Pocket Notes

Law of Contract

Law means a set of rules which regulates our behaviour and are important to a civilized society. And thus, there is no space for legislation in an uncivilized society.

According to John Austin, ‘Law is the aggregate set of rules by a man as politically superior, or sovereign to men, as political subjects.

One should know the law to which he is subject as ignorance of law is no excuse.

Indian Contract Act, 1872

Contracts in India are governed as per, and in accordance with, the provisions of the Indian Contract Act, 1872, which came into force on 1st September 1872. In accordance with the Indian Contract Act, the law recognizes a written as well as an oral contract.

According to Salmond, A contract is an agreement that creates and defines obligation between the parties to it.

According to Pollock, Every agreement and promise which is enforceable by law is said to be a contract.

Important Terms and their Meaning as per Indian Contract Act

  • Offer also termed as a proposal, Defined in Section 2(a)-
    When one person signifies to another his desire to do or to abstain from doing something with a view to obtaining the assent of that other person either to such an act or abstinence, such person is said to make a proposal or an offer.
  • Acceptance, defined in Section 2(b) –
    When any proposal is made to an individual, signifies his acceptance or assent thereto, the proposal is said to be accepted.
  • PromiseDefined in Section 2(b)
    A proposal, when accepted, becomes a promise.
  • Promisor and promisedefined in Section 2(c)
    When the proposal is accepted, the person making the proposal is called as promisor and the person accepting the proposal is called the promisee.
  • Consideration, defined in Section 2(d)
    When at the wish of the promisor, the promisee or any other person has done or abstained from doing something or does or abstains from undertaking something or promises to do or abstain from doing something, such an act or abstinence or promise is called a consideration for the promise.
  • Agreement, defined in Section2(e)
    Every promise or the set of promises forming the consideration for each other. In short, Agreement = Offer + Acceptance.
  • Contract, defined in Section 2(h)
    An agreement enforceable by law is a contract.
  • Void Contract, defined in Section 2(j)
    An agreement which ceases to be enforceable by law becomes void when it is ceased to be enforceable.
  • Void Agreement, defined in Section 2(g)
    An agreement not enforceable by law is void.
  • Voidable Contract, defined in Section 2(i)-
    An agreement is a voidable contract if it is enforceable by law at the option of one or more of the parties thereto, and it is not enforceable by law at the chance of the other or others.

Contract emerges from an Agreement

In order to understand what a contract is, it is important to have a basic idea of an agreement. An agreement may be a wider term than a contract. It is, therefore, appropriate to say that every contract is an agreement, but every agreement is not a contract. Therefore, a contract is a mixture of an agreement and the legal enforceability element.

A contract is a legally binding agreement signed between individuals, the conditions of which the courts have the authority and the duty to enforce. An agreement is a less formal creation of an obligation between two parties. The aim to develop legal ties is essential for the establishment of a contract as this is the most important which distinguishes a contract from an agreement.

Principles:

  • An agreement enforceable in a court of law is a contract.
  • In order for an agreement to be enforceable in a court of law, there must be a meeting of minds between both the parties.
  • The parties to the contract should do something about the other party. There is a mutual obligation to do something for the other party. This is called ‘consideration’ and absence if consideration renders the contract unenforceable.

Essentials of a Contract

A contract has the following essentials:

  • Offer (proposal)
  • Acceptance
  • Consideration
  • Legal enforceability factor
  • Offer (Proposal)
    An offer is a proposal made by one person, which communicates his willingness to enter into a contractual arrangement in exchange for a promise. An offer can be conditional, but it must be clear, precise and not ambiguous. The conditions of the offer must be explicit and not vague or ambiguous. The negotiation of the offer signifies that the proposal must be conveyed to the other party. The communication of the proposal is considered complete with regard to the knowledge of the person to whom it is made.

