LAW OF

C O N T RA C T

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INTRODUCTION

The law of contract is the most important branch of

Mercantile Law.

Without such a law it would be difficult, if not impossible,

to carry on any trade or business in a smooth manner.

The law of contract is applicable not only to business but

also to all day-to-day personal dealings.

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 BEFORE LEARNING THE MEANING OF THE
TERM 'LAW' YOU MUST KNOW AS TO WHY WE
NEED LAW.

NO CIVILIZED SOCIETY CAN EXIST WITHOUT

LAW. IT IS REQUIRED FOR THE PRESERVATION
OF PEACE AND ORDERLINESS IN EVERY
SOCIETY.
WHAT IS WITHOUT LAW, NO PERSON WILL CARE FOR
LAW? OTHERS AND THEIR DEALINGS MAY NOT
MATERIALIZE.

WITH THE GROWTH OF SOCIETY AND THE

CONCEPT OF WELFARE STATE, IT BECAME
NECESSARY TO REGULATE THE CONDUCT OF
PEOPLE AND PROTECT THEIR PROPERTY AND
CONTRACTUAL RIGHTS.

HENCE, EACH COUNTRY ENACTED LAWS

SUITED TO ITS VARIOUS NEEDS AND THE
VALUE SYSTEM IT CHERISHED.
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 "Law is a rule of civil
conduct, prescribed by the
supreme power of state,
commanding what is right
and prohibiting what is
DEFINE wrong." ------- Blackstone.
LAW… 'Law is the body of principles
recognized and applied by
the state in the administrator
of justice." - Salmond.

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 MEANING OF MERCANTILE LAW

• MERCANTILE LAW OR COMMERCIAL LAW IS NOT A

SEPARATE BRANCH OF LAW.

• IT IS A PART OF CIVIL LAW WHICH DEALS WITH THE RIGHTS

AND OBLIGATIONS OF MERCANTILE PERSONS ARISING OUT
OF MERCANTILE TRANSACTIONS IN RESPECT OF
MERCANTILE PROPERTY

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SOURCES OF MERCANTILE LAW

English Mercantile Indian Statute Law

Law
SOURCES

Judicial Decisions Customs and Usages

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ENGLISH MERCANTILE LAW:
• OUR LAWS ARE BASED PRIMARILY ON THE ENGLISH LAWS WHICH DEVELOPED
THROUGH CUSTOMS AND USAGES OF MERCHANTS OR TRADERS IN ENGLAND,
THESE CUSTOMS AND USAGES GOVERNED THESE MERCHANTS IN THEIR
DEALINGS WITH EACH OTHER. THIS LAW IS ALSO KNOWN AS 'COMMON LAW'.

• AS A MATTER OF FACT, IT IS AN UNWRITTEN LAW BASED ON CUSTOMS,

USAGES AND PRECEDENTS. THE MOST IMPORTANT PART OF MERCANTILE
LAW, NAMELY, THE LAW OF CONTRACTS, IS STILL A PART OF COMMON LAW IN
ENGLAND.

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INDIAN STATUTE LAW:

• THE ACTS PASSED BY THE INDIAN LEGISLATURE ARE THE MAIN SOURCE OF
1NDIAN MERCANTILE LAW.

• THE IMPORTANT ACTS PASSED BY THE INDIAN LEGISLATURE ARE THE INDIAN
CONTRACT ACT 1872, THE NEGOTIABLE INSTRUMENTS ACT, THE SALE OF
GOODS ACT 1930, THE INDIAN PARTNERSHIP ACT 1932, THE COMPANIES ACT
1956, AND SO ON

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JUDICIAL DECISIONS:
THE PAST JUDICIAL DECISIONS OF COURTS ARE ANOTHER IMPORTANT SOURCE OF LAW.
THEY ARE GENERALLY FOLLOWED BY THE COURTS WHILE DECIDING SIMILAR CASES
BEFORE THEM.

THE PAST DECISIONS HAVE PERSUASIVE AND GUIDING VALUE.

WHEREVER THE LAW IS SILENT ON A POINT, THE JUDGE HAS TO DECIDE THE CASE
ACCORDING TO THE PRINCIPLE OF EQUITY, JUSTICE AND GOOD CONSCIENCE.

THE DECISIONS OF ENGLISH COURTS ARE ALSO FREQUENTLY REFERRED TO AS

PRECEDENTS IN DECIDING VARIOUS CASES AND FOR INTERPRETING THE INDIAN
STATUTES.

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CUSTOMS AND USAGES:
• THE CUSTOMS AND USAGES OF PARTICULAR TRADE ARE YET ANOTHER
IMPORTANT SOURCE OF INDIAN MERCANTILE LAW.

• THEY PLAY AN IMPORTANT ROLE IN REGULATING THE DEALINGS BETWEEN THE

MERCHANTS OF THAT TRADE. BUT IT IS NECESSARY THAT SUCH CUSTOMS OR
USAGES MUST BE WIDELY KNOWN, REASONABLE, CONSTANT AND MUST NOT
BE INCONSISTENT WITH THE LAW, THE INDIAN CONTRACT ACT RECOGNISES
THIS FACT BY PROVIDING THAT "NOTHING CONTAINED THEREIN SHALL
AFFECT ANY USAGE OR CUSTOM OF TRADE.”

