Legal Environment of Business

LAW OF CONTRACT
The Indian Contract Act, 1872 is the law relating to Contracts in India. It came into
force on September 1, 1872 and is extended to the whole of India except to the
state of Jammu and Kashmir.

The Act has 238 sections altogether. Sections 1 to 75 came into force on September
1, 1872.

Contract

The word contract is derived from the Latin word “Contractum” which means
“drawn together”.

To the layman, the word “contract” probably means “an agreement’ which can be
enforced in the court of law.

Definition

Definition Section 2 (h) of the Indian Contract Act defines the term contract as
follows: “ An agreement which is enforceable at law is contract”.

• Contract = Agreement + Enforceability at Law

Example

Basil invites Hari to dinner and Hari accepts the invitation. It is only a social
agreement and not enforceable in a court of law. So it is not a contract.

Basil agrees to sell his house to Hari for Rs 50,000. This is a contract.

• According to Section 2 ( c ) of the contract act, the person making the proposal is
called the Promisor and the person accepting the proposal is called promise.

A contract is the result of a promise to do a certain thing in exchange for a promise

from another person. Contract law assures that the promise so made is legally
enforced, if any one of the parties fails to abide by the contract.
A contract is said to create a legal bond – a vinculum juris . This arises only when the
Parties have intended to create a legal relationship between them. The infringement of
such obligations will make the parties liable to the extent of the loss suffered by the
aggrieved party for non-performance of the agreed act.
Non-business, religious or charitable agreements need not be contracts. Casual
agreements between friends and family or household agreements are not held as
contracts.
Elements of a contract

The essential elements of a contract are contained in the definition of contract given in
section 10 of contract Act.

According to Section 10, "All agreements are contracts, if they are made by the free
consent of the parties, competent to contract, for a lawful consideration, with a lawful
object and are not expressly declared by the Act to be void.

Elements of a contract

1. Offer ( O )
2. Acceptance ( A)- Consensus of Idem
3. legal Relationship / purpose- ( L)
4. Capacity to contact -of parties. ( C )
5. Free consent. ( F)
6. Lawful Object. ( O )
7. Consideration lawful. (C )
8. Not declared to be void. ( V )
9. Certainty and possibility of performance. ( P )
10. legal relationship (An intention to create legal relationship) ( L )

M nem onics- OAL CFO CV P L

All the above ingredients must be satisfied in every valid contract. It can be noted that
all contracts are agreements, but not all agreements are contracts.

Agreement - There must be an agreement between the parties of a contract. An

agreement involves a valid offer by one party and a valid acceptance by the other
party.

Example Sanitha sends a proposal to Julie to purchase her house for Rs 5 Lakhs and
Julie accepts the proposal, then this results into an agreement.
Offer

Section 2(a) of the Indian Contract Act, 1872 defines the term "Proposal" as when one
person signifies to another his willingness to do or to abstain from doing something
with a view to obtaining the assent of the other to such an act or abstinence, he is said
to make a proposal. The person making the 'proposal' or 'offer' is called the
'promisor' or 'offeror', the person to whom the offer is made is called the 'offeree'.

Acceptance

Acceptance means the expression of assent to whom the proposal is made in a

Contract. Acceptance may be expressed either by conduct or by implied circumstances.
However, silence cannot be prescribed as a mode of acceptance.

• Consensus of Idem – The parties to contract must agree upon the subject
matter of the contract if the same manner and in the same sense.

Example Adarsh has two houses, one at Trivandrum and another at Kochi. Adarsh
expresses his willingness to sell on of his houses to Shanu. Adarsh had in his mind
house at Trivandrum where Shanu had house at Kochi in mind. So there is not
Consensus Ad Idem.

• Capacity of parties – There must be at least two parties to every contract. These
parties must have legal capacity to enter into a contract. Every person who is a major
and possesses sound mind is competent to enter into a contract. (Minors, Lunatics,
drunken persons not competent).

Section 11 of the Indian Contract Act provides the requirements for competency of the
parties to the contact.

It says, "Every person is competent to contract, who is of the age of majority, according
to law, which he is subject to also who is of sound mind and who is not disqualified
from contracting by any law to which he is the subject"

• Free consent – For the formation of a contract, one person must give his consent to
another person. The consent thus obtained must be a free consent. A consent is said to
be free if it is not caused by coercion, undue influence, fraud, misrepresentation or
mistake.

Example Arun asks Ajas to sign an agreement. Ajas refuses to do it. So Arun threaten
Ajas of severe consequences if Ajas is not signing the document. So Ajas finally agrees,
fearing consequences. The consent thus shown by Ajas is not free.
• Consideration – Consideration means something in return. In every contract, each
agreement must be supported by consideration, when one party agrees to give
something (or give up something) he must be benefited by the other party.

According to section 2(d) of the Indian Contract Act, "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 abstain from doing something, such act or
abstinence is called a consideration for the promisee."

Example Amal offers to sell his house to Jasir for Rs 4 Lakhs. Jasir accepts the
proposal. Here, the consideration for the sale of his house is Rs. 4 Lakhs and the
consideration of Jasir’s payment of 4 Lakhs is the house.

• Lawful Object – The object of an agreement must be lawful. It must not be illegal
or immoral or opposed to public policy. When an object of a contract is not lawful, the
contract is void.

