CLATChapter 3

R E A D I N G
M AT E R I A L F O R L E G A L K N O W L E D G E
Unit 3
Contract Law
Requirements of a contract, enforcement and
breach, and special contracts

LEGAL APTITUDE FOR LAW ENTRANCE EXAMS 76

| We will begin by looking at the basic requirements of a

contract. After that, we will learn about the enforcement of a
contract and the consequences of a breach of contract. Finally,
we will briefly examine two special types of contracts - agency
and partnership. |
What is a contract?
Under Section 2(h) of the Indian Contracts Act, 1872 (“the Contract Act”)
“an agreement enforceable by law is a contract”. It implies that all
agreements are not contracts. An agreement must meet some criteria in
order to be enforceable by law and qualify as a contract. These are set out
in Section 10 of the Contract Act:
1. Free consent of parties;

2. Competence of parties to contract;
3. Lawful consideration;
4. Lawful object; and
5. Not expressly declared void by law.
A contract may be bilateral or unilateral. In a bilateral contract, two

parties exchange promises, with each promise forming the consideration
for the other. In the case of a unilateral contract, a promise by one is
exchanged for an act of forbearance on the part of the other.
Illustration: Asha offers to give a reward of Rs.10,000/- to anyone who

finds her missing mobile phone. Binu finds the phone and returns it to
Asha. Asha is bound to give Binu the reward money. This is a unilateral
contract, where Asha makes a promise in exchange for the return of the
missing phone.

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Intention to Create Legal Obligation
Though not expressly set out in the Contract Act, it is accepted by the
courts that the parties to an agreement must have the intention to create
legal obligations in order to give rise to a contract.
Illustration: In the course of a casual conversation, Alok stated that he was

willing to give Rs. 10,000 to anyone marrying his daughter with his
consent. Bala married Alok’s daughter with his consent, and asked for the
money. The court observed that it was not reasonable that the defendant
should be bound by such general words, and that there existed no
intention to create a legal obligation.
Formation of a Contract: Offer and Acceptance
Two parties may enter into an agreement by the communication of a

proposal and its acceptance. Such a proposal is called an ‘offer’, and once
it is accepted, it becomes a promise. An assent to an offer is called an
‘acceptance’. An offer must be distinguished from an invitation to treat, or
an invitation to make offers. Such a statement does not constitute a valid
offer.
Illustration: Goods were displayed in a shop, with the prices attached. This
was held to be an invitation to treat, and not an offer. It was not capable
of conversion into a contract by acceptance.
In an auction, each bid constitutes an offer, which may or may not be

accepted. An auction, therefore, is merely an invitation to treat.
An offer (and acceptance) must be definite and certain. If the offer or

acceptances are not clear enough to permit the conclusion of the
contract, they are not considered valid. Section 29 of the Contract Act
states: “Agreements, the meaning of which is not certain, or capable of
being made certain, are void.” Further, an offer must be communicated to
the other person in order for it to be valid. If one does not know of an
offer, one cannot possibly accept it.
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Illustration: Alok and Bhanu are negotiating the sale of Alok’s property to
Bhanu over the telephone. After all the other terms have been negotiated
and settled, Alok says “My final offer is Rs. 40 lakhs. Will you buy the
property for this price?” However, at the same time, the telephone
disconnects and Bhanu does not hear this statement. There is no offer,
since Alok’s statement was not communicated to Bhanu.
Illustration: Ajay offers to buy Bijay’s computer for Rs. 30,000/-, and tells
Bijay to respond in writing to the offer. Bijay tells Ajay on the telephone
that he would sell him the computer. Ajay is not bound by Bijay’s
statement, since the ‘acceptance’ was not communicated in the
prescribed mode.
In case of communication by a non-instantaneous mode of

communication, such as post or email: (a) an offer is complete as against
the acceptor when the offeror puts it in a mode of transmission outside
the control of the offeror, and (b) an acceptance is complete as against
the offeror when the acceptor puts it in a mode of transmission outside
the control of the acceptor.
Illustration: Sita offered, by post, to sell Gita some iron at a particular

price. The letter reached Gita two days later, and Gita posted a letter of
acceptance on the same day. Due to some delay, the letter reached Sita
after a fortnight, by which time the price of iron had risen. Sita refused to
sell the iron to Gita at the original price. It was held that there was a
binding contract between Sita and Gita.
An offer lapses if a counter offer is made. A counter offer is considered a

fresh offer, which must be accepted in order to give rise to a contract. An
offer also lapses by revocation; an offer may be revoked at any time
before the acceptance is completed as against the offeror. An acceptance
may be revoked at any time before it is complete as against the acceptor,
that is, until it reaches the offeror.
Now that we’ve seen the basics of contracts, we will go on to consider

what are the necessary requirements of a contract.
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Requirements of a valid contract
Section 13 of the Contract Act lays down the doctrine of consensus ad

idem, that is, both parties must accept each other’s promises on the terms
that they are made — that there must be a meeting of minds (consensus
ad idem). If not, there is, in fact, no agreement between them at all. Lack
of consensus ad idem renders the contract void ab initio (that is, void from
the beginning).
Illustration: Anita signs a document that is written in a language that Anita

does not understand. Unless it is shown that the contents of the
document were explained to Anita, the contract is void.
If both parties to an agreement are under a mistake as to a matter of fact

essential to the agreement, there is no meeting of minds, and the contract
is void.
Illustration: Mahesh agrees to buy Naresh’s land. Both of them are

mistaken as to the actual size of the plot of land: they think the plot is 10
acres in size, whereas it is actually 15 acres in size. The contract is void.
Free Consent
A contract is voidable if one of the parties has entered into the agreement
without free consent. Section 14 of the Contract Act provides that consent
is said to be free when it is not caused by:
1. Coercion;
2. Undue Influence;
3. Misrepresentation;
4. Fraud; or
5. Mistake (subject to the provisions of Sections 20, 21, and 22 of the
Contract Act.)
6. Coercion
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Coercion is the committing of, or threatening to commit, any act