Legal principles:

  • Once a person acknowledges another person’s offer, and signals such acknowledgement to the former, a contract comes into existence between them.
  • Agreements that are uncertain are considered as void agreements.
  • Rejected offers may only be accepted if they are renewed.
  • Acceptance
    A contract is formed only after an offer has been acknowledged. Until acceptance is made, no party is bound by it. At that point, the offeror is free to withdraw his offer and the offeree is free not to approve or refuse the offer.
    Once the offer is accepted, it becomes a promise which, if the other conditions of the contract are fulfilled, ties all parties to the promise. Upon acceptance, each party is legally bound by the promise rendered by him through the medium of offer of acceptance of it.
    Communication of the offer and acceptance should be made either by the offeror and the acceptor himself or by the person who has the authority to accept the offer. Therefore, acceptance has to be rendered in the manner specified or implied by the offeror.
  • Consideration
    Consideration is the value that is exchanged against the subject matter of the contract. It is the compensation offered to the other party by the contracting party. Consideration is the price of a promise. It moves at the desire of the Promisor. It may move away from the Promisee or from any other person. Consideration may be past, present or future. it is a common rule that an agreement without consideration is void.
    Consideration may be insignificant of disproportionate to the value of the subject matter but it must be of some value in the eyes of the law.
  • Legal Enforceability Factor
    The essential element of a valid contract of that there must be an intention among the parties that the agreement should carry legal consequences and create legal obligations. When there is no such intention on part of the parties, there will be no contract between them. Agreements of social or domestic nature do not provide for a legal relationship. For example, if two persons agree to provide advice to each other, in the pursuit of virtue, science or art, it cannot be regarded as a contract. In commercial and corporate agreements, the presumption is usually that the parties intend to establish legal relations with each other. But this pre assumed intention is rebuttable which means that it must be presented that the parties did not intend to be legally bound by such agreements.

The Rule of Privity of Contract

The doctrine of privity of contract means that a contract is only between the parties engaged in it and no third party can enforce their rights or claim damages that arise from this contract. Likewise, the third part is not bound by the contract because there is no mutual understanding. For instance, in an English case, Tweddle v Atkinson, the plaintiff was to be married to the daughter of one G and in consideration of this intended marriage G and the Plaintiff’s father entered into a written agreement that each would pay the plaintiff a sum of money. G failed to do so; hence, the plaintiff sued him. His action failed. The court held that no stranger to the consideration can take advantage of the contract, although, the contract was made for the benefit of the stranger.

Agreement in restraint in marriage, void.

The restraint of marriage must be full and absolute. If the parties are at choice, the restraint shall be partial and not absolute. To put it in simple words, if the parties enter into any agreement which stipulates a condition restraining the marriage of either or both of the contracting parties, such an agreement shall be void and will not be enforceable in the court of law. However, such condition must be absolute in nature for instance; A and B enter into an agreement whereby they agree not to marry anyone throughout the lifetime. Such an agreement shall be void. However, where a person is given a choice, for instance, A, the father of B, agrees with B that if B marries anyone, A will oust him from the share in property, this is not an absolute restraint since B can choose not inherent any property of his father and remain free to marry. This will not be considered as an absolute restraint and the agreement will be valid since the restraint is partial.

Important Points

  • Contingent agreements to do or not to do anything, in the event of an impossible event, are void, whether or not the parties are aware of the impossibility of the event at the time when it is made.
  • An agreement to do an act is impossible in itself is void. A contract for an act which, after the contract is executed, becomes impossible or, on the basis of an event which the promisor could not prevent, unlawful, becomes null and void when the act becomes impossible or unlawful.

