LAW OF CONTRACT

IMPORTANCE OF CONTRACT
Boarding a bus, buying a cold drink, house
we rent, electricity that is supplied to us,
telephone and cable we use
Meaning and Introduction of
Law
Law: The rules which regulate the
relations between individuals and
individuals, individuals and society
and individuals and government.
Different types of laws:
Administrative law, Criminal Law,
Civil Law, Constitutional Law,
Business Law, Industrial Law etc.,
 Law of Contract
Governed by Indian Contract Act,
1872
The basic constituents of contracts:
1. Formation of agreements
2. Consideration
3. Setting aside of bad contracts
4. Damages and Compensation
 Division of Contract Act
Chapter I: Of the communication,
Acceptance and Revocation of
Proposals
Chapter II: Of Contracts, Voidable
Contracts and Void Agreements
Chapter IV: Of the Performance of
Contracts
Chapter VI: Of the Consequences of
Breach of Contract.
 Definition of Contract
Section 2(h) of the Indian Contract Act, 1872: A
contract as an agreement enforceable by law
Section 2(e): Every promise and every set of
promises, forming consideration for each other
Section 2(b): 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
This in other words means An agreement is an
accepted proposal.
 Explanation for Contract
Contract consists of essentially two elements:
They are:
1. Agreement
2. Its enforceability of law
Agreement = Offer + Acceptance
Difference between Agreement and Contract:
Agreement is a wide term and contract is a
narrower term.
Agreement is of two types they are : Social
Agreement, Legal Agreement.
 Essential Elements of a Valid
Contract
According to Section 10 all agreements are
contracts if they are made by the free consent, of
parties to competent to contract, for a lawful
consideration and with a lawful object.
Agreement: A invites B to his home to stay with him
for a period of one week but the previous day As
wife died. If A cancels the visit it cannot be
challenged as violation. As it is a social agreement.
A father promises to pay his son 100/- per month as
pocket allowance. Later he refuses to pay. The son
cannot claim it in a court of law as it is a domestic
agreement.
 Essentials elements of a
Contract
Offer and Acceptance
Intention to create legal relationship
Balfour vs Balfour[A husband promised to pay
his wife a household allowance of 30 pounds
every month. Later when they separated and the
husband failed to pay the amount. The wife sued
for allowance. Held agreements such as these
were outside the realm of contract altogether.
In commercial and business agreements the
presumption is usually that the parties intended
to create legal relations.
 Essential Elements of a
Contract:
Rose and Frank Company vs
Crompton Brothers( There was an
agreement between R Company and
C company by means of which the
former was appointed as the
agreement is not entered into as a
formal or legal agreement, and shall
not be subject to legal jurisdiction of
courts. It was held that there was no
binding contract as there was no
 Essential Elements of
Contract
Lawful consideration
Capacity of parties competency
Free and genuine consent
Lawful object
Agreement not declared as void
Certainty and possibility of performance
Montreal gas company vs Vassey: A company agreed
with V that on expiration of Vs existing contract, it
would favourably consider an application by V for a
renewal of his contract. Held the agreement was not
intended to bind the company to renew its contract
with V and imposed no obligation on it to review
 Essential Elements of a
Contract
Legal Formalities
Classification of a Contract:
Classification according to Validity:
Voidable contract: An agreement which is
enforceable by law at the option of one or more of
the parties thereto, but not at the option of the other
or others is a voidable contract. This happens when
the essential element of free consent.
Egg: A promises to sell his car to B for Rs. 2,000. His
consent is obtained by use of force. The contract is
voidable at the option of A. He may avoid the
contract or elect to be bound by it.
 Classification of Contracts
A contract becomes voidable in the following two
cases also:
When a person promises to do something for
another person for a consideration but the other
person prevents him from performing his promise,
the contract becomes voidable at his option.
When a party to a contract promises to perform an
obligation within a specified time, any failure on
his part to perform his obligation within a fixed
time makes the contract voidable at the option of
the promisee.
 Voidable Contract
When a person at whose option a
contract is voidable rescinds it, the
other party thereto need not perform
any promise therein contained in
which he is promisor. If the party
rescinding the contract has received
any benefit under the contract from
another party to such contract he
shall restore such benefit, so far as
may be, to the person from whom it
 Void agreement and void
contract
Void agreement: An agreement not
enforceable by law is said to be void. A void
agreement does not create any legal rights or
obligations. It is a nullity and is a destitute of
legal effects altogether.
Void Contract: A contract which ceases to be
enforceable by law becomes void when it
ceases to be enforceable. A contract when
originally entered into may be valid and
binding on the parties. It may subsequently
become void.
 Agreements
Illegal agreements: An illegal agreement is one
which transgresses some rule of basic public policy
or which is criminal in nature or which is immoral.
Such an agreement is a nullity and has much wider
import than a void contract. All illegal agreements
are void but all void agreement or contract are not
necessarily illegal.
Unenforceable contracts: An unenforceable
contract is one which cannot be enforced in a court
of law because of some technical defect such as
absence of writing or where the remedy has been
barred by lapse of time.
 Contracts: According to
Formation
A contract may be made in writing or by word
of mouth or inferred from the conduct of the
parties or the circumstances of the case.
Express Contract: If the terms of a contract are
expressly agreed upon (whether by words
spoken or written) at the time of formation of
the contract, the contract is said to be an
express contract. Where the offer or
acceptance of any promise is made in words,
the promise is said to be express. An express
promise results in an express contract.
 According to formation
Implied Contract: An implied contract is one
which is inferred from the acts or conduct of the
parties or course of dealings between them. It is
not the result of any express promise or
promises by the parties but of their particular
acts. It may also result from a continuing course
of conduct of parties. Where the proposal or
acceptance if any promise is made otherwise
than in words, the promise is said to be implied.
Egg: gets into a public bus, takes a cup of tea in
a restaurant.
 According to formation
Quasi Contract: It is not a contract. A
contract is intentionally entered into
by the parties. A quasi contract on
the other hand is created by law. It
resembles a contract in that a legal
obligation is imposed on a party who
is required to perform it. It rests on
the ground of equity that a person
shall not be allowed to enrich himself
unjustly at the expense of another.
