LAW OF CONTRACT

The law relating to Contract constitute the important branch of

commercial law. This is governed by the Indian Contract Act, 1872.
This Act is based mainly on English Common Law consisting of
judicial precedents. It extends to the whole of India including the State
of Jammu and Kashmir.

The act is divisible into two parts.

First part-(Section 1 to 75) deals with general principles of law of

contract and it is applicable to all contracts.

Second part (Section 124-238) deals with some special kinds of

contract.

E.g.: indemnity, guarantee , bailment , pledge etc.

(Section 76 -123-repealed by the Sale of Goods Act)

DEFINITION
The Contract Act defines Contract as an agreement enforceable by
law (sec 2(h). All agreements are not contract. Only those agreements
which are enforceable by law ie which are capable of being enforced
through a court of law are contracts.

Analysis of above stated definition bring into light following points.

 1) There is an agreement between two or more persons
2) Agreement should be enforceable through court of law.

Agreement + Enforceability at law = Contract

Agreement (sec 2 (e))

An agreement consist of an offer or proposal from one person and

acceptance of that offer from the other. According to S. 2 (e) “Every
promise and every set of promises, forming the consideration for each
other, is an agreement”. In an agreement there is a promise from both
sides. Eg. A promises to deliver his watch to B and in return B Promises
to pay a sum of Rs. 2,000 to A. There is said to be an agreement
between A and B.

The person who makes the offer is called offeror or promisor and the
person who accepts the offer is called offeree or promisee

Another essential element of agreement is Consideration. It is so

important that is why it is said that “No Consideration, No Contract”.
Consideration is something which is of some value in the eyes of law.

Consideration is quid pro quo i.e, something for something. it is a

reasonable equivalent or some valuable passed on by the promisor to
the promise.
Enforceability by law

Section 10 of the contract act provides for the essential elements of

valid contract. To constitute a valid contract, the following elements
are essential.-

1) The agreement should not be a mere social agreement or domestic

agreement.

Eg; promising to go to a movie with your friend and not going.

2) There should have an intention to create legal obligation.

3) There must be Consensus ad idem. (Meeting of minds)

The parties to contract must have agreed about the subject matter in
the same sense at the same time. Eg: Different car offered

4) The consent of the parties should be free and genuine.

There is absence of free consent if agreement is induced by coercion,

misrepresentation, fraud, undue influence, or mistake.

5) There should be a lawful consideration

6) Parties to agreement should have capacity to contract.
A) Attained age of majority,
B) Is of sound mind
7) Agreement must not be expressly declared void by the contract
act itself or by other laws.

Thus we can say that an agreement which satisfies all above said
conditions can only be enforced through the court of law and become
contract. All agreements are not contract. Only those agreements
which are enforceable by law ie which are capable of being enforced
through a court of law are contracts.

1.OFFER AND ACCEPTANCE (offer 2 (a), acceptance 2(b) )

An offer or proposal is an expression of willingness to do or not to
do something to obtain assent of the other person.
Section 2(b) of the Act, “When the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be accepted.
A proposal, when accepted, becomes a promise.”
Express or Implied offer:
Offer is either express or implied. When the offer is made by express
communication then the offer is said to be an express offer. The
express offer can be either in words or in written format. Whereas
when the offer is not communicated expressly but communicated by
conduct or by the circumstances of the case, the offer is called an
implied offer. For eg. A says to B that he will sell his bike to B for
Rs.30, 000, it is an express offer. For eg, a bid at an auction is an
implied offer.

Specific offer and General offer

Offer made to a definite ascertained person it is specific offer.
General offer is made to public at large. It can be accepted by any
person who is aware of it. Eg: pamphlet missing son.
Cross offer and Counter offer
When two parties make identical offers to each other, in ignorance of
each other’s offer, the offers are called cross offer. In such case there
is no concluded contract.
When the person to whom offer is made accepts it with a condition,
the acceptance is only a counter offer and it is not a valid acceptance.
Essentials of valid offer.
* OFFER MUST BE DEFINTE ,CERTAIN AND NOT
AMBIGIOUS
* OFFER MUST BE MADE WITH INTENTION TO CREATE A
LEGAL RELATIONSHIP
*OFFER MUST BE COMMUNICATED TO THE OFFEREE
* OFFER SHOULD NOT CONTAIN A TERM, THE NON-
COMPLAINCE OF WHICH AMOUNT TO ACCEPTANCE
*INIVITATION TO OFFER IS NOT AN OFFER

INIVITATION TO OFFER IS NOT AN OFFER (offer to chaffer)

Under certain circumstances, a person may disclose his readiness to
negotiate and invite offers. Such invitation to make offers will not
become a contract when a person make an offer in response to the
invitation.
If a shopkeeper displays in his window certain goods with prices
marked on them, there is no offer to sell that goods to anyone who is
ready to purchase it. The display of goods with marked price is only
an “invitation to make an offer” or an “offer to chaffer” oor offer to
negotiate. When a person makes an offer to purchase that goods at the
marked price, the shopkeeper can accept the offer or reject it.
Eg:,auction, shop board etc.

