“Education is not preparation for life; education is

life itself.”
IV Semester B.com
As per NEP Syllabus

Business Regulatory Framework

Module 1

Introduction – Definition of a contract, essentials of valid contract,

offer and acceptance, consideration, contractual capacity, free consent,
classification of contract, discharge of a contract, breach of contract and
remedies to breach of contract

Prepared by
Prof. Rajath G
Vidya Vardhaka Sangha First Grade College
Mangaladhama, Basaveshwarnagar, Bengaluru – 79

Year: 2024

Note:
1. Topics which are highlighted in Green Colour are very important.
2. Topics which are highlighted in Blue Colour are important for
Section A.
3. Examples for each and every topic is added for better understanding.

“ALL THE BEST”

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
 Chapter 1
The Indian Contract Act, 1872

Definition of a Contract
According to Section 2(h) of Indian Contract Act, the term contract is defined as an
“agreement enforceable by law”.
On analysing the definition, we find that, the contract consists of two essential elements,
a) an agreement
b) enforceability by law.
The term ‘agreement’ given in Section 2(e) of the Act is defined as “every promise
and every set of promises, forming the consideration for each other”.

Again, Section 2B defines ‘promise’ as when the person to whom the proposal is
made signifies his assent thereto, the proposal is set to be accepted. The proposal,
when accepted, becomes a promise.

Agreement = offer/proposal + acceptance.

Enforceability by law, an agreement to become a contract must give rise to a legal
obligation, which means a duty enforceable by law.

Contract = accepted proposal + enforceability by law.

Essential Elements of a Valid Contract

According to Section 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 hereby expressly declared to be void.

The following essential elements must co-exist in order to make valid contract:
1. Proper offer and proper acceptance with intention to create legal relationship.
2. Lawful consideration and lawful object.
3. Capacity to contract.
4. Free consent.
5. Agreements not declared void or illegal.
6. Certainty of meaning.
7. Possibility of performance of an agreement.
8. Necessary legal formalities.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
1. Proper offer and proper acceptance with intention to create legal
relationship: A contract starts with one party making an offer to do something
or refrain from doing something, and the other party accepting that offer.

Example: Alex offers to sell his car to Ben for $10,000. Ben accepts the offer,
and they both intend for the sale to be legally binding.

2. Lawful consideration and lawful object: Both parties must exchange

something of value (consideration) and the purpose of the contract must not be
illegal or against public policy.

Example: Sarah promises to pay Michael $500 in exchange for Michael

repairing her roof. The consideration is the money and the roof repair, and the
object (roof repair) is lawful.

3. Capacity to contract: Both parties must be legally capable of entering into a

contract. This means they must be of legal age and mentally competent.

Example: A minor (under 18 years old) generally lacks capacity to contract, so

a contract they enter into might not be enforceable against them.

4. Free consent: Both parties must agree to the terms of the contract without any
undue influence, coercion, misrepresentation, or fraud.

Example: If Jane signs a contract with Tom because Tom threatened to harm
her if she didn't, her consent is not free, and the contract may be voidable.

5. Agreements not declared void or illegal: The contract must not be

specifically prohibited by law or rendered illegal by the courts.

Example: A contract to engage in illegal gambling activities would be void

because gambling is illegal in many jurisdictions.

6. Certainty of meaning: The terms of the contract must be clear enough for a
court to enforce. Uncertain or ambiguous terms may make a contract
unenforceable.

Example: If a contract states that John will sell "some" of his land to Maria
without specifying how much land, it lacks certainty.

7. Possibility of performance of an agreement: The terms of the contract must

be possible to fulfil. Contracts that require impossible tasks or outcomes are not
enforceable.

Example: If Anna agrees to sell her house on Mars to Bob, it's not possible to
perform because humans cannot currently live on Mars.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
 8. Necessary legal formalities: Some contracts must be in writing or follow
specific formalities to be enforceable, as required by law.

Example: In some jurisdictions, contracts for the sale of land must be in

writing to be enforceable.

These elements collectively ensure that a contract is valid and enforceable under the
law.

Types of Contracts

Types of Contracts on the basis of

Validity Formation Performance

Valid Contract Express Contract Executed Contract

Void Contract Implied Contract Executory Contract

Voidable Contract Tacit Contract Unilateral Contract

Illegal Contract Quasi Contract Bilateral Contract

Unenforceable
Contract

1. On the basis of validity

a. Valid contract: A valid contract is one that is legally binding and enforceable
under law. It meets all the essential elements required by law, such as offer,
acceptance, consideration, capacity, and legality of purpose.

Example: You hire a plumber to fix a leak in your bathroom for a specified fee. Both
parties agree to the terms, and the plumber completes the work satisfactorily.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
b. Void contract: A void contract is not legally binding right from the beginning. It
lacks one or more essential elements required for validity, such as illegality or
impossibility of performance.

Example: A contract to sell illegal drugs would be void because the subject matter is
illegal.

c. Voidable contract: A voidable contract is valid and enforceable unless one party
chooses to void it due to circumstances like misrepresentation, undue influence,
coercion, or incapacity.

Example: A contract entered into by a minor (underage person) is voidable at the

minor's option, meaning they can choose to enforce or cancel the contract upon
reaching the age of majority.

d. Illegal contract: An illegal contract involves unlawful acts or purposes that are
against the law or public policy. Such contracts are not enforceable.

Example: A contract to hire someone for illegal gambling activities would be illegal
and unenforceable.

e. Unenforceable contract: An unenforceable contract is one that cannot be enforced

in a court of law due to legal technicalities, such as a lack of required formality (e.g.,
not in writing when required by law) or statute of limitations issues.

Example: A verbal agreement for the sale of land, which is required to be in writing
to be enforceable under the law of the jurisdiction.

2. On the basis of formation

a. Express contract: An express contract is created through explicit words, whether

spoken or written, to define the terms and conditions.

Example: Signing a lease agreement where all terms, such as rent amount and
duration, are clearly stated in the written contract.

b. Implied contract: An implied contract is inferred from the actions or conduct of

the parties involved. It is not explicitly stated but rather understood based on the
circumstances.

Example: A person sits down at a restaurant, orders a meal, eats it, and then pays the
bill. By ordering and consuming the meal, there is an implied contract to pay for the
services rendered.

c. Tacit contract: A tacit contract is similar to an implied contract and is inferred

from the circumstances and conduct of the parties, but it may also involve a mutual
understanding that is not necessarily expressed.
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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Example: A person regularly receives a newspaper delivered to their doorstep and
pays for its monthly. There is a tacit understanding between the person and the
newspaper company that payment is due for the service provided.

d. Quasi contract: A quasi contract is not an actual contract but a legal remedy
imposed by the court to prevent unjust enrichment of one party at the expense of
another when no actual contract exists.

Example: If someone mistakenly pays your utility bill, you might be obligated under
a quasi-contract to reimburse them because they conferred a benefit on you without
your consent.

3. On the basis of performance

a. Executed contract: An executed contract is one where all parties involved have
fulfilled their obligations under the contract.

Example: You hire a painter to paint your house. After the painter finishes the job and
you pay them, the contract is considered executed.

b. Executory contract: An executory contract is one where some obligations under

the contract have yet to be performed by one or both parties.

Example: You sign a contract to purchase a car from a dealership. You have agreed to
pay the purchase price in installments over the next year. Until you make the final
payment and receive the title, the contract remains executory.

c. Unilateral contract: A unilateral contract involves a promise made by one party in

exchange for the performance of an act by another party. The contract is formed when
the act is performed.

Example: A reward offers for finding a lost dog is a unilateral contract. The person
who finds the dog can claim the reward by performing the act (returning the dog).

d. Bilateral contract: A bilateral contract involves promises exchanged by both

parties, where each party is obligated to perform a certain action or actions.

Example: A typical sales contract is bilateral. The buyer promises to pay a certain
amount of money, and the seller promises to deliver a specific item or service in
return.

The English law classifies the contract into:

(i)Formal contracts and
(ii) Simple contracts

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Formal contracts include

a. Contract of record: A contract of record is established when a court issues a

judgment that imposes a legal obligation on one or more parties. This obligation
becomes binding and enforceable as if it were a contract voluntarily entered into by
the parties involved. It is based on the principle that a court’s judgment represents the
final resolution of a legal dispute and carries the authority to create legal rights and
duties.

Example: Imagine a scenario where a tenant fails to pay rent, and the landlord files a
lawsuit for eviction and unpaid rent. If the court rules in favor of the landlord, it may
issue a judgment ordering the tenant to pay a specified amount of money (back rent)
to the landlord. This judgment becomes a contract of record, as it creates a legal
obligation for the tenant to pay the specified amount as determined by the court.

b. Contract under seal: A contract under seal is a formal agreement that involves the
affixation of a seal or mark by one or more parties, signifying their intention to be
bound by the terms of the contract. Historically, contracts under seal were considered
more formal and binding than simple written or oral contracts. They often had a
longer statute of limitations for enforcement and were more difficult to challenge in
court due to their presumed validity.