 According to formation
Egg: T a tradesman leaves goods at
Cs house by mistake. C treats the
goods as his own. C is bound to pay
for the goods.
E- Commerce Contract: An E-
Commerce contract is one which is
entered into between two parties via
internet. In Internet, different
individuals or companies create
networks which are linked to
 Classification according to
performance
Executed contract: Executed means
that which is done. An executed
contract is one in which both the
parties have performed their
respective obligations.
Thus when a person buys a bun
containing a stone and subsequently
breaks one of his teeth, he has a
right to recover damages from the
seller. (chaproniere vs Mason)
 Classification according to
performance
Executory Contract: Executory means that which remains to
be carried into effect. An executory contract is one in which
both the parties have yet to perform their obligations.
Unilateral or one sided contract: A unilateral or one-sided
contract is one which only party has to fulfil his obligations at
the time of the formation of the contract, the other party
having fulfilled his obligation at the time of the contract or
before comes into existence. Such contracts are also known
as contracts with executed consideration.
Bilateral contract: A bilateral contract is one in which the
obligations on the part of both the parties to the contract are
outstanding at the time of the formation of the contract. It is
also known as contracts with executory consideration,
executory contracts.
 Offer and Acceptance
At the inception of every agreement, there must be a
definite offer by one person to another and its unqualified
acceptance by the person to whom the offer is made.
An offer is a proposal by one party to another to enter into
a legally binding agreement with him. A person is said to
have a made a proposal when he 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
The person making the offer is called as offeror, proposer
or promisor and the person to whom it is made is called as
offeree, or proposee. When the offeree accepts the
offer,he is called the acceptor or promisee.
 Offer
An offer may be made by express words, spoken
or written. This is known as an express offer.
An offer may be implied from the conduct of the
parties or the circumstances of the case. This is
known as an implied offer.
Thus when a transport company runs a bus on a
particular route there is an implied offer by the
transport company to carry passengers for a
certain fare. The offer is complete as soon as
passenger boards the bus. ( Wikie vs London
Passenger Transport board)
 Types of Offer
Specific Offer: When an offer is made to a
definite person it is called as an specific
offer. It can be accepted only by the person
to whom it is made.
General Offer: When an offer is made to the
world at large it is called as an general offer.
Elements of an offer:
Not every proposal made by an offeror is
legally regarded as an offer.
 Elements of an offer
1. The offer must show an obvious intention
on the part of the offeror to be bound by it.
That is the offeror must signify to the
offeree his willingness to do or to abstain
from doing something.
The offeror must make the offer with a view
to obtaining the assent of the offeree to
such act or abstinence.
The offer must be definite
It must be communicated to the offeree.
 Legal rules to the offer
1. Offer must be such as in law is capable of being
accepted and giving rise to legal relationship.
2. Terms of offer must be definite, unambiguous
and certain and not loose and vague
3. An offer is different from:
A. A declaration of intention and an announcement
B. A father wrote to his would be son-in-law that
his daughter would have a share of what he left.
Held it was merely a statement of intention ( Re
Ficus)
 Legal rules for an offer
An auctioneer advertised in a newspaper
that a sale of office furniture would be held.
A brokers came from a distant place to
attend that auction, but all the furniture was
withdrawn. The broker thereupon sued the
auctioneer for his loss of time and expenses.
Held a declaration of intention to do a thing
did not create a binding contract with those
who acted upon it, so that the broker could
not recover. ( Harris vs Nickerson)
 Legal rules for an offer
An invitation to make an offer or do business
Display of goods by a shop keeper in his
window, with prices marked on them, is not an
offer but merely an invitation to the public to
make an offer to buy the goods at the marked
prices.
Likewise quotations, catalogues,
advertisements in a newspaper for sale of an
article, or circulars sent to potential customers
do not constitute an offer. They are instead an
invitation to the public to make an offer.
 Legal Rules for an offer
Offer must be communicated
An acceptance of an offer, in ignorance of the
offer is no acceptance and does not confer any
right on the acceptor.
S sent his servant L to trace his missing
nephew. He then announced that any body who
traced his nephew would be entitled to a certain
reward. L traced the boy in ignorance of this
announcement. Subsequently when he came to
know of the reward, he claimed it. Held he was
not entitled. (Lalman shoukla vs gouri dutt)
 Legal rules for an offer
Offer must be made with a view to
obtaining the assent
Offer should not contain a term the
non-compliance of which may be
assumed to amount to acceptance.
A statement of price is not an offer
Three telegrams were exchanged
between Harvey and Facey:
 Legal rules for an offer
Will you sell us your Bumper Hall pen?
Telegraph lowest cash price answer paid
(Harvey to Facey)
Lowest price for Bumper Hall 900 (Facey
to Harvey)
We agree to buy Bumper Hall pen for the
sum of 900 asked by you (Harvey to
Facey)
Held there was no concluded contract
between Harvey and Facey.
 Offer
Cross Offer: When two parties make identical
offers to each other, in ignorance of each other
offer, the offers are cross offers. In such a case
the Court will not construe one offer as the
offer and the other as the acceptance and as
such there is no concluded the contract.
P agreed to purchase a machine and signed a
contract to the effect. The contract contained
several clauses in small print which P did not
read. Held P was bound by those clauses. (L
Estrange vs Graucob Ltd)
 Acceptance
A contract emerges from the acceptance of an offer.
Acceptance is the act of assenting by the offeree to an
offer. In other words it is the manifestation by the
offeree of his willingness to be bound by the terms of
the offer.
When the offeree signifies his assent there to the offeror
the offer is said to be accepted.
Acceptance may be express or implied. It is express
when it is communicated by words, spoken or written or
by doing some required act.
It is implied when it is to be gathered from the
surrounding circumstances or the conduct of the parties.
 Acceptance
A widow promised to settle some immovable
property on her niece if the niece stayed with her in
her residence. The niece stayed with her in her
residence till her death. Held the niece was entitled
to the property. ( v rao vs a rao)
When an offer is made to a particular person, it can
be accepted by him alone. If it is accepted by any
other person, there is no valid acceptance. The rule
of law is clear that is you propose to make a
contract with A, B cannot substitute himself for A
without your consent.
