Law of Contract

Branch of law

Promises made shall be legally binding on parties to a contract

Introduces a definiteness in business transactions
Evolution
Development of Human Civilization

Frequency of exchanges between persons and communities

Changes in social and economic behavior

Need for a code to govern bilateral transactions

Scheme of Indian Contract Act, 1872

General Principles of contract

Special contracts

Bailment and pledge

Indemnity and guarantee

Agency
Indian Contract Act
Does not deal with

Partnership
Sale of goods
Negotiable instruments
insurance
Nature of Law of Contract
Differs from other branches of law
Does not lay down rights and duties
Lays down principles subject to which parties can create contracts
Parties create law for themselves
Gives freedom to contract in any way the parties please
Contract and Conveyance
Jus in personam
What is a contract ?
A contract is an agreement enforceable by law
What is an agreement ?
Every promise and every set of promises forming consideration for each other is an agreement
What is a promise ?
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.
What is a proposal (offer) ?
A person is said to have made a proposal when he
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

An accepted proposal is an agreement

Agreement = Offer + Acceptance

Essential elements of a valid contract
Offer and Acceptance
Intention to create legal relationship (agreements of social or domestic nature do not contemplate legal
relationship)
Lawful consideration
Capacity of parties to contract
Free and genuine consent
Lawful object
Agreements not declared to be void
Certainty and possibility of performance
How can you make an offer ?
By express words
By implied conduct of parties

e.g. “Will you sell your car to me for Rs. 100000?”

Or
Installation of a public telephone at a public place
To whom can an offer be made ?
To definite person
To world at large
(Carlill v/s Carbolic Smoke Ball co)
What constitutes an offer ?
An obvious intention to be bound by it
Object of obtaining assent of offeree
Must be definite
Must be communicated
Legal Rules as to offer
Must be capable of being accepted
“A social invitation is not an offer”
Must be definite and certain
“I will sell you a car”. I have three cars.
Which Car ? At what price ? Where ? When?

Must be communicated
No communication no acceptance, No acceptance, no agreement, No agreement, no contract

Must have an intention to obtain assent of other party

Offer should not contain a term the non compliance of which may be assumed to amount to acceptance

One cannot say that if the acceptance is not communicated by certain time, the offer would be considered as
accepted
 A statement of price is not an offer

What is not an offer ?

A declaration of intention and an announcement

An auctioneer announcing an auction in the newspaper. If the auction is cancelled, one cannot sue for
cancellation

It is merely a declaration of intention or announcement

An invitation to make an offer or do business

Display in a shop

Invitation to purchase

Sale of goods in malls, contract is made when the cashier at the counter accepts the payment

What is Acceptance ?
An act of assenting to the offer.

Can be Express or Implied

At an auction sale, X is the highest bidder. The auctioneer accepts the offer by striking the hammer on the
table. This is an implied acceptance.
Legal Rules as to Acceptance
It must be absolute and unqualified

A made an offer to B to purchase a house with possession on 25th July. The offer was followed by an
acceptance suggesting possession from 1st Aug. There was no agreement.

It must be communicated to the offeror

A mere resolve or determination of offeree without any manifestation is not acceptance

A draft agreement for supply of coal

Sent to the manager of a railway company
Manager wrote on it “approved” and put it in his drawer. Not communicated to the offeror
No contract resulted.

Must be given within a reasonable time.

Must not precede the offer

Must be given by the party to whom the offer is made

Must be given before the offer is revoked

Cannot be implied from silence

Communication
 Deemed to be made by an act or omission
Can be done through words spoken or written or through conduct

A proposes to sell his house to be at a certain price.

The offer is sent through a letter posted on 10th July.
Letter reaches to B on 12th July
Communication of Offer is complete on 12th.
B accepts to purchase at the offered price. He sends is assent through a letter posted on 14th July.
Comm. is complete as against A on 14th.
This letter reaches A on 16th July.
Comm is complete as against B on 16th.
Communication of revocation
Taking back, withdrawal, recalling

Comm is complete as against the person to whom it is made, when it is put into transmission

As against the person who makes it, when the other person comes to know of it
Time for revocation
Of offer
Any time before the communication of acceptance is complete as against the proposer

Of Acceptance
Any time before the communication of acceptance is complete as against the acceptor
Consideration
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

Consideration can be

Past
Present
Future

It is an act e.g. A promises B to guarantee payment of price of the goods which B sells on credit to C.

It is an abstinence e.g. A promises B not to file a suit against him if B pays A Rs. 500.
Legal Rules as to Consideration
It must move at the desire of the promisor
It may move from the promisee or from any other person
It may be an act, abstinence or forbearance
May be past, present or future
Need not be adequate.
Must be real and not illusory.
Must be something which the promisor is not already bound to do
 Must not be illegal and immoral
Capacity to contract
Who can contract ?
A major
A person of sound mind
A person who is not disqualified from contracting by any law to which he is subject
Contracts with minor
Inoperative and void ab initio
Contracts with persons of unsound mind
A lunatic
A drunken or an intoxicated person
But when he is not under the influence of intoxication, he is capable of contracting.
FREE CONSENT

Consent is not free when it is affected by any of the following elements:

Coercion
Undue influence
Misrepresentation
Mistake

Valid contract requires consensus ad idem.

