Law of Contracts

The Indian contract Act 1872

Business Law developed with the changing
practices of trade and commerce.
The Indian Contract Act, 1872 is the
foundation on which all business relations
rest.
It is the branch of law which determines the
circumstances in which promises made b the
parties to a contract shall be legally binding.
It also defines the remedies that are available
against a person who fails to perform his
contract, and prescribes conditions under the
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 What are Contracts ?
An Agreement enforceable by Law is a Contract. - S.2(h)

Every promise and every set of promises, forming the consideration for each other, is an
Agreement . - S.2(e)

When a 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 - S.2(b)

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. - S.2(a)

A person making the Proposal is called the “Promisor” and the person accepting the
proposal is called the “Promisee”.- S. 2(a)

33
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 Formation of a contract
Proposal ACCEPTED Promise
or Offer

ES
IS
M
R O
P
F L N
O IO
E T TUA AT
S U E R
- M NSI D
CO

Agreement Contract
FO RC E ABLE BY
EN
LAW
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 Offer or Proposal
An offer is an expression by one party of
his assent to certain definitive terms,
which looks forward to acceptance by the
other to the exact same terms.

Offeror: the one making the offer.

Offeree: the one to whom the offer is made.

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 Pall Mall Gazette

ll £ 100 REWARD
ll M a
P a t e Carbolic smoke ball co
t
Gaze er 13,
v e m b
£100
No 9 1 reward will be paid by the Carbolic
18
Smoke Ball Company to any person who
contracts the increasing epidemic influenza
colds, or any disease caused by taking cold,
after having used the ball three times daily
for two weeks, according to the printed
directions supplied with each ball.
£1000 is deposited with the Alliance Bank,
Regent Street, showing our sincerity in the
matter.
During the last epidemic of influenza many
thousand carbolic smoke balls were sold as
preventives against this disease, and in no
ascertained case was the disease contracted
by those using the carbolic smoke ball
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 Carlill v Carbolic Smoke Ball
Carlill v Carbolic Smoke Ball
Co [1893] 1 QB 256

The defendants issued an ad

offering a £100 reward to anyone
who used their product – smoke
Ball - according to the directions
and still managed to catch the
flu. The ad said that they had
deposited £1000 in a bank to
show their sincerity in the
matter.
Mrs. Elizabeth Carlill used the
ball exactly according to
instructions from Nov. to Jan.,
but she caught the flu.
She sued for £100.

77
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 Carlill v Carbolic Smoke Ball Co
[1893] 1 QB 256 - Defense Arguments

1. The advertisement was not correctly stated;

2. She had not acted in reliance on the Ad.;

3. She had not used the device as directed;

4. She had not contracted influenza;

5. The Co. had no notice of her purchase of the Ball;

6. There was no valid contract;
7. It was a gaming contract and not enforceable;
8. The advertisement was not a contractual offer or,
if it was, it was not accepted; and,
9. If a contract, it was against public policy - void

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 Reward doubled

99
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 Communication, Acceptance
and Revocation
Ø The communication of proposals, the acceptance of
proposals, and the revocation of proposals and
acceptances, respectively, are deemed to be made by any
act or omission of the party proposing, accepting or
revoking, by which he intends to communicate such
proposal, acceptance or revocation, or which has the
effect of communicating it.
- S.3

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 Section 3 of Indian contact Act
The communication of of what?
proposals, the acceptance of proposals, and
the revocation of proposals and acceptances,
respectively,
are deemed to be made by any act or
omission of the party Which
party?
proposing, accepting or revoking, What act ?

by which he intends to communicate Communica

te what ?
such proposal, acceptance or revocation,
or which has the effect of communicating it.
Effect of the
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act ?
 Section 3 rearranged
The communication of
proposals, the acceptance of proposals,
–

and the revocation of proposals and

acceptances, respectively,
are deemed to be made by any act or omission of the
party
– proposing, accepting or revoking,
by which he intends to communicate
– such proposal, acceptance or revocation,
or which has the effect of communicating it.

