LAW OF CONTRACT

Meaning of Contract :

A Contract is a lawful agreement in other word an agreement enforceable by law is a

Contract.
A Mathematically view is hereunder:

1. Contract = Agreement + Legal enforceability

OR
Contract = Legally Enforceable Agreement

2. Agreement + Enforceable By law = Contract

So, an agreement is a contract when
a. Free Consent of the parties: When there is an absence of coercion (Section 15),
under influence (Section 16), fraud (Section 17), Misrepresentation (Section 18) and
mistake(Section 20, 21 and 22). The consent is said to be free.
b. Capacity of the Parties to Contract: Section 11 and 12 lay down that the competent
Parties are persons who have attained majority (Exception for this was laid down by
Mohori Bitee V. Dharmodas Ghosh ILR(1903) 30 Cal 539(Pc). Persons who are of
sound mind and persons who are not disqualified by law.
c. Lawful Consideration and Lawful object: Section 23 lays down that the
consideration and Object is lawful unless it is forbidden by law or it defeats
Provisions if any law or is fraudulent or involves injury to a person or property or is
violative of public health, morality, peace and orders.

Meaning of Agreement: -

In legal parallels coma agreement is used to mean a promise/ commitment or a series of

reciprocal promises which constitutes consideration for the parties to contract.

In an agreement coma one person offers or proposes something to another person, coma in
turn accepts the same. In other words, offer plus acceptance amounts to the agreement coma
we can say that an accepted proposal is an agreement.

The party to the agreement to whom the offer is given or proposal is made, give his/her assent
in this regard for mutual consideration, considered as accepted, which results in a promise

In the Contract Act, the word ' reciprocal ' refers to the 'mutual or or give-and-take'. Hence,'
reciprocal promise' is the promise which results in consideration or part thereof, for the
parties to the agreement.

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Characteristics of agreement :-

The main characteristics of the agreement are discussed below :-

1) Plurality of persons:
To constitute an agreement, at least two persons should be there, as one person cannot make
an agreement with himself/herself.

2) Consensus ad idem:
It is a Latin term, which implies " concurrence of minds ", i.e, when in an agreement there is
common understanding between the parties with respect to the terms and conditions of the
agreement.
This means that the parties to the agreement must agree upon the same thing in the same
sense as intended, with their corresponding rights and duties, concerning the performance of
promises in the past or future.

Elements of agreement:

Basically there are two key elements of the agreement which are discussed as hereunder:

Offer / proposal:
A person makes an offer, when he/she expresses to another person his/her willingness to
undertake an application, in exchange for a promise, act or abstinence. The person who
expresses his/her willingness or the one who makes the offer is known as offerer or proposal,
whereas the person to whom the offer is made is regarded as offeree.

Offer made by the offeror must be clear, i.e., the terms considering the offer must be certain.
In addition to this, the offer should be communicated to the offeree which is considered as
complete when the offeree comes to know about it.

Acceptance:
As the name signifies, the offeree gives his or her assent to the offeror, whether expressly or
impliedly to receive or undertake something which is proposed to him or her it is as
acceptance. It is required to be communicated to the person who makes the offer, prescribed
mode within a reasonable time. It must be unqualified and absolute
Further, an offer is made to a particular person to be accepted by the specific person only.
However in the case of a general offer it is open to all and any one can accept it.

Example:
Alex offers to sell his Royal Enfield to Ben for rupees 80000 /-. So, when Ben accepts the
offer it becomes an agreement.

The term "agreement" is broader in comparison to "contract", as in " every contract is an

agreement, vice versa is not possible". This is because all the contracts contain the element of

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the agreement, i.e., offer and acceptance, however, not all the agreement contains the main
elements which constitutes a Contract, i.e., legal enforceability. So, we can say that every
agreement is not a Contract

Considerations:

A valid contract must include consideration for every party involved. In simple terms
consideration is the basic reason a party enters into a legal contract. To explore this concept,
consider the following consideration definition :

Consideration is the benefit that each party receives, expects to receive, entering into a
contract. Consideration is often monetary, it can be a promise to perform a specific act, or a
promise to refrain from doing something.
In order for a contract or agreement to be legally binding coma every party to the contract
must receive some type of consideration. In other words, a contract is a two - way street. So
each party must receive something of value from the other party or parties. Illegal or Immoral
acts are not legally considered to serve as consideration.