Example Eldhose promises to pay Aiju Rs 5 Lakhs for murdering Davood Ibrahim. Here
the object of the contract is to commit murder. It is unlawful and therefore the contract
becomes void.

• Not declared to be void – The agreement might not have been expressly declared
void by any law in force in the country. In such cases, the agreement cannot be
enforced.

Example A agrees to supply liquor to B, subsequently prohibition Act comes into force.
Thus all agreement to supply liquor become void, thereafter. Therefore B cannot
enforce the agreement which is made before the act comes into force. The agreement
has already become void from the date of prohibition order come into effect.

• Certainty and possibility of performance – The term of contract should be

certain and precise. They should not be vague and they should not create any
confusion in the minds of the parties.

Example Sanitha agrees to sell one of her houses. She has four houses. Here the terms
of agreement is uncertain. A agrees to pay Rs 1 Lakh to B if B brings his son (who died
last year). This is an impossible act .In both these examples, the agreement void.

• An intention to create legal relationship – The agreement should create a legal

obligation. Mere informal promise is not to be enforced. Social agreements are not to
be enforced as they do not create any legal obligation.
Agreement

• All contracts are agreements but all agreements are not contracts.

• Every promise and every set of promises forming consideration for each other is an
agreement.

• Agreement = Offer + Acceptance.

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

Types of Contract - Classification of contracts

Based on legal effects

1. Valid Contract

2. Void Contract

3. Voidable contract

4. Unenforceable contract

5. Illegal contract

Based on Performance

1. Unilateral Contract

2. Bilateral contract

3. Executed contract

4. Executory contract

Based on Formation

1. Express Contract

2. Implied contract

3. Quasi contract

Based on legal effects

Valid Contract – An agreement enforced by law is a valid contract. An agreement
becomes a valid contract when it fulfills all the essentials of a contract as laid down in
section 10.

Example • Sophi offers Arun to sell his house for Rs 3 Lakhs. B agrees to buy the
house for this price. It is a valid contract.

Void Contract – A contract coming out from a void agreement is a void contract. A
contract becomes void when it ceases to be enforceable by law.

Section 2(g) of the Act defines a void agreement as, “An agreement not enforceable by
law is said to be void.” A contract may be void ab initio (from the inception) or may be
rendered void subsequently. A valid contract may be made void by some subsequent
impossibility or when a voidable contract is made void by the aggrieved party. For
instance, where the consent of the aggrieved party was not a free consent, the contract
becomes void though at the beginning it was an enforceable contract.

Following are the instances of void agreements:

Agreements in Restraint of Trade (Section 27)

According to Section 27 of the Indian Contract Act, every agreement, by which anyone
is restrained from exercising a lawful profession, trade or business of any kind, is void
to that extent.
The citizens of India are free to carry on any business or occupation or engage
themselves in any trade. This right and freedom is given by the Constitution of India
under Article 19(1)/(g). Just as the legislature by means of any of its legislation cannot
deprive the citizens of their legitimate right to freedom of trade and occupation, the
individuals also cannot barter it away by agreement. The Indian public policy requires
that every man is at liberty to work for himself. So by entering into a contract with
others he must not deprive himself from choosing the suitable trade/occupation for him.

Illustration: In Madhub Chander vs. Raj Coomar, there were two rival shopkeepers in
a locality, and one of them agreed to pay a sum of money to the plaintiff if he would
close the business in that area. The plaintiff accordingly did so, but the defendant
refused to give any money to him. The court held the agreement to be void.

All the agreements in restraint of trade are void. Whether the restraint is partial or
general or specific or complete, it is void unless it falls within any of the statutory or
judicially created exceptions. There are two kinds of exceptions to the rule,

• those created by statute; and

• those arising from judicial interpretations of Section 27.

Statutory Exceptions

The exception mentioned in the Section 27 of the Contract Act, relates to sale of
goodwill, i.e., exception no. 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 as reasonable with
regard to the nature of the business.

Agreement, which is Uncertain and Ambiguous (Section 29)

Any agreement the meaning of which is not certain or capable of being made certain, is
void. This provision is explained in Section 29 of the Indian Contract Act, 1872.

In Guthing vs. Lynn, a horse was bought for a certain price coupled with a promise to
give 5 pounds more if the horse proved lucky. The agreement was held to be void for
uncertainty. The court had no machinery to determine what luck, bad or good, the
horse has brought to the buyer. Such cases have generally arisen in connection with
the sale of goods, bearing uncertainty as to the price.

The terms of the agreement should not be vague. The agreement where the
parties fail to express their intention clearly, is void. But where there is any possibility of
making the meaning certain, the agreement is valid. So where the price is left to be
decided by a third party, the agreement is not void. But an agreement to agree in
future is void for there is no certainty whether the parties will be able to agree or not.

Agreement to do Impossible Acts (Section 56) – Void

According to Section 56 of Indian Contract Act, “An agreement to do an act

which is impossible to perform is void.”

“Where one person has promised to do something which he knew or with reasonable
diligence, might have known that the promise is impossible or unlawful, such promisor
must make compensation to such promisee for any loss which the promisee sustains
through the non-performance of the promise.”

