UNIT NO:- 01

Law of Contract -1872 :- Nature of contract and

essential elements of valid contract, Offer and
Acceptance, Consideration, Capacity to contract and
free consent, Legality of object. Unlawful and illegal
agreements, Contingent contracts, Performance and
discharge of contracts, Remedies for breach of
contract. Indemnity and guarantee
Introduction

◼ According to Section 2 (h)

◼ the Indian Contract Act: ‘An agreement

enforceable by law is a contract.’

A contract, therefore, is an agreement the object

of which is to create a legal obligation.
◼ i.e., a duty enforceable by law.
 Come in force.

◼ 1st of September 1872.

◼ The indian contract act may divided into two

parts.

section 1 – 75 deals with principles of the law .

section 124 – 238 deals with types of the law

Such as guarantee, bailment, agency etc.
Essential Element of Contract.

◼ (1) An Agreement.

and

◼ (2) Legal Obligation.

1. Agreement

◼As per Section 2(e):

‘Every promise and every set of promises,
forming the consideration for each other, is an
agreement.’

◼ ‘When the person to whom the proposal is made signifies his assent there
to, the proposal is said to be accepted. A proposal, when accepted,
becomes a promise.’

◼ Agreement = Offer + Acceptance.

2. Legal obligation

◼ An agreement to become a contract must give

rise to a legal obligation, i.e.,

◼ A duty enforceable by law.

◼ ‘All contracts are agreements but all

agreements are not contracts.’ Eg:- social,religon.
SOME ESSENTIAL ELEMENTS OF A
CONTRACT.

◼ 1. Offer and acceptance.

◼ 2. Intention to create legal relations.
◼ 3. Lawful consideration.
◼ 4. Capacity of parties(Sec. 11)
◼ 5. Free consent(Sec. 13).
Cont....

◼ 6. Lawful object. (Sec. 23).

◼ 7. Writing and registration.
◼ 8. Certainty. (Section 29)
◼ 9. Possibility of Performance. (Section 56)
◼ 10. Not expressly declared void.
1. Offer and acceptance

◼ OFFER:-The words ‘proposal’ and ‘offer’ are

synonymous and are used interchangeably.
Section 2(a) of the
Indian Contract Act defines a ‘proposal’ 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, he is said to make a proposal/offer .

SOME LEGAL RULES REGARDING A VALID OFFER

1. An offer may be ‘express’ or ‘implied’.
2. An offer must be capable of creating legal relations.
3. An invitation to offer is not an offer.
4. An offer may be ‘specific’ or ‘general’.
Acceptance

◼ A contract, as already observed, emerges from

the acceptance of an offer.
◼ Section 2(b) states
‘A proposal when accepted becomes a promise’ and defines ‘acceptance’ as
‘when the person to whom the proposal is made signifies his assent there
to, the proposal is said to be accepted. ’
Some Legal Rules Regarding a Valid Acceptance
1. Acceptance must be given only by the person to whom the offer is made
2. Acceptance must be absolute.
3. Acceptance must be expressed in some usual and reasonable manner.
4. only Mental acceptance is not enought.
5. Acceptance must be communicated by the acceptor.
2. Intention to create legal relations

◼ There must be an intention among the parties that the

agreement should be attached by legal consequences
and create legal obligations.

◼ Agreements of a social or domestic nature do not

legal relations, and as such they do not give rise to a
contract.
3. Lawful consideration sec 2(d)

◼ The third essential element of a valid contract is the

presence of consideration’.

◼ Consideration has been defined as “the price paid by

one party for the promise of the other.”

◼ An agreement is legally enforceable only when each

of the parties to it gives something and gets
something.
4, Capacity of parties(Sec. 11)

◼ The parties to an agreement must be competent to

contract, otherwise it cannot be enforced by a court
of law.

◼ In order to be competent to contract the parties must

be of
◼ The age of majority and
◼ of Sound mind
◼ Must not be disqualified from contracting by any law
to which they are subject (Sec. 11).
5. Free consent(Sec. 11-22).

◼ Free consent of all the parties to an agreement is another

essential element of a valid contract.

◼ ‘Consent’ means that the parties must have agreed upon the
same thing in the same sense (Sec. 13).

◼ There is absence of ‘free consent’ if the agreement is induced

by
(i) Coercion, sec-15 (case- Renganayakamma v/s Chetty . 1918 )
(ii) Undue influence, sec-16
(iii) Fraud, sec-17
(iv) Misrepresentation, sec-18
(v) Mistake (Sec. 20,21,22).
6. Lawful object. (Sec-23).

