NDEJJE UNIVERSITY

FACULTY OF BUSINESS ADMINISTRATION AND MANAGEMENT

NAME : MUKASA ISAAC

REG NO : 23/2/302/W/207

SIGNATURE : ……………………………………

COURSE UNIT : MERCANTILE LAW

LECTURER : MR WANGWA JOEL

YEAR : TWO

SEMESTER : ONE

QUESTION

It’s all about the chain of relation one party initiates and the other party responds. All their
intentions sum up to a contract using in all the elements of a valid contract, explain how the
above statement in relation to all the element of a valid contract.
For the better functioning of all formal business relations, professionalism must be ensured. A
Valid Contract is a significant way to protect your business and eliminate legal liability.

A valid contract is a written or expressed agreement between two parties to provide a product or
service. A void contract is missing an element. In a voidable contract, there is an option for the
parties to enforce the terms even though an element is missing, or some other issue exists with
the terms.

Contract law is an area of law that oversees and interprets agreements between people or
businesses for the exchange of goods, property, services, or money. Sometimes an agreement
needs to be interpreted to see if it is valid or enforceable and if it can be enforced. A valid
contract definition would include all contracts that are not void, voidable, or unenforceable.
Additionally, for a contract to be a valid contract, there are specific requirements that must be
met: Offer, Acceptance, Consideration, Legality, Capacity and Mutual Agreement

Offer is the first required element of a contract. It includes a promise to provide goods or
services in exchange for something of value. It can also include refraining from doing something.
There must be an offer in order for there to be a valid contract. Contracts may be written or
verbal, but there must be an offer.

Acceptance is the second element of a contract. Through either words or actions, the other party
to a contract accepts the offer. Acceptance is a promise to pay for the listed goods or services or
provide some form of consideration. Acceptance shows that the party to whom the offer was
made agrees to the terms and agreements in the offer. A party who accepts an offer must know of
the offer, have intent to accept it, and agree to the terms of the contract.

Consideration is required for a valid contract. Consideration consists of something of value being
exchanged for something else in a contract. This is often the payment of goods. It can also be the
action of refraining from doing something that is the thing of value. This helps to show that the
contract is not for a gift and that it is intended for there to be an exchange for something of value.
Consideration does not have to include money and can be something of value or something else.
An example of this could be a person giving their lawnmower to their neighbor to keep in
exchange for the neighbor agreeing to mow their lawn.
Legality is the next element for a valid contract. Legality indicates that the contract is not for an
illegal purpose. The contract must not have illegal property as the subject of the contract either.
There cannot be a valid legal contract for the purchase of illegal drugs. A contract to hurt or kill
someone else would never be a valid contract. If an action or item is not legal, it cannot be
included in a contract.

A void contract is one that is not valid on its face. A void contract cannot be enforced and is
treated as if it never existed. Void contracts can include ones that involve an illegal subject in the
contract or a contract that is so unfair and unconscionable to public policy. If a party to the
contract was mentally incapacitated, the contract can be held void. If a contract is impossible to
perform it can be held void. An example of this would be a party who entered a contract agreeing
to replace someone's roof for a set amount of money and that person is injured and unable to
walk. That would be impossible to perform so the contract would be void. Misrepresentation or
mistake can also cause a contract to be void. If one party misrepresented themselves when
entering a contract and the other party did not know, the contract can be void. Mistakes of fact
can also be a factor in causing a contract to be voided. If both parties or one party made an actual
mistake as to something in the contract such as price, the contract can be voided. An example of
this may be John's agreement to install kitchen cabinets in Sarah's house; The contract was
written up and signed and later found to have the price listed at $50 instead of $5000. The
contract could most likely be held to be void in that case.

The voidable contract definition is a valid agreement where one party has the right to void the
contract if they desire. There are generally two ways in which a contract is voidable. This can
occur if one of the parties chooses to void the contract or if one party was under undue influence
when the contract was created. Once again, consider a contract made with a minor. If a minor
chooses to continue the contract they may, however, if they want out of it at any time before
reaching the age of majority, they may legally do so. Also, the other party cannot legally enforce
compliance with the contract if the minor does not follow through on payment or services. If a
party is forced to sign with undue influence or tricked in some way into entering a contract, it
will be voidable. Finally, a contract that was formed when one party was under the influence,
may in some instances be voidable. Voluntary intoxication, however, is very difficult to prove as
a sole reason for voiding a contract. Otherwise, anyone who makes a contract over a drink could
change their mind and try and void it at a later time.

A voidable contract example would be that John was seventeen and entered into a contract with
Bill's Car Lot to purchase a car. They signed all of the paperwork and contract and John drove
the car home. Six months later, while John is still seventeen, he decides he does not like the car
and does not want to continue making payments on it. He returns the car to Bill's Car Lot and
asks for the contract to be voided. Bill must do so because John was a minor when entering into
the contract and is still a minor; Therefore the contract is voidable.

