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MODULE 1

INDIAN CONTRACT ACT, 1872- AN OVERVIEW

1.1 INTRODUCTION

The law of contracts, in India, is governed by the Indian Contract Act,
1872 (“The Contract Act”). It contains the general principles of contracts,
contracts of indemnity, guarantee, bailment and agency, and is not an
exhaustive code of legislation. The Contract Act is largely based on
common law principles of English court. This does not however mean that
the Indian Contract Act can usually be interpreted by using the English
common law principles but is permissible only when the Indian contract
law is silent about any issue or does not provide adequate clarity in a
situation, and thus cannot be understood without applying the English
common law principles.1

The Contract Act defines a contract as “an agreement which is enforceable
by law”.2 Section 10 of the Contract Act enlists the essential elements of a
valid contract. Parties must enter into a contract with ‘free consent’,
meaning that parties must not have entered the contract by mistake,
coercion, undue influence, fraud or misrepresentation.3 The presence of
any one of these elements in the formation of a contract implies the
absence of free consent, and hence, such a contract is rendered voidable at

1West Bengal v. M/s B.K. Mondal and Sons, [1962] 1 supp SCR 876 (India)
2 S. 2(h), The Indian Contract Act, 1872
3 ibid at s.14

the option of the party who had not freely consented. Further, it is
imperative that parties have consensus ad idem, or meeting of the minds,
that is, both parties share a common understanding or mutually assent to
be enforced by terms and conditions of the contract.

A valid contract must have an offer/proposal and acceptance. As per the
Contract act, “when one person signifies her/his willingness to do or to
abstain from doing anything to another person, with a view to obtaining
the assent of that other person to such act or abstinence, s/he is said to
make a proposal.”4 Conversely, “when the person to whom the proposal is
made signifies his/her assent, the proposal is said to be accepted. A
proposal, when accepted, becomes a promise.”5 The communication of an
acceptance is complete, as against the offeror, when the acceptor has put
the acceptance in transmission to be sent to the offeror, such that it is out
of the power of the acceptor; and as against the acceptor, when the
acceptor’s acceptance comes to the knowledge of the offeror.6

A valid contract must have a valid consideration. According to the Indian
Contract Act, “when, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such act or
abstinence or promise is called a consideration for the promise.” The
above definition implies that Indian contract law allows consideration to
flow from a third party, unlike the English law. The Indian law also
recognizes past and future considerations. A consideration, to be valid,

4 S. 2(a), The Indian Contract Act, 1872
5 ibid at s.2(b)
6 ibid at s.4

need not be adequate but it should be real. However, it is pertinent to note
that an inadequate consideration is an adverse inference in cases where
undue influence or coercion is alleged. An agreement without a valid
consideration is considered void, except when the agreement is made
between near relatives out of natural love and affection; when it is an
agreement for compensation of voluntary services; or when it is a promise
to pay a time barred debt provided it is signed by the debtor or his
authorized signatory.7

Parties must be competent to enter into a contract. That is, parties must
have attained the age of majority, is of sound mind, and is not otherwise
not disqualified from entering into a contract.8 In Mohiri Bibi v.
Dharmodas Ghose9, the court held that a contract entered into a by a minor
is void ab initio. The Contract Act states that “a person is said to be of
sound mind for the purpose of making a contract, if, at the time when he
makes it, he is capable of understanding it and of forming a rational
judgment as to its effect upon his interests.”10Unsoundness of mind could
result from idiocy, lunacy or insanity and drunkenness and similar factors.
The Act provides that a person who is usually of unsound mind, but
occasionally of sound mind, may enter into a contract when s/he is of
sound mind, that is, the Act considers contracts entered into by usually
unsound persons during their lucid intervals as valid11. Persons
disqualified from entering into a contract include alien enemies, accredited
representatives of foreign sovereign, convicts et cetera.

7 ibid at s.25
8 ibid at s.11
9 [(1903) 30 I.A. 114 (P.C.)]
10 S.12, The Indian Contract Act, 1872
11 ibid

A valid contract under the Indian contract act must have a lawful object12,
in the absence of which the contract is considered void. A contract is said
to have unlawful object “if it is forbidden by law; is of such a nature that,
if permitted, it would defeat the provisions of any law; or is fraudulent; or
involves or implies, injury to the person or property of another; or the
Court regards it as immoral, or opposed to public policy.”13

There must be an intention to create a legal obligation for a contract to be
considered valid under the Indian Contract Act. A seminal case about the
matter is Balfour v. Balfour14. The defendant husband who was employed
in Ceylon, went for a vacation with the plaintiff wife to London, where the
wife fell sick and was unable to return to Ceylon with her husband.
Subsequently, the husband promised the wife a maintenance of 30 pounds
every month. When the husband failed to stand by this promise after their
relationship turned sour, the wife sued the husband for restitution. The
court held that there was no valid contract between the husband and wife
as there was no intention to create a legal obligation by the defendant.
Hence, the husband was not obligated to pay for the wife’s maintenance.