◼ For the formation of a valid contract it is also

necessary that the parties to an agreement must agree
for a lawful object.

◼ The object for which the agreement has been entered

into must not be fraudulent or illegal or immoral or
opposed to public policy or must not imply injury to
the person or property of another (Sec. 23).

◼ If the object is unlawful for one or the other of the

reasons mentioned above the agreement is void.
According to Section 23, the object is said to be unlawful if –

◼ (a) It is forbidden by law;

case :- sreenevasa v/s Ram Mohan. (1952)

◼ (b) It is fraudulent;
◼ (c) It involves an injury to the person or
property of any other;
◼ (d) The court regards it is immoral or opposed
to public policy.
7. Writing and registration. Sec-25

◼ According to the Indian Contract Act, a contract may be oral or in writing.

But in certain special cases it lays down that the agreement, to be valid,
must be in writing or/and registered.

◼ Similarly, certain other Acts also require writing or/and registration to

make the agreement enforceable by law which must be observed.

◼ An agreement for a sale of immovable property must be in writing and

registered under the Transfer of Property Act, 1882 before they can be
legally enforced.
8. Certainty. (Section 29)

◼ Section 29 of the Contract Act provides that Agreements, the

meaning of which is not certain or capable of being made
certain, are void.’

◼ In order to give rise to a valid contract the terms of the

agreement must not be uncertain. It must be possible to
ascertain the meaning of the agreement, for otherwise, it
cannot be enforced.
9. Possibility of Performance. (Section 56)

◼ It must be capable of performance. Section 56

lays down that ‘An agreement to do an act
impossible in itself is void’.

◼ If the act is impossible in itself, physically or

legally, the agreement cannot be enforced at
law.
Essential of valid Performance

◼ (i) It must be unconditional

◼ (ii) It must be made at a proper time and
place
◼ It should be in respect of the whole
Obligation.
◼ It must provied resonable opportunity.
◼ It must be in proper form.
Etc.......
10. Not expressly declared void.

◼ The agreement must not have been expressly

declared to be void under the Act. Sections 24—30
specify certain types of agreements which have been
expressly declared to be void.
KINDS OF CONTRACT

◼ A) According to enforceability
◼ B) According to Formation.
◼ C) According to performance.
A) According to enforceability

◼ 1. Valid contract
◼ 3. Void contract
◼ 3. Voidable contract
◼ 4. Unenforceable contract
◼ 5. Illegal or unlawful contract
1. Valid contract (sec 10)

◼ A valid contract is an agreement enforceable

by law. An agreement becomes enforceable by
law when all the essential elements of a valid
contract as listed above are present.
2. Void contract (sec 2j)

◼ Literally the word ‘void’ means ‘not binding

in law’.

Accordingly the term

‘void contract’ implies a useless contract which has no legal effect at all.
Section 2( j) defines:

‘A contract which ceases to be enforceable by law becomes void Contract.’

‘An Agreement which to be enforceable by law
becomes void Agreement.’ (sec 2g)
3. Voidable contract (sec 2i)

◼ According to Section 2(i),

◼ ‘An agreement which is enforceable by law at
the option of one or more of the parties there
to, but not at the option of the other or others,
is a voidable contract.’
4. Unenforceable contract

◼ An unenforceable contract is one which

is valid in itself, but is not capable of
being enforced in a court of law because
of some technical defect such as absence
of writing, registration, requisite stamp,
etc., or time barred by the law of
limitation.
5. illegal or unlawful contract

◼ The word ‘illegal’ means ‘contrary to

law’ the term ‘contract’ means ‘an
agreement enforceable by law.’ As such,
to speak of an ‘illegal contract’ involves
a contradiction in terms. Moreover, being
of unlawful nature, such an agreement
can never attain the status of a contract.
b) According to Formation.

◼ Express contract.
◼ Implied contract.
◼ Quasi contract.
Express contract.

◼ Contracts entered into between the parties by

words spoken or written, are termed as express
contracts.

◼ For example, if X tells Y on telephone that he offers to sell his

house for Rs.20,000 and Y in reply informs X that he accepts
the offer, there is an express contract.
Implied contract.

◼ Where the offer or acceptance is made not by

words, written or spoken, but by acts and
conduct of parties, it is termed as an implied
contract.
Quasi contract.

◼ Contractual obligations are generally created

voluntarily; but there are some obligations
which are not contractual, but which are
treated as such by law, that is to say, there is
no contract in fact, but there is one in the
contemplation of law.
C) According to performance.

◼ Executed contract.
◼ Executory Contract.
◼ Unilateral contract.
◼ Bilateral contract.
Executed contract.