Example: Let's consider a scenario where a company enters into a contract with a
supplier to purchase goods under a seal. The contract is drafted, signed by both
parties, and affixed with a wax seal bearing the company's logo. The use of the seal
distinguishes this contract from ordinary contracts and indicates a higher degree of
formality and intent to create a legally binding obligation.

Distinction Between Void and Voidable Contract

Basis Void Contract Voidable Contract
Contract ceases to be Contract is enforceable at the
Definition
enforceable by law option of the aggrieved Party
Reasons for Illegality or Impossibility Fraud, Coercion, undue influence
Invalidity or lack of legal capacity
Legal No legal action can be taken Can be enforced until voided by
Action because it's invalid. the affected party
Does not provide any legal The aggrieved gets a right to
Rights remedy for the parties to the rescind the contract and to declare
contract it void otherwise it remains valid
Timing of Invalid from the outset Becomes invalid only if and when
Invalidity it is voided by the affected party

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Distinction Between Void agreement and illegal
agreement

Basis Void agreement Illegal agreement

Nature Not forbidden under law Are forbidden under law
A Void agreement is not An illegal agreement is always
Scope
necessarily illegal void.
Parties are not liable for any Parties to illegal agreements are
Punishment
punishment under the law liable for punishments.
Its not necessary that Agreements collateral to illegal
Collateral agreements collateral to void agreements are always void.
agreement agreements may be void. It
may be valid also
Void agreements is not Void- All illegal agreements are void
Effects ab-initio but may subsequently from the beginning
become void

Proposal/offer:
The words proposal or offer is defined under section 2(A) of the Indian Contract Act
1872, as 'when one person signifies to another his willingness to do or to abstain from
doing anything with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal'.
The person making the proposal or offer is called the 'promiser' or ' offeror', the person
to whom the offer is made is called the 'offeree' and the person accepting the offer is
called the 'promisee' or 'acceptor'.

Types of Offers

General Offer Special Offer

Cross Offer

Counter Offer Standing Offer

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
a. General offer: A general offer is an offer made to the public or a large group of
people. It is intended to be accepted by anyone who meets the specified conditions.

Example: A reward poster offering $500 to anyone who finds and returns a lost dog
would be a general offer. Anyone who finds the dog and meets the conditions (e.g.,
returns it to the owner) can claim the reward.

b. Special offer: A special offer is directed to a specific person or group of people. It

is not open to the general public.

Example: A retailer sends a promotional email offering a 20% discount on purchases

to its loyalty card members only. This offer is special because it is limited to a specific
group of customers.

c. Cross offer: A cross offer occurs when two parties make offers to each other
simultaneously, but the offers are identical or nearly identical in terms.

Example: Person A offers to sell their car to Person B for $10,000. At the same time,
Person B offers to buy the same car from Person A for $10,000. Both offers are cross
offers because they mirror each other in terms of intent and value.

d. Counter offer: A counter offer is made in response to an original offer, changing

its terms in some way. It operates as a rejection of the original offer and a new offer
made in return.

Example: Seller A offers to sell a house for $300,000. Buyer B responds by offering
to buy the house for $280,000. Buyer B's offer of $280,000 is a counter offer because
it changes the price from Seller A's original offer of $300,000.

e. Standing, open or continuing offer: A standing offer, also known as an open or

continuing offer, is an offer that remains open for acceptance over a period of time.

Example: A company advertises on its website that it will purchase used smartphones
at a fixed price of $200 each throughout the year. This offer is a standing offer
because it is open for acceptance by anyone who meets the terms (e.g., provides a
smartphone in acceptable condition) at any time during the specified period.

Rules as to Offer:
a. The offer must be capable of creating legal relations: For an offer to be valid, it
must indicate a clear intention by the offeror to enter into a legally binding agreement
if the offer is accepted by the offeree.

Example: A person offers to sell their car for $5,000. This offer is capable of creating
legal relations because it implies an intention to enter into a binding contract upon
acceptance.
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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
b. The offer must be certain, definite, and not vague: An offer must be clear and
specific enough so that the terms and conditions are understood by both parties. Vague
or uncertain terms can invalidate the offer.

Example: "I might sell my car to you sometime next year" is vague and uncertain. In
contrast, "I offer to sell my car to you for $10,000 by the end of this month" is certain
and definite.

c. The offer may be expressed or implied: An offer can be explicitly stated (express)
or inferred from the conduct or circumstances of the parties (implied).

Example of expressed offer: A written job offer letter stating the terms of
employment.

Example of implied offer: Placing items for sale in a shop window implies an offer
to sell them at the displayed price.

d. The offer must be distinguished from an invitation to offer: An invitation to

offer (invitation to treat) is an invitation for others to make an offer, whereas an offer
indicates a willingness to enter into a contract on specific terms.

Example: A store displaying goods with price tags is an invitation to treat. When a
customer picks an item and takes it to the cashier to pay, they are making an offer to
purchase.

e. An offer may be specific or general: An offer can be directed to a specific person

or group (specific) or to the public at large (general).

Example of specific offer: Offering to sell your car to a named individual.

Example of general offer: A reward poster offering a reward for the return of a lost
item to anyone who finds it.

f. The offer must be communicated: The offeror must communicate the offer to the
offeree directly or indirectly through words, conduct, or other means.

Example: Sending an email stating the terms of a job offer to a prospective employee.

g. The offer must be made with the view to obtaining the consent or assent of the
offeree: The offeror must intend for the offeree to accept the offer, indicating a
mutual intention to enter into a contract.

Example: A company offering a contract to a supplier for the supply of goods,

expecting the supplier to accept the terms and conditions.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
h. An offer may be conditional: An offer can be made conditional upon certain terms
or events occurring before it becomes binding.

Example: "I offer to buy your house for $300,000, subject to a satisfactory inspection
report."

i. The offer should not contain terms, the non-compliance of which would
amount to acceptance: An offer should not include terms that, if not rejected
explicitly by the offeree, would be considered acceptance.

Example: "I offer to sell my car to you for $8,000, unless I hear otherwise from you
by next Friday" would create confusion because silence could be construed as
acceptance.

Offer and invitation to offer: An offer should be distinguished from an invitation to

offer. An offer is definite and capable of converting an intention into a contract.
Whereas invitation to an offer is only a circulation of an offer, it is an attempt to
induce offers and precedes a definite offer. Acceptance of an invitation to offer does
not result in the contract and only an offer emerges in the process of negotiation.

Examples for Invitation to offer:

Advertisement for Sale: Imagine a store putting up a banner saying, "50% off on all
electronics this weekend!" This advertisement is an invitation to offer because the
store is inviting customers to come and negotiate the purchase of electronics at the
discounted price. The customer, by picking an item and offering to buy it at the
advertised price, makes the offer. The store then has the option to accept or reject that
offer.

Tender Invitation: A government agency issues a tender notice inviting bids for the
construction of a bridge. Companies interested in undertaking the project submit their
bids. The tender notice is an invitation to offer because it solicits bids, but it does not
constitute an offer to enter into a contract. The agency assesses the bids and chooses
the most suitable one, thereby accepting the offer made by the winning bidder.

Acceptance
According to section 2(b), a proposal or offer is said to have been accepted when the
person to whom the proposal is made signifies his assent to the proposal to do or not
to do something.

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Rules regarding acceptance:
1. Acceptance must be absolute and unqualified: This means the offeree (person
receiving the offer) must agree to all the terms of the offer exactly as they are, without
adding new conditions or changing anything. If the offeree tries to change the offer in
any way, it becomes a counter-offer, not an acceptance.

Example: John offers to sell his car to Alice for $10,000. Alice agrees to buy the car
for $10,000 without asking for any changes to the price or conditions. This is absolute
and unqualified acceptance.

2. Communicated to the offeror: Acceptance must be clearly communicated to the

person who made the offer (the offeror). It cannot be assumed or implied; it needs to
be explicitly stated or shown through actions.

Example: Sarah offers to sell her bicycle to Tom for $100. Tom responds to Sarah's
offer by saying, "I accept your offer to buy the bicycle for $100." Tom's acceptance is
communicated directly to Sarah.

3. Acceptance must be in the mode prescribed: If the offer specifies a particular

way or method in which acceptance should be communicated (like by email, in
writing, etc.), the offeree must follow that method.

Example: Alex offers to sell his laptop to Ben and states in the offer, "Please confirm
your acceptance via email." Ben must send an email stating his acceptance of the offer
for it to be valid.

4. Time: Acceptance should be communicated within a reasonable time frame, unless

the offer specifies a deadline. If no time frame is specified, it should be done promptly
to prevent the offer from expiring.

Example: Emily offers to hire David for a job and asks him to let her know within a
week if he accepts the offer. David must communicate his acceptance within that
week for it to be valid.

5. Mere silence is not acceptance: Simply staying silent or not responding to an offer
does not mean acceptance. There must be an active indication from the offeree that
they agree to the terms of the offer.