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 divided
Section 3 rearranged
The communication of
proposals,
–

– the acceptance of proposals,

are deemed toand
be the
made by any act
revocation of or omission
proposals
of the Proposer
and acceptances, respectively,
are deemed to be made by any act or
omission of the party
– proposing,
– accepting or revoking,
by which he intends to communicate
– such proposal,
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 Modified
Section 3 rearranged
The communication of
– proposals,
– the acceptance of proposals,
– and the revocation of proposals and acceptances,
respectively,
are deemed to be made by any act or omission of the party
– proposing,
– accepting
– or revoking,
by which he intends to communicate
– such proposal,
– acceptance
– or revocation,
or which has the effect of communicating it.
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 Acceptance of Offer
A boy ran away from his house. Father issued a
pamphlet, offering a reward to any body who
finds the boy. One man did not see the
pamphlet, but over heard part of a conversation
and found the missing boy. Can he claim the
reward offered ?
Har Bhajan Lal Vs. Haricharan Lal AIR 1925 All
539.

“ Performance of the conditions of the proposal,

or the acceptance of any consideration for the
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 When communication is complete ?
On 7th July, a Building society handed over a written offer to sell a
house A. Acceptance was to be by post. On 8th July 12.30 PM, The
society sent a letter revoking the offer. At 3.50 PM on the same day, A
posted a letter accepting the offer, He received the letter of revocation at
5.30 PM.
Henthorn v Fraser (1892) 2.Ch.27. “where the circumstances are such that
,according to ordincry usages of mankind, the post might be used as a means of
communicating the acceptance of an offer, the acceptance is complete as soon as it is
posted. “
The communication of an acceptance is complete,
as against the proposer when it is put in a course of transmission to him,
so as to be out of the power of the acceptor ,
as against the acceptor, when it comes to the knowledge of the proposer.(
S.4)
Ramdas chakrabarti Vs. Cotton ginning Co Ltd (1887) 9 All 36 Share allotment
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 Revocation of Proposals & acceptance

● A proposal may be revoked at any time

before the communication of its acceptance
is complete as against the proposer, but not
afterwards.
● An acceptance may be revoked at any time
before the communication of the acceptance
is complete as against the acceptor, but not
afterwards - [S.5]

● How Carbolic Smoke Co can revoke the offer ?

?
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 Revocation of a Proposal
A proposal is revoked –
(1) by the communication of notice of revocation by the
proposer to the other party;
(2) by the lapse of the time prescribed in such proposal for
its acceptance, or, if no time is so prescribed, by the lapse of a
reasonable time, without communication of the acceptance;
(3) by the failure of the acceptor to fulfill a condition
precedent to acceptance; or
(4) by the death or insanity of the proposer, if the fact of the
death or insanity comes to the knowledge of the acceptor
before acceptance. - [S.6]

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 What Agreements are Contracts ?

All agreements are contracts if they are made -

by the free consent of parties 1919

competent to contract,
for a lawful consideration and
with a lawful object, and
are not hereby expressly declared to be void.
Nothing herein contained shall affect any law in
force in India, and not hereby expressly repealed,
by which any contract is required to be made in
writing or in the presence of witnesses, or any law
relating to the registration of documents. - S.10
Discharge of
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contracts
 Consent and Free consent
Two or more persons are said to consent
when they agree upon the same thing in the
same sense. - [S.13]

Consent is said to be free when it is not

caused by –
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions ofWhat
S.agreements
20,21& are
22.
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contracts ?
 Coercion
Ø "Coercion" is the committing, or threatening to
commit, any act forbidden by the IPC or
Ø the unlawful detaining, or threatening to detain, any
property, to the prejudice of any person whatever,
Ø with the intention of causing any person
Ø to enter into an agreement. - [S.15]
A threatened to commit suicide and induced his wife to release
certain rights in an immovable property in favour of his brother.
Chikham Amiraju V Chikham Seshamma- (1917) 41 Mad 33

?
Held voidable, though suicide is not punishable under IPC,
C threatened to initiate criminal action and induced B to sign an agreement.
Is this coercion?
Askari Mirza Vbibi Jai kishori (1912) 16 IC 344 – to threaten a criminal
prosecution is not per se an act forbidden by IPC.