◼ An executed contract refers to that contract in which

both the parties have fulfilled their respective
obligations.
◼ In other words, an executed contract is one where
nothing remains to be done by either party.
Executory contract.

◼ An executory contract refers to that contract in which

one or both the parties have not fulfilled their
respective obligations.
◼ In other words, an executory contract is one where
something remains to be done by either party.
Unilateral contract.

◼ A contract is said to be unilateral where one party to

a contract has performed his share of obligation
either before or at the time when the contract comes
into existence.
◼ It is only the obligation of the other party which
remains outstanding at the time of formation of the
contract.
Bilateral contract.

◼ In a bilateral contract obligations of both the

parties are outstanding.
◼ At the time of the formation of the contract.
They are, executory contracts or contracts
With executory consideration.
◼ In other words, in a bilateral contract, there is
only a promise for a promise.
CAPACITY TO CONTRACT.

◼ Section 11 lays down that

◼ “Every person is competent to contract”
◼ If........
◼ who is of the age of majority
◼ who is of sound mind,
◼ He is not disqualified from contracting by any
law to which he is subject.
A) Minor

◼ A minor is a person who is not a major.

◼ According to the Indian Majority Act, 1875, a
minor is one who has not completed his or her
18th year of age.
◼ A person attains majority on completing his
18th year in India.
In the following two cases, a person continues to be a minor
until he completes the age of 21 years.

◼ (a) Where a guardian of minor’ person or

property has been appointed under the
Guardians and Wards Act, 1890;

◼ (b) Where the superintendence of a minor’s

property is assumed by a Court.
Why should minors be protected ?

◼ A minor has an immature mind and cannot

think what is good or bad for him. Minors are
often exploited and their properties stolen. As
such he must be protected by law from any
exploitation or ill design. But at the same
time, law should not cause unnecessary
hardship to persons who deal with minors.
Effects of minor’s agreement

◼ A minor’s agreement being void is wholly

devoid of all effects. When there is no contract
there should be no contractual obligation
either side.
various rules regarding minor’s
agreement.
◼ 1. An agreement with or by a minor is void.
◼ Section 10 of the Contract Act requires that the parties to
a contract must be competent and Section 11 says that a
minor is not competent. But neither Section makes it
clear whether the contract entered into by a minor is void
or voidable. Till 1903, courts in India were not
unanimous on this point.
◼ The Council made it perfectly clear that a minor is not
competent to contract and that a contract by a minor is
void.
2. No Ratification

◼ An agreement with minor is completely void.

A minor cannot ratify the agreement even on
attaining majority, because a void agreement
cannot be ratified. A person who is not
competent to authorise an act cannot give it
validity by ratifying it. (sec 68)
3. Minor can be a promisee or
beneficiary
◼ If a contract is beneficial to a minor it can be
enforced by him. There is no restriction on a minor
from being a beneficiary.

◼ X, a minor, insured his goods with an insurance company. The goods were
damaged. X filed a suit for claim. The insurance company took the plea
that the person on whose behalf the goods were insured was a minor. The
court rejected the plea and allowed the minor to recover the insurance
money.
◼ (The General American Insurance Company Ltd. v. Madan Lal Sonu Lal
(1935) ).
4. No estoppel against a minor

◼ Where a minor by misrepresenting his age has

induced the other party to enter into a contract
with him, he cannot be made liable on the
contract.
◼ There can be no estoppel against a minor.

◼ The court may, however, require the minor to

compensate the other party on the ground of equity.
5. No Specific performance

◼ A minor’s contract being absolutely void, there can

be no question of the specific performance of such a
contract. A guardian of a minor cannot bind the
minor by an agreement for the purchase of
Immovable property;

◼ so the minor cannot ask for the specific performance

of the contract which the guardian had no power to
enter into.
6 No insolvency

◼ A minor cannot be declared insolvent

even though there are dues payable from
the properties of the minor.
7. Partnership

◼ A minor being incompetent to contract

cannot be a partner in a partnership firm,
◼ But under Section 30 of the Indian
Partnership Act, he can be admitted to
the benefits of partnership with the
consent of all partners by an agreement
executed through his lawful guardian
with other partner.
8. Minor can be an agent

◼ A minor can act as an agent. But he will

not be liable to his principal for his acts
( he can not be held personally liable for
negligence or breach of duty).

