LAW OF

CONTRACT
Unit 2 - 4
Definition of Contract
■ “A contract is an agreement creating and defining obligation between the parties”-
Salmond

■ “A contract is an agreement between two or more persons intended to create a legal

obligation between them and to be legally enforceable”- David Walker
 
■ “ A contract is an agreement enforceable by law made between two or more persons, by
which rights are acquired by one or more to acts done or forbearance on the part of
others” – Anson.
 
■ “An agreement enforceable by law is a contract”- Indian Contract Act Section 2(h)
 
■ “Contract means an agreement enforceable by law between two or more parties to do or
forbade to do something.”- Nepalese Contract Act, 2056 Section 2(a)
 NATURE OF CONTRACT
■ There most be an agreement.
■ The parties most intend their agreement to result in legal
relation.
■ Consideration.
■ The party must have capacity to contract.
ESSENTIAL ELEMENT OF VALID CONTRACT
■ Agreement between two parties.
■ Intention of create legal relation.
■ Mutual absent (offer and acceptance)
■ Capacities of parties.
■ Lawful consideration.
■ Possibility of performance.
■ Certainty or Clarity.
■ Subject matter legally.
■ Not expressly declared void.
■ Formalities.
Process of Contract
■ First and foremost, an offer is made by one party to another, which when accepted by
the party to whom it is made, leads to the agreement. If that agreement is enforceable in
the court of law, it is known as a contract.
Types of Contract
 On the basis of Validity
■ Valid Contract: An agreement which is enforceable by law, is a valid contract. The contract that meets
all essential elements of valid contract.

■ Void Contract: The contract which is no longer enforceable in the court of law is a void one. No
contract exist in the void contract.

■ Voidable Contract: A contract in which one of the parties to the contract has a choice to avoid
performing his/her part, then it is termed as a voidable contract. When the consent of the party is not
free, the contract becomes voidable, at the option of the aggrieved party.

■ Illegal Contract: A contract which is forbidden by law is termed as an illegal contract.

■ Unenforceable Contract: The contract whose substance is good, but due to some issues, it is not
enforceable, is called an unenforceable contract. A contract that cannot be enforced due to legal defense.
On the basis of Formation
■ Express Contract: When the terms of the contract are expressed orally or in writing, it is
known as an express contract. Contracts arising from expressly made promises are called
express contracts.
■ Implied Contract: The contract which is constituted by implication of law or action, is an
implied one. It says “insofar as such proposal or acceptance is made otherwise than in words,
the promise is said to be implied.” Thus contracts entered into between parties by virtue of their
conduct are called implied contracts.
■ Quasi-Contract: These are not a real contract, but are identical to a contract, which is formed
out of some circumstances. A quasi contract is a retroactive arrangement between two parties
who have no previous obligations to one another. It is created by a judge to correct a
circumstance in which one party acquires something at the expense of the other.
■ The contract aims to prevent one party from unfairly benefiting from the situation at the other
party's expense. These arrangements may be imposed when goods or services are accepted,
though not requested, by a party. The acceptance then creates an expectation of payment.
On the basis of Performance
■ Executed Contract: When the contract is performed, it is known as an executed contract.
When both the parties have completely performed their respective obligations under the
contract, it is said to be executed contract. It means that whatever was the object of the
contract has been carried out. In most executed contracts the promises are made and then
immediately completed.
■ Executory Contract: When the obligation in a contract, is to be performed in future, it is
described as an executory contract. An executory contract is one which is one in which one
or both parties are still to perform their obligations. In such contracts, the consideration is
the promise of performance or obligation. In executory contracts, the consideration for the
promise made is carried out sometime in the future.

