General Principles of

Law of Contract
Dr. R. Rajesh Babu
rajeshbabu@iimcal.ac.in

Introduction
o Fundamental to all business/commercial transactions
o The Indian Contract Act,1872 creates an obligation
between the parties and not against the whole world
(right in personam).
o The Act lays down the general principles relating to
formation, performance and enforceability of contracts
and the rules relating to certain special types of contracts
like, Indemnity and Guarantee; Bailment and Pledge, and
Agency
o Separate enactments: The Partnership Act; the Sale of
Goods Act; the Negotiable Instruments Act.
 Broad hierarchy in contract law

Contract (Contract Act)

Movable goods - Immovable goods - Services

Sale of Goods Act TP Act Contract Act

Consumer Protection Act

What is a Contract?

A contract is An agreement enforceable by law

Every promise and every set of promises, forming the
consideration for each other is an agreement.
A promises B a laptop. B promises Rs. 10 and A agrees.
Is this agreement enforceable by law?
All contracts are agreements but all agreements are not
contracts.
Conditions for enforceability
All agreements are contracts, if they are made by the
free consent of the parties competent to contract, for a
lawful consideration and with a lawful object, and
are not hereby expressly declared to be void. (S. 10)
Essential elements of valid Contract:
1. Valid Offer and Acceptance
2. Consideration
3. Capacity to contract
4. Free consent of the parties
5. Lawful object of the agreement
6. Certainty and consensus ad idem

Elements of Contract

Agreement
(Offer and acceptance)

Consideration Free Consent

Contract

Capacity Lawful Object

Certainty
1. Offer and Acceptance
Carlill vs. Carbolic Smoke Ball Co (1892)

Binding because:
that the advertisement was a unilateral offer to all the world;
that satisfying conditions for using the smokeball constituted acceptance of the
offer that the company's claim;
that £100 was deposited at the Alliance Bank showed the serious intention to be
legally bound

1.1 Specific and General Offer

Specific Offer:
made to a specified person or a group of
persons - can be accepted only by the person
to whom made.
General Offer: made to the world at large.
can be accepted by anyone by complying with
the terms of the offer.
Offer may be express or implied
Communication of offer
Gauri sent all the servants in search of the missing nephew.
Lalman Shukla, one of the servants, left the house in search, he
was handed some money for his railway fare and other expenses.
As soon as Lalman Shukla left the house, the defendant
announced a reward of Rs. 501 for whosoever found
nephew. Shukla had no idea that such an announcement was
made.
The plaintiff found the missing nephew and brought him back to
his home in Kanpur. Six months after the said incident occurred,
Dutt sacked the plaintiff.
After being removed from the job, the plaintiff claimed the money
from the defendant and the latter denied to pay the said
remuneration.

Case
Mr. X sees a book displayed in a shelf of a book shop with the
price tag of Rs.800. Mr, X tenders Rs.800 on the counter and
asked for the book. The book seller refuses to sale saying that the

another copy of the book in the stock. Is the book seller bound to
sale the book to X?

Sunil had a bumper hall pen. Henry sent telegram to Sunil

asking about two questions :
1. Will you sell the bumper hall pen ?
2. What is the minimum price of bumper hall pen?
After some time, Sunil replied the minimum price of pen is
Rs. 1000.
Henry replied that he agrees to purchase the pen.
 A Customers in a self-service shop selected a medicine
which could only be sold by or under the supervision of
a qualified pharmacist.
The shelves are not supervised by a pharmacist,
though a pharmacist supervise the transaction at the
cash desk.
Pharmacist charged with unauthorized sale.
Guilty?

1.2 Offer vs. Invitation to offer

Taxi for hire.

Prospectus issued by a company.
Tenders bid
IPO
Price-catalogues, price lists, quotations
Display of goods with a price-tag in a shop window.
E-commerce eg. www.shoppersstop.com
1.3 Acceptantce
Acceptance must be absolute and unqualified
(counter-offer)
Acceptance must be communicated to the person
making the offer (in the manner mentioned eg
email/fax)
Would silence imply acceptance? Eg. Discount on
DVD for CC holder. Duty to deny?
Offer and acceptance can be revoked by notice,
expiry of time (reasonable time)

1.3 The Postal Rule (mailbox rule)

Day 1: Ramesh makes an offer to Suresh.

Day 2: Ramesh decides to revoke the offer and puts
a letter in the mail to Suresh.
Day 3: Suresh puts a letter accepting the offer in
the mail.
Day 4: Suresh receives Ramesh's revocation letter.
 The letter of revocation can be effective only when
received, that is Day 4. However, a contract was formed
on Day 3 when the letter of acceptance was posted. It is
too late for Ramesh to revoke the offer.
Acceptance is from the date of letter not when offeror
opens. Acceptance is complete as soon as the letter is put
into the box.
Telephone, fax, telex, email?

Consideration
Nestle ran a sales promotion whereby if persons sent in 3 chocolate
bar wrappers and a postal order for Rs. 10 they would be sent a CD.
Sharma owned the copyright in one of the CD offered and disputed
the right of Nestle to offer the records and sought an injunction to
prevent the sales of the records which normally retailed at Rs. 200.
Under the Copyright Act retailers were protected from breach of
copyright if they gave notice to the copyright holders of the ordinary
retail selling price and paid them 7% of this. Nestle gave notice
stating the ordinary selling price was the Rs. 10 and three chocolate
bar wrappers.
The question for the court was whether the chocolate bar wrappers
formed part of the consideration. If they did, it was impossible to
ascertain the value they represented and therefore Nestle would not
have complied with their obligation to give notice of the ordinary
retail selling price. If the wrappers were a mere token or condition
of sale rather than constituting consideration, then the notice would
be valid and Nestle could sell the records.
Chappel v Nestle [1960] AC 87 House of Lords

Held:

The wrappers did form part of the consideration as

the object was to increase sales and therefore
provided value. The fact that the wrappers were
simply to be thrown away did not detract from this.

Therefore Plaintiff were granted injunction and Nestle

could not sell the records as they had not complied
with the notice requirements under s.8.

2. Consideration
An agreement made without consideration is void (Sec
25)
Consideration means something which is of some value in
the eye of law
Consideration must be mutual. Both parties must receive
something of value. Involvement of money is not required.
When at the desire of the promisor, the promisee or any
other person has done or abstain from doing, or does or
abstain from doing, or promises to do or abstain from
doing, something, such act or abstinence or promise is
called consideration
It may be:
the promisee has done or abstained from
doing; or
promises to do or abstain from doing;
Including - forbearance, deteriment, loss
or responsibility given, suffered or
undertaken

Consideration
A contract to sell horse worth Rs. 50000 for Rs. 1000?
Whether consent is freely given? coercion, fraud,
mistake!
Forbearance to sue! Sufficient consideration?
BUT consideration , i.e. not:
performance of a public duty or a duty imposed by law
performance of a previous contractual obligation
Promise to pay less than amount due no
consideration.
Part payment as full discharge.
 2.2 Consideration
Not illusory: An agreement will not be enforced if
the consideration is so vague as to be illusory.

o Vijaya Minerals Pvt. Ltd v. Bikash Chandra Deb (C-HC

1996): Agreement to sell manganese and iron ore
price in agreement only 16% of the current market
value.
o Bank of India v. Swaranakar (SC 2003) Agreement
against revocation VRS once applied cannot
withdraw

2.3 Exceptions to consideration

Natural Love and affection- Any agreement, made without
consideration, is valid if it is made on account of natural love
and affection between the parties, standing in near relation
to each other, provided it is expressed in writing and it is
registered under the law.
Compensation for voluntary services: Any agreement,
made without consideration, is valid if it is a promise to
compensate a person, who has already voluntarily done
something for the person making the promise.
Promise to pay a debt, barred by Limitation law: Any
promise, made in writing and signed to pay a debt, is
binding on the person signing it even though it may be
barred by the law of limitation.
2.4 Test cases
1. A, promises, for no consideration, to give to B Rs 1000.
2. A, for natural love and affection, promises to give his
son, B, Rs. 1000.
3.
Rs. 50.
4. A owes B Rs. 1000, but the debt is barred by limitation
Act. A signs a written promise to pay B Rs. 500.
5. Agreement to swim and cross Ganga for Rs. 1000.

3. Free and Genuine Consent

Two or more people are said to consent when they agree
upon the same thing in the same sense. However, if the
consent is obtained through:
Coercion
undue influence
fraud
misrepresentation
mistake
Contract induced due to coercion, fraud, or
misrepresentation is voidable.
Where both parties to an agreement are under a
mistake as to a matter of fact essential to the
agreement, the agreement is void
 Workmen of Appin Tea Estate vs. Industrial Tribunal
(1966): The demand of the workers for bonus was
accepted after a threat of strike. The question was, whether
such a decision between the Union of the workers and the
Indian Tea Association could be declared void on the
ground that there was coercion?
It was held that because of the doctrine of collective
bargaining under the Industrial Dispute Act the demand of
the workers could be backed by a threat of strike. Such a
threat was neither a threat to commit an offence under the
IPC, nor was it unlawful detaining or threatening to detain
any property and hence it did not amount to coercion, and
as such the agreement was valid.
Statutory Compulsion is no coercion

Shri Krishan Vs. Kurushetra Uni 1976 SC, - a

candidate for the LL.B. exam, who was short in attendance,
did not mention that fact in the admission form for the
exam. Neither the Head of the department nor the
University authorities made proper scrutiny to discover the
truth. Has he committed fraud?
It was held by the SC that there was no fraud by the
candidate and the University had no power to withdraw the
candidature of the candidate.
Silence is no fraud
Exceptions :(1) When there is a duty to speak, keeping silenc
e is fraud - (Uberrimae fidei)
(2) When silence is, in itself, equivalent to speech, such silen
ce is a fraud.
4. Parties competent to contract
The following persons are incompetent to contract
Minors
Persons of unsound mind
Persons disqualified by law
A person is of sound mind for the purpose of contracting
if at the time of contracting, he is capable of
understanding the contract and capable of making a
rational judgment as to the effects of the contract upon
his interests.
In India, a contract done by a minor or person of
unsound mind is absolutely void ab initio.

5. Lawful object
The object is unlawful if
It is forbidden by law,
Is of such a nature if permitted it would
defeat the provisions of any law,
It is fraudulent
The court regards it immoral,
The court regards it opposed to public policy.

Thus every agreement of which the

consideration or object is unlawful is void.
Dixon v Francis [1956-60]
o The Appellant agreed that the Respondent would have
the right to live in her house and occupy the garage free
of cost so long as he and his wife live together in peace .
Is this contract valid?
o Held: In order to constitute a valid contract the parties
must so express themselves that their meaning can be
determined with a reasonable degree of certainty.
o The language used was so obscure and so incapable of
any definite or precise meaning that the court is unable
to attribute to the Parties any particular contractual
intention.

Associated British Ports v Tata Steel UK Ltd [2017]

EWHC 694 (Ch)
The case was with reference to a 25 year port licence agreement entered

agreement provided that in the event of

(half way
through the 25 year contract term), either party could serve notice on the
other requiring the terms of the licence to be re-negotiated. If the parties
could not agree amended terms within 6 months, the matter was to be
referred to an arbitrator whose decision was to be binding.
In Feb 2016, Tata arguing that a major financial change in circumstances had
affected the operation of its steel works at the harbour owned by ABP and
that the terms of the licence must be re-negotiated.
ABP argued that clause was void for uncertainty due to the triggering event

uncertain to create a binding obligation to refer a dispute to arbitration. ABP

also contended that there were no or insufficient objective criteria to guide
the arbitrator in deciding how to amend the licence terms.
Classification according to validity
Voidable contract: An agreement enforceable by
law at the option of one or more of the parties
thereto., but not at the option of the other.
Eg: Consent obtained by force.
Void agreement: An agreement not enforceable
by law is void.
Void contract: A contract ceases to be enforceable
by law becomes void when it ceases to be
enforceable.

Void Agreements
oAgreement without consideration is void
oAgreement in restraint of marriage is void
oAgreement in restraint of trade
oNon-compete Agreements?
opartial and not total; unreasonable; public interest
oAgreement in restraint of legal proceedings
oAgreements by way of wager/ bet. Wager contract is
one in which parties professing opposing views on
the result of an uncertain event, mutually agree that
depending on the outcome of such event, one will
pay or hand over a sum of money or other stake.
oSection 294-A , IPC
 Agreements by way of wager, void :S. 30
Subhash K. Manwani v. State of MP (2000) MP HC...
to treat an agreement by way of wager as void, is that
the law discourages people to enter into games of chance
and make earning by trying their luck instead of spending
their time, energy and labour for more fruitful and useful
work for themselves, their family and society.
Exceptions: (1) Horse racing; (2) Prize competitions :
The Prize Competitions Act, 1955; (3) contests, where
the results are based predominantly on skill, rather
than on mere chance; (4) Lotteries sanctioned by

Prenuptial Agreements
Privity of Contract
Only a Party to a Contract (not a stranger) can sue
on it. The contract can confer rights or impose
obligations only on the parties to the contract.
There are two aspects of this doctrine.
1.Only parties to the contract are entitled under it.
Rights or benefits may be conferred upon a third
party but such a third party can neither sue under
the contract nor rely on defenses based on the
contract.
2.Secondly the parties to a contract cannot impose
liabilities on a third party

Exceptions to Privity Rule

Agency: The rule here is that if one of the
contracting parties contracts as an agent, then
either the agent or the principal, but not both, can
sue to enforce the contract.
Trusts: The law of trusts can enable a third party
beneficiary to initiate action that will enforce the
promisor s obligation.
Consumer contacts
Conclusion of a Contract: Discharge,
Frustration, Breach and Damages

Discharge of a contract
It means that the contract has been performed
and is no longer a pending legal obligation.
A contract may be discharged by:
1. Performance
2. Termination by time
3. Mutual agreement - by novation, alteration
or recession (Sec.62), remission or waiver
(Sec.63).
4. Operation of law
5. Impossibility of performance (ss 37-67)
6. Breach of contract
 is made and shall continue in force for a period of
five (5) years from the date it is made, and
thereafter for successive five (5) year terms, unless
and until terminated by one year prior notice in

3. Discharge by Mutual Agreement

Parties are free to mutually abandon, modify or
rescind the contract and the original contract
need not be performed. Sec. 62
(i) Novation - replacing party/contract (substantial
alteration)
(ii) Rescission: - discharge of both parties from the
obligations of a contract by agreeing to rescind the
contract.
(iii) Remission or waiver: Accepting lesser
obligation or intentional abandonment
A owes B 27 lakhs. A pays Rs. 20 lakhs and B accepts in
satisfaction of his full claim on A.
4. By operation of law
1. Material alteration;
2. Merger of an inferior contract into a
superior contract;
3. Discharge of an insolvent;
4. When rights and liabilities under the
same contract become vested in the
same person

5. Impossibility or Frustration of
Contract: Legal Excuses
The general rule followed in most
jurisdictions is that performance under a
contract will only be excused in extreme
circumstances or when the performance
falls under a legally recognized excuse from
performance.
Impossibility; Subsequent Illegality; Acts of
God/Nature; Death of a Party; Destruction;
War
 Contract not frustrated by mere commercial
difficulty: Merely because the procurement of the
goods becomes difficult because of a strike in the
mill, or there is a rise in prices, or a person will not
be able to earn the expected amount of profits, is not
enough to frustrate the contract.
Benefits from void contracts:
is discovered to be void, or when a contract becomes
void, any person who has received any advantage
under such agreement or contract is bound to
restore it, or to make compensation for it, to the

5.1 Impossibility of Performance or

Frustration of contract
Initial impossibility: An agreement to do an
act impossible in itself is void
A agrees B to discover treasure by magic. The agreement is
void. The performance of the agreement being
impossible, the agreement is void.
Subsequent Impossibility: Performance of
contract was quite possible when it was made,
but some subsequently event rendered its
performance impossible or unlawful.
A contracts to take in cargo for B at a foreign port. A s
Government afterwards declares war against the country in
which the port is situated. The contract become void when
war is declared.
 6. Breach or non-Performance of
contract
Breach of contract is failure of a party to perform his
obligations under a contract. When one party
commits a breach, the other party can claim
damages or specific performance.

The breach of contract may be:

Actual breach of contract, or
Anticipatory or constructive breach of contract. -
when a party to a contract has refused to perform, or
disabled himself from performing his promise in its entirety

7. Remedies for breach of contract

The aggrieved party may:
Cancel the contract which will relieve him from all
contractual obligations (rescission)
Cover and receive damages.
Demand specific performance
Demand injunction.
Recover any consideration given to the breaching
party (restitution)
Recover proportionate payment for the work done
(Quantum Meruit).
Frustration of contract - case
Sarah contract to hire a stall in the towns market.
Subsequent to the making of the contract, the owner
accidently drop a still lit cigarette, resulting in the market
stand being destroyed by a fire.
Would the destruction of the stall mean the contract for the
rental of the stall is frustrated?

If the subject matter of a contract is destroyed, the contract

will be frustrated. However, in this case there is an element
of fault. It was the owner of the stalls fault the subject
matter was destroyed, due to their negligent act of dropping
a lit cigarette on the wooden stand.
Where one party is at fault, the contract will not be
frustrated.

Joe is paying Sasha Rs. 30k for her to build a website.

Sasha received an advance of Rs. 15k. The contract has
now been frustrated due to a law which renders the
creation of this particular type of website illegal. Joe is
now trying to claim his advance payment back. Sasha has
spent over 50hrs working on the website, and her usual
hourly rate is Rs. 200.
Since the contract is frustration, can Joe claim the advance
payment back? If so, will he be entitled to the claim back Rs.
15k advance?
An advance payment may be retained, so long as the
amount does not exceed the specified advance payment
under the contract, and does not exceed the expenditure
of the party who has received the payment.
7. Damages/Compensation for breach
Damages are monitory compensation for the
losses suffered or gains prevented due to the
breach.
Types of Damages:
Vindictive or exemplary damages - punitive
damages. e.g.. for dishonor of cheque.
Compensatory damages- general damages and
special damages.
Nominal damages
Liquidated damages and penalty
Civil jail?
Remoteness of damage -
Hadley vs. Baxendale rule
On the breach of a contract such damages can be
recovered,
(1) as may fairy and reasonably be considered
arising naturally, i.e., according to the usual course of
things from such breach, OR
(2) as may reasonably be supposed to have been in
the contemplation of both parties at the time they
made the contract.
The principle stated in the two branches of the rule is
liability of the party making the breach of contract
depends on the knowledge, imputed or actual, of the
loss likely to arise in case of breach of contact.