CONTRACT ACT

What is a Contract?

CONTRACT : S.2(h)-

“An agreement enforceable by law”

or,

an agreement made with an intention to create a legal obligation (enforceable by law)

An agreement which is legally enforceable alone is a contract. Agreements which are not legally
enforceable are not contracts but remain as void agreements which are not enforceable at all or as
voidable agreements which are enforceable by only one of the parties to the agreement.

“All contracts are agreements, But all agreements are not contracts.”

AGREEMENT – S.2(e)

“Every promise and every set of promises forming the consideration for each other”

PROMISE: S.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”

An agreement is an accepted proposal.

OFFER/PROPOSAL 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 person either to such act or abstinence, he is said to make a
proposal.

ACCEPTANCE sec 2(b) –

When the person to whom the proposal is made, signifies his assent there to , the proposal is said to be
accepted.

PROMISOR and PROMISEE sec 2(c) -

When the proposal is accepted, the person making the proposal is called as promisor and the person
accepting the proposal is called as promisee.

CONSIDERATION sec 2(d) –

When at the desire of the promisor, the promisee or any other person has done or abstained from doing
something or does or abstains from doing something or promises to do or abstain from doing
something, such act or abstinence or promise is called a consideration for the promise.

Price paid by the one party for the promise of the other Technical word meaning QUID-PRO-QUO i.e.
something in return.

ESSENTIALS OF A VALID CONTRACT

As per Section 10 “All agreements are contracts, if they are made – by free consent of the parties,
competent to contract, for a lawful consideration and with a lawful object, and not hereby expressly
declared to be void .”

Offer + Acceptance = Promise + Consideration = Agreement + Enforcement By Law = Contract

ESSENTIAL ELEMENTS OF A VALID CONTRACT

• Offer and acceptance

• Legal relationship

• Consensus - ad-idem

• Free consent.

• Capacity or competency of parties

• Lawful object

• Lawful consideration

• Certainty and possibility of performance

• Agreements not declared to be void

• Legal formalities

Offer and Acceptance: In order to create a valid contract, there must be an agreement between two
parties. An agreement involves a valid offer by one party and valid acceptance of the same by the other
party.

Legal relationship: The parties must intend their agreement to result in legal relations. This means that
the parties must intend that if one of them falls to perform his promise, he shall be answerable for that
failure in law. Duties and rights should be legal and not merely moral. [an agreement of a purely
domestic or social nature is not a contract ]

Consensus-ad-idem: The minds of both the parties must be ad-idem. In other words, the tow parties
must have agreed about the subject matter of the contract at the same time and in the same sense.

Free consent (Permission or Willingness): An agreement must have been made by free consent of the
parties. consent is said to be free when it is not caused by

 Coercion
 undue influence
 Fraud
 misrepresentation or mistake.

If any of above flaw exists in a contract it will be held as void

Capacity to Contract : The parties to a contract must have capacity (legal ability) to make valid
contract.

Section 11 of the Indian contract Act specify that every person is competent to contract provided.

 Minor : Is of the age of majority according to the Law which he is subject

 sound mind : ( lunatic, idiot, drunkenness)

 Not disqualified by any law to which he is subject :

a) Aliens

b) Foreign sovereigns ambassadors

c) Convicts

d) insolvent.
Lawful object : The object of agreement should be lawful and legal. Consideration or object of an
agreement is unlawful if it

 is forbidden by law; or

 is of such nature that, if permitted, would defeat the provisions of any law; or

 is fraudulent; or

 Involves or implies, injury to person or property of another; or Court regards it as immoral, or

opposed to public policy

Lawful consideration : All contracts must be supported by consideration. Consideration means

“something in return” (quid pro quo). It can be cash, kind, an act or abstinence. It can be past,
present or future. However, consideration should be real and lawful. Each party must promise
something and receive something

A consideration must not be unlawful, immoral or opposed to the public policy.

TYPES OF CONTRACT

ON THE BASIS OF CREATION/FORMATION

• Express contract : Where the terms of the contract are expressly agreed upon in words (written
or spoken) at the time of formation, the contract is said to be express contract.