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INDIAN CONTRACT ACT,
1872

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 WHAT IS A CONTRACT?
 Broadly speaking, a contract is an agreement made between two or more persons to do or to abstain from
doing a particular act. A contract invariably creates a legal obligation between the parties by which certain
rights are given to one party and a corresponding duty is imposed on the other party. A contract has been
defined by different authorities in various ways.

 Some of the important definitions are as follows:-

 A contract is an agreement, creating and defining the obligations between parties.
- Salmond

 A contract is an agreement enforceable by law made between two or more persons by which rights are
acquired by one or more to acts or forbearance on the part of others.

- Sir William Anson

 Every agreement and promise enforceable at law is a contract.

- Sir Fredrick Pollock

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A CONTRACT ESSENTIALLY
CONSISTS OF TWO ELEMENTS:

AN AGREEMENT ITS ENFORCEABILITY BY LAW

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AGREEMENT

Section 2(e) of the contract act defines agreement as “every promise, and every set
of promises forming the consideration for each other.

In this context a promise refer to a proposal (offer) which has been accepted.
For example, ram offers to sell his car for rs. 50,000 to sonal. Sonal accepts this
offer. It becomes a promise and treated as an agreement between ram and sonal.

In other words, an agreement consists of an offer by one party and its acceptance by
the other.

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OFFER ACCEPTANCE AGREEMENT

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 AGREEMENT

• Offer and its acceptance constitute an

Agreement
• May not create a legal obligation
• Every agreement need not be a contract.
• Agreement is not concluded and binding on
concerned parties.
Difference
CONTRACT

• Enforceability of an agreement constitute a

contract
• Creates a legal obligation
• All contracts are agreements
• Contract is concluded and binding on concerned
parties.
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Classification of Contracts

Contract

On the basis of On the basis of

On the basis of Execution Enforceability.
Creation

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 On the Basis of Creation

 A CONTRACT MAY BE

(I) MADE IN WRITING OR BY WORD OF MOUTH

OR

(II) INFERRED FROM THE CONDUCT OF THE PARTIES OR CIRCUMSTANCES OF THE

CASE

THE FIRST CATEGORY OF CONTRACT IS TERMED AS 'EXPRESS CONTRACT' AND

THE SECOND AS 'IMPLIED CONTRACT'

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 19

EXPRESS CONTRACT
• AN EXPRESS CONTRACT IS ONE WHERE THE TERMS ARE CLEARLY STATED
IN WORDS, SPOKEN OR WRITTEN.

• FOR EXAMPLE,
A WROTE A LETTER TO B STATING “ OFFER TO SELL MY CAR FOR RS.
30,000 TO YOU", B ACCEPTS THE OFFER BY LETTER SENT TO A. THIS IS AN
EXPRESS CONTRACT.
SIMILARLY, WHEN A ASKS A SCOOTER MECHANIC TO REPAIR HIS
SCOOTER AND THE MECHANIC AGREES, IT IS AN EXPRESS CONTRACT MADE
ORALLY BY SPOKEN WORDS.
 IMPLIED CONTRACT
A contract may be created by the conduct or acts of parties (and not by their words
spoken or written). It may result from a continuing course of conduct of the
parties.

For example,
Where a coolie in uniform carries the luggage of a to be carried out of
railway station without being asked by a to do so and a allows it, the law implies
that a has agreed to pay for the services of the coolie. This is a case of an implied
contract between A and the coolie.
Similarly, when a boards a dtc bus, an implied contract comes into being. A
is bound to pay the prescribed fare.
Eating in a restaurant etc

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 ON THE BASIS OF EXECUTION

• ON THE BASIS OF THE EXTENT TO WHICH THE CONTRACTS HAVE

BEEN PERFORMED, WE MAY CLASSIFY THEM AS

(I) EXECUTED CONTRACTS,

AND

(II) EXECUTORY CONTRACTS.

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 EXECUTED CONTRACTS:
• IT IS A CONTRACT WHERE BOTH THE PARTIES HAVE FULFILLED THEIR
RESPECTIVE OBLIGATIONS UNDER THE CONTRACT.

• FOR EXAMPLE,

A AGREES TO SELL HIS BOOK TO B FOR RS. 30. A DELIVERS THE

BOOK TO B AND B PAYS RS. 30 TO A. IT IS AN EXECUTED CONTRACT.

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 EXECUTORY CONTRACTS:
 IT IS A CONTRACT WHERE BOTH THE PARTIES TO THE CONTRACT HAVE STILL
TO PERFORM THEIR RESPECTIVE OBLIGATIONS.

 FOR EXAMPLE,
A AGREES TO SELL A BOOK TO B FOR RS. 30. IF THE BOOK HAS NOT BEEN
DELIVERED BY A AND B HAS NOT PAID THE PRICE. THE CONTRACT IS
EXECUTORY.

 A CONTRACT MAY SOMETIMES BE PARTLY EXECUTED AND PARTLY

EXECUTORY. IT HAPPENS WHERE ONLY ONE OF THE PARTIES HAS PERFORMED
HIS OBLIGATION.

IN THE EXAMPLE GIVEN ABOVE, IF A HAS DELIVERED THE BOOK TO B

BUT B HAS NOT PAID THE PRICE. THE CONTRACT IS EXECUTED AS TO A AND
EXECUTORY AS TO B.