Agreement in Restraint of Legal Proceedings (Section 28)

For any contract to become valid it must be enforceable by law. Therefore any clause in
the agreement restraining either of the party to enforce his agreement is void.

Section 28 of the Indian Contract Act provides that:

“Every agreement,- (a) by which any party thereto is restricted absolutely from
enforcing his rights under or in respect of any contract, by the usual legal proceedings
in the ordinary tribunal, or which limits the time within which he may thus enforce his
rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party thereto
from any liability, under or in respect of any contract on the expiry of a specified period
so as to restrict any party from enforcing his rights is void, to that extent.”

Thus, Section 28 applies to the agreements, which restrain enforcement of contractual

rights.

The following agreements are declared as void under Section 28:

• Agreement which restricts absolutely the parties from enforcing their legal rights
under a contract, and
• Agreement, which limit the time within which a party may enforce his contractual
rights.
• Section 28 does not apply to the agreements which restrict the enforcement of
legal right partially.
• This Section states that “An agreement which restrains a person from enforcing
his rights absolutely void.”
Voidable contract – An agreement which is enforceable by law at the opinion of one
or more of the parties there to but not at the opinion of the other or the others is a
voidable contract. A voidable contract remains to be good till it is avoided by the party
entitled to do so.

Example • If the consent of the party was caused by coercion, the contract is
enforceable at the option of the party whose consent was not free.

Unenforceable contract – An unenforceable contract is one which cannot be

enforced in a court of law because of some technical defects such as absence of
writing, time barred, want of stamps etc.

Example • When the promissory not is under – stamped, the agreement therein
becomes unenforceable because of that technical defect.

Illegal Contract – An illegal agreement is one which criminal in nature or which is

immoral or which is against public policy.

Example • A contract to commit dacoity is an illegal contract.

Classification based on Performance

Unilateral contract – A unilateral contract is one in which only one party has to fulfill
his obligation at the time of the formation of the contract and the other party having
fulfilled his obligation at the time of the contract or before contract comes into
existence.

Example • Amina permits a coolie to put his luggage to a carriage. The contract comes
into existence as soon as the coolie puts the luggage. So Amina has only to fulfill his
part.

Bilateral Contract – A bilateral contract is one in which the obligation on the part of
both the parties to the contract are outstanding at the time of the contract.

Example • Athulya promises to paint a picture in return for which Saranya promises to
Rs 1000.

Executed Contract – If both parties of a contract have performed their respective

obligation, contract is known as an executed contract.

Example • Amal contracts with Bessy to buy a house for Rs 1,00,000. Amal paid Rs.
1,00,000 to Bessy. Bessy executed the sale deed and delivered its possession.
Executory contract – An executory contract is one in which both parties have not yet
performed their obligations either wholly or in which there remains something to be
done on both sides.

Example • Rahul agrees to paint a picture for Rejith for Rs. 500. Rahul has not painted
the picture and Rejith has not paid the price also.

Classification based on Formation

Express contract – If the terms of a contract are expressly agreed upon (whether
orally or in writing) at the time of the formation of the contract, the contract is said to
be an express contract.

Example • Collin writes to Aby “ I am willing to sell my car to you for Rs 50,000”. Aby
accepts Collin’s offer by another letter.

Implied contract – An implied contract is one which is inferred from the act or
conduct of the parties or course of dealings between them.

Example • Diljith gets into a public bus. Then he enters into an implied contract with
the authorities of the bus that he wishes to travel in the bus.

Quasi Contract – Under certain circumstances, law itself creates legal rights and
obligations against the parties. These obligations are known as quasi contracts. It is
created by law and it only resembles a contract.

Quasi-Contracts
Under special circumstances, obligations resembling those created by a contract are
imposed by law although there is no contract between the parties. Such contracts are
called Quasi-Contracts.

Sections 68 to 72 deal with Quasi-Contractual Obligations.

• Claim for Necessaries supplied to a person incapable of contracting or on his

account
• Reimbursement of person paying money due by another, in payment of which he
is interested
• Obligation of person enjoying benefit of non-gratuitous act
• Responsibility of finder of goods
• Liability of person to whom money is paid, or thing delivered by mistake or under
coercion.
Example • Aiju , a tradesman leaves goods at Sajid’s house by mistake. Suppose Sajid
treats the goods as his own, then Sajid is bound to pay to Aiju a reasonable price for
the goods.

Legal Terminology

quid-pro-quo

is consideration means something in return

doctrine of privity of contract

A person who is not a party to the contract cannot sue upon it. Only the party to the
contract can enforce the same.

Ex-Nudo-Pacto Nor-Oritur action

It means from bare promise, no right of action can arise

Champerty

It is a bargain where by one party agrees to assist the other in recovering property.

OFFER

Definition • As per Section 2 (a) of the contract Act, “When one person signifies to
another his willingness to do or abstain from doing anything, with a view to obtaining
the assent of that other to such act or abstinence, he is said to make an offer”.

Example • When A expresses his willingness to sell motor care for Rs 10,000 with a
view to get B’s acceptance, A is said to make an offer.

Definition • The word offer of the English law is synonymous to the word proposal of
the Indian Contract Act. • The person making the offer is called the offeror and the
person accepting the proposal is called the offeree. • Offer is made either by words
spoken or by words written. This is expressed offer. An offer is made by conduct or
behavior. This is implied offer.