The Contract Act explicitly declares certain contracts to be void. They are
agreements without consideration15, agreements in restraint of marriage16,
agreements in restraint of trade17, agreements in restraint of legal

12 S. 23, The Indian Contract Act, 1872
13 ibid
14 [(1919) 2 KB 571]
15 S. 25, The Indian Contract Act, 1872
16 ibid at s. 26
17 ibid at s. 27

proceedings18, agreements whose meaning is uncertain19, agreements to do
an impossible act20, and agreements by way of wager21.

Parties to a contract are obliged to perform their obligations under the
contract22, except when the contract has been rescinded, altered, or a new
contract has been substituted for the old contract.23 Obligations under a
contract may be discharged by parties, either by performance of the
contract, by mutual agreement, by impossibility of performance24, by lapse
of time, by operation of law, or by breach of contract. Breach of a contract
takes place when a party fails to fulfil its promise or obligations under the
contract, either on the specified date of performance (actual breach), or
before the time agreed for performance (anticipatory breach). In the event
of a breach of a contract, the party injured can claim damages for
compensation or loss suffered as a result of the breach, from the other
party.

The Indian Contract Act does not expressly mention about software
contracts or information technology contracts. However, it does not
contract the validity of such agreements per se. Since section 10 of the Act
reads that, “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 hereby expressly declared to be void.
Nothing herein contained shall affect any law in force in India, and not
hereby expressly repealed, by which any contract is required to be made in

18 ibid at s. 28
19 ibid at s. 29
20 ibid at s. 56
21 ibid at s. 30
22 ibid at s. 37
23 ibid at s. 62
24 ibid at s.56

writing or in the presence of witnesses, or any law relating to the
registration of documents”25, it can be inferred that an electronic contract,
or an information technology contract, can be considered lawful as long as
it possesses the requisite elements for validity as per section 10. Courts of
law across jurisdictions have, time and again, observed that general
principles of contract law apply to all forms of contract. This implies, that
contracts entered into via the computer, or technology contracts, are also
governed by the standard laws of contract. Technology contracts have
been discussed in detail in the following chapters.

1.2 TECHNOLOGY CONTRACTS AND THEIR TYPES

With the advent of technology, and its growing prevalence and influence
in our daily lives, it is only natural that information technology contracts
are a rapidly developing sector in the field of contracts. Variably called
software contracts or electronic contracts, technology contracts are legally
enforceable agreements between a software developer or vendor, and an
user of the software. A technology agreement is usually entered into by an
user by clicking on an “I agree” or “I accept” icon, which indicates their
consent to be bound by such contracts.

One of the most important concerns regarding technology contracts is their
enforceability. Although information technology contracts are treated as
regular contracts across jurisdictions, their unique nature poses certain
enforcement issues. Users tend to circumvent obligations or exceed the
rights afforded by these contracts, on grounds that they were not
adequately aware of the terms and conditions of the electronic contract,

25 bid at s.10

since they were buried deep within the e-contract, which is presented as an
inconspicuous hyperlink or a scrollable document on a webpage, and often
eludes the eyes of regular customers. This is especially true in cases of
technology contracts like clickwrap, browse wrap or end user license
agreements. Another major concern is intellectual property infringement.
Most software licensors retain their intellectual property rights in the
software and only licenses the software to users for using the software as
per the terms and conditions laid down in the software license agreement.
Further, proprietary licensors generally do not allow creating any
derivative works using the licensed software. However, most of the times,
users exceed their usage rights in the software, by unauthorized use or
redistribution, in clear violation of the software licensing terms. Also,
technology contracts are often held unenforceable due to their automated
nature and are considered as adhesion contracts where the software
developer is in a superior bargaining position and the users are not
presented with any opportunity to negotiate the terms of such agreements,
which tantamount to unconscionability. Issues plaguing the various types
of software, including the aforementioned concerns, have been discussed
in the following chapters.

Most common types of information technology agreements include
software development agreements, software licenses, software
maintenance and support agreements, open source software licenses, cloud
computing agreements, information technology outsourcing agreements,
click-wrap agreements, browse-wrap agreements, shrink-wrap agreements,
end user license agreements, e-commerce agreements, among various

others. Some of these agreements have been dealt with in detail in the
following chapters.