Introduction To Contract Nature of Contract: The Indian Contract Act, 1872

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INTRODUCTION TO CONTRACT
NATURE OF CONTRACT
The law of contract is that branch of law which determines the circumstances in
which promises made by the parties to a contract shall be legally binding on them.
Its rules define the remedies that are available in a court of law against a person
who fails to perform his contract, and the conditions under which the remedies are
available.
The law of contract introduces definiteness in business transactions.
The Indian Contract Act, 1872
The law relating to contracts is contained in the Indian Contract Act, 1872. The Act
deals with –
(1) The general principles of the law of contract.
(2) Some special contracts only.
Nature of the law of contract
The law of contract differs from other branches of law in an important respect. It
does not lay down a number of rights and duties which the law will enforce; it
consists rather of a number of limiting principles, subject to which the parties may
create rights and duties for themselves which the law will uphold. The parties to a
contract, in a sense, make the law for themselves. So long as they do not infringe
some legal prohibition, they can make what rules they like in respect of the subject-
matter of their agreement, and the law will give effect to their decisions.
Definition of Contract
A contract is an agreement made between two or more parties which the law will
enforce. Sec. 2(h) defines a contract as an agreement enforceable by law. Every
agreement and promise enforceable at law is a contract.
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AGREEMENT AND ITS ENFORCEABILITY
Contract = Agreement + Enforceability by law
An agreement is defined as “every promise and every set of promises, forming

consideration for each other.” A promise is defined thus: “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 that an agreement is an accepted proposal. In order, therefore, to form an
agreement, there must be a proposal or offer by one party and its acceptance by the
other.
Agreement = Offer + Acceptance.
Consensus ad idem
The essence of an agreement is the meeting of the minds of the parties in full and
final agreement. There must, in fact, be consensus ad idem. This means that the
parties to the agreement must have agreed about the subject-matter of the agreement
in the same sense and at the same time. Unless there is consensus ad idem, there
can be no contract.
Example: A, who owns two horses named Rajhans and Hansraj, is selling horse
Rajhans to B. B thinks he is purchasing horse Hansraj. There is no consensus ad
idem and consequently no contract.
Obligation
An agreement, to become a contract, must give rise to a legal obligation or duty.

The term ‘obligation’ is defined as a legal tie which imposes upon a definite person
or persons the necessity of doing or abstaining from doing a definite act or acts.
Example: A agrees to sell his car to B for Rs. 10,000. The agreement gives rise to
an obligation on the part of A to deliver the car to B and on the part of B to pay Rs.
10,000 to A. This agreement is a contract.
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ESSENTIAL ELEMENTS OF A VALID CONTRACT
According to Sec. 10, all agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a
lawful object and are not expressly declared to be void. In order to become a
contract, an agreement must have the following essential elements:
1. Offer and acceptance: There must be two parties to an agreement, i.e., one party
making the offer and other party accepting it. The terms of the offer must be
definite and the acceptance of the offer must be absolute and unconditional. The
acceptance must also be according to the mode prescribed and must be
communicated to the offeror.
2. Intention to create a legal relationship: When the two parties enter into an
agreement, their intention must be to create legal relationship between them. If
there is no such intention on the part of the parties, there is no contract between
them. Agreements of a social or domestic nature do not contemplate legal
relationship; as such they are not contracts.
3. Lawful consideration: An agreement to be enforceable by law must be

supported by consideration. ‘Consideration’ means an advantage or benefit moving
from one party to the other. In simple words, it means ‘something in return’. The
agreement is legally enforceable only when both the parties give something and get
something in return. Consideration need not necessarily be in cash or kind. It may
be an act or abstinence (abstaining from doing something) or promise to do or not
to do something. It may be past, present or future. But it must be real and lawful.
4. Capacity of parties-competency: The parties to the agreement must be capable

of entering into a valid contract. Every person is competent to contract if he-
(a) is of the age of majority,
(b) is of sound mind, and
(c) is not disqualified from contracting by any law to which he is subject.
5. Free and genuine consent: It is essential to the creation of every contract that
there must be free and genuine consent of the parties to the agreement. The consent
of the parties is said to be free when they are of the same mind on all the material
terms of the contract.
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6. Lawful object: The object of the agreement must not be (a) illegal, (b) immoral,
or (c) opposed to public policy. If an agreement suffers from any legal flaw, it
would not be enforceable by law.
7. Agreement not declared void: The agreement must not have been expressly
declared void by law in force in the country.
8. Certainty and possibility of performance: The agreement must be certain and

not vague or indefinite.
Example: A agrees to sell to B “a hundred tons of oil”. There is nothing whatever

to show what kind of oil was intended. The agreement is void for uncertainty.
9. Legal formalities: A contract may be made by words spoken or written. As

regards the legal effects, there is no difference between a contract in writing and a
contract made by word of mouth. It is, however, in the interest of the parties that
the contract should be in writing.
CLASSIFICATION OF CONTRACTS
1. Classification according to validity.
Voidable contract. An agreement made 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. When the consent of a party to a contract is not free, the contract
is voidable at his option. [Sec. 2 (i)].
Example: 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.
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
destitute of legal effects altogether. It is void ab initio.
Void contract. A contract which ceases to be enforceable by law becomes void

when it ceases to be. A contract, when originally entered into, may be valid and
binding on the parties, e.g., a contract to import goods from a foreign country. It
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may subsequently become void, e.g., when a war breaks out between the importing
country and the exporting country.
Illegal agreement: An illegal agreement is one which transgresses some rule of

basic public policy or which is criminal in nature or which is immoral.
Unenforceable contract: 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.
2. Classification according to formation.
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.
Implied Contract: An implied contract is one which is inferred from the acts or
conduct of the parties or course of dealings between them.
Example: there is an implied contract when, A gets into a public bus,
Quasi Contract: Strictly speaking, a quasi-contract is not a contract at all. A

contract is intentionally entered into by the parties. A quasi contract is created by
law. It resembles a contract in that a legal obligation is imposed on a party who is
required to perform it.
Example: T, a tradesman, leaves goods at C’s house by mistake. C treats the goods
as his own. C is bound to pay for the goods.
3. Classification according to performance.
1. Executed Contract: Executed means that which is done. An executed contract is

one in which both the parties have performed their respective obligations.
Example: A paints a picture of B and B pays for the same.
2. Executory Contract: Executory means that which remains to be carried into

effect. An executory contract is one which both the parties have yet to perform
their obligations.
Example: A agrees to engage the services of B as his servant from next month.
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3. Unilateral or one-sided Contract: Only one party has to fulfill his obligation at
the time of the formation of the contract, the other party having fulfilled his
obligation at the time of the contract.
4. Bilateral Contract: Obligations on the part of both the parties to the contract are
outstanding at the time of formation of the contract. Similar to executory contracts.
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OFFER AND ACCEPTANCE
OFFER
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 made a proposal, when he “signifies
to another his willingness to do or abstain from doing anything, with a view to
obtaining his assent for such act or abstinence”.
The person making the offer is known as offeror, proposer or promisor and the
person to whom it is made is called the offeree or promisee. When the offeree
accepts the offer, he is called the acceptor or promisee.
Offer and its types –
Express Offer: An offer may be made by express words, spoken or written. Such
an offer is known as an express offer.
Implied Offer: An offer may also be implied from the conduct of the parties or the
circumstances of the case. This is known as implied offer.
For example, An offer by the Transport Co. to carry passengers for a certain fare.
Specific Offer: When an offer is made to a definite person, it is called specific offer.
General Offer: When an offer is made to the world at large, it is called as general
offer.
A mere making of an offer does not become a contract. Ordinarily it is the

acceptance of the offer and intimation of that acceptance which results in a contract.
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Legal Rules as to Offer:
1. Offer must be such as in law is capable of being accepted and thus giving rise to
legal relationship. An offer must be such as would result in a valid contract when it
is accepted.
2. Terms of offer must be definite, unambiguous and certain and not loose and
vague.
Example: A says to B, “I will sell you a car”. A owns three different cars. The
offer is not definite.
3. An Offer may be distinguished from:
(a) A declaration of intention and an announcement: A declaration by a person

intending to do something gives no right of action to another. Such a declaration
only means that an offer will be made or invited in future and not that an offer is
made now.
Example: An advertisement for a concert or an auction sale does not amount to an

offer to hold such concert or auction sale.
(b) An invitation to make an offer or do business: Display of goods by a shopkeeper

