Law of Contract

Unit 1
The Indian Contract Act, 1872 defines the term “Contract” under its section 2(h) as
“An agreement enforceable by law”. In other words, we can say that a contract is anything that
is an agreement and enforceable by the law of the land.

This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in
order to understand a contract in the light of The Indian Contract Act, 1872 we need to define
and explain these two pivots in the definition of a contract.

Agreement
In section 2 (e), the Act defines the term agreement as “every promise and every set of promises,
forming the consideration for each other”.
Now that we know how the Act defines the term “agreement”, there may be some ambiguity in
the definition of the term promise.

Promise
The Act in its section 2(b) defines the term “promise” here as: “when the person to whom the
proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A
proposal when accepted, becomes a promise”.
In other words, an agreement is an accepted promise, accepted by all the parties involved in the
agreement or affected by it. This definition says that in order to establish or draft a contract, we
need to initiate some steps:
i. The definition requires a person to whom a certain proposal is made.
ii. The person (parties) in step one has to be in a position to fully understand all
the aspects of a proposal.
iii. “signifies his assent thereto” – means that the person in point one accepts or
agrees with the proposal after having fully understood it.
iv. Once the “person” accepts the proposal, the status of the “proposal” changes to
“accepted proposal”.
v. “accepted proposal” becomes a promise. Note that the proposal is not a promise.
For the proposal to become a promise, it has to be an accepted proposal.

To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

Enforceable By Law
Now let us try to understand this aspect of the definition as is present in the Act. Suppose you
agree to sell a bike for Rs.30,000 with a friend. Can you have a contract for this?

For an agreement to change into a Contract as per the Act, it must give rise to or lead to legal
obligations. In other words, it must be within the scope of the law. Thus we can summarize it as
Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law)

What is a Contract?
A contract is an accepted proposal (agreement) that is fully understood by the law and is legally
defined or enforceable by the law.
So a contract is a legal document that bestows upon the party’s special rights (defined by the
contract itself) and also obligations that are introduced, defined, and agreed upon by all the
parties of the contract.

Difference between agreement and contract

Let us see how a contract and agreement are different from each other. This will help you
summarize and make a map of all the important concepts that you have understood.

Contract Agreement

A promise or a number of promises that

A contract is an agreement that is
are not contradicting and are accepted
enforceable by law.
by the parties involved is an agreement.

An agreement must be socially

A contract is only legally enforceable. acceptable. It may or may not be
enforceable by the law.

A contract has to create some legal An agreement doesn’t create any legal
obligation. obligations.

An agreement may or may not be a

All contracts are also agreements.
contract.

Question: “A person A agrees to sell his house to a person B for Rs.50 lakhs.” This is an
example of………
a. A contract
b. An agreement
c. Neither a Contract nor an Agreement
d. It is a contract as soon as A gets the money.

Answer: Let us see what we need for the above to be a contract. We need Accepted Proposal
(Agreement) + Enforceable by law (defined within the law). We have an “accepted proposal” by
A as inferred from the phrase “A agrees to sell.”, but we don’t know whether B has been made a
party to the agreement or not. So this is neither a contract nor an agreement and the answer is
C) Neither a Contract nor an Agreement.

Types of contracts on the basis of validity or enforceability

Chapter 2 of the Indian Contract Act, 1872 discusses the voidable contracts and void
agreements. On the basis of validity or enforceability, we have five different types of
contracts as given below.

Contracts may be classified according to their enforceability as (i) valid (ii) void contracts or
agreements (iii) voidable (iv) illegal and (v) unenforceable.
(i) Valid Contracts:
The Valid Contract as discussed in the topic on “Essentials of a Contract” is an agreement
that is legally binding and enforceable. It must qualify all the essentials of a contract. A valid
contract creates in favour of one party a legal obligation binding upon the other.
(ii) Void Contract Or Agreement
The section 2(j) of the Act defines a void contract as “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. This makes all those
contracts that are not enforceable by a court of law as void.