Example: Sam offers to sell his textbook to Lily. Lily receives the offer but does not
respond or communicate her acceptance or rejection. This is not acceptance because
Lily's silence does not indicate agreement.

6. Acceptance by conduct: Sometimes, acceptance can be shown through actions

rather than words. If the offeree behaves in a way that clearly indicates agreement
with the offer, this can be considered acceptance.
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Example: Mike offers to mow his neighbour’s lawn for $50. The neighbour hands
Mike $50 after he finishes mowing the lawn. The neighbour’s act of paying Mike
demonstrates acceptance of the offer.

Communication of offer and acceptance

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

person to whom it is made (Section 4). An offer may be communicated either by
words spoken or written or it may be inferred from the conduct of the parties.

When a proposal is made by post its communication will be complete when the letter
containing the proposal reaches the person to whom it is made.

Example: 'A' makes proposal to 'B' to sell his house for Rs. 2 Lakhs. The letter is
posted on 10th March. This letter reaches 'B' on 12th instant. The offer is said to have
been communicated on 12th, where B receives the letter.

Communication of acceptance: It is complete:

(i) as against the proposer, when it is put in course of Transmission to him so as to be

out of the power of the acceptor to withdraw the same.

(ii) as against the acceptor, when it comes to the knowledge of the proposer.

Communication of acceptance by post: When a proposal is accepted by a letter sent

by the post the communication of acceptance will be complete as against the proposer
when the letter of acceptance is posted and as against the acceptor when the letter
reaches the proposer.

Acceptance over telephone or telex or fax: When and offer is made of instantaneous
communication like telex, telephone, fax or through email, the contract is only
complete when the acceptance is received by the offeree, and the contract is made at
the place where the acceptance is received.

Revocation of offer and acceptance

Under Section 4, the communication of revocation is complete:

(i) 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 power of the person who makes it

(ii) as against the person to whom it is made, when it comes to his knowledge.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Example of Revocation of Offer:

• Scenario: Sarah offers to sell her bicycle to Tom for $100. However, before
Tom has a chance to accept the offer, Sarah changes her mind and decides to
keep the bicycle.
• Revocation: Sarah calls Tom and says, "I'm sorry, but I've decided not to sell
my bicycle anymore." Sarah has effectively revoked her offer by
communicating her change of heart to Tom before he accepted the offer.

Example of Revocation of Acceptance: A buys a laptop and accepts it upon delivery.

Later discovers it has a faulty keyboard and revokes acceptance, returning the laptop
for a refund.

Modes of revocation: A proposal may be revoked by any of the following methods:

1. By notice revocation
2. By lapse of specified time or reasonable time
3. By the death or insanity of the offeror or the offeree
4. Case of non-fulfilment of conditions of offer
5. In case of Counter offer

Consideration
Consideration means the price agreed to be paid by the promisee for the obligation of
the promisor. Therefore, consideration has been defined in English judgement as
"some right, interest, profit or benefit accruing to one party (i.e., Promisor) or
forbearance, detriment, loss or responsibility given, suffered or undertaken by the
other (i.e., the Promisee)" at the request of the promisor.

Section 2(d) 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 abstain from doing something, such an act or
abstinence or promise is called consideration for the promise".

1. Consideration is the doing or not doing of something which the promisor desires to
be done or not done.
2. Consideration must be at the desire of the promisor.
3. Consideration may move from promisee or any other person.
4. Consideration may be past, present or future.
5. Consideration need not be adequate, but should be real.

Examples:
1. A promises to maintain B’s child and B promises to pay A ‘1000 yearly for the
purpose. Here, the promise of each party is the consideration for the promise of the
other party.
2. ‘C’ promises his debtor ‘D’ not to file a suit against him if he agrees to pay
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Rs.10,000 more on the principal amount. Here the abstinence of ‘C’ is the
consideration for ‘D’ promise to pay.

Legal requirements regarding consideration

1. Consideration must move at the desire of the promisor: Consideration must be
given in return for the promise made by the other party. It should be done because the
promisor wants it, not just voluntarily.

Example: Alice promises to pay Bob $100 if Bob paints her fence. Here, Bob's
painting of the fence is consideration because he does it in response to Alice's promise
to pay.

2. Consideration from promisee or any other person: Consideration can come from
the promisee (the person to whom the promise is made) or from another person, as
long as it moves at the promisor's desire.

Example: Carol promises to pay Dan $500 if Dan completes a project for Alice. Even
though Carol is not Alice, her promise to Dan can still be consideration because it
moves at Alice's desire (since Alice benefits from Dan completing the project).

3. Executed and executory consideration: Executed consideration means something

has already been performed, while executory consideration means something is yet to
be performed.

Example: Executed consideration would be if Ellen promises to pay Fred $50 for
fixing her bike (after he fixes it). Executory consideration would be if Greg promises
to pay Helen $200 for mowing his lawn (before she starts mowing).

4. Past consideration: Past consideration refers to something that has already been
done before the promise was made. Generally, past consideration is not valid
consideration.

Example: Ian promises to pay Jack $50 because Jack helped him move last week.
Jack's help was in the past and not given in exchange for Ian's promise, so it's not
valid consideration.

5. Adequacy of consideration: Adequacy of consideration refers to whether what is

exchanged is of roughly equal value. The law generally does not concern itself with
the fairness of the bargain, as long as some consideration is present.

Example: Kate sells her old bicycle to Leo for $1. Although the bicycle is worth
much more, the $1 is still valid consideration, as it symbolizes a transaction.

6. Performance of what one is legally bound to perform: If a person is already

legally obligated to do something, doing it cannot be considered new consideration.
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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Example: Mary is contractually obligated to deliver goods to Nora. Nora promises to
pay Mary an additional $100 if she delivers on time. Mary delivering the goods on
time is not new consideration because she was already bound to do so.

7. Consideration must be real and competent: Consideration must be something of

value in the eyes of the law, and it must be something a person is capable of giving.

Example: Paul promises to give Quinn his vintage car in exchange for Quinn's
promise to pay $5,000. The vintage car is considered real consideration because it has
value. However, if the car were a toy car with no real value, it wouldn't count as valid
consideration.

8. Consideration must not be unlawful, immoral, or opposed to public policy:

Consideration must be legal and morally acceptable. Contracts involving illegal acts
or against public policy are not enforceable.

Example: Rachel promises to pay Sam $1,000 if he steals confidential information

from his employer. This promise is based on an illegal act (stealing), so it is not valid
consideration.

Validity of an agreement without consideration

The general rule is that an agreement made without consideration is void (section 25).
In every valid contract consideration is very important. A contract May only be
enforceable when an adequate consideration is there. However, the Indian Contract
Act contains certain exceptions to this rule. In the following cases, the agreement
though made without consideration, will be valid and enforceable.

1. Natural love and affection: A Written and registered agreement based on natural
love and affection between the parties standing in near relation (eg. Husband and
wife) to each other is enforceable even without consideration.

2. Compensation for past voluntary services: A promise to compensate, wholly or

in part, a person who has already done something for the promisor, is enforceable
under [section 25(2)]. In order that promise to pay for the past voluntary services, the
following essential factors must exist:

a. The services should have been rendered voluntarily.

b. The services must have been rendered for the promisor.
c. The promisor must be in existence at the time when services were rendered.
d. The promisor must have intended to compensate the promisee.

3. Promise to pay time barred debt: When a promise in writing signed by the person
making it or by his authorised agent, is made to pay debt barred by limitation it is
valid without consideration [section 25(3)]

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
4. Agency: According to Section 185 of the Indian Contract Act, no consideration is
necessary to create an agency.

5. Completed gift: In case of completed gifts, the rule no consideration no contract

does not apply. Explanation (1) to section 25 states " nothing in this section shell
affect the validity as between the donor and Donee, of any gift actually made". Thus,
gifts do not require any consideration.

6. Bailment: No consideration is required to affect the bailment (section 148)

7. Charity: If a promisee under takes the liability on the promise of the person to
contribute to charity, where the contract shall be valid.

Other Essential elements of a Valid Contract

Capacity to Contract
Meaning: Capacity refers to the competence of the parties to make a contract. It is
one of the essential elements to form a valid contract.

Who is competent to contract?

Every person who (a) has attained the age of majority, (b) is of sound mind and (c) is
not otherwise disqualified from contracting, is competent to contract (section 11)

(a) age of majority: In India, the age of majority he is regulated by the Indian majority
act (act IX of 1875). Every person domiciled in India attains majority on the
completion of 18 years of age.

Law relating to minor's agreement or position of

minor's
1. A contract made with or by a minor is void-ab-initio: A minor is not competent
to contract and any agreement with or by a minor is void from the beginning.

2. No ratification after attaining majority: A minor cannot ratify the agreement on

attaining majority as the original agreement is void-ab-initio.

3. Minor can be a beneficiary or can take benefit out of a contract: Though a

minor is not competent to contract, nothing in the Contract Act prevents him from
making the other party bound to the minor.
A minor cannot become partner in a partnership firm. However, he may with the
consent with all the partners, be admitted to the benefits of the partnership (section 30
of the Indian Partnership Act, 1932).

