Module 2: Contract Drafting

KINDS OF CONTRACTS

1. Valid Contracts
A valid contract is one that contains all the essential elements and is enforceable in a court of law. Such
contracts create legal obligations between the parties involved, granting one party the right to compel
the other to fulfill their obligations or refrain from certain actions. If a party fails to fulfill its duties under
the contract, the other party may seek legal recourse. A contract becomes legally binding upon
execution, typically through the signing of an agreement. However, various factors may render a contract
unenforceable, and understanding what makes a contract legitimate can sometimes be complex.

2. Void Contracts
Void contracts lack one or more necessary elements that would make them legally enforceable. These
contracts are not valid and have no legal effect from the start. If a contract is impossible to fulfill or
becomes unenforceable due to changes in law, it is considered void. Additionally, if a contract conflicts
with public policy, it becomes void, and no party can seek legal action for non-performance.

3. Voidable Contracts
Voidable contracts initially appear valid and enforceable, as they fulfill the necessary conditions for a
contract. However, they contain a flaw that allows one or both parties to annul or void the contract.
These contracts remain valid unless one party exercises its right to revoke the agreement. Voidable
contracts often involve contingencies, and one party can choose to enforce or cancel the contract.
Typically, only one party may be required to perform its obligations.

4. Express Contracts
An express contract is formed when the terms of the agreement are explicitly stated by the parties,
either verbally or in writing, at the time of creation. The terms are clearly communicated and agreed
upon. Express contracts are the result of direct promises made by the parties involved. For example, if a
person agrees to provide a service or make a payment, that promise is considered an express contract.

5. Implied Contracts
Implied contracts are created when the parties' actions or conduct indicate an agreement, without the
use of explicit language. These contracts are inferred from the circumstances or behavior of the parties.
For example, when someone consumes a service (like drinking milk at a hotel), it is implied that they will
pay for it. Implied contracts are based on the assumption that the parties have agreed to the terms
through their behavior.

6. Quasi-Contracts
A quasi-contract is not a true contract in the traditional sense but is imposed by law to prevent unjust
enrichment. The law creates rights and obligations between the parties, even though they never
intended to form a contract. For instance, if a letter is delivered to the wrong recipient, the recipient may
be legally obligated to return it.

Classification Based on Performance

1. Unilateral Contracts
A unilateral contract involves only one party performing its duty when the contract is formed. The other
party's performance may have occurred beforehand, or it may be required later. For example, if
someone offers a reward for finding their lost pet, the contract is formed when the pet is found and
returned. The offeror has already fulfilled their obligation, and the offeree must now perform their duty.

2. Bilateral Contracts
In a bilateral contract, both parties have obligations that remain unfulfilled when the contract is made.
Each party makes a promise in exchange for the other party’s promise. For example, if one party agrees
to pay Rs. 30 in exchange for the other party agreeing to sew a shirt, both parties have reciprocal duties.
Each party is both a promisor and a promisee.

Classification Based on Execution

1. Executed Contracts
An executed contract is one where both parties have fully performed their obligations. Once a contract is
executed, the parties are bound by its terms and must fulfill their responsibilities as agreed. The contract
is considered complete, and each party is obligated to uphold their end of the deal. Execution can be
done through an express agreement, implied conduct, or electronically through e-signatures as per the
Information Technology Act, 2000.

2. Executory Contracts
An executory contract is one where one or both parties still need to perform their obligations. In some
cases, a contract may be partially executed and partially executory if certain obligations are fulfilled
while others remain unperformed.

3. Contingent Contracts
A contingent contract is one where the performance or fulfillment of the agreement depends on the
occurrence of a specified future event. The obligations of the contract are contingent upon an uncertain
event. For example, a business might agree to pay a commission to a salesperson contingent on
achieving a sales target. If the event happens, the contract is performed; otherwise, it is not.

Contingent contracts are common in areas like insurance, indemnification, and guarantees. The key
elements of a contingent contract include:

 It is contingent upon an uncertain event.

 It serves as collateral to the main contract.

 The contingency determines whether the contract will be performed or not.

These contracts should be carefully drafted to ensure that the terms are clear and unambiguous, and the
event that triggers the contract is objectively determinable. It is advisable to seek legal advice when
creating contingent contracts to ensure compliance with applicable laws.

