Essential Elements of Contract and E-Contract

The Act came into force on 1 September 1872. It is based largely on English common law principles. Originally it also covered sale of goods and partnership, but these were carved out:

• Sale of Goods: formerly ss.76–123, now the Sale of Goods Act, 1930.

• Partnership: formerly ss.239–266, now the Indian Partnership Act, 1932.

• Remaining structure: ss.1–75 (general principles), ss.124–147 (indemnity and guarantee), ss.148–181 (bailment and pledge), and ss.182–238 (agency).

The Act is not exhaustive. Section 1 saves usages and customs of trade, and other statutes apply alongside it.

• s.2(a) Proposal (offer): a person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the other’s assent.

• s.2(b) Promise: a proposal when accepted.

• s.2(c) Promisor and promisee: the person making the proposal is the promisor, and the person accepting is the promisee.

• s.2(d) Consideration: when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains, or promises to do or abstain, something. That something is a consideration for the promise.

• s.2(e) Agreement: every promise and every set of promises forming the consideration for each other.

• s.2(f) Reciprocal promises: promises which form the consideration or part of the consideration for each other.

• s.2(g) Void agreement: an agreement not enforceable by law.

• s.2(h) Contract: an agreement enforceable by law.

• s.2(i) Voidable contract: an agreement enforceable by law at the option of one or more of the parties, but not at the option of the other or others.

• s.2(j) Void contract: a contract which ceases to be enforceable by law.

Formula to remember: Agreement + Enforceability = Contract. All contracts are agreements, but not all agreements are contracts.

Section 10 says all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared void. Writing and registration are required only where a statute demands them.

The full checklist is:

1. Two or more parties (offer and acceptance).

2. Intention to create legal relations.

3. Free consent.

4. Capacity of parties.

5. Lawful consideration.

6. Lawful object.

7. Certainty and possibility of performance.

8. Not declared void.

9. Legal formalities, where required.

Kinds of offer: express or implied; general (to the world, as in Carlill v Carbolic Smoke Ball Co.), specific, cross-offers, counter-offers, and standing (continuing) offers (for example tenders: Great Northern Railway v Witham).

Rules:

• The offer must be capable of creating legal relations and be clear and definite.

• It must be communicated to the offeree. In Lalman Shukla v Gauri Dutt (1913), the servant who found the missing nephew could not claim the reward, because he did not know of the offer when he acted. (Contrast Carlill, where performance after knowledge sufficed.)

• An offer is different from an invitation to treat. Examples: price lists, advertisements, goods displayed in shops (Pharmaceutical Society v Boots), catalogues, auction bids, and the statement in Harvey v Facey (“lowest price for Bumper Hall Pen”), which was only information. In an auction, the bid is the offer and the fall of the hammer is acceptance (s.64 Sale of Goods Act).

• A counter-offer destroys the original offer (Hyde v Wrench). A mere request for information is not a counter-offer (Stevenson v McLean).

Revocation of an offer (ss.5 and 6): may be revoked at any time before acceptance is complete as against the proposer. Modes (s.6): by communication of notice of revocation; by lapse of time (stipulated or reasonable); by failure to fulfil a condition precedent; by death or insanity of the proposer (if the acceptor comes to know of it before acceptance); by counter-offer; by rejection.

• Acceptance must be absolute and unqualified, and expressed in the manner prescribed; if no manner is prescribed, in a usual and reasonable manner.

• Silence is not acceptance (Felthouse v Bindley). The offeror cannot impose acceptance by silence.

• Only the person to whom the offer is made can accept it, except in a general offer.

• Acceptance by conduct (s.8): performing the conditions of a proposal, or accepting consideration for a reciprocal promise, is acceptance.

• Acceptance must be given before the offer lapses or is revoked, and within a reasonable time.

Communication (s.4): the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. Acceptance is complete as against the proposer when put in a course of transmission to him, so as to be out of the power of the acceptor to withdraw it. As against the acceptor it is complete when it comes to the knowledge of the proposer. The same logic applies to revocation.

Postal rule: Adams v Lindsell and Household Fire Insurance v Grant: acceptance by post is complete on posting. Instantaneous communication (telephone, telex, e-mail): the contract is made where and when the acceptance is received, per Entores Ltd v Miles Far East Corp. (English Court of Appeal) and followed by the Supreme Court in Bhagwandas Goverdhandas Kedia v Girdharilal Parshottamdas (1966).

