PAN African eNetwork

Project
Master of Finance and Control

Business Environment and Law (BEL)

Semester - I
Ms. Manpreet Kaur

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 INDIAN CONTRACT ACT, 1872

Nature and Kinds of Contract –

1. What is a contract?
Contract means “an agreement which is enforceable by law” - Section 2(h) of the Indian Contract
Act, 1872.

2. Every contract is an agreement, but every agreement is not a contract (Example – social
engagements and commercial obligations – perusing through the contents and nature of agreement)
3. Only those agreements which satisfy the essential conditions mentioned in Section 10 of the ICA
qualify as contracts –
- Section 2 (e) - “Every promise and every set of promises forming the consideration for each
other is an agreement”
- Promise on both sides
- Offer and Acceptance (Example – buy and sell certain goods at a certain price)
- Section 2 (b) – “when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal when accepted becomes a promise.”

4. Essentials of a valid contract – Section 10 – “all agreements are contracts if they are made by free
consent of parties competent to contract, for a lawful consideration and with a lawful object and
are no hereby expressly declared to be void.”

-Agreement between two parties – valid offer and a valid acceptance

-Parties should be competent to contract
-There should be lawful consideration and lawful object
-There should be free consent of the parties
-The agreement must not be one, which has been expressly declared to be void.

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5. Offer and Acceptance –
•Agreement is one of the essential elements of a contract – meeting of minds – “Consensus ad idem” – agreeing to the
same thing in the same sense

•Offer – Section 2(a) – “when a person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal.”

•Offer and Invitation to treat distinguished – one may not offer to sell his goods, but may make some statement or may
give some information with a view to inviting others to make offers on that basis. Example of mere information with a
discretion (to sell or not) - catalogue of books along with prices, an auction where goods to be auctioned are displayed is
not an offer for the sale of goods but merely an ITT (when bid accepted by the fall of hammer – contract), advertisement
calling for tenders – submission of tender is an offer and will result in a contract when the tender is accepted.

•Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. (1952) 2 Q.B. 795 – goods (medicines)
displayed in show window with price tags in a self service store. Nobody is bound to accept an offer.

•Harvey v. Facey (1893) A.C. 552 – Quotation of the price was held not to be an offer. “Plot of land – Bumper Hall Pen…
telegraph lowest price…”

•An offer can be withdrawn BEFORE it is accepted. (Example – bid may be retracted before the fall of hammer).Therefore
communication of offer and acceptance is very important. Lalman Shukla v. Gauri Dutt (1913) 11 All. L.J. 489 – acting in
ignorance of offer does not amount to acceptance of the same. Section 4 – “Communication of a proposal is complete
when it comes to the knowledge of the person to whom it is made”.

•Cross-Offers – even though parties intend the same bargain, there arises no contract – having knowledge of the offer
and then acceptance is an essential ingredient of a valid contract.

•Specific and General Offers – case of Lalman Shukla; case of Carlill v. Carbolic Smoke Balls Co. (1893) I Q.B. 256 –
CSB as preventive remedy against influenza, offering a reward to anyone who contacted influenza or cold after having
used CSB thrice a day as per printed directions. Carlill used CSB and contacted cold – sued – held – “General Offer” –
addressed to all – had ripened into a contract with the plaintiff by her act of performance of the required conditions and
thus accepting the offer. She was entitled to claim the reward.
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•Standing, open or continuing offer – an offer which is allowed to remain open for acceptance over a period
of time is known as standing, open or continuing offer. Example – an offer to supply 1000 bags of wheat
from 1st January to 31st December, in accordance with the orders which may be placed from time to time, is
a standing offer.

•Acceptance – Section 2 (b) – “when the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.”

•Effect of Acceptance – Once an offer is accepted – a contract is created. Before the acceptance, neither
party is bound thereby and therefore at this stage the Offeror is free to revoke or withdraw his offer, and the
Offeree is free not to accept the offer or reject the same. After the offer has been accepted, it becomes a
promise, which if other conditions of a valid contract are satisfied, binds both parties to the promise. Anson –
“Acceptance is to an offer what a lighted match is to a train of gunpowder. It produces something which
cannot be recalled or undone….So an offer may lapse for want of acceptance or be revoked before
acceptance. An Offeree may decide to reject the offer. Until an offer is accepted, it creates no legal rights,
and it may be terminated at any time.