An unenforceable contract is one that is not going to be enforced by the court for a particular
reason. Several of these reasons have been previously mentioned, including unconscionability,
mistakes, public policy, certain impossibility, vague terms, and a few others. Anytime a contract
is too confusing, vague, or lacks certain elements it can be unenforceable. Certain contracts have
statutory requirements, such as they must be in writing. If a contract fails to fulfill that
requirement, it will be unenforceable. All void contracts are unenforceable, and voidable
contracts are unenforceable by one or both of the parties. A contract that becomes impossible to
fulfill after entering can be unenforceable. An unenforceable contract example could be that
ABC Manufacturing agrees to deliver 1000 pounds of corn to Company C within sixty days.
Within ten days of the contract, a flood occurs and destroys all of ABC's cornfields. The contract
is now unenforceable due to impossibility.

The Doctrine of Laches is an equitable doctrine that can sometimes void a contract if a defendant
can prove that a delay by an opposing party in filing a lawsuit has caused them to be in a worse
position due to the delay than it would have been if the party had fulfilled the contract in a timely
manner. If the delay caused the damages to be more exorbitant, then the doctrine of laches may
apply.

For the better functioning of all formal business relations, professionalism must be ensured. A
Valid Contract is a significant way to protect your business and eliminate legal liability.
A valid contract consists of the roles, responsibilities, and expectations of all the parties that are
involved in the business. A contract can only be valid when all its elements are in place. It is
important for both parties to ensure all the essentials of a valid contract have complied.

Importance Of A Valid Contract

A valid contract has its set of guidelines. Only the written ones are taken seriously because a
written contract can be enforced in court.

The following are the examples of some commonly used binding contracts –

Contracts while investing in real estate

Employment contract – Recruiting new hires

Purchase/Sale Contract in case of Goods and Services

Legal contract while doing business investment

Requirements Of A Valid Contract

A Valid Contract is defined as an agreement that can be enforced by law under the Contract Act,
1872. To consider a contract valid, it is essential that it can be enforced by law. All the essential
elements should be there in the agreement.

Formation Of A Valid Contract:

According to The Contract Act, 1872 the basic requirement for a valid contract is ‘Agreement’
and ‘Enforceability’.

Agreement

The first and foremost requirement of a valid contract is an agreement. A statement that lists all
the promises that are for the consideration of both parties is an agreement. It has the list of Dos
and Don’ts of the proposal. Once the proposal made by one party is accepted by the other, it
becomes a promise, and hence, the agreement becomes valid.

The following are the requirement of an agreement:

It must be made between two people i.e the offeror and the offeree. Both these parties should be
different individuals, as one cannot enter into an agreement with oneself

Both the individuals involved in the contract must go through the agreement carefully and
meticulously and understand it fully before accepting it

For an agreement to become a contract, it must generate some sort of legal obligation via
contract laws. Hence, the individuals who are in the contract can go to the court of law in case
the contract is breached

Enforceability

An agreement must create a legal obligation as per the provision of contract laws. An agreement
that does not create any enforceability cannot be called a valid contract.

Elements of a contract

To be valid, a contract must generally contain all of the following elements:

Offer

Acceptance

Consideration

Legality

OFFER:

Contracts always start with an offer. An offer is an expression of a willingness to enter into a
contract on certain terms. It is important to establish what is and is not an offer. Offers must be
firm, not ambiguous, or vague. A person who is making the offer is called the offeror.

Invitation to Treat: Offers are different than an invitation to treat. An invitation to treat is not
an offer. When you list your home for sale, you are not making an offer; you are making an offer
to treat. You are inviting potential buyers to make an offer to you to buy your home. The same is
true with most advertising. The stores are making an offer to treat. They are expressing their
willingness to sell you something if you offer them their asking price. However, they are not
bound to accept your offer. For example, you place an ad online to sell your automobile for a
certain price. Someone makes an offer to buy the automobile from you at full price. Do you have
to accept their offer? No. You are making an offer to treat, and you are not bound to accept their
actual offer to buy your automobile.

Puffery: Advertisers often use puffery to promote their products. So, was the advertising slogan
“Red Bull Gives You Wings” meant to be a true statement or puffery? In a class action lawsuit
filed on Jan. 16, 2013, in the U.S. District Court of the Southern District of New York by
Benjamin Careathers, Mr. Careathers claimed he had been drinking Red Bull since 2002. His
lawsuit argued that Red Bull mislead consumers about the superiority of its products starting
with its slogan “Red Bull gives you wings” and its claims of increased performance,
concentration, and reaction speed. Red Bull eventually settled the lawsuit for 13 million dollars.
Red Bull maintains that its marketing and labeling have always been truthful and accurate, and
denies any and all wrongdoing or liability.”

Courts will determine whether a statement in advertising is false versus puffery by using the
“reasonable person” standard. In other words, would a reasonable person believe the exaggerated
statement in an advertisement is meant to be true? It is hard to imagine a jury would find that the
Red Bull advertisement that by drinking their product one would grow wings was anything but
puffery.