In the world of business and legal transactions, the foundation of any contractual agreement hinges on
the interplay between two critical concepts: offer and acceptance. Whether it is a straightforward
agreement or a complex commercial arrangement, offer and acceptance form the cornerstone of binding
rights and obligations between parties.

This section delves into the essence of offer and acceptance, their pivotal role in contract formation, and
the essential elements that render them legally enforceable. Whether you are an aspiring entrepreneur,
a legal scholar, or simply intrigued by the nuances of contractual relationships, this discussion provides
insight into the core principles that govern agreements.

An offer represents the initial expression of willingness to enter into a binding agreement. It specifies the
terms and conditions that the offering party proposes to the other, indicating their intention to establish
a contractual relationship. It is crucial, however, to distinguish an offer from an invitation to treat. The
latter refers to preliminary communications inviting negotiation, rather than a definitive proposal to
contract.

Acceptance is the clear, unconditional agreement by the offeree to the terms of the offer. It signifies a
willingness to be bound by the proposed terms and marks the point at which a contract comes into
existence. To establish mutual assent, acceptance must mirror the terms of the offer precisely and be
communicated in the manner prescribed.

For a contract to be valid, there must be a “meeting of the minds” between the offeror and the offeree.
This implies a mutual understanding and agreement on the essential terms of the contract. A genuine
and voluntary consensus regarding key elements—such as the subject matter, price, quantity, and other
critical details—is indispensable for forming a binding agreement.

In the world of business and legal transactions, the foundation of any contractual agreement hinges on
the interplay between two critical concepts: offer and acceptance. Whether it is a straightforward
agreement or a complex commercial arrangement, offer and acceptance form the cornerstone of binding
rights and obligations between parties.

This section delves into the essence of offer and acceptance, their pivotal role in contract formation, and
the essential elements that render them legally enforceable. Whether you are an aspiring entrepreneur,
a legal scholar, or simply intrigued by the nuances of contractual relationships, this discussion provides
insight into the core principles that govern agreements.

The Offer

An offer represents the initial expression of willingness to enter into a binding agreement. It specifies the
terms and conditions that the offering party proposes to the other, indicating their intention to establish
a contractual relationship. It is crucial, however, to distinguish an offer from an invitation to treat. The
latter refers to preliminary communications inviting negotiation, rather than a definitive proposal to
contract. For example, a shopkeeper displaying goods in a store is not making an offer to sell, but rather
inviting offers from customers.

Acceptance

Acceptance is the clear, unconditional agreement by the offeree to the terms of the offer. It signifies a
willingness to be bound by the proposed terms and marks the point at which a contract comes into
existence. Acceptance must be unequivocal and correspond exactly to the offer made. If the offeree
attempts to alter the terms of the offer, it constitutes a counteroffer, not acceptance.
Moreover, acceptance must be communicated in the manner prescribed by the offeror. For example, if
the offer specifies that acceptance must be in writing or through a particular form of communication
(such as email), failure to comply with these terms may render the acceptance invalid.

The Meeting of the Minds

For a contract to be valid, there must be a "meeting of the minds" between the offeror and the offeree.
This concept refers to a mutual understanding and agreement on the essential terms of the contract. A
genuine and voluntary consensus regarding key elements—such as the subject matter, price, quantity,
and other critical details—is indispensable for forming a binding agreement. The meeting of the minds
ensures that both parties are on the same page and are voluntarily entering into the agreement without
misunderstanding or coercion.

Legal Considerations in Offer and Acceptance

1. Communication of Offer: An offer must be communicated to the offeree to be effective. An offer

cannot be accepted if the offeree is unaware of it.

2. Revocation of Offer: The offeror has the right to revoke the offer before acceptance, provided
that the revocation is communicated to the offeree.

3. Time Limitations: If the offer specifies a time for acceptance, it must be accepted within that
time frame. If no time is specified, acceptance must occur within a reasonable period.

4. Mirror Image Rule: Under the mirror image rule, acceptance must reflect the exact terms of the
offer. Any change or addition constitutes a counteroffer rather than an acceptance.

