pacta sunt servanda (agreements must be kept)

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What is a contract
Agreement and enforceability
Standard form contracts
Section 10 – Conditions/ Pre requisites of a valid contract
Virtual contracts

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Introduction
The law relating to contracts is contained in the Indian Contract Act, 1872.

For business executives, contract law is tremendously significant because

it underlies or is related to all major areas of law affecting business.

The general principles of the law of contracts are covered in 75 sections.

The Indian Contract Act, 1872 is not a complete code on the law of contracts.
The preamble to the Act reads: “Whereas it is expedient to define and amend
certain parts of the law relating to contracts, it is hereby enacted as follows.”

Further the Indian Contract Act does not affect any usage or custom of trade.
Thus, the parties to a contract, which clearly provide for the application of usages
into their contracts, are expressly saved from the operation of this Act.

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Section 2(h) defines a contract as “an agreement
enforceable by law”
Thus to make a contract there must be –
(i) an agreement
(ii) the agreement should be enforceable by law.

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Meaning and Essentials of a
Valid Contract
Contract. A contract is an agreement,
enforceable by law, made between at least
two parties by which rights are acquired by
Legal
one and obligations are created on the part Agreement
Obligation
of another.
Agreement.
Section 2(e) defines an agreement as “every
promise and every set of promises forming Contract
consideration for each other”.
Contract = Agreement + Legal Obligation
In this context, the word ‘promise’ is defined
by s.2(b). In a contract there are at least two
parties. One of them makes a proposal (or
an offer) to the other, to do something, with
a view to obtaining the assent of that other
to such act.

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Thereby for the formation of a contract

There must be an agreement

An agreement must be enforceable by law

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Section 10: What agreements are contracts
All agreements are contracts if they are
made by the free consent of parties
competent to contract, for a lawful
consideration and with a lawful object, and
are not here by expressly declared to be
void.

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Examples.
(i) A agrees to sell his motorcycle to B for Rs 10,000. The agreement
gives rise to a legal obligation on the part of A to deliver the
motorcycle to B and on the part of B to pay Rs 10,000 to A. The
agreement is a contract. If A does not deliver the motorcycle, then B can
go to a court of law and file a suit against A for non-performance of the
promise on the part of A. On the other hand, if A has already given
the delivery of the motorcycle and B refuses to pay the price, A can go to
the court and file a suit against B for non- performance of promise.
(ii) A invites B for dinner in a restaurant. B accepts the invitation. On the
appointed day, B goes to the restaurant. To his utter surprise A is not
there or A is there but refuses to entertain B. B shall have no remedy
against A. Similarly, in case A is present in the restaurant but B fails to turn
up, then A shall have no remedy against B.
(iii) A gives a promise to his son to give him a pocket allowance of Rs 150
every week. In case A fails or refuses to give the promised amount, his son
has no remedy against A.

Cont….

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Privity of Contract. As a contract is entered into by two or more persons
thereby creating rights and obligations for them, it is a party to the contract
only who can enforce his rights as against the other party (i.e., the
promisor). The basic principle underlying law of contracts is that a stranger
to a contract cannot maintain a suit for a remedy. The law entitles only
those who are parties to the contract to file suits for exercising their rights.
This is known as ‘privity of contract’.

Example. A is indebted to B. A sells certain goods to C.C gives a promise to

A to pay off A’s debt to B. In case C fails to pay, B has no right to sue C,
being a stranger to the contract between C and A. In other words C is not in
privity with B. However, C is in privity with A.

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The concept of privity of contracts is illustrated below:

M M = Manufacturer
Goods Rs. W = Wholesaler
W R = Retailer
B = Buyer
Goods Rs B is in privity of contract with
R R only but not with W and M

Goods Rs
B Privity of Contract

Classification of Contracts. Contracts may be classified in terms of their

(i) Validity or enforceability,
(ii) Mode of formation and
(iii) Performance. 10
Essentials of a Valid Contract

There should be a valid agreement for which there should

always be an offer and an acceptance
Intention to create legal relationship
A valid Consideration
Consent of the parties should be free
Lawful objects
Not expressly declared to be void
The formalities laid down under Section 10 should be
compiled with

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Proposal (or offer) and Acceptance [Ss.3-9]
Modes of Making an Offer
 Express offer
 Implied offer
 Offer by abstinence
 Specific and general offers
 Philosophy underlying general offers
 Implied offer
Difference between Offer and Invitation to Offer. An offer is to be
distinguished from an invitation to offer. A prospective shareholder by
filling up a share application form, usually attached to the prospectus, is
making the offer. An auctioneer at the time of auction inviting offers from
the bidders is not making an offer. Cont….