Counter-Offers: A counter-offer negates the original offer. It alters the original offer, and by
doing, so releases the person making the original offer from any obligation. For example, A
makes an offer to treat regarding the sale of A’s automobile for $10,000.00. B offers A
$9,000.00. If A accepts this offer, B is bound to purchase the vehicle for that price. A does not
have to accept B’s offer and is not bound to. However, A then makes a counter-offer to B that A
will sell the vehicle for $9,500.00. B is not bound to buy the vehicle for that price, but A is now
bound to sell the vehicle to B for that price if B accepts the counter-offer.
ACCEPTANCE:

Acceptance by the offeree (the person accepting an offer) is the unconditional agreement to all
the terms of the offer. There must be what is called a “meeting of the minds” between the parties
of the contract. This means both parties to the contract understand what offer is being accepted.
The acceptance must be absolute without any deviation, in other words, an acceptance in the
“mirror image” of the offer. The acceptance must be communicated to the person making the
offer. Silence does not equal acceptance.

CONSIDERATION:

Consideration is the act of each party exchanging something of value to their detriment. A sells
A’s automobile to B. A is exchanging and giving up A’s automobile while B is exchanging and
giving up B’s cash. Both parties must provide consideration.

Past Consideration: Voluntarily doing something for someone is not consideration. A sees B’s
lawn needs to be cut so A voluntarily does so. B comes home from work and is so pleased that B
gives A $30 for cutting the lawn. The following week A cuts B’s lawn again without B asking A
to do so. A now asks B for $30 for cutting the lawn and B refuses to do so. A claims they have a
contract since A has provided consideration by mowing B’s lawn, even though it was voluntary.
A is incorrect. B is not obligated to provide consideration to A. There is no contract. However, if
B had asked A to mow the lawn, but did not set the price, A would probably be able to enforce
the contract after mowing the lawn because B requested he does so.

Performance of an Existing Duty: If a person has a duty to do something, such as a public

servant, the performance of the duty is not consideration.

Promissory Estoppel: In some instances, one party is not providing consideration but is relying
on a reasonable promise made by another. A party that is induced to action based on a reasonable
promise may be able to enforce the promise under the legal theory of promissory estoppel.

This is explained in the Restatement (Second) of Contracts[1] § 90. Promise Reasonably

Inducing Action Or Forbearance:
(1) A promise which the promisor should reasonably expect to induce action or forbearance on
the part of the promisee or a third person and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise. The remedy granted for
breach may be limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without
proof that the promise induced action or forbearance.

For example, A works for B who has promised to provide A retirement benefits if A works for B
for 25 years. After A is employed with B for 15 years, B tells A that the retirement benefits will
now be half the amount originally promised. A can enforce the original promise under the theory
of promissory estoppel even though A has provided no consideration. A can make the case that
A was induced and acted on this promise.

LEGALITY:

The fourth required element of a valid contract is legality. The basic rule is that courts will not
enforce an illegal bargain. Contracts are only enforceable when they are made with the intention
that they are legal and that the parties intend to legally bind themselves to their agreement. An
agreement between family members to go out to dinner with one member covering the check is
legal but is not likely made with the intent to be a legally binding agreement. Just as a contract to
buy illegal drugs from a drug dealer is made with all the parties knowing that what they are
doing is against the law and therefore not a contract that is enforceable in court.

Lack of Mental Capacity: The capacity to enter into a contract may be compromised by mental
illness or intellectual deficiency. Issues of dementia and Alzheimer’s can blur the lines of
competency to sign a contract. Competency to enter into a contract requires more than a transient
surge of lucidity. It requires the ability to understand not only the nature and quality of the
transaction but an understanding of its significance and consequences. If a person is found to
lack the mental capacity to enter into a contract, then the contract is not automatically void but it
is voidable.

Minors and Contracts: Minors under the age of 18 years old are allowed to sign contracts, but
they are voidable at the minor’s election. The exception to this rule is that contracts for
necessities are not voidable. Necessities are general goods or services necessary for subsistence,
health, comfort, or education. The burden to prove a contract is for necessities for a minor is on
the plaintiff. Minors can affirm their contract made while a minor formally or by actions upon
reaching the age of 18.

Contracts That Must Be In Writing: As already mentioned above, not all contracts have to be
in a written format. However, some absolutely do, or they are voidable. Under the common law
doctrine of the “Statute of Frauds,” which has been codified in the General Obligations Law
(GOB), contracts for the purchase of real property (GOB § 5-703), contracts that cannot be
performed in less than 1 year, and contracts that guarantee the debt of another (co-signers) (GOB
§ 5-701) must all be in writing. It is important to understand that just about any form of writing is
acceptable. A handwritten contract to purchase real property on a napkin is acceptable if all the
elements of a contract are met. The use of email and text messages may also be acceptable under
GOB § 5-701(4).

Unilateral Versus Bilateral Contracts: Most contracts are bilateral, meaning both parties are in
agreement and the four basic elements of a contract exist. For example, B offers to buy A’s
automobile for a specific price and A accepts the offer and agrees to give B the automobile upon
receipt of those specific funds. Both parties are agreeing to the contractual arrangement. It is
bilateral. In a unilateral contract, one party is making an offer and promise if someone does
something in return. There is no agreement necessarily between two individuals as there is in a
bilateral contract. However, an offer is made and if another individual accepts the offer and
performs, an enforceable contract exists. An example would be if A offers a reward of $100 to
the person who finds and returns A’s missing cat. If B finds and returns the cat to A, A would be
bound to pay B the $100 reward. This is a unilateral contract.

