CVM University

Faculty of Commerce, Management and Law

S. G. M. English Medium College of Commerce and Management
(SEMCOM)

Vallabh Vidyanagar

Class : BBA, ITM, BCOM Subject : Business Law- I

Faculty : Dr. Dipal Patel Module 1 : Basic of Contract

Topics

● Definitions: Agreement, contract, voidable, void, void

contract, voidable contract and agreement and Illegal
agreement
● Essentials of a valid contract
● Offer
● Essentials of valid offer
● Revocation of offer
● Acceptance
● Essentials of valid acceptance
● Revocation of acceptance
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Module - 1

Basic of Contract
Introduction

According to Oxford English Dictionary the word law means, “Rule made by
authority for the proper regulation of a community or society or for correct conduct
in life”

Indian Contract Act of 1872 came into effect from 1st September, 1872. It extends
to the whole of India except the state of Jammu and Kashmir. This Act Passed in
Indian Parliament.

The law of contract is the branch of law which determines the circumstances in
which a promise made by the parties to a contract shall be legally binding on them.
All of us enter into a number of contracts everyday knowingly or unknowingly.
Each contract creates some rights and duties upon the contracting parties. Indian
Contract Act deals with the enforcement of these rights and duties upon the parties.

Definition, Meaning And Nature Of Contract

The term Contract has been defined under Section 2(h) of Indian Contract Act,
1872 as, “an agreement ..enforceable by law is a contract”
A Contract therefore, is an agreement the object of which is to create a legal
obligation, i.e. a duty enforceable by law.

Two main elements –

1. Agreement‐ As per Sec 2 (e) “ Every promise and every set of promises,
forming the consideration for each other, is an agreement”

2. Legal Obligation‐ An agreement to become a contract must give rise to a

legal obligation that is duty enforceable by law.

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Agreement:

As per section 2(e) it is defined as every promise and every set of promises
forming the consideration for each other.

Here a promise is defined in section 2 (b) as a proposal when accepted becomes a

promise.

In short A contract is an agreement and an agreement is a promise and a promise is

an accepted proposal.

When agreement becomes contract:

An agreement is a contract when it is enforceable by law. An agreement that the

law will enforce is a contract. The conditions of enforceability are stated in S10 of
the act- an agreement is a contract when it is made for some consideration between
parties who are competent with their free consent and for a lawful object.

Which agreements are contract:

All agreements are contract 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 expressly declared to be void. Every contract is an agreement but every
agreement is not a contract.

An agreement becomes a contract when the following conditions

are satisfied:

❖ There should be a consideration

❖ Parties are competent to contract

❖ Consent is free

❖ Object is lawful

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Void agreement 2(g):-

An agreement not enforceable by law is void

Voidable contract 2(i):-

An agreement is a voidable contract if it is enforceable by Law at the option of one
or more of the parties there to (i.e. the aggrieved party), and it is not enforceable by
Law at the option of the other or others

Void contract :-
A contract which ceases to be enforceable by Law becomes void when it ceases to
be enforceable

All agreements are contracts, if they are made –

❖ By Free Consent Of The Parties,

❖ Competent To Contract,

❖ For A Lawful Consideration And

❖ With A Lawful Object, And

❖ Not Expressly Declared As Void

Offer + Acceptance = Promise

Promise + Consideration = Agreement
Agreement + Enforceability By Law = Contract

Lawful consideration (“Quid Pro Quo”):-

In order to create a valid contract then there should be a lawful consideration. Here
consideration means something in return for which in Latin we can say “Quid Pro
Quo”. The consideration need not be adequate but there should be consideration to
the contract.Consideration must not be unlawful, immoral or opposed to the public
policy

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Capacity:-
In order to enter into a contract then the parties to the contract should have capacity
to enter into the contract. It means that the person should be major according to
which act he is applicable, should not be lunatic, drunkard, idiocy, etc.. The parties
to a contract must have capacity (legal ability) to make valid contract

Position of agreement entered into between minor: Validity: - An agreement with a

minor is “void-ab-initio”

● A minor's has received any benefit under a void contract, he cannot be asked
to return the same
● If a minor has received any benefit under a void contract, he cannot be asked
to return the same
● Fraudulent representation by a minor- no difference in the status of
agreement. The contract remains void
● A minor with the consent of all the partners, be admitted to the benefits of an
existing partnership
● Contracts entered into by minors are void-ab-initio. Hence no specific
performance can be enforced for such contracts.