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 price.
Newspaper advertisements are not offers. A recognized exception to this is a
general offer of reward to the public.
4. Offer must be communicated. An offer to be complete must be communicated to

the person to whom it is made.
For example, ‘A’ proposes, by letter, to sell a house to ‘B’ at a certain price. The
communication of the proposal is complete when B receives the letter.
An acceptance of an offer, in ignorance of the offer, is not acceptance and does not
confer any right on the acceptor.
5. Offer must be made with a view to obtaining the assent. Offer must be made to
obtain the assent of the party addressed and not merely with a view to disclosing the
intention of making an offer.
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6. Offer should not contain a term the non-compliance of which may be assumed to
amount to acceptance. Thus a man cannot say that if acceptance is not
communicated by a certain time, the offer would be considered as accepted.
Example: A writes to B, “I will sell you my horse for Rs. 5,000/- and if you do not
reply, I shall assume you have accepted the offer.” There is no contract if B does
not reply.
7. A statement of price is not an offer. Merely stating of the price does not amount
to an offer.
Cross Offers: When two parties make identical offers to each other, in ignorance of
each other’s offer, the offers are cross offers. In such a case, the Court will not
construe one offer as the offer and the other offer as the acceptance and as such
there can be no concluded contract.
ACCEPTANCE
A contract emerges from the acceptance of an offer. Acceptance is the act of assent
by the offeree to an offer.
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.
Who can accept?
Acceptance of a particular offer: When an offer is made to a particular person, it

can be accepted by him alone and no one else.
Acceptance of general offer: When an offer is made to world at large, any persons
to whom the offer is made can accept it.
Legal Rules as to acceptance.
1. The offer must be absolute and unqualified i.e., it must conform to the offer. An
acceptance, in order to be binding, must be absolute and unqualified in respect of all
terms of the seller, whether material or immaterial, major or minor. It is well settled
that both offer and acceptance must be based on three components-
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certainty, commitment and communication. If any of the three components is

lacking either in the offer or in acceptance it does not give rise to a valid contract.
2. It must be communicated to the offeror. To conclude a contract between the

parties, the acceptance must be communicated in some perceptible form. A mere
resolve or mental determination on the part of the offeree to accept an offer, when
there is no external manifestation of the intention to do so, is not sufficient.
Example: A tells B that he intends to marry C, but tells C nothing of his intention.
There is no contract, even if C is willing to marry A.
3. It must be according to the mode prescribed or usual and reasonable mode. If the
acceptance is not according to the mode prescribed, or some usual and reasonable
mode, where no mode is prescribed the offeror may intimate to the offeree within a
reasonable time that the acceptance is not according to the mode prescribed and
may insist that offer must be accepted in the prescribed mode only.
Example: A makes an offer to B and say – “if you accept the offer, reply by wire”.
B sends the reply by post. It will be a valid acceptance unless A informs B that the
acceptance is not according to the mode prescribed.
4. It must be given within a reasonable time. If any time limit is specified, the
acceptance must be given within that time. If no time limit is specified, it must be
given within a reasonable time.
5. It cannot precede an offer. If the acceptance precedes an offer, it is not a valid

acceptance and does not result in a contract.
6. It must show an intention on the part of the acceptor to fulfill terms of the
promise. If no such intention is present, the acceptance is not valid.
7. It must be given by the party or parties, to whom the offer is made.
8. It must be given before the offer lapses or before the offer is withdrawn.
9. It cannot be implied from silence. The acceptance of an offer cannot be implied

from the silence of the offeree or his failure to answer, unless the offeree has by his
previous conduct indicated that his silence means that he accepts.
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Communication of Offer, Acceptance and its Revocation.
When is communication complete?
The communication of an offer is complete when it comes to the knowledge of the

person to whom it is made.
Example: A proposes, by a letter, to sell a house to B at a certain price. The letter is

posted on 10th July. It reaches B on 12th July. The communication of the offer is
complete when B receives the letter, i.e., on 12th July.
Communication of acceptance
The communication of acceptance is complete –
1. as against the proposer, when it is put into a course of transmission to him, so as

to be out of the power of the acceptor.
2. as against the acceptor, when it comes to the knowledge of the proposer.
Communication of revocation
Revocation means ‘taking back’, ‘recalling’ or ‘withdrawal’. It may be a

revocation of offer or acceptance. The communication of revocation is complete –
- As against the person who makes it, when it is put into a course of transmission to
the person to whom it is made, so as to be out of the reach 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.
Revocation of proposal: A proposal may be revoked at any time before the

communication of its acceptance is complete as against the proposer, but not
afterwards.
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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.
For example: A proposes by a letter sent by post to sell his house to B. The letter is
posted on the 1st day of the month. B accepts the proposal by a letter as against the
acceptor, but not afterwards.
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Sec 2(a)
(1989) 2 SCC 163 ABC Laminart Pvt.Ltd v/s A.P.Agencies
Agreement- whether a particular clause formed part of the

agreement or were merely general term- where parties transacted
the business, inter aila, on the basis of that clause, held, it formed
part of the agreement and the parties would be bound by it. It
would not be open to any party to deny its existence on the
ground of it being only a general term
-Estoppel-
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FREE CONSENT
It is essential to the creation of a contract that the parties have a consensus ad idem,
i.e., they agree upon the same thing in the same sense at the same time and their
consent must be free and real.” All agreements are contracts if they are made by the
consent of parties”.
Meaning of free consent
Consent is said to be free when it is not caused by –
Coercion,
Undue influence,
Fraud,
Misrepresentation and
Mistake.
Where there is no consent, there is no contract.
When consent is not free, i.e., where it is caused by coercion, undue influence,
fraud or misrepresentation, the contract is voidable at the option of the party whose
consent is so obtained.
Example: ‘A’ is forced to sign a promissory note at the point of pistol. ‘A’ knows
what he is signing but his consent is not free. The contract in this case is voidable
at his option.
COERCION
When a person is compelled to enter into a contract by the use of force by the other
party or under a threat, “coercion” is said to be employed. Coercion is the
committing, or threatening to commit, any act forbidden by the Indian Penal Code,
1860 or 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.
The threat amounting to coercion need not necessarily proceed from a party to the
contract. It may proceed even from a stranger to the contract.
Coercion includes fear, physical compulsion and menace to goods.
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Example: ‘A’ threatens to shoot ‘B’ if ‘B’ does not release him ‘A’ from a debt
which ‘A’ owes to ‘B’. ‘B’ releases ‘A’ under the threat. The release has been
brought about by coercion.
Consent is said to be caused by coercion when it is obtained by:
1. Committing or threatening to commit any act forbidden by the Indian Penal