General offer.
 Legal Rules as to
acceptance
It must be absolute and unqualified
It must be Communicated to the offeror
F offered to buy his nephews horse at 30 pounds
saying : If I hear no more about it I shall consider
the horse is mine at 30 pounds.
The nephew did not write to F at all, but he told his
auctioneer who was selling his horses not to sell that
particular horse because it had been sold to his uncle.
The auctioneer inadvertently sold the horse. Held F
had no right of action against the auctioneer as the
horse had not been sold to F his offer of 30 pounds
not having been accepted. ( Felthouse vs Bindley)
Legal rules as to acceptance
It must be according to the mode prescribed or usual and
reasonable mode
It must be given within a reasonable time
It cannot be precede an offer
It must show an intention on the part of the acceptor to fulfil terms
of the promise
It must be given by the party or parties to whom the offer is made
It must be given before the offer lapses or before the offer is
withdrawn
It cannot be implied from silence
Where an offeree accepts an offer subject to contract or subject
to formal contract or subject to contract to be approved by
solicitors the matter remains in the negotiation stage and the
parties do not intend to be bound until a formal contract is prepared
and signed by them.
 Legal rules to acceptance
An agreement to enter into an agreement
upon terms to be afterwards settled between
the parties is a contradiction in terms.
An actress was engaged by a theatrical
company for a certain period. One of the
terms of the agreement was that if the play
was shown in London, she would be engaged
at a salary to be mutually agreed upon. Held
there was no contract ( Loftus vs Roberts)
 Communication of Offer,
Acceptance and Revocation
Mode of communication: The
communication of offer, its
acceptance and their revocation
respectively are deemed to be made
by any act, or omission of the party
offering, accepting and revoking.
Such act or omission must however
have the effect of communicating
such offer, acceptance or revocation.
It can be in the form of written,
Communication when it is complete
The communication of an offer is complete when it comes to the
knowledge of the person to whom it is made.
Communication of acceptance: The communication of an
acceptance is complete
1. as against the proposer when it is put into a course of
transmission to him, so as to be put out of the power of the
acceptor.
2. As against the acceptor when it comes to the knowledge of the
proposer.
Revocation means taking back, recalling or withdrawal is complete
as against the person who makes it, when t is put into a course of
transmission to the person to whom it is made, so as to be out of
the power of the person who makes it.
As against the person to whom it is made, when it comes to his
knowledge.
 Time for revocation of offer and
acceptance.
A proposal may be revoked at any
time before the communication of its
acceptance is complete as against the
proposer but not afterwards.
Time for revocation of acceptance: An
acceptance may be revoked at any
time before the communication of the
acceptance is complete as against the
acceptor but not afterwards.
 Time for revocation of offer and
acceptance
Loss of letter of acceptance in postal transit
Contracts over telephone: It is equated to oral
agreements. But the offeree must make sure that his
acceptance is properly received that is heard and
understood by the offeror.
Offer comes to an end:
By communication of notice of revocation
By lapse of time
By death or insanity of the offeror provided the offeree
comes to know of it before acceptance.
By non fulfilment by the offeree of a condition
precedent to acceptance.
 Offer comes to an end:
If a counter offer is made
If an offer is not accepted according to the
prescribed or usual mode.
If the law is changed
But still it has to follow the changes:
It can be revoked at any time before its
acceptance is complete as against the
offeror.
Revocation takes effect only when it is
communicated to the offeree.
 Offer comes to an end
If the offeror has agreed to keep his offer open for a
certain period. He can revoke it before the expiration
of that period only
If the offer has in the meantime not been accepted.
If there is no consideration for keeping the offer open.
Rejection of an Offer: Once rejected it cannot be
accepted. It can be expressed or implied.
Express rejection is effective only when notice of
rejection reaches the offeror.
Implied rejection (counter offer, conditional
acceptance)
 Consideration
Section 2(d) defines consideration as
follows: 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 to abstain from
doing, something such act or
abstinence or promise is called a
consideration for the promise.
 Consideration
An act that is doing of something. In this sense consideration
is in an affirmative form.
An abstinence or forbearance that is abstaining or refraining
from doing something.
A return of promise.
Abdul Aziz vs Masum: The secretary of a Mosque committee
filed a suit to enforce a promise which the promisor had made
to subscribe Rs. 500 to the rebuilding of a mosque. Held the
promise was not enforceable because there was no
consideration in the sense of benefit as the person who made
the promise gained nothing in return for the promise made.
And the seceratry of the committee to whom the promise was
made suffered no detriment as nothing had been done to
carry out the repairs. Hence the suit was dismissed.
 Legal rules for
Consideration
It must move at the desire of the promisor
It may move from the promisee or any other person.
An old lady by a deed of a gift made over certain
property to her daughter D under the direction that
she should pay her aunt, P (sister of the old lady) a
certain sum of money annually. The same day D
entered into an agreement with P to pay her the
agreed amount. Later D refused to pay the amount
on the plea that no consideration had moved from P
to D. Held P was entitled to maintain suit as
consideration had moved from the old lady sister of
P to the daughter D. (Chinnayya vs Ramayya)
 Legal rules to consideration
It may be an act, abstinence or forbearance or a return
promise:
Forberance to sue: If a person who could sue another for the
enforcement of a right agrees not to pursue his claim, this
constitutes a good consideration for a promise by the other
person. This results in a benefit to the person not sued and a
detriment to the person who could sue.
Compromise to a dispute claim
Composition with creditors: A debtor who is financially
embarrassed may call a meeting of his creditors and request
them to accept lesser amount in satisfaction of their debt. If
the creditors agree to it, the agreement is binding upon the
debtor and the creditors and this amounts to a compromise
of the claims of the creditors.
Legal rules to Consideration
It may be present, past or future
It need not be adequate
It must be real and not illusory
It must not be something which the promissor is
not already bound to do
Ramachandra Chintamani vs Kalluraju ( There was
a promise to pay a vakil an additional sum if the
sit was successful. Held the promise was void for
want of consideration. The vakil was under pre-
existing contractual obligation to render the best
of his services under the original contract.