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4. A minor can always plead(claim) minority: A minor can always plead minority
and is not stopped to do so even where he has taken any loan or entered into any
contract by falsely representing that he was a major.

5. Contract for supply of necessaries: Minor is liable to pay out of his property for
the necessaries supplied to him by the other (section 68).

6. Contract by guardian - how far enforceable: though a minor's agreement is void,

his guardian can, under circumstances enter into a valid contract on the minor's behalf.
Where the guardian makes a contract for the minor, which is within his competence
and which is for the benefit of the minor, there will be valid contract which the minor
can enforce.

7. Person of sound mind: A person is said to be of sound mind for the purpose of
making a contract if, at the time when he makes it, he is capable of understanding it
and of forming a rational judgement 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.

8. Contract by disqualified person: Besides minor's and persons of unsound mind,

there are also other persons who are disqualified from contracting, partially or wholly,
so that the contracts by such persons are void. Incompetency of contract may arise
from political status, corporate status, legal status, etc. The following persons fall in
this category: Foreign sovereigns and ambassadors, alien enemy, corporations,
convicts, insolvent, etc.

Free consent
According to Section 13, "Two or more persons are set to have consented when they
agree upon the same thing in the same sense (consensus-ad-idem)”.
Consequently, when parties to a contract make some fundamental error as to the
nature of transaction, or as to the person dealt with or as to the subject matter of the
agreement, it cannot be said that they have agreed upon the same thing in the same
sense. And if they do not agree in the same sense, there cannot be consent.
A contract cannot arise in the absence of consent.

Consent may be free or not free. Only free consent is necessary for the validity of a
contract. Consent is free when it is not caused by coercion, undue influence, fraud,
misrepresentation or mistake (section 14). When consent is not free due to mistake,
the agreement is void but in all other cases, the contract is voidable at the option of the
party whose consent was obtained by coercion, etc.

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Elements vitiating free consent:
a. Coercion (section 15): "coercion" is the committing or threatening to commit, any
act forbidden by the Indian Penal Code (45 of 1860), or 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.

Example: Sarah owns a small business and desperately needs a loan to keep it
running. Tony, a wealthy investor, offers Sarah a loan of $50,000 at an exorbitant
interest rate of 50% per annum. Sarah initially declines because she knows the interest
rate is unfair and she cannot afford such high repayments.

However, Tony becomes aggressive and threatens to destroy Sarah's business

reputation if she doesn't accept his terms. Feeling intimidated and with no other
apparent options, Sarah reluctantly signs the loan agreement.

b. Undue influence (section 16): A contract is said to be induced by "undue

influence" where the relations subsisting between the parties are such that one of the
parties, he is in a position to dominate the will of the other and uses that position to
obtain and unfair advantage of the other. The person is deemed to be in a position to
dominate the will of the other, when he holds authority real or Apparent over the
other, or when he stands in a fiduciary relation to the other.

Example: Sarah's financial advisor pressures her into investing in a risky scheme,
assuring her it's her best option. Due to her trust in him, Sarah agrees, unaware of the
scheme's risks.

c. Fraud (section 17): As per the act "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:

(i) the suggestion, as to a fact, of that which is not true by one who does not believe it
to be true
(ii) the active concealment of a fact by one having knowledge or belief of the fact
(iii) a promise made without any intention of performing it;
(iv) any other act fitted to deceive;
(v) any such act or omission as to law specially declared to be fraudulent.

Example: Amit sells a piece of land to Sonal, claiming it has no legal disputes
pending against it, whereas he knows there is an ongoing legal case challenging
ownership. Sonal discovers the truth after purchasing the land and can sue Amit for
fraud under Section 17 of the Indian Contract Act, citing his intentional
misrepresentation to induce her into the contract.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
(d) Misrepresentation (Section 18): Where a person asserts something which is not
true, though he believes it to be true, his assertion amounts to misrepresentation.
Misrepresentation may be either innocent or without reasonable ground.

Misrepresentation is misstatement of facts by one, which misleads the other who,

consequently, can avoid the contract.

According to section 18, there is misrepresentation:

1. When a person positively states that a fact is true when his information does not
warrant it to be so

2. When there is breach of duty by a person without intention to deceive which brings
an advantage to him, and loss to the other;

3. When a party causes the other party to the agreement to make a mistake as to the
subject matter.

Example: Ravi is looking to buy a car and sees an advertisement placed by Car Mart,
a local dealership. The advertisement claims that a particular used car, a 2018 model,
has only been driven 10,000 kilometres and is in excellent condition. Based on this
representation, Ravi visits Car Mart and speaks with the sales representative, Karan.

During their conversation, Karan reaffirms that the car has only been driven 10,000
kilometres and is in excellent condition with no previous accidents. Ravi, relying on
this information, agrees to purchase the car for a negotiated price of Rs. 5 lakhs.

After purchasing the car and driving it for a few days, Ravi notices some mechanical
issues and decides to have it inspected by a certified mechanic. The mechanic
discovers that the odometer has been tampered with and the actual mileage is closer to
50,000 kilometres. Additionally, the mechanic finds signs of previous repairs
indicating that the car had been in a minor accident.

(e) Mistake (Section 20): Mistake refers to an erroneous belief held by both parties
regarding a fact or circumstance that is crucial to the contract.
Section 20 applies when both parties to a contract are under a mistake as to a matter of
fact essential to the agreement. This means both parties have a mistaken
understanding of an important fact related to the contract.

If there is a mutual mistake of fact, the agreement may be declared void by either
party. This means the contract is considered null and void from the beginning, as there
was no genuine meeting of minds on the essential terms.

The mistake must relate to a fact, not to law or opinion. It should be a fundamental
misunderstanding about a fact that is central to the contract’s purpose or performance.

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Example: Arun agrees to sell his antique watch to Priya, believing it to be a rare
limited edition worth Rs. 1 lakh. Priya, too, agrees to buy it at this price, assuming it's
a rare find. However, both parties are mistaken—the watch is a replica worth only Rs.
10,000.

A Unilateral mistake, that is to say, mistake of one party, does not render the
agreement void. (Section 22)

Distinction Between Coercion and Undue Influence

Basis Coercion Undue Influence
Coercion is an act where force is It is an act of influencing the will of
used as a tool for making a party a person by another
Meaning
who is generally unwilling to come
into a contract
Nature of It is regarded as criminal offence It is not regarded as a criminal
offence offence
Relationship There is no established relationship There is an already established
of between the contracting parties relationships between the
Contracting contracted parties i.e., fiduciary
Parties relationship
Threat, physical violence or force Psychological pressure aur
Actions subjecting a person to social
pressure or dilemma
To force a person to enter into a To take advantage of the other
contract with the other party parties position by having an ill
Aim
usually for the benefit of the other intention
party
Burden of Lies between aggrieved party Lies with the party who is in a
Proof dominating position
A threatens to Kill B, if C does not A tells B to sell his property by
Example sell his property to him. Here, A is creating mental pressure.
forcing C

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Distinction Between Fraud and Misrepresentation
Basis Fraud Misrepresentation
Wrongful or Criminal deception The action/ offense of giving a
Meaning intended to result in financial / false/misleading account of nature
personal gain of something
The person who is committing The person who is making wrong
Knowledge mistake or making wrong statement believe that it may be
of falsehood statement knows, he is doing true
wrong
Contract is voidable even though The contract is not voidable if the
Means of
the aggrieved party have the means aggrieved party had the means of
discovering
of discovering the truth with discovering the truth of ordinary
the truth
ordinary diligence diligence
The injured party can reject the The injured party is entitled to
Available contract and claim damages reject the contract/ sue for
remedy restitution, but cannot claim the
damages
To deceive the other party by There is no such intention to
Intention
hiding the truth deceive the other party

Lawful Object and Lawful Consideration:

“Object means purpose or design”.

Lawful object: The object for which the agreement has been entered into must not be;
a. Fradulent b. Illegal c. Immoral d. Opposed to the public policy e. Must not imply
injury to the person/ property of another.

Lawful Consideration: The consideration of an agreement is lawful unless it is

forbidden by law or it would defeat the provisions of any law or is fraudulent or
involves/implies injury to a person or property of other.

Unlawful object: The object of an agreement is unlawful if it is;

a. Fradulent b. Illegal c. Immoral d. Opposed to the public policy e. Must not imply
injury to the person/ property of another.

Unlawful Consideration: The consideration of an agreement is unlawful if it is

a. forbidden by law b. it would defeat the provisions of any law c. Fraudulent d.
involves/implies injury to a person or property of other e. immoral f. opposed to the
public policy.

There are 7 circumstances which would make consideration as well as an object

unlawful:

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
1. Forbidden by law: Acts forbidden by law are those which are punishable under
any statute as well as those prohibited by regulations or orders made in exercise of the
authority conferred by the legislature.

2. Defeat of the provision of law: It refers to a situation where the purpose or intent
of a legal provision is undermined or thwarted, either intentionally or unintentionally,
by certain actions, circumstances, or arrangements.