The following condition should be satisfied in order to be

capacity to contract
I. Is of the age of majority according to the Law which he is subject, and

II. Who is of sound mind and

III. Is not disqualified from contracting by any law to which he is subject

However the following exceptions are available to the above rule:

❖ Person of unsound mind can enter into a contract during his lucid interval.

❖ An alien enemy, foreign sovereigns and accredited representative of a

foreign state. Insolvents and convicts are not competent to contract.

Free consent :-
Consent of the parties must be genuine consent means agreed upon samething in
the same sense i.e. there should be “consensus – ad – idem”. A consent is said to
be free when it is not caused by coercion, undue influence, fraud,
misrepresentation or mistake.

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Lawful object :-
❖ The object of agreement should be lawful and legal.

❖ Two persons cannot enter into an agreement to do a criminal act.

Consideration or object of an agreement is unlawful if it

a. is forbidden by law; or
b. is of such nature that, if permitted, would defeat the provisions of any law;
or
c. is fraudulent; or
d. Involves or implies, injury to person or property of another; or
e. Court regards it as immoral, or opposed to public policy

“Agreement is a wider term than contract whereas all contracts

are agreements. All agreements are not contracts.”
Difference between contract and agreement

No. Particular Contract Agreement

1 Section Contract 2(h) Agreement 2(e)

2 Enforceability Every contract is Every promise is not enforceable

enforceable

3 Interrelationship A contract includes an An agreement does not include a

agreement contract

4 Scope The scope of a contract is Its scope is relatively wider, as it

limited, as it includes only includes both social agreement
commercial agreement and commercial agreements.

5 Validity Only legal agreements are An agreement may be both legal

called contracts. and illegal.

6 Legal Every contract contains a It is not necessary for every

Obligation legal obligation. agreement to have legal
obligation.

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Essential Elements Of Valid Contract

1. Agreement: To form a contract there must be an agreement between the
parties. Agreement is created by offer and acceptance. It is the result of
mutual exchange of promises between the parties.

Eg: an agreement between the tenant and the owner.

2. Creation Of Legal Relationship: Agreement made between parties must

create a legal relationship. Legal relationship consists of rights and
obligations which can be claimed by the parties in the court of law.

3. Lawful Consideration: Agreement is a mutual exchange of promises

between parties. Each party making a promise gets something in return. It
constitutes a consideration for his promise .

4. Contractual Capacity: Parties making an agreement must have contractual

capacity. Lack of contractual capacity would invalidate the contract.
Contractual capacity of the party means he or she must be legally competent
for making a contact. The person to have contractual capacity must satisfy
the following conditions:

a. He must not be a minor.

b. He must be of a sound mind and not lunatic, idiot or drunkard.

c. He must not have been declared disqualified by law from contracting

such as insolvent, convict and alien enemy etc.

5. Free Consent Of The Parties: State of mind of parties is involved in

making an offer and giving acceptance for it. As soon as an offer is accepted
it becomes a binding promise having legal consequences. Two or more
persons are set to have consent if they agree upon the same thing in the same
sense. And their consent is said to be free if it has not been induced by
anyone one of the following factors;

a. Coercion

b. undue influence

c. misrepresentation

d. fraud

e. mistake

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6. Lawful Object Of Agreement: Agreement is made for some object or

purpose such object is formed on the basis of promises made by the parties.
These promises are made either for doing or not doing anything.

7. Agreement, Not Declared Expressly Void: There are certain agreements

which have been expressly declared void by the law. Thus an agreement
made by parties should not fall in that category. If it is so it would also meet
the same fate and cannot be enforced in the court of law.

8. Certainty In The Meaning Of Agreement: Agreement made by the parties

must be certain or capable of being made certain in its meaning. It is because
agreement would result in creating rights and obligations between the
parties.

Other Legal Formalities: agreement to be enforced, needs to satisfy other

conditions of being in writing, registered and duly stamped. Generally Indian
contract act does not make any discrimination between written and oral
agreement. Oral agreements are as good as written agreements.

Section 2(a) “Offer” :-

❖ Offer is one of the essential elements of a contract. According to Sec 2(a) of
Indian Contract Act 1872, defines the term Offer or Proposal “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 person either to
such act or abstinence, he is said to make a proposal”
❖ To form an agreement, there must be at least two elements – one offer and
the other acceptance.

❖ This offer is the foundation of any agreement. “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

❖ The person who makes an offer is called “Offeror” or “ Promisor” and the
person to whom the offer is made is called the “Offeree” or “Promisee”.

