TOPIC: CONTRACT ACT 1872 (MODULE 1)

INTRODUCTION:

This act came into force on 1st September 1872

It extends to the whole of Sub Continent(India & Pak)

The Act is divided into 2 parts;

Section 1-75 Section 124-238

General Contract Special Contract

It is commonly called as “Law of Contract”

 Section 2(h) defines contract as, “an agreement enforceable by law”

What is Contract?

Agreement Law Offer to sell his car

Agreement
=
Rs.2 lacs Promise
Acceptance to buy car
Offer Acceptance

 Thus, “all contracts are agreement; but all agreements may not be contract”

 Section 2(e) defines Agreement as, “ every promise and every set of promises,
forming the consideration for each other”

 Section 2(b) defines promise, “when a person to whom the proposal is made,
signifies his assent thereto, the proposals is said to be accepted. A proposal when
accepted becomes a promise.”
There are 2 kinds of rights of a person;

Right in Rem Right in Personam

(right against Contract creates “Right in Personam”
(right against a
the whole world) person)

 Contract creates contractual

obligation upon the party:

Ex. A agrees to sell B his flat at Rs.10 lacs. B accepted to buy

the flat at Rs. 10 lacs.

Here, both parties are now under contractual obligation to

perform their part of promises
Q. Which Agreements are not Contract?

 When the intention is “not to create any legal relation”

 Agreement relating to social matters:

Case law: Kalai Halder v/s Sheikh: Invitation for dinner

A invited B to his house for dinner. B accepted the invitation to come to A’s house. A made all the
preparation of food to welcome B. However, B did not turn up. The entire food and efforts were in vain.

Can A file a suit for breach of promise against B?

No, because accepting invitation for dinner creates a social relation, not legal relation.

 Domestic arrangement between husband and wife:

Case law: Balfour v/s Balfour

A husband agreed to pay to his wife certain amount as maintenance every month while he was abroad.
Husband failed to pay the promised amount.

Wife sued him for the recovery of the amount.

Can the wife recover the amount by filing a case? No, because it was a social agreement between the
Husband and Wife and not legal relation.
Q1. ESSENTIALS OF VALID CONTRACT [Section 10]

1. Two Parties
Natural Person Artificial Person
 There must be atleast 2 parties to form a contract.
 Parties can be Natural person or artificial person.

Acceptor
2. Offer & Acceptance Offeror

Agreement = Promise
 The 1st step to form an agreement is Offer.
 The 2nd step towards forming an agreement is Acceptance.
 The person giving an offer is called “Offeror” and to whom the offer is given is called “Offeree”
and the person accepting the offer is called “Acceptor”

3. Must create Legal relation Social Relation does

not create contract

 To form a valid contract, the offer must create a legal relation between the parties, not social
relation.

Case law: Balfour v/s Balfour

A husband agreed to pay to his wife certain amount as maintenance every month
while he was abroad. Husband failed to pay the promised amount.

Wife sued him for the recovery of the amount.

Can the wife recover the amount by filing a case? No, because it was a social
agreement between the Husband and Wife and not legal relation.
4. Agreement should be certain

 The terms of the agreement should be clear, definite and certain.

 It should not be unclear, vague, indefinite and uncertain.

No certainty between
the parties

I offer to sell you my car at Rs. 70000/-

5. Free consent

 To form a valid contract, the consent of the parties must be obtained freely.
 The elements of Coercion, Undue Influence, Fraud, Misrepresentation, Mistake makes the
consent not free.

 6. Competent Parties

Major person Sound mind Not disqualified by law

 To form a valid contract, the parties to the contract must be competent (capable to enter into
contract).
 Section 11 of the Act defines Competent Parties as per law are:
I) Major Person
II) Person of Sound Mind
III) Person not disqualified by the law
 Thus, a Minor, Person of Unsound mind and person disqualified by law are incompetent parties and
no valid contract can be created with them.