Code.
2. Unlawful detaining or threatening to detain any property.
Effect of coercion:
When consent to an agreement is caused by coercion, fraud or misrepresentation,

the agreement is a contract voidable at the option of the party whose consent was so
caused.
The contract act says a person to whom money has been paid, or anything delivered
by mistake or under coercion, must repay or return it.
Duress
In the English Law, the near equivalent of the term “coercion” is “duress”. Duress
involves actual or threatened violence over the person of another (or his wife,
parent or child) with a view to obtaining his consent to the agreement. If the threat
is with regard to the goods or property of the other party, it is not duress.
UNDUE INFLUENCE
Sometimes a party is compelled to enter into an agreement against his will as a

result of unfair persuasion by the other party. This happens when a special kind of
relationship exists between the parties such that one party is in a position to exercise
undue influence over the other. “undue influence” is defined as follows:
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.
Where a person holds an apparent authority over the other.
Example: The relationship between master and servant, doctor and patient. Or
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Where a person stands in a fiduciary relation. E.g. relation of trust and confidence
to the other.
Where a contract is made with a person whose mental capacity is temporarily or

permanently affected by reason of age, illness or mental or bodily distress.
Example: ‘A’, a man enfeebled by disease or age, is induced by ‘B’s influence over
him as his medical attendant, to agree to pay ‘B’ an unreasonable sum for his
professional services. ‘B’ employs undue influence.
Effect of undue influence
When consent to an agreement is obtained by undue influence, the contract is

voidable at the option of the party whose consent was so obtained. Any such
contract may be set aside either absolutely or if the party who is entitled to avoid it
has received any benefit thereunder, upon such terms and conditions as to the Court
may seem just and equitable.
Relationships which raise presumption of undue influence:
The following relationships usually raise a presumption of undue influence, viz;
i. parent and child,

ii. Guardian and ward,
iii. Trustee and beneficiary,
iv. Religious adviser and disciple,
v. Doctor and patient,
vi. Solicitor and client and
vii. Fiancé and fiancée.
Burden of proof
In an action to avoid a contract on the ground of undue influence, the plaintiff has
to establish that –
The other party was in a position to dominate his will. Mere proof of nearness of
relationship is not sufficient for the Court to assume that one relation was in a
position to dominate the will of the other;
The other party actually used his influence to obtain the plaintiff’s consent to the
contract; and the transaction is unconscionable (unreasonable).
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MISREPRESENTATION AND FRAUD
A statement of fact which one party makes in the course of negotiation with a view
to inducing the other party to enter into a contract is known as a representation. It
must relate to some fact, which is material to the contract. It may be expressed by
words spoken or written or implied from the acts and conduct of the parties.
A representation, when wrongly made, either innocently or intentionally, is a

misrepresentation. Misrepresentation may be –
An innocent or unintentional misrepresentation, or

An intentional, deliberate or willful misrepresentation to deceive or defraud the
other party.
The former is called “misrepresentation” and the latter “fraud”.
MISREPRESENTATION
Misrepresentation is a false statement which the person making it honestly believes

to be true or which he does not know to be false. It also includes non-disclosure of a
material fact or facts without any intent to deceive the other party.
Example: ‘A’, while selling his mare to ‘B’, tells him that the mare is thoroughly
sound. ‘A’ genuinely believes the mare to be sound although he has no sufficient
ground for the belief. Later on ‘B’ finds the mare to be unsound. The representation
made by ‘A’ is a misrepresentation.
Accordingly, there is misrepresentation–
When a person positively asserts that a fact is true when his information does not
warrant it to be so, though he believes it to be true.
When there is any breach of duty by a person which brings an advantage to the
person committing it by misleading another to his prejudice.
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When a party causes, however innocently, the other party to the agreement to make
a mistake as to the substance of the thing which is the subject of the agreement.
Requirements of misrepresentation
A misrepresentation is relevant if it satisfies the following requirements:
1. It must be a representation of a material fact. Mere expression of opinion does

not amount to misrepresentation even if it turns out to be wrong.
2. It must be made before the conclusion of the contract with a view to inducing
the other party to enter into the contract.
3. It must be made with the intention that it should be acted upon by the person to
whom it is addressed.
4. It must actually have been acted upon and must have induced the contract.
5. It must be wrong but the person who made it honestly believed it to be true.
6. It must be made without any intention to deceive the other party.
7. It need not be made directly to the plaintiff.
A wrong statement of facts made to a third person with the intention of

communicating it to the plaintiff, also amounts to misrepresentation.
Consequences of misrepresentation
The aggrieved party, in case of misrepresentation by the other party, can –

1. Avoid or rescind the contract; or
2. Accept the contract but insist that he shall be placed in the position in which he
would have been if the representation made had been true.
Loss of right of rescission
The aggrieved party loses the right to rescind or avoid the contract for
misrepresentation or fraud –
If he, after becoming aware of the misrepresentation or fraud, takes a benefit under
the contract or in some other way affirms it.
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If restitutio in integrum (i.e., restoration to the original position) of the parties is not
possible, e.g., where the subject matter of the contract has been consumed or
destroyed.
If a third party has acquired rights in the subject matter of the contract in good faith
and for value.
FRAUD
Fraud exists when it is shown that –
A false representation has been made-

a. Knowingly, or
b. Without belief in its truth, or
c. Recklessly, not caring whether it is true or false and the maker intended the other
party to act upon it, or
d. There is a concealment of a material fact or that there is a partial statement of a
fact in such a manner that the withholding of what is not stated makes that which is
stated false.
“Fraud” means and includes any of the following acts committed by a party to a
contract, or with his connivance intentional active or passive acquiescence, or by
his agent with intent to deceive or to induce a person to enter into a contract:
The suggestion that a fact is true when it is not true and the person making the
suggestion does not believe it to be true;
The active concealment of a fact by a person having knowledge or belief of the fact;
A promise made without any intention of performing it;
Any other act fitted to deceive;
Any such act or omission as the law specially declares to be fraudulent.
Example: A sells, by auction, to B a horse which A knows to be unsound. A says

nothing to B about horse’s unsoundness. This is not fraud in A.
Essential elements of fraud
There must be a representation or assertion and it must be false. Without a

representation or assertion there can be no fraud except in cases where silence may
itself amount to fraud or where there is an effective concealment of a fact.
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The representation must relate to a material fact which exists now or existed in the
past.
The representation must have been made before the conclusion of the contract
with the intention of inducing the other party to act upon it. Not only must the
representation be false and made with the knowledge of its falsity, but it must also
be made with intent to deceive the other party.
The representation or statement must have been made with a knowledge of its
falsity or without belief in its truth or recklessly, not caring whether it is true or
false.
The other party must have been induced to act upon the representation or
assertion. A mere falsehood is not enough to give a right of action. It must have
induced the other party to act upon it.
The other party must have relied upon the representation and must have been
deceived.
The other party, acting on the representation or assertion must have subsequently
suffered some loss.
It is common rule of law “that there is no fraud without damage”.
Consequence of fraud
A contract induced by fraud is voidable at the option of the party defrauded. Until it
is avoided, it is valid. The party defrauded has, however, the following remedies:
He can rescind the contract. Where he does so, he must act within a reasonable
time. If in the interval, while he is deliberating, an innocent third party has acquired
an interest in the property for value, he cannot rescind the contract.
Example: A purchases certain goods from B by making a misrepresentation. A sells

the goods to X before B avoids the contract. B loses the right to avoid the contract.
He can insist on the performance of the contract on the condition that he shall be
put in the position in which he would have been if the representation made had been
true.
He can sue for damages.
Contract not necessarily voidable – Exceptions
When consent to an agreement is caused by coercion, fraud or misrepresentation,

the agreement is a contract voidable at the option of the party whose consent was so
caused, but in the following cases, the contract is not voidable.
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Where the consent of a party to a contract was caused by misrepresentation or fraud

and that party could discover the truth by ordinary diligence. The phrase “ordinary
diligence” means such diligence as a prudent man would take in his own case under
similar circumstances.
Example: A, by a misrepresentation, leads B erroneously to believe that five

hundred tonnes of indigo are made annually at his factory. B examines the accounts
of the factory, which show that only four hundred tones of indigo have been made.
After this B buys the factory. The contract is not voidable on account of A’s
misrepresentation.
Where a party enters into contract in ignorance of the misrepresentation or fraud.
Where, before the contract is avoidable, the interests of third parties intervene. But
it is important that the third parties acquire interest in the subject matter for value
and act bona fide.
Where a party to a contract, whose consent was caused by misrepresentation or

fraud, cannot be put in the position in which he would have been if the
representation made had been true.
Silence as to facts
The general rule is that a person before entering into a contract need not disclose to
the other party the material facts which he knows, but he must refrain from making
active concealment (like concealing a crack on the surface of a table by filling it
and repolishing it). This means mere silence is not fraud.
Example: Before letting his house, a landlord failed to tell the tenant that it was in a
ruinous condition. Held, he was not liable in deceit as the tenant should have
inspected the house.
Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud.
Statutory exceptions: There are two statutory exceptions to the above rule:
Where the circumstances of the case are such that, regard being had to them, it is
the duty of the person keeping silence to speak. Where silence is, in itself,
equivalent to speech.
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MISTAKE
Mistake may be defined as an erroneous belief about something. It may be a

