Contract Laws

Module 2
Indian contract act 1872
Introduction

 It extends to the whole of India

 Came into force on the first day of September, 1872.
 Plaintiff v.
Defendant
Plaintiff:
Party who brings legal action
Has a burden of Proof

Defendant:
Party who is being sued
Defendant will answer all the claims made by plaintiff
 Appellant v
Respondent
Appellant:
Those who initiate an appeal based on an issue of
law to the higher court.

Respondent:
the party being sued or tried and is also known as the
appellee.
 Contract

Agreement + Enforceable by Contract

Law

Promise + Consideration Agreement

Accepted Proposal

Proposal + Acceptance Promise

Section 2

 PROPOSAL/OFFER

 (a) When one person signifies to another his willingness to do or

to abstain from doing anything, with a view to obtaining the
assent of that other to such act or abstinence, he is said to make a
proposal;
Promise

 (b) When a person to whom the proposal is made, signifies his

assent thereto, the proposal is said to be accepted. A proposal,
when a accepted, becomes a promise;
 (e)Every promise and every set of promises, forming the
consideration for each other, is an agreement;
 (h) An agreement enforceable by law is a contract;
Void and Voidable Contract
Void contract: A contract which was valid when it was first entered into
but subsequently becomes unenforceable due to impossibility of
performance, change of law or other reasons, is called void contract.
Example is a contract to import goods from a foreign country. If war
breaks out between the countries, it becomes impossible to import goods.
The contract, therefore, cannot be enforced.

Voidable Contract: It is a contract that is enforceable by law at the option

of one of the parties. A formal agreement between two parties that may be
rendered unenforceable for any number of legal reasons, which may
include: Failure by one or both parties to disclose a material fact. A
mistake, misrepresentation, or fraud. This happens when the consent is
received through coercion, undue influence, fraud, misinterpretation or
Mistake.
 Section 2 (j) A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable.
 Section 2 (i) 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;
 Void contract – Taylor v. Caldwell
 Defendant: owner of a theatre
 Plaintiff wanted to perform a musical performance.
 Previous day of performance, theatre burnt down
 Taylor asks Caldwell for compensation for loss
 Court: no compensation as the contract is impossible to perform
Basis of difference Void Contract Voidable Contract

Contract is enforceable at
Contract ceases to be
Definition the option of the
enforceable by law.
aggrieved party.

Contract becomes void

either because of Contract becomes
sudden and voidable when it is
Nature unexpected events or of caused by coercion,
law changes, before the undue in uence, fraud
performance becomes and misrepresentation.
due.

The aggrieved gets a right

Does not provide any to rescind the contract
Rights legal remedy for the and to declare it void
parties to the contract. otherwise it remains
valid.
Essentials of a Valid Contract

Section 10
 All agreements are contracts if they are made by the free consent
of parties competent to contract, for a lawful consideration
and with a lawful object, and are not hereby expressly declared
to be void.
Essentials of a Valid Contract

 Offer and Acceptance

 Lawful Consideration
 Lawful object
 Contractual Capacity
 Free Consent
1. Offer and acceptance
 Offer/Proposal

Offeror/
Promiser

Offer/
Proposal Offeree/
Promisee
Types

 Specific Offer
 Where an offer is made to a particular and specified person.
 Only that person can accept such specific offer

 General Offer
 It is an offer made to public at large with or without any time limit
 Anyone performing the conditions of the offer can be considered to have
accepted the offer
 Until the general offer is retracted or withdrawn, it can be accepted by
anyone at any time as it is a continuing offer.
 Carlill v. Carbolic Smoke Ball Co
 Carlill v. Carbolic Smoke Ball Co
 Defendant
1. Advertisement is vague(no time limit)
2. No intention to enter into a legal obligation with the plaintiff
3. Puffing ad
4. Not for a particular person. Acceptance not communicated. No consideration

 Court
1. Not vague. If disease is contacted while using the product
2. Not a puffing ad. Had 1000 pounds in Alliance bank
3. Performance of the conditions is a sufficient acceptance without notification
(general offer)
 Cross Offer
 Occurs when parties make identical offers to each other in ignorance of each others offer
 A cross offer cannot be treated as mutual acceptance and therefore no binding contract

 Counter Offer
 The offeree on receiving the offer imposes conditions.
 Modifies offer  counter offer
 Amounts to rejecting the first offer

 Open Offer
 Made to Public at large, open for a certain period of time
Essentials of an Offer/Proposal