7. Consideration ‘quid pro quo’ = something in return

 Consideration means “something in return’

 To form a valid contract, consideration is essential
 Section 25 of the Act states “No consideration, No Contract”

Section 25: No consideration, No contract

8. Agreement must have legal object

Section 23: Consideration or Object shall be unlawful, if prohibited by law

 To form a valid contract, the object and consideration on which the contract is made must be
lawful.
 If the object and consideration is unlawful, immoral or against public policy then it cannot be a valid
contract.

Ex. A agrees to give B Rs.1 lac, if B burns the house of C. B accepts

the offer. The object of the Agreement is unlawful, hence the
agreement is VOID.

9. Agreement must not be void

Illegal agreement Void Agreement

Prohibited by law Does not have legal effect

-Threat to commit murder -Agreement in restraint of marriage

-Robbery -Agreement in restraint to trade
-Defamation -Agreement in restraint to legal
-Dealing in drugs etc proceedings etc

10. Writing & Registration

 Agreements can be formed orally or in writing.

 However it is advisable to have an agreement in written form and registered.
Q2. TYPES OF CONTRACT & AGREEMENT

1. Valid Contract all essentials of valid contract must be present

2.VoidAgreement Agreement which has null/no effect in the eyes of law, not
[Section 2(j)] enforceable

3. Voidable Agreement when there are 2 parties, out of which 1 party breaches
[Section 2(i)] the contract then the contract becomes voidable
(avoidable) on the party of other party.

1st slab: 30% payment

2nd slab: 30% payment

3rd slab: 40% payment

Ex. Here, Ram told the constructor to construct his house, and he will pay him in slab wise. It was
agreed that first Ram will have to pay to start the work of each slab. After completing the 2nd slab, when
the constructor asked for 3rd slab amount, Ram didn’t pay, meaning he breached the contract.

Will the constructor construct the 3rd slab as per the contract?
No, because the contract has become Voidable on the part of constructor.

4. Illegal Agreement Agreement which is against public policy, morality or

is criminal

Agreement to Kidnap Agreement to murder dealing in drugs

 Thus, Illegal Agreements are not only unenforceable, but also punishable by law.
5. Expressed Agreement 6. Implied Agreement

when the agreement is entered when the agreement is entered without any word,
either orally or in writing but by conduct or act of parties

Ex. Ordering a coffee Ex. picking a newspaper

in a restaurant from vendor’s stall

this is not real contract but alike/resemble like a contract.

7. Quasi Contract
Here the parties don’t intend to enter into contract, but by
fiction of law they are entered into contract by law.

Ex. If a patient who was in the state of
unconsciousness was taken to the hospital, and
the doctor treated him (without the consent of the
patient). The patient shall be liable to pay the fee of
doctor as there has been Quasi contract between
the doctor and patient.
Ex. If a parcel has been wrongly delivered to the
neighbor. It shall be the duty of the neighbor to
return the good to the true owner, and if it doesn’t
then true owner can take action, as there has been
Quasi contract between the true owner and
neighbor.

8. Executed Contract 9. Executory Contract

when both parties have when parties are yet to perform

performed their respective obligation under the contract
obligations under contract
 When contract is entered by two or more parties
10. E-contracts using electronic means, such as email is known as
e-commerce contracts.

There EDI contracts or Cyber contract or Mouse

click contracts
 11. Unilateral Contract 12. Bilateral Contract

When in a contract one party When both parties exchange

makes an express promise of mutual promises. These types of
performance without a reciprocal contracts are commonly used in
agreement from other party business transactions.

Ex. You placed an advertisement

offering Rs.500/- reward to the
person who returns your missing
dog.

AGREEMENT CONTRACT

Every promise and every set of An agreement which is enforceable by

promises forming consideration for law is a contract.
each other is an agreement

Agreement= Offer + Acceptance Contract= Agreement + law

It may not create legal obligation. It creates legal obligation

All agreements are not contracts. All contracts are agreements.