mistake of law or a mistake of fact.
Mistake of Law
Mistake of law of the country. Ignorantia Juris non excusat, i.e. Ignorance of law is
no excuse, is a well settled rule of law. A party cannot be allowed to get any relief
on the ground that it had done a particular act in ignorance of law. A mistake of law
is, therefore, no excuse and the contract cannot be avoided.
Mistake of law of a foreign country. Such a mistake is treated as a mistake of fact

and the agreement in such a case is void.
Mistake of fact
Mistake of fact may be :
1) A bilateral mistake, or
2) A unilateral mistake
Bilateral mistake
Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, there is a bilateral mistake. In such a case, the agreement
is void.
The following two conditions have to be fulfilled for the above:
1. The mistake must be mutual, i.e. both the parties should misunderstand each
other and should be at cross purposes.
Example: A agreed to purchase B’s motor car which was lying in B’s garage.
Unknown to either party, the car and garage were completely destroyed by fire a
day earlier. The agreement is void.
2. The mistake must relate to a matter of fact essential to the agreement. As to what
facts are essential in an agreement will depend upon the nature of the promise in
each case.
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But an erroneous opinion as to the value of a thing which forms the subject matter
of an agreement is not to be deemed a mistake as to a matter of fact.
The various cases which fall under bilateral mistake are as follows:
Mistake as to the subject matter: where both the parties to an agreement are
working under a mistake relating to the subject matter the agreement is void.
Mistake as to the subject covers the following cases:
Mistake as to the existence of the subject matter. If both the parties believe the
subject matter of the contract to be in existence, which in fact at the time of the
contract is non-existent, the contract is void.
Example: A agrees to buy from B a certain horse. It turns out that the horse was
dead at the time of the bargain, though neither party was aware of the fact. The
agreement is void.
Mistake as to the identity of the subject matter. It usually arises where one party
intends to deal in one thing and the other intends to deal in another.
Example: In an auction sale, the auctioneer was selling tow.(fiber) A bid for a lot,
thinking it was hemp.(plant from which rope is made) The bid was extravagant for
tow, but reasonable for hemp. There was no contract in such a case.
Mistake as to the quality of the subject matter. If the subject matter is something
essentially different from what the parties thought it to be, the agreement is void.
Example: Table napkins were sold at an auction by a description “with the crest of
Charles I and the authentic property of that monarch”. In fact the napkins were
Georgian. The agreement was void as there was a mistake as to the quality of the
subject matter.
Mistake as to the quantity of the subject matter. If both the parties are working
under a mistake as to the quantity of the subject matter, the agreement is void.
Mistake as to the title to the subject matter. If the seller is selling a thing which he
is not entitled to sell and both the parties are acting under a mistake, the agreement
is void.
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Example: A person took a lease of a fishery which, unknown to either party, already
belonged to him. Thus, the lease is void.
Mistake as to price of the subject matter. If there is a mutual mistake as to the price
of the subject matter, the agreement is void.
Mistake as to the possibility of performing the contract. Consent is nullified if

both the parties believe that an agreement is capable of being performed when in
fact this is not the case. The agreement, in such case, is void on the ground of
impossibility.
Impossibility may be –
i) Physical impossibility
ii) Legal impossibility
A contract is void if it provides that something shall be done which cannot, as a

matter of law, be done.
Unilateral mistake
When in a contract only one of the parties is mistaken regarding the subject matter
or in expressing or understanding the terms or the legal effect of the agreement, the
mistake is a unilateral mistake. 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 of fact. A
unilateral mistake is not allowed as a defence in avoiding a contract unless the
mistake is brought about by the other party’s fraud or misrepresentation.
Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By
mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a
defence.
Exceptions
Mistake as to the identity of the person contracted with. It is a fundamental rule of

law that if one of the parties represents himself to be some person other than he
really is, there is a mistake as to the identity of the person contracted with.
Mistake as to the nature of contract. If a person enters into a contract in the

mistaken belief that he is signing a document of a different class and character
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altogether, there is a mistake as to the nature of contract and the contract is void.
He can successfully plead non est factum (it is not his deed, i.e., document). The
very basis of the contract, i.e., consent, is missing in this case. Thus, where in
signing a document the mind of the signer does not go with signature, there is a
mistake which would vitiate the contract.
Example: M, an old man of poor sight, indorsed a bill of exchange thinking it was a
guarantee. There was no contract on the ground that the mind of the signer did not
accompany the signature.
(1990) Supp SCC 216 Dularia Devi v/s Janardhan Singh-
Sec17-19
Where a document containing an agreement obtained by fraud
and misrepresentation as to the character of the document itself,
the contract is void and not voidable- different from fraudulent
representation as to the contents of the document.
There is a clear distinction between fraudulent misrepresentation
as to the character of the document and fraudulent
misrepresentation as to the contents there of. The former is void
the later is voidable.
(1990) 1 SCC 207 Bismillah v/s Jnaneshwar Prasad
Sec19- non est factum( it is not his deed or document) The

common law defence of non est factum to actions on specialities
in its origin was available where an illiterate person, to whom the
contents of a deed had been wrongly read, executed it under a
mistake as to its nature and contents, he could say that it was not
his deed at all. In its modern application, the doctrine has been
extended to cases other than those of illiteracy and to other
contracts in writing. In most of the cases in which this defence was
pleaded the mistake was induced by fraud, but that was not,
perhaps, a necessary factor as the transaction is invalid not
merely on the ground of fraud, where fraud exists, but on the
ground that the mind of the signer did not accompany the
signature, in other words he never intended to sign and therefore,
in contemplation of law never didi sign.
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(1994) 1 SCC 1 S.P.Chengalvaraya Niadu v/s

Jagannath
Sec17- Fraud- A fraud is an act of deliberate deception with the

design of securing something by taking unfair advantage of
another. It is a deception in order to gain by another’s loss. It is
cheating intended to get an advantage.
(1989) 2 SCC 1 ITC Ltd. v/s George Joseph Fernandes
Sec.20- Mistake as to fact- it must be a common mistake of both

the parties about the same vital fact- Distinction between
Common Mistake and Mutual Mistake- Mistake must also be as to
the substance or essential and integral element of the contract.
Where parties make mutual mistake misunderstanding each other

and are at cross purposes, there is no real correspondence of offer
and acceptance and the parties are not really consensus ad idem.
There is thus no agreement at all and the contract is void. A
common mistake is their where both parties are mistaken about
the same vital fact although both parties are ad idem e.g.: The
subject matter of the contract has already perished. The contract
in such a case is void.
Sec 20 is concerned with common mistake of fact and not mutual

mistake. A common mistake is made or shared alike by both while
mutual mistake is made or entertained by each of the parties
towards or with regard to each other.
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_________________________________________________________
CONSIDERATION
Consideration is one of the essential elements to support a contract. Subject to

certain exceptions, an agreement made without consideration is ‘nudum pactum’ (a
nude contract) and is void.
Consideration is a technical term used in the sense of ‘quid pro quo’ (i.e.,
something in return). When a party to an agreement promises to do something, he
must get ‘something’ in return. This ‘something in return’ is defined as
consideration.
Example: A agrees to sell his car to B for Rs. 10,000/-. Car is the consideration for
B and price is the consideration for A.
Definition of Consideration:
“A valuable consideration in the sense of the law may consist either in some right,
interest, and profit or benefit accruing to one party, or some forbearance, detriment,
loss or responsibility given, suffered or undertaken by the other.”
The contract act defines consideration as- “When at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or to abstain from doing, something, such act or
abstinence or promise is called a consideration for the promise.”
Example: A promises to B to guarantee payment of price of the goods which B sells

on credit to C. Here selling of goods by B to C is consideration for A’s promise.
(An act of doing something.)
A promises B not to file a suit against him if he pays him Rs. 500. The abstinence
of A is the consideration for B’s payment.
Need for consideration:
The reason why the law enforces only those promises which are made for
consideration is that gratuitous or voluntary promises are often made rashly and
without due deliberation.
Legal Rules as to consideration:
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1. It must move at the desire of the promisor. An act constituting