◼ A minor can draw, deliver and endorse

negotiable instruments without himself
being liable.
9. Joint contract by minor and adult

◼ Where a minor & an adult jointly enter into an

agreement with another person ,In such a case,
the adult will be liable on the contract but not
the minor.
10. Liability for necessaries

◼ A claim for necessaries supplied to a minor is

enforceable by law.
◼ Minor is legally bound to support is governed by
Section 68 of the Indian Contract Act.
◼ But a minor is not liable for any price that he may
promise and never for more than the value of the
necessaries. There is no personal liability of the
minor, but only his property is liable.
B) PERSONS OF SOUND MIND

◼ According to Section 12 , A person is said to

be of sound mind for the purpose of making a
contract, if, at the time when he makes it, he is
capable of understanding it and of forming a
rational judgment as to its effects upon his
interests.’
PERSONS OF UNSOUND MIND

Idiot
Lunatic
Drunken person
PERSONS OF UNSOUND MIND

Idiot: A person who completely lost his mental

powers and who is incapable of forming a
rational judgment is called an idiot.
A person who is devoid of any faculties
of thinking or rational judgment is called an
idiot . all agreements other than those for
necessaries of life, with idiots are absolutely
void.
Cont...

◼ Lunatic: A person whose mental powers are

deranged due to some mental strain is called a
lunatic.
❑ A person whose mental powers are deranged
is called a lunatic. agreement made with
lunatic ,except those made during lucid
intervals (period in which he is in his senses )
For necessaries supplied to lunatic are valid.
and the property of lunatic can be taken.
Cont...

◼ Drunken person: A person who is in the state

of intoxication(under the influence of drink or
drugs) is incapable of entering into a contract.
Cont...

◼ Hypnotism
◼ Mental Decay.
Effects of agreements made by
persons of unsound mind.
◼ An agreement entered into by a person of
unsound mind is absolutely void and
inoperative as, against him but he can derive
benefit under it . The property of a person of
unsound mind is, however, always liable for
necessaries supplied to him or to any one
whom he is legally bound to support, under
Section 68 of the contract Act.
C) Disqualified Persons

◼ a. Alien enemies
◼ b. Foreign sovereigns and ambassadors
◼ c. Convict
◼ d. Married women
◼ e. Insolvent.
Alien enemies

◼ Alien enemy: A person who is not a citizen of

India is called an alien.
◼ Contract with Alien enemy is void only with
special reference form central gov. We can
enter into contract.
◼ Hence An alien friend can contract but an
alien enemy cannot contract.
Foreign sovereigns and ambassadors

◼ One has to be cautious while entering into

contracts with foreign sovereigns &
Ambassadors, beause whereas they can sue
others to enforce the contract entered upon
with them ,they cannot be sued without
obtaining the prior sanction of central Gov.
Thus they are in privileged position & are
ordinarily considered incompetent to contract.
Convict

◼ convict is incapable of entering into contract

.and the incapability ends when sentence
expires or punishment finish.
Cont...

◼ Married women

◼ Insolvent.

◼ Pardanashin Women

◼ Coeporation.
 A person is incompetent to
contract under the following circumstances:

◼ 1

Section 11 of The Indian Contract Act specifies that

every person is competent to contract provided:
✔ He should not be a minor i.e. an individual who has not attained the age of majority i.e.
18 years.

✔ He should be of sound mind while making a contract. A person with unsound mind
cannot make a contract.

✔ He is not a person who has been personally disqualified by law.

 INCAPACITY

DISQULIFIE
UNSOUND D
MINORITY
MIND BY LAW

Idiot lunatic DRUNKED

ALIEN ENEMY CONVICTS

CORPORATION
:
Contingent contracts,

◼ Section 31 defines “a contingent contract is a contract to do

or not to do something, if something event., collateral to such
contract, does or does not happen.”
◼ Contingent contracts are called conditional contracts under
English Law.

◼ The event on which the performance depends upon may be

either an event which is certain to happen (though no one
nows when it may happen) or it may be an event which is
uncertain. In other words the said event may or may not
happen. Contracts of insurance are contingent Contract.
Essential elements of contingent contracts:

◼ 1) The performance of a contingent contract will

depend on a future event.
◼ 2) The happening of the event must be uncertain.
◼ 3) The happening or non-happening of such future
event should not form an essential part of the contract
but it should only be collateral to it.
◼ 4) The happening or non-happening of such future
event must be beyond the powers of the contracting
parties.
Rules regarding contingent contract

◼ 1An event happening.