Sec 2(a).When one person signifies to another his willingness to do or

to abstain from doing anything, with a view to obtaining the assent of
that other to such act or abstinence, he is said to make a proposal;
2.(b) When the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise;
2.(c) The person making the proposal is called the “promisor”, and
the
person accepting the proposal is called the “promisee”;
2.(d) 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;

2.(e) Every promise and every set of promises, forming the

consideration for each other, is an agreement;
2.(f) Promises which form the consideration or part of the
consideration
for each other, are called reciprocal promises;
2.(g) An agreement not enforceable by law is said to be void;
2.(h) An agreement enforceable by law is a contract;
2.(i) 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;

Sec. 6-REVOCATION OF OFFER

a)Notice:- An offer may be revoked at anytime before the letter of
acceptance posted by offeree.
b)Lapse of time : if a time is prescribed in an offer for its acceptance,
offer terminates by lapse of time , if it is not accepted within
stipulated period.
c)Non fulfillment of condition precedent.
A offers goods to B. subjected to condition that B should pay price
before certain date B fails to do so offer terminates. (lapses)
d)Death or insanity of the proposer
In India before acceptance by promisee death should be made known
to the promisee.

2. ACCEPTANCE
- Sec.2 (b)
When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise;

- Essentials
* ACCEPTANCE MUST BE GIVEN BY THE PERSON TO
WHOM THE PROPOSAL IS MADE
* ACCEPTANCE MUST BE COMMUNICATED TO THE
OFFEROR
* ACCEPTANCE TO BE VALID, MUST BE MADE WITHIN
THE TIME ALLOTED BY THE OFFER
* ACCEPTANCE CANNOT BE IMPLIED BY SILENCE
* ACCEPTANCE MUST BE UNCONDITIONAL
* IF PARTICULAR METHOD IS SPECIFIED FOR
ACCEPTANCE, ACCEPTOR MUST FOLLOW IT
COMMUNICATION OF ACCEPTANCE
As against the proposer- when it is put in the course
of transmission to him, so as to be out of the power of
the acceptor
As against the acceptor- when it comes to the
knowledge of the proposer
B accepts A’ s proposal by letter sent by post. The
communication of acceptance is complete,
As against A – when the letter is posted
As against B - when the letter is received by A

A proposes by a letter send by post to sell his house to B. The letter is

posted on first of March 2020. B accepts the proposal by a letter send
by post on 4th of the month. The letter reaches a on 6th March.
A may revoke his offer at any time before B post his letter of
acceptance that is on 4th March but not afterwards. B may revoke his
acceptance at any time before the letter of acceptance reaches a that is
6th ,but not afterwards.

CONSIDERATION (section 2 (d))

An agreement without consideration is void.

Consideration is something of some value or worth in the eyes of law.

It is therefore defined to be the price of the promise. The contract act,
defines consideration to be some act or abstinence or promise on the
part of the promise or acceptor at the desire of the offeror or promisor.
Ex Nudo Pacto non oritur action – No action arises from a nude
agreement. In other words, no action arises from an agreement
without a consideration.

Nudum Pactum – An agreement without consideration, is void and

unenforceable.

There are few exceptions where agreement resulted into a contract

without any consideration. They are

1. Natural love and affection – written and registered agreement.

2. Past voluntary services – A finds B lost purse gives it to him. B
promices to give 50. Is a contract.
3. Time barred debt -written and signed by debtor or his agent

PRIVITY OF CONTRACT

Doctrine of privity of contract means that a contract between the parties

only and no third person can sue upon it.