consideration must have been done at the desire or request of the promisor.
Example: A saves B’s goods from fire without being asked to do so. A cannot
demand payment for his services.
2. It may move from the promisee or any other person. Under the Indian law,
consideration may move from the promisee or any other person, i.e., even a
stranger. This means as long as there is consideration for a promise it is
immaterial who has furnished it. But the stranger to contract will be able to
sue only if he is a party to the contract.
3. It may be an act, abstinence or forbearance or a return promise.
(a) Forbearance 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.
(b) Compromise of a disputed claim. Compromise is a kind of forbearance.
(c) Compromise with creditors. A debtor, financially embarrassed, may call a

meeting of his creditors and request them to accept a lesser amount in satisfaction
of their debt. If the creditors agree to it, the agreement is binding both upon the
debtor and the creditors and this amounts to a compromise of the claims of the
creditors.
4. A consideration may be past, present or future.
Example: A renders some service to B at latter’s desire. After a month B promises

to compensate A for the services rendered to him. It is past consideration.
A receives Rs. 5,000/- in return for which he promises to deliver certain goods to B.
The money A receives is the present consideration.
D promises to deliver certain goods to E after a week. E promises to pay the price
after a month. This is future consideration.
5. It need not be adequate. Consideration, as already explained, means

“something in return”. This something in return need not necessarily be
equal in value to something given. The law simply provides that a contract
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should be supported by consideration. So long as consideration exists, the

Courts are not concerned as to its adequacy, provided it is of some value.
6. It must be real and not illusory. Although consideration need not be

adequate, it must be real, competent and of some value in the eyes of the
law.
Example: A promises to put life into B’s dead wife should B pay him Rs. 500/-.
A’s promise is physically impossible of performance.
7. It must be something which the promisor is not already bound to do. A

promise to do what one is already bound to do either by general law or
under an existing contract is not a good consideration for a new promise.
8. It must not be illegal, immoral or opposed to public policy.
STRANGER TO 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.
Exceptions:
The following are the exceptions to the rule that “a stranger to a contract cannot
sue”.
1. A trust or charge. A person (called beneficiary) in whose favour a trust or other

interest in some specific immovable property has been created can enforce it even
though he is not a party to the contract.
2. Marriage settlement, Partition or other family arrangements.
3. Acknowledgement or estoppel. Where the promisor 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.
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4. Assignment of a contract.
5. Contracts entered into through an agent.
6. Covenants running with the land.
A contract without consideration is void –
Exceptions :
The general rule is “ex nudo pacto non oritur action” i.e., an agreement made
without consideration is void. There are exceptions to this rule. They are:
1. Love and affection: A written and registered agreement based on natural

love and affection between near relatives is enforceable even if it is without
consideration.
2. Compensation for voluntary service: A promise to compensate, wholly or

in part, a person who has already voluntarily done something for the
promisor, is enforceable, even though without consideration.
Example: A finds B’s purse and gives it to him. B promises to give A Rs. 50/-.
This is a contract.
3. 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 authorized in that behalf.
Example: D owes C Rs. 1,000/- but the debt is barred by the Limitation Act. D
signs a written promise to pay C Rs. 500/- on account of the debt. This is a
contract.
4. Completed gift.
5. Agency: No consideration is necessary to create an agency.
6. Charitable subscription.
7.
(1990) 1 SCC 731 Bihar State Elec. Board v/s Green
Rubber Industry-
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Sec 10- Contract deed once signed, even without reading

the contents, becomes binding on the parties-Maxim-
‘nudum pactum ex quo non orituractio’- a voluntary
promise, without any other consideration other than mere
goodwill or natural affection. A naked pact, a bare
agreement.
DISCHARGE OF CONTRACT
In a Contract, the parties have to fulfil their contractual obligations.

When such obligations come to an end, the contract is said to be
discharged. In other words, discharge of contract means ‘termination of
contractual relationship between the parties.
A contract is said to be discharged, when it ceases to operate/ exist.
A contract may be discharged in positive (i.e. by performance) or in

negative (i.e. by breach or failure to perform by either or both the
parties).
For instance, a student’s contract with the college stands discharge on

expiry of the term of his course, i.e. he will have to leave the college
after completion of the course irrespective of his success or failure in
the examination.
Modes of Discharge
1. By Performance of Contractual Obligation.

2. By Subsequent Agreement (Doctrine of Novation).
3. By Impossibility of Performance (Doctrine of Frustration).
4. By Breach of Contract.
5. By lapse of Time.
6. By Operation of Law.
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1. Discharge by Performance
A contract is said to be discharged, if the parties had fulfilled their

respective obligations under the contract.
For example: ‘A’ offers to sell his house to ‘B’ for Rs. 50,000/- and ‘B’
accepts the same. Later ‘B’ pays the entire amount and ‘A’ hands over
the house. Here the parties have fulfilled their respective obligations.
The contract is said to be discharged.
2. By Subsequent Agreement – ‘Doctrine of Novation’
Sec.62 of the Indian Contract Act, 1872, deals with the Doctrine of
Novation. The expression ‘Novation’ means substitution of a new
contract in the place of an existing contract. With the creation of a new
contract, the existing contract stands extinguished / terminated.
The contract or Novation may take place between:-
a. The same parties with the same terms and conditions.

b. The same parties with altered terms and conditions.
c. With the change of parties with same/old terms and conditions.
d. With the change of parties and with altered terms and conditions.
The new contract in the above cases must be supported by a lawful

consideration. The mutual discharge of the old contract may be treated
as a consideration for the new contract.
a. Same parties and same terms and conditions:
The parties to the contract may mutually agree to enter into a new
contract with the same terms and conditions in order to discharge the
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existing /old contract. Then old contract stands terminated and new
contract will come into force.
Example: If a promissory note is about to expire on limitation, the

parties may execute a new promissory note.
b. Same parties with altered terms and conditions:
The parties may enter into a new contract by changing or altering the
terms and conditions of the existing/old contract.
Example: In the above example if the debtor, before the expiry of the
promissory note, gives the creditor some gold as security, the parties
remain unchanged but the terms of the contract are altered from
promissory note to mortgage deed.
c. Change of parties with the terms and conditions:
A new contract may be entered into with the change of parties under the
same terms and conditions of the existing /old contract in order to
discharge the old contract.
Example: ‘A’ offered to sell his house to ‘B’ for Rs. 50,000/- payable in
two instalments in 6 months. ‘B’ accepts to purchase the same. Later
‘B’ with the consent of ‘A’ and ‘C’ withdraws from the contract and
‘C’ accepts to purchase it by entering into a new agreement with ‘A’.
Here, the parties are changed, but the terms and conditions are the
same.
d. Change of parties and change of terms and conditions:
A contract between two parties may stand discharged against a new

contract entered into by the change of parties with altered terms and
conditions.
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Example: In the above example, if the parties (‘A’ and ‘B’) agree to
discharge the old contract against a new contract of mortgage of the
said house between ‘A’ and ‘C’ for Rs. 30,000/-. Here the parties are
changed and terms and conditions are also changed.
Rules of Novation
For Novation to be valid, the essential conditions are :-
1. To substitute new contract, the old contract must exist.

2. The new contract must fulfil the essentials of a valid contract.
(Sec.10 of Indian Contract Act).
3. Discharge by impossibility of performance- Doctrine of

Frustration
One of the essential elements of a valid contract is ‘possibility of

performance’. If the performance of a contract is impossible, it is void.
Impossibility of performance renders the contract void.
Thus, Sec.56 of the Act lays down that “an agreement to do an act
impossible itself is void”.
In English Law, impossibility of performance is known as the ‘Doctrine

of Frustration’. It is based on two maxims,
(i) Lex non cogit and impossibilia It means Law does not recognise
what is impossible, and
(ii) Impossibillium mulla obligatio est It means what is impossible
does not create an obligation.
According to Sec.56 of the Act, impossibility of performance takes

place under the following circumstances:
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1. Impossibility existing at the time of agreement.
a. Initial impossibility known to parties.

