LAW OF CONTRACT

Contract:
An agreement made
between two or more parties
which the law will enforce.
 An agreement comes into
existence by the process of offer
by one party and unqualified
acceptance by the other party.
Agreements are: Social & legal.
Only a legal agreement is a
Contract.
What is an agreement ?
When a person to whom a
proposal is made signifies his
assent thereto, the proposal is
said to be accepted. A proposal
when accepted becomes a
promise. Every promise and
every set of promises, forming
the consideration for each
other is an agreement.
ESSENTIALS OF A VALID CONTRACT

There must be an offer:

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.
 Essentials of offer :
Offer must be communicated to the
offeree.
It is the duty of the offeror to
communicate all the terms of the
offer to the offeree. Actual
communication may not be
required.
Offer constitutes a willingness to do
some act or abstinence.
Offer must be made to some
other person.
 Offer to one particular person….
 Offer to a group of persons…..
 Offer to the whole world…..
(Continuing offer Vs Offer of
Reward for Information).
Offer may be expressed or
implied.

Offer must be made with a view

to obtaining the assent of the
other and should not be an
expression of intention or
enquiry.
Offer may be conditional.

Offer must be capable of

creating legal relationship.

 The terms of the offer must

be certain.
 An offer must not thrust the
burden of acceptance on the
offeree.
 Offer must be distinguished from:
 Cross offers,
 Counter offers,
 Invitation to offer,
 Declaration of intention,
 Auctions & Tenders.
Price lists,
catalogues and
advertisements are
not offers.
 An offer can be revoked, it
may come to an end due to
lapse of time, it may be
revoked when the acceptor
fails to fulfil the condition
precedent to acceptance or it
may be revoked by the death
or insanity of the proposer.
 There must be unqualified
acceptance of the offer :
Acceptance is to an offer what
a lighted match is to a train of
gunpowder. ( But before a
lighted match is brought in
contact with gunpowder, it can
be removed from the train)
 Elements of acceptance:
Must be made by the party to
whom the offer is made.
It must be absolute &
unqualified.
It must be expressed in some
usual or reasonable manner.
It must be given within
reasonable time.
It cannot be made in
ignorance of the offer.
It must be given before the
offer lapses.
It must be communicated to
the offeror.
Mere mental acceptance is no
acceptance.
Intention to create legal
relationships:
A husband promises to pay a
e.g.
monthly allowance to his wife.
This cannot be a contract as
there is no intention on the part
of the husband to create a legal
relationship
Balfour Vs Balfour
Lawful consideration:
Consideration is the price for
which the promise of the other
is bought.
Consideration means
something in return (give
something & get something) It
may also be a loss or detriment
suffered by one party & profit
or benefit to another party.
Justice Lush in the Case Currie Vs.
Misa
 ‘a valuable consideration in the
sense of the law may consist either
in some right, interest, profit or
benefit accruing to one party or
some forbearance, detriment, loss
or responsibility given, suffered or
undertaken by the other’
 According to the Contract Act:
 When at the desire of the
promisor, the promisee or any
other person has done or
abstained from doing, or does
or abstains from doing, or
promises to do or abstain from
doing something, such act or
abstinence or promise is called
a consideration for the
promise.
 Essential elements:
Consideration must move at
the desire of the promisor.
Consideration may move
from the promisee or any
other person.
It is an act, abstinence,
forbearance or detriment.
Consideration can be past,
present or future.
Consideration need not be
adequate.
It must have some value in
the eyes of law.
It must be real not
illusory.
It must be something
which one is not already
bound to do.
Consideration must be
lawful…..
It is not forbidden by law.
It should not be of such a nature
that if allowed it would defeat the
provisions of some law of the
country.
It should not be fraudulent.
It should not involve injury to
the property or person of the
other.
Court should not regard it as
immoral or opposed to the public
policy.
Subject to certain
exceptions, an agreement
made without consideration
is a nude contract and is
void.
 Exceptions:
Love and affection.
A written and registered
agreement based on natural love
and affection between near
relatives.
Compensation for past
voluntary services.
Promise to pay a time barred
debt.
Completed gift.

Transfer of property by one

person to another as a gift

according to the provisions of
Transfer of Property Act.
Contract of agency does
not require consideration.
Consideration is not
required for remission of
debt.
A contract of guarantee is
made without
consideration.
Competency of Parties: The
following persons are
incompetent to contract:
 1.Minors,
A contract with a minor is void
abinitio.
Payment can be made out of
the property of a minor for the
necessaries of life supplied to
him.
 Necessaries are those without which an individual
cannot reasonably exist.
A minor cannot ratify any
contract made during his
minority.
A minor may be admitted to
the benefits of a partnership.
The minor’s contracts do not
impose any liability on his
parents even if the contract is
for necessaries.
A minor cannot be declared
insolvent because he is
incapable of contracting debts.
2. Persons of unsound mind
Idiot
Lunacy or insanity
Drunkenness or intoxication
 3. Disqualified persons
Alien enemies
Foreign sovereigns & ambassadors
Convicts
Undischarged insolvent
What about the following
‘persons’?
Married woman.
Corporations.
 Free & genuine consent:.