In conclusion, offer and acceptance are the fundamental components in the creation of a legally binding
contract. Their proper understanding and application are crucial for ensuring that agreements are
enforceable and recognized in a court of law. By ensuring mutual consent and clear communication, both
parties can establish their rights and obligations in a manner that is both transparent and legally sound.

CONSIDERATION

Consideration forms the foundation of any contract. Without it, an agreement cannot be deemed legally
binding. Under the Indian Contract Act of 1872, consideration is defined as something done at the
request of the promisee. The promisor may request something from the promisee or another person in
exchange for consideration, and this act of providing consideration forms the essence of the contract.

Past Consideration

Past consideration refers to something that has already been done or refrained from before the promise
is made. For instance, if Mr. A provides transportation to Mr. B in June, and later in July, Mr. B agrees to
pay Rs. 1,000 for the service, the transportation service provided in June serves as past consideration.
Although the promise to pay comes later, the act of transportation is treated as past consideration. This
is sometimes referred to as "moral consideration."
For example, imagine you come across an accident and assist the victim by taking them to the hospital. A
few days later, the victim offers you Rs. 2,000 as a token of thanks for your help. Your assistance in this
case would be considered past consideration.

Present or Executed Consideration

When you enter into a contract and provide consideration to the promisor simultaneously, this is
considered present or executed consideration. This is when the exchange happens right away, either
through an act or a forbearance. For example, purchasing fruits from a seller and paying immediately is a
case of present consideration.

Future or Executory Consideration

Future consideration refers to a promise where the act or forbearance is yet to be performed. It signifies
that the responsibilities of both parties are to be carried out at a later time. For example, if you buy a car
from a showroom and agree to pay once the car is delivered the following week, this constitutes future
consideration.

Valid Consideration

To be valid, consideration must meet the following conditions:

1. Must be at the request of the promisor: For consideration to be valid, it must be given at the
promisor's request. If a person voluntarily acts (for instance, helping someone without being
asked), the act does not qualify as valid consideration. For example, if you find a person's lost
wallet and ask for a reward, your act is voluntary, and they are not legally obligated to
compensate you.

2. Consideration can be transferred: The promisee is not required to personally provide the
consideration. It can be transferred to someone else. As long as you are a party to the contract,
you may file a lawsuit, even if you were not directly provided consideration.

3. Must be legal: The consideration must be legal and not against the law. If the consideration
violates the law, harms a person or property, or is immoral, the contract is considered void.

4. Consideration must be possible and real: A valid consideration must be feasible and capable of
being performed. It cannot be an impossible or ambiguous act. If the consideration is physically
impossible or illegal, the contract is unenforceable.

5. Adequacy of consideration: Indian law does not require consideration to be equal in value. The
parties are free to negotiate the value of consideration. For example, if you agree to sell a
collection of books worth Rs. 1,000 for just Rs. 200, this is still valid. You cannot later claim that
the consideration was insufficient based on poor negotiation.

The Role of Consideration in Contracts

Consideration is critical in contracts because it imposes a duty on both parties to fulfill their promises.
Without it, the contract would lack sufficient value to bind the parties to their obligations. However,
there are exceptions where contracts may be valid even without consideration.

Contracts Without Consideration

Certain contracts can be legally binding even without consideration under specific conditions, as laid out
by the Indian Contract Act. These exceptions include:

1. Love and Affection: When a contract is made out of genuine love and affection, particularly
between closely related parties, no consideration is required, provided it is documented in
writing.

2. Unpaid Services: If someone offers services out of goodwill or out of gratitude without expecting
anything in return, and the promisee later compensates the promisor, no consideration is
required at the time of the agreement. Such agreements can be oral or written.

3. Promise to Pay a Time-barred Debt: If a person promises to repay a debt that is no longer legally
enforceable due to the passage of time, the promise can still be valid if made in writing.

4. Agency Agreements: An agreement to establish an agency may also not require consideration.

5. Gifts: If a gift is promised, it may be valid without consideration, as long as it is made with the
intention of giving something freely.