Example:
John backed into Allen's car, damaging it. John is liable to pay for the damages, but does not
have the money right now. While Allen could sue John for the damages to his car, he enters
into an agreement with John to give him 90 days to pay the full amount plus an additional
amount for the inconvenience. The agreement states that Alan will not file a lawsuit before
the 90 days is up, but is free to do so after that time. This agreement, or "contract" provides
consideration for both parties.

Elements of consideration:
In order for a contract to be considered valid and enforceable by the courts, three elements of
consideration must be met. If one or more of these elements are missing, the contract lacks
the necessary requirements, could potentially be deemed invalid by the court. The required
elements of consideration include:
1. The contract must include a bargain for the terms of the exchange. In simple terms, all
parties involved must benefit from the contract.

2. There must be a mutual exchange between the parties. In simple terms, parties involved
must benefit from the contract.

3. The exchange in the contract must be something of value.

In addition to the elements of consideration, a contract must contain certain other elements to
be enforceable. While these requirements vary by State, these requirements include:
a. An intent by both parties to enter into the agreement.
b. The subject matters must be legal.
c. One party must make an offer.
d. The offer party must accept an offer.

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Types of consideration :

Consideration in a contract is the exchange of anything of value by each party. Most Often,
services or goods are exchanged or promised in a contract, through consideration may be
whatever the parties agree to. Examples include:
a. Money
b. Services
c. Personal property
d. Real Property
e. Promise to act
f. Promise to refrain from acting

Consideration is of the following five kinds:

1. Past consideration:
Past consideration is something wholly done , forborne, or suffered before the making of the
agreement.

Illustration: A saves B's life. B promises to pay A rupees 21000/- out of gratitude. Hence,
the consideration is passed, I did nothing for refrained doing anything on account of B's
promise. Whatever he did, he did before B's promise was made .

2. Present consideration:
The consideration which moves simultaneously with the promise is called present
consideration or executed consideration.
Illustration: X buys an article from a shop and pays the price immediately. The
consideration moving from X is present or executed consideration.
3. Future consideration:
This type of consideration is a promise to do or abstain from doing something in the future.
Sometimes executed consideration is also known as future consideration.
Illustration: A promise to pay a sum of money to B in consideration of B's promise to
deliver a book for A. As B's promise has not yet been performed, executory.

4. Unreal consideration:
When a consideration exists only in words, and not in fact. Then such consideration is known
as unreal consideration for a promise.

Illustration : A promise to pay B, Rs. 2000/- on particular day in consideration of a promise

B to pay A Rs. 500/- at the same time coma the consideration is "Unreal or illusory", and the
promise will be regarded as merely a gratuitous promise by A pay to pay B, Rs. 1500/-.

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5. Unlawful consideration:
Section 23 of the act describes the term unlawful consideration. A consideration is said to be
unlawful if:
- It is forbidden by law, or
- It would defeat the provision of any law , or
- It is fraudulent ,
- Involves or implies injury to a person or property of another, or
- It is regarded as Immoral or opposed to public policy by the court.
Illustration:
A, B and C enter into an agreement for the division among them of gains acquired or to be
acquired, by fraud. The agreement is void, as its object is unlawful .