Consent is said to be free when

it is not caused by (i)coercion,
(ii)undue influence, (iii)fraud,
iv)misrepresentation or
(v)mistake.
 Coercion: Coercion is :
The committing or
threatening to commit any
act forbidden by the Indian
Penal Code, 1860.
Or the unlawful detaining, or
threatening to detain any
property to the prejudice of any
person whatever, with the
intention of causing any person
to enter into an agreement.
Even threat to commit suicide
amounts to coercion.
The threat need not proceed from
the party to the contract, it may
proceed from a third person also.
A threat to file a civil or criminal
suit is not forbidden by the Indian
Penal Code.
The burden of proving that the
consent was obtained by coercion
shall lie upon the aggrieved party
who wants to set aside the contract.
Effect of Coercion:
The contract is voidable at the
option of the party whose consent
was so obtained.
When the aggrieved party decides
to set aside the contract, it must
give back any benefit received from
the other party under the contract.
Moreover, the other party need not
perform his part of the contract.
If the aggrieved party does not opt
to set aside the contract, it works as
a valid contract.
Undue Influence: where
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.
When a person is in a position to
dominate the will of the other:
Real or apparent authority.
Fiduciary relation.
Persons with affected mental
capacity.
When a transaction appears to be
unconscionable, it is presumed
that the stronger party has
exercised undue influence over the
weaker party.
 Undue influence may be exerted by a
person who is not a party to the
contract.
Lack of foresight is not a ground for
establishing a case of undue influence.
The law presumes undue influence in
a contract with a “pardanashin
woman”, and the courts throw the
burden on the other party to prove
that undue influence was not
exercised.
Effect of undue influence:
The contract is voidable at the option of the party
whose consent was so obtained.
The court may direct the aggrieved party to refund
the benefit whether in whole or in part or set aside
the contract without any direction for refund of
benefit.
If the aggrieved party does not opt to set aside the
contract, it works as any other valid contract.
Burden of proof: is on the party who is in a
position to dominate the will of the other.
Fraud: Fraud exists when it is
shown that a false
representation has been
made, knowingly, or without
belief in its truth, or recklessly,
not caring whether it is true or
false, and the maker intended
the other party to act upon it.
It also exists when there is a
concealment of a material fact.
The fraud cannot be
committed by a stranger to the
contract.
The fraud must have been
committed upon the other
party.
The following acts constitute a
fraud:
Suggestion that a fact is true, by
one, who does not believe it to be
true.
An active concealment of fact, by
one, having knowledge of the act.
 A promise made without any
intention of performing it.
Any such acts or omission which
law specifically declares to be
fraudulent.
Mere silence is not fraud,
except;
When silence itself is equivalent
to speech.
When it is the duty of the person
keeping silence to speak.
When it is the duty of the seller
to disclose latent or hidden defect.
 Effect of fraud.
The contract is voidable at the
option of the defrauded party.
The defrauded party is entitled
to compensation for any
damage he has sustained.
The defrauded party may
insist that the contract shall be
performed and that he should
be put in the position in which
he would have been if the
representation made was true.
 Misrepresentation is a mis-
statement of a material fact made
innocently with an honest belief as
to its truth or non-disclosure of a
material fact, without any intent to
deceive the other party.
The effect of misrepresentation is that
the agreement is voidable by the party
whose consent is obtained by
misrepresentation.
 Mistake is erroneous belief about
something. It may be mistake of
law or mistake of fact.
Mistake of law does not result in a
voidable contract.
Bilateral mistake of fact renders a
contract void. (lack of consensus ad
idem). The mistake must relate to fact,
not opinion. The fact must be
essential to the agreement & the fact
must be existing at the time of
contract.
 Instances of Bilateral Mistake:
Mistake as to.
1. the existence of the subject
matter.
2. the identity of the subject
matter.
3. title or rights.
4. the quantity of subject matter.
5. the quality of subject matter.
6. assumptions.
 Unilateral mistake does not effect the
validity of an agreement. However, if it
can be proved that the mistake was
caused by fraud or misrepresentation
it can be avoided.
Instances of Unilateral Mistake:
Mistake as to.
1. Identity of the contracting party.
2. The character of document.
Lawful object: The object of an
agreement is unlawful if: it is
forbidden by law; or it is of
such a nature that, if
permitted, it would defeat the
provisions of any law; or it is
fraudulent; or it involves or
implies injury to the person
or property of another; or the
court regards it as immoral, or
opposed to public policy.
Agreements opposed to Public
Policy
1. Trading with an enemy
2. Agreements interfering with the
course of justice.
3. Stifling prosecution.
4. Maintenance and champerty
agreement
5. Traffic in public offices
6. Agreements creating interest
opposed to duty
7. Agreements unduly restraining
personal liberty...................
 Agreements opposed to Public
Policy
8. Agreements interfering with
parental duties
9. Marriage brokerage agreements
10. Agreements creating
monopolies
11. Agreements to defraud
creditors
12. Agreements to defraud
revenue authorities
Agreement should not be
expressly declared void by any
law in force in the country.
Agreements in restraint of
marriage
Agreements in restraint of trade
(exception is the sale of goodwill,
or agreements by partners under
the partnership act)
Uncertain agreements (the
meaning of which is
uncertain)......
Agreements in restraint of legal
proceedings
Curtailing the period of
limitations
Wagering agreements
Possibility of performance:
An agreement to do an
impossible act is in itself void.
Legal formalities: A contract
may be made by words spoken or
written. It is in the interest of the
parties that the contract should
be in writing. In some cases the
document in which the contract
is incorporated is to be stamped.
In some other cases, the contract,
besides being a written one, has
to be registered.
CONTINGENT CONTRACT
A contingent contract is a
conditional contract.
“A contingent contract is a contract
to do or not to do something, if
some event, collateral to such
contract, does or does not happen.”
CONTINGENT CONTRACT
 When a contract is contingent,
i.e.depending upon the happening
or non-happening of a future event,
its performance will become due
only on the happening or non-
happening of such event.
Quasi Contract
 These are contracts which are not
founded on actual promises. These
contracts are created by
circumstances & are based on the
maxim: no man must grow
rich out of other person’s
cost.
 Forms of Quasi Contract
1. Supply of necessaries
2. Payment of lawful dues by
interested person
3. Obligation of a person
enjoying benefit of a
gratuitous act
4. Finder of goods
Discharge of a Contract