Example: An agreement to put life into a dead body.
b. Initial impossibility unknown to parties.
Example: ‘A’ enters into an agreement with ‘B’ to supply goods in
transit. But ‘A’ could not supply since the goods were destroyed
(unknown to both).
2. Impossibility after formation of contract or subsequent impossibility:
The performance is possible at one time of entering into a contract, but

later, it becomes impossible due to non happening of certain unforeseen
events.
Example: Natural Calamities, Act of God, Countries at War, etc..
Rabinson vs. Devison
In this case, the defendant’s wife, a piano player, promised to play

piano at concert on an occasion. But she could not give her
performance due to ill health. In an action by the plaintiff, the defendant
was held not liable.
Kerell vs. Henry
The defendant agreed to hire a flat from plaintiff on 26th and 27th June
1902 for viewing the proposed coronation procession of King Edward-
VII. Owing to sudden illness of the King, the procession was cancelled.
In an action against the defendant for rent, it was held not liable.
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4. Breach of Contract
It may be classified as
i. Anticipatory Breach
ii. Present Breach
In anticipatory breach, one party expresses his inability to perform his

part before the due date of its performance.
Present breach is simply a breach of contract or actual breach of

contract. It takes place either at the time when the performance of the
contract falls due or during the performance of the contract.
5. Discharge by Lapse of Time
The Limitation Act, 1963, imposes an obligation on the parties in

respect of certain contract to perform within a specified period.
6. Discharge by Operation of Law
A contract may be discharged by operation of Law in case of death,

insolvency, unauthorised alteration of terms of the contract, etc.
CAPACITY TO CONTRACT
The parties who enter into a contract must have the capacity to do so. ‘Capacity’
here means competence of the parties to enter into a valid contract. An agreement
becomes a contract if it is entered into between the parties who are competent to
contract.
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 and
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(c) Is not disqualified from contracting by any law to which he is subject.
The following persons are incompetent to contract:

1. Minors
2. Persons of unsound mind
3. Persons disqualified by any law to which they are subject
1. MINORS
A minor is a person who has not completed eighteen years of age. In the
following two cases, he attains majority after twenty-one years of age:
(1) Where a guardian of a minor’s person or property has been

appointed under the Guardians and Wards Ac 1890, or
(2) Where the superintendence of a minor’s property is assumed by a
Court of Wards.
Minor’s Agreements:
1. An agreement with or by a minor is void and inoperative ab initio.
2. He can be a promisor or a beneficiary. Incapacity of a minor to enter into a

contract means incapacity to bind himself by a contract. Nothing debars him
from becoming a beneficiary.
3. His agreement cannot be ratified by him on attaining the age of majority.

Consideration which passed under the earlier contract cannot be implied into
the contract which the minor enters on attaining majority.
Example: M, a minor, borrows Rs. 5,000 from L and executes a promissory

not in favour of L. After attaining majority, he executes another promissory
note in settlement of the first note. The second promissory note is void for
want of consideration.
(1) If he has received any benefit under a void agreement, he cannot be

asked to compensate or pay for it. Sec.65 which provides for
restitution in case of agreements discovered to be void does not
apply to a minor.
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Example: M, a minor, obtains a loan by mortgaging his property. He is not

liable to refund the loan. Not only this, even his mortgaged property cannot
be made liable to pay the debt.
(2) He can always plead minority. Even if he has, by misrepresenting his

age, induced the other party to contract with him, he cannot be sued
either in contract or in tort for fraud because if the injured party were
allowed to sue for fraud, it would be giving him an indirect means of
enforcing the void agreement.
(3) There can be no specific performance of the agreements entered into

by him as they are void ab initio. A contract entered into on his behalf
by his parent/ guardian or the manager of his estate can be specifically
enforced by or against the minor provided the contract is (a) within the
scope of the authority of the parent/guardian/ manager, and (b) for the
benefit of the minor.
(4) He cannot enter into a contract of partnership, but he may be

admitted to the benefits of an already existing partnership with the
consent of the other parties.
(5)He cannot be adjudged an insolvent.
(6)He is liable for ‘necessaries’ supplied or necessary services rendered

to him or anyone whom he is legally bound to support.
(7) He can be an agent.
(8) His parents/ guardian are/ is liable for the contract entered into by
him, even though the contract is for the supply of necessaries to the
minor.
Minor’s liability for necessaries:
A minor is liable to pay out of his property for ‘necessaries’ supplied to him or to
anyone whom he is legally bound to support (Sec.68). The claim arises not out of
contract but out of what are called quasi-contracts. Again, it is only the property of
the minor which is liable for meeting the liability arising out of such contracts. He
is not personally liable.
2. PERSONS OF UNSOUND MIND
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One of the essential conditions of competency of parties to a contract is that they

should be of sound mind. A test of soundness of mind reads as follows:
“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.
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 make a contract when he is of unsound mind.”
Lunatics: A lunatic is a person who is mentally disturbed 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 lost his mental powers. He does not
exhibit understanding of any ordinary matter. An agreement with an idiot, like that
of a minor, is void.
Drunken or intoxicated persons: A drunken or intoxicated person suffers from

temporary incapacity to contract, i.e., at the time when he is so drunk or intoxicated
that he is incapable of forming a rational judgment. The position of a drunken or
intoxicated person is similar to that of a lunatic.
Agreements entered into by persons of unsound mind are void. However, persons of
unsound mind are liable for necessities supplied to them or to anyone whom they
are legally bound to support.
3. OTHER PERSONS
Alien enemies: An alien is a person who is not a subject of the Republic of India.
Contracts with an alien friend, subject to certain restrictions, are valid. Contracts
with alien enemy (an alien whose State is at war with the Republic of India).
AGENCY
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In an Agency one person (Principal) employs another person (Agent) to represent

him or to act on his behalf, in dealings with a third person. The act of the Agent
binds the Principal in the same manner in which he would be bound as if he did the
act himself. (Vicarious liability).
“An ‘Agent’ is a person employed to do any act for another or to represent another
in dealings with third person. The person for whom such act is done or who is so
represented is called the ‘Principal’.
Who may employ Agent?
Any person who is of the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an Agent.
Who may be an Agent?
As between the Principal and the third person, any person may become an Agent,
but no person who is not of the age of majority and of sound mind can become an
Agent, so as to be responsible to his Principal according to the provisions in that
behalf herein contained.
Consideration not necessary – no consideration is necessary to create an Agency.
The authority of an Agent may be express or implied.
Extent of Agent’s authority – An agent having an authority to do an act has

authority to do every lawful thing which is necessary in order to do such act.
For example: Rocky constitutes Jockey, his Agent to carry on his business of a Ship
Builder. Jockey may purchase timber and other materials and hire workmen, for
the purpose of carrying on the business.
Agent’s authority in an emergency – An agent in an emergency, has authority to

do all such acts for the purpose of protecting his Principal from loss as would be
done by a person of ordinary prudence, in his own case under similar

circumstances.
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For example: Ramu consigns provisions to Ravi at Kolkata, with direction to send
them immediately to Rajesh at Chennai. Ravi may sell the provision at Kolkata, if
they will not bear the journey to Chennai without spoiling.
Distinction between an Agent and a Servant –
(1) An agent is employed to bring the principal into legal relation with third
person/s or to represent him in dealings with third person/s.
A servant does not ordinarily create legal relation between the employer and third
person/s.
(2) An agent is bound to follow all the lawful instructions of the principal but he is
not subject to the direct control and supervision of the principal.
A servant acts under the direct control and supervision of his employer.
(3) An agent may work for several principals at the same time. But a servant
usually serves only one master.
(4) A principal is liable for the wrongs of his agent done within the scope of his
authority. A master is liable for the wrongs of the servant if they are committed in
the course of his employment.
CREATION OF AN AGENCY
The relationship of principal and agent between the person represented and the
person representing has to exist. This creates a legal relationship. To create such a
relationship the following aspects are requisite.
(a) By actual authority –