The statute does not mention it expressly, but courts apply the English presumptions. Social and domestic agreements are presumed not to be intended as legal (Balfour v Balfour), though the presumption can be rebutted (Merritt v Merritt). Commercial agreements are presumed legal, unless there is an “honour clause” (Rose and Frank Co. v Crompton Bros.). Advertisements with mere puffery are not contracts, but those with a serious promise are (Carlill).

Section 11: every person is competent to contract who (a) is of the age of majority under the law to which he is subject, (b) is of sound mind, and (c) is not disqualified by any law.

Minor (Indian Majority Act 1875): below 18 years, or below 21 where a guardian of the person or property has been appointed by a court or the minor’s property is under the Court of Wards.

• Mohori Bibee v Dharmodas Ghose (Privy Council, 1903): a minor’s agreement is void ab initio. Hence it cannot be ratified after majority.

• There is no estoppel against a minor, and a minor cannot be made liable even if he misrepresented his age. Restitution may be ordered only where the minor himself seeks relief and has obtained property by fraud (Specific Relief Act 1963, s.33, and equitable restitution).

• A minor may be a promisee or beneficiary (Raghava Chariar v Srinivasa Raghava).

• A minor’s estate is liable for necessaries supplied (s.68). The minor is not personally liable.

• Guardian’s contracts for the minor’s benefit are enforceable (Mir Sarwarjan v Fakhruddin).

• A minor cannot be a partner, but may be admitted to the benefits of partnership (s.30, Partnership Act). A minor may be an agent, and the principal is liable (s.184), but the minor is not personally liable.

Sound mind (s.12): capable of understanding the contract and forming a rational judgment of its effect on his interests at the time of making it. A person usually of unsound mind may contract during lucid intervals. A usually sound person cannot contract when delirious, drunk, or so ill that he cannot understand.

Disqualified persons: alien enemies, foreign sovereigns and ambassadors (partly), convicts (during sentence), insolvents, and corporations beyond their objects (ultra vires).

s.13: two or more persons consent when they agree upon the same thing in the same sense (consensus ad idem). s.14: consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake. s.19: an agreement caused by coercion, fraud or misrepresentation is voidable at the option of the party whose consent was so caused. s.19A: same for undue influence (with power of court to set aside on terms). Mistake, by contrast, renders an agreement void (bilateral) or has no effect (unilateral).

Coercion (s.15): committing or threatening to commit any act forbidden by the Indian Penal Code (now the Bharatiya Nyaya Sanhita, 2023), or unlawfully detaining or threatening to detain any property, with the intention of causing any person to enter into an agreement.

• It is irrelevant whether the IPC/BNS is in force where coercion is employed.

• Coercion may come from a stranger to the contract and be directed at any person (Ranganayakamma v Alwar Setti: a widow was forced to adopt a boy by threatening to prevent the husband’s cremation).

• A threat to commit suicide is coercion (Chikham Amiraju v Chikham Seshama).

• A threat to file a civil suit is not coercion.

Undue influence (s.16): a contract is induced by undue influence where the relations between the parties are such that one is in a position to dominate the will of the other and uses that position to obtain an unfair advantage.

• Presumed relationships: parent and child, guru and disciple, doctor and patient, solicitor and client, trustee and beneficiary, fiancé and fiancée (not husband and wife by default).

• Where the dominant party holds a real or apparent authority, or the other is weak by age, illness or mental distress, the burden is on the dominant party to prove the contract was not induced by undue influence (s.16(3)). In an unconscionable bargain, the burden is on the stronger party.

• Cases: Lloyds Bank v Bundy; Raghunath Prasad v Sarju Prasad (moneylender, unconscionable interest); Subhas Chandra Das Mushib v Ganga Prasad Das (1967); Ladli Prasad Jaiswal v Karnal Distillery (1963).

• Pardanashin women: the contract must be proved to have been explained to and understood by them.

Fraud (s.17): includes any of the following acts committed by a party, or with his connivance, or by his agent, with intent to deceive another party or to induce him to enter into the contract: (1) suggestion as a fact of that which is not true by one who does not believe it true, (2) active concealment of a fact by one having knowledge or belief of it, (3) a promise made without any intention of performing it, (4) any other act fitted to deceive, and (5) any such act or omission as the law specially declares to be fraudulent.