Essentials elements of an offer:-

1. There must be two parties.

2. The offer must show the willingness of the offeror. Mere telling the plan is
not an offer or Mere expression of willingness does not constitute an offer

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3. The offer must be made with a view to obtaining the assent of the offeree.

4. A statement made jokingly does not amount to an offer.

5. Offer must be made with the intention to create legal relations :-

An offer, in order to constitute a contract, must be intended to create and be

capable of creating legal relations. Merely social or moral relations, not
intended to have a money value, will not constitute legal obligations.

6. Mere statement of one’s intention is not sufficient to constitute offer :-

The offer must be made with the intention to obtain the assent of another
regarding the doing or not doing of a particular act.

7. Offer must be communicated to the offeree :-

It is to be remembered that there is no offer till it is communicated to the

offeree as otherwise he cannot accept it, being completely unaware of it.

8. Invitation to offer is not the same thing as offer itself :-

The offer and the invitation to offer are not the same thing but they are two
quite different terms. In case of an “invitation to offer” there is no intention
on the part of the person sending out the invitation to obtain the assent of
the other person to such invitation.

9. Offer must be certain :-

An offer must be certain and definite. Its terms should not be so vague so as
to prevent a contract being formed.

10.Offer must be made in the form of request not as order :-

It must be remembered that a proposer cannot make an offer in the form of

order so as to compel the offeree to reply to his offer rather he must make a
request to this effect.

11.Offer may be Express or Implied :-

a. i. Express :- When an offer is made by words written or oral, it is

called an express offer.

b. ii. Implied :- When an offer is expressed neither in words written or

oral but ‘by the way of conduct’ it is called an implied offer.

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12.Offer may be Specific or General :-

The offer being made to a particular individual or orgs. Is known as a

specific offer. On the other hand, if an offer has been made to a group of
people or public at large is known as a general offer.

13.Offer may be Positive Act or Negative Abstinence :-

When an offer is regarding the doing of a particular act, it is called the

“Positive Offer”, When it is regarding the not doing of a particular act, it is
called “Negative Offer”. An offer may involve a positive act or abstinence
by the offeree.
14.Offer may be Conditional or Unconditional :-

For the acceptance of his proposal a proper may impose one or more
conditions or may propose without any condition also

a. Offeror cannot impose any such condition the non‐fulfillment of

which would lead to acceptance of that offer.
b. The terms and conditions imposed by the offeror must be mentioned
in the offer in such a way that a person of reasonable prudence may
find indication for those conditions and those conditions must be
reasonable eyesight.

Kinds of offer:-
❖ Express Offer

❖ Implied Offer

❖ Counter Offer

❖ Cross Offer

❖ General Offer

❖ Specific Offer

❖ Standing Offer

❖ Continuous Offer

1. General Offer: It is an offer which is made to a group of people or public at

large. Such an offer can be accepted by any member of that group or public.

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2. Specific Offer: Sometimes an offer is made to a particular person, part or

org. such an offer is known as a specific offer. This specific offer can be
accepted only by that particular person or org.

3. Counter Offer: Incomplete and conditional acceptance of an offer is known

as a counter offer. In other words, the acceptor, instead of accepting the offer
as such along with all its terms and conditions deviates from it. Such
acceptance becomes a counter offer.

4. Cross Offer: Two parties exchange identical offers with each other. They are
ignorant about each other’s offers.

Lapse/ Revocation of an offer

Revocation of offer means withdrawal, cancellation or lapse of offer. According to
Sec 6 of this act, Offer can be revokedBy the following ways the offer can be
lapsed:

❖ By communication of notice of revocation

❖ By lapse of time

❖ By failure to accept condition precedent

❖ By the death or insanity of the offeror

❖ By counter – offer by the offeree

❖ By not accepting the offer, according to the prescribed or usual mode

❖ By rejection of offer by the offeree

❖ By change in law.

Section 2 (b) “Acceptance” :-

❖ When the person to whom the proposal is made, signifies his assent thereto,
the proposal is said to be accepted.

On analysis of the above definition the following elements can be derived:

❖ Acceptance must be absolute and unqualified

❖ Acceptance must be communicated

❖ Manner of acceptance

❖ If there is deviation in communication of an acceptance of offer, offeror may

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reject such acceptance by sending notice within reasonable time. If the

offeror doesn’t send notice or rejection, he accepted acceptance of offer.