Void Contract: A contract which was legal and enforceable when it was entered into may
subsequently become void due to impossibility of performance, change of law or other
reasons. When it becomes void the contract ceases to have legal effect. In other words, a void
contract is not valid from its inception but subsequent to its formation, it becomes invalid and
destitute of legal effect because of certain reasons.
Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A
dies of natural causes in 4 years. The contract is no longer valid and becomes void due to the
non-enforceability of the agreed terms.
Void agreement: “An agreement not enforceable by law is said to be void.”— Sec.2(g). A
void agreement has no legal effect. It confers no rights on any person and creates no
obligations.
Example: An agreement made by a minor; agreements made without consideration (except
the cases coming under Sec.25); certain agreements against public policy; agreements in
restraint of trade or in restraint of marriage or in restraint of legal proceedings, etc.
(iii) Voidable Contract:
These types of Contracts are defined in section 2(i) of the Act: “An agreement which is
enforceable by law at the option of one or more of the parties thereto, but not at the option of
the other or others, is a voidable contract.”
A voidable contract is a contract which can be avoided or set aside at the option of one of the
parties to the contract. It can be set aside at the option of the party defrauded. Until it is
avoided or rescinded by the party entitled to do so by exercising his option in that behalf, it
remains valid. But the aggrieved party must exercise his option of rejecting the contract (i)
within a reasonable time and (ii) before the rights of third parties intervene, otherwise the
contract cannot be repudiated.
Section 64 lays down the rights and obligations of the parties to a voidable contract after it
has been rescinded.
Examples:
1.Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair.
This contract would be valid, the only problem is that person B is a minor and can’t legally
enter a contract.
So, this contract is a valid contract from the point of view of A and a “voidable” contract
from the point of view of B. As and when B becomes a major, he may or may not agree to the
terms. Thus, this is a voidable contract.

2. X threatens to kill Y if he does not sell his new Ambassador car to X for Rs.12,000. Y
agrees. The contract has been brought about by coercion and is voidable at the option of Y,
i.e. the aggrieved party.
3. A, with the intention to deceive B, falsely represents that fifty lakh bulbs are made
annually at A’s factory, and thereby induces B to buy the factory. The contract has been
caused by fraud and as such is voidable at the option of B.
(iv) Illegal Contract:
An agreement that leads to one or all the parties breaking a law or not conforming to the
norms of the society is deemed to be illegal by the court. A contract opposed to public
policy is also illegal.
The illegal contracts are deemed as void and not enforceable by law. As section 2(g) of the
Act states: “An agreement not enforceable by law is said to be void.”
Thus, we can say that all illegal contracts are void but the reverse is not true. Both the void
contracts and illegal contracts can’t be enforceable by law. Illegal contracts are actually void
ab initio (from the start or the beginning).
Also because of the criminal aspects of the illegal contracts, they are punishable under law.
All the parties that are found to have agreed on an illegal promise are prosecuted in a court of
law.
Example: A agrees to sell narcotics to B. Although this contract has all the essential elements
of a valid contract, it is still illegal.
(v) Unenforceable Contracts:
Unenforceable contracts are rendered unenforceable by law due to some technical defects
such as absence of writing, registration, requisite stamp, etc., or time barred by the law of
limitation. The contract can’t be enforced against any of the two parties.
Example: A agrees to sell to B 100kgs of rice for 10,000/-. But there was a huge flood in the
states and all the rice crops were destroyed. Now, this contract is unenforceable and cannot
be enforced against either party.
Question: Discuss the main differences between a void and a voidable contract.
Answer: The following table will illustrate the major differences between a void and a
voidable contract.

Void Contract Voidable Contract

 “An agreement which is enforceable by
“A contract which ceases to be enforceable
law at the option of one or more of the
by law becomes void when it ceases to be
parties thereto, but not at the option of the
enforceable”.
other or others, is a voidable contract.”

A contract becomes void if either it lacks A contract becomes a voidable contract

the essential elements, the law changes when at least one of the parties reserves its
drastically or the terms of the contract consent or the consent of one of the parties
change such that it is no longer possible to was not free at the time of the formation of
enforce the contract in a court of law. the contract.