Legal rules to consideration
It must not be illegal, immoral or opposed to
public policy
Stranger to a Contract: It is a general rule of
law that only parties to a contract may sue and
be sued on that contract. This rule is known as
the doctrine of privity of contract. Privity of
contract means relationship subsisting
between the parties who have entered into
contractual obligations. It implies a mutuality
of will and creates a legal bond or tie between
the parties to a contract.
Legal rules to consideration
Consequences of doctrine of privity of a
contract:
A person who is not a party to a contract
cannot sue upon it even though the contract is
for his benefit and he provided consideration.
A contract cannot confer rights or impose
obligations arising under it on any person
other than the parties to it. Thus if there is a
contract between A and B, C cannot enforce it.
 Exceptions to Privity of a
contract
A trust or charge
Marriage settlement, Partition or other family
arrangements: When an arrangement is made in
connection with marriage, partition or other family
arrangements and a provision is made for the
benefit of a person, he may sue although he is not
a party to the agreement.
Acknowledgment or Estoppel : Where the promissor
by his conduct, acknowledges or otherwise
constitutes himself as an agent of a third party a
binding obligation is thereby incurred by him
towards the third party.
 Exceptions of a privity of a
contract
Egg: A receives some money from T to be paid over
to P. A admits of this receipt to P. P can recover the
amount from A who shall be regarded as the agent
of P.
Assignment of a Contract: The assignee of rights
and benefits under a contract not involving personal
skill can enforce the contract not involving personal
skill can enforce the contract subject to the equities
between the original parties. Egg; Thus the holder in
due course of a negotiable instrument can realise
the amount on it even though there is no contract
between him and the person liable to pay.
 Exceptions to Privity to a
contract
Contracts entered into through an agent
Covenants running with the land: In cases
of transfer of immovable property, the
purchaser of land with notice that the
owner of the land is bound by certain
conditions or covenants crated by an
agreement affecting the land shall be
bound by them although he was not party
to the original agreement which contained
the conditions or covenants.
 Contract without Consideration is
Void - Exceptions
Love and affection: In simple words a written and
registered agreement based on natural love and
affection between near relatives is enforceable even if
it is without consideration.
A hindu husband after referring to quarrels and
disagreement between him and his wife executed a
registered document in favour of his wife agreeing to
pay her for maintenance, but no consideration moved
from his wife. Held the agreement was void for want of
consideration (Rajluky vs Bhoothnath). As the essential
requirement that the agreement is made on account of
natural love and affection between the parties was
missing.
Contract without consideration is void
-Exceptions
Compensation for voluntary services: A promise to
compensate wholly or in part a person who has already
voluntarily done something for the promissor is
enforceable even though without consideration. In simple
words a promise to pay for a past voluntary service is
binding.
Promise to pay a time barred debt: A promise by a debtor
to pay a time barred debt is enforceable provided it is
made in writing and is signed by the debtor or by his
agent generally or specially authorised in that behalf. The
promise may be to pay the whole or any part of the debt.
A debt is barred by limitation if it remains unpaid or
unclaimed for a period of three years.
 Contract without consideration is
void - Exceptions
Completed gift: No consideration no
gift doesnt apply here also
Agency
Charitable subscriptions: Where the
promisee on the strength of the
promise makes commitments that is
changes his position to his detriment.
 Capacity to Contract
Capacity means competence
An agreement becomes a contract if it is entered
into between the parties who are competent to
contract.
According to section 11 every person is
competent to contract who
(a ) is of the age of majority according to the
law to which he is subject
(b) is of sound mind
(c ) is not disqualified from contracting by any
law of which he is subject to.
 Minors
According to Section 3 of Indian Majority
Act, 1875 a minor is a person who has not
completed eighteen years (18) of age. In
the following two conditions he will attain
majority after 21 years of age:
1. Where a guardian of a minors person or
property has been appointed under the
Guardians and Wards Act, 1890
2. Where the superintendence of a minor
property is assumed by a Court of Wards.
 Minors
Basic rules for minors (2):
Law protects minors against their own
inexperience and against the possible
improper designs of those more experienced
Law should not cause unnecessary hardship
to persons who deal with minors.
Minors agreements:
An agreement with or by a minor is void and
inoperative ab initio:
 Minors
Mohiribibi vs Dharmodas Ghose: In this case a
minor mortgaged his house in favour of a
money lender to secure loan of Rs. 20,000/- out
of which the mortgagee (the money lender)
paid the minor a sum of Rs. 8000/-.
Subsequently the minor sued for setting aside
the mortgage stating that he was underage
when he executed the mortgage. Held the
mortgage was void and therefore it was
cancelled. Further the money lenders request
for returning back his money was also rejected.
 Minor
He can be a promisee or a beneficiary
His agreement cannot be ratified by hi on attaining
his majority.
If he has received any benefit under a void
agreement he cannot be asked to compensate for it
or pay for it.
He can always plead for minority.
Egg: S a minor by fraudulently representing himself
to be of full age, induced L to lend him 400 pounds.
He refused to repay it and L sued him for the money.
Held the contract was void and S was not liable to
repay the amount.
 Minor
The court may where a loan or some
property is obtained by the minor by
some fraudulent representation and
the agreement is set aside, direct
him, on equitable considerations to
restore the money or property to the
other party, Where as the law gives
protection to the minors, it does not
give them liberty to cheat men.
 Minor
There can be no specific performance of the
agreements entered into by him as they are
void ab initio
He cannot enter into a contract of partnership
He cannot be adjudged insolvent
He is liable for necessaries supplied or
necessary services rendered to him or
anyone whom he is legally bound to support.
He can be an agent
 Minor
His parents/guardian are/is not liable for
the contract entered into by him even
though the contract is for the supply of
necessaries to the minor. But if the minor
is acting as an agent for the parents/
guardian shall be liable under the contract.
A minor is liable in tort (a civil wrong) : But
where a tort arises out of a contract a
minor is not liable in tort as an indirect way
of enforcing an invalid contract.