Essential Characteristics of a valid offer

• The terms of an offer must be clear and certain or at least capable of being made
certain.
Example – A agrees B a hundred tons of oil. There is nothing whatsoever to show
what kind of oil was intended to be sold. Hence the agreement is void for uncertainty
and vagueness.

• Offer must be communicated to the offeree.

Example – In Fitch Vs Snedakar, a person gave information without knowing that an

award was offered for it and claimed the award subsequently. It was held that he was
not entitled to the award since he was not aware of the same.

• An offer must be made with an intention of creating legal obligations /

Relations.

Example – A invited B for a dinner and when B came, dinner was not ready. B could not
enforce it since it is just a social agreement.

Balfour v/s Balfour (1919) 2 KB 571 is a leading English contract law case. It held
that there is a rebuttable presumption against an intention to create a legally
enforceable agreement when the agreement is domestic in nature.

Brief Fact Summary. A husband promised to pay his wife a £30 per month
allowance. The wife sued her husband to enforce the promise.

Synopsis of Rule of Law.

Agreements between husband and wife to provide monies are generally not contracts
because generally the "parties d[o] not intend that they should be attended by legal
consequences."

• Invitation to an offer is not an offer.

Example – When a merchant sends his quotation, it is not an offer but is only an
invitation on his part of his readiness to transact business on those terms.

• Special terms attached to an offer must be communicated.

• An offer may be to an individual or to the public at large.

Example – In Carlil Vs Carbolic Smoke ball company, the company has offered by
advertisement a reward of $ 100 to anybody contracting influenza after using their
smoke ball. Mrs Carlil did and she was entitled for $ 100 since it was a general offer and
she accepted it.

• Offer may be expressed or implied.

Example – A writes to B that he is prepared to sell his house for Rs. 2 Lakhs. This is an
express offer. If a person hires a taxi, it is implied that he has to pay the fare.

• Offer must be made with a view to obtaining the assent of the other party

• Offer may be conditional.

• Offer should not contain a term, the non compliance of which would amount to
acceptance.

Kinds of offers

• General offer – If an offer is addressed to an unascertained body of individuals, it is

called general offer.

Example • A issues a public advertisement that he would give Rs 100 to anyone who
brings back his missing dog, it is a general offer.

• Special offer – If an offer is addressed to a definite individual or body of individuals,

it is called a specific offer.

Example • A promises to give Rs 100 to B if he brings back his missing dog, it is a

special offer.

• Standing offer – An offer for a continuous supply of a certain article at a certain rate
over a definite period is called a standing order.

– Example – A, by means of an offer agrees to supply coal to B at a particular price for

a period of two years. It is a standing offer.

• Counter offer– A counter order is rejecting the original offer and making a new
offer. – Example – A offers to sell his house for Rs 2 lakhs to B. B accepts to purchase
it for Rs One lakh. This is a counter offer.

• Cross offer – When two parties make identical offer to each other in ignorance of
each other’s, such offer is called cross offer.

– Example – A by letter offers to sell his car to B for Rs 50,000. B by letter offers A to
buy the same car for Rs. 50,000. It is a cross offer.

Lapses of offer

• Revocation by communication of notice.

• By lapse of prescribed time.

• Death of the offeror.

• Insanity of the offeror.

• Non- Fulfillment of conditions.

• Offer not accepted according to the mode prescribed. • Rejection by a counter offer.

CONSIDERATION

Definition

The term consideration is defined in Sec. 2 (d) of the Indian contract Act as “When at
the desire of the promisor, the promise or any other person has done or abstained from
doing, or promises to do or to abstain from doing something, such act, abstinence or
promise is called a consideration for the promise.”

• Consideration is the backbone of all promises.

• Consideration means something in return to the promisor.

Essentials of consideration

• Consideration must move at the desire of the promisor.

• Consideration may move from promisee or any other person.

• Consideration may be past, present or future.

• Consideration need not be adequate.

• Consideration must be real and not illusory.

• Consideration must be lawful.

• Consideration must be something which the promisor is not already bound to.

• Consideration must move at the desire of the promisor. – Example – X’s son is missing
and Y voluntarily goes in search for him. Y cannot claim any remuneration or reward for
finding out X’s son because he has not done it at X’s request.

• Consideration may move from promisee or any other person. – Example – In

Chinnayya Vs Rammayya, it was held that consideration moving from third party is also
good consideration.
• Consideration may be past, present or future. – Example – X’s son was rescued from
drowning by Y on 15th August at the request of X. Subsequently on 17th, X promised to
pay Rs 500 for the service rendered in the past. Y’s consideration in this case is past
consideration.

• Consideration may be past, present or future. – Example – X agrees to look after the
child of Y and he further agrees to receive all expenses incurred by him from Y at the
end of the year. In this case, consideration is a future one for X.

• Consideration need not be adequate. – Example – A agrees to sell his horse worth Rs
25,000 to B for Rs. 1000. The contract is valid provided A’s consent was freely
obtained.

• Consideration must be real and not illusory. – Example – A promises to shift a

mountain from one place to another if B paid Rs 10,000. A’s promise is physically
impossible of performance.

• Consideration must be lawful. – Example – Where A promises to obtain an

employment for B in the public service and B, in return promises to pay Rs. 1000 to A,
the agreement is void as the consideration is unlawful.

