cancelled by one party, leading to uncertainty and instability.
Loss of time and money: If parties have already performed their obligations under the voidable contract, it can lead to a loss of time and money.

The case of Mohori Bibee v. Dharmodas Ghose is an example of a voidable contract in which one party has the option to either affirm or avoid the contract. The court held that the contract in question was voidable since the minor involved in the contract was not competent to enter into a contract. Therefore, the minor had the option to avoid the contract.

6) Unenforceable Contract:

An unenforceable contract is a contract that cannot be enforced in a court of law due to legal technicalities. For example, if a contract is not in writing and the law requires it to be in writing, the contract is unenforceable.

Avoids illegal activities: An unenforceable contract avoids unlawful activities or transactions that violate the law.
Not enforceable: An unenforceable contract is not enforceable in a court of law, and the parties cannot rely on the contract to claim their rights.
Loss of time and money: If parties have already performed their obligations under the unenforceable contract.

The case of Gherulal Parakh v. Mahadeodas Maiya is an example of an unenforceable contract in which the contract was not enforceable due to a technical defect. The court held that the contract in question was unenforceable since it was not stamped as per the Indian Stamp Act. Therefore, the contract could not be enforced in a court of law.

In conclusion, the Indian Contract Act recognizes several contracts commonly used in business transactions. Understanding the different types of contracts can help parties involved in business transactions to know their legal obligations and rights. Therefore, it is essential to consult with legal experts while entering into a contract to ensure that the contract is legally binding and enforceable.

The Indian Contract Act, 1972, https://legislative.gov.in/sites/default/files/A1872-09.pdf .
Satyabrata Ghose v. Mugneeram Bangur & Co AIR 1954 SC 44 at p. 48.
Mohori Bibee v. Dharmodas Ghose [1903] UKPC 12, (1903) LR 30 IA 114.
Moses v. Macferlan (1760) 2 Bur 1005.
Balfour v. Balfour [1919] 2 KB 571. Types of contracts under the Indian Contract Act
Gherulal Parakh v. Mahadeodas Maiya 1959 AIR 781 1959 SCR Supl. (2) 406.