Gift versus contract:

Gifts are very similar to contracts, but they are different. Gifts do require an offer, acceptance,
and delivery of the gift, but are generally not enforceable. If A promises to give B a birthday gift
but fails to do so, B cannot enforce the promise. There is no consideration provided by B.
However, B is also in no worse position than before the promise was made. From a legal
standpoint, if a party does not follow through with the promise of a gift, the parties are in no
worse position because of it, and therefore there is no cause of action.

List and discuss with examples all the main elements constituting a valid contract.

According to Section 2(h) of CA 1950, a contract is an agreement enforceable by law. In other

words, a contract is an agreement enforceable by the law between two or more parties or to
abstain from doing some act or acts, their intention being to create legal relation and not merely
to exchange mutual promise both having given something or having promised to give something
of value as consideration for any benefit derived from the agreement.

There are 4 main elements constituting a valid contract which is offer, acceptance, intention to
create legal relation and consideration. There are 4 more other basic elements besides the main
ones mentioned just now, which is, certainty, legality, capacity and consent.

Before any contracts are formed, agreement is required, which comprises both offer and
acceptance. An offer is an undertaking made with the intention that it shall become binding on
the person making it as soon as it is accepted by the person to whom it is addressed. It may be
made to a specific person, a group of persons or to the public at large and an offer must be
distinguished from an invitation to treat. The most important factor to differentiate between an
offer and an invitation to treat is the intention of the parties. For instance, advertisements or
display of goods, they are regarded as merely supplying information or notifying others
regarding the goods or services, therefore, they are considered as invitation to treat because they
are inviting the other party to make an offer. To give an example with a case about the display of
goods differ from an offer; let’s see Fisher v Bell (1961). In Fisher v Bell (1961), a shopkeeper
had offered for sale a flick knife and exhibited it in his ship window. As the law prohibited the
sale of offensive weapons, he was convicted. On appeal, however, the court held that ‘offer for
sale’ has a technical meaning in law, and a shop window display is an invitation to treat, not an
offer in contractual terms, the conviction was therefore quashed. In Pharmaceutical Society of
Great Britain v Boots Cash Chemicals (Southern) Ltd (1953), it was held that goods on the
shelves are an invitation to treat and the offer occurs at the counter, at which point the customer
offers to buy a certain good for a certain price and cashier can either choose to accept or reject
the offer.
For a contract to be valid there must be a proper acceptance by the offeree. It basically occurs
when the offeree signifies his assent to the offeror. Acceptance must be in accordance to the
terms of the offeror and must be communicated to the offeror of made in accordance to the
method prescribed by offeror. Communication plays a very important role in order for the
contract to be valid as for there to be a valid contract, the offeree must convey his acceptance to
the offeror and acceptance is only effective when it is communicated or brought to the notice of
the offeror. Silence does not amount to acceptance. The offeror cannot bind the offeree by stating
that if the offeree fails to communicate or does nothing on his part; it would be constructed as
acceptance. To give an example of it with a case, let’s look into Felthouse v Bindley (1862).

Facts:

Mr. Felthouse wrote to his nephew who wanted to sell a horse to him, stating that ‘If I hear no
more about him, I consider the horse mine…’ Subsequently, there was no notice from his
nephew and Felthouse considered the horse his own. The horse was not delivered to Mr.
Felthouse and later there was an auction at the nephew’s property for the other livestock. The
nephew told the auctioneer, Mr. Bindley, not to sell the horse at the auction but Bindley
accidently sold it. Felthouse sued the auctioneer and his action could only succeed if it could be
shown that Felthouse actually owned the horse.

Held:

Mr. Felthouse did not have ownership of the horse as there was no acceptance of the contract.
Acceptance must be communicated clearly and cannot be imposed due to silence of one of the
parties. Although the nephew had expressed interest in completing the sale, there was no
communication of that intention. As such, there was no valid contract.

Silence can be amount to acceptance only under some exceptions, such as where acceptance is
conveyed to an authorized agent of the offeror, where communication of acceptance has been
waived by the offeror, where communication of acceptance can be implied through the conduct
of the acceptor, and where the postal method is used to convey acceptance. As mentioned,
acceptance can occur when it is communicated. Besides communication, acceptance can occur
by post. Acceptance by post is deemed to take effect when the letter is correctly addressed,
properly stamped and placed into the post box. Acceptance is said to be complete as soon as it is
posted. Example to this is, The household Fire and Carriage Accident Insurance Company
(Limited) v Grant (1878-79).

Facts:

The defendant applied for shares in the plaintiff’s company. The company’s acceptance of the
offer was posted to him was never received. The plaintiff went bankrupt and their books showed
the defendant owing for the price of shares, less dividends. The defendant refused to pay on the
ground that he did not receive an acceptance, and was not a shareholder. The plaintiff’s
liquidator filed a suit against him.