No consideration no contract

A promise without consideration cannot create a legal obligation. The general rule is that an
agreement made without consideration is void. This rule is contained in section 25 of the
Indian Contract Act which declares that " an agreement made without consideration is void".
This means that consideration is a must in all cases. But this section provides certain
exceptions where an agreement is valid even without consideration. These cases are:

While discussing the definition of ' consideration', it was seen that an agreement without
consideration(nudum Pactum) is void. To this general principle, Section 25 of the act has laid
down three important exceptions, provide as follows :
A agreement made without consideration is void, unless:
1. It is writing and registered, is made out of natural love and affection by a person standing
in a relationship; or
2. It is a promise to compensate (wholly or in part), a person who has already voluntarily
done something for the promisor, or something which the promisor was legally compellable
to do.
3. It is a promise made in writing and signed by the promisor (or his duly authorised agent),
to pay (wholly or in part), a debt by the law of limitation.

Apart from the above three cases, every agreement, in order to be enforceable by law, is
supported by consideration. Other words, exceptions are the circumstances in which an
agreement made without consideration is valid in India.
Additionally, S.25 does not affect the validity of a gift which is already made, as by its very
definition, a gift is a transfer without consideration.

As seen earlier, in England, a contract under seal is valid even in the absence of
consideration. Contract has to be in writing and signed, and delivered by the parties. So called
a deed or a special contract. Indian law, however, does not provide that such contracts would
be valid in absence of consideration. Action in India is governed by section 25 of the act.
Thus, an agreement made without consideration is void, except in the following three cases :

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Exception 1:

Agreement made on account of natural love and affection [section 25(1)]:

An agreement without consideration is enforceable if, it is
i) expressed in writing, and
ii) registered under the law for the time being in force for the registration of document, and is
iii) made on account of natural love and affection,
iv) between the parties standing in near relation to each other.

The following conditions must be satisfied for the application of exception:

a. The agreement is in writing
b. It is registered
c. It is made on account of natural love and affection
d. It is between parties standing in near relation to each other,

Love and affection :

It is not to be presumed that merely because a husband passes a registered writing to his wife,
to pay her money or anything else, a valid contract though no consideration has moved from
the wife, the writing must have been passed out of natural love and affection. Other words,
not to be supposed that the nearness of relationship necessarily imports natural love and
affection

Thus, where a Hindu husband executed a registered document in favour of his wife, whereby,
referring to quarrels and disagreements between the parties, husband agreed to pay her for a
separate residence and maintenance, as there was no consideration moving from the wife, it
was held in in Rajlukhy Dabee V.Bhoonath [(1900) C.W.N.488], in a suit by the wife brought
on the agreement coma the agreement was void as being made without consideration. It was
further held by Rajlukhy Dabee V.Bhoonath [(1900) C.W.N.488], that the agreement could
not be said to have been made on account of natural love and affection, the recitals in the
agreement being opposed to that view.

Exception 2 :

Agreement to compensate far past voluntary services under section 25(2) :

An agreement without consideration is enforceable if it is a promise to compensate wholly or

in part, a person who has already voluntarily done something for the promisor or something
which the promisor was legally bound to do.
Example: A finds B's purse and gives it to him. B promises to give him 100. This is the
contract. In order to that a promise to pay for past voluntary services be binding, the
following conditions must be satisfied:
a. The service should have been rendered voluntarily
b. The services must have been rendered for the the promisor and not anybody else

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Exception 3:
Agreement to pay time barred Debt [section 25 (3)] :
According to this exception a promise to pay a time barred debt wholly or in part is
enforceable if such promises are in writing and signed by the debtor or his authorised agent.
A time barred debt cannot be recovered and, therefore, a promise to repay such debt is
without consideration.

The third exception to the general rule is when a promise is made to pay a time barred Debt.
Thus,
An agreement made without consideration is valid when it is a promise, writing and signed
by the person to be charged where with (or by his agent), to pay (wholly or in part) a debt of
which the creditor might have enforced payment, for the law of the limitation of Suits.

Example: A owes B Rs. 1000/- but the Debt is barred by the limitation act. A signs a written
promise to pay Rs. 500/- on account of the debt, this is a contract.