forbidden by the Indian Penal Code, 1860, or the unlawful detaining of, or
threat to detain, any property with the intention of compelling any person
to enter into a contract. (Section 15, Contract Act).
Illustration: A threatens to commit suicide if his wife and son do not agree
to sell their property to him. The wife and son sign the agreement. The
contract is voidable at the instance of the wife and son for coercion.
Undue Influence
A contract is said to be induced by undue influence where the relations

subsisting between the parties are such that one of the parties is in a
position to dominate the will of the other and uses that position to obtain
an unfair advantage over the other party. (Section 16(1), Contract Act)
Section 16(2) of the Contract Act provides that a person is in a position to

dominate the will of another where:
1. A person holds a real or apparent authority over the other, or is in a

fiduciary relation with the other person; or
2. A person makes a contract with a person whose mental capacity is
temporarily or permanently affected because of age, illness, or mental
or bodily distress.
Illustration: Achyuthananda, the office-bearer of a temple trust,

pressurises Santosh, a devotee, to make some donations to the trust. The
contract is voidable at Santosh’s instance for undue influence.
Fraud
Fraud means and includes any of the following acts committed by a party
to a contract, or with her connivance, or by her agent, with intent to
deceive the other party, or to induce him to enter into a contract:
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1. Stating facts that are not true, with knowledge of their falsity;
2. Actively concealing a fact despite having knowledge or belief of that
fact;
3. Making a promise without any intention of performing it;
4. Doing any act fitted to deceive; or
5. Doing any act which the law specially declares to be fraudulent.
A contract is voidable for fraud only if it was the fraud that caused the
other party to enter into the agreement.
Illustration: Lalita wants to sell her property to Sanjay, and in order to get
a high price, shows him fictitious letters from fake buyers, offering a very
high price for the property. Sanjay, believing the letters to be genuine,
enters into an agreement to buy Lalita’s property for a high price. The
contract is voidable at Sanjay’s instance, for fraud.
Misrepresentation
Misrepresentation means and includes:
1. The positive assertion, in a manner not warranted by the information

of the person making it, of that which is not true although the person
making the statement believes it to be true;
2. Any breach of duty done without an intent to deceive which gives an
advantage to the person making it, or to persons claiming under her, by
misleading another person to her prejudice or to the prejudice of any
persons claiming under her; or
3. Causing, however innocently, a party to an agreement to make a
mistake as to the substance of the subject matter of the agreement.
(Section 18, Contract Act)
A contract is voidable only if the misrepresentation was such as to cause

the other party to enter into the contract. Although misrepresentation
and fraud are similar in that both are based on a false representation, the
difference between the two is that in the case of misrepresentation, the
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person making the statement believes it to be true, whereas in the case of

fraud, the person making the representation knows it to be untrue.
Illustration: Ajit, a landlord, represents to Binayak, a lessee, that a house

has four bedrooms, whereas one of the rooms is not fit for use as a
bedroom. Ajit, however, does not know that one of the rooms is not fit for
use as a bedroom. This would amount to misrepresentation, and the
contract is voidable at Binayak’s instance.
Competence of Parties
The following persons are not competent to enter into a contract (Section
11, Contract Act):
1. Minors;
2. Persons of unsound mind; and
3. Persons disqualified from contracting by any law to which they are
subject.
Minors
An agreement entered into with a minor is void ab initio. Minors can

enforce contracts made in their favour for valuable consideration, because
although they cannot incur liability, they are not debarred from acquiring
title to anything valuable. Legal guardians of minors can enter into
contracts on their behalf and for their benefit.
Section 68 of the Contract Act is important here:
“If a person incapable of entering into a contract, or any one whom he is

legally bound to support, is supplied by any person with the necessities
suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person”.

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Persons of Unsound Mind
Contracts with persons of unsound mind are absolutely void. Section 12 of

the Contract Act defines ‘sound mind’ for the purposes of entering into a
contract: if, at the time of entering into a contract, a person is capable of
understanding it, and of forming a rational judgment as to its effect upon
that person’s interests, the person is of sound mind for the purposes of
contracting.
Persons Disqualified from Contracting by any Law to which they are

Subject
In certain scenarios, some persons are specifically barred from entering

into contracts of some kinds by the law that governs them. In these
scenarios, any such contract would be void. For instance, corporations
derive their power from Charters, Statutes, or Acts which create them. If a
corporate enters into a contract beyond the scope permitted in such
Charter, Statute, or Act, the contract would be void.
Lawful Consideration
Consideration is defined in Section 2(d) of the Contract Act. The definition

provides that in the first place, the act or abstinence that is to be a
consideration for the promise should be done at the desire of the
promisor; second, that it should be done by the promisee or any other
person; and last, that the act or abstinence may have been already
executed or is in the place of being done or may be still executory (to be
performed in the future.)
Consideration need not be adequate, or equal in value to the promise; all

that is required is that it have some value in the eyes of the law, and cause
some incremental change in the position of the receiver. Something not
done at the desire of the promisor, but voluntarily, will not amount to
valid consideration.
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Lawful Object
Section 23 defines what consideration and objects are lawful, and what
are not:
“The consideration or object of an agreement is lawful, unless —
It is forbidden by law; or is of such a nature that, if permitted, would

defeat the provisions of any law, or is fraudulent; or involves or implies
any injury to the person or property of another; or the court regards it as
immoral, or opposed to public policy”.
An illegal contract is totally unenforceable. The maxim ‘ex turpi causa non
oritur actio’, means ‘out of a base cause, no action arises.’ The principle of
public policy is: ‘ex dolo malo non oritur actio’ (No court will lend its aid to
a man who founds his cause of action upon an immoral or illegal act.)
Agreements Opposed to Public Policy
An agreement that tends to be injurious to the public or against the public

good is void as being contrary to public policy. Some examples of
agreements opposed to public policy are:
1. Trading with an alien enemy;

2. Sale of public offices (Illustration: An agreement to pay money to a
public servant to induce the public servant to retire and thus make way
for the appointment of the promisor is virtually trafficking with
reference to an office, and is void); and
3. Agreements which tend to abuse the legal process, such as agreeing to
pay money to a person to give evidence in a civil suit on the promisor’s
behalf.