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Proposal/ Offer 'concurrence of wills' or a 'meeting of the
minds' of two or more parties.

Acceptance

Matures into a promise

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Some examples of different types of offers.
i. A real estate company proposes, by a letter, to sell a flat to Rajiv at a certain
price. This is an offer by an act by written words (i.e., letter). This is also
known as an express offer.
ii. If the company proposes, over telephone, to sell the flat to Rajiv at a certain
price then this is an offer by an act (by oral words). This is an express offer.
iii. A company owns a fleet of motor boats for taking people from Mumbai to
Goa. The boats are in the waters at the Gateway of India. This is an offer by
conduct to take passengers from Mumbai to Goa. Even if the incharge of
the boat does not speak or call the passengers, the very fact that the motor
boat is in the waters near Gateway of India signifies company’s willingness
to do an act with a view to obtaining the assent of other(s) (i.e., would-be
passengers). This is an example of an implied offer.
iv. Akbar, a creditor, offers not to file a suit against Begum, a debtor, if the
latter pays him the amount of Rs 2000 outstanding. This is an offer by
abstinence or omission to do something.

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Proposal or Offer
Section 2(a) 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, he is said to make a
proposal

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Essentials Of a Valid Offer
Offer must either be expressed or implied
Upton Rural District Council V Powell

Offer must intend to create a legal relationship

Balfour V Balfour
Mc Gregor V Mc Gregor

Offer must be certain and not vague in meaning

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Offer may be specific or general
Carlill V. Carbolic Smoke Ball Company

Offer must be communicated

Lalman Shukla V Gauri Dutt

Offer must be distinguished from invitation to

offer

An offer should not force an action on the offeree

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Acceptance
Essentials of a valid Acceptance
 Acceptance should be given by a proper person i.e. to whom the offer was made.

 Within proper time even if no specific time has been mentioned.

 Must be communicated. Mental acceptance is no acceptance.

 It can either be expressed or implied.

 Acceptance must succeed the offer.

 Offer once rejected cannot be accepted

Cross Offers
Counter Offers

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Capacity to Contract [Ss.10-12]
Persons who are Competent to Contract. Any one cannot enter into a
contract; he must be competent to contract according to the law. Every person is
competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and
(iii) is not disqualified from contracting by any law to which he is subject (s.11).
Capacity of a Minor to Enter into a Contract. The contract law defines
maturity as the age of majority. That usually is 18 years. Does this mean that a
minor is not competent to contract? No, a minor may make a contract, but he is
not bound by the contract; however the minor can make the other party bound by
the contract.
A minor’s parents/guardians are not liable to his creditors for the breach of a
contract by him whether the contract is for necessaries of life or not.

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A minor cannot contract null and
void ab intitio
As per Section 3 of Indian Majority Act, 1875 a person
who is over 18 years of age is ‘major’.
However if a guardian of a minor’s person or property
has been appointed under the Guardian and Wards Act or
superintendent of minor’s property is assumed by a court
of Wards and he become major after completing the age
of 21.
Mohiri Bibi vs Dharmodas Ghose

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Incompetent to contract
Minor can be a beneficiary in a contract
Person of Unsound mind
An insolvent
A convict undergoing imprisonment
Alien Enemy
Foreign Diplomats

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Consent and Free Consent
Meaning of Consent. We have seen earlier that an offer by one party is
accepted by the other party. The consent of the offeree to the offer by the offeror
is necessary. It is essential to the creation of a contract that both parties agree to
the same thing in the same sense. When two or more persons agree upon the
same thing in the same sense they are said to consent.

Free consent. For a contract to be valid it is not only necessary that the parties
consent but also that they consent freely. Where there is a consent but no free
consent the contract is voidable at the option of the party whose consent was not
free. Thus, free consent is one of the essentials of a valid contract. A consent is
said to be free when it is not caused by: (i) coercion, (ii) undue influence, (iii)
fraud, (iv) misrepresentation or (v) mistake.
Cont….

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Examples.

(i) A agrees to sell his Maruti car Delux model for Rs 1.20 lakhs. B agrees to
buy the same. There is a valid contract since A and B have consented to
contract on the same subject matter.