? PGDM 15 – LAW OF
Consent 21
 Undue Influence
(1) A contract is said to be induced by "under 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.
(2) In particular and without prejudice to the generally of the
foregoing principle, a person is deemed to be in a position to
dominate the will of another –
(a) where he hold a real or apparent authority over the other,
or where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason
of age, illness, or mental or bodily distress. - [S.16(1)&(2)]
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 Undue Influence Contd..
(3) Where a person who is in a position to
dominate the will of another, enters into a
contract with him,
and the transaction appears, on the face of it
or on the evidence adduced,
to be unconscionable,
the burden of proving that such contract was
not induced by undue influence shall be
upon the person in a position to dominate the
will of the other. - [S.16 (3)]
Consent
Nothing in the sub-section shall affect the
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 Fraud
"Fraud" means and includes any of the
following acts committed by a party to a
contract, or with his connivance, or by his
agents, with intent to deceive another party
thereto or his agent, or to induce him to enter
into the contract;
1. the suggestion as a fact, of that which is
not true, by one who does not believe it to
be true;
2. the active concealment of a fact by one
having knowledge or belief of the fact;
3. a promise made without any intention of
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 Illustrations and Cases on Fraud

A sells, by way of auction, to B, a horse

which A knows to be unsound. A conceals
the fact from B.
In the above case, B is A’s daughter, and
has just come of age. The relation between
parties would make it A’s duty to disclose.
Derry Vs. Peek (1889) 14 App Cas 337
believed to be true.
Intentional misrepresentation is of the
essence of fraud.
Consent
Amina Vs Hasan koya AIR 2004 SC 1227
 Misrepresentation
Misrepresentation" means and includes –

1) the positive assertion, in a manner not warranted by the

information of the person making it, of that which is not
true, though he believes it to be true;
2) any breach of duty which, without an intent to deceive,
gains an advantage to the person committing it, or
anyone claiming under him; by misleading another to
his prejudice, or to the prejudice of any one claiming
under him;

1) causing, however innocently, a party to an agreement,

to make a mistake as to the substance of the thingConsent
which is subject of the agreement
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- [S.18]
 Mistake
Where both the parties to an agreement are
under mistake as to a matter of fact
essential to the agreement, the agreement
is void.
Explanation : An erroneous opinion as to the value of the
things which forms the subject-matter of the agreement is
not be deemed a mistake as to a matter of fact -
[S.20]
Effect of mistake as to law - A contract is not voidable
because it was caused by a mistake as to any law in force
in India; but mistake as to a law not in force in India has the
same effect as a mistake of fact. - [S.21]
A contract is not voidable merely because it was caused by
one of the parties to it being under a mistake as to a matter
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Consent
 Who are Competent to Contract ?

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 sound mind and
is not disqualified from contracting by any
law to which he is subject. - [S.11]
If a person, incapable of entering into a
contract is supplied with necessaries in life,
the person who supplies is entitled to be
reimbursed - [S.68]
Quasi contract What agreements are
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contracts ?
 What are necessaries?
Ryder v Wombwell (1868) LR 4 Exch 32
“Earrings for a male, spectacles for a blind
person, a wild animal, daily dinner with turtle
and venison for a clerk with a salary of £1 a
week are not necessaries”.
A pair of Chrystal, ruby, and diamond
solitaires, and an antique goblet in silver gilt
were not necessaries of a minor with an
income of £500 a year, even though he was
the son of deceased baronet and moved in
the highest society. Competent to
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contract
 Unsound mind
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 interest.
A person who is usually of unsound mind,
but occasionally of sound mind, may make a
contract when he is of sound mind.
A person who is usually of sound mind, but
occasionally of unsound mind, may not
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Competent to
contract
 Consideration
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 -[S.2(d)]

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 Consideration and exceptions
An agreement made without consideration is
void, unless:
(1) it is expressed in writing and registered
under the law for the time being in force for
the registration of documents, and is made on
account of natural love and affection between
parties standing in a near relation to each
other; or unless
(2) it is a promise to compensate, wholly or in
part, a person who has already voluntarily
done something for the promisor, or
Contd….
something which the promisor was legally
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Void
agreements
What agreements are
contracts ?
 Exceptions to consideration Contd.