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Not Expressly Declared Void
Certain agreements are specifically or expressly declared void by the

Contract Act. These are:
1. Agreements of which the consideration or object is unlawful (Sections

23 and 24);
2. Agreements without consideration (Section 25);
3. Agreements in restraint of marriage (Section 26);
4. Agreements in restraint of trade (Section 27);
5. Agreements in restraint of legal proceedings (Section 28);
6. Agreements that are uncertain and ambiguous (Section 29);
7. Agreements by way of wager (Section 30); and
8. Agreements to do impossible acts (Section 56).
Illustration: Jaya and Amit were rival shopkeepers in a locality, and Amit
agreed to pay Jaya a sum of money in exchange for Jaya closing her shop.
Jaya closed the shop and demanded the money. The agreement was held
to be void.
An agreement absolutely restraining a party from enforcing rights through

a court of law, or an agreement which places a limit as to the time within
which a right may be enforced, is void.
Illustration: A clause in an agreement provided that the Bombay court

alone would have the jurisdiction to adjudicate. The plaintiff filed a suit in
Varanasi, but it was dismissed in view of the agreement. In this case, both,
the Varanasi and Bombay courts had jurisdiction, and since the restraint
was not absolute, it was held to be valid.
Distinction between Illegal and Void Agreements
An illegal transaction is one that is actually forbidden by law. A void

agreement may not be forbidden; all that is said is that if it is made, the
courts will not enforce it. Every illegal contract is also void, but a void
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contract is not necessarily illegal. In both cases, however, the main or

primary agreement is unenforceable.
Performance of contracts
The parties to a contract must either perform, or offer to perform, their

respective promises, unless such performance is dispensed with or
excused under the Contract Act, or under any other law. Unless a contrary
intention appears from the contract, the representatives of a party are
bound by the party’s promises in case of death. A contract to perform
personal services, however, such as an agreement with an artist to paint
one’s portrait, would not bind the representatives of the promissor.
Offer to Perform (Tender)
If a party offers to perform the contract, and the offer of performance

(tender) has not been accepted, the party is not responsible for non-
performance, and the party’s rights under the contract are not lost,
provided:
1. The offer is unconditional;

2. The offer is made at the proper time and place; and
3. The offer is made in such a manner that the person to whom it is being
made has a reasonable opportunity of ascertaining that the person
making it is able and willing there and then to do the whole of what
that person is bound by her promise to do. (Section 38, Contract Act)
Anticipatory Breach
When a party refuses to perform, or has disabled himself from performing

her promise in its entirety, the other party may put an end to the contract
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unless she has, by words or conduct, signified acquiescence to the

continuation of the contract. (Section 39, Contract Act)
Illustration: Rita enters into an agreement with Joy to chop timber from
Joy’s property and deliver it to the nearest railway station on Rita’s carts.
Rita sells the carts before performance is complete. This would amount to
anticipatory breach, and Joy can either acquiesce to the continuation of
the contract, or rescind it.
Time, Place, and Mode of Performance:
If no time for performance is specified, a contract must be performed

within a reasonable time. (Section 46, Contract Act) If the parties intended
that time should be of the essence of the contract, a failure to perform at
the specified time would give the promisee the right to rescind the
contract. (Section 18, Contract Act) Generally speaking, time is presumed
to be of the essence in the case of commercial contracts.
Illustration: Maggu agrees to supply sweets for Dayal’s daughter’s

wedding. Dayal tells Maggu specifically that the sweets are for the guests
at the wedding, which has been fixed for a particular date. Maggu does
not supply the sweets on the date of the wedding. Here, time is of the
essence of the contract, and therefore Dayal can rescind the contract.
Impossibility and Frustration:
An agreement to do an act impossible in itself is void. (Section 56,

Contract Act) Where, however, one person has promised to do something
which she knew, or, with reasonable diligence, might have known, and
which the promisee did not know to be impossible or unlawful, such
promisor must make compensation to such promisee for any loss which
such promisee sustains through the non-performance of the contract.
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If the performance of a promise becomes impossible for any reason that

the promisor could not prevent, or unlawful, after the contract is made,
the contract becomes void when the act becomes impossible or unlawful.
This is the doctrine of frustration. (Section 56, Contract Act). However, the
performance of a contract must become impossible or unlawful for the
doctrine of frustration. A contract cannot be regarded as impossible
merely because it is more difficult to perform than anticipated, or less
remunerative.
Illustration: Mitesh enters into a contract with Suresh, who is in another

country, to deliver some linseed oil to Suresh in his country. Subsequently,
the export of linseed oil from his country is banned. Mitesh is not bound
to perform the promise under the contract, as the contract has been
rendered void under the doctrine of frustration.
Illustration: A, a manufacturer, agrees to sell some machines to B for a

certain price. After the contract is made, the government raises the
manufacturing tax on the machines by 20%. A now finds that there is no
profit in selling the machines to B at the price fixed. This would not
amount to impossibility. The contract is still valid, and A must perform the
promise.
Consequences of Rescission, and of a Contract Becoming Void
When a voidable contract is rescinded, the other party need not perform
any promise contained in the contract, and the party rescinding the
contract must return to the other party any benefit received under it.
If an agreement is discovered to be void, or if it becomes void, for

example, due to frustration, any person who has received some
advantage under the agreement must return it or compensate the person
from whom the advantage was received. (Section 65, Contract Act)
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Illustration: Aftab, a landlord, recovers a rent from Bina, the tenant, that is
higher than that permitted under the rent control legislation. Aftab must
return the excess rent to Bina.
Consequence of a breach: Specific Performance
In certain situations, a party takes an action against the party who has
breached a contract, to compel the breaching party to perform its
obligations under the contract. This is called ‘specific relief’, and the law
relating to such remedies is usually found in The Specific Relief Act, 1963
(“the Specific Relief Act”).
The specific performance of any contract may, at the discretion of the