Express or implied. An authority is said to be expressed when it’s given by words
spoken or written. An authority is said to be implied when it is to be inferred from
the circumstances of the case.
(b) By Ratification –
When an act has been done by one person on behalf of another though without his
authority or knowledge, the person on whose behalf the act is done may either
disown the act or ‘ratify’ the same.
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Ratification means according approval to the act by a person on whose behalf the
act is done. If the act done on behalf of a person, although without the knowledge
or the authority of that person, is ratified, the person ratifying the act becomes the
principal and the person who has done the act becomes the agent.
(c) By implication/operation of law –

In case of necessity, the law confers an authority on one person to act as an agent
for another without any regard to the consent of the principal. This issues during
extraordinary emergencies in which a person who is an agent may out of necessity
assume such power and his acts, fairly done, would be binding on the principal.
DUTIES OF AN AGENT:
(a) Duty to follow principal’s direction. An agent is bound to conduct the

business of his principal according to the directions given by the principal. When
the agent does not act as per the conditions, if any loss is sustained by the principal,
he must make it good to his principal, and if any profit accrues, he must account for
it.
(b) Duty to show proper care and skill – The agent is supposed to take due care
and act with reasonable diligence. He is bound to make compensation to his
principal in respect of the direct consequences of his negligence. However, he is
not liable to his principal in respect of loss or damages which is indirectly or
remotely caused.
(c) Duty to render proper accounts – an agent is bound to render proper accounts
to his principal on demand.
(d) Duty not to make secret profits from the agency – an agent except with the
knowledge and consent of his principal, shall not make any profit from the
transaction other than what is due to him as remuneration or commission
(e) Duty to avoid conflict of interest – an agent must not put himself in a position
where his duty and interest conflict. This conflict invariably arises when the agent
is personally interested in the principal’s transactions.
RIGHTS OF AN AGENT:
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An agent may retain out of any sums received on account of the principal, all
monies due to himself in respect of his remuneration and advances made or
expenses incurred by him in the conduct of business.
DUTIES OF PRINCIPAL:
(a) To indemnify the agent against the consequences of all lawful acts.
(b) To indemnify the agent against the consequences of acts done in good faith.
(c) To indemnify the agent for injury caused by the principal’s neglect.
(d) To pay the agent the commission or other remuneration agreed.
RIGHTS OF A PRINCIPAL:
(a) To recover damages.

(b) To obtain an account of secret profits and recover them.
BAILMENT
A ‘bailment’ is the delivery of goods by one person to another person for some
purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed off according to the directions of the person
delivering them.
The person who delivers the goods is called the ‘Bailor’.
The person to whom the goods are delivered is called the ‘Bailee’.
Delivery to bailee how made?
The delivery to the bailee may be made by doing anything which has the effect of
putting the goods in possession of the bailee.
If the owner maintains control over the goods there is no bailment.
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For example: A lady took her old jewels to a gold smith for remaking. Every
evening she used to receive the half made jewels, put the same into a box and lock
the same. She allowed the locked box to remain in the premises of the gold smith
but, kept the key in her possession. One night the jewels were stolen. There was no
bailment in this case as she had not handed over the possession of the jewels to the
gold smith.
Bailor’s duty to disclose faults in goods bailed – the bailor is bound to disclose to
the bailee faults in the goods bailed, of which the bailor is aware, and which
materially interfere with the use of them, or expose the bailee to any risks.
Care to be taken by bailee – the standard of care is that of a reasonable man would
take of his own goods of the same bulk, quantity and value as the goods bailed.
Duty not to mix bailor’s goods with his own goods – the bailee must not mix the
goods of the bailor with his own goods. If the bailor consents the bailee may mix
the bailor’s goods, and in such a case the bailor and bailee would have an interest in
the mixed goods in proportion to their respective share.
If mixture is beyond separation, the bailor is entitled to be compensated by the

bailee for the loss of the goods.
RIGHTS OF BAILEE:
(a) To recover necessary expenses incurred in bailment.

(b) To recover compensation from the bailor.
(c) To have a lien on the goods bailed.
(d) Right of suit against a wrongdoer.
PARTNERSHIP
Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually
‘Partners’ and collectively a ‘Firm’.
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ESSENTIALS OF A PARTNERSHIP:
(a) Association of two or more persons.

(b) Agreement – the relationship is one of contractual nature
(c) Business – a partnership can be formed only for the purpose of carrying on
business including trade, occupation and profession.
(d) Sharing of profits – the object of partnership must be to make profits.
The Partnership Act does not provide for the compulsory registration of Firms.
RIGHTS OF A PARTNER:
(a) Right to take part in business.

(b) Right to share profits.
(c) Right to interest on capital.
(d) Right to indemnity.
(e) Right to interest on advances.
DUTIES OF A PARTNER:
(a) Not to claim remuneration.

(b) To indemnify the firm for all willful neglect.
(c) Account for personal profits.
(d) To account for profits in competing business.
TYPES OF PARTNERS:
(a) Actual or ostensible partner – actually engaged in the conduct of the business
of the partnership.
(b) Dormant/Silent/Non-working – one who does not take an active part in the
conduct of the business of the firm.
(c) Nominal partner – a partner who lends his name to the firm without having any
real interest in it. But he is liable to outsiders for all the debts of the firm.
(d) Partner by Estoppel or Holding out – a partnership by estoppel is an

exceptional case where even in the absence of a contract a person becomes liable as
if he were a partner. Sometimes a person who is not a partner in a firm may, under
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certain circumstances, be liable for its debts as if he were a partner. Such a partner
is called ‘a partner by estoppel’ or ‘holding out’.
“A retired businessman of some repute assumed the honorary presidentship of the

business of certain persons who requested him for the same. Held, he was liable for
the debts of the firm to those who gave credit to the firm in the bona fide belief that
he was a partner.
Requirement to constitute a Partnership:

Minimum 2 and maximum 10 in case of banking business and 20 in all other cases.
Dissolution of Firms:
(a) Dissolution by agreement – a firm may be dissolved with the consent of all the
partners.
(b) Compulsory dissolution – a firm is dissolved-

(i) By the adjudication of all the partners or all the partners but one as insolvent,
(ii) By happening of any event which makes it unlawful for the business of the firm
to be carried on.
(c) The expiry of the term for which the firm was constituted.
(d) The death of a partner.
(e) Partnership at will – where the partnership is at will, the firm may be dissolved
by any partner giving notice in writing to all the other partners of his intention to
dissolve the firm.
(f) Dissolution by Court – in cases of insanity, permanent incapacity, misconduct,

breach of agreement, business working at a loss.
REMEDIES FOR BREACH OF CONTRACT
A contract gives rise to correlative rights and obligations. A right accruing to a

party under a contract would be of no value if there were no remedy to enforce that
right in a Court of Law in the event of its infringement or breach of contract. A
remedy is the means given by law for the enforcement of a right.
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When a contract is broken, the injured party (i.e., the party who is not in breach) has
one or more of the following remedies:
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
1. 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.
Example: A promises B to supply 10 bags of cement on a certain day. B agrees to