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On the Basis of Enforceability

Contract

Valid Void Voidable Illegal Unenforceable

Contract Contract Contract Contact Contract

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 VALID CONTRACT:

• A CONTRACT WHICH SATISFIES ALL THE CONDITIONS PRESCRIBED BY

LAW IS A VALID CONTRACT. IF ONE OR MORE OF THESE ELEMENTS
IS/ARE MISSING, THE CONTRACT IS EITHER VOID, VOIDABLE, ILLEGAL
OR UNENFORCEABLE.

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 VOID CONTRACT:
 ACCORDING TO SECTION 2 (0) A CONTRACT WHICH CEASES TO BE
ENFORCEABLE BY LAW BECOMES VOID WHEN IT CEASES TO BE
ENFORCEABLE.

 IT IS A CONTRACT WITHOUT ANY LEGAL EFFECTS AND IS A NULLITY.

 A CONTRACT MAY BECOME VOID DUE TO IMPOSSIBILITY OF PERFORMANCE,
CHANGE OF LAW OR SOME OTHER REASONS. SECTION 2(G) SAYS THAT AN
AGREEMENT NOR ENFORCEABLE BY LAW IS SAID TO BE VOID.

 IN THE CASE OF VOID AGREEMENT, NO CONTRACT COMES INTO EXISTENCE.

SUCH AN AGREEMENT CONFERS NO RIGHTS ON ANY PERSON AND CREATES NO
OBLIGATIONS. IT IS VOID AB-INTIO I.E., FROM THE VERY BEGINNING.

 A VOID AGREEMENT NEVER MATURES INTO A CONTRACT, IT IS VOID FROM THE

VERY BEGINNING.

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 VOIDABLE CONTRACT:

• ACCORDING TO SECTION 2(I) OF THE CONTRACT ACT, AN

AGREEMENT WHICH IS ENFORCEABLE BY LAW AT THE OPTION OF
ONE OR MORE OF THE PARTIES THEREON, BUT NOT AT THE OPTION
OF THE OTHER OR OTHERS, IS A VOIDABLE CONTRACT.

• THUS, A VOIDABLE CONTRACT IS ONE WHICH CAN BE SET ASIDE OR

REPUDIATED AT THE OPTION OF THE AGGRIEVED PARTY. UNTIL IT IS
SET ASIDE OR AVOIDED BY THE PARTY ENTITLED TO DO SO, IT
REMAINS A VALID CONTRACT.

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 28

DISTINCTION BETWEEN:
VOID CONTRACT VOIDABLE CONTRACT

• It is void from the very beginning. • It remains valid till it is repudiated by

• A contract is void if any essential the aggrieved party.
element of a valid contract (other than • A contract is voidable if the consent of
free consent) is missing. a party is not free.
• It cannot be enforced by any party. • If the aggrieved party so decides, the
• Question of damages does not arise contract may continue to be valid and
enforceable.
• If it is not avoided within a reasonable
time it may become valid.
• The aggrieved party can also claim
damages.
 Illegal or Unlawful Contract
The word illegal' means contrary to law. You know that contract is an agreement
enforceable by law and therefore, it cannot be illegal. It is only the agreement
which can be termed as illegal or unlawful. Hence, it is more appropriate to use the
term 'illegal agreement' in place of 'illegal contract'.

An 'illegal agreement' is one which has been specifically declared to be unlawful
under the provisions of the contract act or which goes against the provisions of any
other law of the land. Such agreement cannot be enforced by law.

For example,
a agrees to pay rs.50,000 to B if B kills C. This is an illegal agreement
because its object is unlawful. Even if B kills C, he cannot claim the agreed
amount from A.

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 UNENFORCEABLE CONTRACT:
 IT IS A CONTRACT WHICH IS ACTUALLY VALID BUT CANNOT BE ENFORCED
BECAUSE OF SOME TECHNICAL DEFECT.

 THIS MAY BE DUE TO NON-REGISTRATION OF THE AGREEMENT, NON-PAYMENT

OF THE REQUISITE STAMP FEE, ETC.

 SOMETIMES, THE LAW REQUIRES A PARTICULAR AGREEMENT TO BE IN

WRITING. IF SUCH AGREEMENT HAS NOT BEEN PUT IN WRITING, IT BECOMES
UNENFORCEABLE.

 FOR EXAMPLE,
AN ORAL AGREEMENT, FOR ARBITRATION ARE UNENFORCEABLE
BECAUSE THE LAW REQUIRES THAT AN ARBITRATION AGREEMENT MUST BE IN
WRITING. IT IS IMPORTANT TO NOTE THAT IN MOST CASES, SUCH , CONTRACTS
CAN BE ENFORCED IF THE TECHNICAL DEFECT INVOLVED IS REMOVED.

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ESSENTIALS OF A VALID
CONTRACT

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 32

Proper offer and its proper acceptance

Intention to create legal relationship

Free consent

Capacity of parties to contract

Lawful consideration
Lawful object

Agreement not expressly declared void

Certainty of meaning

Possibility of performance

Legal formalities

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Proper Offer and
Proper Acceptance
• In order to create a valid contract it is necessary
that there must be at least two parties, one
making the offer and the other accepting it.