Conclusion

In summary, consideration is an essential component of a valid contract. Without consideration, the

agreement cannot be legally enforced. While adequate consideration is important, it does not need to
be equal in value, and the law allows flexibility in how parties agree on terms. However, there are certain
exceptions where contracts can exist without consideration, such as in cases of love, affection, or gifts, as
long as they are clearly documented.

Contractual Capacity

Introduction:

Contractual capacity is a key concept in contract law that defines whether individuals have the legal
competence to enter into binding agreements. It refers to a person's ability to understand the terms of a
contract, comprehend its implications, and possess the legal authority to be bound by the contract. This
essay will explore the significance of contractual capacity, the criteria for determining it, and the
consequences of lacking it under the Contract Act.

I. Significance of Contractual Capacity:

Contractual capacity is essential to maintaining fairness in contractual relationships. It ensures that

individuals are not coerced, deceived, or manipulated into agreements they do not fully understand or
are incapable of fulfilling. By establishing the legal competence required to form valid contracts, it strikes
a balance between the individual's freedom to contract and the protection of vulnerable parties. This
principle safeguards the integrity of contracts while ensuring that those at a disadvantage are shielded
from exploitation.

II. Requirements for Contractual Capacity:

A. Age:
One of the primary factors determining contractual capacity is age. In most legal systems, individuals
under the age of majority (usually 18 years) are classified as minors and have limited capacity to
contract. While minors can enter into contracts, these contracts are typically voidable at the minor's
discretion. This provision is in place to protect minors from being bound by agreements that they might
not fully understand or that could be exploitative. However, contracts for essential items like food,
clothing, and shelter are enforceable, even against minors.

B. Mental Capacity:
Mental capacity refers to an individual's ability to understand the nature and consequences of their
actions. A person who suffers from mental impairments or mental illness may lack the capacity to form a
valid contract. If a person cannot comprehend the terms of an agreement or make rational decisions due
to mental incapacity, the contract may be deemed voidable. Courts may invalidate contracts entered into
by individuals whose mental capacity is impaired at the time of the agreement.

C. Intoxication:
Intoxication, caused by alcohol or drugs, can impair a person's judgment and decision-making abilities.
Contracts made while a person is intoxicated may be voidable if the intoxicated party can prove they
lacked the capacity to understand the nature and consequences of the contract at the time of its
formation. The intoxicated party must demonstrate that their judgment was significantly impaired and
that they could not comprehend the contract’s terms.

III. Consequences of Lacking Capacity:

A. Void vs. Voidable Contracts:

When an individual lacks the necessary capacity to enter into a contract, the agreement may either be
void or voidable. A void contract has no legal effect from the outset, as if the contract never existed. A
voidable contract remains valid until the affected party exercises their right to void it. Typically, minors,
individuals with mental impairments, and those under the influence of intoxication can void contracts
entered into due to their lack of capacity.

B. Restitution and Protection:

If a contract is voided due to a lack of capacity, the parties involved are generally restored to their pre-
contractual positions. This means any benefits exchanged under the contract must be returned, and the
parties should be placed back in the position they were in before the contract was made. Restitution
aims to protect parties who lacked capacity and prevents unjust enrichment.

IV. Exceptions to the Capacity Rule:

Though contractual capacity is generally required for a valid contract, there are some exceptions.
Contracts for necessaries, such as food, shelter, and medical care, are enforceable even against minors
who lack full capacity. Additionally, contracts entered into by individuals acting on behalf of others, such
as agents or representatives, may be binding, regardless of the individual's personal capacity.

Conclusion:

Contractual capacity is a cornerstone of contract law, ensuring fairness and protecting individuals who
may be vulnerable or unable to fully comprehend the nature of their agreements. By acknowledging the
limitations of certain parties and providing legal remedies, the law upholds the integrity of contracts
while safeguarding the rights of those who cannot fully understand or fulfill their obligations. For legal
practitioners and individuals alike, understanding the requirements and implications of contractual
capacity is crucial for navigating and upholding valid contractual relationships.

Free Consent and Related Concepts in Indian Contract Law

1. Free Consent
As per Section 14 of the Indian Contract Act, free consent exists when two or more persons agree on the
same thing, in the same sense. A contract is formed when both parties understand and agree to the
terms in the same way.

