CMA Intermediate · Business Laws and Ethics

Indian Contracts Act, 1872: formula sheet

Full chapter guide

Key formulas

Agreement: Agreement = Promise + Promise forming consideration for each other (Section 2(e)); Every promise and every set of promises forming the consideration for each other is an agreement.
Contract: Contract = Agreement enforceable by law (Section 2(h)); All contracts are agreements; not all agreements are contracts.
Void agreement: Agreement not enforceable by law = void (Section 2(g)); Void from the start. Compare Section 2(j): a contract that later ceases to be enforceable becomes void then.
Voidable contract: Enforceable at the option of one party, not the other (Section 2(i)); Valid until the entitled party chooses to avoid it.
Consideration: Act or abstinence or promise, at the desire of the promisor, by the promisee or any other person (Section 2(d)); Without consideration an agreement is void, unless one of the exceptions in Section 25 applies.
Exceptions to no consideration, no contract (Section 25): (1) written, registered, natural love and affection between near relations; (2) promise to compensate for something already voluntarily done; (3) written, signed promise to pay a time-barred debt; Also, Explanation 2: inadequate consideration does not make an agreement void if consent was freely given.
Uncertainty and impossibility: Meaning not certain or capable of being made certain = void (Section 29); act impossible in itself = void (Section 56); Section 20: both parties mistaken about a fact essential to the agreement makes it void. Wrong opinion about value is not such a mistake.
Restraint of trade: Agreement restraining a lawful profession, trade or business is void to that extent (Section 27); Exception 1: seller of goodwill may agree not to carry on a similar business within specified local limits, if the Court finds the limits reasonable.
Proposal: Section 2(a): willingness to do or abstain + signified to another + with a view to obtaining assent; All three parts must be present. Mere statement of intention or an invitation is not a proposal.
Promise: Proposal + Acceptance = Promise (Section 2(b)); Acceptance must be absolute and unqualified.
Communication of proposal: Complete when it comes to the knowledge of the person to whom it is made (Section 4); The offeree cannot accept before knowing of the offer.
Communication of acceptance: Against the proposer: complete when put in a course of transmission to him, out of the acceptor's power to recall. Against the acceptor: complete when it comes to the proposer's knowledge (Section 4); This is the postal rule. It decides when revocation is too late.
Communication of revocation: Against the person making it: complete when put in course of transmission out of his power to recall. Against the person to whom it is made: complete when it comes to his knowledge (Section 4); A revocation sent but not received does not yet bind the offeree.
Revocation of proposal: Section 5: before acceptance is complete as against the proposer; After this point the proposal cannot be withdrawn.
Revocation of acceptance: Section 5: before acceptance is complete as against the acceptor; The acceptor's revocation must reach the proposer before or at the same moment as the acceptance, as the Section 5 illustration shows, for example by a faster message.
Section 7 rules of acceptance: Absolute and unqualified + in the prescribed manner, or in a usual and reasonable manner if none is prescribed; If the proposer prescribes a mode and the acceptor uses another, the proposer may insist on the prescribed mode. If he does not insist, within a reasonable time after the acceptance is communicated to him, that the proposal be accepted in the prescribed manner, he is deemed to have consented to the acceptance.
Definition of consideration: Consideration = act, abstinence or promise, at the desire of the promisor, by the promisee or any other person (Section 2(d)); Past, present and future consideration are all valid in India.
General rule: No consideration = no contract (agreement is void), Section 25; Exceptions: natural love and affection (written and registered, between near relatives), compensation for past voluntary service, written promise to pay a time-barred debt.
Adequacy: Consideration must be real and lawful, but need not be adequate; Courts do not measure the fairness of the bargain, unless free consent is affected.
Privity: Only parties to a contract can sue; a stranger to the contract cannot; Exceptions include trust beneficiaries, family settlements, assignment, estoppel and covenants running with land.
Competence to contract: Adult + sound mind + not disqualified by law (Section 11); Majority is 18 years, or 21 if a guardian is appointed by a court or the person is under a court of wards.
Minor's agreement: Minor's agreement is void ab initio; No ratification on majority, no specific performance, no estoppel against the minor, but a minor can be a beneficiary. Necessaries supplied are recoverable only from the minor's property (Section 68, quasi-contract).
Free consent (Section 14): Consent is free if NOT caused by coercion, undue influence, fraud, misrepresentation or mistake; 'Caused' means the consent would not have been given but for the defect.
Effect of coercion, fraud, misrepresentation (Section 19): Contract is voidable at the option of the party whose consent was so caused; For fraud or misrepresentation, that party may instead insist on performance and be put in the position as if the representation were true.
Effect of undue influence (Section 19A): Contract is voidable; court may set aside absolutely or on just terms if a benefit was received; Always cite 19A for undue influence, not Section 19.