3. Defeat of any rule for the time being in force in India: It refers to actions or
circumstances that undermine or circumvent a specific rule or regulation that is
currently applicable and enforceable under Indian law
Example: A construction company, in order to expedite completion and reduce costs,
deliberately violates building safety regulations by using substandard materials and
ignoring structural integrity requirements. This action defeats the rules and standards
set forth by local building codes and safety regulations, potentially endangering the
safety of occupants and undermining the regulatory framework aimed at ensuring safe
construction practices in India.

4. Fraudulent: The following is an example of consideration or object is unlawful on

the ground of fraud
a. A, an agent for a zamindar agrees for money without the knowledge of his
principal, to obtain for B, a lease of land belonging to his principal. The agreement
between A and B is void, as the consideration is fraudulent.

5. Injury to the person or property of another: The general term “injury” means
criminal or wrongful harm.
a. An agreement to print a book in violation of another’s copyright is void, as the
object is to cause injury to the property of another. It is also void as the object of the
agreement is forbidden by law relating to copyright.

b. A promises to repay his debt by doing manual labour daily for a special period and
agrees to pay interest at an exorbitant rate in case of default. Here A’s promise to
repay by manual labour is the consideration for the loan, and this consideration is
illegal as it imposes what, in substance, amounts to slavery on the part of A.

6. Immoral: The following is an example of agreements where the object or

consideration is unlawful, being immoral:
A contract between two parties where one agrees to pay the other for smuggling
contraband goods into the country would be considered immoral under the Indian
Contract Act. Such a contract promotes illegal activities and would be unenforceable
in Indian courts due to its immoral nature.

7. Agreement opposed to public policy: refers to a contract or agreement that is

considered harmful or detrimental to the public interest. Such agreements are
generally deemed unenforceable by law.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Other Circumstances

a. Trading with enemy

b. Stifling prosecution
c. Champerty & maintenance
d. Interference with the course of justice
e. Marriage brokerage contracts
f. Interest against obligation
g. sale of public offices
h. agreement for the creation of monopolies
i. agreement in restraint of marriage
j. agreement in restraint of trade
k. agreement in restraint of legal proceedings

Agreements expressly declared void

1. Consideration unlawful in part: An agreement where the consideration or object
involves unlawful activities in part is void. Even if only a portion of the consideration
or object is illegal, the entire agreement becomes unenforceable.

Example: A agrees to sell a piece of land to B for Rs. 50 lakhs, of which Rs. 10 lakhs
are paid openly and Rs. 40 lakhs are to be paid secretly to evade taxes. Here, the
agreement is void because part of the consideration (Rs. 40 lakhs) involves an
unlawful act (tax evasion).

2. Agreement – the meaning of which is uncertain (section 29): An agreement is

void if its meaning is uncertain, vague, or indeterminate in essential aspects such as
subject matter, quantity, price, or time of performance.

Example: A agrees to sell "a reasonable quantity of apples" to B without specifying

the exact quantity. This agreement is void because the quantity of apples to be sold is
uncertain and not defined clearly.

3. Wagering agreement: A wagering agreement is one where parties bet on the

outcome of an uncertain event, and neither party has any interest in the event other
than the bet itself. Such agreements are void because they do not create any valuable
consideration.

Example: A and B bet Rs. 10,000 on the outcome of a cricket match between India
and Australia. This agreement is void as it is purely based on chance, and neither party
has any interest in the cricket match other than the bet.

4. Speculative transactions: A speculative transaction is one where parties agree to

buy or sell goods or securities without intending to take actual delivery or possession
of the goods or securities. Such agreements are void because they do not involve
genuine intent to trade.
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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
Example: A agrees to buy 100 shares of XYZ Company from B at a specified price in
the future, purely speculating on the price movements without intending to actually
purchase the shares. This agreement is void because it is speculative and does not
involve genuine intent to trade in shares.

5. Wager and collateral transactions: Wager and collateral transactions involve a

primary transaction (such as a loan) that is conditioned upon the occurrence of a
contingency (like winning a bet). These agreements are void because they are linked
to uncertain events beyond the control of the parties.

Example: A lends Rs. 1 lakh to B at an interest rate of 20% per month, with the
condition that if B wins a lottery within six months, he will pay back Rs. 2 lakhs;
otherwise, he will pay back only Rs. 1 lakh. This agreement is void because the
repayment of the loan is contingent on the uncertain event of winning a lottery.

Performance of contracts
The Parties to a contract must either perform, or offer to perform, their respective
promises unless such performance is dispensed with or excused under the provisions
of the contract act or of any other law. Promises bind the representatives of the
promiser in case of death of such promisor before performance, unless a contrary
intention appears from the contract (section 37).

Examples: A promises to deliver goods to B on a certain day on payment of Rs.1,000.

A die before that day. A’s representatives are bound to deliver the goods to B, and B
is bound to pay the Rs.1,000 to A’s representative.

A promises to paint a picture for B by a certain day, at a certain price. A die before the
day. The contract cannot be enforced either by A’s representatives or by B.

The performance may be actual or offer to perform.

Actual performance: Where a party to a contract has done what he had undertaken to
do or either of the parties have fulfilled their obligations under the contract within the
time and in the manner prescribed.

Example: X borrows Rs.5,000 from Y with a promise to be paid after 1 month. X

repays the amount on the due date. This is actual performance.

Offer to perform or attempted performance or tender of performance: It may happen

sometimes when the performance becomes due, the promisor offers to perform his
obligation but the promise refuses to accept the performance.

Example: P promises to deliver certain goods to R. P takes the goods to the appointed
place during business hours but R refuses to take the delivery of goods. This is

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
attempted performance as P, the promisor has done what he was required to do under
the contract.

By Whom contract may be performed?

1. Promisor himself: If there is something in the contract to show that it was the
intention of the parties that the promise should be performed by the promisor himself,
such promise must be performed by the promisor. This means contracts which involve
the exercise of personal skill or diligence, or which are founded on personal
confidence between the parties must be performed by the promisor himself.

Example: A promises to paint a picture for B and this must be performed by the
promisor himself.

2. Agent: Where personal consideration is not the foundation of a contract, the

promisor or his representative may employ a competent person to perform it.

3. Representatives: A contract which involves the use of personal skill or is founded

on personal consideration comes to an end on the death of the promisor. As regards
any other contract the legal representatives of the deceased promisor are bound to
perform it unless a contrary intention appears from the contract (section 37, para 2).
But their liability under a contract is limited to the value of the property they inherit
from the deceased.

4. Third persons: When a promisee accepts performance of the promise from a third
person, he cannot afterwards enforce it against the promisor.

Example: A received certain goods from B promising to pay Rs.10,000/-. Later on, A
expressed his inability to make payment. C, who is known to A, pays Rs.6,000/- to B
on behalf of A. However, A was not aware of the payment. Now B is intending to sue
A for the amount of Rs.10,000/- which is not possible. B can sue only for the balance
amount i.e., Rs.4,000/- and not for the whole amount.

5. Joint Promisors: When two or more persons have made a joint promise, then
unless a contrary intention appears from the contract, all such persons must jointly
fulfill the promise. If any of them dies, his legal representatives must, jointly with the
surviving promisors, fulfill the promise. If all of them die, the legal representatives of
all of them must fulfill the promise jointly. (section 42).

Examples:

a. A promises to B to pay Rs.1,000/- on delivery of certain goods. A may perform the

promise either himself or causing someone else to pay the money to B. If A dies
before the time appointed for payment, his representative must pay the money or
employ some other person to pay the money. If B dies before the time appointed for

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
 the delivery of goods, B's representative shall be bound to deliver the goods to A and
A is bound to pay Rs.1,000/- to B's representative.

b. A promises to paint a picture for B or a certain price. A is bound to perform the

promise himself. He cannot say some other painter to paint the picture on his behalf.
If A dies before painting the picture, the contract cannot be enforced either by A's
representative or by B.

c. A delivered certain goods to B for a promise of Rs.5,000/-. Later on, B expresses

his inability to clear the dues. C, who is known to B, pays Rs.2,000/- to A on behalf of
B. Before making this payment, C did not tell B about it. Now A can sue B only for
the balance and not the whole amount.

Rights of Joint Promises

"When a person has made a promise to two or more persons jointly, then unless a
contrary intention appears from the contract, the right to claim performance rests, as
between him and them, with them during their joint lives, and after the death of any of
them with the representatives of such deceased person jointly with the survivor or
survivors, and after the death of the last survivor, with the representatives of all
jointly".
Example: A, in consideration of Rs.5,000/- lent to him by B and C, promises B and C
jointly repay the sum with interest on specified day but B dies. In such a case right to
demand payment shall rest with B's representatives, jointly with C during C's lifetime,
and after the death of C, with the legal representatives of B and C jointly.