– Unilateral Contract
– Bilateral Contract
 Offer
■ “An offer is an intimation to enter into a contract, and which in its terms expressly or impliedly
indicates that it is to become binding on the offer as soon as it has been accepted by an act,
forbearance, or return promise on the part of the people to whom it is addressed.”- J. Beatson

■ “When one person signifies to another person his willingness to do or obtain form doing anything
with a view of obtaining the assent of that other to such act or abstinence, he is said to make a
proposal.”-Indian Contract Act Section 2(a)
 
■ “Offer means a proposal put by a person with a hope to get assent from the other to do or not to
do something.”- Nepalese Contract Act, 2056 Section 2(b)
 LEGAL RULES REGARDING VALID OFFER
■ Express or implied offer.
■ Intention to create legal relationship.
■ Terms of offer must be clear and certain.
■ Offer may be either conditional or unconditional.
■ An invitation to make an offer is no offer.
■ An offer may be made to a particular person or to a particular group of persons or to the world at
large.
■ Offer must be communicated.
REVOCATION OF OFFER
LAPSE OF OFFER
■ By notice of revocation.
■ By lapse of stimulated or given time.
■ By expiry of seasonal time.
■ By death of insanity of offeror.
■ By refusal of acceptance.
■ By counter-offer by the offeree.
■ By subsequent illegality or destruction of subject matter.
ACCEPTANCE
■ “Acceptance of an offer is the expression, by words or conduct, of
assent to the terms of the offer in manners prescribed by the offeror”-
J. Beatson.
 
■ “When a person to whom the proposal is made, signifies his assent
there to, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise.”- Indian Contract Act, 1872, Section 2(b)

■ “Acceptance means an assent given by a person upon the offer in a

sense as taken by offeror.”- Nepalese Contract Act, 2056, Section 2©
LEGAL RULES REGARDING ACCEPTANCE
■ Acceptance only by the offeree.
■ Acceptor must have knowledge of offer.
■ Acceptance must be absolute and unconditional.
■ Express or implied acceptance.
■ Acceptance must be communicated by acceptor.
■ Acceptance must be made within the time or within a
reasonable time.
■ Acceptance must be made before revocation or lapse of
offer.
REVOCATION AND LAPSE OF
ACCEPTANCE
■ By notice of revocation.
■ By death or insanity of offeree.
CONSIDERATION
■ “Consideration is the price for which the promise of other is bought”- Sir Frederic Pollock
 
■ “When at the desire of the promisor, the promisee or any other person has done or
abstained from doing or does or obtains 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.”- Indian Contract Section 2(d)
 
■ “Consideration means promise to do or abstain from doing something in return of doing
the act mentioned in proposal.”-Nepalese Contract Act 2056, Section 2(d)
RULES REGARDING
CONSIDERATION
■ Desire or request of promissor is essential.
■ Consideration must be of some value in the eye of
law.
■ Consideration need not be adequate.
■ Consideration must move from the promises.
■ Consideration must not be illegal, immoral or
opposed to the public policy.
■ Consideration may be past, present or future.
EXCEPTION TO NECESSITY OF
CONSIDERATION OR EXCEPTION
TO THE RULE “NO
CONSIDERATION, NO CONTRACT”
 Capacity

■ The parties who enter into a contract must have the

capacity to do so.
■ “Capacity “here means competence of the parties to
enter into a valid contract.
■ An agreement becomes a contract if it is entered into
between the parties
Cont...
■ Every person is competent to contract who
■ (a)is of the age of majority according to the law to which he is subject,
■ (b)is of sound mind, and
■ (c)is not qualified from contracting by any law to which he is subject.
■ Thus, it declares following persons to be incompetent to contract:
■ 1. Minors
■ 2.Persons of unsound mind
■ 3. Persons disqualified by any law to which they are subject
 MINORS AGREEMENT
■ The position of minor as regards his agreements may be summed up as
under:
■ 1. An agreement with or by a minor is void and inoperative abinitio.
(mihiribibi v Dharmodas Ghose(1903)
■ 2.He can be a promise or beneficiary.
■ 3.His agreement cannot be ratified by him on attaing the age of majority.
■ 4.If he has received any benefit under a void agreement, he cannot be
asked to compensate or pay for it.
 PERSON OF UNSOUND MIND

■ One of the essential conditions of competency of

parties to a contract is that they should be of sound
mind.
■ “A person is said to be of sound mind for the purpose
of making the contract if, at the time when he makes it,
he is capable of understanding it and of forming a
rational judgment as to its effect upon his interests.
contd.