It is not final and binding on the It is final, concluding and binding on the
parties. parties.
Q3. DEFINE PROPOSAL/OFFER AND ESSENTIALS OF VALID PROPOSAL.

I] MEANING OF PROPOSAL:

 Section 2(a) of the act defines proposal as;

When one person signifies to another,

his willingness to do or 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.

 Proposal is same as “Offer” under English law of contract.

 It is the first step in formation of contract.

 The person making the proposal is called “offeror”

Ex. When A offers to sell his watch to B for Rs.1000/-

Offeror Offeree
II] ESSENTIALS OF VALID PROPOSAL:

1. Offer must be in the form of request

 An offer cannot be dictating or demanding.

 An offer must always be in the form of request.

2. It must create legal relations (not social relation):

 An offer must intend to create legal relations between the parties.

 An offer creating a social relation cannot create valid contract.
 Case law: Kalai Halder v/s Sheikh [Invitation for dinner]
3. Terms of offer must be definite and certain:

 If the terms of the offer are vague or indefinite, it cannot form a valid contract.
 Ex. A agrees to sell 10 kg potatoes at some price: Here the offer is uncertain

4. Offer may be specific or general:

 Offer can be specific i.e. made to a specific person or it can be general i.e. made
in general to the public.

Case law: Carlil v/s Carbolic Smoke Ball co. (1893)

Carbolic smoke Ball Co. advertised in many newspapers that 100 pound shall
be given to any person who contracted influenza after using the smoke ball
produced by the Co.
Mrs. Carlil used the smoke balls as per direction of the company and
contracted influenza.

Was the company liable to Mrs. Carlil?Yes, because it was a General Offer

Case law: Lalman Shukla v/s Gauri Dutt

Gauri Dutt’s nephew was found missing. His servant Lalman Shuka went in
search of the lost nephew. Later, Gauri Dutt announced a reward, that if
anyone traced the boy, would get some reward.
Lalman Shukla found the nephew. Later he got to know about the reward and
went to Gauri Dutt to claim.

Is Gauri Dutt liable to pay Lalman his reward for finding the newphew?
Held that, Lalman was not aware of the offer, hence there could be no
acceptance. Thus, he is not entitled to any reward.
5. Offer can be expressed or implied:

By act or conduct of parties

Oral Writing

 Offer can be Expressed or Implied.

 Expressed means either in Oral or Written form.
 Implied means “by an act or conduct of parties”

6. Offer must be communicated:

 When there is no communication, there is no offer.

 Communication is an important link between the proposal and acceptor.
 For valid offer, it must be communicated.

7. Offer may be conditional

 An offeror may put a condition while making an offer.

 However, if the offer is conditional, then the conditions must be clearly
communicated.

8. Offer must be ready to be accepted

 The person making the offer is bound by that offer, once it is

accepted by the other party.
 The offeror cannot reverse his offer, once accepted.
IV] INVITATION TO OFFER/ STANDING OFFER/ OPEN OFFER

 These are not offer but an invitation to make offer. A mere statement of price is not
an offer.

 Ex. Window displays, Tenders, Auction sales are all invitation to offer.

Case Law: Harvey v/s Facie [1893]

The plaintiffs through telegram asked 2 questions from defendant;

i) will you sell us Bumper Hall pen? And
ii) Telegraph lowest cash price

The defendants replied through telegram, “lowest price for Bumper Hall pen is 900
euro. The plaintiff sent another telegram stating “we agree to buy the Bumper Hall pen
at 900 euro”. However the defendant refused to sell.

Are the defendants liable? Privy council held that the defendant are not liable to sell
because out of 2 question they answered only one and neither have they indicated
their willingness to sell. Thus no offer was made. Mere statement of price is not an offer.

V] COUNTER OFFER:

 A rejection to the original offer is counter offer. It is a new

offer.