Distinction Between Succession and Assignment

Basis Succession Assignment

Succession refers to the transfer of Assignment is the transfer of a
rights and obligations of a party to contractual right from one party
1. Nature of a contract upon their death or (assignor) to another (assignee) with
Transfer incapacity. It happens the consent of the original contracting
automatically and by operation of party. It requires the consent of all
law. parties involved.
Succession occurs automatically Assignment is a voluntary act where
upon the death or incapacity of a the assignor decides to transfer their
2. Automatic
party to the contract, without the rights under the contract to another
vs. Voluntary
need for any specific action by the party with the consent of all relevant
parties involved. parties.
It primarily applies in cases of It can apply to any contractual right,
personal rights or obligations that whether personal or otherwise, unless
3. Applicability
are not purely personal in nature. the contract specifically prohibits
assignment.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
 Upon succession, the rights and The assignee steps into the shoes of
obligations of the deceased or the assignor and assumes the rights
4. Legal incapacitated party pass to their and benefits under the contract.
Implications legal heirs or representatives However, the original party (assignor)
automatically. may still be liable unless expressly
released by the other party.
Succession is generally not Unless specifically prohibited by the
revocable as it happens contract or the law, assignment can
5. Revocability automatically upon a certain event usually be revoked or amended by
(like death or incapacity). mutual agreement of the parties
involved.

Time and place for performance of the promise

The law on the subject is contained in sections 46 to 50 provisions where of are
summarised below:

(i) if no time is specified in a contract for the performance of the promise, the promise
must be performed within reasonable time. The expression reasonable time is to be
interpreted having regard to the fact and circumstances of a particular case.

(ii) if a promise is to be performed on specified date but the hour is not mentioned, the
promisor may perform it at any time during the usual hours of business, on such day.
For example, if the delivery of goods is offered say after sunset, the promisee may
refuse to accept delivery, for the usual business hours are, between 10 a.m. And 5:00
p.m. Moreover, that delivery must be made at the usual place of business.

(iii) when no place is fixed for the performance of a promise, it is the duty of the
promise sir to ask the promisee to fix a reasonable place for the performance of the
promise.

(iv) where the promiser has not undertaken to perform the promise without an
application by the promisee, and the promise is to be performed on a certain day it is
the duty of the promisee to apply for performance at a proper place and within the
usual hours of business.

Reciprocal Promises
Reciprocal promises are promises that form the basis of a contract where:

One party makes a promise to do something if the other party also makes a promise to
do something; or One party makes a promise to abstain from doing something if the
other party also makes a promise to abstain from doing something.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
In simpler terms, reciprocal promises are mutual promises made by parties to a
contract, where each party agrees to do something or to refrain from doing something
in exchange for the other party's promise.

Performance of reciprocal promises

1. General Observations: Reciprocal promises are promises that form the basis of a
contract where each party agrees to do something or abstain from doing something in
exchange for the other party's promise. The Act provides rules for the performance of
such promises to ensure fairness and enforceability.

2. Simultaneous Performance of Reciprocal Promises (Section 51)

Example: Sale of Goods

• Situation: A agrees to deliver goods to B on January 1st, and B promises to

pay the price on the same date.
• Rule: Unless the contract expressly or by implication requires otherwise, both
parties are bound to perform their promises simultaneously.
• Explanation: In this scenario, A's obligation to deliver the goods and B's
obligation to pay the price are both due on January 1st. Neither party can
demand performance from the other until they are ready and willing to perform
themselves.

3. Performance of Reciprocal Promises Where the Order of Performance is

Expressly Fixed (Section 52)

Example: Construction Contract

• Situation: A is contracted to build a house for B. The contract specifies that A

will complete the foundation work by June 1st, and B will make the first
payment upon completion of the foundation work.
• Rule: Each party must perform their promise according to the sequence
specified in the contract.
• Explanation: Here, A must finish the foundation work by June 1st, and only
then can B be required to make the payment. The order of performance is
crucial, and any deviation would be a breach of contract.

4. Performance of Reciprocal Promises When the Order of Performance is Fixed

by Implication (Section 53)

Example: Employment Contract

• Situation: A hires B as an accountant with a salary due at the end of each

month. B is obligated to submit a report of monthly accounts by the 25th of
each month.

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
 • Rule: Even if the contract does not explicitly state the order, if one party is to
perform first by the nature of the contract, the other party's performance is due
subsequently.
• Explanation: In this case, B must submit the report by the 25th of each month,
after which A will pay the salary by the end of the month. The implication here
is that B's performance (submitting the report) precedes A's obligation (paying
the salary).

5. Effect of One Party Preventing Another from Performing Promise (Section 54)

Example: Lease Agreement

• Situation: A lease an apartment to B. The lease contract specifies that B must

pay the rent by the 5th of each month, and A must provide maintenance
services by the 10th of each month.
• Rule: If one party prevents the other from performing their promise, the
affected party may seek compensation for any losses incurred due to the
prevention.
• Explanation: If A refuses to perform maintenance services, thereby preventing
B from using the apartment properly, B can claim compensation for any
inconvenience or damages suffered as a result of A's prevention of
performance.

Impossibility of performance
Section 56 contemplates various circumstances under which agreement maybe void,
since it is impossible to carry it out.

"An agreement to do an act impossible in itself is void. A Contract to do an act which,

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

1. Impossibility existing at the time of contract: When the parties agree upon doing
of something which is obviously impossible in itself the agreement would be void.
Impossible in itself means impossible in the nature of things. The fact of impossibility
maybe and may not be known to the parties.

(i) if known to the parties: It would be observed that and agreement constituted, quite
unknown to the party, may be impossible of being performed and hence void. For
example, B promises to pay sum of Rs.5,000/- if he is able to swim across the Indian
Ocean from Bombay to Aden within a week. In this case, there is no real agreement,
since both the parties are quite certain in their mind that the act is impossible of
achievement. Therefore, the agreement, being impossible in itself, is void.

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(ii) if unknown to the parties: Where both the promisor and promisee ignorant of the
impossibility of performance, contract is void.

(iii) if known to the promisor only: Where at the time of entering into a contract, the
promisor alone knows about the impossibility of performance, aur even if he does not
know though he should have known it with reasonable diligence, the promising is
entitled to claim compensation for any loss he suffered on account of non-
performance.

2. Supervening impossibility: When performance of promise become impossible or

illegal by occurrence of an expected even or a change of circumstances beyond the
contemplation of parties the contract becomes void. e.g. Change in law, etc.,

Contracts which need not be performed

The law is contained in sections 62 to 67 of the Contract Act.

" If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed" (section 62)

a. Effect of Novation (Section 62)

Example: Novation of Debt

• Situation: A owes B a debt of Rs. 50,000. A enters into a new agreement with
B, where C agrees to repay the debt to B instead of A, and B agrees to
discharge A from the debt.
• Rule: Novation occurs when a new contract substitutes an existing contract,
either by replacing an obligation with a new obligation or by substituting new
parties.
• Explanation: In this case, after novation, A is no longer obligated to repay the
debt to B because C has taken over that obligation through the new agreement.
The original contract's performance (A repaying B) is no longer necessary due
to the novation.

b. Effect of Rescission (Section 63)

Example: Rescission of Contract

• Situation: A contracts with B to sell B a car for Rs. 5,00,000. Before the
delivery of the car, both parties agree to rescind (cancel) the contract.
• Rule: Rescission of a contract extinguishes the rights and obligations of the
parties under that contract.
• Explanation: Once the contract is rescinded by mutual agreement, neither
party is required to perform their obligations under the original contract. A

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 does not have to deliver the car, and B does not have to pay Rs. 5,00,000. The
contract is treated as if it never existed.

c. Effect of Alteration of Contract (Section 62)

Example: Alteration of Terms

• Situation: A contracts with B to paint B's house for Rs. 50,000. After starting
the work, A and B mutually agree to change the color scheme and extend the
completion date.
• Rule: Alteration of a contract changes the terms of the original contract with
the consent of all parties involved.
• Explanation: Once the contract is altered by mutual agreement, the parties are
bound by the new terms. A is no longer obligated to perform the original
contract as initially agreed (painting in the original color scheme and by the
original deadline). Instead, A must now perform according to the altered terms.

d. Promise May Waive or Remit Performance of Promise (Section 63)

Example: Waiver of Performance

• Situation: A contracts with B to deliver goods by a specific date. Before the

due date, B informs A that delivery can be delayed due to unforeseen
circumstances, and A agrees to waive the on-time delivery requirement.
• Rule: A promisee (B) may waive or remit the performance of a promise made
to them. This means they can voluntarily give up their right to demand
performance.
• Explanation: In this case, A has the right to demand timely delivery of goods
as per the contract. However, A voluntarily chooses to waive this right and
allows B to deliver the goods later than originally agreed upon. As a result, B is
no longer obligated to perform the promise within the original timeframe.