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•Essentials of Valid Acceptance –

-Acceptance should be communicated by the Offeree to the Offeror (act or omission, implied or express,
by conduct [Carlill Case]) Felthouse v. Bindley (1863) 7 L.T. 835 - letter offering to buy the horse for a
certain price… stating “If I hear no more about the horse, I shall consider the same to be mine for ‘X’…”
held – No communication by nephew – No contract – Communication to the auctioneer not enough –
Offeror cannot impose upon the Offeree a duty to reply.

-Acceptance should be absolute and unqualified (Example – price – otherwise it is a counter offer) It
lapses by rejection or counter offer. Hyde v. Wrench – A’s farm land offer – 1000; B – 950; A – disagreed;
B – 1000; A – disagreed … original offer had lapsed; B’s offer was a counter offer to which A refused. No
contract.

-Acceptance should be made in some usual and reasonable manner, unless the proposal prescribes the
manner of acceptance

-Acceptance should be made while the offer is still subsisting – after an offer has been revoked or lapsed,
there is nothing which can be accepted.

-When is communication of acceptance complete? – Section 4 – “the communication of acceptance is

complete as against the proposer, when it is put in the course of transmission to him so as to be out of
the power of the acceptor… the communication of acceptance is complete as against the acceptor, when
it comes to the knowledge of the proposer.”

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•Revocation – Section 5 “a proposal may be revoked at any time, before the communication of its
acceptance is complete as against the proposer, but not afterwards”

•Modes of Revocation of Offer – by notice of revocation by the proposer to the other party, by lapse of
time described in the proposal for its acceptance (reasonable time), by failure of the acceptor to fulfill a
condition precedent (example – earnest money) to the acceptance, by death or insanity of the proposer, if
the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.

•Revocation of Acceptance – Indian law permits revocation of acceptance after the letter of acceptance
has been posted – by a faster means of communication.

6. Intention to create a legal relationship – Offer + Acceptance = Valid Contract – if there is an intention to
create a legal relationship. Example – social engagements and commercial agreements. Intention may be
expressly mentioned or may be inferred from the nature of agreement. Test is objective. Meritt v. Meritt
(1970) I W.L.R. 1211 – husband and wife were joint owners of a certain mortgaged property, Husband
moved out of matrimonial house and promised “upon payment of outstanding dues I will agree to transfer
the property into your sole ownership”… Legal Relationship.

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Consideration –
•Essentials of a valid contract – Section 10

•Subject to certain exceptions, an agreement without consideration is void according to Section 25

•Consideration means something in return for the promise. It may be either some benefit conferred on one party
or some detriment suffered by the other.

•Section 2 (d) – “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 or promise is called a consideration for the promise.”

•Consideration is the price for which the promise of the other is bought and the promise thus given for the value
is enforceable.

•Essentials –
-At the desire of the promisor
-By the promise or any other person (no Privity of consideration in India)
-Consideration may be past, present or future
-Example – past services at my request – after services are rendered I promise to pay ‘x’ – PAST Consideration,
Past services voluntarily rendered – no consideration but Section 25(2) is an exception to this rule
-Present consideration – when one of the parties to the contract has performed his part of the promise, which
constitutes the consideration for the promise by the other side, it is known as executed consideration.
Performance of the promise by the other side is the only thing now to be done.
-Future consideration – when one person makes a promise in exchange for the promise by the other side, the
performance of the obligation by each side to be made subsequent to the making of the contract, the
consideration is known as executor.
-There should be some act, abstinence or promise by the promisee, which constitutes consideration for the
promise
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•The principle of Privity of Contract – only those persons who are parties to the contract can enforce the same. A
stranger to the contract cannot enforce the same even though the contract may have been entered for his benefit.

•Exceptions –
-Trust of contractual rights or beneficiary under a contract – the basis of an action by the third party in such a case
is actually not the enforcing of contract but the right conferred by a particular contract in favour of a third party in
the form of trust etc. for example – in a contract between A and B, beneficial right in respect of some property may
be created in favour of C. in such a case, C can enforce his claim on the basis of the right conferred upon him.
-Conduct Acknowledgement or Admission – sometimes there may be no Privity of contract between two persons,
but if one of them by his conduct, acknowledgement or admission recognizes the right of the other to sue him, he
may be liable on the basis of the law of estoppel.