 Example: 'A' agrees to sell his house to 'B', but 'A' intends to sell his house in Haridwar, while 'B'
believes it is in Delhi. In this case, there is no mutual agreement, so the contract is void.

2. Coercion (Section 15)

Coercion occurs when one party is forced to enter into a contract through unlawful threats or pressure.
This could involve threats to perform an illegal act, like forcing someone to sign under the threat of harm
or unlawful actions.

 Example: 'A' is forced at gunpoint by 'B' to hand over his goods. The agreement made under this
threat is considered coerced and, therefore, voidable.

Effect:

 The contract is voidable at the discretion of the coerced party.

 If coercion is proven, the victim can decide whether to honor the contract or void it.

Coercion-inducing Methods:

 Threatening illegal acts under Indian law.

 Holding property illegally to pressure someone into a contract.

3. Undue Influence (Section 16)

Undue influence arises when one party abuses their dominant position to unfairly influence the other
party into entering a contract. This usually occurs in fiduciary relationships, where trust and authority are
involved.

 Example: A teacher persuades a student to sell a gold ring under duress, exploiting their position
of trust and authority.

Effect:

 The agreement is voidable at the discretion of the influenced party. Only the aggrieved party can
cancel the contract.
4. Fraud (Section 17)
Fraud involves deceptive actions or omissions with the intent to mislead or deceive another party into
entering into a contract.

 Example: Misrepresentation or concealment of facts, such as promising something with no

intention to fulfill it.

Effect:

 A contract formed through fraud is void.

 The aggrieved party can terminate the contract and claim damages.

5. Misrepresentation (Section 18)

Misrepresentation involves false statements made innocently or negligently, which lead to a party
entering a contract based on false information.

 Example: A person misrepresents the condition of a product without any intention to deceive,
but it leads the other party to enter a contract.

Effect:

 The contract may be rescinded by the party who suffered due to the misrepresentation.

6. Mistake (Sections 20-22)

Mistakes can be of fact or law, and they can be unilateral or bilateral:

 Error of Fact: When one or both parties misunderstand an essential fact related to the contract.

o Bilateral Mistake: Both parties are mistaken about a fact essential to the agreement,
rendering the contract void.

o Unilateral Mistake: When only one party makes a mistake, the contract is still
enforceable.

 Error of Law: Ignorance of Indian law is no defense, but mistakes in foreign law are treated as
factual errors.

Conclusion
Free consent is a key element for a contract to be legally binding. It must be given without any coercion,
undue influence, fraud, or misrepresentation, and the parties must agree voluntarily and with full
understanding. A valid contract hinges on ensuring all parties provide their consent freely and without
any wrongful influence.

Legality of Objects

As per Section 23 of The Indian Contract Act, a contract must have a lawful object and consideration to
be considered valid. The object refers to the purpose for which the parties enter into a contract, and the
consideration represents the agreed-upon exchange between them. The fulfillment of the contract's
object leads to the transfer of consideration from one party to another. Let's examine the key criteria
under contract law to determine what qualifies as a lawful object and consideration.
Legal Purpose and Legal Consideration

Both the object and consideration of a contract are considered legal unless:

 They are explicitly prohibited by law.

 They are inherently dishonest or fraudulent.

 The objective of the contract is defeated due to the nature of the object or consideration.

 They involve harm or injury to a person or property.

 They are deemed immoral by societal standards.

 They contravene public policy.

A contract is rendered void if it involves an illegal object or prohibited consideration. The term "illegal
object or consideration" refers to any illegal or criminal activity. When assessing the legality of an act,
relevant laws and regulations are considered, but they are not applicable if they conflict with overarching
legal principles.

However, it is important to note that not all void contracts are necessarily illegal.

Deceptive Nature of the Contract

Contracts with deceptive terms concerning their object or consideration are considered void and invalid.

Example: A enters into a contract with B, agreeing to pay B if B steals money from C. This contract is void
as its object is illegal.

Violating Legal Intent

A contract is void if its purpose is to violate any legal requirements. This occurs when:

 The contract's aim is to carry out an illegal act.

 The contract's intended result is illegal, either directly or indirectly.

 Completing the contract would require breaking the law.