• Mere silence is not fraud unless there is a duty to speak or the silence is equivalent to speech (Explanation to s.17).

• Contracts uberrimae fidei (insurance, family settlements, partnership, company prospectus, guarantee) require full disclosure.

• Derry v Peek: fraud is a false statement made knowingly, without belief in its truth, or recklessly.

• The defrauded party may rescind and claim damages. Under s.19, a party induced by misrepresentation cannot avoid the contract if he had the means of discovering the truth with ordinary diligence, but this exception does not protect a fraudster.

Misrepresentation (s.18): (1) a positive assertion in a manner not warranted by the information of the person making it, though he believes it true; (2) any breach of duty which gains an advantage to the person committing it without intent to deceive; (3) causing, however innocently, a party to make a mistake as to the substance of the thing which is the subject of the agreement.

Mistake (ss.20–22):

• s.20 (bilateral mistake of fact essential to the agreement): the agreement is void. Examples: Raffles v Wichelhaus (the Peerless case, two ships of the same name), Couturier v Hastie (non-existent goods), Cooper v Phibbs (mistaken ownership), Cundy v Lindsay (mistake as to identity).

• s.21: mistake as to a law not in force in India is treated as mistake of fact. A mistake as to a law in force in India has the same effect as ignorance of law and does not make the contract voidable.

• s.22: a contract is not voidable merely because it was caused by one party’s unilateral mistake as to a matter of fact.

• Tarsem Singh v Sukhminder Singh (1998): the mistake must be as to a fact essential to the agreement.

Features of Indian consideration (s.2(d)):

• Moves at the desire of the promisor.

• May move from the promisee or any other person. Thus a stranger to consideration may sue (Chinnaya v Ramayya, Madras HC, 1882; Durga Prasad v Baldeo), but a stranger to the contract cannot (privity).

• Past consideration is good consideration in India (“has done or abstained”), unlike England. Cases: Sindha v Abraham; Kedarnath v Gorie Mohamed.

• Consideration must be real, not illusory, but need not be adequate (Explanation 2 to s.25). Inadequacy may be relevant to free consent.

• Consideration must not be an already existing legal duty (pre-existing duty rule, partly relaxed in Williams v Roffey Bros).

s.25 (agreement without consideration is void), with three exceptions:

1. A written and registered agreement made on account of natural love and affection between parties standing in a near relation to each other.

2. A promise to compensate for something done voluntarily (past voluntary service) for the promisor.

3. A written, signed promise to pay a time-barred debt (s.25(3)).

Other cases needing no consideration: completed gift (Transfer of Property Act), gratuitous bailment, agency (s.185), charitable subscriptions (when acted upon), and remission/accord (s.63).

Privity of contract: only parties to a contract can sue or be sued (Tweddle v Guest; Dunlop Pneumatic Tyre v Selfridge). In India: Jamna Das v Ram Autar (Privy Council). Exceptions: trust, marriage settlements, family arrangements and partition, acknowledgment/estoppel, assignment, covenants running with land, agency, statutory rights (insurance beneficiary), and M.C. Chacko v State Bank of Travancore (1969), where a beneficiary was allowed to enforce a contract because of a trust-like arrangement.

Unlawful consideration/object (s.23): forbidden by law; of such a nature that, if permitted, it would defeat the provisions of any law; fraudulent; involving or implying injury to the person or property of another; or the court regards it as immoral or opposed to public policy. Such agreements are void.

• Gherulal Parakh v Mahadeodas Maiya (1959): public policy should be applied narrowly, and wagering agreements are void but not illegal.

• Central Inland Water Transport Corp. v Brojo Nath Ganguly (1986): unconscionable and unreasonable contract terms are opposed to public policy.

• ONGC v Saw Pipes Ltd. (2003): “patent illegality” as a ground to set aside an award under public policy; later narrowed in Associate Builders v DDA (2015), and now governed by s.34(2A) of the Arbitration and Conciliation Act, 1996.

• Examples of immoral: marriage brokerage contracts, sexual immorality. Public policy: stifling prosecution, trafficking in public offices, champerty and maintenance (limited).

Void by express provision (ss.24–30):

• s.24: consideration or object partly unlawful. If the lawful part is separable (severability), it is enforceable; otherwise the whole is void.

• s.26: agreements in restraint of marriage (except of minors).