1. Intention to create Legal Relationship

2. Certainty of terms
 Terms of offer must be definite/certain
 Vague and ambiguous terms  invalid offer
 Guthing v. Lynn
 Person decided to buy a horse
 When he bought it he said “ If the horse proves to be lucky, I will pay 5 pounds
extra”
 Later refused to pay
 Court: lucky not certain as it is subjective.
 Ruled in favour of defendant
3. Statement of Intention and Invitation to Offer
 Mere statement of intention not an Offer
 Invitation to offer is not an offer
 Invitation to offer  done to negotiate terms of offer
 Harvey v. Facie
 The plaintiff telegraphed “Will you sell Bumper Hall Pen” “Telegraph lowest cash price”
 Defendants replied “lowest price for Bumper Hall Pen is £900”
 Plaintiff telegraphed immediately “we agree to buy Bumper Hall Pen at £900”
 Defendants did not sell
 Privy Council: Answered only one question, mere statement of the lowest price at which the
vendor would sell not a contract
4. Offer must be Communicated
 For an offer to be complete  communicated to person to whom it is made.
Acceptance

 Assent given to a proposal

 Converts proposal into a promise

 Sec 2(b)
Essentials of a valid Acceptance

1. Acceptance must be communicated  if not communicated to

offerer then no contract created

2. Acceptance must be absolute and unqualified

 Acceptance with conditions attached is a counter offer

3. Acceptance when offer is in force

4. Acceptance can be Express or Implied
 Express – communicated in words (spoken/written)
 Implied - acceptance inferred from surrounding circumstance or conduct of parties
 Eg Ramanbhai v. Ghansiram, Hargopal v. Peoples Bank of North India
5. Acceptance through prescribed or reasonable mode
6. Mere mental acceptance is no acceptance
7. Acceptance by definite person
consideration
 Sec 25, “ An agreement without consideration is void”
 It is the benefit falling due to the promiser
 Substance of what is wanted by each side to bargain

 Sec 2(d)
 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 to abstain from doing, something, such
act or abstinence or promise is called a consideration for the promise
Legal Rules

1. Consideration must move at the desire of the promisor

 Act or abstinence should be done at the desire of the promisor and
not a third party.
2. Consideration may move from the promisee or any other
person
 Indian Contract Act recognises consideration moving from a third
party other than the promisee
 Provided it is done at the desire of promisor
 Chinnaya v. Ramaya
3. Consideration may be past , present or future
 Past consideration  X renders service in Jan. In March Y promises to compensate X
valid according to Indian contract Act

 Present Consideration/Executed Consideration  moves simultaneously with promise. X

receives money from Y to deliver goods

 Future Consideration/Executory Consideration X will deliver goods to Y in a week and

Y will pay after 2 weeks
4. Consideration need not be adequate  need not be adequate or equivalent to
promise

5. Consideration must be real not illusionary

 Must have some value in the eyes of the law
 White v. Bluett
 Son took money from father and signed a promissory note
 Everyday complains that the father has treated the other sons better
 One day he said that he would stop complaining if the father agreed to forgo the money owed –
Father agreed
 Later father went to court
 Court: Consideration not valid as it is illusionary.
 Ruled in favour of father
7. Discharge of a pre-existing obligation is no consideration
 Consideration must be something more than what the promisee is already bound to do
 Stilk v. Myrick

8. Consideration must not be unlawful, immoral, or opposed to public policy

 Exceptions
 An agreement made without consideration is void, unless
1. An agreement made on account of natural love and affection
 A written and registered agreement based on natural love and affection among near
relatives

2. Compensation paid for past voluntary services

 A promise to compensate wholly or in part a person who has already voluntarily done
something for the promisor does not require consideration to be enforced
3. Time barred debt:
 A promise in writing to pay a time barred debt is valid without consideration.

4. Agency
 No consideration is necessary to create an agency

5. Completed gift
 Nothing in this section shall affect the validity, as between the donor and donee, of any
gift actually made.
 For a gift, not being an agreement to make a gift, no consideration is necessary
Legality of
object/consideration
 Agreements in which there is no legality of object and/or
consideration  void
 The consideration or object of an agreement is lawful unless
 It is forbidden by law
 Is of such nature that, if permitted, it would defeat the provisions of
any law
 Is fraudulent
 involves or implies, injury to the person or property of another
 The Court regards it as immoral, or opposed to public policy.
1. Forbidden by law
 Acts forbidden by law means acts that are punishable under any Statute or Rules or Regulations
made under any Statute.
 Eg getting into an agreement to poach tigers for fur

2. Defeat provisions of any law

 Not directly against any law but if permitted defeat provisions of any law
 Eg money lent for the marriage of a minor defeats the purpose of the Child Marriage Restraint Act
1929 hence not recoverable
3. Fradulent – fraud being committed