 Minor
Minor is liable for necessaries. That is his properties will
be liable for meeting the liability arising out of the
contract. He will not be physically responsible.
Necessaries not defined.
Necessary goods doesnt mean that which are needed for
bare needs but includes articles which are reasonably
necessary to the minor having regard to his station in
life.
Services which are necessary: Education, Training for a
trade, medical advice, legal advice, provision of a funeral
for deceased husband of a minor widow, house given on
rent for minors education and living purposes
Loan taken for his necessities also makes him liable.
 Persons of Unsound Mind
Parties entering into a contract should be of
sound mind.
Sound mind means at the time of contract
when he makes it he is capable of
understanding it and of forming a rational
judgment as to its effect upon his interests.
A PERSON WHO IS USUALLY OF UNSOUND
MIND BUT OCCASIONALLY OF UNSOUND
MIND CAN MAKE A CONTRACT WHEN HE IS
OF SOUND MIND
 Persons of Unsound Mind
Soundness of mind of a person depends on two
facts:
1. his capacity to understand the contents of the
business concerned and
2. 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.
Whether a party to a contract is of sound mind
or not is a question of fact to be decided by a
court of law.
Persons of Unsound of Mind
Lunatics: A lunatic is a person who is
mentally deranged due to some mental
strain or other personal experience. He
suffers from intermittent intervals of sanity
and insanity. He can enter into contracts
during the period when he is of sound mind.
Idiots: An idiot is a person who has
completely his mental powers. Idiocy is
permanent whereas lunacy denotes
periodical insanity with lucid intervals.
Persons of Unsound of Mind
Drunken or intoxicated persons: A
drunken or intoxicated person suffers
from temporary incapacity to
contract that at the time when he is
so drunk or intoxicated that he is
incapable of forming a rational
judgment. The position is similar to
that of lunatic.
Agreements entered into by persons
of unsound mind are void.
 Persons of Unsound of Mind
Other persons:
Alien enemies
Foreign sovereigns and their diplomatic staff and accredited
representatives of foreign states
Corporations: It cannot enter into a contract which are
completely personal in nature because it is not an individual
Insolvents: When a debtor is adjudged insolvent, his
property vests with the official receiver or official assignee
Convicts: A convict when undergoing imprisonment is
incapable of entering into a contract. He can enter into a
contract and sue if he is lawfully at large under a licence
called ticket of leave.
 Free consent
Consent means acquiescence or act of assenting
to an offer. Two or more persons are said to
consent when they agree upon the same thing in
the same sense.
Free Consent : Consent is said to be free when it is
not caused by
Coercion
Undue influence
Fraud
Misrepresentation
Mistake
 Discharge of a contract
A contract may be discharged by any
of the following means:
1. By performance
2. By agreement or consent
3. By impossibility
4. By lapse of time
5. By operation of law
6. By breach of contract.
 By performance
Actual performance
Attempted performance or tender: Tender is
not actual performance but is only an offer
to perform the obligation under the
contract. Where the promissor offers to
perform his obligation under the contract
but the offeree refused to accept the
performance (Attempted performance)
Tender is equivalent to actual performance
except in case of tender of money (Tender)
 Discharge by agreement or
consent
EODEM MODO QUO QUID CONSTITUITUR EODEM MODO
DESTRUITUR ( that is a thing may be destroyed in the
same manner in which it is constituted. The ways of
discharge of contract by an agreement may be done in
any of the following ways:
Novation: When a new contract is substituted for an
existing one between the same parties,
A contract between two parties is rescinded in
consideration of a new contract being entered into on
the same terms between one of the parties and a third
party.
It should take place before expiry of the time of
performance of the original contract.
Discharge by agreement or consent

Rescission: When all or some of the terms of a

contract are cancelled. It may occur by mutual
consent of the parties, where one party fails in
the performance of his obligation.
Alteration : Alteration of a contract may take
place when one or more of the terms of the
contract is/are altered by the mutual consent
of the parties to the contract.
Remission: Remission means acceptance of a
lesser fulfilment of the promise made
Discharge by agreement or
consent
Waiver: Waiver takes place when the
parties to a contract agree that they
shall no longer be bound by the
contract.
Merger: Merger takes place when an
inferior right accruing to a party
under a contract merges into a
superior right accruing to the same
party under the same contract or
some other contract.
 Discharge by impossibility of
performance
Impossibility existing at the time of
agreement
1. known to the parties
2. unknown to the parties
Couturier vs hastie: A sold to B
certain goods supposed to be on a
voyage. The goods had ceased to
exist due to the perils of the sea.
Impossibility arising subsequent to
the formation of contract
 Discharge by supervening
impossibility
Destruction of subject matter of contract
Non existence or non occurrence of a particular
state of things
A and B contract to marry each other. Before the
time fixed for marriage. A goes mad. The
contract becomes void.
Death or incapacity for personal service :
personal skill (singing)
Change of law or stepping in of a person with
statutory authority:
Outbreak of war
 Impossibility of performance not
an excuse
In the following cases, a contract is not
discharged on the ground of supervening
impossibility :
Difficulty of performance
Commercial impossibility
Impossibility due to the failure of a third
person
Strikes, lockouts and civil disturbances
Failure of one of the objects.
 Discharge by lapse of time/
Discharge by operation of law
By death
By merger
By insolvency
By unauthorised alteration of the
terms of a written agreement
By rights and liabilities becoming
vested in the same person
 Discharge by breach of a
contract
Actual breach of a contract:
At the time when the performance is due
During the performance of a contract
Express repudiation of the contract
Implied repudiation
Anticipatory breach of a contract:
By expressly renouncing the contract
By doing some act so that the performance of his
promise becomes impossible.
It might not be completely void it depends upon the
parties.
 Remedies for breach of a
contract
There are remedies for breach of a
contract. They are:
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of
the contract
5. Suit for injunction
 Rescission
When a contract is broken by one party, the other
party may sue to treat the contract as rescinded
and refuse further performance. In such a case,
he is absolved of all his obligations under the
contract.