• Implied contract : Implied contracts in contrast come into existence by implication. Most often
the implication is by law and or by action.

• Tacit contract : Tacit contracts are those that are inferred through the conduct of parties.

• Quasi contract : A quasi contract is created by law. Thus, quasi contracts are strictly not
contracts as there is no intention of parties to enter into a contract. It is legal obligation which
is imposed on a party who is required to perform it

ON THE BASIS OF VALIDITY

• Valid contract : An agreement which has all the essential elements of a contract is called a
valid contract. A valid contract can be enforced by law.

• Void contract : A contract which ceases to be 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.

i. Under a mistake of facts

ii. Consideration or object of an agreement is unlawful

iii. Agreement made without consideration

iv. Agreement in restrain of marriage

v. Restraint of trade

vi. Restrain legal proceeding.

• Voidable contract : Defines that an agreement which is enforceable by law at the option of one
or more parties but not at the option of the other or others is a voidable contract. Result of
coercion, undue influence, fraud and misrepresentation

• Unenforceable contract : Where a contract is good in substance but because of some technical
defect cannot be enforced by law is called unenforceable contract. These contracts are neither
void nor voidable. Example: Writing registration or stamping.
 • Illegal contract : Contracts those which are forbidden by law. All illegal contracts are hence
void also, because of the illegality of their nature they cannot be enforced by any court of law.
In fact even associated contracts cannot be enforced. Contracts which are opposed to public
policy or immoral are also illegal.

“All illegal agreements are void agreements but all void agreements are not illegal.”

ON THE BASIS OF EXECUTION/PERFORMANCE

• Executed contract : An executed contract is one in which both the parties have performed their
respective obligation.

• Executory contract : An executory contract is one where one or both the parties to the contract
have still to perform their obligations in future. Thus, a contract which is partially performed
or wholly unperformed is termed as executory contract.

ON THE BASIS OF LIABILITY

• Unilateral contract : A unilateral contract is one in which only one party has to perform his
obligation at the time of the formation of the contract, the other party having fulfilled his
obligation at the time of the contract or before the contract comes into existence.

• Bilateral contract : A bilateral contract is one in which the obligation on both the parties to the
contract is outstanding at the time of the formation of the contract. Bilateral contracts are also
known as contracts with executory consideration.

OFFER

When one person signifies to another, his willingness to do or to abstain from doing anything, with a
view to obtaining the consent of that other person towards such act or abstinence, he is said to be
making an offer or proposal.’

Types Of Offer

 Express Offer
 Implied Offer
 Specific Offer
 General Offer

Essentials of an Offer :

i) Terms of must be definite, unambiguos, & certain or capable of being made certain

ii) Every offer should be communicated, ie., offeree must have the knowledge of the offer

iii) An offer cannot contain a term, the non-compliance of which would to amount to acceptance

iv) Offer must have a intention of creating a binding, mere statement does not amount to an offer

v) Must have intention to create a legal relationship

vi) Must be made with a view to obtain assent thereto

vii) If no time is fixed within which the offer is to be accepted, the offer does not remain open for an
indefinite period

viii) A offer must be distinguished from a mere invitation to offer

ix) Offer may be ‘positive’ or ‘negative’

x) Two identical cross-offers do-not result in a contract

 ACCEPTANCE

An acceptance is the act of manifestation by the offeree of his intention to the terms of offer and
willingness to be bound by the terms of the offer communicated to him.’

 An agreement emerges from the acceptance of an offer.

 Acceptance is the second stage of a contract.

Essentials of Valid Acceptance

i) Must be absolute & unqualified & according to the terms of offer

ii) To be made by the offeree

iii) Communicated to the offeror

iv) After receiving the offer

v) Before the offer lapses-within the time period

vi) Mode of Communication, if any, must be as prescribed in the offer

vii) In case of rejection of offer – a renewal of offer required

CONSIDERATION

It is the price for which the promise of the other is bought.