◼ 2Event not happening.
◼ 3 Future contract of living person.
◼ 4Specified event not happening within fixed
time.
◼ 5 Impossible event.
DISCHARGE & PERFOMRANCE OF
CONTRACT

◼ When the rights and obligations arising out of a

contract are extinguished, the contract is said to be
discharged or terminated.
A contract may be discharged in any of the
following ways

◼ 1. By performance—actual or attempted.
◼ 2. By mutual consent or agreement.
◼ 3. By subsequent or supervening impossibility or
illegality.
◼ 4. By lapse of time.
◼ 5. By operation of law.
◼ 6. By breach of contract.
1. By performance—actual or
attempted.
◼ Performance of a contract takes place when
the parties to the contract fulfill their
obligations arising under the contract within
the time and in the manner prescribed. Sec. 37

◼ 1. Actual performance
◼ 2. Attempted performance or tender.
2. By mutual consent or
agreement.
◼ A contract is created by means of an agreement, it
may also be discharged by passing another
agreement between the same or other parties.
Sections 62 and 63 deal with this subject and
provide for the following methods of discharging
a contract by mutual agreement:
◼ 1. Novation 2. Alteration.(in Agreement)

◼ 3. Rescission(before date of performance) 4. Remission (extent of

performance)

◼ 5. Waiver
3) BY SUBSEQUENT OR SUPERVENING
IMPOSSIBILITY OR ILLEGALITY

◼ Impossibility at the time of contract. There is no question of

discharge of a contract which is entered into to perform
something that is obviously impossible, . “an agreement to do
an act impossible in itself is void.”

◼ Subsequent impossibility. A contract to do an act which, after

the contract is made, becomes impossible, or, by reason of
some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful’.
◼ 1) Destruction of subject Matter 2) Incapacity of personal
services 3) Change of Law.
4. By lapse of time.

◼ Thus in certain circumstances lapse of time

may also discharge a contract. Where “time is
of essence in a contract.”
5. By operation of law.

◼ A contract may be discharged independently of the wishes of

the parties. i.e. by operation of law.

◼ DISCHARGE BY OPERATION OF LAW

◼ a. Death.
◼ b. Insolvency.
◼ c. Merger
◼ d. Unauthorized material alteration
6) BREACH OF CONTRACT

◼ ‘Breach of contract by a party there to is also a method of

discharge of a contract, because ‘breach’ also brings to an end
the obligations created by a contract on the part of each of the
parties.

◼ The party not at fault can sue for damages for breach of contract as per
law; but the contract as such stands terminated. Breach of contract may be
of two kinds:

◼ (1)Anticipatory breach; and

◼ (2) Actual breach
1)Anticipatory breach
◼ An anticipatory breach of contract is a breach of contract occurring before
the time fixed for performance has arrived. It may take place in two ways:

(a) Expressly by words spoken or written. Here a party to the contract

communicates to the other party, before the due date of performance, his
intention not to perform it.

(b) Impliedly by the conduct of one of the parties. Here a party by his own
voluntary act disables himself from performing the contract.
2. Actual breach
◼ Actual breach may also discharge a contract. It occurs when a party fails to
perform his obligation upon the date fixed for performance by the contract.
There can be no actual breach of contract by reason of non-performance so
long as the time for performance has not yet arrived.
Following remedies against the guilty party

◼ 1. Rescission of the contract.

◼ 2. Suit for damages.
◼ 3, Suit upon quantum meruit.(‘as much as is earned’)
◼ 4. Suit for specific performance of the
contract.(that the courts issue a order for specific perorfamce.)
◼ 5. Suit for an injunction.(Thus ‘injunction’ is a preventive relief)
 Assignment No :- 01
(Solve any 5) Time:20Min

◼ What is the Indian Contract Act

◼ What is An Agreement.
◼ What is Legal Obligation
◼ What is Lawful consideration.
◼ What is Free consent
◼ What is Certainty.
◼ What is Possibility of Performance.
◼ What is Lawful object
◼ What is consideration.
◼ What is Valid contract
 Assignment No :- 01
(Solve any 5) Time:20Min

◼ What is Void contract

◼ What is Voidable contract
◼ What is Unenforceable contract
◼ What is Illegal or unlawful contract
◼ What is Quasi contract.
◼ What is Implied contract.
◼ What is Executory Contract.
◼ What is Bilateral contract.
◼ What is CAPACITY TO CONTRACT.
◼ What is Minor
 Assignment No :- 01
(Solve any 5) Time:20Min

◼ What is PERSONS OF SOUND MIND

◼ What is Alien enemies
◼ What is Convict
◼ What is Contingent contracts
◼ What is PERSONS OF UNSOUND MIND
◼ What is DISCHARGE & PERFOMRANCE OF
CONTRACT
◼ What is BREACH OF CONTRACT
◼ What is DISCHARGE BY OPERATION OF LAW
◼ What is DISCHARGE OF CONTRACT By lapse of time
◼ What is DISCHARGE OF CONTRACT by Alteration