 Ex. A offers to sell the painting at Rs.2000/- to B. B says he

will buy at Rs.1200/-. Here is has rejected A’s offer and
made his counter offer.
Q4. DEFINE ACCEPTANCE AND ESSENTIALS OF VALID ACCEPTANCE

I] MEANING:

 Section 2(b) defines acceptance,

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”.

 The person making the proposal is called “Promisor” and the person accepting is
called “promisee”

Sir William Anson, “Acceptance is to offer what a lighted match is to

a train of gun powder”
II] ESSENTIALS OF VALID ACCEPTANCE:

1. Acceptance must be absolute and unconditional

 Acceptance with conditions is no acceptance at all.

 Acceptance cannot be conditional.
 For valid Acceptance, it must be absolute and unconditional.

2. Manner of acceptance: Usual and Reasonable mode

 Acceptance may be made with orally or in writing or even by implied ways.

 The promisor may prescribe a particular mode of acceptance.
 But, if the particular mode of acceptance is not specified, then acceptance can
be done is usual and reasonable mode

3. Acceptance must be communicated

 Acceptance, made by the acceptor is required to be communicated to the

proposer.
 If there is no communication to the acceptance, there is no acceptance at all.

Case Law: Brogden vs. Metropolitan Railway Co. (1877)

B a supplier, sent a draft agreement relating to the supply of coal to the manager of
railway Co. viz, Metropolitian railway for his acceptance. The manager wrote the word
“Approved” on the same and put the draft agreement in the drawer of the table.
By an over sight the draft agreement remained in drawer.

Will it amount to communication? Held, that there was no contract as the manager
had not communicated his acceptance to the supplier, B.
4. Silence does not amount to acceptance

 An acceptance to an offer cannot be implied.

 Hence, remaining silent does not amount to acceptance.
 Mental acceptance is no acceptance at all.

Case Law: Felthouse vs. Bindley (1862)

F (Uncle) ordered to buy his nephew’s horse for £30 saying “If I hear no more
about it I shall consider the horse mine at £30.” The nephew did not reply to F at
all.
Will that amount to nephew’s acceptance? No, as mere silence does not amount
to acceptance

5. Acceptance of proposal is acceptance of all terms of offer

 For valid acceptance of proposal, all the terms of the offer must be acceptance.
 One cannot ignore some terms and accept few terms of the offer.

6. Acceptance must be made within specified time

 Acceptance can be made till the time the offer is subsisting and valid.
 Once the offer expires, acceptance is of no use.

7. Person accepting the offer must not be ignorant

 Acceptance shall be made only when the person is aware of the offer.
 If the acceptor was ignorant of the offer itself, then there cannot be acceptance.
 [Case Law: Lalman Shukla v/s Gauri Dutt]
Q5. EXPLAIN COMMUNICATION, ACCEPTANCE AND REVOCATION OF OFFER AND
ACCEPTANCES [SECTION 3-6]

SECTION 3: COMMUNICATION, ACCEPTANCE AND REVOCATION OF PROPOSAL AND

ACCEPTANCES.

 communication of proposals Shall be deemed to be made by any

act or omission of part proposing,
 acceptances of proposals accepting or revoking which intends
to communicate such proposal,
 revocation of proposals and acceptances acceptance or revocation

SECTION 4: WHEN COMMUNICATION OF PROPOSAL AND ACCEPTANCE COMPLETE?

When communication When communication of

of Proposal is complete Acceptance is complete

As against the proposer As against the acceptor

When it comes to the
knowledge of the
person to whom it is When it is put in the When comes to the
made course of transmission knowledge of the
to him, so as to be out proposer
of power of the
acceptor

Nice deal! I
Ex. will buy it..
A proposes to sell his house to B for Rs.20 lacs

By sending a letter to B

B accepts the offer by sending a letter by post

A B

Q. When is the communication of proposal of A complete?

 When B receives the letter

Q. When is the communication of acceptance of B complete?

 On the part of A- when the letter is posted by B
 On the part of B- when the letter is received by A
 WHEN COMMUNICATION OF REVOCATION IS COMPLETE?