•Consideration need not be adequate – an agreement to which the consent of the promisor is freely given is not
void merely because the consideration is inadequate; but the inadequacy of consideration may be taken into
account by the Court in determining the question whether the consent of the promisor was freely given.

•Consideration must be real

•Exceptions when agreement without consideration is valid. Section 25 as a general rule declares that an
agreement without consideration is void. However, the Section mentions three exceptions – Section 25 – “An
agreement made without consideration is void unless – (1) it is expressed in writing and registered under the law
for the time being in force for the registration of documents and is made on account of natural love and affection
between parties standing in a near relation to each other, or unless (2) it is promise to compensate, wholly or in
part, a person who has already voluntarily done something for the promisor, or something which the promisor
was legally compellable to do; or unless
(3) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or
specially authorized in that behalf, to pay wholly or in part of a debt of which the creditor might have enforced
but for the law for the limitation of the suits
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Capacity to Contract and Free Consent
•One of the essentials of a valid contract – parties must be competent to contract.

•Section 11 – “every person is competent to contract who is of the age of majority according to
the law to which he is subject, and who is of sound mind, and is no disqualified from
contracting by any law to which he is subject.”

•Following are not competent to contract –

-Minor
-Person of unsound mind
-Person disqualified from contracting by law

Free Consent
•Essentials of a valid contract – free consent –
•Section 14 – consent is free when the same has not been caused by –
-Coercion
-Undue Influence
-Fraud
-Misrepresentation
•Section 15 – “Coercion is said to be there when the consent of a person has been caused
either by – (a) committing or threatening to commit any act forbidden by the Indian Penal
Code, or by – (b) unlawful detaining, or threatening to detain any property to the prejudice of
any person whatsoever
•“Where the relations subsisting between two parties are such that one of the parties is in a
position to determine the will of other, and uses that position to obtain an unfair advantage
over the other, there is said to be undue influence” (Section 16)

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•In the following cases, a person is deemed to be in a position to dominate the will of another:
-Where he holds a real or apparent authority over the other (example – an employer over his employee, income tax authority
over an assessee, police or judicial officer over an accused etc.), or
-Where he stands in a fiduciary relation to the other (example – relationship of confidence and trust like solicitor and client,
trustee and beneficiary, medical attendant and patient, spiritual adviser and devotee, husband and wife, creditor and debtor,
master and servant ect.) or,
-Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age,
illness, or mental or bodily distress

•Presumption of undue influence in unconscionable bargains – (borrowed 3000, promised to repay 25000)

•As per Section 17 – essentials of Fraud –

-False statement of fact – There should be a false statement of fact by a person who himself does not believe the statement
to be true
-The statement should be made with the wrongful intention of deceiving another party thereto and inducing him to enter
into the contract on that basis

•Mere silence is not fraud unless there is a duty to speak or where silence itself is equivalent to speech (examples – “If you do
not say anything I consider the goods are good)

•In cases of contracts of insurance which are based on duty to speak are contracts of good faith (uberrima fides). There is a
duty to make full disclosure and suppression of truth by keeping silence is considered falsehood.

•Active concealment amounts to fraud (example – ore in A’s estate, B conceals)

• Wrongful intention is a sine qua non – Derry v. Peek – directors of a company mentioned in the prospectus that they had
permission to run tramways with steam or mechanical power instead of animal power. Such permission had not yet been
granted and the company was wound up. Directors were sued for fraud, but it was held that they had no wrongful intention to
deceive. Hence, no fraud.

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•Misrepresentation – when a person makes a false statement, which he himself believes to be true and
he does not intend to deceive other party, there is misrepresentation. Derry v. Peek

•Fraud and Misrepresentation – differences –

-Knowledge of truth or falsity of statement
-Intention to deceive
-Contract “Voidable” in case of fraud and misrepresentation both. But if the party could have discovered
the truth with ordinary diligence in case of misrepresentation, then contract can’t be avoided.