Distinction between Novation and alteration

Basis Novation Alteration

Novation involves the substitution Alteration refers to a change in the
of an existing contract with a new terms or conditions of an existing
Nature of
contract that either replaces an contract by mutual agreement of the
Change
obligation with a new one or parties.
substitutes new parties.
Novation completely extinguishes Alteration modifies the terms of the
the original contract and creates a original contract while keeping the
Legal Effect new one in its place. It discharges basic framework intact. It does not
the obligations under the original discharge the original contract but
contract. changes its terms as agreed upon.

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 Novation requires the consent of Alteration also requires the mutual
Consent all parties involved: the original consent of all parties to the contract
Requirement parties to the contract and any new to change its terms.
parties introduced.
Novation can involve changes to Alteration typically involves changes
the parties involved, the to specific terms or conditions of the
Scope of obligations, or other fundamental contract, such as price, quantity, time
Change aspects of the original contract. of performance, etc., without
fundamentally changing the nature
of the contract.
Novation is explicitly recognized Alteration is generally recognized
under Section 62 of the Indian under the principle of mutual consent
Legal
Contract Act as a legal means to and is governed by contract law
Recognition
substitute an existing contract with principles without specific statutory
a new one. provision.

Restoration of benefit under a voidable contract (section 64)

The law on the subject is " when a person at whose option a contract is voidable
rescinds it, the other party there to meet not perform any promise therein contained in
which he is the promisor. The party rescinding a voidable contract shall, if he has
received any benefit there under from another party to such contract, restore such
benefit, so far as maybe, to the person from whom it was received”.

Example: An Insurance Company may rescind a policy on the ground that material
fact has not been disclosed. When it does so, the premium collected by it in respect of
the policy reduced by the amount of expenses incurred by it in this connection must be
paid to the policy holder.

Discharge of a contract
The contract may be discharged either by an act of the parties or by an operation of
law in the different base set out below:

1. Discharge by performance: It takes place when the parties to the contract fulfill
their obligations arising under the contract within the time and in the manner
prescribed.

Discharge by performance maybe (1) actual performance or (2) attempted

performance.

Actual performance is said to have taken place, when each of the parties has done
what he had agreed to do under the agreement.

When the promisor offers to perform his obligation, but the promisee refuses to accept
the performance, iT amounts to attempted performance or tender.
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Example: A contracts to sell his car to B on the agreed price, as soon as the car is
delivered to B and B pays the agreed price for it, the contract comes to an end by
performance.

2. Discharge by mutual agreement: Section 62 of the Indian contract act provides if

the parties to a contract agree to substitute a new contract for it, or to refund or remit
or alter it, the original contract need not be performed. The principles of novation,
rescission, alteration and remission.

Example: A owes B Rs.10,000/-. A enters into an agreement with B and mortgage his
(A's), estates for Rs.5,000/- in place of the Debt of Rs.10,000/-. This is a new contract
and extinguishes the old. A owes B Rs.50,000/-. A Pays to B Rs. 30,000 who accepts
it in full satisfaction of the debt. The whole is discharged.

3. Discharge by impossibility of performance: The impossibility may exist from the

very start. In that case it would be impossibility ab initio. Alternatively, it may
Supervene. Supervening impossibility may take place owing to

(a) unforeseen change in law (b) destruction of the subject matter essential to that
performance (c) the non-existence or non-occurrence of particular state of things,
which was naturally contemplated for performing the contract, as a result of some
personal incapacity (e) the declaration of a war

Example: (i). A agrees with B to discover a treasure by magic. The agreement is void
due to inital impossibility.

(ii). A and B contract to marry each other. Before the time fixed for the marriage, A
goes Mad. The contract becomes void.

(iii). A contracts to act at a theatre for six months in consideration of a sum paid in
advance by B. On several occasions A is too ill to act. The contract to act on those
occasions becomes void.

4. Discharge by lapse of time: A contract should be performed within a specified

period as prescribed by the limitation act, 1963. If it is not performed and if not, action
is taken by the promisee within the specified period of limitation, he is deprived of
remedy at law.

Example: If a creditor does not file a Suit against the buyer for recovery of the price
within 3 years, the debt becomes time barred and hence irrecoverable

5. Discharge by operation of law: A contract may be discharged by operation of law

which includes by death of promisor, by insolvency etc.,

Example: A took a land on lease from B. Subsequently, A purchase is that very land.
Now, A becomes the owner of the land and the ownership rights being superior to
rights of a Lessee, the earlier contract of lease stands terminated.
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6. Disturbed by breach of contract: Breach of contract maybe actual breach of
contract or anticipatory breach of contract. If one party defaults in performing his part
of the contract on the due date, he is said to have committed Breach thereof. When on
the other hand, a person repudiates a contract before the stipulated time for its
performance has arrived, he is deemed to have committed anticipatory Breach.

Example: A contract to marry B. Before the agreed date of marriage, he marries C. B

is entitled to sue A for breach of promise.

7. The promise may dispense with or remit performance of the promise made to him
or may accept any satisfaction he thinks fit. In the first case, the contract will be
disturbed by remission and in the second by Accord and satisfaction (section 63)

8. When a promisee neglects or refuses to afford the promisor reasonable facilities for
the performance of the promise, the promisor is excused by such neglect or refusal
(section 67)

Breach of Contract
Anticipatory breach of contract, also known as anticipatory repudiation, occurs when
one party to a contract clearly indicates, either by words or actions, that they do not
intend to fulfill their contractual obligations before the time of performance arrives.
This type of breach allows the other party to consider the contract as breached
immediately, rather than waiting for the actual time of performance to arrive.

Examples: (i) A hires B to construct a new office building by a specified date. Before
the construction is due to start, B informs A that they will not be able to start the
project on the agreed-upon date due to financial difficulties and lack of resources.

(ii) X agrees to sell Y a rare piece of artwork on a specific date for a specified price. A
week before the agreed-upon date, X tells Y that they have decided to sell the artwork
to someone else for a higher price.

Actual breach of contract: It occurs when one party to a contract fails or refuses to
perform their obligations under the contract at the time specified for performance, or
by their conduct indicates that they do not intend to perform their obligations at all.
This type of breach occurs after the time for performance has arrived or when it
becomes clear that performance will not be forthcoming.

Actual breach of contract may be committed:

a. At the time when the performance of the contract is due

Example: A Agrees to deliver 100 bags of sugar to B on 1st July 2024. On the said
day, he fails to supply 100 bags of sugar to B. This is actual breach of contract. The
breach has been committed by A at the time when the performance becomes due.

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b. During the performance of the contract: Actual breach of contract also occurs
when during the performance of the contract, one party fails or refuses to perform his
obligation under it by express or implied act.

Example: A company (Employer) hires B (Employee) to start working on a specific

project by a certain date. B signs the employment contract agreeing to start work on
that date. However, on the agreed-upon date, B does not show up and does not
communicate any reason for their absence

Liability for damages

Breach of contract entitles the injured party to file a suit for damages, which are the
monetary compensation awarded to a person by the court. Thus, the liability for the
damages may be classified as under:

1. Liability for Ordinary Damages: Ordinary damages, also known as general

damages, are those that naturally arise in the usual course of events from the breach of
contract. They are typically foreseeable losses that the party in breach should have
anticipated at the time of entering into the contract.

Example:

• Scenario: A contracts to deliver goods to B by a specific date. A fails to deliver

the goods on time, causing B to lose a resale opportunity and incur financial
losses.
• Ordinary Damages: B can sue A for the financial losses directly resulting from
the breach, such as the difference between the resale price B could have
obtained and the market price they eventually sold the goods for.

2. Liability for Special Damages: Special damages, also known as consequential

damages, are losses that do not naturally flow from the breach of contract but arise as
a result of special circumstances known to both parties at the time of contract
formation.

Example:

• Scenario: A contracts with B to repair B's antique clock. A fails to complete the
repair on time, causing B to miss an important event where the clock was
supposed to be displayed.
• Special Damages: B can claim for the loss of reputation or business
opportunities directly resulting from A's delay in repairing the clock, provided
that A was aware of the event's importance to B at the time of entering into the
contract.

3. Liability to Pay Vindictive or Exemplary Damages: Vindictive or exemplary

damages, also known as punitive damages, are awarded by the court to punish the

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party in breach for their willful or malicious conduct, rather than to compensate the
innocent party for their losses.

Example:

• Scenario: A sells defective goods to B despite knowing about the defects and
their potential harm. B incurs losses due to the defects and brings a lawsuit
against A.
• Exemplary Damages: If the court finds that A acted willfully or with gross
negligence in selling defective goods, the court may award B exemplary
damages in addition to compensatory damages. The purpose is to deter A and
others from similar misconduct in the future.

4. Liability to Pay Nominal Damages: Nominal damages are symbolic damages

awarded by the court when the innocent party proves a breach of contract but fails to
prove any actual financial loss or harm.

Example:

• Scenario: A contracts to deliver goods to B by a specific date. A fails to deliver

the goods on time, but B suffers no financial loss or harm as a result of the
delay.
• Nominal Damages: Despite no actual loss, B can still sue A for nominal
damages as a recognition of A's breach of contract. The amount awarded may
be small, such as a nominal sum like Rs. 1.