4. Injurious to person or property

 Agreement to injure a person or another’s property
 ‘A’ borrowed money from ‘B’. He is unable to pay either the principal or interest.
Therefore he agrees to render manual labour for certain period failing which he agrees to
pay exorbitant interest. This agreement is void as there is ‘Injury’ caused to A

5. Immoral
 Advancing money to one spouse to help finance a divorce
 If any service done/article sold to a prostitute to help her carry on her vocation
6. Against public policy  public interest
 Trading with an alien enemy
 Stifling prosecution
 Agreement to create monopolies
 Agreement in restraint of marriage
 Agreement in restraint of trade
Capacity to contract
 Sec 11: Every person is competent to contract who is of the age
of majority according to the law to which he is subject, and who
is sound mind and is not disqualified from contracting by any
law to which he is subject.
 Persons incompetent to contract
 Minors
 Persons of unsound mind
 Persons disqualified by law to which they are subject to
Contractual Capacity of Minors

 Contract with a minor is said to be Void ab initio

 Mohoribibi v. Dharmodas Ghose
 Minor went to a money lender (representative) and executed a
mortgage in favour of the money lender to get a loan
 Mother wrote to money lender’s lawyer stating that her son was a
minor and that lending him money was at one’s own risk and peril
 Lawyer made minor sign a lengthy agreement in which there was a
declaration that he had attained majority.
 Later minor refused to repay and went to court to have the mortgage
declared void
 Court: Minor cannot be held liable
Effect of Minor’s Agreement

1. No Estoppel
 Indian Evidence Act 1872: When one person has, by his declaration,
act or omission, intentionally caused or permitted another person to
believe a thing to be true and to act upon such belief, neither he nor
his representative shall be allowed, in any suit or proceeding between
himself and such person or his representative, to deny the truth of
that thing.
 No estoppel against a minor
2. No liability in contract or in Tort arising out of a contract
 Tort : Civil wrong that unfairly causes someone else to suffer loss or harm

3. Doctrine of restitution
 If a minor acquires goods/property by misrepresentation age  can be compelled to
restore if traceable in his/her possession
 If said goods/property has been sold or converted them  No restitution
 Money given to minor  no restitution
4. No ratification  ratification = validation of an agreement previously entered by
minor after attaining majority

5. Beneficial contracts  agreements entered into by a minor for his/her benefit are
vaild and enforceable.

6. Minor as an agent  not entitled to employ an agent but can be an agent for
someone else.
As an agent can represent principal and bind him to acts done in course of agency
7. Minor as a partner  According to Partnership Act 1932, minor cannot make a
contract of partnership
 May be admitted to its benefits with consent of all other partners
 Cannot be held personally liable for any obligation of the firm but share in firm’s
property can be made liable

8. Minor as shareholder  can hold shares through a guardian

9. Insolvency  cannot be declared insolvent

10. Liability for necessaries
 Minor is liable for the necessaries supplied to him/her
 Robert v. Gray

11. Contract by guardian:

 Valid contract can be entered into with the guardian on behalf of the minor.
 The guardian must be competent to make the contract and the contract should be
for the benefit of the minor.
Sound mind

 A person will be considered to be of sound mind if he at the time

of entering into a contract is capable of understanding it and
forming a rational judgment as to its effect upon his interest.

 Necessaries of life supplied to a person of unsound mind

Contract by disqualified persons

 Alien Enemy
 Convict – while undergoing imprisonment
 Insolvent
Free consent
 Sec 13 defines consent
 “Two or more person are said to consent when they agree upon
the same thing in the same sense “

 Consensus ad idem  meeting of the minds

 Sec 14 defines free consent

 Consent is said to be free when it is not caused by –

(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of section 20,21, and 22.
Coercion

 Threat or force used by one party against another in order to

make him/her enter into an agreement.

 Sec 15 “Coercion is the committing, or threating to commit, any

act forbidden by the Indian Penal Code 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.
 If an agreement caused due to coercion
 Voidable at the option of the party whose consent was so caused
 Ranganayakamma v. Alwar Shetty

 Chikkam Amiraju v. Chikkam Seshamma

 Burden of Proof: lies on the party who wants to relieve himself/herself of the
consequences of coercion
Undue Influence

 Consent obtained through dominating another

 Sec 16(1)
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.
 A person is said to dominate the will of another:
a. Where he/she holds a real or apparent authority other the other eg master and
servant, police officer and accused
b. Where he stands in a fiduciary relationship to the other  mutual trust and
confidence
c. where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress eg
doctor and patient
 If an agreement caused due to undue influence
 Voidable at the option of the party whose consent was so caused

Burden of proof: lies with the person who is in a position to dominate the will of the
other