Court will not accept under the following
circumstances: where the plaintiff has expressed
his ratification, owing to circumstances it is
impossible to restore back to their original
positions, where only one part of the contract is
sought to be rescinded but it cannot be rescinded.
 Rescission
When a party treats the contract as
rescinded he makes himself liable to
restore any benefits he has received
under the contract to the party from
whom such benefits were received, if
he has rightfully rescinded then he
has to be rightfully compensated.
 Damages
Damages are monetary compensation allowed to the
injured party by the court for the loss or injury suffered
by him by the breach of a contract.
Types of damages:
Ordinary damages: When a contract has been broken
the injured party can recover from the other party such
damages as naturally and directly arose in the usual
course of things from the breach. Egg: A agrees to sell B
and deliver 50 quintals of wheat at 475/- per quintal and
B agreed to pay at the time of delivery but at the time
of delivery it rose to 500/- per quintal. A refused to
deliver B can go to a court of law for that 25/- of loss per
quintal.
 Damages
Special Damages: Damages in contemplation
of the parties. Damages other than those
arising from the breach of a contract may be
recovered if such damages may reasonably be
supposed to have been in the contemplation of
both the parties as the probable result of the
breach of the contract. Such damages are
known as special damages.
Simpson vs London & NW Rail.co (goods
coming late to the show and loss has to borne
by the railway company)
 Damages
Vindictive damages: Damages for the
breach of a contract are given by
way of compensation for loss
suffered and not by way of
punishment for wrong inflicted.
For breach of a promise to marry and
dishonour of a cheque court may
order exemplary damages.
 Damages
Nominal damages: Where any loss has not
been suffered by either of the parties then the
damages awarded will be nominal to the
effected party.
Damages for loss of reputation:
Damages for inconvenience and discomfort:
Damages can be recovered for physical
inconvenience and discomfort. The general rule
in this connection is that the measure of
damages is not affected by the motive or the
manner of the breach .
 Quantum meruit
The phrase quantum meruit literally
means as much as earned. A right to
sue on a quantum meruit arises
where a contract partly performed by
one party has become discharged by
the breach of the contract by the
other party.
 Specific performance
The court may in some
circumstances direct the party in
breach to carry out his promise
according to the terms of the
contract. This is a direction by the
court for specific performance of the
contract at the suit of the party not
in breach.
 Injunction
Where a party is in breach of a
negative term of a contract (that is
where he is doing something which
he is promised not to do) the court
may by issuing an order restrain him
from doing what he promised not to
do. Such an order of the court is
known as an injunction.
 Contract and indemnity and
guarantee
Contract of indemnity: A contract by which
one party promises to save the other from
loss caused to him by the conduct of the
promissor himself or by the conduct of any
other person is called as a contract of
indemnity. The person who promises to
make good the loss is called the indemnifier
and the person whose loss is to be made
good is called the indemnified or indemnity-
holder (promisee). It is a class of contingency
contract.
 Contract of indemnity
A contracts to indemnify B against the
consequences of any proceedings which C
may take against B in respect of a certain sum
of 200/- This is a contract of indemnity.
A and B claim certain goods from a railway
company as rival owners. A takes delivery of
the goods by agreeing to compensate the
railway company against loss in case B turns
out to be the true owner. There is a contract
of indemnity between A and the railway
company.
 Contract of indemnity
Rights of indemnity holder:
1. all damages which he may be compelled to
pay in any suit in respect of any matter to which
the promise to indemnify applies.
2. All costs which he may be compelled to pay in
bringing or defending such suits.
3. All sums which he may have paid under the
terms of any compromise of any such suit. The
compromise should not be contrary to the orders
of the indemnifier and should be prudent or
authorised by the indemnifier.
 Rights of Indemnifier
Indian contract is silent regarding indemnifier rights.
Contract of guarantee: A contract of guarantee is a
contract to perform the promise or discharge the
liability of a third person in case of his default. The
person who gives the guarantee is called the surety,
the person in respect of whose default the
guarantee is given is called as principal debtor and
the person to whom the guarantee is given is called
the creditor. A guarantee may either be oral or
written. It may be express or implied and may even
be inferred from the course of conduct of the parties
concerned.
 Contract of Guarantee
S stands for surety, P stands for
principal debtor and C stands for
creditor.
S requests C to lend 500/- to P and
gurantees that if P fails to pay the
amount he will pay. This is a contract
of guarantee. S in this case is the
surety C the creditor and P the
Principal debtor.
 Essential features of
Guarantee
Concurrence: A contract of guarantee requires
the concurrence of all the three parties to it the
principal debtor, the creditor and the surety.
The liability of the principal debtor is primary.
Essentials of a valid contract
Writing not necessary: A guarantee may be
either oral or written. It may be express or
implied. Implied guarantee may be inferred
from the course of conduct of the parties
concerned.
 Difference between Indemnity and
Contract of guarantee
Sl Contract of Indemnity
No.
1 There are two parties to the
contract the indemnifier
and the indemnified
2 The liability of the
indemnifier to the
indemnified is primary and
independent
3 There is only on contract in
the case of a contract of
indemnity
4 It is not necessary for the
Contract of guarantee
There are three parties to the
contract the creditor, the
principal debtor and the surety
The liability of the surety to the
creditor is collateral or
secondary, the primary liability
being that of the principal
debtor .
In a contract of guarantee there
are three contracts one between
the principal debtor and the
creditor, the second between the
creditor and the surety and the
third between surety and
principal debtor
4. It is necessary that the surety
 Difference between Indemnity and
Contract of guarantee
Sl No Contract of Indemnity Contract of Guarantee
5 The liability of the There is usually an existing debt
indemnifier arises only on or duty the performance of which
the happening of a is guaranteed by the surety
contingency
6 An indemnifier cannot A surety on discharging the debt
sue a third party for loss due by principal debtor, steps into
in his own name, because the shoes of the creditor. He can
there is no privity of proceed against the principal
contract. He can do so debtor in his own right.
only if there is an
assignment in his favour
 Types of guarantee
Specific guarantee: When a guarantee extends
to a single transaction or debt it is called as a
specific or simple guarantee. It comes to an
end when the guaranteed debt is duly
discharged or the promise is duly performed.