Example: A and B agree that B will not file a lawsuit on A’s behalf if A steals from B. This agreement
violates provisions of the Indian Penal Code (IPC) and is thus void.

Harm or Injury to Person or Property

A contract must not cause harm to any person or property. If the contract’s purpose leads to such harm,
it is considered unlawful.

Examples:

 Writing a book about someone's life without their consent.

 Destroying a building or violating property rights.

 Violating intellectual property, such as copyright infringement.

Example: A and B enter into a contract where A agrees to pay B if A damages a public landmark. This
contract is void as it lacks a lawful purpose and consideration.

Immorality of the Contract

A contract will not be deemed void merely because it involves an immoral object or consideration.
Immorality refers to acts that violate societal standards of conduct or morality.

Example: A lends money to B under the condition that B will divorce C and marry A. If B refuses to
divorce C, A cannot legally claim the repayment of the loan. This contract is deemed void because its
purpose is immoral.

Contravention of Public Policy

In business law, the object of a contract must not contravene public policy to be considered lawful.
Public policy is meant to protect the collective welfare of society, rather than restricting individual rights.
Examples of contracts considered contrary to public policy include:

 Agreements with parties from countries with which India does not maintain friendly relations.

 Contracts that prevent a party from taking legal action.

 Champerty and Maintenance: Contracts where one party supports another’s legal action
without a personal stake, in exchange for a share of the damages or settlement.

 Agreements that attempt to traffic in public office or manipulate legal processes.

 Contracts that encourage corrupt behavior in judicial or government functions.

These types of contracts are void as they violate the principles of public policy.

Void Agreements

A void agreement is defined under the Indian Contract Act, 1872 as an agreement that is not
enforceable by law. While void agreements can arise in various scenarios, some specific types are
explicitly stated in the Act. Below are key examples of such agreements:

1. Agreement in Restraint of Marriage

An agreement that restricts an adult (major) from marrying is void. However, this does not apply to
minors. For adults, any agreement where one agrees to forgo marriage in exchange for a benefit is also
void.

Example: If A agrees not to marry unless B gives him $50,000, such an agreement is void.

2. Agreement in Restraint of Trade

An agreement that prevents someone from engaging in any business, practicing law, or pursuing any
form of trade is considered void. This type of agreement violates an individual's constitutional rights.

There are exceptions, such as:

  If a person sells their business along with its goodwill, the buyer may request that the seller
refrain from operating the same type of business within a specific geographic area.

 A partner in a business may agree not to engage in a competing business while the partnership is
in existence.

For example, if Doctor A hires Assistant B for three years, and B agrees not to practice medicine
elsewhere during this period, the agreement is valid. However, if A, a lawyer, sells his law firm to B and
agrees not to practice law for the next 20 years in the state, the agreement is unreasonable and void.

3. Agreement to Stay Legal Actions

An agreement that prohibits one party from pursuing their legal rights through courts, arbitration, etc., is
void.

Exceptions include:

 Agreements that require any disputes to be settled via arbitration, with the resulting decision
being final and binding. Such agreements must be written.

 Any agreement where the parties mutually agree that future disputes will be resolved through
arbitration is valid, provided it is in writing.

4. Agreement with Uncertain Meaning

If an agreement’s meaning is unclear or uncertain, it is considered void and cannot be legally enforced. A
contract must have clear terms to be valid. However, if the uncertainty can be resolved, the contract may
still be enforceable.

Example: If A agrees to sell 100 kg of fruit to B but fails to specify the type of fruit, the agreement is void.
However, if A only sells oranges, the meaning becomes clear, making the agreement enforceable.

5. Wagering Contracts

An agreement based on wagering, where the outcome depends on an uncertain event, is void under the
Indian Contract Act. A wagering agreement typically involves one party betting on whether a specific
uncertain event will occur or not, with the outcome determining whether a party wins or loses money.

The essential elements of a wagering agreement include:

 A commitment to pay money or its equivalent.

 The outcome depends on an uncertain event.

 The event is beyond the control of the parties.

 Both parties must have the intention to wager.

 The only interest between the parties is the stake in the wager.

However, certain contracts are not considered wagering agreements, such as:

 Insurance contracts
 Share market transactions

 Contracts related to athletic competitions or skill-based competitions.