The validity and enforceability of the

voidable contract depend on the choice of
Void contracts can’t be fulfilled. the unbound party. If the unbound party
decides to repudiate the contract it
becomes void.

This type of contract can’t grant any rights

The right to rescind a voidable contract is
or considerations to any of the involved
retained by the unbound party.
parties.

Question: State the differences between void and illegal contracts.

Answer:
(1) In all contracts there must be legality, otherwise they are void and hence destitute of legal
effect. Some contracts are illegal in themselves, e.g., contracts of immoral nature, contracts
against public policy, contracts in restraint of trade.
(2) All illegal contracts are void but all void contracts are not illegal.
(3) An illegal contract or agreement is destitute of legal effect ab-initio.
(4) The difference between void and illegal contracts is significant in cases of collateral
transactions, e.g. A, a person, who lent money to another to pay bets already made or lost is
not precluded from recovering it; but money advanced for illegal transactions cannot be
recovered. Thus the term ‘illegal’ is narrower in meaning than ‘void’ or ‘voidable’.
(5) All illegal contracts are void, but all contracts which are void are not necessarily illegal.
Question: An offer can’t be accepted after it has been terminated. Explain when an offer
ceases to be capable of acceptance.
Answer: Yes, an offer can’t be accepted after it has been terminated. An offer ceases to be
capable of acceptance or offer lapses or comes to an end in the following circumstances:
1) By communication of notice of termination of offer to the offeree
2) By lapse of the specified or reasonable time
3) By death or insanity of the offer
4) By counter offer
5) By not being accepted according to the prescribed or usual mode.
6) By non-fulfilment of a condition precedent.

Unit 2
Doctrine of Privity of Contract:
Privity of contract is a doctrine of contract law that states that contracts should not give rights
or obligations to entities other than those who are parties to the contract.

Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a contract can sue on a contract in the following
cases:
1. Trust
2. Family Settlement
3. Assignment of a Contract
4. Acknowledgement or Estoppel
5. A covenant running with the land
6. Contract through an agent
1. Trust
If a contract is made between the trustee of a trust and another party, then the beneficiary of the
trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.

Example: Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun
in possession of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000
and transfer half of the estate in Ravi’s name, once he becomes 21 years old.
After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied
giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with
Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to
sue upon the contract between Arjun and his father, even though he was not a party to it.

2. Family Settlement
If a contract is made under a family arrangement to benefit a stranger (person not a party to the
contract), then the stranger can sue in his own right as a beneficiary of the contract.
Example 1: Peter promised Nancy’s father that he would marry Nancy else would pay Rs
50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy
filed a case against Peter which was held by the Court since the contract was a family
arrangement with Nancy as the beneficiary.

Example 2: Ritika was living in a Hindu Undivided Family (HUF). The family had made a
provision for her marriage. Eventually, the family went through a partition and Ritika filed a suit
to claim her marriage expenses. The Court held the case because Ritika was the beneficiary of
the provision despite being a stranger to the contract.

3. Assignment of a Contract
If a contract is made for the benefit of a person, then he can sue upon the contract even though
he is not a party to the agreement. It is important to note here that nominees of a
life insurance policy do not have this right.

4. Acknowledgment or Estoppel
If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges
it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment
can also be implied.

Example 1: Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds
to be paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the
amount.

Example 2: Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out
of the sale price, Pankaj was to be paid Rs 25,000 as his professional charges. Seema promised
to pay Pankaj the amount before taking possession of the property. She made three payments of
Rs 5,000 each and then stopped paying him. Pankaj filed a suit against Seema which was held
by the Court because Seema had acknowledged her liability by conduct.

5. A Covenant Running with the Land

When a person purchases a piece of land with the notice that the owner of the land will be bound
by all duties and liabilities affecting the land, then he can sue upon a contract between the
previous land-owner and a settler even if he was not a party to the contract.