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Assignment of contract
Section 2 (h) of the Indian Contract Act, 1872 defines a contract as "an agreement enforceable by law". It is characterised by an offer and an acceptance along with consideration and is backed by the power of law. An agreement is a promise by one party to another. A proposal once accepted becomes a promise.
Does the Assignment of a Contract Assign the Arbitration Agreement: The
Under the Indian Contract Act 1872 ("ICA"), an arbitration agreement is a distinct and separate contract. Like all other contracts, it can be transferred by way of assignment to third parties under Section 37 of the ICA. The Supreme Court of India in Khardah Company Ltd vs Raymon & Co. (India) Private Ltd has held... Continue reading
Subcontracting v. Assignment
ASSIGNMENT. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
Sub-contracting and Assignment : Resolving the Legal Conundrum
Assignment. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
Assignment of Contract
Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the 'promisee' is necessary for assigning any obligation under the ...
PDF Assignment of Rights and Its Practical Relevance in Financial
contract, that is, the creation of a new contract between the original party and the new party, which makes it all the more necessary for assignment clauses in contracts to deal with novation; if the intention is to transfer obligations as well. As per the Transfer of Property Act, 1882, assignment of contractual rights or benefits has been
Doctrine of Privity of Contract
The law does not allow a stranger to file a suit on the contract. This right is available only to a person who is a party to the contract and is called Doctrine of Privity of Contract. Let's understand this with the help of an example: Peter has borrowed some money from John. Peter owns a property and decides to sell it to Arjun.
PDF The Indian Contract Act, 1872 Arrangement of Sections
56. Agreement to do impossible act. Contract to do an act afterwards becoming impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful. 57. Reciprocal promise to do things legal, and also other things illegal. 58. Alternative promise, one branch being illegal. Appropriation of payments 59.
PDF The Indian Contract Act, 1872
The Indian Contract Act, 1872 1.5. enforceable by law becomes void when it ceases to be enforceable". Thus a void contract is one which cannot be enforced by a court of law. Example : Mr. X agrees to write a book with a publisher. After few days, X dies in an accident. Here the contract becomes void due to the impossibility of performance of the
Indian Contract Act, 1872
Indian Contract Act, 1872. The Indian Contract Act, 1872 [1] prescribes the law relating to contracts in India and is the key act regulating Indian contract law. The Act is based on the principles of English Common Law. It is applicable to all the states of India. It determines the circumstances in which promises made by the parties to a ...
Novation of contract : what you need to know
Novation under Section 62 of the Indian Contract Act, 1872. Section 62 is based on the principle - those who create something can also put an end to it. Section 62 of the Indian Contract Act, 1872, states that when the contracting parties want to discharge a contract, then they can: substitute a new contract in place of the old one; or ...
Novation, Rescission, Alteration under the Indian Contract Act
The doctrine of novations is recognized under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation can be effective only when there is a new contract and not a new agreement. Hence, mere agreement to substitute the existing contract will not be binding unless it has been accepted and executed mutually by all ...
PDF Indian Contract Act, 1872 Introduction Basics-Offer, Acceptance
Valid Contract S.2(h): A contract is said to be a valid contract when all the essential conditions as laid down under section 10 of the Contact Act are fulfilled. Void Contract S. 2(j): A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable. Thus, a contract which has no
PDF Kluwer Arbitration Blog
Does the Assignment of a Contract Assign the Arbitration Agreement: The Indian Perspective Ajar Rab (ANR LAW LLP) · Tuesday, March 19th, 2024 Under the Indian Contract Act 1872 ("ICA"), an arbitration agreement is a distinct and separate contract. Like all other contracts, it can be transferred by way of assignment to third parties under
PDF Article
The provisions of Indian Contract Act, 1872 (hereinafter referred as the "Act, 1872") do not specifically provide any scope for dealing with the assignments of contractual rights and obligations but Section 130 of the Transfer of Property Act, 1882 (hereinafter referred as the "Act, 1882") provides for transfer of action claims
Essentials of a valid contract under the Indian Contract Act,1872: A
The law of Contract in India is contained in the Indian Contract Act,1872 and it is mainly based on English common law consisting of judicial precedents. The Act ensures that the rights and obligations arising out of the contract are honored and the promises are kept. It provides for the appropriate legal remedies to the aggrieved party in case ...
PDF Topic Indian Contract Act 1972 Overview
According to Sec.13, meeting of minds or identity of minds or receiving the same thing in same sense at same time. A Valid Offer & acceptance. Intention to create legal relationship. Consensus - ad - idem. Lawful Consideration. Capacity to contract. Free consent. Legality of object. Possibility of performance.
Capacity and Competency to Contract under Indian Contract Act
Section 10 of the Indian Contract Act provides that an agreement in order to be a contract, must satisfy the following conditions: It must be made by free consent of the parties. The parties must be competent to contract. It must be made for a lawful consideration and with a lawful object. It should not have been expressly declared as void by law.
The Doctrine of Privity of Contract under Indian And English Law
The doctrine of privity of contract has changed in recent years and it is now well settled that a beneficiary under any contract or any special law can initiate legal action against a third party without being a party to the contract End-Notes: * Indian Contract Act, 1872 (1967; HC of A). (1861)1 B & S 393. [1914] UKHL 1 (1 July 1914).
Types of agreements under Indian Contract Act, 1872
A offers to purchase a lawful plot of land and an unlawful parking space from B for a sum of Rs. 20 lakhs. The agreement shall be void as one of the objects is illegal. 2. Agreements without consideration under Section 25 of the Act. A, without any reciprocal promise, agrees to pay a sum of Rs. 5000 to B.
Breach of Contract under Indian Contract Act 1872: Explained
A contract is breached when there is a violation of certain terms and conditions stated in the contract. There are various reasons a breach can occur, such as delay in payment, postponement in delivery of the assets, etc. If there is any breach, the Act also gives the remedies for breach of contract. Breach of contract can ensue for both ...
Assignment of contract under Indian contract act
Assignment of contract under Indian contract act 1872 Assignment of contracts.Assignment by Parties : Assignment of Contractual Obligation & Contractual Righ...
Consideration under the Indian Contract Act, 1872
Consideration is defined under Section 2d of the Indian Contracts Act, 1872. It is defined as when the promisee at the request to the promisor has: Done or abstained from doing something, Does or abstains from doing something, Promises to do or abstain from something, Then such act or abstinence is called consideration.
Different types of Contracts under the Indian Contract Act
Introduction . The Indian Contract Act, of 1872 governs the law of contracts in India. A contract is defined as an agreement between two or more parties that is enforceable by law and involves an offer made by one party, which the other party accepts.Both parties enter into a legal relationship agreeing to fulfil certain obligations.

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Capacity and Competency to Contract under Indian Contract Act

Competency to Contract under Indian Contract Act

Age of majority

Competency to Contract: Position of Minor’s Agreement

An agreement entered into by a minor is altogether void

Minor can be a beneficiary

Minor can always plead minority

Ratification on attaining majority is not allowed

Contract by a guardian – how far enforceable

Competency to Contract: Persons of unsound mind

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Competency to Contract: Persons disqualified by law

Contract by disqualified persons

Section 64: Consequences of rescission of voidable contract

Section 33 in The Specific Relief Act, 1963

Section 65 of The Indian Contract Act, 1872

Section 68: Claim for necessaries supplied to person incapable of contracting, or on his account

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Breach of Contract under Indian Contract Act 1872: Explained

Introduction

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When is a contract breached?

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Different types of Contracts under the Indian Contract Act

Introduction

Different types of contracts under the Indian Contract Act

Advantages:

Disadvantages:

2) Implied Contract: