You are on page 1of 73

Law of Contract

• Foundation of the Modern Business • Business stands on Promise and Performance • Law of Contract – Rules of Promises, their formation, performance and enforceability. • Contracts also deals with - Sales of Goods, Negotiable Instruments, Insurance, and Insolvency – General Principles of Contract • Precedes - Mercantile Law

• Definition of Contracts • Elements of Contract – Consideration, enforceability, Lawful object, etc… • Doctrine of Unjust enrichment • Indemnity and Guarantee

• Example – A owns a plot of land and B is the immediate neighbour. the right of A to have complete possession and enjoyment of land is available not only against B but also the whole world.means a right against particular person or persons. .means right against the whole world. This right can only be exercised by A.Nature of Law of Contract • Right in Personam . • Example • A is entitled to receive a sum of money form B. • Right in Rem .

1 to 75 – General Principles of Contract – Sec. Indemnity & Guarantee. Agency etc. 1872 • Applicable whole over India except the State of Jammu and Kashmir • Came into force on 01 Sept 1872 • Originally has 266 Sections • Presently has 238 Sections – two parts – Sec. Bailment & Pledge. .The Indian Contract Act. 124 to 238 – Special types of Contract.

• Halsbury – An agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act. by which rights are acquired by one or more to acts or forbearances on the part of the other or others. .Contract – Definition • Sir William Anson – A contract is an agreement enforceable at law made between two or more persons.

2( h) .Sec.Definition • Contract . 2 (e) – Every promise or every set of promises forming the consideration for each other – Two elements – Promise and Consideration • Promise – Sec. . 2 (b) – a proposal when accepted becomes a promise.An agreement enforceable by law – Two elements – Agreement and Enforceability of law • Agreement Sec.

Characteristics of Agreement • Plurality of Persons – Tow or more persons to make an agreement • Consenus-ad-idem – Consenting Minds – Agree on the subject-matter in the same sense .

Types of Agreements Unenforceable A Offer to make Arms B Accepts • Offer Mutually agreed • Agreement Illegal Contract • Unenforceable .

Types of Agreements Enforceable A Offer to print books B Accepts • Offer Mutually agreed • Agreement Valid Contract • Enforceable .

Offer Acceptance Agreement All contracts are agreements but all agreements are not contracts .Agreement An agreement comes into existence when one party makes a proposal or offer and the other accepts it.

Ram doesn’t arrive for the dinner. Shyam to a dinner at a Leela Palace Hotel. Shyam accepts the invitation. Mr. Mr. Ram invites Mr. • There was no intention between two parties for creating any legal obligation.Agreement .Example • Mr. . Ram for not fulfilling the promise. Shyam cannot file a case against Mr. It is purely a social agreement if Mr.

Balfour (P) lived in Ceylon and visited England on a vacation. Balfour – Mr. .Case • Balfour v.Contract . The defendant later asked to remain separated and Mrs. Balfour sued for restitution of her conjugal rights and for alimony equal to the amount her husband had agreed to send. The plaintiff remained in England for medical treatment and the defendant agreed to send her a specific amount of money each month until she could return. Balfour (D) and Mrs.

. • The court will not enforce agreements between spouses that involve daily life.Case • Issues • Must both parties intend that an agreement be legally binding in order to be an enforceable contract? • Under what circumstances will a court decline to enforce an agreement between spouses? • Holding and Rule • Yes. Both parties must intend that an agreement be legally binding in order to be an enforceable contract.Contract .

Contract • Agreements between husband and wife over matters that affect their daily lives are not subject to contractual interpretation. • The court held that as a matter of public policy it could not resolve disputes between spouses. . • The court held that it was presumed that the parties made the agreement as husband and wife and did not intend that it could be sued upon. even when consideration is present.


Not Expressly Declared Void Offer & Acceptance Intention to Create Relationship Writing and Registration Lawful Consideration Essentials of Contract Possibility of performance Capacity of Parties Certainty Lawful Object Free Consent .

Offer and Acceptance • • • • Lawful Offer by one party Lawful acceptance by another party According to the Rules of Indian Contract Act Proper Communication .

B sang a song but A did not take her for a movie. B cannot initiate a case against A because it lacked the intention to create any legal relations .Intention to Create Legal Relationships • If no intention of parties – Not a contract • Social and domestic nature do not contemplate legal relations • Agreement must attach legal consequences and create legal obligations • Example – A promised his wife B for a movie if she sings a song.

• Consideration is the price for which the promise of another is brought. .Consideration • Major Elements of Contract • An agreement without consideration is void • Blackstone – Consideration is recompense given by the party contracting to another.

11 – Major according to law • Contract not valid with incompetent persons – Minors – Persons of unsound mind – Persons disqualified by law .Capacity of Parties • Parties must be competent to enter into contract • Sec.

• No influence • Absence of consent – – – – – Coercion Undue influence Fraud Misrepresentation Mistake .Free Consent • Parties must have agreed upon the same thing in the same sense.

Lawful Object • Object should be enforceable by law • Should not be – – – – Fraudulent illegal immoral opposed to public policy .

This is vague as specifications are not clear and what is the type of oil that to be supplied is also mentioned. .Certainty • • • • Terms should be precise and certain No Vague terms should be used A promises to sell C 100 Kg of Oil.

. – Not enforceable because cannot be performed.Possibility of Performance • Capable of Performance • Physically and Legally • A agrees to B to discover treasure by magic.

Writing and Registration
• Oral Contracts are Valid • Special cases – written and registered agreements are only valid • Arbitration Agreements, Transfer of Property, Mortgage etc…

Not expressly declared Void
• Agreement must not be declared void under this Act • Except according to Sections 24-30
– Restraint from marriage – Restraint from trade etc…

Types of Contract

Validity & Enforceability • Valid Contract • Voidable Contract • Void Contract • Unenforceable Contract • Illegal or Unlawful Contract

Creation • Express Contract • Implied Contract • Constructive or Quasi-Contract

Execution • Executed Contract • Executory Contract

Types of Contract Valid and Enforceability • Valid Contract – Enforceable by law • Voidable Contract – At the options of one or more of the parties – not at the option of other party – if right not exercised it’s a valid contract • Void Contract – Useless contract – not enforceable by law • Unenforceable Contract – though a valid contract – became unenforceable because of technical or other reasons • Illegal or Unlawful Contract – agreements prohibited by law .

Types of Contract Creation • Express Contract – Proposal and Acceptance are spoken or written • Implied Contract – Conduct of parties • Quasi or Constructive Contracts – obligations arising not by agreement but because of operation of law .

Types of Contract Execution • Executed Contract – Both parties have performed their part of the contract • Executory Contract – Yet to be performed wholly or partly .

he is said to make a proposal.Offer and Acceptance • Proposal or Offer – Sec. – Essentials • Expression of willingness • Made to another person • With a object of gaining the consent of the other person – A person who makes the proposal or offer is called promisor or offeror – A person to whom its made is called offeree – A person accepting the offer is called the promisee or acceptor . with a view to obtaining the assent of that other to such act or abstinence. 2(a) – When one person signifies to another his willingness to do or abstain from doing anything.

Must be certain and loose words not to be used • X purchase a horse from Y and promised to purchase another if the first one proves to be luck. 4. An offer must be either words or in conduct • Express Offer – which is expressed in words • Implied Offer – which is inferred from the conduct of a person or the circumstances 2. Y could not enforce the agreement.Rules regarding a Valid Offer 1. An offer must contemplate giving rise to legal consequences and be capable of creating legal relations 3. An invitation to offer is not an offer . X refused to buy second one. its being loose and vague.

Offer should not contain a term. Cross-offers is not contract .Offer can be made subject to any terms and conditions 9. the noncompliance of which would amount to acceptance 8. Offer must be communicated to the Offeree 7.Rules regarding a Valid Offer 5. An Offer may be specific or general • Specific Offer – Made to a definite person • General Offer – made to the world at large 6.

Lapse and Revocation of Offer • An offer lapses after a stipulated or reasonable time • Offer lapses by not being accepted in the mode prescribed. • Offer lapse by rejection • Death or insanity of the offeror or offeree • Revocation • Revocation by non-fulfilment of condition precedent to acceptance • Subsequent illegality or destruction of subject matter .

Acceptance • When the person to whom the proposal is made signifies his assent it is an acceptance of the proposal. • Expressed Acceptance – made in words spoken or written • Implied Acceptance – by conduct • Can be made only by the person to whom its been made .

Rules Regarding Valid Acceptance • Acceptance must be given by the person to whom the offer is made • Acceptance must be absolute and unqualified • Acceptance must be in some usual and reasonable manner. before its lapse • Acceptance must succeed the offer • Rejected offer can be accepted only if renewed . unless specified • Communicated by the acceptor • Acceptance must be given with a reasonable time.

Communication of Offer. Acceptance and Revocation • When the parties are physically present and negotiate in person. agreement comes into existence • Sections 4 and 5 of the Contract Act deals with rules regarding acceptance of offer through post and other communication modes .

so as to be out of the power of the acceptor to withdraw the same – As against the acceptor when it comes to the knowledge of the proposer . when it is put in course of transmission to him.Rules of Communication • Communication of Offer – complete when its reaches the offeree • Communication of acceptance – As against the proposer.

when the letter is posted. when it is put into a course of transmission – As against the person to whom it is made. when it comes to his knowledge . as against B when the letter is received by A.Rules of Communication • A proposes by letter to the sell the house to B for 10 lakh. • Communication of Revocation – – As against the person who makes it. B accepts A’s proposal sent by Post. The communication of the acceptance is complete a against A.

or promises to do or abstain from doing – Such act or abstinence or promise is called a consideration for the promise .CONSIDERATION • Consideration is the price for which the promise of other is brought and the promise thus given for value is enforceable • Sec 2 (d) Indian 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.

Y and Z enter into an agreement under which X pays Rs. • Consideration may be Past. A cannot demand payment for his services as it is a voluntary act on his part and B never asked his to do so • Consideration must move from the promisee or any other person – X.1 Crore to Y and Y agreed to build a House for Z.Essentials of a Valid Consideration • Consideration should move at the desire of the Promisor – A sees B drowning and saves his life. Here Z is a party to the contract but stranger to consideration and can enforce the contract. Present or Future Past Consideration – consideration for the promise is given before Present Consideration .Future or Executory Consideration .Consideration and Promise is Simultaneous Future Consideration .

Essentials of a Valid Consideration • • • • Consideration need not be adequate Consideration must be real Consideration must be Lawful Consideration must be something which the promisor is not already bound to do. .

. 10) • Every person is competent to contract who is of the age of majority according t the law to which he is subject. and is not disqualified form contracting by any law to which he is subject. (Sec. and who is of sound mind.Consent of Parties • Competent Persons to contract.

Consent of Parties • Minor – Sec 3. of Indian Majority Act 1875 – A person under 18 years of age. • Absolutely .Void contracts – because their mental faculties are not mature • Beneficial agreements – valid .

12 – A person is said to be of sound mind for the purpose of making a contract. . if at the time when he makes it. • Absolutely void and inoperative against him.Consent of Parties • Person of Unsound mind • Sec. he is capable of understanding it and of forming a rational judgement as to its effect upon its interests.

Capacity of Parties • • • • • Unqualified persons Alien Enemies Foreign Sovereign and Ambassadors Convict Insolvent .

Capacity of Parties • Free Consent • Sec 13 – Two or more persons are said to consent when they agree upon the same thing in the same sense. • Consent to be free and caused by – Coercion – threatening to commit – voidable contract – Undue influence – (a) one party in a position to dominate the will of the other (b) Uses the position to obtain an unfair advantage over the other – voidable contract .

Capacity of Parties – Free Consent • Misrepresentation – wrongly representing of fact by one party to the other either before or at the time of the contract – with the intention to induce the other to enter into the contract – voidable contract • Fraud – intentionally deceive the other person – voidable contract • Mistake – erroneous belief concerning something .

Legality of Object & Consideration  Object and Consideration of agreement must be lawful  Sec. 23 – kinds of consideration and objects are lawful  Forbidden by Law  Defeat the provisions of Law  Fraudulent  Implies or involves injury to the person or property  Immoral  Opposed to Public Policy .

2. (g) An agreement not enforceable by law is void.Void Agreement  Sec.  Minor  Unsound person  Unlawful Consideration  Unlawful object  With consideration  Impossible events or Acts  Restraint of marriage  Restraint of Trade  Restraint of Legal Proceedings  Uncertain Meaning  Wager Agreement  Impossible Events  Impossible Acts .

Performance of Contract • A person cannot acquire rights under a contract to which he is not a party • Promisee can demand the performance of Contract – Exception – Legal heirs • Competent person to perform a contract – – – – Promisor Agent of Promisor Legal Representatives Performance by third Person .

 Reimbursement of person paying money due by another.Quasi Contracts  Obligations resembling those created by a contract are imposed by law even though the parties have not entered into contract  Claims for necessaries supplied to a person incapable of contracting or on his account. in payment of which he is interested  Obligation of person enjoying benefit of non-gratuitous act.  Responsibility of finder of goods  Liability of person to whom money is paid. or thing delivered by mistake .

Breach of Contract & Remedies Available  Breach of Contract is another mode of discharge  When one party fails to perform the contract  Anticipatory – before the time fixed for performance ◦ Expressly by words spoken or written ◦ Impliedly by conduct of parties ◦ Effects – either sue for damages or make the party responsible for consequences of non performance of contract .

Breach of Contract & Remedies Available  Actual Breach – When one party fails to perform the contract on the actual date of the performance of the contract  Injured party is entitled to ◦ Rescission of the Contract – cancel the contract – file suit for damages ◦ Suit for damages     Ordinary Special Exemplary Nominal ◦ Suit upon Quantum Meruit – as much as he earned or in proportion to work done ◦ Suit for Specific Performance ◦ Suit for injunction .

Indemnity and Guarantee • Contract of 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 • A person who promises to make good the loss is called the indemnifier • A person whom the loss is to be made good is indemnified .

Indemnity and Guarantee  Contract of Guarantee – A contract to perform the promise. or discharge the liability of a third person in case of his default  A person who gives the guarantee is called a surety  A person in respect of whose default the guarantee is given is called the principal debtor  Consideration is important .

 Extent of Liability ◦ Surety is liable only on the default of the principal debtor ◦ Liability of surety arises immediately on the default of the principal debtor ◦ Principal debtor need not resort to securities before suing the surety ◦ Surety will not be liable for creditor guarantee by misrepresentation .Nature and Extent of Surety’s Liability  The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.

Continuing Guarantee • When a guarantee is given for a single or specific debt – single or specific guarantee • When a guarantee extends to series of distinct or separable transactions – continuing guarantee • Revocation of Continuing Guarantee – Notice to Creditor by surety – Death of the surety .

Discharge of Surety  Notice of Revocation  Death  Variance of Terms of Contract  Release by principal debtor  Arrangement by creditor with principal debtor  Creditor’s Act or omission impairing surety’s remedy  Loss of security  Invalidation of contract of Guarantee .

CONTINGENT CONTRACTS • Section 31of the Indian Contract Act defines contingent contract as – “ A contract to door not to do something if some event. collateral to such contract. . does or does not happen” • So in simple words. it may be defined as a conditional contract.

• The performance of the contract must be conditional. • The event must be future uncertain.Essential Elements of Valid Contingent Contract • There must be a valid contract. • The event must be collateral to the contract .

Rules regarding the enforcement of the Contingent Contract • It depends on the happening of the future uncertain event.(Section 33) . So the contract will be enforced only if the happening of that uncertain event becomes impossible as that event cannot happen. So the contract will be enforced only if that uncertain event has happened. (Section 32) • It depends on the Non-Happening of the future uncertain event.

(Section 35) • It depends on the Non-Happening of the specified uncertain event within the fixed time.Rules regarding the enforcement of the Contingent Contract Cont. second para) .. So the contract will be enforced only if that uncertain event happens within the fixed time. • It depends on the happening of the specified uncertain event within the fixed time.(Section 35. So the contract will be enforced only if the happening of that uncertain event becomes impossible within the fixed time as that event cannot happen.

Rules regarding the enforcement of the Contingent Contract Cont. This will be void whether the impossibility of the event is known or not to the parties at the time of making the contract. .. • Contingent Contract dependent on the impossible event is void and cannot be enforced by law as the impossible event will never happen.

Problems .

Problems  A invites B for a Dinner. A makes an elaborate arrangement but fails to turn up.  B sues for the loss sustained . B accepts the invitation.

• Essentials of a valid contract .Answer • No . because the agreement of a social nature and hence lacks the intention to create legal relationship. A cannot sue B for the loss he has suffered.

Problem • N agrees to pay Rs. and in consideration M agrees to write 100 pages of report form him in five minutes. • Is it a valid contract .100.

Answer  No. .  It is a void agreement because an agreement to do an act impossible in itself is void. it is not a valid contract.

. Can A be asked to repay the money.Problem • A aged 15 yrs obtains a loan form B.

Answer • No. • A minors agreement is void abnitio . A cannot be asked to repay the money.