As against the person As against the person to

who makes it whom it is made

When it is put in the When comes to the

course of transmission knowledge of the
to him, so as to be out person against whom it
of power of the person is made
who makes it

Ex. I don’t want to buy, let

me send him a
A wants to revoke his offer of selling house telegram to revoke my
acceptance
He sends a telegram to B

A B

Q. When is the revocation of proposal of A complete?

 When B receives the telegram

Q. When is the revocation of acceptance of B complete?

 On the part of A- when the telegram is sent by B
 On the part of B- when the telegram is received by A

SECTION 5: WHEN REVOCATION OF PROPOSAL & ACCEPTANCE CAN BE MADE?

A Proposal may be revoked at any time An Acceptance may be revoked any time
before the communication of acceptance before the communication of acceptance
is completed, not afterwards is complete, not afterwards

B Since the acceptance

A B’s acceptance
received, now A is received by A, now
cannot revoke. B cannot revoke
 SECTION 6: HOW REVOCATION CAN BE MADE?

A proposal is revoked-

By communication of notice of revocation

By lapse of time

By failure of acceptor to fulfill a condition

By death/insanity of proposer

By Counter-offer

By subsequent illegality
Q6. STATE BRIEFLY THE LAW RELATING TO COMPETENCE OF PARTIES TO A CONTRACT

I] MEANING:
 Section 11 of the act defines competent party as;

Every Person who is

a) at the age of majority,
b) of a sound mind,
c) must not be disqualified by law

 It means a minor, unsound mind person and a person disqualified by law are
incompetent to enter into contracts.

II] MINOR’S AGREEMENT:

a) Meaning:

 A minor is a person who has not completed the age of 18 years.

 A minor is incompetent to enter into any contracts.

 Any agreement entered by a minor is void-ab-initio (wrong from the

beginning)

Case Law: Mohori Bibee v/s Dharmodas Ghosh

A minor took a loan by mortgage, for a sum of Rs.20000/-, the money gave the minor
Rs.8000/-.Later the minor filed a suit for setting aside the mortgage. The money lender
claimed a refund of Rs.8000/- from the minor.

Court held that the agreement with a minor is void.

b) Law relating to Minor’s agreement:

1. A minor is incompetent to enter into contract

 A minor is a person who has not completed the age of 18 years.

 A minor is incompetent to enter into contract.
 An agreement with a minor is Void-ab-initio.
 An agreement with minor is unenforceable in the court of law.

2. No Specific performance of Minor’s agreement

 An agreement with minor is VOID and it cannot be enforced in the court of law.
 No suit for specific performance can be brought against Minor’s agreement

3. No Ratification of Minor’s agreement

 Ratification means “to accept later”

 Minor’s agreement is void ab initio (wrong from beginning)
 Hence minor’s agreement cannot even be ratified later.

4. Law of Estoppel- not applicable to a minor

 Estoppel means “to stop”

 Law of Estoppel states that a person shall be stopped from denying from what he
earlier stated.
 It means a person cannot approbate and reprobate at the same time.
 However, law of estoppels is not applicable to Minor.

5. Surety of minor is liable

 If any person has given guarantee or surety for and on behalf of a

minor, then on the default of minor, an action can be brought
against the surety.
 Thus, the surety of the minor shall be held liable.

6. Minor cannot be declared insolvent

 A minor cannot be adjudged (declared) as insolvent as he is

incapable to enter into contract.
c) Exceptions (what a minor can do?)

1.Promisee or Transferee

-A minor can be a promise or transferee.

-Law allows minor to take benefits but not liabilities.
-A minor can enforce a contract where he is getting benefits, not obligations.

2.Agent

-A minor can act as an agent.