When consent is not free, contract is voidable.

Coercion

Coercion includes fear, physical compulsion & menace

Threat to commit suicide amounts to coercion

Undue Influence
When one of the parties to a contract is in a position to dominate the will of the other
When he/she abuses this position to obtain unfair advantage

Following relationships raise presumption of Undue Influence

Parent and child
Guardian and ward
Trustee and beneficiary
Religious advisor and disciple
Doctor and patient
Solicitor and client
Fiance and fiancee

Misrepresentation

It is a false statement
The person making it honestly believes it to be true
Or he does not know it to be false
 Misrepresentation includes non disclosure of material fact without any intention to deceive

Fraud

It exists when a false representation is made

Knowingly without belief in its truth &
Recklessly
And the person making it intended the other party to act upon it

It exists when there is a concealment of a material fact or partial statement of fact with an intention to
deceive or to induce to enter into a contract

Mistake

Of law

Of own country of foreign

No defence contract is void

Of fact

Bilateral Unilateral

Agreement Generally not allowed

is void as a defence

Exceptions:

Identities of
Persons

Nature of contract
Legality of Object
Consideration must be legal

It is unlawful in the following cases:

It is forbidden by law

It is fraudulent

It involves or implies injury to the person or

Property of another

It is regarded immoral

It is opposed to public policy

 EFFECTS OF ILLEGAL AGREEMENTS

Void ab initio

Collateral transaction become tainted with illegality

No action can be taken for recovery of money paid or property transferred

No action can be taken for breach of agreement

CONTINGENT CONTRACTS

It is contract to do or not do something if some

Event collateral to such contract does or does not
Happen

Event is uncertain
Event is collateral

‘A’ agreed to purchase certain shares of a company if the company appointed him as its sole agent at a
certain place. Before the company do that, it went into liquidation.
‘A’ was entered in the list of contributories.
Held A was not liable as the event upon which purchase of share was to take place, never occurred.
Performance of contract
Performance of a contract takes place when parties to it fulfill their obligations within the time prescribed and
in the manner prescribed.
What is an offer to perform ?
A software company enters into a contract with a mining company to install electronic device system for
dispatch of mined lignite. The software company installs the system.
Subsequently the mining company prevents them from operationalizing the system.
Time is of essence in a contract
The performance of a promise within the specified time by a party to the contract is essential in order to
entitle him to enforce performance from the other party.

In business and mercantile contracts, time is of essence because business requires certainty.
Discharge of contract

Termination of contractual relationship between the parties

Discharge takes place when rights and obligations created by a contract come to an end
How can a contract be discharged?
By performance
By agreement or consent
By impossibility
By lapse of time
By operation of law
By breach of contract

‘X’ let out a hall for music concert.

 The hall fell through in an earthquake before the first concert could take place.

Contract is discharged.
Breach of a contract
If a party breaks his obligation which the contract imposes, there takes place a breach of the contract.

Actual breach may take place either at the time when performance is due
Or during the performance of the contract
Anticipatory breach may take place when the party repudiates his obligations before the time of performance
arrives

‘A’ undertakes to supply 10 cars to B on 1st Jan. Before this date, he informs B that he is not going to supply
the goods. This is anticipatory breach of contract.
What can you do in case of breach?
Can rescind the contract
Can sue for damages
Can sue for specific performance
Can sue for injunction
Quasi contracts
It is a relationship resembling that created by a contract.

Constructive contracts under English law

Principle of unjust enrichment

It is created by law

Types of quasi contracts

Supply of necessities
Payment by the interest person
Obligation to pay for non gratuitous act
Responsibility of finder of goods
Something delivered in Mistake or under coercion

A supplies the wife and children of B, who is a minor, with necessaries suitable to her condition in life. A is
entitled to be reimbursed from the property of B.

F picks up a diamond on the floor of S’s shop

He hands it over to S to keep it till true owner is found out

No one appears to claim it for quite some weeks in spite of the wide advt.

F claims the diamond from S

S refuses to return

A village was irrigated by a tank

 The Govt effected certain repairs to the tank for its preservation

The Govt had no intention to do so gratuitously

The Zamindars enjoyed the benefits thereof

An insurance company paid the amount on a policy under the mistake that the goods had been destroyed by a
peril insured against.
The goods in fact had been sold.
The co. can recover the money.
Indemnity
A contract by which one party promises to save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other person
Guarantee
It is a contract to perform the promise, or discharge the liability of a third person in case of his default.
Bailment
Derived from a French verb, bailler = to deliver

Delivery of Goods is a key concept of Bailment

The possession has to be parted with by the bailor

e.g. A delivers the goods for being transported from Anand to Ahmedabad to a transport company
Pledge
Bailment of
goods
as security
for payment of
a debt or
performance of a promise
is called pledge

e.g. A borrows Rs. 200 from B and keeps his watch as security for payment of the debt

Any kind of movable property i.e. goods, documents or valuables may be pledged