DISCHARGE BY PERFORMANCE
DISCHARGE BY AGREEMENT OR
CONSENT
DISCHARGE BY IMPOSSIBILITY OF
PERFORMANCE
DISCHARGE BY LAPSE OF TIME
DISCHARGE BY OPERATION OF LAW
DISHARGE BY BREACH OF CONTRACT
DISCHARGE BY PERFORMANCE
ACTUAL PERFORMANCE
When both parties perform their promises &
there is nothing remaining to perform.

ATTEMPTED PERFORMANCE
When the promisor offers to perform his
obligation, but promisee refuses to accept the
performance. It is also known as tender.
DISCHARGE BY AGREEMENT OR
CONSENT
 NOVATION :New contract substituted for old contract
with the same or different parties.
 RESCISSION : When some or all terms of a contract are
cancelled.
 ALTERATION :When one or more terms of a contract
is/are altered by the mutual consent of the parties to the
contract.
 REMISSION :Acceptance of a lesser fulfillment of the
promise made.
 WAIVER :Mutual abandonment of the right by the
parties to contract.
 MERGER :When an inferior right accruing to a party to
contract merges into a superior right accruing to the
same party.
DISCHARGE BY IMPOSSIBILITY
OF PERFORMANCE
KNOWN TO PARTIES
UNKNOWN TO PARTIES
SUBSEQUENT IMPOSSIBILITY
SUPERVENNING IMPOSSIBILITY
Destruction of subject matter
Non-existence of state of things (Failure of Ultimate Purpose)
Death or incapacity of personal services
Change of law
Outbreak of war
DISCHARGE BY LAPSE OF TIME

 THE LIMITATION ACT 1963, CLEARLY STATES

THAT A CONTRACT SHOULD BE PERFORMED
WITHIN A SPECIFIED TIME CALLED PERIOD OF
LIMITATION

 IF IT IS NOT PERFORMED AND IF THE

PROMISEE TAKES NO ACTION WITHIN THE
LIMITATION TIME, THEN HE IS DEPRIVED OF
HIS REMEDY AT LAW
DISCHARGE BY OPERATION OF
LAW
DEATH
MERGER
INSOLVENCY
UNAUTHORISED ALTERATION OF THE
TERMS OF A WRITTEN AGREEMENT
RIGHTS & LIABILITIES VESTING IN THE
SAME PERSON
DISCHARGE BY BREACH OF CONTRACT
ACTUAL BREACH :
 At the time of performance
 During the performance

ANTICIPATORY BREACH
 By the act of promisor (implied repudation)
 By renunciation of obligation (express repudation)
Breach of contract…