• Consideration must be something which the promisor is not already bound to. –
Example – A is paid salary for doing a job. So he is bound to do the job. But a promise
to pay another sum of money for doing the job is without consideration.

Different Kinds of consideration

• Present consideration – When consideration is given simultaneously with promise, ie

at the time of promise, it is said to be present consideration. – Example – Cash sales.

• Future consideration – A consideration is said to be future consideration when it is

done in future or yet to be complied with.

• Past consideration – When consideration for a present promise was given by party in
the past, ie before the date of promise, such a consideration is a past consideration. –
Example – A has already rendered some service to B and B now makes a promise.

Section 23 covers the illegality of both the object of the contract and the
consideration for it.
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 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.

Thus if the object or consideration of any contract falls under any of these
circumstances it is not lawful and such contracts are not valid. Section 23 clearly
specifies the nature of consideration and objects that are not lawful. The agreement is
illegal if the object or consideration of that agreement is unlawful for any of the reasons
as mentioned in Section 23.
ACCEPTANCE

Definition

Section 2 (b) of the contract Act defines ‘Acceptance’ as follows: “When the person to
whom the offer is made signifies his assent thereto, the offer is said to be accepted.”

• The offeree, when he accepts the offer, is called the acceptor.

• Acceptance can be made by words, spoken or written.

• An offer can be accepted only by the person to whom it is made.

Essentials of a valid acceptance

• Acceptance must be absolute and unqualified. – Example – A says to B, “ I offer to

sell my house for Rs. 2 Lakhs.” B replies “ I will purchase it only for Rs 1 Lakh”.

It is only a partial acceptance.

• Acceptance must be communicated to the offeror.

• Acceptance must be made within a reasonable time.

• Acceptance must be communicated in some usual and reasonable manner.

• Acceptance may be expressed or implied.

• Acceptance must be made by the offeree.

• Acceptor must be aware of the proposal at the time of the offer.

• Acceptance must be made only after the offer is made.’

• Acceptance must be given before the offer lapses or is revoked.

• Acceptance concludes the contract.

Free Consent of the Parties

The parties must have entered into the contract out of their own free will. Consent
implies agreeing upon the same thing in the same sense. According to Section 14 of the
Act, the consent is said to be free when it is not caused by:

• Coercion, as defined in Section 15, or,

• Undue influence, as defined in Section 16, or,

• Fraud, as defined in Section 17, or,

• Misrepresentation, as defined in Section 18, or,

• Mistake, subject to the provisions of Section 20-22.

Coercion: Coercion (known as Duress under English Law) is to induce a person forcibly
to enter into a contract. Coercion must be so extreme that the person is left with no
other option but to give his assent against his will. Coercion may be by use of physical
force or a threat involving imminent danger to life or health of a person.

Fraud: To constitute fraud there must exist a fact and the fact must be misstated and
the materiality of the fact must be proved, and the main factor that determines the
essence of fraud is the defendant’s knowledge of the falsity of his or her statement.

The intention of the defendant to deceive must also exist. In short, it is a false
statement made with an intention to deceive another person.

Misrepresentation: Misrepresentation and fraud are similar except the fact that
misrepresentation lacks scienter and intention to deceive. Professor G. Fridman states
that four conditions must be met before a court will accept that there has
been fraudulent misrepresentation:

• That the representations complained of were made by the wrongdoer to the victim
(before the contract);

• That these representations were false in fact;

• That the wrongdoer, made them recklessly without knowing whether they were false
or true; and

• That the victim was thereby induced to enter into the contract in question (a legal
presumption exists in this regard).

Mistake: It takes place when the parties to the contract are ignorant about the
existing fact pertaining to the transaction. A mistake may be unilateral or bilateral.

Where one party makes mistake to the contract, it is called a unilateral mistake.

Similarly, where there is mistake on both sides of the parties there is a bilateral
mistake. In Smith v, Hughes, there was a contract for supply of oats between the
plaintiff and the defendant. The defendant has refused to accept the shipment on the
grounds that the contract was for “old oats.” The words old oats were not used at any
point of time in the contract. The court held that the contract be performed as it
appeared that the words “old oats” were never used at the moment of “meeting of
minds.”

The presence of fraud, undue influence etc., in the formation of the contract does not
negate the consent. There is consent but it is not freely given. The result of the consent
given under fraud, coercion etc. is that the contract becomes voidable at the option of
the other party. The party can either reject the contract or accept it.

Consent must be voluntary, and if there is any force or deception by either party to
obtain agreement of the other party and the contract may be voided by the injured
party. If the agreement is induced by bilateral mistake, the agreement is void and not
voidable.

Fraud (Section 17)

Before entering into a contract, the person who makes the offer or his agent may make
any representations so as to obtain the acceptance or consent from the other party. In
the course of these representations, many of them may be false, which the person
making it may or may not be aware. The false representation when made with an
intention to deceive the other party is called ‘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.” The term fraud includes all intentional or
willful misrepresentation of facts, which are material for the formation of a contract.
The most important factor involved in the fraud is the intention to mislead the other
party.