court, be enforced:
1. When there is no standard to ascertain the actual damage caused by

the non-performance of the act agreed to be done; or
2. When the act agreed to be done is such that monetary compensation
for its non-performance would not be adequate relief. (Section 10,
Specific Relief Act)
Unless otherwise proved, it is assumed:
1. That the breach of a contract to transfer immovable property cannot

be adequately relieved by monetary compensation; and
2. That the breach of a contract to transfer movable property can be
relieved by monetary compensation, except where:
a. The property is not an ordinary article of commerce, or is of special
value of interest to the plaintiff, or consists of goods that are not
easily obtainable in the market; and
b. The property is held by the defendant as the agent or trustee of the
plaintiff. (Explanation to Section 10, Specific Relief Act)
Illustration: Roy agreed to sell some rare and beautiful antique furniture
to Joy, but later, refused to give Joy the furniture. Joy could not claim
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specific performance in this case; Roy being a dealer who only wanted the
antique furniture for resale.
Specific Performance of part of a Contract
As a general rule, a court will not compel specific performance of a

contract, unless:
A party to a contract is unable to perform the whole of her part of it, but
the part which must be left unperformed bears only a small proportion to
the whole in value, and can be compensated by way of money; in such a
case, the court may, at the suit of either party, order the specific
performance of that part of the contract which can be so performed, and
order monetary compensation for the remaining part;
A party to a contract is unable to perform the whole of her part of it, and
the part which must be left unperformed:
a. Forms a considerable part of the whole, in which case, the court may
order specific performance if the other party pays or has paid the
agreed consideration for the whole of the contract, reduced by the
consideration for the part which must be left unperformed; or
b. Cannot be compensated by way of money, in which case the court may
order specific performance if the other party pays or had paid the
consideration for the whole of the contract without any abatement,
But in either case, the other party must relinquish all claims to the
remaining part of the contract and all right to compensation, either for
the deficiency or for the loss or damage sustained through the default of
the defendant.
A part of a contract, taken by itself, can and ought to be specifically

performed, and that part stands on a separate and independent footing
from another part of the same contract which cannot or ought not to be
specifically performed, in which case, the court will order specific
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performance of the part which can and ought to be specifically performed.

(Section 12, Specific Relief Act)
Illustration: Vijay agrees to sell Vivek 100 acres of land. It turns out that
Vijay only owns 98 acres, and the remaining 2 acres belong to a stranger,
who refuses to sell them. The 2 acres are not necessary for the use or
enjoyment of the other 98 acres, nor are they so important that the loss
of their use may not be compensated in money. In such a case, on Vivek’s
suit, Vijay may be directed to convey 98 acres to Vivek and to compensate
Vivek for not conveying the remaining 2 acres.
Consequence of breach: Damages
A party to a contract who breaches the contract must compensate the

other party for any loss or damage that arises naturally from the breach,
or which the parties knew, when they made the contract, to be likely to
result from the breach of the contract. (Section 73, Contract Act)
The Supreme Court held that there are two principles on which damages
are calculated in the case of breach of contract of sale of goods. It stated:
“The first is that he who has proved a breach of a bargain to supply what
he has contracted to get, is to be placed so far as money can do it in as
good a situation as if the contract had been performed; but this principal is
qualified by a second which imposes on a plaintiff the duty of taking all
reasonable steps to mitigate the loss consequent on the breach, and
debars him from claiming any part of the damage which is due to his
neglect to take such steps”. (Murlidhar Chiranjilal v. Harishchandra
Dwarkadas, AIR 1962 SC 366)
The general principles relating to the measure of damages are laid down
in Section 73 of the Contract Act. The second part of Section 73 of the
Contract Act relates to damages that both parties knew, at the time they
entered into the contract, as likely to be resulting from a breach. This is
called the rule of ‘special damages’.
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Illustration: A, the owner of a mill, engaged B to deliver a broken

crankshaft to the manufacturer for repair. B delayed the delivery.
Unknown to B, this was the only crankshaft that A owned, and as a result,
there was a delay in restarting the mill. A sought to recover profits they
would have made had the mill started without delay. The court rejected
the claim on the ground that the facts known to the defendant were
insufficient to ‘show reasonably that the profits of the mill must be
stopped by an unreasonable delay in the delivery of the broken shaft by
the carriers’ to the manufacturer. If, on the other hand, B knew that such
a loss would result from a delay in delivering the crankshaft, B may be
liable to pay the damages resulting from the delay in restarting the mill.
Special Contracts: Agency
An ‘agent’ is a person employed to do any act on behalf of another (‘the

principal’), or to represent the principal in dealings with third persons.
(Section 182, Contract Act). The underlying doctrine of agency is that a
person who does an act through another is deemed to do it himself.
The distinction between an agent and a servant or employee is that while

in the case of an agent the principal merely directs what must be done, in
the case of employees, the employer also directs how it is to be done.
Illustration: A, a common carrier, engaged B, another common carrier, to

carry C’s goods from one place to another. C’s servants loaded the goods
from C’s premises. A was held to be C’s agent.
Contracts entered into through an agent, and obligations arising from acts
done by an agent, may be enforced in the same manner, and will have the
same legal effects, as if the contracts had been entered into, and the acts
done, by the principal in person. (Section 226, Contract Act)
Illustration: A appoints B as an agent. B borrows some money from C on

A’s behalf. A is bound to repay the loan to C.
An agency is terminated when:

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a. The principal revokes the agent’s authority;

b. The agent renounces the business of the agency;
c. The business of the agency is completed;
d. Either the principal or the agent dies or becomes of unsound mind; or
e. The principal is adjudicated an insolvent under any law for the time
being in force for the relief of insolvent debtors. (Section 201, Contract
Act)
Agent’s Authority
An agent’s authority may be express or implied. (Section 186, Contract