Explanation 1 : Nothing in this section shall

affect the validity, as between the donor and
donee, of any gift actually made.

Explanation 2 : An agreement to which the

consent of the promisor is freely given is not
void merely because the consideration is
inadequate; but the inadequacy of the
consideration may be taken into account by
the Court in determining the question
whether the consent of the promisor was
Void What agreements are
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agreements contracts ?
 Legality of object and consideration
The consideration or object of an agreement is
lawful, unless –
It is forbidden by law; or
is of such nature that, if permitted it would defeat the
provisions of any law or
is fraudulent; or involves or implies, injury to the person or
property of another; or
the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of

an agreement is said to be unlawful.
Every agreement of which the object or consideration
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What agreements are
contracts ?
 Void agreements

An agreement not enforceable by law is said to be void;

[S.2(g)]
The following types of agreements are declared to be void:

1) Agreements of which consideration and objects are unlawful in

–S. 24
2) Agreements without consideration - S. 25
3) Agreements in restraint of marriage – S. 26
4) Agreements in restraint of trade. – S. 27
5) Agreements in restraint of legal proceedings – S. 28
6) Unmeaning Agreements – S. 29
What agreements are
contracts ?
 Consideration and objects are unlawful in part

Agreement void, if considerations and objects unlawful in

part.-If any part of a single consideration for one or more
objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the
agreement is void.
Illustration : A promises to superintend, on behalf of B, a
legal manufacture of indigo, and an illegal traffic in other
articles. B promises to pay to A a salary of 10,000 rupees a
year. The agreement is void, the object of A's promise, and
the consideration for B's promise, being in part unlawful.
- [S. 24]
Pickering v Illfracambe – 1868 LR 3 CP 235 : “ Where you
cannot sever the legal part form the illegal part, the contract
is altogether void. Otherwise, you can reject the bad part
and retain the good. “ Void
agreements
 Agreement in restraint of marriage

Every agreement in restraint of the marriage of

any person, other than a minor, is void. -
[ S. 26]
Rao Rani v Gulab Rani LR 1942 All 810 :
Agreement between two co- widows that if any
of them remarried, she should forfeit her right
to the deceased husband’s property. Held
valid. all that was provided was that if a widow
elected to remarry, she would be deprived of
her rights”

Void
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agreements
 Agreements in restraint of Trade
Every agreement by which anyone is restrained from
exercising a lawful profession, trade or business of any
kind, is to that extent void.
Exception 1 - One who sells the goodwill of a business may agree with
the buyer to refrain from carrying on a similar business, within
specified local limits, so long as the buyer, or any person deriving
title to the goodwill from him, carries on a like business therein,
Provided that such limits appear to the court reasonable, regard
being had to the nature of the business. - [ S. 27]
Other exceptions:
Ø Agreement among partners not to carry on similar business
during the continuance of partnership, on dissolution, on
retirement from partnership , reasonable restrictions
specifying the local limits are permissible. (S.11,36 of
Partnership Act)
Ø Trade Combinations
 Restraint of Trade – Cases.

Ø Trego V Hunt (1896) Ac, 26

Ø “ It is difficult to imagine that when the goodwill and
trade of a retail shop were sold, the vendor might the
next day set up a shop within a few doors ad draw off
all customers”

Ø Gujarat Bottling co Ltd v Coca Cola Co (1995)5 SCC

545
Ø The Agreement restrained the franchisee to
manufacture, bottle, sell, deal or otherwise be
concerned with the products, beverages of any other
brands or trade marks/ trade names during
subsistence of the agreement including the period of
one year notice. Void
agreements
 Restraint of Legal Proceedings

Ø As per S.28, every agreement, which restricts

absolutely from enforcing his rights under any contract,
by the usual legal proceedings,
Ø or which limits the time within which he may thus
enforce his rights, is void to the extent.