❖ Acceptance of offer must be made by offeror

❖ Time limit for acceptance

❖ Acceptance of offer may be expressly (by words spoken or written); or

impliedly (by acceptance of consideration); or by performance of conditions
(e.g.in case of a general offer)

❖ Mere silence is not acceptance of the offer

❖ Acceptance subject to the contract is no acceptance

The following are the exceptions to the above rules:

❖ Where the offeree agrees that non – refusal by him within specified time
shall amount to acceptance of offer.

❖ When there is custom or usage of trade which specified that silence shall
amount to acceptance
Essentials of a Valid Acceptance :-

1. Acceptance must be absolute and unqualified :-

It must be absolute and unconditional. In this regard section 7 says that in

order to convert a proposal into a promise, the acceptance must be absolute
and unqualified. If there is a variation in the acceptance, the acceptance is
not an acceptance, but a counter proposal.

2. The acceptance must be expressed in some usual and reasonable

manner :-

According to section 7 the acceptance must be expressed in some usual and

reasonable manner, unless the proposal prescribes the manner in which it is
to be accepted. While making an offer the offeror may prescribe a particular
mode or manner of acceptance and the acceptor must abide by it. If the
acceptor does not follow that particular mode for sending his acceptance, the
offeror further insists the acceptor to abide by it. But if it is still not followed
the offeror can reject the acceptance. On the other hand, if no mode is
prescribed by the offeror then the acceptor can follow the usual mode of
acceptance.

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3. Communication of acceptance must be made by the acceptor or his

authorized agent :-

A communication of acceptance to be made valid, must be either by the

offeree himself or his authorized agent. A communication of acceptance by
any other person will not be valid.

4. Time of acceptance:

To make it valid acceptance, it must be given within a stipulated period of

time if any. When no time is specified, acceptance must be given within a
reasonable period of time.

5. Acceptance of an offer is the acceptance of all its terms :-

If the terms of an offer are not apparent on the face of it and no reasonable
caution is taken to draw the attention of the acceptor, then those terms will
not be binding.

6. A mere answer to a question can neither constitute an offer nor

acceptance :-

A mere answer to a question will not constitute neither an offer nor

acceptance. There must be an expression of willingness to be bound.

7. Acceptance may be express or implied :-

i. Express :- Where an offer is accepted by words, written or oral the

acceptance is called express.

ii. Implies :- When an offer is accepted by conduct, the acceptance is

called implied.

8. Mental acceptance is no acceptance :-

It is clear from Section 2(b) that an acceptance to be binding must be

communicated, an intention to accept or even a mental resolve to accept a
proposal does not give rise to a contract.

9. Acceptance of the general offer need not to be communicated :-

In case of general offers, formal communication of the acceptance is not

necessary.

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10. There can be no acceptance unless there is knowledge of the offer :-

It may be noted that an offer must be communicated, Although the offeree

may be ignorant of some of the terms of the offer.

11. Acceptance must be made before offer is revoked: Acceptance implies

mental readiness of the person for proposed act or abstinence. Therefore, it
must be given before the offer lapses or is withdrawn or canceled. Once the
offer is dead due to any reason if it is dead forever, and to revive it, such
offer is to be made afresh.
12. Acceptance is not implied from silence if the party: Acceptance of offer
is not implied from silence. The offeror cannot impose a condition that his
silence will amount to acceptance. Silence on the part of the offer in no case
may amount to acceptance.

General rules as to communication of acceptance:

The following are the rules for the communication of acceptance of an offer :

❖ In case of acceptance by post

Where the acceptance is given by post, the communication of acceptance is

complete as against the proposer when the letter of acceptance is posted. Thus,
mere posting of a letter of acceptance is sufficient to conclude a contract. However,
the letter must be properly addressed and stamped

❖ Delayed or no delivery of letter

Where the letter of acceptance is posted by the acceptor but it never reaches the
offeror, or it is delayed in transit, it will not affect the validity of acceptance. The
offeror is bound by the acceptance.

❖ Acceptance by telephones telex or tax

If the communication of an acceptance is made by telephone, tele-printer, telex, fax

machines, etc, it completes when the acceptance is received by the offeror. The
contract is concluded as soon as the offeror does not hear the acceptance.

❖ The place of Contract

In case of acceptance by the post, the place where the letter is posted is the place of
contract. Where the acceptance is given by instantaneous means of communication
(telephone, fax, tele-printer, telex etc.), the contract is made at the place where the
acceptance is received.

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❖ The time of Contract

In case of acceptance by post, the time of posting the letter of acceptance to the
time of contract. But in case of acceptance by instantaneous means of
communication, the time of contract is the time when the offeror gets the
communication, the time of contract is the time when the offeror gets the
communication of acceptance.