Example: Peter owned a piece of land which he sold to John under a covenant that a certain part
of the land will be maintained as a public park. John abided by the covenant and eventually sold
the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot.
When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability
since he was not a party to the contract, the Court held him responsible for violating the
covenant.

6. Contract through an Agent

If a person enters into a contract through an agent, where the agent acts within the scope of his
authority and in the name of the person (principal).

Question: Vidya purchases a property from Krishna. Rajiv is already living in the property on a
three-year lease. As a part of the purchase agreement, Vidya takes over the lease. There are
some leakages in the house that Krishna promises to fix, as a part of the contract. A few months
go by and the leakages are still not fixed. Rajiv calls Vidya, the new owner, and she says that it
is Krishna’s responsibility. Can Rajiv file a suit for repairs against Krishna?

Answer: Since there is no contract between Rajiv and Krishna about repairing the leakage, if he
files a suit, it will probably be dismissed by the Court. Krishna had agreed to carry out the
repairs in his purchase contract with Vidya. Hence, she can file a suit against Krishna to get the
work done. Rajiv, on the other hand, can sue Vidya for not performing her obligations according
to the lease contract.

Agreement with Minor parties

Section 11 states that only persons who have attained majority according to the law are
competent to contract. Therefore, there must be a law that defines the age of majority.

In India, the Indian Majority Act, 1875 declares the age of majority of all persons to be 18 years.
If a minor has a guardian or Court of Ward looking after him, his age of majority becomes 21
years. Hence, any contract with a party below the age of 18 years is invalid as per the Act.

Rules relating to Agreement with Minor Parties

Although, as a general rule, a contract with minors is void, we must keep in mind the following
rules as well:
1) A contract with a minor is void and, hence, no obligations can ever arise on him thereunder.
2) The minor party cannot ratify the contract upon attaining majority unless a law specifically
allows this.
3) No court can allow specific performance of a contract with minors because it is void
altogether.
4) The Partnership Act also prohibits minors from becoming partners in a firm. They can,
however, receive the benefits of partnership and ratify the same upon attaining majority.
5) The rule of estoppel under evidence law does not apply to minors under contractual
obligations. In other words, even if a minor forms a contract claiming majority age, legal
obligations cannot arise against him.
6) Parents or guardians of minors can name them in contracts only if it benefits them. But even
in this case, the minor cannot be personally liable.

Ratification of Minor’s agreements:

An agreement with minor is completely void. A minor cannot ratify the agreement even on
attaining majority, because a void agreement cannot be ratified. A person who is not competent
to authorise an act cannot give it validity by ratifying it.

A minor can be an individual who has not attained the age of 18 years and the attaining majority
for every contract is an essential condition precedent. Agreements with minors as per Indian
contract act, a minor's agreement stands void, which means that it has no stand whatsoever in the
eyes of the law. So, a contract with a minor stand null and void since either party cannot impose
it. And even after the person attains majority, the same agreement cannot be ratified by him. The
difference here is that a minor’s contract is void/null; So, a contract however, it is not illegal as
there is no statutory provision on this.
Example: Where a minor borrowed a sum of money by executing a simple promissory note for
it and after attaining majority executed a second promissory note in respect of the original loan
plus interest thereon, a suit upon the second promissory note was not maintainable.
Ratification on attaining majority is not permitted as minor agreement/contract is void-ab-initio
(void from the beginning).
As a minor’s agreement is void, he could not validate it through ratification on attaining
majority. But an individual who supplies necessaries of life to a minor, or to one whom the
minor is lawfully bound to support according to his situation in life, is permitted to be
reimbursed from the property of the minor, not based on any contract, but on responsibility
resembling a contract. However, a minor’s property is legally responsible for necessities, and no
personal liability is incurred through him.

Necessities: These goods, described as necessities, include the goods and services important
for the minor's survival. Such goods include food, shelter, clothing, or lodging. It also
includes education and medical supplies. Automobiles are sometimes included as necessities.
The economic status of the minor's parents is usually used to determine whether particular
goods or services are necessary.

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