• For example, the offer must be definite and duly

communicated to the other party. Similarly, the
acceptance must be unconditional and
communicated to the offeror in the prescribe
mode, and so on. Unless such conditions with
regard to the offer and the acceptance are satisfied
the agreement does not become enforceable.

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 OFFER OR PROPOSAL

• SECTION 2(A) DEFINES THE TERM 'PROPOSAL' AS FOLLOWS:

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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 36

• Offer must intend to create legal relations:

1

• Terms of offer must be certain and not vague:

2

• offer must be distinguished from a mere declaration of intention

3

• Offer must be distinguished from an invitation to offer

4

• The offer must be communicated:

5

• Offer should not contain a term the non-compliance of which would be acceptance
6

• Special terms or conditions in an offer must also be communicated

7
 ACCEPTANCE

• Section 2(b) of the indian contract act defines the term 'acceptance’ as

"when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal when accepted becomes a promise. "

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 38

• Acceptance must be absolute and unqualified

1

• Acceptance must be in the prescribed manner

2

• Acceptance must be communicated

3

• Acceptance must be communicated by a person who has the authority to accept

4

• Acceptance must be made within the time prescribed or within a reasonable time
5

• Acceptance must be given before the offer lapses or is withdrawn

6
LAPSE OF AN OFFER:

By death or insanity of
By lapse of stipulated or By rejection of offer by
the offeror or the offeree
reasonable time the offeree
before acceptance

If it is not accepted in the By counter-offer by the

By revocation
prescribed or usual mode offeree

By subsequent illegality
or destruction of subject-
matter

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Intention to Create Legal Relationship

There must be an intention among the parties to create a legal relationship, if an

agreement is not capable of creating a legal obligation it is not a contract.

In case of social or domestic agreements, generally there is no intention to create

legal relationship.

For example,
in an invitation to dinner there is no intention to create legal relationship and
therefore, is not a contract. Similarly, certain agreements between husband and
wife do not become contracts because there is no intention to create legal
relationship.

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BALFOUR V. BALFOUR

• Mr. Balfour had promised to pay f 30 per month to his wife living in
england when she could not accompany him to cylon where he was
employed. Mr. Balfour failed to pay the promised amount. Mrs. Balfour
filed a suit against her husband for breach of this agreement, it was held
that she could not recover the amount as it was a social agreement and
the parties never intended to create any legal relations.

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 FREE CONSENT:
• FOR A CONTRACT TO BE VALID, IT IS ESSENTIAL THAT THERE MUST
BE FREE AND GENUINE CONSENT OF THE PARTIES TO THE CONTRACT.
THEY MUST HAVE MADE THE CONTRACT OF THEIR OWN FREE WILL
AND NOT UNDER ANY FEAR OR PRESSURE.

• ACCORDING TO SECTION 14, CONSENT IS SAID TO BE FREE WHEN IT

IS NOT CAUSED BY ( I ) COERCION,‘ (II) UNDUE INFLUENCE, (III)
FRAUD, (IV) MISREPRESENTATION, OR ( V ) MISTAKE.

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 CONSENT:

• SECTION 13 OF THE INDIAN CONTRACT ACT DEFINES THE TERM

'CONSENT' AS TWO OR MORE PERSONS ARE SAID TO CONSENT WHEN
THEY AGREE UPON THE SAME THING IN THE SAME SENSE.

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 COERCION

• . SECTION 15 OF THE CONTRACT ACT DEFINES 'COERCION' AS

COERCION IS

( I ) THE COMMITTING OR THREATENING TO COMMIT, ANY ACT

FORBIDDEN BY THE INDIAN PENAL CODE; OR

(II) THE UNLAWFUL DETAINING OR THREATENING TO DETAIN,

ANY PROPERTY, TO THE PREJUDICE OF ANY PERSON WHATEVER,
WITH THE INTENTION OF CAUSING ANY PERSON TO ENTER INTO AN
AGREEMENT

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 UNDUE INFLUENCE:

• SECTION 16 (I) OF THE CONTRACT ACT DEFINES UNDUE INFLUENCE

AS 'A CONTRACT IS SAID TO BE INDUCED BY UNDUE INFLUENCE'
WHERE THE RELATIONS SUBSISTING BETWEEN THE PARTIES ARE
SUCH THAT ONE OF THE PARTIES IS IN A POSITION TO DOMINATE
THE WILL OF THE OTHER AND USES THAT POSITION TO OBTAIN AN
UNFAIR ADVANTAGE OVER THE OTHER

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 FRAUD
 THE TERM 'FRAUD' IS DEFINED BY SECTION 17 OF THE INDIAN CONTRACT ACT AS FOLLOWS:
FRAUD MEANS AND INCLUDES ANY OF THE FOLLOWING ACTS COMMITTED BY A
PARTY TO A CONTRACT OR BY ANY ONE WITH HIS CONNIVANCE OR BY HIS AGENT, .WITH
INTENT TO DECEIVE ANOTHER PARTY THERETO OR HIS AGENT, OR TO INDUCE HIM TO
ENTER INTO THE CONTRACT:

I) THE SUGGESTION, AS TO A FACT, OF THAT WHICH IS NOT TRUE, BY ONE WHO DOES NOT
BELIEVE IT TO BE TRUE;

II) THE ACTIVE CONCEALMENT OF A .FACT BY ONE HAVING KNOWLEDGE OR BELIEF OF THE
FACT;

III) A PROMISE MADE WITHOUT ANY INTENTION OF PERFORMING IT;

IV) ANY OTHER ACT FITTED TO DECEIVE;

V) ANY SUCH ACT OR OMISSION AS THE LAW SPECIALLY DECLARES TO BE FRAUDULENT."