Act). An agent who has the authority to do an act also has the authority to
do every lawful thing necessary in order to do such an act. (Section 188,
Contract Act)
Illustration: A appointed B as an agent to manage a business. B would also

have the authority to borrow money for the business.
In an emergency, an agent has authority to do all such acts for the

purposes of protecting the principal from loss as would be done by a
person of ordinary prudence, in her own case, under similar
circumstances. (Section 189, Contract Act) This is called the doctrine of
necessity. It is essential, however, that the agent communicates with and
obtains instructions from the principal wherever possible; otherwise, the
act of the agent in the emergency will not bind the principal.
Illustration: A sends some goods to another port on a ship. B is the master

of the ship, and when the ship reaches the other port, B tries to contact A
to get directions for the disposal of the goods. A, however, is unreachable,
and the goods would perish if left on the ship for more time. B sells the
goods. B had the authority to do this because this was an emergency.
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Ostensible Authority of an Agent
If an agent has done acts or incurred obligations to third persons on behalf

of the principal without authority, and if the principal has, by words or
conduct, induced such third persons to believe that the acts or obligations
were within the agent’s authority, the principal is bound by such acts or
obligations. (Section 237, Contract Act)
Illustration: A’s agent, B, is authorised to borrow up to Rs.1,00,000/- on

A’s behalf. B borrows Rs.1,50,000/- from C, who does not know of the
limit on B’s borrowing powers by A. A must repay the entire amount to C.
Duties of an Agent
An agent must conduct the principal’s business according to the principal’s

instructions, or, if there are no such instructions, according to the custom
which prevails in doing business of the same kind at the place where the
agent conducts business. If the agent acts otherwise, the agent must make
good to the principal any loss that is sustained, and if there is profit, the
agent must account for it. (Section 211, Contract Act)
Illustration: A, the principal, instructs B, the agent, to buy some wheat and
dispatch it by rail. B buys the wheat, but dispatches it in an open truck.
The wheat is destroyed in a fire. B must make good the loss suffered to A.
An agent must also conduct the business of the agency with such skill as is
generally possessed by a person engaged in a similar business, unless the
principal had notice of the agent’s lack of skill.
Illustration: A bank was asked to collect money on behalf of a customer,

and remit it to the customer. The bank sent the money, about Rs.34,000/-
by draft, by ordinary post. The draft was lost. As an agent, the bank was
held to be negligent in sending such a large amount through ordinary
post.

………………………………………………………………………………………………………………………………………………………………………………………………………………………….


An Agent’s Rights
Out of any moneys received on account of the principal in the agency

business, an agent may retain all moneys due to the agent in respect of
advances made or expenses properly incurred by the agent, and any
remuneration payable to the agent for acting as an agent. (Section 217,
Contract Act) Where there is no contract to the contrary, an agent is
entitled to retain goods, papers, and other property, movable or
immovable, of the principal received by the agent, until the amount due
to the agent for commission, disbursements and services in respect of the
same has been paid or accounted for to the agent. (Section 221, Contract
Act)
Illustration: A engages B as an agent to collect rent on A’s behalf. B can

retain the rent collected until B’s remuneration is paid.
Special Contracts: Partnership
The law relating to partnership was contained in Chapter XI of the

Contracts Act prior to 1932. Chapter XI, however, was not exhaustive of
the law of partnership, and so, Chapter XI was repealed and The Indian
Partnership Act, 1932 (“the Partnership Act”) was promulgated. The other
provisions of the Contract Act, however, are generally still applicable.
(Section 3, Partnership Act)
The relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all is called a
‘partnership’. The persons who have entered into partnership with one
another are individually called ‘partners’, and collectively, a ‘firm’. The
name under which their business is carried on is called the ‘firm name’.
(Section 4, Partnership Act)
An agreement to share profits is an essential element in the constitution

of a partnership, but not an agreement to share loss.
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


Illustration: A, a designer, and B, a business man, decide to form a

partnership business to sell any goods that A designs. Under the terms of
their agreement, A and B would each receive a share of any profits, but
only B would have to bear any losses. This is a valid partnership
arrangement.
There is mutual agency between the partners in a partnership. The

business is carried on on behalf of all the partners; as such, each partner is
an agent of all the other partners, and equally, each of the partners is a
principal to all the other partners to the extent that each partner is bound
by the acts of the other partners done in the furtherance of the
partnership business. Liabilities of the firm can be enforced against each
of the partners personally. (Sections 18-30, Partnership Act) A partner is
an agent of the firm for the purposes of the business of the firm, and
cannot be an employee of the firm. A firm is not presumed to be an agent
of a partner.
Illustration: A and B are partners in a firm. B borrows some money from C

for the partnership business. When the loan becomes due, C calls upon A
for repayment. A must repay the loan.
Where a person enters into a transaction in her own name and does not
profess to act for and on behalf of the firm of which she is a partner, and
where there is nothing to show that she had acted in any manner
expressing or implying an interest to bind the firm, the transaction will not
be binding on the firm simply because she was in fact a partner and the
transaction could have been entered into by her on behalf of the firm in
exercise of her implied authority.

Practice Exercises
Question 1
Principle: Agreements in restraint of trade are void
Facts: Ted and Sam are two partners in a toy company. They specialise in
action figures, and are very well known in the market. The makers of a
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


leading international cartoon series approach them to ask them to make

the action figures for their latest cartoon series. However, they state that
the company must not make the toy of any other cartoon series for the
time period of their contract. Ted and Sam agree to this. 5 months later
however, due to unavailability of raw material, Ted and Sam declare that
they cannot make the action figures.
Can they be held liable for breach of contract?
a. Yes, because they agreed to the agreement, and are thus liable under
it.
b. No, because the contract stands frustrated on account of supervening
impossibility, and thus Ted and Sam need not be held responsible.
c. No, because the agreement was in restraint of trade and such
agreement are void.
d. Yes, because even though the agreement was in restraint of trade, by
agreeing to it, they made it binding upon themselves.
Question 2
Principles:
i. An offer is made when a person signifies his willingness to do or abstain