• s.27: agreements in restraint of trade are void, with the sole statutory exception of sale of goodwill within specified local limits. Cases: Madhub Chunder v Raj Coomar Dass; Nordenfelt v Maxim Nordenfelt Guns (English); Niranjan Shankar Golikari v Century Spinning (1967: a negative covenant during the term of employment is valid); Percept D’Mark v Zaheer Khan (2006: post-term restraint void); Superintendence Co. of India v Krishan Murgai (1981).

• s.28: agreements in restraint of legal proceedings (absolutely restricting remedies, or curtailing limitation periods). Exceptions: arbitration agreements and agreements to refer existing disputes. Courts uphold exclusive jurisdiction clauses where more than one court has jurisdiction (Hakam Singh v Gammon (India) Ltd., 1971; ABC Laminart v A.P. Agencies, 1989). Section 28 was amended in 1997.

• s.29: agreements whose meaning is uncertain.

• s.30: wagering agreements are void; collateral transactions are not void (Gherulal Parakh). Exception: prizes for horse races above Rs. 500 (s.294A IPC, now covered under BNS). Some states (e.g., Maharashtra, Gujarat) have stricter amendments making wagers illegal.

A contingent contract depends on an event collateral to the contract (s.31). Enforcement: on the happening of the event (s.32), on its non-happening (s.35), and a contract contingent on an impossible event is void (s.36). s.33 deals with events happening in a certain way, and s.34 with the conduct of a living person. Certainty (s.29) and possibility (s.56) are separate requirements. Insurance and indemnity are classic contingent contracts, while a wager is not contingent because the event is not collateral.

No general requirement of writing or registration. Specific statutory requirements: s.25(1) registration; arbitration agreements in writing (Arbitration Act s.7); Registration Act 1908, s.17 (immovable property above Rs. 100); Transfer of Property Act (sale, mortgage, lease, gift); Negotiable Instruments Act (written and signed).

An e-contract is a contract formed and executed through electronic means (the internet, e-mail, apps, EDI) rather than on paper. The general law of contract applies equally to it.

Types: click-wrap (the user clicks ‘I agree’), browse-wrap (terms linked on the site, weakest enforceability), shrink-wrap (terms inside software packaging), e-mail contracts, EDI (electronic data interchange), and smart contracts on a blockchain.

Information Technology Act, 2000 (amended 2008) is based on the UNCITRAL Model Law on Electronic Commerce, 1996. Key provisions:

• s.2(1)(t): definition of ‘electronic record’.

• s.3 and s.3A: authentication by digital signature and electronic signature.

• s.4: legal recognition of electronic records.

• s.5: legal recognition of electronic signatures.

• s.10A (inserted in 2008): contracts formed through electronic means are not unenforceable solely because electronic form or means were used for the proposal, acceptance or revocation.

• s.11–13: attribution, acknowledgment and the time and place of dispatch and receipt. Dispatch occurs when the record enters a computer resource outside the originator’s control. Receipt occurs when it enters the designated computer resource of the addressee, or if none is designated, when the addressee retrieves it. Place is the place of business of the originator (dispatch) and the addressee (receipt).

• First Schedule (s.1(4)): the Act does not apply to negotiable instruments (other than cheques), powers of attorney, trusts, wills, and contracts for the sale or conveyance of immovable property.

• s.75: extra-territorial application.

Evidentiary position: earlier s.65B of the Evidence Act governed electronic evidence (Anvar P.V. v P.K. Basheer, 2014; Arjun Panditrao Khotkar v Kailash Kushanrao Gorantyal, 2020, which held that the s.65B certificate is mandatory). Under the Bharatiya Sakshya Adhiniyam, 2023 (in force from 1 July 2024) the corresponding provision is s.63.

Key cases:

• Trimex International FZE Ltd. v Vedanta Aluminium Ltd. (2010): a contract may be concluded through e-mail exchange even without a formal signed document.

• Shakti Bhog Foods v Kola Shipping (2009): an arbitration agreement can be concluded by electronic communication.

• P.R. Transport Agency v Union of India (Allahabad HC, 2006): an e-mail acceptance concludes the contract at the place where it is received.

• Bhagwandas Kedia (1966): the rule for instantaneous communication.

Related legislation: Consumer Protection (E-Commerce) Rules, 2020; Digital Personal Data Protection Act, 2023; UN Convention on the Use of Electronic Communications in International Contracts (2005); UNCITRAL Model Law on Electronic Signatures (2001).