Ø Reference of future disputes and existing questions to

arbitration is valid. [Ex to S. 28]
Ø Continental drug & C0 Ltd v Chemoids & Industries Ltd
– AIR 1955 CAL 161 : The contract fell under the
concurrent jurisdiction of both the Bombay and Alipore
courts, but the contract provided that “any dispute
arising between the parties, settlement of the same
legally or otherwise will be decided n Bombay” - Partial
Void
agreements
 Unmeaning Agreements

Ø Agreements, the meaning of which is not certain, or

Ø capable of being made certain, are void. - [S. 29]
Ø Guthying v Lynn (1831) 2 B Ad 232
Ø A horse was bought for a certain price coupled with a
promise to give £ 5 more if the horse proved lucky –
uncertain, void.

Ø Further, an agreement “to enter into an agreement in

future” is void for uncertainty unless all the terms of the
proposed agreement are agreed expressly or implicitly.

Ø Thus, an agreement to engage a servant some timeVoidnext

year, at a salary to be mutually agreed upon is a void
agreements
 Wagering Agreements
Agreements by way of wager are void; and
no suit shall be brought for recovering
anything alleged to be won on any wager, or
entrusted to any person to abide the result of
any game or other uncertain event on which
may wager is made.
This section shall not be deemed to render
unlawful a subscription or contribution, or
agreement to subscribe or contribute, made
or entered into for or toward any plate, prize
or sum of money, of the value or amount of
 What is Wager?
In Tracker vs. Hardy Cotton, L.J., described
a ‘wager’ as follows:
“The essence of gaming and wagering is
that one party is to win and the other to lose
upon a future event which at the time of the
contract is of an uncertain nature - that is to
say, if the event turns out the other way he
will win.
Features of wager:
Uncertain event
Void
Mutual chances of gaining or losing. agreements
 Agreement to do impossible acts

An agreement to do an act impossible in

itself is void.

A contract to do an act which, after the

contract is made, becomes impossible or, by
reason of some event which the promisor
could not prevent, becomes void when the
act becomes impossible or unlawful.

Where one person has promised to do

Void
something which he knew or, with agreements
 S.111 Indian Evidence Act
111. Proof of good faith in transactions
where one party is in relation of active
confidence.-Where there is a question as to
the good faith of a transaction between
parties, one of whom stands to the other in a
position of active confidence, the burden of
proving the good faith of the transaction is
on the party who is in a position of active
confidence.

Illustrations
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 Discharge of Contract
When the object of the contract is fulfilled,
the liability of either party under the contract
comes to an end. The contract is then said
to be discharged.
Contract is discharged by different ways:
by Performance - (S. 31 – 67)
by Impossibility of Performance ( S. 56)
by Agreement (S.62- 67) and
by Breach.
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 Performance of Contract
The parties to a contract must either perform,
or offer to perform, their respective promises,
unless such performance is dispensed with or
excused under the provision of this Act, or of
any other law.
Promises bind the representative of the
promisor in case of the death of such
promisors before performance, unless a
contrary intention appears from the contract.
- [S.37]