Lapse/Revocation Of Acceptance:
❖ Failure of acceptor

❖ Death or insanity of acceptor

❖ No reasonable time and manner

❖ By rejection

❖ By supervising impossibility

Types Of Contract
A. On Basis Of Formation:

i. Express Contracts: These contracts result from express agreements.

Express agreements are formed by making offer and giving acceptance in
the words spoken or in writing. According to sec 9 of Indian Contract Act
“in so far as the proposal and acceptance of any promise is made in words,
the promise is said to be express. An express promise leads to the formation
of an express contract”.

ii. Implied Contract: Implied contracts are formed on the basis of implied
promises on the part of parties. Implied promises are those which are not
made by the parties in writing or by word of mouth. Rather these promises
are inferred from the conduct of the parties or from the circumstances. In an
implied contract, one of the parties conducts himself or does some act which
is being accepted by the other party either by his conduct or course of his
dealing or circumstance. Thus in an implied contract, making of an offer and
giving acceptance to it is manifested by the Act on the part of the party.

iii. Quasi‐contract: Quasi contracts are based on the principle of justice and
equity. Inspite of not having any contract between parties, the rights and
obligations are created. These are resembling to rights and obligations as
created by a formal contract. In such contracts, obligations between parties
are created by operation of law rather than offer and acceptance.

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B. On Basis Of Performance:

i. Executed Contract: Contract consists of legal obligations. On the complete

discharge of these obligations, the contract is said to have been executed. In
other words, both the parties have fulfilled their respective promises, which
they have made in contract.

ii. Executory Contract: This contract is one that has not been yet performed.
In other words, parties having made promises for doing or not doing
anything have not fulfilled their respective promises.

C. On Basis Of Validity:

i. Valid Contract: Contract is said to be valid if it satisfies all conditions

required for its enforceability. In other words, a valid contract is enforceable
in the court of law.

ii. Void Contract: A contract ceases to be enforceable by law becomes void.

Literally the word void means not binding in law. It implies a useless
contract which has no legal effect at all.

iii. Void Agreement: Agreement which is not enforceable by law is void

agreement. In other words, if an agreement lacks any one of the essentials of
a valid contract accept free consent it becomes void. Void agreements do not
have any legal consequence and it is null and void in the eyes of law.

iv. Voidable Contract: According to Sec 2(i) “An agreement which is

enforceable by law at the option of one or more parties, but not at the option
of other or others is a voidable contract.

v. Illegal Contract: Every contract is formed on the basis of promises made by

the parties in that contract. The contract is said to be illegal if its object is
illegal.

vi. Unenforceable Contract: Sometimes, a contract may be good in the eyes of

law. But due to some technical reason it may not be allowed to be enforced
in the court. Technical reasons such as the contract is not made in writing or
is not registered or has no adequate stamp duty on it. Due to non‐fulfillment
of prescribed legal formalities these cannot be claimed in the court, once
these reasons are rectified contracts may be allowed to be reinforced.

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Different Case Laws

1. Carlill v Carbolic Smoke Ball Co. [1893] is a leading case of General Offer

Company advertised that a reward of 100 pounds would be given to any

person who would suffer from influenza after using the medicine (Smoke balls)
made by the company according to the printed directions. One lady, Mrs. Carlill,
purchased and used the medicine according to the printed directions of the
company but suffered from influenza. She filed a suit to recover the reward of 100
pound. The court held that there was a contract as she had accepted a general offer
by using the medicine in the prescribed manner and as such as entitled to recover
the reward from the company

2. Balfour vs Balfour [1919] is a leading case of creating a legal relationship

In this case the defendant was a civil servant stationed in Ceylon. He and his
wife were enjoying their leave in England. When the defendant was due to return
to Ceylon his wife could not accompany him because of her health. The defendant
agreed to send her 30 pound a month as maintenance expenses during the time they
were thus forced to live apart. She sued for breach of this agreement. Her action
was dismissed on the ground that no legal relations had been contemplated and
therefore there was no contract.

3. Mohori Bibee v. Dharmodas Ghose is a leading case of minor

Mr. D, a minor, mortgaged his house for Rs.20000 to a money - lender, but the
mortgagee, i.e. the money- lender, paid him a sum of Rs.8000. Subsequently, the
minor sued for setting aside the mortgage. Privy council has held that the contract
was void, as Mr. D was minor and therefore he is not liable to pay anything to the
lender.

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