Held:

There was a valid and binding contract because once posted, acceptance was complete. The post
office was a common agent so acceptance occurred when it reached the defendant’s agent. The
postal acceptance rule balances the parties’ interests: the offeror can make communication of
acceptance a condition of the contract, or can inquire if he does not receive a timely acceptance.
The offeree would have to inquire if his acceptance was received before knowing if he was
bound. In addition, fraud could result if acceptance was dependent on it being received by the
offeror.

The offeror is bound by the contract the moment the acceptor posts his letter of acceptance
irrespective of whether the proposer has knowledge of acceptor’s actions and the offeree will
only be bound once the proposer receives and has knowledge of the letter of the acceptance. The
postal rule is not applicable to telecommunication such as telephone, telex or telegraph. In such
circumstances, the contract is deemed to be complete when acceptance is actually received by
the offeror or his agent.

As there is acceptance, there is revocation. According to Section 5 of CA 1950, acceptance may

be revoked at any time before communication of the acceptance is complete as against the
offeree but not afterwards. For example, Susan proposes, by a letter sent by post, to sell her
house to Andrew. Andrew accepts the proposal by a letter sent by post. Susan may revoke her
proposal at any time before or at the moment when Andrew posts his letter of acceptance, but not
afterwards. Andrew may revoke his acceptance at any time before or at the moment when the
letter communicating reaches Susan, but not afterwards. In other words, communication of
revocation is complete as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the power of the person who
makes it, and as against the person to whom it is made, when it comes to his knowledge.

Intention to create legal relations is the third main element constituting a valid contract. An
agreement reached between an offeror and an offeree will be legally binding contract only if the
parties intended that they should be legally bound. The parties’ intention to be bound can be
expressly stated or be implied from their actions. Where intentions are expressly stated, the
courts would not impute otherwise unless there is strong evidence to prove the contrary.
However in the event intentions are to be implied from the conduct of the parties, there are
certain presumptions that would be considered depending on the relationship between the parties
to the agreement. In social and domestic agreements between family and friends, there is a
presumption that these agreements are not meant to be legally binding unless the contrary can be
proven. Such a presumption can be rebutted if it appears from the circumstances that the parties
intended to be legally bound. In business and commercial agreements which are more formal in
nature, there is a presumption that there is intention to create legal relations. As such, any
agreement would be regarded as legally binding unless the contrary is proven. For instance, an
unambiguous declaration in a commercial contract that it is to be binding in honour only and not
in law will be accepted by the courts. Also, the intention to exclude legal consequences must be
set out clearly in unambiguous words. The onus of proof is on the party who alleges that no legal
effect is intended. The intention to create legal relations may be expressed or implied. Expressed
as, there is no issue in this matter because the intentions of the parties are clearly spelt out.
Implied as, this is where the intention is not clear but need to be presumed. The law assumes that
in two ways. First as in, social domestic agreements, there is no intention to create legal relations
unless it is rebutted and second as in, business commercial agreements, there is an intention to be
legally bound unless the contrary can be proven.

Consideration, as the last main element constituting a valid contract, is an essential element to
the formation of a valid contract. It is either money or money’s worth, basically it is some benefit
accruing to one party or some detriment suffered by the other.
In other words, a simplistic definition of consideration may be ‘the price paid for the purchase of
a promise’. Consideration can be regarded as what each party gives in return for what it gains
from the other party. According to the definition by Lush J in Currie v Misa (1874-80),
consideration is, as some right, interest, profit or benefit accruing to the one party or some
forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.
Consideration for the promise is when, at the desire of the promisor, the promisee or any other
person has done or abstained from doing, something, such act or abstinence or promise,
according to Section 2(d) of CA 1950.

Consideration can be regarded as something which is of value that is given for the promise made
in a contract. The value of consideration given need not be adequate but must be sufficient. It
also may move from the promise or even the third party. Lastly, it can be executor, executed or
past.

Those mentioned until now are the 4 main elements constituting a valid contract furthermore, as
mentioned above; there are 4 more basic elements required which are, certainty, legality,
capacity and consent.

In order to have a valid contract all parties to a contract must have capacity to enter into a
contract. Capacity refers to the legal ability to enter into a contract and the law generally
presumes that everyone has capacity to contract except certain categories of persons. According
to Section 11 of CA 1950, every person is competent to contract who is of the age of majority
according to the law to which he is subject, of sound mind and not disqualified from contracting
by any law to which he is subject.

For certainty, according to S30, CA 1950, agreements that are not certain in meaning or which
the meaning is not capable of being made certain, are void. The terms of an agreement must be
clear, precise and certain. It cannot be vague. An agreement which is ambiguous and uncertain is
not capable of being accepted as a valid contract.

Sometimes, a contract may be legal and thus unenforceable. Such agreements which are
forbidden by law, of the nature as to defeat any law, fraudulent, involves or implies injury to
person or property of another, court regard it as immoral, or opposed to public policy, are
regarded as void.
Lastly, for consent, contracts must be entered into with the free consent of the parties. In other
words, the both parties involved in a contract must enter the contract with freely given consent.
Consent is not freely given when it is caused by coercion, undue influence, fraud,
misrepresentation, and mistake. These are vitiating factors which result in discharge of the
contract.