Undue influence (Section 16): Position to dominate the will + use of it to obtain an unfair advantage; Dominance is presumed for real or apparent authority, fiduciary relation, or a person whose mental capacity is affected by age, illness or distress. If the deal looks unconscionable, the burden of proof is on the dominant party.
Exception to Section 19: Not voidable for misrepresentation or fraudulent silence if the party had means of discovering the truth with ordinary diligence; Illustration (b): the buyer checked the accounts, so the contract stands.
Mistake (Sections 20 to 22): Bilateral mistake of fact essential to the agreement: void. Mistake of law in India: no effect. Unilateral mistake: not voidable on that ground alone; Know the three-way split and apply it.
Unlawful object (Section 23): Forbidden by law / defeats a law / fraudulent / injury to person or property / immoral or opposed to public policy: agreement is void; Learn the five heads in this order.
Agency (Section 238): Principal is affected by an agent's misrepresentation or fraud made in the course of business within authority; not if outside authority; Illustration (a): an unauthorised misrepresentation by the agent still makes the contract voidable at the option of the third party, as between that third party and the principal.
Inadequate consideration (Section 25, Explanation 2): Inadequate consideration does not by itself make an agreement void; But the court may consider it when deciding whether consent was freely given.
Contingent contract (Section 31): Contingent contract = promise to do or not do something + if a collateral event does or does not happen; Illustration: A pays B ₹10,000 if B's house is burnt. The event is collateral to the contract.
Enforcement when the event must happen: Cannot be enforced until the uncertain future event happens; void if it becomes impossible; This is the rule in Section 32. It is stated here in plain words.
Enforcement when the event must not happen (Section 33): Enforceable when the happening of the event becomes impossible, and not before; Official illustration: payment if a ship does not return is enforceable once the ship sinks.
Section 70 conditions: Lawful act or delivery + no intention to act gratuitously + other person enjoys the benefit ⇒ pay compensation or restore; All three conditions must be present. Check each one in the answer.
Obligation resembling contract (Section 73, second paragraph): Injured person gets the same compensation as if the other had contracted and broken the contract; Remedy follows the contract-breach measure of compensation. Remote and indirect loss is not recoverable.
Contingent contract versus wager: Contingent: valid if other essentials are met. Wagering agreement: void (Section 30); Look for a real interest in the event and a promise that is not just a bet.
Discharge by agreement (Section 62): New contract substituted, or old contract rescinded or altered ⇒ original contract need not be performed; Novation, rescission and alteration all rest on the parties' fresh agreement. The new party must assent, as Illustration (c) shows.
Impossible agreement (Section 56, para 1): Act impossible in itself ⇒ agreement void from the start; Example: Illustration (a), agreeing to discover treasure by magic.
Supervening impossibility (Section 56, para 2): Act becomes impossible, or unlawful by an event the promisor could not prevent ⇒ contract void when that happens; Void from the moment of the event, not from the start. Illustration (d): war declared, contract becomes void.
Compensation for known impossibility (Section 56, para 3): Promisor knew or could have known; promisee did not know ⇒ promisor compensates promisee; Both conditions are needed: promisor's knowledge and promisee's ignorance.
Damages for breach (Section 73): Compensation = loss naturally arising in usual course, or loss the parties knew was likely; no remote or indirect loss; In sale cases the usual measure is the difference between contract price and market price at the time of breach.
Mitigation (Section 73 Explanation): Loss estimated after taking into account the means of remedying the inconvenience; The injured party should take reasonable steps to reduce loss.
Discharge of surety (Section 134): Release of principal debtor by contract, or creditor's act or omission discharging debtor ⇒ surety discharged; A link to the guarantee chapter. Illustration (c): creditor fails to supply timber, surety is discharged.
Section 73: compensation for breach: Damages = loss naturally arising from breach + loss the parties knew was likely; remote and indirect loss excluded; The loss must be caused by the breach and be proved. Compensation is for loss, not for gain beyond that.
Section 73: duty to mitigate: Recoverable loss = total loss − loss that reasonable steps could have avoided; The injured party cannot claim for loss it could have avoided with reasonable effort.
Section 74: stipulated sum: Compensation = reasonable compensation ≤ sum named in the contract; Applies whether the sum is a liquidated damages clause or a penalty. The named sum is the upper limit.
Quantum meruit claim: Claim = reasonable value of work done or benefit given before the breach; Available to the party who did part performance when the other side breaks the contract.
Market-price measure for sale of goods: Damages = contract price − market price on the date of breach (for seller's breach, market price − contract price); A usual way to quantify ordinary damages. Used as a working method; the principle is Section 73.