5. Damages for Deterioration Caused by Delay: Damages for deterioration caused

by delay are awarded when the delay in performance causes physical damage or
deterioration to the subject matter of the contract.

Example:

• Scenario: A contract to transport perishable goods from one city to another for
B. Due to A's delay in transportation, the perishable goods spoil and become
unsellable.
• Damages for Deterioration: B can claim damages to compensate for the loss
incurred due to the spoilage of goods caused by A's delay. The damages
awarded would cover the value of the spoiled goods that could have been sold
if delivered on time.

How to calculate the damage/ Remedies to breach of contract

Under a contract for the sale of goods, the measure of damages, when the buyer
breaks the contract, he is the difference between the contract price and the market
price at the date of breach. If the contract is broken by the seller, the buyer is entitled

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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
to recover from the seller the difference between the market price and the contract
price at the date of breach.

Duty to mitigate the loss: The party who suffers in consequence of the breach of
contract must take all reasonable steps to mitigate the loss from such a breach; he
cannot claim as damages any loss which he has suffered due to his own negligence.

Besides claiming damages as remedy for the breach

of contract, the following remedies are also
available:
(i) Rescission of Contract: Rescission of contract means the cancellation or
annulment of the contract. It restores the parties to the position they would have been
in if the contract had never been made.

Example:

• Scenario: A contract to sell a piece of land to B. Before the sale is completed,

A discovers that there is a legal dispute over ownership of the land, which A
did not disclose to B.
• Rescission: B can seek rescission of the contract due to A's failure to disclose
the legal dispute. Rescission would cancel the contract and restore B to the
position they were in before entering into the contract, possibly with the return
of any consideration (money or other property) provided to A.

(ii) Suit Upon Quantum Meruit: Quantum meruit means "as much as is deserved." It
allows a party to claim payment for the value of work done or services rendered even
though no formal contract existed or the contract has been breached.

Example:

• Scenario: A hires B to renovate A's house under a verbal agreement. B

completes half of the renovation work but A refuses to pay B the agreed
amount.
• Quantum Meruit: B can file a suit upon quantum meruit to claim payment for
the value of the work already completed. The court will assess the reasonable
value of B's services and award B payment accordingly, despite the lack of a
formal written contract.

(iii) Suit for Specific Performance: Specific performance is a remedy where the
court orders the breaching party to fulfill their obligations under the contract as
agreed, rather than awarding monetary damages.

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Example:

• Scenario: A contract to sell a unique piece of artwork to B. Before the sale is

completed, A changes their mind and refuses to transfer ownership of the
artwork to B.
• Specific Performance: B can file a suit for specific performance, asking the
court to compel A to fulfill the contract by transferring the artwork to B. This
remedy is typically sought in contracts involving unique items or where
monetary compensation is inadequate.

(iv) Suit for Injunction: An injunction is a court order that restrains a party from
doing a certain act or compels them to perform a specific act. It prevents the breaching
party from continuing or repeating their breach of contract.

Example:

• Scenario: A and B enter into a non-compete agreement where A agrees not to

engage in similar business activities within a specified geographic area for a
certain period. A breach the agreement by starting a competing business in the
restricted area.
• Injunction: B can file a suit for injunction, seeking a court order to prevent A
from continuing to operate the competing business in violation of the non-
compete agreement. The injunction would restrain A from further breaching
the contract terms.

Contingent contract
A contract maybe absolute or a contingent. An absolute contract is one where the
promisor undertakes to perform the contract in any event without any condition.
Whereas section 31 of the act defines contingent contract as " a contract to do or not to
do something, if some event collateral to such contract, does or does not happen".

Example: A contracts to pay B Rs.1 lakh if B's house is destroyed by fire. This is a
contingent contract

Essentials of a Contingent Contract

1. Uncertainty of Event: A contingent contract must be based on the occurrence or
non-occurrence of a future event that is uncertain.

Explanation: The event must be uncertain at the time of making the contract. That is,
it must not be certain to happen or not happen.

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2. Event Beyond Control: The event whose occurrence or non-occurrence
determines the performance of the contract must be beyond the control of the parties
to the contract.

Explanation: Neither party should have the power to ensure that the event will or will
not happen. The event should depend on factors outside the control of the parties.

3. Legal Contract: A contingent contract must fulfill all the essential elements of a
valid contract as per the Indian Contract Act, 1872.

Explanation: It must involve an offer and acceptance, lawful consideration, competent

parties, free consent, lawful object, and be enforceable by law.

4. Future Event: The performance of the contract must depend on the happening or
non-happening of a future event.

Explanation: The event may occur or not occur in the future. The contract cannot
solely depend on past events or current conditions; it must relate to a future uncertain
event.

5. Dependency on Event: The rights and obligations of the parties under a contingent
contract are contingent upon the happening or non-happening of the specified event.

Explanation: Until the event specified in the contract occurs or fails to occur, the
parties may not be required to perform their obligations under the contract.

6. Clear and Definite Terms: The terms of the contingent contract must be clear,
definite, and not vague.

Explanation: The contract should specify clearly the nature of the event upon which
the contract depends, the obligations of the parties, and the consequences of the event
occurring or not occurring.

Quasi contract
A quasi contract, also known as a constructive contract or implied-in-law contract, is
not a true contract but a legal fiction created by courts to prevent unjust enrichment of
one party at the expense of another. It arises in situations where there is no formal
agreement between the parties, but the law imposes an obligation resembling a
contractual obligation to prevent unfairness.

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Types of Quasi Contracts
1. Supply of Necessaries (Section 68)

Explanation: A person who supplies necessaries (essential goods or services) to

another person who is incapable of contracting or to someone who is legally bound to
provide for that person is entitled to reimbursement from the property of that
incapable person.

Example:

• Scenario: A finds B unconscious in a public place and takes B to a hospital for

emergency medical treatment. B regains consciousness but has no means to pay
for the treatment.
• Quasi Contract (Supply of Necessaries): A, in providing essential medical
services to B, has a right to claim reimbursement from B's property or estate for
the reasonable expenses incurred. This is because B benefited from the
necessaries provided by A, and it would be unjust for B to receive the benefit
without compensating A.

2. Payment by an Interested Person (Section 69)

Explanation: A person who is interested in the payment of money which another is

bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the
other.

Example:

• Scenario: A contractor is hired to build a house for B. A fails to pay the

supplier of construction materials. The supplier threatens to stop delivery,
which would halt the construction. C, a friend of B, pays the supplier to ensure
the project continues.
• Quasi Contract (Payment by an Interested Person): C, by paying the supplier on
behalf of B to prevent the project's interruption, is entitled to be reimbursed by
B. Even though there was no prior agreement between C and B, C acted in B's
interest to ensure the project's progress, and fairness dictates that C should be
compensated.

3. Obligation to Pay for Non-Gratuitous Act (Section 70)

Explanation: A person who lawfully does something for another person, or delivers
something to him, not intending to do so gratuitously, and such other person enjoys
the benefit thereof, is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.

Example:
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Prof. Rajath G, Dept. of Commerce, Vidya Vardhaka Sangha First Grade College
 • Scenario: A mistakenly delivers a parcel containing valuable goods to B's
address, thinking it was meant for B. B receives the parcel and uses the goods
without realizing the mistake.
• Quasi Contract (Obligation to Pay for Non-Gratuitous Act): A can claim
compensation from B for the value of the goods delivered. Although A did not
intend to deliver the goods to B, B benefited from receiving them, and
therefore, B is obligated to compensate A for the goods or return them.

4. Finder of Lost Goods (Section 71): A person who finds goods belonging to
another and takes them into his custody, is subject to the same responsibility as a
bailee.

Example:

• Scenario: A finds a wallet containing identification and cash on the street. A

takes the wallet home and contacts the owner using the identification found
inside.
• Quasi Contract (Finder of Lost Goods): A, by taking custody of the lost wallet,
becomes a bailee (temporary custodian) of the wallet and its contents. A is
obligated to take reasonable care of the wallet and to return it to the rightful
owner. The owner of the wallet may be required to reimburse A for any
reasonable expenses incurred in preserving the wallet until it is returned.

5. Liability for money paid or thing delivered by mistake or under coercion

(Section 72): "A person to whom money has been paid, or anything delivered, by
mistake or under coercion must repay or return it".

Example: A and B jointly owe Rs.100 to C, A alone pays the amount to C, and B not
knowing this fact, pays Rs.100 over again to C. C is bound to repay the amount to B.

Wagering agreement and Contingent Contract

Wagering Agreement Contingent Contract
It is a promise to give money or money's It is a contract to do or not to do
worth upon the determination or something give some event, collateral to
ascertainment of an uncertain event. such contract does or does not happen
The uncertain event is the sole The event is only Collateral
determining factor
It is essentially of a Contingent nature It may not be of a wagering nature
A Wagering agreement is void Contingent contract is valid
The parties have no other interest in the The parties are interested in the subject
subject matter of the agreement except matter of the contract
the winning or losing of the amount of
the wager i.e., a game of chance.

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