Essentials of a Valid Contract

For a valid contract, it is also essential that the consent of the contracting parties must be given out of free wish, will, and accord. Where consent to an agreement is caused by:

  • Coercion
    It means committing or threatening to commit any act forbidden by the Indian Penal Code or any other criminal law.
  • Undue Influence
    Relations which involve domination.
  • Fraud
    Fraud is interpreted to include and shall involve the following actions, committed by a party to contract or by its connivance or by its representative, carried out with the ‘intention to deceive’ or to induce a person to come into a contract.
    • The idea that a statement is true when it is not true and the person making such suggestion do not believe it to be true.
    • Promise made without any specific intent to make it happen.
    • Any other act fitted to be deceived.
    • Effective concealment of a fact by an individual who has an understanding or belief of the fact.
  • Misrepresentation
    It means a careless, reckless or negligent misstatement of a fact material to the contract given by a person without prior inquiry or confirmation of facts. A contract induced by misrepresentation is voidable at the option of the party so misrepresented.
  • Mistake
    It renders a contract as void if the below-mentioned situations exist:
    • When the parties to an agreement are mistaken,
    • Their mistake is as to a matter of fact and not law,
    • The fact is essential to the contract.

Types of Contracts

The important types of contract, as provided under the Indian Contract Act, 1872 are briefly mentioned below:

  1. Contingent Contracts
    It is a sort of conditional contract and the condition is of an uncertain nature. A contingent contract is a contract to do something or not to do something, if there is or does not happen to be any incident of a collateral event to that contract. A contingent contract is dependant or conditional upon the happening or non- happening of a future event or contingency. Contingency must be collateral to the contract.
  2. Contract of Indemnity
    It is a contract by which one party to an agreement promises to save or protect the other party from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person. Indemnity is security against or compensation for the loss.
  3. Contract of Guarantee
    A contract of guarantee is a contract to fulfil the promise or release the liability of the third person on the event of default. The person who gives the guarantee is called the surety, whereas, the person in respect of whose default the guarantee is given is called the principal debtor. A creditor is a person to whom the guarantee is given.
  4. Contract of Agency
    The rule of the contract of agency provides that, when the principal expressly or impliedly authorizes some act to be done, he is liable for such an act of the agent if the same has been in the course of performance of his duties as an agent.
  5. Contract of Bailment
    A bailment is the delivery of goods by one person to another for some specific purpose, upon the condition when such purpose is accomplished, the goods so delivered shall be returned or may be disposed off as per the instructions of the person delivering them. A ‘Bailor‘ is a person delivering the goods, whereas, a ‘Bailee‘ is a person to whom the goods are delivered.
  6. Pledge
    Pledge is a kind of bailment of goods with the object that those goods shall serve as a security for the payment of a debt or performance of a promise.
  7. Partnership
    It is a type of business relationship in which two or more people pool capital, expertise, and other resources to share profit and losses in accordance with the terms of the partnership agreement they have entered into. A partnership function on the principle of mutual agency, i.e., any act done by a partner during the sustenance of partnership and in the name of the firm, not only binds the partner but the firm as a whole.
Shyam promised to take Manohar out for a dinner in a five-star hotel. Even after two weeks, Shyam did not fulfil the promise. Manohar wants to sue Shyam to enforce that promise.
If Manohar goes to court:


(a) He can recover the value of the dinner from Shyam.
(b) He can compel Shyam to buy dinner at a five-star hotel.
(c) This promise will not be enforced by a court of law, as there is no consideration from Manohar.
(d) None of the above answers is correct


Answer – Option C

Explanation – According to the aforementioned principles, there has to be a consideration and absence of the same renders the contract unenforceable. In the given facts, there exists no consideration from Manohar and hence, there exists no contract between them. Also, Manohar cannot recover any damages or cannot sue Shyam in a court of law because neither does a court of law entertain a social contract of this nature nor does it take care of trifles.

Amar wanted to purchase a particular piece of land. He sent a letter to his cousin, Binod, offering him Rs. 4 lakhs for it. Binod replied that he would not sell it below Rs. 5 lakhs. Amar communicated his willingness to pay this amount. Binod did not sell the land to Amar. Amar sued him for breach of contract.
Considering the aforementioned legal principles decide if:


(a) Binod is liable because once he communicates an offer to Amar and Amar accepts it, a contract comes into existence.
(b) Binod is not liable because he has rejected the offer by giving a counter-offer which is also not specific.
(c) Binod is liable as he has misled Amar by his actions.
(d) Binod is not liable as there is no legally enforceable factor.


Answer – Option B

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