(ii) A who owns two Maruti cars, offers to sell one, say, yellow-coloured, to B for
Rs 1.20 lakhs. B agrees to buy the car for the price thinking that A is selling
the other car red coloured. There is no consent and hence no contract. A
and B have agreed not to the same thing but are thinking for different cars.

(iii) A signed a promissory note which he was told was a letter of guarantee. He
was held not liable on the promissory note, as there was no consent and
consequently no agreement entered into by him.

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Meaning of Coercion (Ss. 15 and 72). Coercion is (i) the committing or
threatening to commit any act forbidden by the Indian Penal Code or (ii) the
unlawful detaining.
Meaning of Undue Influence (s.16). Undue influence consists in the improper
exercise of power over the mind of one of the contracting parties by the other.
Meaning of Misrepresentation (Ss.18-19). Misrepresentation is also known as
simple misrepresentation whereas fraud is known as fraudulent
misrepresentation.
Meaning of ‘Mistake’ [Ss.20-21]. Mistake may be defined as an erroneous
belief on the part of the parties to the contract concerning something pertaining
to the contract.
Meaning and Effect of ‘Unilateral Mistake’. There is a unilateral mistake where
only one party to a contract is under a mistake as to a matter of fact.
Mistake of Law. It may be (i) mistake of law of the land, or (ii) mistake of foreign
law. In the first case the rule is “Ignorantia juris non-excusat”.
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Consideration [Ss.2(d), 23-25,185]
The term consideration is used in the sense of quid pro que, i.e., “something in
return”. This something or consideration need not be in terms of money.
Abstinence or promise is called a consideration for the promise”.
“No Consideration, No Contract” [Ss.10 and 25]. A promise without
consideration cannot create a legal obligation. The benefit so received or the
loss, damage or inconvenience so caused is regarded in law as the
consideration for the promise.
Rules Regarding Consideration
1. Consideration must move at the desire of the promisor
2. Consideration may move either from the promisee or any other person
3. Consideration need not be adequate
4. Consideration must be real and competent
5. Consideration must be legal
6. A consideration may be present, past or future
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Consideration
Sec 2(d) of Indian Contract Act 1872, defines
consideration as
“When at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or
abstains from doing, or promises to do or promises to
abstain from doing something, such act or abstinence or
promise is called consideration for the promise.”

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Sec 10. of the Indian Contract Act 1872 says that
Consideration is necessary for any valid contract.
&
According to Sec. 25, an agreement made without
consideration is void.

Hence……..
No Consideration No Contract

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 CONTRACTS WITHOUT CONSIDERATION
 Agreements made on account of natural love and
affection [Sec. 25(1)]
It is registered under the law
If is between parties standing in near relation to each
other

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Exceptions to rule
Compensation for past voluntary services
Promise to pay time barred debt if it is in written
Gifts made under Transfer of Property Act
Contracts of Agency
Contract of Gurantee as per section 127 of ICA, 1872

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Promise to pay time barred debt [Sec. 25(3)
(i) If it is expressed in writing
(ii) If it is signed by the debtor or his agent
4. Gifts

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Unlawful Consideration And Object [Ss.23-24]
There are certain cases in which the consideration and the object of an
agreement are unlawful, thereby making it unenforceable. Section 23 defines
an illegal agreement as one the consideration or object of which
(i) is forbidden by law; or
(ii) defeats the provisions of any law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v) the court regards it as immoral or opposed to public policy.
Examples. X agrees to buy from a jeweller certain jewellery to be delivered to
him after two months. In the meantime, the government enacts a law on gold
control and prohibits dealings in gold. When the time for delivery of the
jewellery comes the jeweller refuses to deliver the same. What can X do? He
has no cause of action. The contract becomes void when the law is enacted.
Thus, the contract was originally valid but becomes void later on by
subsequent (supervening) illegality.
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Agreements Declared Void [Ss.26-30]
The Act declares certain agreements to be void. Some of them (such as the
following) have already been explained: (i) agreements entered into through a
mutual mistake of fact between the parties (s.20); (ii) agreements, the object or
consideration of which is unlawful (s.23); (iii) agreements, part of consideration of
which is unlawful (s.24); (iv) agreements made without consideration (s.25).
Some other agreements which are declared to be void are below.
 Agreements Against Public Policy (Ss.26-28).
 Agreement in Restraint of Trade. Section 27
 Restraint of Legal Proceedings (s.28)
 Uncertain or Ambiguous Agreements (s.29)
 Wagering Agreements (s.30)

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