A promise to pay a time barred debt may be enforced under this exception. There must be a
promise made in writing and signed by the person to be charged there with (or by his agent),
to pay a debt wholly or in part. Where it is sought to recover a time barred debt on the
strength of a subsequent promise to pay made by the debtor or his agent, the document relied
on must contain an express promise to pay.

Thus , A passed a promissory note for Rs. 5000/- in favour of B . After the pro-note had
become time barred. A wrote B a letter in which he said inter alia " I am quite willing to
renew the note; come and see me with it". And did not not renew the note. Is B entitled to
recover Rs. 5000/- from A?
No. UnderSection 25(2), a promise to pay a time-barred debt must be an express promise to
pay, and not merely an unconditional acknowledgement involving, as here, an implied
promise to pay. Therefore, B is not entitled to recover Rs. 5000/- from A [ Balkrishna
V.Jayshankar, 40 Bom L.R. 1010].

Validity of gift already made ( Section 25, explanation 1):

Explanation 1 to Section 25 provides that nothing in section 25 is to affect the validity,
between the donor and the donee of any gift actually made by the donor to the donee.
This is apparently provided only out of abundant question, and if clarifies that gifts actually
made are not vitiated. By its very definition, implies absence of consideration moving from
the donee, and gift is actually made, validity cannot be questioned on the ground that the
contract is void on the ground of absence of consideration.

Inadequacy of consideration(Section 25, explanation 2):

Explanation 2 to Section 25 provides that an agreement to which the consent of the promise is
freely given is not void mainly because the consideration is inadequate.

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Example: A agrees to sell a horse worth Rs. 1000/- for Rs. 10/-. A's consent to the agreement
was freely given. The agreement is a contract notwithstanding the inadequacy of the
consideration. Inadequacy of consideration, a matter for the parties.

It may be noted that whether the consideration is adequate or not is entirely a matter for the
parties. It is not necessary (nor does the Act say so) that the consideration should be adequate
to the promise; the value to the consideration is a matter for the promisor himself. So,
possibility of any benefit to the promisor, or any determinant to the promise will be regarded
in the law as sufficient consideration.
It is a rule of English law that consideration must have some value in the eyes of the law,
though it may not be adequate, i.e., it must be real. If it is not enough that something, whether
an actor a
Promise appears, on the face of the transaction, to be given iNR exchange for the promise.
That which is given need not to be of any particular value, it must be something which the
law can regard as having some value. So that the Giving of it affects a real change in the
promise's position.

Contract of agency:
Section 185 is specifically states that no consideration is necessary to create an agency.Thus,
when a person is appointed as an agent, appointment is valid even if there is no
consideration.Although, generally, an agent gets remuneration by way of commission for the
services rendered, iteration is immediately necessary at the time of appointment.

Permissions: Under Section 63:

No consideration is required for an agreement to receive less than what is due.This is called
remission in the law

CHARITY:
If a person undertakes a liability on the premise of another to contribute to charity, what is
valid. This case, the no consideration no contract rule does not apply

Example: Peter is a Trustee of his town Charity organisation. He wants to build a small pond
in the town to enhance greenery and offer the residents a good place to walk around in the
evenings. He raises a charity fund where he appeals to the people to come ahead and
contribute to the cause. Many people come forward as subscribers the fund and agreed to pay
Peter the share of the amount once he enters into a contract for constructing the pond
After raising half the amount, Peter hires contractors for building the pond. 10 people out at
the last moment. M files Suit against them for recovery. Court ordered the 10 people to pay
the amount to Peter since he had undertaken a liability based on their promise to pay. Even
though there was no consideration, the contract was valid and enforceable by law.

BAILMENT:
Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from
one person to another person. This delivery is made upon a contract that post accomplishment

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of the purpose of the goods will either be returned or disposed of, into the direction of the
person delivering them. No consideration is required to affect the contract of bailment.

CONCLUSION:
Thus, consideration is an integral part of a contract. The rules of consideration states that it is
essential to have consideration for a contract. But there are some specific exceptions to the
"No consideration No contract" rule.