Quick revision

Section 10: agreements are contracts if made by free consent of competent parties, for lawful consideration and lawful object, and not expressly declared void.
Section 10 also preserves laws requiring writing, witnesses or registration for certain contracts.
A proposal can be revoked before communication of its acceptance is complete as against the proposer, but not afterwards (Section 5).
An acceptance can be revoked before its communication is complete as against the acceptor, but not afterwards (Section 5).
Performing the conditions of a proposal, or accepting consideration for a reciprocal promise offered with it, is acceptance (Section 8).
Consent is free when not caused by coercion, undue influence, fraud, misrepresentation or mistake (Section 14).
A contingent contract depends on an event collateral to the contract happening or not happening (Section 31).
A contract contingent on an event happening cannot be enforced until that event happens, and becomes void if the event becomes impossible (Section 32).
A contract contingent on an event not happening can be enforced when that event becomes impossible, and not before (Section 33).
A valid offer of performance must be unconditional, made at a proper time and place, and give a reasonable chance to check the thing offered (Section 38).
A surety is discharged if the creditor releases the principal debtor by contract, or by an act or omission that discharges the debtor (Section 134).
Where a sum or penalty is named for breach, the injured party gets reasonable compensation not exceeding that amount, whether or not actual loss is proved (Section 74).

Common mistakes

Saying every agreement is a contract. Fix: Write the formula: contract = agreement + enforceability by law. Give a social agreement as the example of an agreement that is not a contract.
Treating a void agreement and a voidable contract as the same. Fix: A void agreement is not enforceable by law at all (Section 2(g)). A voidable contract is enforceable until the entitled party chooses to avoid it (Section 2(i)).
Treating a price tag, catalogue or auction call as an offer. Fix: Say it is an invitation to offer. The customer's request to buy is the offer and the seller's acceptance completes the contract.
Saying a counter-offer is acceptance. Fix: A qualified reply rejects the original offer and is a new proposal. The original cannot be accepted later unless it is repeated.
Saying past consideration is invalid in India. Fix: Remember that Section 2(d) uses 'has done or abstained', so past consideration at the promisor's desire is valid in India.
Treating inadequate consideration as no consideration. Fix: Write that consideration must be real but need not be adequate. Inadequacy matters only as evidence of fraud or lack of free consent.
Calling a contract induced by fraud or coercion 'void'. Fix: Free consent defects (except bilateral mistake) give a voidable contract. Only the injured party can cancel it. Reserve 'void' for unlawful object and bilateral mistake.
Treating fraud and misrepresentation as the same thing. Fix: Fraud involves intent to deceive or reckless disregard for truth. Misrepresentation is an innocent false statement. Both allow rescission, but in your answer name the intent element before choosing the label.
Treating every conditional promise as contingent. Fix: Check that the event is collateral to the contract and is not part of the main performance or the parties' own promises.
Calling a contingent contract a wagering agreement, or the reverse. Fix: Remember that a wager is void (Section 30) and rests only on the bet. A contingent contract is valid if it meets the other essentials, and the parties often have a real interest, as in insurance.

Exam tips

In the MCQ section, test one essential at a time. The usual traps are void versus voidable, and no consideration versus inadequate consideration.
In written answers, open with the Section 2 definitions. Quote the idea, not the whole section, to save time.
For an essentials question, use a numbered list with a one-line explanation each. Aim for clear, short points.
For a problem question, always end with the legal status (valid, void or voidable) and, if money moved, the Section 65 consequence.
Learn the Section 1 facts: the short title, extent to the whole of India, and commencement on 1 September 1872. They come up as short MCQs.
For a theory question, give the definition with its section number first. Then add one example. This is an easy way to earn marks.
For difference questions, use intention, effect and example as your points: offer vs invitation to offer, offer vs counter-offer.
In MCQs, check whether the question asks about the proposer or the acceptor. The answer usually depends on that.