Module 1
Module 1
• Example: A classic example is Carlill v. Carbolic Smoke Ball Co. (1893), where
the company’s promise in an advertisement was held enforceable because it
had the essential elements of offer, acceptance, and intention to create legal
relations.
2. Reliance Theory
The reliance theory emphasizes the role of reliance and trust in creating contractual
obligations, which may not always arise purely from mutual promises:
• Intention for Legal Obligation: Not all promises are contractual; intent is
critical. Courts test intention by examining the extent of reliance. For instance,
in Central London Property Trust Ltd. v. High Trees House Ltd. (1947), the
reliance on a landlord’s promise was key to the court’s enforcement of
equitable relief under promissory estoppel.
3. Transfer Theory
The transfer theory sees contracts as vehicles for transferring rights from one party
to another, with a focus on the contractual promise's effect on rights:
• Rights Transfer: This theory emphasizes that contracts often involve the
transfer of rights, particularly in promises to perform future acts for the
benefit of another party.
4. Utilitarian Theory
Utilitarian theory justifies contract law by arguing that it serves the welfare of society,
focusing on the overall utility contracts provide:
• Social Benefit: Contracts are viewed as tools that enhance social welfare, as
they enable predictable exchanges and mutual benefits among individuals.
5. Rights-Based Theory
Rights-based theory holds that contracts arise from and are justified by individual
rights, with the law protecting these rights through enforceable agreements:
The doctrine of privity of contract limits the right to claim damages and enforce
obligations strictly to the contract’s original parties.
• Case Law: In Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915), the
court reinforced that only those directly involved could enforce contractual
terms.
• Relevant Case: Donoghue v. Stevenson (1932), though a tort case, indirectly
raised questions about privity by acknowledging indirect claims for damages
when harm was caused.
• Definition under Section 2(d): The Indian Contract Act defines consideration as
an act or abstinence that a promisor requests, whether performed by the
promisee or another. This broader scope contrasts with English law, which
requires consideration directly from the promisee.
• Case Law: Central London Property Trust Ltd. v. High Trees House Ltd. (1947)
demonstrated promissory estoppel. The landlord’s promise of reduced rent
during wartime was enforceable when the tenant relied on it.
4. Doctrine of Restitution
Section 65 of the Indian Contract Act mandates returning any benefits when a
contract is declared void.
o Subsequently Void: Contracts initially valid but later void due to changes
in law or impossibility.
• Case Law: In Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd.
(1943), a contract became void due to wartime restrictions, and the court
ordered the return of advance payments, reinforcing the doctrine of restitution.
This doctrine under Section 7 of the Indian Contract Act requires unconditional
acceptance to form a contract.
6. Doctrine of Frustration
• Case Law: Taylor v. Caldwell (1863) set the precedent that destruction of the
concert hall frustrated the contract, excusing parties from obligations.
• Indian Application: Section 56 of the Indian Contract Act mirrors this doctrine,
emphasizing voidability upon subsequent impossibility.
7. Doctrine of Necessity
• Legal Grounds for Necessity: This doctrine applies when public policy,
emergency, or welfare requires enforcing an otherwise voidable or
unenforceable contract.
Quasi-Contracts
2. Basis of Quasi-Contracts
o The right of possession remains with the original owner and is only
considered “exhausted” once the owner reclaims the property.
o Example: If a person finds lost goods and the owner later appears to
claim them, the finder has a duty to return the goods even without a
formal contract.
o The possessor has no legal claim to retain or benefit from the property
and must respect the owner’s rights.
▪ Section 69: Concerns cases where one person pays money for
another’s benefit, even without authorization, creating a duty of
repayment.
o State of West Bengal v. B.K. Mondal & Sons (1962): The court held that
the state was liable to pay for services rendered in good faith without
an explicit contract, recognizing a quasi-contractual duty.
o Courts use this doctrine to mandate that any undue benefit received
without a rightful basis must be restored to the actual owner.
8. Examples in Practice
In contract law, damages serve to compensate a party for losses resulting from the
breach of a contract. The primary goal is to place the injured party in the position they
would have been in had the contract been performed as intended. There are several
types of damages that courts may award, each with distinct characteristics and
purposes. The main types are liquidated, unliquidated, exemplary, and nominal
damages.
1. Liquidated Damages
2. Unliquidated Damages
Unliquidated damages are often classified further into types like compensatory,
consequential, and incidental damages. For instance, if a business partner breaches
a contract by failing to deliver goods as promised, the aggrieved party can claim
unliquidated damages reflecting their actual financial loss. In such cases, the court
examines factors like the severity of the breach, the extent of the loss, and the
surrounding context of the contractual relationship to award an appropriate sum.
4. Nominal Damages
Nominal damages are symbolic and awarded when a breach of contract has occurred
but has not resulted in any substantial loss or harm to the non-breaching party. They
serve to recognize that a legal right has been violated, even if no significant financial
damage has ensued. Although the amount awarded is minimal, usually a token sum,
nominal damages uphold the principle that a contractual breach merits a remedy
regardless of the actual loss.