Continuing guarantee: When a guarantee
extends to a series of transactions it is called a
continuing guarantee. The liability of the
surety in case of a continuing guarantee
extends to all the transactions contemplated
until the revocation of the guarantee.
 Discharge of a guarantee
By revocation, By the conduct of the
creditor( variance of the terms of the
contract, release or discharge of
principal debtor, compounding by
creditor with principal debtor,
creditors act or omission impairing
surety's eventual remedy, loss of
security), By invalidation of a
contract ( obtained by
misrepresentation, obtained by
 Bailment and Pledge
Ballier means to deliver
Bailment is the delivery of the goods
by one person to another for some
purpose upon a contract, that they
shall when the purpose is
accomplished, be returned or
otherwise disposed of according to
the directions of the person
delivering g them .
 Requisites of bailment
Contract
Delivery of possession
For some purpose
Return of specific goods
Bailment is concerned only with
goods
Generally the consideration will be in
the form of money being paid
 Classification of goods
For the exclusive benefit of the bailor
For the exclusive benefit of the bailee
For the mutual benefit of bailor and
bailee
Gratuitous bailment
Non Gratuitous bailment
 Duties and rights of bailor and
bailee
Duties of Bailor: To disclose know
faults, to bear extra ordinary
expenses of bailment, to indemnify
bailee for loss in case of premature
termination of gratuitous bailment (in
this case the loss which the bailee
has suffered should be less than the
benefit if it exceeds then it has to be
compensated by the bailor), to
receive back the goods, to indemnify
 Duties of bailee
To take reasonable care of the goods
bailed, not to make unauthorised use of
goods, not to mix the goods bailed with
his own goods, not to set up an adverse
title, to return any accretion of goods, to
return the goods
Rights of bailor: enforcement of rights,
avoidance of a contract, return of goods
lent gratuitously, compensation from a
wrong - doer
 Rights of a bailee
Delivery of goods to one of several joint
bailors of goods, delivery of goods to bailor
without title ( if the bailee doesn't know about
the defective title of the bailor and if he
returns to the bailor he that is bailee is not
responsible), right to apply to court to stop
delivery, right of action against trespassers,
bailees lien (lien: means the right of a person
to retain the possession of some goods
belonging to another until some debt or claim
of the person in possession is satisfied.
 Termination of bailment
A contract of bailment can be
terminated in the following cases:
On the expiry of the period
On achievement of the object
Inconsistent use of the goods
Destruction of the subject matter
Gratuitous bailment
 Pledge
The bailment of goods as security for
payment of a debt or performance of a
promise
The promise is called as pledge
The bailor is in this case called as pledger or
pawnor and the bailee is Pawnee.
A bailment is for security. It is a different
kind of bailment.
Any kinds of movable property that is goods,
documents, or valuables may be pledged.
 Difference between bailment and
pledge
Pledge is the bailment of goods as a
security for the performance of a specific
promise that is the payment of a debt or
performance of a promise. Bailment on the
other hand is for a purpose of any kind.
In case of default by the pawnor to repay
the debt the Pawnee may after giving notice
to the pawnor sell the goods but may retain
the goods and sue for his charges.
 Difference between bailment and
pledge
In case of pledge the pawnee has no right to use the
goods pledged with him. In case of bailment the
bailee may do so if the terms of bailment so provide.
Rights of pawnee:
Rights of retainer, Right of retainer for subsequent
advances, right to extra ordinary expenses, right
against true owner, pawnees rights where pawnor
makes default ( he may file a suit against the pawnor
upon the debt or promise and may retain the goods
pledged as a collateral security, he may sell the
goods pledged after giving the pawnor a reasonable
notice of the sale.
 Rights of pawnor
Right to get back the goods, right to
redeem debt, preservation and
maintenance of the goods, rights of
an ordinary debtor
 Principal and an Agent
A person who has capacity to
contract may enter into a contract
with another either by himself or
through another person. When he
adopts the latter course he is said to
be acting through an agent.
The persons for whom such act is
done or who is so represented is
called the principal.
 Principal and an Agent
Essentials of relationship of agency:
Agreement between the principal
and the agent
Intention of the agent to act on
behalf of the principal
Rules for agency:
1. Whatever a person can do
personally he can do through an
agent.
 Rules for agency
2. He who does an act through another
does it by himself
3.A person who is a major only can
appoint an agent
4. Any person who is authorised to act
as such may be an agent
5. But no person who is not of the age
of majority and of sound mind is
responsible to his principal.
 Principal and Agent
Difference between agent and
servant
A. no legal relationship (servant)
B. Servant is under direct control
C. An agent can work for several
principals but servant cannot
D. A principal is liable for agents
wrongs and master is liable for
servant if they are committed in the
course of employment
 Agent and independent
contractor
There are differences between agent
and an independent contractor
Creation of agency:
By express agreement
By implied agreement
By ratification
By operation of law
 Types of agency
Agency by implied agreement ( A
woman allowed her son to drive a car
for her, she paying all the expenses
of maintenance and operation. The
son caused an accident injuring his
wife. Held the wife could sue the
mother as the son was an implied
agent of the mother (smith vs moss)
 Agency by ratification
The agent must purport to act as agent for a
principal who is in contemplation and is identifiable
at the time of contract.
The principal must be in existence at the time of a
contract
The principal must have contractual capacity
Ratification must be with full knowledge of facts
It should be done within reasonable time
The whole transaction must be ratified
Must be communicated
It should not put a third party to damages.