-He can bind the principal for all his acts

3.Partner in a partnership

-A minor can be added as a partner in a partnership firm, upon consent

of all the partners.
-However, a minor partner shall be entitled to profits in the firm but will
not be liable for any losses.

4.Quasi contract: the property of minor is liable under Quasi contract

-In case of quasi contract, if any person has supplied necessaries of life to a minor like
food, clothing, medicines, education, than that person will have the right to recover the
amount from the estate (property) of the minor.
III] CONTRACT BY PERSON OF UNSOUND MIND:

 Section 12 defines a person of unsound mind. It is a state of mind where a person is

incapable to take a rational decision. He is incapable to understand the terms of
contract in its real sense.

 A person may be of sound mind, but sometimes become unsound mind when;
i) under the influence of alcohol or drugs
ii) suffering from high fever
iii) suffering from epilepsy

 So, when a person of sound mind, is in the unsound state of mind, he becomes
incompetent to enter any contract.

IV] CONTRACTS BY PARDA-NISHIN WOMEN:

A Parda-nishin woman is separated from society due to

custom or religion.

She is not allowed to mix freely in the society.

So, while entering into a contract with a Parda-nishin

lady, the terms of contract should be explained to her and she must have
understood such term in the same sense. Else the agreement shall not stand valid.
V] CONTRACTS BY CORPORATION:

Company is an artificial person and can enter into contracts.

However, there are 2 limitations on the corporate:

Natural Limitation Legal Limitation

Since company is an Companies cannot enter

artificial person, it cannot contract beyond its MOA
sign on its own. Directors and AOA, else it shall be
and officers enter contracts ultra-vires (beyond the
on behalf of the company powers)

VI] CONTRACTS BY INSOLVENT:

An insolvent/bankrupt person is disqualified bylaw from contracting during his

insolvency.
Q7. EXPLAIN CONSIDERATION AND ITS ESSENTIAL REQUIREMENTS

I] Meaning:

 Section 2(d) defines consideration,

 When at the desire of the promisor,
 the promisee or any other person

has done or abstained does or abstains Promises to do or abstain

from doing or from doing or from doing something

 such act, abstinence or promise is called consideration for the promise.

 It means “quid pro quo” i.e. “something in return”

 A consideration can be Past, Present or Future.

 Consideration is an essential part of contract.

 Section 25 of the Act states, “No consideration, No contract”

 Ex. A agrees to sell his car to B for Rs.50000/-. The consideration for A shall be
Rs.50000/- and the consideration for B shall be the car.
II] ESSENTIALS OF CONSIDERATION:

1. It must move at the desire of promisor

-As the object of contract belongs to the promisor, consideration must always be
decided by the promisor.

2. Paid by promisee or any other person

-Consideration may proceed from promise or any other person on behalf of promisee.
-As per Law of contract, a stranger to the contract can sue on the agreement, if
such a person is the beneficiary.

3. It can be Past, Present or Future consideration

-Consideration may be either Past i.e Executed consideration i.e “has done or
abstained from doing” or
-Consideration may be present i.e Executed consideration i.e “does or abstains from
doing” or
- Consideration may be future i.e Executory consideration i.e “to do or abstains from
doing”

4. It need not be adequate

-It is immaterial as to the amount of consideration. It may or may not be adequate

(sufficient). But it is important for valid contract, to have consideration.
-There must be some value in the eyes of law.

5. It must not be unlawful, illegal, immoral or oppose to public policy

-Consideration must always be lawful and legal.

-Illegal and unlawful consideration does not constitute valid contract.
-Likewise, consideration should not be oppose to public policy.

6. It must be real and not illusory

-For a valid consideration, it must be real and not illusory.

IV] EXCEPTIONS: [WHEN AGREEMENT CAN BE VALID WITHOUT CONSIDERATION]

1. An agreement made out of love and affection, does not require

consideration.

2. A Promise to compensate for past voluntary service

3. Promise to pay a time barred debt

4. No consideration is required to create an agency

5. Gift doesn’t require consideration