•In cases of Coercion, Fraud, Undue Influence and Misrepresentation – Contract is voidable at the
option of the party concerned
•Mistake – Section 20, 21, 22 – consent obtained by mistake is also not free consent - “Consensus ad
idem” – consenting to the same thing in the same sense

•2 kinds of mistake – mistake in the mind of the parties – no genuine agreement at all since there is no
Consensus ad idem

•There may be a genuine agreement but there may be mistake as to a matter of fact relating to the
agreement – A agrees to buy a certain commodity from B. The commodity had been destroyed by fire at
the time of agreement, and both parties were unaware. Contract – void.

•Mistake should be on part of both parties

•Mistake should be with regard to an essential subject matter (example – title)

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Legality of Object
For the validity of a contract – both object and consideration should lawful. According to Section 23, the
consideration or object of an agreement are lawful, unless –

•It is forbidden by law, or

•Is of such nature that it would defeat the provision of law, or
•It is fraudulent, or
•It involves or implies injury to the person or property of another, or
•The Court regards it as immoral or opposed to public policy
•Examples – agreement to pay money to another for committing crime or tort is unlawful and thus
unenforceable, but mere non –observance of some statutory requirements is not necessarily void. An
agreement between A and B to share the proceeds of a fraudulent transaction is void. Borrower of
money is made to execute a bond for manual labour until repayment and paying exorbitant r.o.i in default
is slavery – opposed to public policy; or an agreement to sell liquor shop to someone who doesn’t hold
license is forbidden by law and hence void.
•VOID AGREEMENTS – Indian Contract Act specifically declares the following agreements as void –

-Agreements in restraint of marriage – Section 26

-Agreements in restraint of Trade – Section 27 [exceptions – sale of goodwill, exceptions under Indian
Partnership Act, restraint by a contract of service, trade combinations, solus agreements] – Indian
Competition Act, 2002 – trade agreements (cartels), solus agreements (exclusive dealing)
-Agreement in restraint of legal proceedings – Section 28
-Ambiguous and uncertain agreements – Section 29
-Agreements by way of wager – Section 30

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Performance and Discharge of Contracts
•Every contract consists of reciprocal promises. The parties must either perform, or offer to perform their
respective promises. When the promisor is willing to perform the contract and he offers to perform the same,
the promisee has a duty to accept the performance of the contract. If the offer of performance is not accepted
by the promisee, the promisor cannot be blamed for non-performance (Section 38). Every offer of
performance of contract must fulfill the following conditions –
-It must be unconditional
-It must be made at proper time and place, and under such circumstances that the person to whom it is made
may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing
then and there to do the whole of what he is bound by his promise to do.
-If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity
of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver.
-If there are a number of joint promisees, an offer of performance may be in favour of one of them.
•By whom should the contract be performed – contract based on personal confidence or skill – promisor
himself. Otherwise – representative may perform.

Discharge of Contract – when a contract ceases to bind the parties to it, it is said to be discharged. It may
be discharged by –
-Performance of a contract
-Breach of contract
-Impossibility of performance [Doctrine of Frustration of Contract]
-Agreement and Novation

•Doctrine of Frustration of Contract – because of a supervening event the performance of a contract becomes
impossible, the promisor is excused from the performance of the contract. [example – natural disaster,
existence of subject matter of the contract, circumstances – legal or physical]
•Novation means substitution of an existing contract with a new one. Parties, by an agreement may substitute
an old contract with a new one – change in terms and conditions or change in parties to contract
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Remedies for Breach of Contract
Two remedies – DAMAGES and QUANTUM MERUIT (Section 73 and 74). Remedies by way of specific
performance of contract and injunction restraining the other party from making a breach of contract are
contained in Specific Relief Act.

•Damages – Section 73 contains the rules laid in Hadley v. Baxendale (1854) – such damages can be
recovered as may fairly and reasonable be considered arising naturally i.e. according to the usual course of
things (not special loss arising out of special circumstances) from such breach, or as may reasonably be
supposed to have been in contemplation of both the parties at the time they made the contract. In either case,
it is necessary that the resultant damage is the probable result of the breach of contract.
-Compensation can also be provided for mental anguish according to Indian Supreme Court
-Special circumstances – should be brought to the notice at the time of making the contract
-Duty to mitigate loss

•Quantum Meruit – Ordinarily, if a person having agreed to do some work or render some services, has done
only a part of what he was required to do, he cannot claim anything for what he has done. When a person to
agrees to complete some work for a lump sum, non completion of the work does not entitle him to any
remuneration even for the part of work done. But the law recognizes an important exception – Quantum Meruit
– meaning – the injured party who himself has not made a breach of the contract is entitled to be
compensated for whatever work he may have already done, or whatever expense he may have incurred.
Example – A & B contract; A performed a part but is prevented by B from performing the rest of his part – A
can recover remuneration from B for whatever he has already done.