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 Tender of Performance
Where a promisor has made an offer of
performance to the promisee, and the offer
has not been accepted, the promisor is not
responsible for non-performance, nor does
he thereby lose his rights under the contract.
Every such offer must fulfill the following
conditions –
1. it must be unconditional;
2. it must be made at a proper time and
place, and under such circumstances that
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 Discharge by Agreement
Novation
If the parties to a contract agree to substitute
a new contract for it, or to rescind or alter it,
the original contract need not be performed.-
[S.62]
Appointment in response to an
advertisement. The employee was placed in
a scale lower than that mentioned in the
advertisement. After accepting the placement,
he claims the higher pay scale.
Nagendra Kumar Brijraj Singh v Hindustan
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 Discharge by Breach
1. Anticipatory Breach:
Prior to the promised date of performance,
the promisor absolutely repudiates the
contract.
2. Present Breach:
Failure to perform as promised or making it
impossible for the other party to perform.
The innocent party is excused from
performance or from further performance.
Frost v knight – (1872) LR 7 Exch 111: D
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 Remedies for Breach of Contract

Injured party entitled to one or more of the

following remedies:
Rescission of the contract:
● He need not perform his part of the contract.
Suit for damages.
● For monetary compensation for the loss or injury
suffered. Actual loss to be proved.
Suit upon quantum meruit
● ‘quantum meruit’ means “as much as is earned”. In
case of breach after part performance of the
contract, reasonable compensation is awarded for
the part performed.
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 Remedies for anticipatory Breach
Anticipatory breach – options for the injured
party is to sue at once or wait for
performance. Consequences are:
1. Party repudiating may choose to perform.
2. If while the contract is open, some event
happens which discharges the contract
other wise than by repudiation, promisor
may take advantage.
Avery v Bowden – 1855 5 E&B 714: D
chartered P’s ship to load with a cargo. Before
the appointed day, when the ship arrived, D
requested the captain of the ship to go away
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 Quasi Contracts
Theory of unjust enrichment - Enrichment of
one person at the cost of another. Justice
demands that this should be prevented.
The Indian Contract Act provides for 5 kinds
of ‘relations resembling those created by
contract’
S. 68 - Claim for necessaries supplied to
person incapable of contracting, or on his
account
S. 69 - Reimbursement of person paying
money due by another, in payment of which
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 Payment by interested persons
Conditions:
Payer must be interested in making payment.
B is lessee of certain land. For default of land
revenue due to the govt. by A (owner) the land
is put up for sale. B pays the dues to the govt
to avoid sale. A is bound to make good.
He should not be bound to pay.
A worker was injured due to negligence of the
contractor. Port authority was under statutory
liability to pay compensation. Suit against the
contractor under this section failed. Port
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 Payment of Non –gratuitous acts
Five conditions must be satisfied:
A person should lawfully do something for
another.
He must not intend to act gratuitously
The other party must enjoy the benefit.
The beneficiary has the choice to reject the
services.
The services should have been rendered
without request.
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 Paid by Mistake.
A person to whom money has been paid, or
anything delivered, by mistake or under
coercion must repay or return it. - [S.72]
Sales Tax Officer v Kanhaiya Lal saraj – AIR
1959 SC 135 : Tax was paid under UP Sales
Tax law on certain transactions, and
subsequently, the High court ruled that such
levies are ultra vires. Money paid under
mistake of law also comes under S.72.
S. Ketrabarsappa v Indian Bank – AIR 1987
Karnt 236:
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 INDEX
2. Indian contract Act 27.Mistakes. 46.Discharge of a Con
3. What are contracts28.? competent to contract
47.Performance
4. Formation of contract
29.Necessaries 48.Tender of Performa
5. Offer or Proposal 30.Unsound Mind 49.Discharge by
agreement
6. Carbolic smoke Ball 31.Consideration
50. Discharge by breach
15.Communication.. 32.Consideration - 51. Remedies for breach
21.Acceptance of Offer Exceptn 52. Remedies for breach
60. Quasi contracts
22.Comnicatn 33.Exception – contd.61. Payment by interested
. complete 34.Legal objects etc.62. Non gratuitous acts
23.Revocation & Accept 35.Void Agreements 63. Paid by mistake
24.Revocation 36.unlawful in part
25.Agreements & Contracts
37.Restraint of Marriage.
26. Free consent 38.Restraint of trade.
27.Coercion 39.Cases
28.Undue influence 40.Restraint of Legal action
29.Undue Influence contd.
41.Unmeaning Agreements 57