■ A person ,who is usually of unsound mind but occasionally of

sound mind, may make a contract when he is of sound mind.
■ A person ,who is usually of sound mind but occasionally of
unsound mind, may not make a contract when he is of unsound
mind Eg:A person is a lunatic ,who is at intervals of sound
mind, may contract during those intervals.
Contd..

■ Soundness of minds depends on two facts:

■ i)his capacity to understand the contents of the business
concerned,
■ ii) his ability to form a rational judgmental as to its effect on
his interests.
■ If a person is incapable of both, he suffers from unsoundness
of mind
Contd..

■ Drunken or intoxicated persons: A drunken or

intoxicated person suffers from temporary incapacity
to contract i.e. at the time when he is so drunk or
intoxicated that he is incapable of forming a rational
judgment. The position of a drunken or intoxicated
person is similar to that of a lunatic.
CONTRACT OF PERSON OF
UNSOUND MIND
■ Lunatics: A lunatic is a person who is mentally deranged due to
some mental strain or personal experience. He suffers from
intermittent intervals of sanity and insanity. He can enter contracts
during the period when he is of sound mind.
■ Idiots: An Idiot is a person who has completely lost his mental
powers. He does not exhibit understanding of even ordinary matters.
Idiocy is permanent lunacy denotes periodical insanity with lucid
intervals. An agreement of an idiot , like that of minor is void.
Contd..
■ alien enemies - The rights and liabilities of an alien to sue and
be sued in respect of a contract generally depend on whether he
is an alien friend or an alien enemy. An alien friend can sue and
bested in the same manner as a British citizen.
■ corporations - there are specific rules which govern contracts
made by registered companies with:
■ (1) members;
■ (2) third parties (including pre-incorporation contracts)
FREE CONSENT

■ “Two or more persons are said to consent

when they agree upon the same thing in
the same sense.”-Indian Contract Act,
Section 13
Cont…
Consent is said to be free when it is not
caused by;
■ Coercion (Compulsion).
■ Undue influence.
■ Misrepresentation.
■ Fraud.
■ Mistake. 
CONTINGENT CONTRACT
■ Contingent contracts usually occur when
both negotiating parties fail to reach an
agreement. The contract is characterized
as "contingent" because the terms are not
final and are based on certain events or
conditions occurring.
Cont…
■ In case where there is condition, then such contract is called
Contingent Contract. Therefore Contingent Contract means
Conditional Contract. When imposed and condition is
fulfilled, the Contingent Contract becomes valid and then
parties have to perform their obligations. If imposed and
Condition is not fulfilled, the Contingent Contract become
Void and then it need not be performed. So Contingent
Contract is to be performed under some circumstances only.
Definition
■ “A contingent contract is a contract to do
or not to do something, if some event
collateral to such contract does or does
not happen.”- Indian Contract Act
Section 31
 
ESSENTIAL ELEMENTS OF CONTINGENT CONTRACT
OR CHARACTERISTICS OF CONTINGENT CONTRACT

■ Performance of contract depends upon contingency.

■ Contingency is uncertain.
■ Event must be collateral to the contract.
LEGAL RULES REGARDING
CONTINGENT CONTRACT
■ On the happening of future uncertain event.
■ On the non-happening of future uncertain event.
■ When event becomes impossible to happen.
■ On the happening of an event with a fixed time.
■ On the non-happening of event within a fixed time.
■ If agreement is made for an impossible act.
PERFORMANCE OF CONTRACT

“Performance of Contract” means fulfilling of their respective legal obligations

created under the contract by both promisor and promise.
– By whom contracts must be performed?
– By the promisor himself.
– By the promisor or his agent.
– By the legal representatives.
– Performance by a third person.
RULES REGARDING
PERFORMANCE OF CONTRACT
■ Performance may be actual performance or tender to performance.
■ Performance must be exact and precise/unconditional.
■ Time for performance of contract.
■ Place for performance of the contract.
■ Person to whom perform contract.
■ Performance of the joint promises.
■ Person who can demand for performance of the contract.
■ Orders of performance.
■ Duty of other party to give facility for performance.
Types of Performance
1) Actual Performance
2) Substantial Performance
3) Partial Performance
4) Attempted Performance
Actual Performance