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Sale of Goods

Contracts for Sale of Goods are subject to the general legal principles applicable to all contracts such as –
offer, acceptance, consideration, capacity of parties, free and real consent, legality of the object. The general
provisions of ICA continue to apply to contracts fro sale of goods in so far as they are not inconsistent with the
express provisions of Sale of Goods Act, 1930.

Formation of contract of sale of goods - it is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. A contract of sale may be absolute or conditional. The term COS is a
generic term and includes both a sale and agreement to sell.

Essentials of COS –
1. Two parties – there must be 2 distinct parties – buyer and a seller to effectuate COS. They must be
competent to contract. Buyer means a person who buys or agrees to buy goods. Seller is a person who
sells or agrees to sell goods.
2. Goods – there must be some goods the property in which is or is to be transferred from seller to the buyer.
The goods which form the subject matter of the contract of sale must be movable. Transfer of immovable
property is not regulated by SOG Act, 1930
3. Price – consideration is a must, which should be money. When goods are exchanged for goods it is not a
sale but a barter. There is however, nothing to prevent the consideration from being partly in money and
partly on goods
4. Transfer of general property – as distinguished from special property in goods from seller to the buyer. If A
owns certain goods he has general property in the goods. If he pledges them with B, B has special
property of goods.
5. Essentials of a valid contract

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Sale of Goods

Difference between Sale and Agreement to sell –

1. Transfer of property – in a sale the property in goods passes from seller to buyer immediately so that the
seller is no more the owner of goods sold. In Agreement to sell (ATS) transfer is to take place at future
time and/or subject o certain conditions fulfilled.
2. Executed and Executory contract
3. Type of goods – sale can only be in case of specific and existing goods only. ATS is mostly in case of
future and contingent goods, although in some cases it may also refer to unascertained existing goods.
4. Risk of loss – in a sale, if the goods are destroyed, the loss falls on the buyer, even though the goods are
in the possession of seller. In ATS – the loss falls on seller even though goods are in possession of the
buyer.
5. Consequences of breach – in a sale if the buyer fails to pay the price of goods or if there is a breach of
contracts by the buyer, the seller can sue for the price even though goods are still in his possession. In an
ATS if there is a breach of contract by the buyer the seller can only sue for damages and not for price
even though the goods are in the possession of the buyer.
6. Right to re-sell – in a sale the seller cannot re-sell the goods. If he does so the subsequent buyer does not
acquire title of the goods. In an ATS in case of re-sale, the buyer who takes goods for consideration and
without notice of prior agreement gets a good title. In such a case, the original buyer can only sue the
seller for damages.
7. General and particular property – a sale is a contract + conveyance and creates jus in rem i.e. gives right
to the buyer to enjoy goods as against the world at large including the seller. An ATS is merely a contract
pure and simple and create jus in personam i.e. gives a right to the buyer against the seller to sue for
damages.

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Sale of Goods

- Subject matter – According to Section 2 (7), goods means “every kind of movable property other than
actionable claims and money and includes stocks and shares, growing crops, grass and things attached
to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
Trademarks, copyrights, patent rights, goodwill, electricity, water, gas are all goods.”

- Actionable claims and money are not goods – actionable claim means a claim to any debt or any
beneficial interest in movable property not in possession.

Classification of Goods –
1. Existing goods – specific, ascertained, unascertained or generic goods
2. Future goods
3. Contingent goods

Condition and Warranty –

Condition – is a stipulation which is essential to the main purpose of the contract. It goes to the root of the
contract. Its non-fulfillment upsets the very basis of contract.

Warranty – is a stipulation which is co-lateral to the main purpose of contract. It is not of such vital
importance as the condition is.

Caveat Emptor – Buyer Beware.

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 Thank You

Please forward your query

To: kaur.manprit19@gmail.com
CC: manoj.amity@panafnet.com

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