COMPETENECY OF PARTIES (capacity to contract)

Every person who has attained the age of majority and who has not
been disqualified from entering into a contract is competent to contract.
Therefore, the following persons are parties incompetent to contract.-

1. A minor i.e a person below 18 years

2. A person of unsound mind or insane

3. A person disqualified by any law of contract (Alien Enemy)

 1.
a) Thus, an agreement with a minor is absolutely void. (Ab
initio void)
b) A minor can be a promisee or a beneficiary. A minor can be a buyer or
mortgagee. A minor cannot be seller or mortgagor.
d) Minor cannot ratify the agreement on attaining majority.
e) A minor can always plead minority
f) A minor cannot enter into a contract of partnership. But can be admitted
to the benefit of partnership firm with the consent of the partners.
g) A minor is liable for necessaries supplied to him. He is liable to pay out
of his properties for necessaries supplied to him.

2. A person of unsound mind or insane (non compos mentis)

Void agreement.

A unsound person is liable for necessaries supplied to him. He is liable

to pay out of his properties for necessaries supplied to him.

Can enter into contract during lucid intervals.

4. Alien enemy

In times of war one cannot enter into a contract with an alien enemy.
When war is declared between 2 countries , the performance of
obligations already created will be suspended.

CONSENT MUST BE FREE

free consent
- “ mere consent is not sufficient , free consent is required”.
- Consent is said to be free , when it is not caused by
*Coercion
*Undue influence
*Fraud
*Misrepresentation
*Mistake

COERCION – Sec-15
Committing an act forbidden by IPC or threatening to commit an act
forbidden by IPC or
Unlawful detaining or threatening to detain any property with the
intention of causing to enter into an agreement.
The contract become voidable.
UNDUE INFLUENCE – Sec.16
One party is in a position to dominate the will of other. Uses that
position to obtain unfair advantage.
A person is deemed to be dominate the will of the another
1.Where he holds a real or apparent authority or
2.Where he stands in a fiduciary relation over other or
3.Where he makes a contract with a person when the mental
capacity is temporarily or permanently affected by reason of age,
illness or mental or bodily distress.

FRAUD – Sec-17
*There must be representation or assertion and it must be false.
*Suggestion, as to a fact which is not true or which he doesn’t
believes to be true.
*Active concealment of facts one having knowledge or belief of facts.
*A promise made without the intention of performing it
*Any other act fitted to deceive
*Any such act/omission as specifically declared to be fraudulent.

Mere silence as to facts is not fraud. Unless there is a duty to speak

Uberrimae fidei : contract of outmost good faith

MISREPRESENTATION – SEC-18
If the following conditions are satisfied the Representation made by a
party to contract will become innocent misrepresentation

It must be a representation of fact.

It must be made before the conclusion of the contract.
It should be made with a view to induce the other party to enter into a
contract.
It must have induced the other party and he must have entered into the
contract.
The representation should be a false one and the person made it
honestly believed it to be true.
Derry vs Peek case.

Fraud :- TO DECIEVE THE OTHER PARTY BY HIDING THE

TRUTH. THE PERSON MAKING THE SUGGESTION BELIEVES
THAT THE STATEMENT IS UNTRUE.
MISREPRESENTATION: - THERE IS NO SUCH INTENTION
TO DECIEVE THE OTHER PARTY. THE PERSON MAKING
THE STATEMENT BELIVES IT TO BE TRUE, ALTHOUGH IT IS
NOT TRUE.

Mistake Sec .20

- Erroneous belief which leads the other party to misunderstand the
others.
Mistake may be of law or fact.

Mistake of Law :- It is well settled that ignorance of law is not an

excuse (Ignorantia juris non excusat).A party cannot get any relief
on the ground that he had done a particular act in ignorance of law.
Ignorance of law of foreign country is treated as mistake of fact.

Mistake of fact
classified into 2 categories : Bilateral mistake and unilateral mistake
Bilateral mistake
If both parties to an agreement are under a mistake as to a matter of
fact essential to the agreement. In bilateral mistake agreement is void.

VOID AGREEMENTS
1.Agreement of which the consideration or object is not lawful – Sec
23 &24
2.Agreement without consideration- Sec.25
3.Agreement In restraint of marriage – Sec 26
“ every agreement in restraint of marriage of any person, other than
minor is void”
4.Agreement in restraint of trade – Sec 27
“every agreement by which one is restrained from exercising a lawful
profession, trade or business of any kind , is to the extend is void”
Exception : trade secret, partnership
5.Agreement in restraint of legal proceeding – Sec 28
- A party is restricted absolutely from enforcing legal rights by usual
legal proceeding
6.Agreement which is ambiguous and uncertain – Sec 29
7.Wagering Agreements – Sec 30

WAGERING AGREEMENT
Wager means a bet. A wagering agreement is one in which reciprocal
promises are made to give money or something of value upon the
result of a future uncertain event with regard to which the parties hold
opposite views.