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 MISREPRESENTATION

• A REPRESENTATION, WHEN WRONGLY MADE, EITHER

INNOCENTLY OR INTENTIONALLY, IS CALLED
'MISREPRESENTATION'.

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MISTAKE
48
 CAPACITY OF PARTIES:
• THE PARTIES TO AN AGREEMENT MUST BE COMPETENT TO CONTRACT
I.E., THEY MUST BE CAPABLE OF ENTERING INTO A CONTRACT. IF ANY
PARTY TO THE CONTRACT IS NOT COMPETENT TO CONTRACT, THE
CONTRACT IS NOT VALID.

• SECTION 11 OF THE ACT WHICH SAYS THAT EVERY PERSON IS

COMPETENT TO CONTRACT WHO IS OF THE AGE OF MAJORITY
ACCORDING TO THE LAW TO WHICH HE IS SUBJECT AND WHO IS OF
SOUND MIND, AND IS NOT DISQUALIFIED FROM CONTRACTING BY
ANY LAW TO WHICH HE IS SUBJECT.

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Thus, A Person To Be Competent To
Contract Should Not Be

1 2 3
A Minor Of An Unsound Mind Disqualified From
Contracting

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 A MINOR:

• ACCORDING TO SECTION 3 OF THE INDIAN MAJORITY ACT, A PERSON

IS DEEMED TO HAVE ATTAINED MAJORITY

(I) WHEN HE COMPLETES 18 YEARS OR

(II) WHERE A GUARDIAN OF PERSON OR PROPERTY OR BOTH. HAS

BEEN APPOINTED BY A COURT OF LAW (OR WHERE HIS PROPERTY HAS
PASSED UNDER THE SUPERINTENDENCE OF THE COURT OF WARDS),
HE ATTAINS MAJORITY ON COMPLETION OF 21 YEARS.

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 POSITIONS OF MINOR:
• CONTRACT WITH A MINOR IS VOID AB INITIO

• FRAUDULENT REPRESENTATION BY A MINOR IS VOID

• RATIFICATION OF A CONTRACT BY A MINOR ON ATTAINING THE AGE OF

MAJORITY IS VOID

• MINOR AS A PARTNER

A MINOR CANNOT BE A PARTNER IN A PARTNERSHIP FIRM. HOWEVER,

A MINOR MAY, WITH THE CONSENT OF ALL THE PARTNERS FOR THE TIME
BEING, BE ADMITTED TO THE BENEFITS OF PARTNERSHIP

• A MINOR CANNOT BE DECLARED INSOLVENT BECAUSE HE IS

INCAPABLE OF CONTRACTING DEBTS.

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EXCEPTIONS

CONTRACT FOR THE CONTRACT BY CONTRACT FOR SUPPLY

BENEFIT OF A MINOR GUARDIAN OF NECESSARIES

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 WHO IS A PERSON OF SOUND
MIND?
SECTION 12 OF THE INDIAN CONTRACT ACT WHICH READS 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
EFFECT UPON HIS INTERESTS. THUS SOUNDNESS OF MIND OF A PERSON
DEPENDS ON TWO FACTS:

 I) HIS CAPACITY TO UNDERSTAND THE TERMS OF THE CONTRACT, AND

II) HIS ABILITY TO FORM A RATIONAL JUDGMENT AS TO ITS EFFECT UPON
HIS INTERESTS. IF A PERSON IS INCAPABLE OF BOTH, HE SUFFERS FROM
UNSOUNDNESS OF MIND. IDIOTS, LUNATICS AND DRUNKEN PERSONS ARE
EXAMPLES OF THOSE HAVING AN UNSOUND MIND

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 Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or
other.Persona1 experience.

 Idiots: an idiot is a person who is permanently of unsound mind. Idiocy is a congenital defect.
Such a person has no lucid intervals. He cannot make a valid contract.

 Drunken persons: Section 12 of the Indian Contract Act reads: a same man is delirious from
fever or who is so drunk that he cannot understand the terms of a contract or form a
rational judgement as to its effects on his interest cannot contract while such delirium or
drunkenness lasts.

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PERSONS DISQUALIFIED BY LAW
Alien Enemy

Foreign Sovereigns and Ambassadors

Convicts

Insolvents

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Home Study:

Make A Report On
Mohiribibi Vs Dharmodas Ghosh Case

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LAWFUL CONSIDERATION:

• AN AGREEMENT MUST BE SUPPORTED BY

CONSIDERATION, CONSIDERATION MEANS
SOMETHING IN RETURN. IT IS ALSO DEFINED AS
THE PRICE PAID BY ONE PARTY TO BUY THE
PROMISE OF THE OTHER.

• HOWEVER, THIS PRICE NEED NOT ALWAYS BE IN

TERMS OF MONEY.