 Classification of agents
Special agents: To perform a
particular act
General Agent: To do all the acts
connected to a particular trade,
business or employment
Universal agent: His authority is
unlimited. He can bind his principal
by any act which he does provided it
should be legal and agreeable to the
law of the land
 Duties of an agent
To carry out the work undertaken
according to the directions given by
the principal
To carry out the work with reasonable
care, skill and diligence
To render proper accounts to his
principal
To communicate with the principal in
case of difficulty
Not to deal on his own account
 Duties of an agent
To pay sums received for the principal
To protect and preserve the interests of the
principal in case of his death or insolvency
Not to use the information obtained in the
course of the agency against the principal
Not to make secret profit from agency
Not to put himself in a position where
interest and duty conflicts
Not to delegate authority
 Rights of an agent
Right of retainer
Right to receive remuneration
Right of lien
Right of indemnification
 Duties of principal
To indemnify agent for the acts done
in good faith
To indemnify agent for the acts done
lawfully
To indemnify agent for injury caused
by principals neglect
To pay the agent the commission or
other remuneration
 Rights of Principal
To recover damages
SALE OF GOODS ACT
Sale: A contract of sale of goods is a
contract whereby the seller transfers or
agrees to transfer the property in goods
to the buyer for a price. There may be a
contract with one part of the owner.
Essentials of sale: Two parties, Goods,
Price and Transfer of general property
 Sale and agreement to sell
Transfer of property
Type of goods
Risk of loss
Consequences of breach
Right to resell
General and particular property
Insolvency of the buyer
Insolvency of the seller
 Types of goods
Goods: Every kind of movable
property other than actionable claims
and money and include stock and
shares, growing crops, grass and
things attached to or forming part of
the land which are agreed to be
severed before sale or under the
contract of sale.
Existing goods, Future goods,
Perishable goods, Durable goods,
 Rights of an unpaid seller
Unpaid seller: A seller of goods is deemed
to be an unpaid seller when:
The whole of the price has not been paid
or tendered
A bill of exchange or other negotiable
instrument has been received as a
conditional payment and the condition on
which it was received has not been fulfilled
by reason of the dishonour of the
instrument or otherwise.
 Rights of an unpaid seller
Right of lien
Right of Stoppage in transit
Right of resale
Right of withholding the delivery
Suit for price
Suit for damages
Repudiation of contract before due date
Suit for interest
 Conditions and Warranties
Condition: A condition is a stipulation
which is essential to the main
purpose of the contract. It goes to
the root of the contract
Warranty: A warranty is a stipulation
which is collateral to the main
purpose of the contract
Differences: Difference as to the
value, Difference as to breach,
difference as to treatment
 Implied condition
Condition as to title
Sale by description
Condition as to quality or fitness
Condition as to merchantability
Condition implied by custom
Sale by sample
Condition as to wholesome ness
 Implied warranty's

Warranty of quiet possession

Warranty of freedom from
encumbrances
Warranty to as to quality of fitness by
usage of trade
Warranty to disclose dangerous
nature of goods
Caveat Emptor
 Partnership
Governed by Indian Partnership Act,
1932
Partnership: Is the relation between
persons who have agreed to share
the profits of a business carried on
bay all or any of them acting for all.
Persons who have entered into
partnership with one another are
called individually partners and
collectively as a firm.
 Types of partners
Actual or ostensible partners: By an agreement joins and
takes active participation in the business.
Sleeping or dormant partner: Who does not take part in
the business but shares profits and invests capital
Nominal partner: Just lends his name to be utilised and no
share in profits and no investment.
Partner in profits only: only for profits
Sub partner: When a partner agrees to share his profits
derived from the firm with a third person that third person
is known as a sub partner
Partner by estoppel: Becoming a partner by holding out
( a retired businessman becoming a honorary president
for a firm and later on to share the losses if occurs)
 Characters of a firm
Association of two or more persons
Agreement
Business
Sharing of profit
Mutual agency
Minor may be admitted for the benefits of
partnership
Consideration no need to be present
All people who are eligible to enter into a contract
are liable to enter into a partnership deed.
 Registration of Partnership
An application form of a statement giving the
necessary information to be filed with the Registrar
of Firms of the area
The name of the firm
The place or principal place of business of the firm
The names of other places where the firm carries
on business
The date when each partner joined the firm
The names and full permanent addresses of all the
partners
The duration of the firm
 Process of registration
The statement should be signed by all the
parties or by their agents.
When the registrar is satisfied that the
above provisions have been duly complied
with, he shall record an entry of the
statement in the Register of Firms .
Then a certificate of registration will be
issued.
Registration will be effective from the date
of entry in the register of firms
 Rights and duties of
Partners
Rights of a partner: Right to take part in the
business, right to be consulted, right of access to
accounts, right to share in profits, right to interest
on capital, Right to interest in advances (any
advances more than his capital for the firm he
should be compensated with 6% interest per
annum), right to be indemnified, right to the use
of partnership property, right of partner as agent
of the firm, no new partner to be introduced, no
liability before joining on behalf of the
partnership, right to retire, right not to be
expelled
 Duties of a partner
To carry on the business for the greatest common
advantage
To be just and faithful
To render true accounts and full information of all things
affecting the firm
To indemnify for fraud
To attend diligently
Not to claim remuneration
To share losses
To indemnify wilful neglect
To hold and use property of the firm exclusively for the firm
To account for personal profits
 Termination of Partnerships
Dissolution of firm:
By agreement
Compulsory dissolution( Partner becoming insolvent,
less than two members)
Dissolution on the happening of certain
contingencies
Dissolution by notice of partnership at will
Dissolution by court:
Insanity, Permanent capacity, Misconduct,
persistent breach of agreement, transfer of interest,
business working at a loss, any other ground
E contracts and Ecommerce
Ecommerce: Is the online transaction of business
which consists of buying and selling products or
services over electronic systems such as the
internet and other computer networks. The amount
of trade conducted electronically has grown
extraordinarily since the spread of the internet.
Ecommerce or electronic commerce is the practice
of buying and selling varied good and services on
the world wide web. Ecommerce happens over
wired communication lines connected throughout
the globe where the worldwide web serves as the
central medium for all trading transactions.
 Ecommerce and Contract's
Ecommerce enables sell and purchase of
commodities and services right from your home
and without leaving for seeking what you need.
Electronic Contracts: Contracts that are not paper
based but rather in electronic form are born out
of the need for speed convenience and efficiency.
E-contracts is a contract modelled, specified,
executed and deployed by a software system.
IN India e-contracts are governed by IT Act, 2000.