According to Section 17 of the Indian Contract Act of 1872, ‘fraud’ means and includes
any of the following acts committed by a party to a contract, or with his connivance, or
by his agent, with intent to deceive another party thereto or his agent, or to induce him
to enter into the contract:

• The suggestion, as to a fact, of that which is not true, by one who does not believe it
to be true;

• The active concealment of a fact by one 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.

b. Section 17 of the Act enumerates various acts, which constitute fraud. According to
Section 17, the following acts, committed by a party or his agent to deceive the other
party amount to fraud:

Where there is false statement of fact: When a person knowingly states a fact, which is
actually not true, and which even he does not believe it to be true, it is considered as
fraud. This kind of statement must be relating to a matter of fact and not of opinion.

Where a person conceals material fact: If a person intentionally takes steps to

conceal a material fact which is very important for the formation of a contract, it
amounts to fraud. Moreover, if he knows that disclosure of such concealed facts would
be detrimental to his interest, it is an act of fraud.

When a person promises without intention to perform: If a person enters into a contract
without having an intention to perform it, it is a fraud. This kind of act implies the
intention to deceive the other party.

Another acts to deceive: Any other acts, which are done with an intention to deceive
the other party, are defined as fraudulent. In addition to the above, all such acts that
are declared as fraudulent by law of the country also come under fraudulent acts.

In Hadley vs. Baxendele case, a broken shaft was given to a carrier to bring it to a
repair shop. The carrier was not told that the absence of the shaft would completely
stop the work of the owner. The carrier was in breach of contract because the delivery
was delayed by several days. Admitting to damages, the defendant nevertheless argued
that the damages for loss of profit were too remote.

The court said that damages should be restricted to what “may fairly and reasonably be
considered either arising naturally, i.e., according to the usual course of things, from
such breach of contract itself, or such as may reasonably be supposed to have been in
the contemplation of both the parties, at the time they made the contract, as the
probable result of the breach of it.”

Now, if the special circumstances under which the contract was actually made were
communicated by the plaintiffs to the defendants, and thus known to both the parties,
the damages resulting from the breach of such a contract, which they would reasonably
contemplate, would be the amount of injury which would ordinarily arise from a breach
of contract under these special circumstances so known and communicated.”

PERFORMANCE OF CONTRACT

Definition

Performance of a contract consists in doing or causing to be done what the promisor

has promised to do. A contract creates legal obligations. Performance of a contract
means the carrying out of these obligations.

When the terms of a contract are fulfilled by the respective parties to the contract,
performance of contract takes place.

Example A promises to deliver 100 bags of wheat to B and B promises to pay Rs. One
lakh on delivery. The contract is said to be performed when A delivers 100 bags wheat
to B and B pays Rs. One Lakh to him.

Who may perform the contract?

• The contract may be performed by three categories. – Promisor – Agent – Legal

representative

Promisor – If a contract involves the exercise of personal skill and qualifications of the
promisor, then it must be performed by the promisor himself.

Agent – When the personal skill of the promisor is not necessary and the work could be
done by anyone, the promisor or his representative may employ a competent person to
perform it. He acts as the agent of the promisor.
Legal representative – If the promisor dies before the performance of the contract, his
legal representatives like sons and daughters who inherit the property of the deceased
promisor are bound to perform it.

. Who can demand performance?

• Naturally, it is only the promisor who can demand performance of the promise. It
makes no difference whether the promise is for the benefit of the promise or for any
other person. • In certain cases, a third party can also enforce a promise under a
contract even though he is not a party to contract. • In the case of death of promisor,
his legal representatives can demand performance.

Example • A promises to B to pay C a sum of Rs. 500. A does not pay the sum to C. C
cannot take any against A. It is only B or his representatives who can enforce this
promise against A since B is the promisee.

Time and Place of performance

• It is for the parties of the contract to determine the time and place of performance of
contract.

• The following rules regarding time and place of performance of a contract are
discussed in the Contract Act.

• Where the time is not fixed – According to section 46, where the contract is to be
performed without any demand by the promise and where no time for performance is
fixed, then the contract must be performed within a reasonable time.

Example • A borrowed certain sum of money from B and B directed to pay the said
sum to C, a third party. A also agreed to repay to C but A did not fulfill his promise for
three years. It was held that the failure to pay the amount to C by A amounted to a
breach of contract since a period of three years considered a reasonable time for
performance.

– Where the time is fixed – According to section 46, when a promise is to be

performed on a certain day and the promisor has undertaken to perform it without
application by the promise, the promisor may perform it at any time during the usual
hours of business on such a day and at the place at which the promise ought to be
performed.

Example • X promises to deliver goods at Y’s godown on the lst of January. On that
day, X brings the goods to Y’s godown, but after the usual hour for closing it. Hence the
goods are not received. In this case, X has not performed his contract in time.
– Place of performance

– If the contract mentions a place, the contract must be performed at the place
mentioned in the contract.

If the place is not mentioned, the promisor must ask the promise to fix a reasonable
place to perform the contract.

DISCHARGE OF CONTRACT

Definition

Discharge of contract means termination of the contractual relationship between the

parties. A contract is said to be discharged when the parties thereto are freed from the
task of performing their respective obligations as arising from the contract.

When a contract is discharged, all the rights and liabilities of the contracting parties are
extinguished and their relationship comes to an end.