pay the price after the receipt of the goods. A does not supply the goods. B is
discharged from liability to pay the price.
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. But if a person rightfully rescinds a contract he is entitled to
compensation for any damage which he has sustained through non-fulfillment of
the contract by the other party.
2. DAMAGES
Damages are a monetary compensation allowed to the injured party by the Court for
the loss or injury suffered by him by the breach of a contract. The object of
awarding damages for the breach of a contract is to put the injured party in the same
position, so far as money can do it, as if he had not been injured i.e., in the position
in which he would have been had there been performance and not breach.
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1. Damages arising naturally – 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. This means that the damages must be the proximate consequence of the
breach of contract. These damages are known as ordinary damages.
Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. 475
per quintal, the price to be paid at the time of delivery. The price of wheat rises to
Rs. 500 per quintal and A refuses to sell the wheat. B can claim damages at the rate
of Rs. 25 per quintal.
2. Damages in contemplation of the parties – special damages.
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,
known as special damages, cannot be claimed as a matter of right. These can be
claimed only if the special circumstances which would result in a special loss in
case of breach of a contract, are brought to the notice of the other party.
3. Vindictive or exemplary 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. Hence, ‘vindictive’ or
‘exemplary’ damages have no place in the law of contract because they are punitive
(involving punishment) by nature. But in case of breach of a promise to marry, and
dishonour of a cheque by a banker wrongfully when he possesses sufficient funds to
the credit of the customer, the Court may award exemplary damages.
4. Nominal damages.
Where the injured party has not in fact suffered any loss by reason of breach of
contract, the damages recoverable by him are nominal.
5. Damages for loss of reputation.
In case of a banker who wrongfully refuses to honour the customer’s cheque. If the
customer happens to be a tradesman, he can recover damages in respect of any loss
to his trade reputation by the breach.
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6. 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.
7. Mitigation of damages.
It is the duty of the injured party to take all reasonable steps to mitigate the loss
caused by the breach. He cannot claim to be compensated by the party in default
for loss which he ought reasonably to have avoided.
8. Difficulty of assessment.
Although damages which are incapable of assessment cannot be recovered, the fact
that they are difficult to assess with certainty or precision does not prevent the
aggrieved party from recovering them. The Court must do its best to estimate the
loss and a contingency may be taken into account.
9. Cost of decree.
The aggrieved party is entitled, in addition to damages, to get the cost of getting the
decree for damages. The cost of suit for damages is in the discretion of the Court.
10. Damages agreed upon in advance in case of breach.
If a sum is named in a contract as the amount to be paid in case of its breach, or if

the contract contains any other stipulation by way of a penalty for failure to perform
the obligations, the aggrieved party is entitled to receive from the party who has
broken the contract, a reasonable compensation not exceeding the amount so
named.
Liquidated damages and penalty.
Sometimes parties to a contract stipulate at the time of its formation that on the
breach of the contract by either of them, a certain specified sum will be payable as
damages. Such a sum may amount to either ‘liquidated damages’ or a ‘penalty’.
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3. QUANTUM MERUIT
The phrase ‘quantum meruit’ 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. The right is founded
not on the original contract which is discharged or is void but on an implied
promise by the other party to pay for what has been done.
4. SPECIFIC PERFORMANCE
In certain cases of breach of a contract, damages are not adequate remedy. The
Court may, in such cases, 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.
Some of the cases in which specific performance of a contract may, in the

discretion of the Court, be enforced are as follows:
(a) When the act agreed to be done is such that compensation in money for its non-
performance is not an adequate relief.
(b) When there exists no standard for ascertaining the actual damage caused for its
non-performance is not an adequate relief.
(c) When it is probable that the compensation in money cannot be got for the non-
performance of the act agreed to be done.
5. INJUNCTION
Where a party is in breach of a negative item of a contract (i.e., where he is doing

something which he 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’.
RECTIFICATION OR CANCELLATION
When through fraud or a mutual mistake of the parties, a contract or other

instrument does not express their real intention, either party may institute a suit to
have the instrument rectified. In such a case, if the Court finds that there has been a
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fraud or mistake, it may ascertain the real intention of the parties, and may, in its
discretion, rectify the instrument so as to express that intention.
(1994) 3 SCC 324 FCI v/s New India Assurance company

ltd.
Sec 28- Agreement in respect of legal proceeding- object and

nature- how to be construed-
Agreement limiting time for assertion of rights by laying claim in
terms of the agreement but not for enforcement of right in court
not void- purpose of prescribing such time limit is to put the other
side on notice and not to restrict the statutory period of limitation.
(1991) 3 SC 79 Gurumukh Singh v/s Amar Singh
Sec23- Unlawful object of agreement- oppose to public policy-

test to determine ‘object’ and ‘public policy’
vide Halsbury’s laws of England
‘Any agreement which tends to be injurious to the public or
against the public good is invalidated on the grounds of public
policy. The question whether a particular agreement is contrary to
public policy is a question of law, to be determined like any other
by the proper application of prior decisions’
The public policy is not static. It is variable with the changing
times and the needs of the society.
(1989) 4 SCC 1 Mahabir Kishore v/s State of M.P.-
Sec72- Money paid under mistake of law is refundable.
(1989) 2 SCC 163 ABC Laminart Pvt.Ltd v/s A.P.Agencies
Sec 28 and 23- Agreement excluding court’s jurisdiction-

Absolute exclusion void- but where more than one court has
jurisdiction, agreement to submit to one, to the exclusion of others
value.
(1989) 1 SCC 76 Jawaharlal Wadhwa v/s Haripada

Chakraborty
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Sec 38 and 73- Anticipatory breach of contract by a party to the

contract-
Claims open to the other party-
Specific performance of the contract can, inter alia, be claimed
only by showing his willingness to perform the contract.
(1993) 4 SCC 181 Deokabai v/s Uttam
Sec56- Frustration of Contract- what ever the alleged source of

frustration, contract is not discharged merely because it turns out
to be difficult to perform or is onerous.
This doctrine cannot be invoked where question of non
performance of mandatory terms of the contract and not of
impossibility of performance of the contract is involved.
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Introduction To Contract Nature of Contract: The Indian Contract Act, 1872

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Introduction To Contract Nature of Contract: The Indian Contract Act, 1872

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The law of contract introduces definiteness in business transactions.

The Indian Contract Act, 1872

(1) The general principles of the law of contract.

(2) Some special contracts only.

Nature of the law of contract

AGREEMENT AND ITS ENFORCEABILITY

Contract = Agreement + Enforceability by law

An agreement is defined as “every promise and every set of promises, forming

Agreement = Offer + Acceptance.

An agreement, to become a contract, must give rise to a legal obligation or duty.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

3. Lawful consideration: An agreement to be enforceable by law must be

4. Capacity of parties-competency: The parties to the agreement must be capable

8. Certainty and possibility of performance: The agreement must be certain and

Example: A agrees to sell to B “a hundred tons of oil”. There is nothing whatever

9. Legal formalities: A contract may be made by words spoken or written. As

1. Classification according to validity.

Voidable contract. An agreement made which is enforceable by law at the option of

Void agreement and void contract.

Void agreement. An agreement not enforceable by law is said to be void. A void

Void contract. A contract which ceases to be enforceable by law becomes void

Illegal agreement: An illegal agreement is one which transgresses some rule of

Unenforceable contract: An unenforceable contract is one which cannot be enforced

2. Classification according to formation.

Example: there is an implied contract when, A gets into a public bus,

Quasi Contract: Strictly speaking, a quasi-contract is not a contract at all. A

3. Classification according to performance.

1. Executed Contract: Executed means that which is done. An executed contract is

Example: A paints a picture of B and B pays for the same.

2. Executory Contract: Executory means that which remains to be carried into

OFFER AND ACCEPTANCE

An offer is a proposal by one party to another to enter into a legally binding

Offer and its types –

A mere making of an offer does not become a contract. Ordinarily it is the

Legal Rules as to Offer:

3. An Offer may be distinguished from:

(a) A declaration of intention and an announcement: A declaration by a person

Example: An advertisement for a concert or an auction sale does not amount to an

(b) An invitation to make an offer or do business: Display of goods by a shopkeeper

4. Offer must be communicated. An offer to be complete must be communicated to

Acceptance may be express or implied. It is express when it is communicated by

Who can accept?

Acceptance of a particular offer: When an offer is made to a particular person, it

Legal Rules as to acceptance.

certainty, commitment and communication. If any of the three components is

2. It must be communicated to the offeror. To conclude a contract between the

5. It cannot precede an offer. If the acceptance precedes an offer, it is not a valid

7. It must be given by the party or parties, to whom the offer is made.

9. It cannot be implied from silence. The acceptance of an offer cannot be implied

Communication of Offer, Acceptance and its Revocation.

When is communication complete?

The communication of an offer is complete when it comes to the knowledge of the

Example: A proposes, by a letter, to sell a house to B at a certain price. The letter is

The communication of acceptance is complete –

1. as against the proposer, when it is put into a course of transmission to him, so as

2. as against the acceptor, when it comes to the knowledge of the proposer.

Revocation means ‘taking back’, ‘recalling’ or ‘withdrawal’. It may be a