 Manu Singh v. Umadat Pandey

Fraud (Sec 17)

 Fraud means and includes any of the following act committed by a

party to a contract or with his connivance or by his agent with intent
to deceive another party thereto or his agent or to induce him to enter
into the contract.
1) the suggestion, as to a fact, of that which is not true by one who
does not believe it be true;
2) the active concealment of a fact by one, having knowledge or belief
of the fact;
3) a promise made without any intention of performing it;
4) any other act fitted to deceive; and
5) any such act or omission as to law specially declared to be
fraudulent
 Voidable at the option of the party whose
consent was so caused
or
can insist the contract be
performed as if representation
had been true

FRAUD (AND)

Aggrieved party can sue

for damages
Misrepresentation

 Misrepresentation’ does not involve deception but is only an

assertion of something by a person which is not true, though he
believes it to be true.
Sec 18

 "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, though he believes it to be true;

(2) any breach of duty which, without an intent to deceive, gains an advantage
to the person committing it, or anyone claiming under him; by misleading
another to his prejudice, or to the prejudice of any one claiming under him;

(3) causing, however innocently, a party to an agreement, to make a mistake as

to the substance of the thing which is subject of the agreement.
Voidable at the option of the party whose consent was so caused
or
can insist the contract be performed as if
representation had been true

*If the party to whom the misrepresentation had been made had means of discovering
the truth with ordinary diligence  Contract not voidable

Ordinary diligence: diligence as a reasonable prudent man would consider necessary

having regard to the nature of the transaction
 Mistake
 Mistake of fact
 Agreement void where both parties are under mistake as to matter of fact essential
to contract Galloway v. Galloway

 A contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to a matter of fact.
 Mistake of Law
 A contract is not voidable because it was caused by a mistake as
to any law in force in India

 Mistake as to a law not in force in India has the same effect as a

mistake of fact.
 Effects
Coercion Voidable
Undue Influence Voidable

Fraud Voidable/Performance + Damages

Misrepresentation Voidable/Performance
(if ordinary diligence done)
Mistake Fact (bilateral) Void
Fact (unilateral) Not voidable
Law (Indian) Not voidable
Law (Foreign) voidable
Discharge of contract
1. By performance
2. By Agreement
3. By impossibility
4. By Bar of limitation
5. By operation of law
6. By Breach of contract
Discharge of contract by
performance
 A party to contract is said to have actually performed his promise
when all obligations under the contract are fulfilled.
 Actual Performance
 Both parties perform their promises. Performance  complete
precise and according to terms of agreement
 Attempted Performance
 Tender of Performance  offer to perform obligations under contract
 Valid tender  contract deemed to have been performed
Discharge of contract by
Agreement
 Novation
 New contract substituted for an existing one

 Rescission
 Mutual consent
 One party fails in obligation then the other party may
rescind

 Alteration
 Alteration of one or more terms of contract
 Old contract is discharged
 Remission
 Acceptance of lesser fulfilment of promise

 Waiver
 Mutual abandonment

 Merger
 An inferior right accruing to a party under a contract merges into a
superior right accruing to the same party under the same or some
other contact
 Discharge of contract by
Void ab
initio
Impossibility of Performance

Impossibility of Performance

Initial Impossibility Supervening Impossibility

Doctrine of
Known to parties
Frustration

Unknown to parties

Void
Grounds for frustration

1. Destruction of the subject matter

 Subject matter of the contract subsequent to its formation is
destroyed without any fault of the parties to contract
2. Non-occurrence of a contemplated event
 The non-occurrence of an event contemplated by both parties as the
reason for the contract
 Change in the state of things which formed the basis of the contract.
3. Death or incapacity for personal service
4. Change of law
5. Outbreak of war
Discharge by limitation

 Limitations Act 1963

 Contract must be performed within specified period
Discharge by operation of law

 Death
 Insolvency – discharged from all liabilities prior to the
adjudication
 Unauthorised alteration – of terms without the consent of the
other party
Discharge by Breach of contract

 Actual Breach
 Anticipatory Breach
Remedies to breach of contract
 Breach: Failure, without legal excuse, to perform any promise
that comprises the whole or part of the contract
 Remedies
 Damages
 Injunction
 Specific performance
 Quantum Meruit
1. Damages – compensation in money for loss suffered by injured
party
 General Damage: ordinary damage that arises as a natural
consequence of breach
 Special Damages: Arise out of special circumstances. Said
circumstance has to be known to both parties
2. Injunction: order passed by court ordering party to do or not to do something

3. Specific performance – compels the defendant to perform contract

4. Quantum Meruit: “as much as is earned”

 Right to claim compensation for work already done