■ When a promisor to a contract has fulfilled his obligation in

accordance with the terms of the contract, the promise is said
to have been actually performed.
■ Actual performance gives a discharge to the contract and the
liability of the promisor ceases to exist.
■ For example, A agrees to deliver 10 bags of cement at B’s
factory and B promises to pay the price on delivery. A delivers
the cement on the due date and B makes the payment. This is
actual performance.
Substantial Performance
■ This is where the work agreed upon is almost finished. The court then
orders that the money must be paid, but deducts the amount needed to
correct minor existing defect.
■ Substantial performance is applicable only if the contract is not an entire
contract and is severable. The rationale behind creating the doctrine of
substantial performance is to avoid the possibility of one party evading
his liabilities by claiming that the contract has not been completely
performed.
■ However, what is deemed to be substantial performance is a question of
fact to be decided in both the case. It will largely depend on what remains
undone and its value in comparison to the contract as a whole.
Partial Performance
■ This is where one of the parties has performed the contract, but not
completely, and the other side has shown willingness to accept the part
performed.
■ Partial performance may occur where there is shortfall on delivery of
goods or where a service is not fully carried out.
Attempted Performance
■ When the performance has become due, it is sometimes sufficient if the promisor offers
to perform his obligation under the contract. This offer is known as attempted
performance or more commonly as tender.
■ Thus, tender is an offer of performance, which of course, complies with the terms of the
contract. If goods are tendered by the seller but refused by the buyer, the seller is
discharged from further liability, given that the goods are in accordance with the
contract as to quantity and quality, and he may sue the buyer for breach of contract if he
so desires.
■ The rationale being that when a person offers to perform, he is ready, willing and
capable to perform. Accordingly, a tender of performance may operate as a substitute
for actual performance, and can affect a complete discharge
DISCHARGE OF PERFORMANCE

■ When a contract is duly performed by both

the parties, the contract comes to happy
ending and nothing more remains.
■ Performance of contract is the principal and
most usual mode of discharge of a contract.
Cont…

■ Performance may be;

1. Actual performance.
When each party to a contract fulfils his obligation
arising under the contract within the time and in the
manner prescribed, it amounts to actual performance of
the contract and contract comes to an end or stands
discharged.
Cont…

2. Attempted performance or tender.

When the promisor offers to perform his obligation under
the contract, but is unable to do so because the promisee
does not accept the performance, it is called “attempted
performance” or “tender”.
– Thus “tender” is not actual performance but is only an
“offer to perform” the obligation under the contract.
A valid tender of performance is equivalent to performance.
■ Essential elements of valid tender are;
– It must be unconditional.
– It must be made at proper time and place.
– It must be of the whole obligation contracted for and not only of the part.
– If the tender relates to delivery of goods, it must give a reasonable opportunity to the promisee
for the inspection of the goods.
– It must be made by a person who is in a position and willing to perform the promise.
– It must be made to the proper person.
– If there are several joint promisees, an offer to any one of them is a valid tender.
– In case of tender of money, exact amount should be tendered in the legal tender money.
■ Effect of refusal to accept a valid tender
– The effect of refusal to accept a properly made “offer of performance” is that the
contract is deemed to have been performed by the promisor i.e. , tendered, and the
promisee can sued for the breach of contract.
– A valid tender, thus, discharges the contract.
MODES OF DISCHARGE OR
TERMINATION OF CONTRACT
1. By performance.
– Actual performance.
– Substantial Performance
– Partial Performance
– Attempted performance/Tender of performance.
 Cont…
2. By impossibility of performance/Supervening Impossibility.
What is supervening impossibility?
■ Sometimes there is possibility of performance at the time of entering into contract
but later on it becomes impossible to perform the contract.
■ It states an agreement impossible to perform at the time of contract is void.
– Cases where the Doctrine of Supervening Impossibility Applies.
■ Destruction of subject matter.
■ Illegal of performance.
■ Change of circumstances.
■ Death or Incapacity of party.
– Where the Doctrine of Impossibility doesn’t apply.
■ Difficulty in performance.
■ Commercial impossibility (difficulty).
■ Strikes and lock outs.
■ Additional tax.
■ Failure to one of the object.
 Cont…
3. By agreement.