A contract is basically a bargain between two parties, each receiving ‘something’ of benefit to them.
This ‘something’ is described as consideration.

Eg., Price for the goods sold

Essentials for a valid Consideration:

i) At the desire of the promisor

ii) May move from the promisee or any other person

iii) Must be an act, abstinence or promise

iv) May be past ,present or future

v) Need not be adequate

vi) Must be real & competent

vii) Must be legal

No Consideration, No Contract : An agreement without consideration is void.

 Consideration is the very essential element of any contract to create legal rights between the
parties

 The law insists on existence of consideration if a promise is to be enforced as legal obligation

 The law provides no remedy to compel a party to perform his promise on an agreement made
without consideration

 A promise without consideration is null & void.

Exceptions to the Rule

Agreement without consideration is void However, consideration not necessary in:

i) Agreement made on account of love & affection

ii) Compensation for past voluntary service

iii) Promise to pay a time-barred debt

iv) Gifts

v) Agency

MINOR

 Minor : A contract with a minor is void ab-initio

 A minor cannot be asked to refund any benefit received under a void agreement

 He is not estopped to plead minority even where he falsely represents himself to be of full age

 A minor ‘s contract cannot be ratified by him on attaining majority

 He cannot be a partner in a partnership firm. He can be admitted to the benefits of an already

existing partnership

 Minor can be a promisee or a beneficiary, He cannot bind himself by a contract, but there
nothing in Act which prevents him from making other party to be bound to the minor.

 His estate is liable to a person who supplies necessaries of life to him

 His parents/guardians are not liable to a minor’s creditor’s on his breach of contract

 He can be an agent

Free Consent : defines consent as “ Two or more persons are said to consent when they agree upon
the same thing in the same sense.”

Free Consent (S.14): consent is said to be free when it is not caused by –

i) Coercion : Coercion is a committing or threatening to commit some act which is contrary to

law

Consent is said to be caused by coercion when it is obtained by either of the following acts

Committing or threatening to commit any act forbidden by the IPC, or Unlawful detaining or
threatening any property English equivalent of coercion

ii) Undue influence : A contract is said to induced by undue influence where:

 A party is in a position to dominate the will of the other, and

 Is in a position to obtain unfair advantage over the other

iii) Fraud : Fraud is a misrepresentation of facts made to induce to enter into a contract with
intention to deceive or cheat.

iv) Misrepresentation : Misrepresentation means an innocent mis- statement of fact to the contract
made by one party to induce the other to enter into a contract. (no desire of deceiving or
defraud)

v) Mistake : Consent is not free when agreement is entered into under mistake. Parties entering
into contracts should not be under any error They must agree on the same thing in the same
sense ‘Consensus ad-idem’ must be present

A contract to be valid it is not only necessary that parties consent, but also that they consent freely
Where there is consent, but not free consent, the contract is voidable at the option of the party whose
consent was not free

Quasi Contract

Under certain circumstances, the law imposes, certain rights & obligations similar to that arises from a
true contract, even though there is no contract, express or implied, between parties.”

Kinds of Quasi Contracts

 Claim for necessaries supplied to a person incapable of contracting on his account(S.68)

 Reimbursement of a person paying money due by another in payment of which he is interested

 Obligation of person enjoying benefit of a non-gratuitous act

 Rights and liabilities of the finder of lost goods

 Liability of persons to whom money is paid or things delivered by mistake or coercion

Termination of Contract

Termination is the discharge of contractual relationship between parties

Modes of Termination of Contract:

1. By Performance : Where parties have fulfilled whatever contemplated – contract ends

2. By Mutual consent : Mutually End the contract or decide other object

3. Subsequent Impossibility of Performance : Void due to subsequent impossibility

4. By Operation of Law : Death , Insolvency , merger , unathorised Alteration

5. By lapse of Time : If contract is not performed & the party aggrieved does not enforce his
rights within limitation period, he is debarred from enforcing the contract

6. By Breach of Contract : Refusal of performance is a breach. When one party refuses to

perform, other party is discharged from its liability