from doing a particular act
ii. The offer is concluded when it comes to the knowledge of the offeree.
iii. Acceptance of the offer must be communicated to the offerer.
iv. The IT Act 2000, provides that unless otherwise agreed the despatch of
an electronic record occurs when it enters a computer resource outside
the control of the originator.
Facts: A software development company Z, and an advertising company Y

enter into a contract. Amongst the terms of the contract, it is stipulated
that the offer will be communicated towards the offeree by post. The
offerer dispatched the documents containing the offer to the offeree by
post. The deadline for the acceptance of the offer was 12 noon, the
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


following Tuesday. The offer reached the offeree at 9 a.m. Tuesday

morning, and the offeree sent an e-mail to the offerer signifying their
acceptance by 11 a.m. the same day. However due to a technical glitch,
the mail reached the offerer by 12:15 p.m., and the offerer saw it only at 2
p.m.
Has a contract been concluded?
a. No, because the acceptance was not made in the same manner as the
offer.
b. No, because the acceptance came to the knowledge of the offerer at 2
p.m., which was beyond the deadline
c. No, because the acceptance entered the computer system at 12:15
p.m.
d. Yes, because the acceptance reached the offerer late, but it had
entered a computer resource outside the control of the offeree by 11
p.m.
Question 3
Principles:
i. A contract is concluded when the offeree signifies to the offerer his

acceptance of the offer
ii. Cross-offers do not result in contracts
Facts:
a. George offers Pritish that he will supply him with 200 cows every
month, in return for a supply of 1500 litres of milk from Pritish’s farm.
Pritish replies to George, accepting his offer, but saying 1500 litres of
milk every 6 weeks.
b. Fred writes to Lisa offering to sell 2500 gas balloons to her for Rs. 6 per
balloon. Lisa replies to Fred saying that she will accept his offer, but at
Rs. 4 per balloon.
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


Which of these is not a valid contract?
a. i.
b. ii
c. Both
d. Neither
Question 4
Principles:

ii. The intention of the offerer must be considered
iii. There must be consensus ad idem between the offerer and the offeree.
Facts:
Purab writes to a leading car dealer in Mumbai, enquiring about the price
of a 1985 Aston Martin. The dealer wrote back to him stating that the
price was Rs. 7 crore. Purab then wrote to the dealer saying that he would
accept his offer, and buy the Aston Martin for Rs. 7 crore.
a. This is a valid contract

b. This is a void contract
c. This is a contract that is void ab initio
d. This is a voidable contract
Question 5
Principles:

ii. An invitation to offer is not a valid offer and the acceptance of the
same cannot be treated as an offer
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


Facts:
a. A branch of a leading sportswear store was promoting an offer where

every 100th customer was assured a surprise gift. Among the gifts
advertised was an LCD TV. Shreya happened to be the 100th customer
of this particular branch, but was given only a cap. She wants to sue the
company, contending that the promotion was an offer and the LCD TV
had been part of the offer, and by visiting the store she had accepted
that offer.
b. A company M invites tenders for the supply of concrete and timber for
their upcoming construction project. Another company N, responds to
the tender, saying they are willing to supply the same at a rate much
cheaper than the market price. However, the tender is eventually
awarded to a company X. Company N wants to sue for breach of
contract, citing the tender as a valid offer.
Which of these two is an invitation to offer, and not an offer?
Options:
a. i
b. ii
c. Both
d. Neither
Question 6
Principle: A contingent contract is a contract to do or not do something

contingent on the occurrence of a particular event. Contingent contracts
are permissible in law only if the events that they refer to are possible.
Facts: A tells B that he will sell him his car if he is the last person on Earth.
Is this a contingent contract?
a. Yes. It is technically possible.

b. Yes. It is a contingent contract.
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


c. No. It is impossible.
d. No. Though it is possible, the chances are so low that it is practically
impossible.
Question 7
Principle: A contingent contract is a contract to do or not do something

contingent on the occurrence of a particular event. Contingent contracts
are permissible in law only if the events that they refer to are possible.
Facts: A tells B he will pay him Rs. 1,000 when he turns 30.
Is this a contingent contract?
a. Yes. The payment is contingent upon the occurrence of an event.

b. Yes. When B turns 30, A will pay him Rs. 1,000.
c. No. There is no consideration.
d. No. B definitely will turn 30. There is no possibility of the event not
happening. This is not a contingent contract.
Question 8
Principle: In case of default by a pawnor, the pawnee has the right to

dispose of the goods in such reasonable manner as he sees fit, acting with
due care for both his interests as well as those of the pawnor.
Facts: A pledges property worth Rs. 1,00,000 for a debt of Rs. 10,000.
When A defaults on his debt, B sells the property for Rs. 10,000. Is this
legal?
a. Yes. A has the right to sell the property to recover his loan.
b. No. B’s right to dispose of the goods is subject to being exercised in a
reasonable manner. This does not meet that requirement.
c. No. B is being malicious.
d. Yes. A’s primary concern is his own interest.
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


Question 9
Principle: The unintended beneficiary of a contractual obligation must,

within reason, restore the parties to the contract to their original position.
Facts: A orders a pizza from Dominos. The Dominos delivery person

accidentally delivers it to C. C eats it. Is C obliged to pay Dominos for the
pizza?
a. No. The mistake was made by the pizza delivery man.

b. No. C didn’t make any mistake.
c. Yes. C ate the pizza knowing that he hadn’t ordered it. Having derived
the benefit of the contract, he must now pay for it.
d. Yes. C stole the pizza.
Question 10
Principle: The unintended beneficiary of a contractual obligation must,

within reason, restore the parties to the contract to their original position.
Facts: A and B enter into a contract whereby B will supply hay to A. the
hay is accidentally delivered to C, who uses it to thatch his roof. Which of
the following actions is C required to undertake?
a. Give the hay to A.