…occurs when a party to
the contract totally or
partially fails to perform
his obligations.
Remedies
When a there is breach of contract, the
injured party has one or more of the following
remedies:
1. Rescission of contract
2. Suit for damages
3. Suit upon ‘quantum meruit’
4. Suit for specific performance of the contract
5. Suit for injunction
Damages…
….monetary compensation for
the loss caused to the injured
party.
Every action for damages raises
two problems:
Remoteness of damage
Measure of damages
 Remoteness of damages….
Hadley Vs Baxendale (1854)
Facts
A shaft in Hadley’s (P) mill broke rendering the mill inoperable.
Hadley hired Baxendale (D) to transport the broken mill shaft to
an engineer in Greenwich so that he could make a duplicate.
Hadley told Baxendale that the shaft must be sent immediately and
Baxendale promised to deliver it the next day. Baxendale did not
know that the mill would be inoperable until the new shaft arrived.
Baxendale was negligent and did not transport the shaft as
promised, causing the mill to remain shut down for an additional
five days. Hadley had paid 2 pounds four shillings to ship the shaft
and sued for 300 pounds in damages due to lost profits and wages.
The jury awarded Hadley 25 pounds and Baxendale appealed.
 Remoteness of damages….
Hadley Vs Baxendale (1854)

Issue

What is the amount of damages to which an injured party

is entitled for breach of contract?
 Remoteness of damages….
 Hadley Vs Baxendale (1854)

 Holding and Rule

 An injured party may recover those damages reasonably considered to

arise naturally from a breach of contract, or those damages within the
reasonable contemplation of the parties at the time of contracting.

 The court held that the usual rule was that the claimant is entitled to the
amount he or she would have received if the breaching party had
performed; i.e. the plaintiff is placed in the same position she would have
been in had the breaching party performed. Under this rule, Hadley would
have been entitled to recover lost profits from the five extra days the mill
was inoperable.
 Remoteness of damages….
Hadley Vs Baxendale (1854)

Holding and Rule

The court held that in this case however the rule should be that the damages
were those fairly and reasonably considered to have arisen naturally from the
breach itself, or such as may be reasonably supposed to have been in the
contemplation of both parties at the time the contract was made.

The court held that if there were special circumstances under which the
contract had been made, and these circumstances were known to both parties
at the time they made the contract, then any breach of the contract would result
in damages that would naturally flow from those special circumstances.
 Remoteness of damages….
Hadley Vs Baxendale (1854)

Holding and Rule

Damages for special circumstances are assessed against a party only when
they were reasonably within the contemplation of both parties as a probable
consequence of a breach. The court held that in this case Baxendale did not
know that the mill was shut down and would remain closed until the new
shaft arrived. Loss of profits could not fairly or reasonably have been
contemplated by both parties in case of a breach of this contract without
Hadley having communicated the special circumstances to Baxendale. The
court ruled that the jury should not have taken the loss of profits into
consideration.
Two rules…
1. General damages are for loss which arises
naturally in the usual course of things from
the breach itself.
2. Special damages are for loss which arises
on account of the unusual circumstances
affecting the plaintiff. They are not
recoverable unless the special
circumstances were brought to the
knowledge of the defendant so that the
possibility of the special loss was in the
contemplation of the parties.
Measure of damages
Damages are compensatory; not penal
In ordinary cases, damages for mental
pain and suffering caused by the breach
are not allowed.
Injured party has to take reasonable
steps to see that his loss is kept to the
minimum. (Duty to mitigate)
 Liquidated Damages
Monetary compensation for a loss, detriment, or injury
to a person or a person's rights or property, awarded by
a court judgment or by a contract stipulation regarding
breach of contract.

Generally, contracts that involve the exchange of

money or the promise of performance have a
liquidated damages stipulation. The purpose of this
stipulation is to establish a predetermined sum that
must be paid if a party fails to perform as promised.
 Liquidated Damages
Damages can be liquidated in a contract only if :
1. the injury is either "uncertain" or "difficult to
quantify";
2. the amount is reasonable and considers the
actual or anticipated harm caused by the
contract breach, the difficulty of proving the
loss, and the difficulty of finding another,
adequate remedy; and
3. the damages are structured to function as
damages, not as a penalty. If these criteria are
 Penalty
 A penalty is a sum that is disproportionate to the actual harm.
It serves as a punishment or as a deterrent against the breach
of a contract. Penalties are granted when it is found that the
stipulations of a contract have not been met. For example, a
builder who does not meet his or her schedule may have to pay
a penalty.
 Liquidated damages, on the other hand, are an amount
estimated to equal the extent of injury that may occur if the
contract is breached. These damages are determined when a
contract is drawn up, and serve as protection for both parties
that have entered the contract, whether they are a buyer and a
seller, an employer and an employee or other similar parties.
 Thank you for listening!
77