Various modes of discharge

1. By performance of contract. – Actual Performance. – Attempted performance.

2. By agreement. – By Novation. – By alteration. – By recession. – By remission. – By

waver. – By merger.

3. By lapse of time.

4. By operation of law. – By death. – By insolvency.

5. By impossibility of performance. – At the time of contract. – Subsequent to contract.

6. By breach of contract.

By performance of contract

When persons who have undertaken the obligations perform it within the time and in
the manner prescribed, the contract will be properly discharged.

By performance of contract Performance is classified into two.

• Actual performance – Section 37 states that in order to claim performance, the

parties to a contract must have actually performed their part of the contract. • Example
– If A agreed to supply 20 bags of rice to D, A must have actually supplied the entire 20
bags of rice. Then only it can be stated that the contract has actually been performed.
• Attempted performance – A person who is bound to perform a promise will be
ready to perform his promise but sometimes the other party refuses to accept that
performance. This is known as attempted performance or tender.

By agreement

As contract emerges from an agreement of both parties, it may also be terminated by

another agreement or consent of both parties.

By agreement Contract may be discharged by agreement in the following ways.

– By Novation.

– By alteration.

– By recession.

– By remission.

– By waver.

– By merger.

By Novation (substitution of a new contract)

– Sometimes, the contracting parties may agree to substitute a new contract in the
place of the original contract between themselves and different parties. The substitution
of new contract is called “Novation”.

. Example A owes Rs 5000 to B. It is agreed between A, B and C that henceforth, C will

repay the amount of Rs. 5000 to B. Old contract disappears and new one is formed.

By alteration – Alteration means a change in one or more of the terms of the

contract.

By mutual agreement, parties to contract can alter one or more terms of the contract.
By such alteration, the contract is discharged.

Example X enters into a contract with Y for supply of 100 bags of Sugar by the first of
the next month. Subsequently, X and Y want to alter the terms of the contract and
thereby X and Y agree that X should supply 50 bags of sugar instead of 100 bags on
the 10th of the next month. In this case, the old contract is discharged.
By recession – Recession means cancellation of contract. In that case, the original
contract need not be performed. Both the contracting parties may agree, by mutual
agreement, to rescind the contract by cancelling some or all the terms of the contract.

. Example X agrees to supply Y certain luxurious good within six months. By the time,
the said goods go out of fashion. Both X and Y agree to cancel the contract. By such
cancellation, the contract between X and Y is discharged.

By remission – Remission means acceptance of a lesser performance than what was

actually due under the contract. It is a unilateral act of promise discharging at his will
and pleasure the obligation of another.

Example X owes Rs. 500 to Y. Y agrees to accept a lesser sum namely, Rs 400 instead
of Rs. 500. As soon as Rs. 400 is paid by X, the whole debt of Rs. 500 is discharged.

By waver – When both parties by mutual consent, agree of abandon their respective
rights, the contract need not be performed and the same is discharged. It is called
waiver.

Example A agrees to supply B 10 bags of rice. B, in return agrees to supply A, 10 bags

of wheat. Subsequently, both A and B agree to abandon their respective rights.
Accordingly A need not supply rice to B. Likewise B need not supply wheat to A. Now
contract is discharged.

By merger – Sometimes, both parties, who have already entered into a contract within
inferior rights, may enter subsequently new contract and the new contract creates
superior rights. Now the previous contract with lesser right is said to be merged with
subsequent contract with superior rights.

Example Y is the owner of the house in which X is residing as a tenant. Subsequently

X buys the property from Y. In such case, X’s lesser rights as leasee will be merged into
his superior rights as an owner.

By lapse of time

Every contract must be performed within specified period and it is called the period of
limitation. If the contract is not performed and the promise fails to take any action
within the period of limitation, then the contact is terminated or discharged by lapse of
time.

Example X borrows Rs. 500 from Y through a promissory note. If X does not pay any
amount, Y must file a suit to recover the amount in a court of law within three years
from the date of execution of the promissory note. If no action is taken by Y within
three years, the promissory note is completely barred by limitation and Y can’t recover
the amount from X.

By operation of law

• A contract may be discharged by operation of law. In other words, law itself

discharges the contract in the following circumstances.

– By death – An contract which is based upon personal skill and qualification of the
promisor is terminated on the death of the promisor.

---In other contracts, the rights and liabilities of deceased person pass of his legal
representatives.

Example X agrees to paint a picture for Y. Subsequent to the agreement X dies. Now
the contract of X with Y discharged because of the death of the promisor.

– By insolvency – If a person is adjudicated insolvent by a competent court, all his

rights and liabilities are vested with the official receiver and the insolvent is discharged
from all his rights and liabilities arising from all his earlier contracts.

By impossibility of performance

Contract will be discharged when the performance of contract becomes impossible.

Impossibility of performance of a contract may exist either

At the time of contract – when both the contracting parties are aware of
impossibility of performance of the contract even at the time of formation of the
contract itself, then the agreement becomes void. If they are not aware, contract
becomes void when such impossibility is discovered.

Example X agrees to pay Y Rs. 10,000 and Y, in return promises to bring the moon
from heaven for X. In such a case, the impossibility is known for the parties.