• FOR' EXAMPLE,

A AGREES TO SELL HIS BOOK TO B FOR RS. 20.

HERE THE CONSIDERATION FOR A IS RS. 20, AND
FOR B IT IS THE BOOK.

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LEGAL RULES FOR VALID CONSIDERATION
Consideration must Consideration may
move at the desire of the move from the promisee
promisor or any other person

Consideration may be Consideration must be

past, present or future of some value

Consideration must be
Legal

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 LAWFUL OBJECT:
• THE OBJECT OF AN AGREEMENT MUST BE LAWFUL.

• AN AGREEMENT MADE FOR ANY ACT WHICH IS PROHIBITED BY LAW

WILL NOT BE VALID.

• FOR EXAMPLE,

IF A RENTS OUT A HOUSE FOR USE AS A GAMBLING THEN, THE

AGREEMENT IS VOID BECAUSE THE OBJECT OF THE AGREEMENT IS
UNLAWFUL. IF THE OBJECT IS UNLAWFUL FOR ANY OF THE REASONS
MENTIONED IN SECTION 23, THE AGREEMENT SHALL BE VOID.

THUS, THE CONSIDERATION AS WELL AS THE OBJECT ,OF THE

AGREEMENT SHOULD BE LAWFUL.

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 AGREEMENT NOT EXPRESSLY
DECLARED VOID
The agreement must not have been expressly declared void under contract act. Sections
24 to 30 specify certain types of agreements which have been expressly declared void. They
are .

 Agreement in restraint of marriage,

 Agreement in restraint of legal proceedings,
 Agreement in restraint of trade and
 Agreement by way of wager.
For example,

a agreed to pay rs. 1,000 to B if he (B) does not marry throughout his life. B promised not
to marry at all. This agreement shall not be valid because it is in restraint of marriage which
has been expressly declared void under section 26.

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 Certainty of meaning:
• Section 29 of the contract act provides that agreements, the meaning of which is
not certain or capable of being made certain, are void. Thus to make a valid
contract it is absolutely essential that its terms must be clear and not vague or
uncertain.

• For a example,

A agreed to sell 100 tonnes of oil to B. Here it is not clear what kind of oil is
intended to be sold. Therefore, this agreement is not valid on the ground of
uncertainty.

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 Possibility Of Performance
The terms of the agreement must also be such as are capable of performance. An
agreement to do an act impossible in itself is void (section 56.)

 If the act is impossible of performance, physically or legally, the agreement

cannot be enforced by law.

For example,
a promises to b that he will enclose some area between two parallel lines or
that he will run at a speed of 200 kms. Per hour or that he will bring gold from the
sun. All these acts are such which are impossible of performance and therefore the
agreement is not treated as valid.

63
 LEGAL FORMALITIES:
THE CONTRACT ACT DOES NOT REQUIRE THAT A CONTRACT MUST BE IN
WRITING TO BE VALID. BUT, IN SOME CASES THE ACT HAS SPECIFIED
THAT THE AGREEMENT MUST BE MADE IN WRITING.

FOR EXAMPLE,
A PROMISE TO PAY A TIME BARRED DEBT MUST BE IN WRITING AND
AN AGREEMENT FOR A SALE OF IMMOVABLE PROPERTY MUST BE IN
WRITING AND REGISTERED UNDER THE TRANSFER OF PROPERTY ACT,
1882. IN SUCH A SITUATION, THE AGREEMENT MUST COMPLY WITH THE
NECESSARY FORMALITIES AS TO WRITING, REGISTRATION, ETC.

IF THESE LEGAL FORMALITIES ARE NOT CARRIED OUT, THEN THE

CONTRACT IS NOT ENFORCEABLE BY LAW.

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CONTINGENT CONTRACTS

65
 A CONTINGENT PERFORMANCE
CONTRACT IS A DEPENDS ON
CONTRACT TO DO OR HAPPENING OF SOME
NOT TO DO UNCERTAIN EVENT.
SOMETHING, IF SOME
EVENT, COLLATERAL
TO SUCH CONTRACT,
CONTINGENT DOES OR DOES NOT
HAPPEN. [SEC 31]

CONTRACTS

PERFORMANCE THE EVENT MUST BE

DEPENDS ON SOME COLLATERAL.
UNCERTAIN EVENT.

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 RULES REGARDING
CONTINGENT CONTRACT
CANNOT BE ENFORCED UNTIL THE EVENT HAS HAPPENED. IF THE
EVENT BECOMES IMPOSSIBLE SUCH CONTRACT BECOMES VOID. (SEC
32)

WHERE THE CONTRACT IS TO BE PERFORMED IF A PARTICULAR

EVENT DOES NOT HAPPEN, PERFORMANCE CAN BE ENFORCED ON
THE EVENT BECOMING IMPOSSIBLE. (SEC 33)

CONTRACT CONTINGENT UPON HOW A PERSON WILL ACT AT AN

UNSPECIFIED TIME, THE EVENT SHALL BE CONSIDERED TO BECOME
IMPOSSIBLE WHEN THE PERSON DOES ANYTHING RENDERING IT
IMPOSSIBLE. (SEC 34)

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• Contract to do or not to do anything if a specified uncertain event
happens within a fixed time, becomes void if the event does not happen
or its happening becomes impossible before the expiry of that time, and
vice versa. (Sec 35)

• Contingent agreement to do or not to do anything, if an impossible event

happens are void whether or not the fact is known to the parties. (Sec 36)

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 DISCHARGE OF CONTRACT
(REFER BOOK)
A contract is said to be discharged when it ceases to operate.
The rights and obligations created by it comes to an end.
A contract may be discharged -
By performance

Actual performance – doing what the parties intended to do when they entered in
to the contract.