CONTINGENT CONTRACT
A contingent contract is a conditional contract. In the case of
contingent contract the performance of the promise depends on the
happening or non-happening of some future uncertain event.
Eg: A make a contract with B to buy to buy B house if A survives C.
This contract cannot be enforced by law unless and until that specified
event has happened.

QUASI CONTRACT 68-72

Quasi contract- As if
In quasi contract there is no real contract arising from the the meeting
of minds, but law attributes to a particular situation rights and
liabilities which are similar to that of contract.
A quasi contract rest upon the principle that a person shall not be
allowed to enrich himself unjustly at the expense of another.

Nemo debt locuplatari ex lines justice. No man should enrich out of

another person’s loss.

A) Necessaries supplied 68
B) Reimbursement of money 69
A person who is interested in the payment of money, which another is
bound by law to pay, and therefore pays it, is entitled to be
reimbursed by the other.
C) Obligation of person enjoying benefit of non-Gratuitous act 70
Quantum Meruit means as much as he deserves. Repayment of
money for non-gratuitous act of another.
Though there is no contract as such or the contract is invalid, when a
person has enjoyed benefit as a result of what another has done or
done non gratuitously. If it is done gratuitously, he cannot claim
compensation.
D) Obligation of finder of lost goods 71
The liability of a finder of lost goods is that of a bailiee.
Rights of
1. Retain the goods against the real owner until he recdieves
compensation for troubles and expences incurred by him.
2. If the owner has Offered specific reward for returning the lost
goods finder can sue for reward and retain goods until he
receives it
 3. Finder can sell goods in following circumstances.
A. Where the thing is in danger OF PERISHING
B. When the owner cannot be found after due diligence
C. Where the owner is found but refuses to pay the lawful charges
of the finder.
E) Liability of person to whom money is paid by mistake. 72

DISCHARGE OF CONTRACT
A contract is said to be discharged when the right and liabilities
created by it comes to an end.

- 1. By performance
- 2 By agreement or novation
- 3. By impossibility of performance (doctrine of frustration)
- 4. By Breach of contract
- 5. By lapse of time.
-6. By operation of law
1. PERFORMANCE
- Doing of that which is required by a contract.
- Parties to a contract fulfills their obligations
- Within time and manner specified.
- Parties are discharged and contract comes to an
end.
In case the promisor dies before the performance of a contract his
promises are binding to his representatives, unless a contrary intention
appears from the contract. In case of contract involving special
qualification of the promisor , the promisor himself must perform the
contract.
2. DISCHARGE BY AGREEMENT or CONSENT
Novation: - If the parties to an existing contract agree to substitute a
new contract in the place of an existing contract the situation is
known as novation. It may be between same parties or between them
and third party.
John owes 2 lakh rupees to Ram under a contract Ram owes David 2
lakh rupees Ram asked john to pay 2 lakh rupees to David in his place
Accord and satisfaction: - Accord and satisfaction is the acceptance
of any other satisfaction than the performance originally agreed.
A owes Rs. 5000/- to B. B agrees to accept Rs. 2000/- in full
satisfaction of claim of Rs.5000/- ( accord) if A pays Rs. 2000/- and it
is accepted by B ( Satisfaction) whole debt is discharged.
Pinnell’s case

REMEDIES FOR BREACH OF CONTRACT

- DAMAGES
-RESCISSION
- QUANTUM MERUIT
- SPECIFIC PERFORMANCE
-INJUNCTION

- DAMAGES
Damages are a monetary compensation adjudged to be paid to the
injured for the loss or injury suffered by him. The principle for
awarding damages is to put the injured party in the same same
financial position as is the contract has been performed.
Different types of damages.
a) Ordinary damages
Which are necessary to compensate the injured party for the loss
sustained by such a breach. (actual loss suffered).

b) Special Damages
Are granted to compensate the plaintiff for losses resulting from
special circumstance’s which are known to both the parties at the time
of making contract.

c) Exemplary Damages
Are awarded not on the basis of the actual loss caused to him but of
the injury to the feeling of the aggrieved party in order to deter other
similar minded persons from doing similar wrongs. (vindictive
damages)

d) Nominal Damages
Are awarded in case of breach of contract when there is only a
technical violation of the legal right but no substantialloss is
incurred. Also known as contemptuous damage.