Subsequent to contract – As a general rule, the impossibility of performance will not

excuse the promisor and in case of non performance, the promisor is liable to pay
damages to the promise. But there may be some cases in which non – performance of
the contract may be due to some even beyond the control of the parties. In such cases,
performance of contract will be discharged. This is called “Doctrine of Supervening
impossibility’.
 Example A and B contracts to marry each other. Before the time fixed for marriage, A
goes mad. This supervening factor renders the contract impossible. So the contract
becomes void.

BY BREACH OF CONTRACT

Breach means failure of a party to perform his obligation under a contract. When a
promisor has failed to perform his part of contract, he has committed a breach of
contract. Breach of contract is of two kinds.

Actual breach of contract – Actual breach of contract may take place at the time
when the performance becomes due and in such cases, one party, fails or refuses to
perform his obligation.

Example X agrees to supply Y, 10 bags of sugar on the 1st of March. In this case,
performance is due on 1st March. On the 1st march, he fails to supply sugar. This is
actual breach of contract at the time when the performance is due.

Anticipatory breach of contract – When a party to a contract refuses to perform his

obligation before the due date of performance, it is called anticipatory breach of
contract.

Example X agrees to supply Y, 10 bags of sugar on the 1st of March. But before this
date, say in the second week of February, he informs B that he is not going to supply
the sugar. This is anticipatory breach of contract by express repudiation.

BREACH OF CONTRACT

Definition

• Parties to a lawful contract are bound to perform their respective obligations. But
when one of the parties of a contract fails to perform his part of contract, he is said to
have committed breach of contract.

• Breach of contract confers a right of action upon the party injured. This right of action
is the remedy available for the injured against the party committing breach of contract.

REMEDIES FOR BREACH OF CONTRACT

• Rescission of contract (Cancellation).

• Restitution. (return of the benefit)

• Suit for specific performance.

• Suit for Injunction.

• Suit from ‘Quantum Meruit’. (as much as earned’)

• Suit for damages.

• Rescission of contract (Cancellation) –

Rescission of contract means annulment of it. It is the revocation of the contract. When
all or some of the terms of contract are cancelled, rescission of a contract takes place.

Example • A promises to supply certain goods to B for price. A does not supply the
goods. B is discharged from his liability to pay the price.

• Restitution – Restitution means return of the benefit received by one party from the
other party in a void contract. When an agreement is, later discovered to be void or
when the contract becomes void, any person who received any advantage under such
agreement or contract is bound to restore it or make compensation for it to the person
from whom he received it.

Example • A pays B Rs. 1,00,000 in consideration of B’s promising to marry C,

daughter of A. But C is dead at the time of promise. The agreement is void at the time
when the death is known. So B must repay the amount of Rs. 1,00,000.

• Suit for specific performance – Specific performance means actual performance

of the particular contract as per agreement. Specific performance will be granted in
those cases where compensation will not be an adequate remedy or actual damage
cannot accurately be assessed and it will usually be granted in contracts connected with
purchase of land or house.

Example A agrees to sell his land to B. If A subsequently refuses to sell the land, B can
file a suit for special performance and the court can compel A to sell and to execute the
sale deed in favor of B in respect of the land agreed to be sold.

• Suit for Injunction – Another remedy for breach of contract is an injunction which
is an order of the court restraining or preventing a person from doing a particular act. It
is another mode of securing the specific performance by the negative terms of a
contract.

Example :-A contracts with B to sing for 12 months at B’s theatre and in no other
place. Later A entered into a contract with C to sing in C’s theatre and refuse to sing in
B’s theatre. Now B can file a suit and obtain an order of injunction restraining A from
singing in C’s theatre.
• Suit from ‘Quantum Meruit’ – The phrase ‘Quantum Meruit’ literally means ‘ as
much as earned’. When a person has done some work under a contract and the other
party repudiates the contract or some even happens which makes further performance
of the contract impossible, then the party who has performed the work can claim
remuneration for the work he has already done.

Example ;-Under a contract, A agrees to do a certain piece of work for a lump sum of
Rs 1000 which is payable on its completion. When A has done 50 % of work, B
repudiates the contract. In such a case, A can claim “ Quantum Meruit” ie Rs 500 being
the reasonable remuneration of 50 % of the work done.

• Suit for damages – Damage means monitory compensation payable by the

defaulting party to the injured party in the event of breach of contract. The object of
awarding damages is to put the aggrieved party in the same financial position, had the
contract been performed.

Different types of damages

• General damages

• Special damages

• Vindictive damages

• Nominal damages

• Liquidated damages

• Penalty

s • General damages – Damages that arise naturally in the usual course of things
from the breach itself are called general damages. These damages are awarded only for
consequences which arise out of breach of contract.

• Special damages – Special damages are those which arise from the breach of
contract under special circumstances.

• Vindictive damages – These damages are awarded with a view to punish the
defaulting party who injured the feelings of the others and not solely with the idea of
awarding compensation to the injured party.

s • Nominal damages – Nominal damages are awarded in cases where the injured
party is able to prove a breach of contract but he has not suffered any real and
substantial loss.
• Liquidated damages – This represent a sum fixed or ascertained by the parties of
the contract. It is a fair and genuine pre – estimate of the probable loss that might
ensure as a result of the breach.

• Penalty – It is a sum fixed in the contract at the time of its formation which is
disproportionate to the damages likely to accrue as a result of the breach. It is used for
forcing the other party to perform the contract.