Contracts are not only applicable to business but are also part of our everyday life. A contract is
made out of the simple act of purchasing a newspaper, using a credit card to buy a dress or
paying a parking fee. Other contracts such as the sale and purchase of property are more
complex, requiring formal written documents. Contract forms the basis in many transactions, for
instance the buying and selling of goods and services, employment contracts, partnership
contracts and insurance policies. The law is only concerned with the fulfillment of certain
conditions by the parties so that the transaction can be recognised as a legally binding agreement
and enforceable.

The three most important remedies available for breach of contract

Remedies that are available for breach of contract would depend on the effect and impact of the
breach. There are basically 4 possible remedies which are, rescission of contract, damages,
specific performance and injunction. Before looking into the three most important remedies
available, let’s look into the first remedy given among the four remedies above, rescission of
contract.

On a breach of a condition of a contract, the injured party may treat the contract as at and end or
rescinded and refuse to perform of fulfill his part of the contract. According to s 40, CA 1950,
when one party to a contract has refused to perform, or disabled himself from performing his
promise in its entity, the promisee may put an end to the contract, unless he has signified, by
words or conduct, his acquiescence in its continuance. For example, let’s look into the example
given under s 76, CA 1950.

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in
every week during the next two months, and B engages to pay her RM100 for each night’s
performance. On the sixth night A willfully absents herself from the theatre, and B, in
consequence, rescinds the contract. B is entitled to claim compensation for the damage which he
has sustained through the non-fulfillment of the contract.

Damages are one of the most important remedies available for breach of contract and there are
four types of damages. The aim of damages is to put the innocent party into a position he would
have been, had the contract been performed. According to Section 76 of CA 1950, the injured
party or the party that has suffered loss has a right to compensation for the loss or damage
suffered, due to the breach of contract.

The first type of the damages is compensatory or ordinary damages. Compensatory or ordinary
damages are given to the party who has suffered loss caused by the breach of contract. The
general position with regard damages for breach of contract is that damages may be recovered as
long as they are not too remote. In other words, damages may only be recovered if the relevant
losses either arise naturally as a result if the breach or do not arise naturally but are losses which
the parties knew, at the time they made the contract, would be a probable result of a breach. The
principles mentioned, stemmed from the decision in Hedley v Baxendale (1854) which is also
provided in s 74 (1) of CA 1950.

Hedley v Baxendale (1854)

Facts:

The plaintiff was a miller whose operations were stopped due to the breakage of crank shaft. The
shaft had to be sent to the manufacturer for repair. The plaintiff sent the crank shaft using the
services of the defendant who was operating as carriers. The plaintiff informed the defendant that
the crank shaft had to be sent immediately as the mill operations had stopped. The carriers failed
to perform and delivery took several days instead of the one day promised. As a result, the
plaintiff lost several days of operation and sued the defendant for the lost profits, ie profits the
plaintiff would have earned had the crank shaft been delivered on time.

Held:

An aggrieved party will be unable to recover consequential losses resulting from a breach unless
the losses are ‘natural’ consequences of breach; or the affected party had expressly informed the
other of the circumstances which would generate the losses. In this case, the defendant had no
means of knowing that the plaintiff would lose profits if the shipment of the shaft was delayed
since this information was not communicated directly to them. Therefore, the loss of profits was
not reasonably contemplated by both the parties when they made the contract.

Thus, it can be concluded that indirect of consequential damages are only recoverable if they are
reasonably foreseeable by both of the parties at the time of the contract as arising naturally from
such breach. Recoverable damages must not be too remote.

The second type of the damages is exemplary damages. Exemplary damages are damages
requested and or awarded by the court when the defendant’s willful acts were malicious, violent,
oppressive, fraudulent, wanton, or grossly reckless. These damages are awarded both as a
punishment and to set a public example.

The third and the fourth type of the damages are liquidated damages and nominal damages.
Liquidated damages are monetary compensation whose amount the parties agree upon during the
formation of a contract for the injured party to collect as compensation if a specific breach
occurs. Nominal damages are damages which consist of a small amount of cash payment which
the court orders to be paid to the plaintiff who has suffered no quantifiable pecuniary loss. The
award serves as a token of honour to the rights of the plaintiff. Nominal damages is often sought
to obtain a legal record of who was at fault.

The remaining two most important remedies available for the breach of contract after damages
are specific performance and injunction. Specific performance is a court order requiring
performance exactly as specified in the contract. This remedy is rare, except in real estate
transactions and other unique property, as the courts do not want to get involved with monitoring
performance. In other words, specific performance is an equitable remedy, specialized remedy
used by the courts when no other remedy such as money, will adequately compensate the injured
party. It is a discretionary remedy and not a arbitrary remedy, ie an injured party may ask for an
order of specific performance but it is up to the court whether or not to grant it.

Last one important remedy for the breach of contract is injunction. Injunction is a court order
directing one party to perform or to refrain from doing a certain act. It is used especially in
situations where a monetary award for damages would not satisfy a plaintiff’s claim or would not
protect personal or property right from irreparable harm.
When a party to a contract unjustifiably fails or refuses to perform his part of the contract, the
other party has a right of legal action. The methods which are given by the law to an innocent
party by which he may enforce a right or redress an injury are called ‘remedies’.