■ Novation
– Substitution of old contract with new contract.
■ Cancellation.
– All the rights and liabilities come to an end.
■ Alteration.
– Alteration means change of existing contract.
– In alteration the “old contract” remains effectively only material part of it is altered.
■ Remission.
– Remission means making less difficult.
– It means the part sacrifice of an amount receivable from debtor.
– It means an acceptance of an amount less than what was receivable according to contract.
■ Waiver
■ Waiver means total sacrifice.
– If a person sacrifices the entire sum receivable from debtor, it is called waiver.
 Cont…
4. By operation of law.

■ Death.
– Contractual rights and liabilities of ordinary nature are transferred to legal heirs after death.
– But the contract of personal nature i.e. requiring services of special capacity and skill does not pass
on legal heirs.

■ Insolvency/Bankruptcy.
– I f a party to the contract becomes insolvent, his liabilities and rights will be developed upon the
official Assignee appointed by the court, and therefore, he will be relieved from his liabilities.

■ Merger.
– When minor contractual right of the same subject matter is affected by superior contractual right
on the same subject matter is affected by superior contractual right on the same subject matter to
the person the earlier inferior right is merged with superior one.
– ‘A’ agrees to rent his house to ’B’ for 10 years. But before completion of ten year ‘B’ buys the
house from ‘A’. Here, the contract for rent merges with contract of sale of house.
Cont…
5. By breach.
■ Anticipatory breach.
– It refers to the breach of contract by a party before the date of performance.
– It may take place by; (a) by notice, or (b) by conduct.
■ Actual breach.
– If a party does not perform or denies to perform the contract at the time when he
is supposed to perform, it is called actual breach.
– So, it is the case to perform the promise on the scheduled date.
REMEDIES OF BREACH OF
CONTRACT
1. Right to rescind the contract.
– Section 82 of NCA states, when a contract is
breached by a party, the other party will also
relieved from his contractual liability, he may
cancel the contract by furnishing a notice thereof
to the other party.
Cont…
2. Right to claim compensation.
■ Compensation actual loss.
– Section 83(1), states suffered party has right to claim actual loss that he has suffered
because of breach of contract.
■  
■ Compensation of an amount equal to that mentioned in the contract.
– Section 83(2) states that if any specific amount of compensation under the breach of
contract is already mentioned in it, the aggrieved party may claim from the other
party a reasonable amount not exceeding that amount.
■  
■ Compensation if not mentioned in the contract.
– Section 83(3) states that if the specific amount of compensation is not mentioned in
the contract, the injured party, under the breach of contract by the other, may claim
an amount equal to his actual loss or a reasonable amount as compensation but no
compensation may be realized for any indirect or imaginary loss or damage.
Cont…
3. Right to claim for Quantum Meruit.
– Quantum Meruit refers to a reasonable consideration that a person is
supposed to get from the other upon the breach of contract.

– According to Doctrine of Quantum Meruit, if a person has done some

work or has supplied some goods to another party and the latter party
has obtained some benefits from such work done or goods supplied, the
former can claim reasonable amount of compensation from the other
for the loss he suffers because of the breach of contract by the latter.
 Cont…
4. Right to get usual performance (Specific Performance).
■ It is an order of the court to perform the contract.
■ Section 86(2) of the Contract Act states that in the following conditions the claim of the
specific performance shall not be allowed;
– If the amount of compensation received for the breach of contract is adequate.
– If the court can not supervise whether the work as mentioned in the contract has been
actually performed or not.
– If the contract has been signed on the basic of one’s personal skill, expertise or
knowledge.
– If the situation is such that the contract can not be executed as stipulated.
– If the party breaching the contract himself demands to execute the contract as stipulated.
Cont…
5. Right to sue for Injunction.
– If a party to the contract is in doubt that the other party is about to breach it, he
may file a complaint in the Appellate Court for injunction that the defendant
may not breach it, mentioned in Nepalese Contract Act 87.
Thank You