b. Pay B for the hay.
c. Both of the actions
d. Neither of the actions
Question 11
Principle: Agreements restraining a legal remedy or rightful recourse in

law; or reducing or exempting liability under any contract, on the expiry of
a specified period so as to restrict any party from enforcing his rights are
void.
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


Facts: Yin, Yang’s mentor and guide through life, contracts with Yang
stating that Yang shall not approach the police or Magistrate but only the
Supreme Court after embezzling large funds from Yang, assuring Yang,
that the Supreme Court is a better and more prestigious forum to sue in,
leaving out conveniently that it is also not approachable without going to
the police or magistrate first. Yang did however state that alternate
dispute resolution was possible – through negotiation or mediation later –
again not stating that against a crime, such was not available.
a. The contract is valid as alternatives are present and duly information

was given
b. The contract is valid as being a mentor, Yang can tell Yin such things.
c. The contract is not valid as it restrains Yin’s recourse in law.
d. The contract is not valid as Yin did not consent freely.
Question 12
Principle: In a contract of bailment, it is the bailor’s duty to disclose faults

in goods bailed, of which the bailor is aware, and which materially
interfere with the use of them, or expose the bailee to extraordinary risk.
Facts: A provides B with his old car for repairwork. B being A’s regular
mechanic knows them car inside out and this time is working on the
ruined handbrake. The footbrakes of late had also partly given way,
something A had knowledge of when he gave the car to B. B, being an
extremely thorough mechanic, took out the car to test the brake on a hill,
but even the footbrake then gave way, resulting in a crash that injured
him.
a. B should have known the car to be faulty.

b. A should have informed B of the defect.

………………………………………………………………………………………………………………………………………………………………………………………………………………………….


c. It was not B’s job to testdrive the car, only to

repair the brake – the injury would never have
occurred.
d. B should have checked the car before taking it out.
Question 13
Principle: A contract of bailment is avoidable at the option of the bailor, if

the bailee does any act with regard to the goods bailed, inconsistent with
the conditions of the bailment.
Facts: X provides his horse to Y for ‘competitive equestrian sporting

events’ only for a period of three years. During training of the horse, a
pedigreed one at that, the trainer sees potential in his speed and asks Y to
allow him to train her for the derby that year presuming it is equestrian in
nature. The horse however cannot cope with the rigorous training. X seeks
to avoid the contract when he gets to know.
a. The derby would fall under the permitted usage and hence Y is safe.
b. The derby is outside ‘competitive equestrian sporting events’ and
inconsistent with the conditions.
c. X should sue the trainer and not Y.
d. The contract is void as one cannot contract over a restricted purpose.
Question 14
Principle: The court will not consider the adequacy of consideration so

long as the consideration is not obviously and unfairly low.
Facts: A agrees to buy a newspaper from B for Rs. 100.
Is this legal?

………………………………………………………………………………………………………………………………………………………………………………………………………………………….


a. Yes. There is consideration. Its adequacy is irrelevant.

b. No. Though there is consideration it is clearly
inadequate and unfair.
c. No, because the newspaper is a bastion of the free press and should be
worth more
d. Cannot be determined from the given facts
Question 15

Facts: A agrees to buy from B the last known surviving copy of the Times
of India that was published on 15.08.1947 for Rs. 50.
Is this legal?
a. Yes. There is consideration. Its adequacy is irrelevant.

b. No. Though there is consideration it is clearly inadequate and unfair.
c. No. This is a historic document and for the sake of Indian history and
legacy, should be worth more.
d. Cannot be determined from the given facts.
Question 16

Facts: What is the basis for the principle stated above?
a. To prevent tax evasion as people can write off undervalued sales as

losses
b. To prevent exploitation of weaker parties
c. Both a and b.
d. To make sure that fraudulent contracts are not passed off as legal.
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


Question 17
Principle: No contract can assign a mere right to sue, but such a right may
be the subject of a contractual agreement to assign.
Facts: A and B had entered into a contract which provided for damages in
the case of breach. A agrees to assign this prospective right to C, in lieu of
a debt owed to C, in exchange of C waiving the debt and interest for the
time being.
Is this valid?
a. Yes. This is an agreement to assign which is valid.

b. No. This is an assignment of a mere right to sue.
c. No, this is an assignment over a right that A never had in the first place
d. Cannot be determined from the given fact
Question 18
Principle: Where both the parties to an agreement are under a mistake as

to a matter of fact essential to the agreement, the agreement is void. An
erroneous opinion as to the value of the thing which forms the subject-
matter of the agreement is not to be deemed a mistake as to a matter of
fact.
Facts: A and B contract over gold biscuits. When the contract was made
the price of gold was considerably higher than at the time of performance
(delivery and payment). A (supplier) hence insisted on the higher price of
the goods while B (one time investor) said that it was a mistake in
agreement of something essential and hence contract was void.

………………………………………………………………………………………………………………………………………………………………………………………………………………………….


a. The contract is void as there was mistake of material fact.

b. The contract is not void as there was only an erroneous opinion about
the value of goods.
c. The contract is void as B being a one time buyer could not be expected
to know of such price fluctuations.
d. The contract is void as gold is not the ‘subject matter’ of the contract.
Question 19
Principle: A contract is not voidable because it was caused by a mistake as

to any law in force in India.
Facts: Priyanka enters a contract with Rahul over the supply of foreign
luxury cars, both parties being Indian. Certain custom duty and taxation
laws followed worldwide were complied with. Indian law however made
an exception to the same. Both parties mistakenly assumed Indian
requirements to be the same and proceeded on the assumption. Rahul
later, on realizing this, sought to avoid the same citing that he would not
have contracted had he known the customs requirements.
a. The contract is void from the start.

b. The contract is voidable at the instance of Rahul.
c. The contract is voidable at the instance of Rahul and/or Priyanka.
d. The contract is valid and consequences have to be borne by both.
Question 20
Principle: No consideration is lawful if it involves or implies injury to the

person or property of another.
Facts: Jack agrees to loan Jill a handsome sum of money if she fetches him
fifteen pails of water everyday for a week. Jill agrees, and says she will
fetch the same from a well atop a hill on Ole McDonald’s farm. Is this
contract valid?
………………………………………………………………………………………………………………………………………………………………………………………………………………………….