Equitable remedies are generally remedies other than the payment of damages. This would
include such remedies as obtaining an injunction, or requiring specific performance if a contract.

Case study on "VALID CONTRACT"

Mr. John wants to sell his car to Mr. Sam. They both have entered into the contract and they
mutually agreed for a consideration of Rs.1000 only. John sold the car later Mr. John’s son files
a case against Sam stating that the consideration was very less hence the contract needs to be
cancelled. Give your comments.

Solution

This case speaks about the contract law of Indian Contract Act, 1872.

A contract is an agreement the object of which is to create a legal obligation, i.e. a duty
enforceable by law. The contract must be valid under certain considerations.

Essentials of valid contract

Agreement:

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

Creation of legal relationship:

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

Lawful consideration:

Agreement is a mutual exchange of promises between parties. Each party making a promise gets
something in return of his promise. It constitutes a consideration for his promise.
Contractual capacity:

Parties making an agreement must have contractual capacity. Lack of contractual capacity would
invalidate 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.

Free consent of the parties:

State of mind of parties is involved in making offer and giving acceptance for it. As soon as offer
is accepted it becomes a binding promise having a legal consequences. Two or more persons are
set to have consent if they agree upon 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

Coercion, undue influence, misrepresentation, fraud, mistake

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.

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 same fate
and cannot be enforced in the court of law.

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 agreement.

With the above one we can relate to our case, As Mr. John mutually agreed to give his car for the
consideration of Rs.1000/- with Mr. Sam and they both entered into the contract, as it is a valid
contract the contract can’t be cancelled as it is a valid contract. In case of consideration it need
not be adequate. When the parties agreed for a lesser amount still it is a valid contract and the
consideration is also valid. If Mr. John’s son file a case, he cannot make it possible.

Top Cases on the Validity of Contract

I. BALFOUR v. BALFOUR

Introduction: Landmark judgement on the intention to create a legal relationship as an essential

element of contract.

Parties: Mr. Balfour & Mrs. Balfour

Brief facts: Mr. & Mrs. Balfour use to live in Ceylon (now Sri Lanka), a happily married
couple. They went on a vacation to England and during their stay Mrs. Balfour was diagnosed
with ‘Rheumatic Arthritis’. The doctor advised her proper rest. Her health could deteriorate, with
the change in weather, therefore she stayed back in England whereas her husband returned back
to Ceylon. As Mr. Balfour promised to send her £30 every month until she stayed back. He
regularly made the due monthly allowance as promised but subsequently, stopped sending the
amount. Mrs. Balfour sued him for the payment of monthly payments.

Issue(s): Was there a valid contract between Mr. Balfour & Mrs. Balfour?

Justice Sargent held that the said contract between the husband & wife was valid and
binding as Mr. Balfour was under obligation to support his wife. The prior monthly transfers
were enough to form the basis of the contract between Mr. & Mrs. Balfour and the consent
of Mrs. Balfour to this arrangement constituted a valid consideration. Mr. Balfour went to the
Court of Appeal against the judgment of the Division Bench.
Decision: The appellate court held that the arrangement between Mrs and Mr Balfour was merely
a social agreement and no a contract. a domestic matter and Mr. Balfour had ‘no intention to
create a legal obligation’. The court also pointed out that, Though Mr. Balfour made a promise to
pay £30 per month and Mrs. Balfour agreed to it but there was no intention to bound by legal
consequences on behalf of Mr. Balfour. The Court also held that such types of agreements can’t
be a contract because usually in such agreements between the spouse, either of the parties do not
intend to bound themselves by legal consequences. Court also made the argument that if the
courts will they’ll start to enforce such intimate arrangements made between couples treating
them as a legal contract then the courts shall be flooded by with matrimonial disputes.

II. LALMAN SHUKLA v. GAURI DUTT

Introduction: Acceptance of the offer as an essential element of a valid contract.

Parties: Lalman Shukla & Gauri Dutt

Brief: Gauri Dutt’s nephew went missing. He therefore sent all his servants in search of the
absconding child, different places. One of his servants, Lalman Shukla was sent to Haridwar
from Cawnpore (Kanpur) to search him, his travelling allowances and other expenses were paid
by the master Gauri Dutt. When he returned back to Kanpur after getting succeeded in finding
his master’s nephew, he was given two sovereigns along with Rs. 20. During the period while
everyone was searching master’s nephew and the plaintiff was also searching him, defendant
circulated pamphlets stating that whosoever finds the boy gets a reward of Rs. 501. The plaintiff
had no idea about the reward and did not asked for anything further and continued his service for
six months. After that, he filed a suit for the recovery of reward from his master, he claimed for
Rs. 499 out of the money that was offered in the handbill. Then, the lower court dismissed the
plaintiff’s plea.

Issue(s):

1. Does the arrangement amounts to a valid contract?

2. Is Mr. Lalman entitled to the reward amount?

3. Decision of the subordinate court was appropriate?

Decision: Court held that, none of the essential ingredients required to for a for an agreement to
be enforceable were not fulfilled in the situation. The primary need for an agreement to be
enforceable is the ‘knowledge and assent of the particular offer. Here, he was not aware about the
offer and had no assent about the act. Thus, it can be concluded that acceptance is the essence to
contract and the plaintiff was just fulfilling his obligation by searching the missing boy.