Attempted performance or tender – it is the legitimate attempt on the part of

the promisor to perform his obligations

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BY MUTUAL AGREEMENT OR CONSENT

• NOVATION: IT OCCURS WHEN A NEW CONTRACT IS SUBSTITUTED FOR AN EXISTING

CONTRACT, EITHER B/W THE SAME PARTIES OR B/W DIFFERENT PARTIES, THE
CONSIDERATION MUTUALLY BEING THE DISCHARGE OF THE OLD CONTRACT.

• EG.- A IS INDEBTED TO BAND B TO C. BY MUTUAL AGREEMENT B’S DEBT TO C AND B’S LOAN
TO A ARE CANCELLED AND C ACCEPTS A AS HIS DEBTOR.

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• RESCISSION: A CONTRACT MAY BE DISCHARGED, BEFORE THE DATE OF PERFORMANCE BY
AGREEMENT B/W THE PARTIES TO THE EFFECT THAT IT SHALL NO LONGER BIND THEM.
SUCH AN AGREEMENT AMOUNTS TO CANCELLATION.

EG.- A PROMISES TO DELIVER GOODS TO B, AND IF A AND B MUTUALLY AGREES TO NOT TO

CONTINUE WITH THE CONTRACT.

• ALTERATION: IT MEANS CHANGE IN ONE OR MORE OF THE MATERIAL TERMS OF A

CONTRACT. IF A MATERIAL ALTERATION IN A WRITTEN CONTRACT IS DONE BY MUTUAL
CONSENT, THE ORIGINAL CONTRACT IS DISCHARGED BY ALTERATION AND A NEW
CONTRACT IN ITS ALTERED FORM TAKES PLACE.

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• REMISSION: IT MAY BE DEFINED AS “THE ACCEPTANCE OF A LESSER SUM THAN WHAT
WAS CONTRACTED FOR A LESSER FULFILLMENT OF THE PROMISE MADE”.

• WAIVER: IT MEANS THE DELIBERATE ABANDONMENT OR GIVING UP OF A RIGHT WHICH A

PARTY IS ENTITLED TO UNDER A CONTRACT, WHERE UPON THE OTHER PARTY TO THE
CONTRACT IS RELEASED FROM HIS OBLIGATION.

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 BY OPERATION OF LAW

• BY DEATH.

• BY MERGER.

• BY INSOLVENCY.

• BY UNAUTHORIZED ALTERATION OF TERMS OF A WRITTEN CONTRACT.

• BY RIGHTS AND LIABILITIES BECOMING VESTED IN THE SAME PERSON.

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 Impossibility existing at the Known to the parties – the

BY time of agreement – agreement is void ab initio.

IMPOSSIBILITY
OF
PERFORMANCE

Unknown to the parties – the Impossibility arising

agreement is void on the subsequent to the formation
ground of mutual mistake. of the contract.

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 BY SUPERVENING IMPOSSIBILITY

• DESTRUCTION OF SUBJECT MATTER OF CONTRACT

• NON-EXISTENCE OR NON-OCCURRENCE OF A PARTICULAR STATE OR THINGS

• DEATH OR INCAPACITY FOR PERSONAL SERVICES

• CHANGE OF LAW OR STEPPING IN OF A PERSON WITH STATUTORY AUTHORITY

• OUT BREAK OF WAR

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IMPOSSIBILITY OF PERFORMANCE IS, AS A RULE, NOT AN EXCUSE FOR NON-
PERFORMANCE.

IN THE FOLLOWING CASES A CONTRACT IS NOT DISCHARGED ON THE GROUND OF

SUPERVENING IMPOSSIBILITY:

DIFFICULTY OF PERFORMANCE,
COMMERCIAL IMPOSSIBILITY,
IMPOSSIBILITY DUE TO FAILURE OF A THIRD PERSON,
STRIKES, LOCK-OUTS AND CIVIL DISTURBANCES, AND
PARTIAL IMPOSSIBILITY.

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BREACH OF CONTRACT

77
 BY BREACH OF CONTRACT

Breach of contract means violation of a contract.

It is of two kinds:

• Anticipatory breach (breach occurring before the time fixed)

• A) by express renunciation.

• B) making the performance of promise become impossible by doing some act.

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 Actual Breach (When A Party Fails To Perform His Obligations Upon The
Fixed Date Of Performance)
• A) On The Due Date Of Performance.
• B) During The Course Of Performance Of Contract.
• I) Express Repudiation.
• Ii) Implied Repudiation

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 REMEDIES FOR BREACH OF
CONTRACT
• WHEN THE CONTRACT IS BROKEN, THE INJURED PARTY HAS ONE OR
MORE OF THE FOLLOWING REMEDIES:

I. RESCISSION OF THE CONTRACT.

II. SUIT FOR DAMAGES.

III. SUIT UPON QUANTUM MERUIT.

IV. SUIT FOR SPECIFIC PERFORMANCE.

V. SUIT FOR INJUNCTION.

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RESCISSION OF THE CONTRACT

Rescission means a right In case of breach of

not to perform an contract the promisee need
obligation. not perform his obligation,

he is not only discharged which he might have

from his liabilities but also sustained due to non
he is entitled to claim performance of the
compensation for damages contract. [Section 39]

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 SUIT FOR DAMAGES

• DAMAGES ARE MONETARY COMPENSATION ALLOWED TO THE INJURED PARTY FOR THE
LOSS SUFFERED.