According to Section 2(h) of the Indian Contract Act, a contract is defined as “an
agreement enforceable by law.” For an agreement to become a contract, it must have
certain essential elements, including a valid offer, acceptance, consideration, and the
intention to create legal relations. A contract is formed when two or more parties
reach an enforceable agreement, giving rise to obligations recognized by law. If one
party breaches the contract, the other party has the legal right to seek remedies.
2. Agreement (Section 2(e))
Section 2(e) defines an agreement as “every promise and every set of promises,
forming the consideration for each other.” An agreement is thus a mutual
understanding or arrangement between two parties, where each promise serves as
the consideration for the other. In essence, an agreement consists of an offer made
by one party and its acceptance by another. However, for an agreement to become a
legally enforceable contract, it must fulfill additional criteria as specified in the Indian
Contract Act, such as lawful object, capacity of parties, and free consent.
For example, if A promises to sell his bike to B for ₹10,000, B’s payment of ₹10,000 is
the consideration for A’s promise to transfer ownership of the bike. In the landmark
case of Chinnaya v. Ramaya, the court held that consideration can flow from a third
party, not necessarily the promisee.
Section 2(a) describes a proposal or offer as a situation where “one person signifies
to another his willingness to do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or abstinence.” A proposal is the initial
step in forming an agreement. The person making the offer is called the “offeror,” and
the person to whom the offer is made is the “offeree.” The purpose of making an offer
is to get the acceptance of the other party to create a binding obligation.
The offer must be specific and clear in its terms to be valid. Offers can be general
(made to the public at large) or specific (directed to a specific individual). A well-
known case illustrating the concept of a general offer is Carlill v. Carbolic Smoke Ball
Co., where the court held that an offer made to the public could be accepted by anyone
who fulfills the conditions specified in the offer.
According to Section 2(b), acceptance occurs when the person to whom a proposal
is made signifies their assent to it. A proposal, once accepted, becomes a promise,
which is an enforceable part of the contract. Acceptance must be absolute and
unqualified, meaning it should match the terms of the offer without modifications.
Furthermore, acceptance must be communicated to the offeror to form a binding
contract.
For example, if A offers to sell his car to B for ₹2 lakh, and B accepts the offer without
any alteration in terms, it constitutes acceptance. This acceptance transforms the
offer into a promise, creating a contract between A and B. If B modifies the offer
terms, it would constitute a counter-offer rather than acceptance.
Under Section 2(a) of the Indian Contract Act, an offer or proposal is defined as “when
one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence.”
An offer is the foundation of contractual obligations, marking the initiation of an
agreement. For a valid offer, the following essential aspects are required:
o An offer must be made with the intention to create legal relations. The
offeror’s willingness should reflect an intention to bind themselves
legally upon acceptance by the offeree.
4. Certainty in Terms
o The terms of the offer must be clear and definite, leaving no ambiguity
about the intent and obligations of the offeror. Uncertain or vague terms
may render the offer void.
5. Types of Offers
o General Offer: Made to the public at large, allowing any member of the
public to accept by fulfilling the specified terms. This type of offer is
common in advertisements.
o In this landmark case, Carbolic Smoke Ball Co. advertised that it would
pay £100 to anyone who contracted influenza after using their product
according to instructions. Mrs. Carlill used the product but still fell ill.
She claimed the reward, and the company argued there was no binding
contract. The court sided with Mrs. Carlill, stating that the company’s
advertisement constituted a general offer to the public, and by fulfilling
the terms, she had accepted the offer.
o Legal Principle: The court ruled that acceptance of a general offer does
not always require explicit communication; performing the specified act
suffices. This case illustrates that fulfilling the conditions outlined in a
general offer implies acceptance.
The concept of an offer under Section 2(a) is crucial in contract formation. Through
the essential components like intention, consideration, communication, certainty, and
various types of offers (general and specific), the law clarifies when an offer becomes
enforceable. Landmark cases such as Lalman Shukla v. Gauri Dutt, Weeks v. Tybald,
and Carlill v. Carbolic Smoke Ball Co. offer substantial insights into the interpretation
of offer-related disputes and reinforce the fundamental requirement of a
communicated, intentional, and clear proposal to initiate legally binding agreements.
Consideration in Contract Law (Section 2(d) and Section 25 of the Indian Contract Act,
1872)
Section 2(d) of the Indian Contract Act defines consideration as an act, abstention, or
promise provided by the promisee or another person at the desire of the promisor. In
simple terms, consideration is the “price” paid for the promisor’s promise, and it
forms the foundation of most enforceable agreements. This aspect of consideration
ensures that there is a reciprocal exchange, grounding the contractual obligation.
o Consideration must carry legal value, even if nominal. This means that
consideration need not be equal to the promisor’s promise but must be
sufficient under the law. Thus, trivial consideration may still create
enforceable obligations if the parties intend to create a binding contract.
4. Abstinence as Consideration
In Chinnaya v. Ramaya, a case that illustrates consideration flowing from a third party,
a promise was upheld where the promisor directed consideration to a third party. The
court ruled that consideration need not solely involve the direct parties to the
contract, broadening the scope for who may fulfill consideration requirements.