Also, this is a leading case wherein the important principle of General Offer was laid down. In
such case, a contract could be made only with the person who has the knowledge about the offer
and accepts it by acting accordingly to fulfil the conditions mentioned in the offer.

III. HARVEY v. FACEY

Introduction: invitation to an offer is not an offer

Parties: Facey & Harvey

Brief facts: Mr. Facey was a real estate owner who was interested to sell his property which was
in Jamaica. Harvey who was interested in buying that property sent a telegraph asking he would
sell his property to Harvey on lowest cash price to be paid. Replying to his telegraph Facey
replied to his second question only. Facey’s telegraph read, lowest price for Bumper Hall Pen is
£900. To which Harvey later replied, he agreed to buy Bumper Hall Pen which was asked for and
he also asked Facey to send him property deed so that he could get early possession. Facey
denied to sell his property to Harvey at that price. Later, Harvey filed a case in the court of
appeal, Harvey won the case. Facey who was unhappy appealed against the decision and case
went to Privy Council which upheld the trial court’s decision.

Issue(s): Was there any offer from Facey to sell the property for £900?

Decision: It was held by the Privy Council that; it would be a contract only if Facey had replied
to Harvey’s third telegraph. Harvey took Facey’s response to his question as an offer to sell at the
named price by him. There was no commitment to sell the property because the offer which was
made by the Harvey by replying to the invitation of an offer was not accepted. Thus, there was
no contract between the two.
IV. MOHORI BIBEE v. DHARMODAS GHOSE

Introduction: competency or Ccapacity of the parties to contract / Minor’s contract

Parties involved: Dharmodas Ghose & Mohori Bibee

Brief facts: Plaintiff, Dharmodas Ghose was in need of money therefore, he pledged his property
and asked for loan of Rs. 20,000 from the moneylender Brahmo Dutt. The debt amount given
was less than Rs. 20,000. Brahmo Dutt who was acting as attorney at that time on the behalf of
the moneylender, knew that Dharmodas Ghose was a minor. Plaintiff filed a suit against Brahmo
Dutt stating that the mortgage deed should be null and void because he was a minor at the time
of contract and hence, it should be cancelled. Later, Brahmo Dutt passed away and the appeal
was prosecuted by his executors. And it was contended by the defendant that plaintiff should not
be excused as he misrepresented his age to him. Even if the deed is void, the debt that was
advanced to him i.e., Rs. 10,500 should be repaid.

Issue(s):

1. Was the mortgage deed void?

2. Deed signed by defendant was voidable or not?

3.Was the defendant entitled liable to receive the mortgage money?

Decision: The Privy Council held that the; person who mortgaged the property was infant at the
time of execution. So, the contract or mortgage deed which was made between the plaintiff and
the defendant was not merely voidable but it was void. It also held that any contract with a minor
or an infant is ‘void ab-initio’. Since minors are incompetent to contract hence, such contracts
are void and invalid in the eyes of law. The minor is not obliged to pay back the amount that was
advanced to him as he was not bound by the promise that was executed in contract.

Minor is a person who has not attained or is below the age of 18 years.

And any contract entered into with a minor shall be be null and void (void ab initio) owing to his
incapacity. Dealings done by the minors without the knowledge and consent of their custodians
or parents shall not be liable to them.
V. RAFFELS v. WICHELHAUS

Introduction: consensus ad idem- “meeting of minds”

Parties: Raffels & Wichelhaus

Brief facts: Mr. Raffels and Mr. Whichelhaus had a contract that Mr. Raffels would send him 125
bales of Surat cotton via a ship named peerless from Bombay. But there were two ships with the
name peerless. The same name of two different ships mislead them and they agreed upon two
different ships in their minds, which means there was no meeting of mind while binding the
contract. When the ship containing cotton reached Liverpool in December, Wichelhaus refused to
receive the shipment and to pay for it. In his understanding the consignment was late as he mis-
understood that the ship earmarked with nomenclature as some other which was supposed to
reach in the month of October. Both of them had mis-understanding in reference to ship names.
Later, due to this delay according the defendant who did not received the order was sued for the
breach of contract by the plaintiff (Raffels).

Issue(s): Was there an enforceable contract between the parties?

Decision: The court held that the contract was vague and hence, it was not an enforceable
contract. For binding of a contract, there should be meeting of minds between the parties.In this
case, there was no consensus ad-idem. At the time they had entered into this contract, there was
ambiguity on the issue as to which ship shall carry the cotton to be delivered. Since, it was a
well-documented deed and not a fraud and hence, it should not be interrupted by extrinsic
evidence.
Reference

All Answers ltd, 'All the Main Elements Constituting Valid Contract' (Lawteacher.net,
September 2024) <https://www.lawteacher.net/free-law-essays/contract-law/all-the-main-
elements-constituting-valid-contract-contract-law-essay.php?vref=1> accessed 6 September
2024