• THE OBJECT OF AWARDING DAMAGES IS NOT TO PUNISH THE PARTY AT FAULT

• BUT TO MAKE GOOD THE FINANCIAL LOSS SUFFERED BY THE INJURED PARTY DUE TO
BREACH OF CONTRACT.

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 Ordinary Damages – arising in the
usual course of things.

RULES Special Damages – such damages

which the parties knew to be likely to
RELATING result from the breach.

TO Compensation is not given for any

remote or indirect loss or damages,
DAMAGES and

Such compensation for damages

arising from breach of quasi contract
shall be same as in any other contract.

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• Exemplary or vindictive damages – essentially in the nature of punishment for
wrong inflicted.

• Nominal damages – the injured party has not in fact suffered any loss due to the
breach of contract.

• Damages for loss of reputation – the smaller the amount of cheque dishonoured,
higher the amount of damages.

• Damages for inconvenience and discomfort –generally not recoverable.

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• Liquidated damages – represent a sum, fixed or ascertained by the parties in the
contract,

• Which is a fair and genuine pre-estimate of the probable loss that might ensue as a
result of the breach if it takes place.

• Penalty – is a sum named in the contract which is disproportionate to the damages

likely to accrue as a result of the breach.

• In india no such distinction is made and the court allow only “reasonable
compensation”.

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QUANTUM MERUIT

 WHEN AN AGREEMENT IS DISCOVERED TO BE VOID. [SEC 65]

 WHEN SOMETHING IS DONE WITHOUT ANY INTENTION TO DO

GRATUITOUSLY. [SEC 70]

 WHEN THERE IS AN EXPRESS OR IMPLIED CONTRACT TO

RENDER SERVICE BUT NO AGREEMENT AS TO REMUNERATION.

 WHEN THE COMPLETION OF THE CONTRACT HAS BEEN

PREVENTED BY THE ACT OF THE OTHER PARTY TO THE
CONTRACT.

 WHEN A CONTRACT IS DIVISIBLE.

 WHEN AN INDIVISIBLE CONTRACT IS COMPLETELY PERFORMED

BUT BADLY.

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 SPECIFIC PERFORMANCE
THE REMEDY OF SPECIFIC PERFORMANCE IS IN THE NATURE OF
EQUITABLE REMEDIES BASED ON THE PRINCIPLES OF EQUITIES.

AMONG THE REMEDIES ARE SPECIFIC PERFORMANCE, INJUNCTION,

RECTIFICATION AND CANCELLATION OF INSTRUMENTS AND
RESCISSION OF CONTRACT.

IN THE DISCRETION OF THE COURT, SPECIFIC PERFORMANCE MAY BE

ENFORCED:

WHERE THERE IS NO STANDARD FOR ASCERTAINING THE ACTUAL

DAMAGE CAUSED BY THE NON-PERFORMANCE; OR

WHERE COMPENSATION IN MONEY FOR THE NON-PERFORMANCE

WOULD NOT AFFORD ADEQUATE RELIEF.

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 SUIT FOR INJUNCTION
• IT IS A JUDICIAL PROCESS WHEREBY A PARTY TO THE CONTRACT IS
ORDERED TO REFRAIN FROM DOING A PARTICULAR ACT OR THING, OR

• TO DO A PARTICULAR ACT OR THING.

• IT A DISCRETIONARY REMEDY AND IT ACTS ONLY IN PERSONAM.

• INJUNCTION MEANS A PROHIBITORY ORDER OF THE COURT TO A PERSON

TO

• NOT TO DO A PARTICULAR ACT HE HAS PROMISED NOT TO DO UNDER A

CONTRACT, OR

• TO DO AN ACT WHICH HE HAS PROMISED, UNDER A CONTRACT, TO DO.

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QUASI CONTRACTS

89
QUASI CONTRACTS

Sometime a person may receive a benefit Such relationships are called quasi This is based on the principles of equity.
which the law regards another person as contracts because although there is no
better entitled, or for which the law contract or agreement between the parties,
considers he should pay to the other they are put on the same pedestal as
person, even though there is no contract though there was a contract between them.
between the parties.

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KINDS OF QUASI CONTRACTS

• RIGHT TO RECOVER THE PRICE OF NECESSITIES SUPPLIED. [SEC 68]

• PAYMENT BY AN INTERESTED PERSON. [SEC 69]

• RIGHT TO RECOVER FOR NON-GRATUITOUS ACT. [SEC 70]

• RESPONSIBILITY OF THE FINDER OF GOODS. [SEC 71]

• WHEN MONEY IS PAID OR THINGS ARE DELIVERED BY MISTAKE OR

UNDER COERCION. [SEC 72]

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