a. The contract is valid as the water being a natural resource is everyone’s

property.
b. The contract is invalid as Jill has trespassed on and stolen from
McDonald’s property.
c. The contract is valid as Jill is providing the subject matter and Jack the
consideration, the money not injuring anyone.
d. The contract is invalid as the subject matter the contract being water is
not lawful, even if the consideration (money) is lawful and not
injurious.
Answers
1. (c), the agreement was in restraint of trade, preventing them form

contracting with anybody else.
2. (d), according to the IT Act, the dispatch of the acceptance occurs
when it reaches a computer resource outside the control of the
originator.
3. (c), both instances have cross-offers, thus they cannot be considered
contracts.
4. (c), the contract is void ab initio because there was no consensus ad
idem.
5. (c), in the first instance, the display of goods in the store window is an
invitation to offer; and in the second a tender is considered an
invitation to offer.
6. (c)
7. (d)
8. (b)
9. (c)
10. (d)

………………………………………………………………………………………………………………………………………………………………………………………………………………………….


11. (c), the contract is not valid as it restrains Yin’s recourse in law. It
could be argued that consent is not free, but not here, as one can
freely consent to a mentor and buy into their tales completely.
Misrepresentation, active concealment etc are other things arguable,
but not in the principle. The question itself states why alternatives are
not available.
12. (b), A should have informed B of the defect.
13. (b), the derby is outside ‘competitive equestrian sporting events’ and
inconsistent with the conditions.
14. (a)
15. (b)
16. (c)
17. (b)
18. (b), the contract is not void as there was only an erroneous
opinion about the value of goods. Self Explanatory. The second
principle qualifies the first one and says it is not absolute, an
erroneous opinion on value of subject matter being the exception.
B’s knowledge needn’t be taken into account, and gold is subject
matter.
19. (d), the contract is valid and consequences have to be borne by both.
The Indian law in question is necessary to be followed and its
ignorance is not an excuse that permits one part to declare the same
as void. International practices are not an exception to Indian law’s
operation.
20. (b), the contract is invalid as Jill has trespassed on and stolen from
McDonald’s property. This theft and trespass is injury to another’s
property. Water maybe a natural resource, but where obtained from
may make extraction of it improper, as here. Here the consideration is
the water as the contract is for the loaning of money and water is

………………………………………………………………………………………………………………………………………………………………………………………………………………………….


given in return. Either way, the promise of each party is consideration

for the other’s promise. Lastly, the even if the consideration was the
money and water the subject matter, water by itself is not unlawful,
the passing on of stolen water/ trespassing to obtain it, is.|
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R E A D I N G

| We will begin by looking at the basic requirements of a

1. Free consent of parties;

A contract may be bilateral or unilateral. In a bilateral contract, two

Illustration: Asha offers to give a reward of Rs.10,000/- to anyone who

Intention to Create Legal Obligation

Illustration: In the course of a casual conversation, Alok stated that he was

Formation of a Contract: Offer and Acceptance

Two parties may enter into an agreement by the communication of a

In an auction, each bid constitutes an offer, which may or may not be

An offer (and acceptance) must be definite and certain. If the offer or

In case of communication by a non-instantaneous mode of

Illustration: Sita offered, by post, to sell Gita some iron at a particular

An offer lapses if a counter offer is made. A counter offer is considered a

Now that we’ve seen the basics of contracts, we will go on to consider

Requirements of a valid contract

Section 13 of the Contract Act lays down the doctrine of consensus ad

Illustration: Anita signs a document that is written in a language that Anita

If both parties to an agreement are under a mistake as to a matter of fact

Illustration: Mahesh agrees to buy Naresh’s land. Both of them are

Coercion is the committing of, or threatening to commit, any act

A contract is said to be induced by undue influence where the relations

Section 16(2) of the Contract Act provides that a person is in a position to

1. A person holds a real or apparent authority over the other, or is in a

Illustration: Achyuthananda, the office-bearer of a temple trust,

Misrepresentation means and includes:

1. The positive assertion, in a manner not warranted by the information

A contract is voidable only if the misrepresentation was such as to cause

person making the statement believes it to be true, whereas in the case of

Illustration: Ajit, a landlord, represents to Binayak, a lessee, that a house

An agreement entered into with a minor is void ab initio. Minors can

Section 68 of the Contract Act is important here:

“If a person incapable of entering into a contract, or any one whom he is

Persons of Unsound Mind

Contracts with persons of unsound mind are absolutely void. Section 12 of

Persons Disqualified from Contracting by any Law to which they are

In certain scenarios, some persons are specifically barred from entering

Consideration is defined in Section 2(d) of the Contract Act. The definition

Consideration need not be adequate, or equal in value to the promise; all

“The consideration or object of an agreement is lawful, unless —

It is forbidden by law; or is of such a nature that, if permitted, would

Agreements Opposed to Public Policy

An agreement that tends to be injurious to the public or against the public

1. Trading with an alien enemy;

Not Expressly Declared Void

Certain agreements are specifically or expressly declared void by the

1. Agreements of which the consideration or object is unlawful (Sections

An agreement absolutely restraining a party from enforcing rights through

Illustration: A clause in an agreement provided that the Bombay court

Distinction between Illegal and Void Agreements

An illegal transaction is one that is actually forbidden by law. A void

contract is not necessarily illegal. In both cases, however, the main or

The parties to a contract must either perform, or offer to perform, their

Offer to Perform (Tender)

If a party offers to perform the contract, and the offer of performance

1. The offer is unconditional;

When a party refuses to perform, or has disabled himself from performing

unless she has, by words or conduct, signified acquiescence to the

Time, Place, and Mode of Performance:

If no time for performance is specified, a contract must be performed

Illustration: Maggu agrees to supply sweets for Dayal’s daughter’s

Impossibility and Frustration: