Law of Contract I

UNIT I
- GAUTAM KUMAR
 Introduction

Introduction – Indian
Contract Law
Agenda for the class
July 23, 2024 What is contract?
Development of Contract
Law
Introduction

• The concept of contract has been known to man since the dawn
of human civilization.
• Contract law is invariably used every day, in every manner of
transaction be it large or small every now and then.
• The law of contract is applicable not only to business but also to
all day-to-day personal dealings.
• In fact, each one of us enters into a number of contracts from
sunrise to sunset.
• When a person buys a newspaper or rides a bus or purchases
goods or gives his radio for repairs or borrows a book from
library, he is actually entering into a contract.
• All these transactions are subject to the provisions of the law of
contract.
3
Introduction

• The growth of commercial and industrial culture, law

of contract acquired significance.
• Original contract law was designed to handle
agreements that was reached by persons knowing well
to each another and in case of contract between
person at a distance
• Problems posed by contract formation was evolved
over time, thus contract law apparently developed to
handle oral transactions were slowly replaced by
written documents.

4
Development of Contract Law

• When the Courts of Justice for the three presidency towns of

Calcutta, Madras and Bombay were established, the English
common law and statute law relating to contracts, as suitable to
Indian conditions, were introduced by Charters' Application of
English law.
• These laws led to many inconveniences to traditional approach
of contracting among Hindus and Mohammadans.
• To remove this difficulty the statute of 1781 empowered the
Supreme Court (Court at Calcutta) and statute of 1797
empowered the Recorders' Court (Court at Madras and
Bombay) to determine all matters of contract in case of:
• Mohammadans by the laws governing them
• In case of Hindus by the laws and usages governing them.
5
Development of Contract Law

• The effects of the statutes was to supersede

English law so far as regards Hindus and
Mohammadans in the case of contracts.
• In spite of the changes made by the Statutes of
1781 and 1799 the difficulties being faced
could not be solved properly.
• It was strongly felt that a comprehensive law
must be enacted in respect of contracts.
• Accordingly, the Indian Contract Bill was
introduced in Legislature.
Introduction – Indian Contract Law

• In the year 1861,the third law commission of British India under

the chairmanship of Sir John Romily presented the report on
contract law for India.
• The law commission submitted a draft on 28th July 1866.
• The draft contract law after several amendments was enacted as
The Act 9 of 1872 on 25th April 1872 and the INDIAN CONTRACT
ACT 1872 came into force w.e.f 1st September 1872.
• The Indian Contract Act, 1872 is one of the oldest in the Indian
law regime, passed by the legislature of pre-independence India.
• The statute contains essential principles for formation of contract
along with law relating to indemnity, guarantee, bailment, pledge
and agency.

7
What is contract?
• A contract is an agreement made between two or more
persons to do or to abstain from doing a particular act.
• A contract invariably creates a legal obligation between
the parties by which certain rights are given to one party
and a corresponding duty is imposed on the other party.
• It determines the circumstances in which the promise
made by the parties to a contract shall be binding on them
and provides for the remedies available against a person
who fails to perform his promise.
• Section 2(h) of the Act states that an agreement
enforceable by law is a contract.

8
What is contract?
• Every contract thus combines two essential elements:
• (i) agreement
• (ii) obligation.
• It creates rights and obligations between the parties to
the contract which are correlative.
• In case a party refuses to honor a contacted obligation,
it will give right of action to other party.
• Right in personam (Jus in personam)
• Example: A owes Rs. 5,000/- to B. B has right to recover Rs.
5,000/- from A.
• In this case right of B is against specific person.
9
 Definitions

Agenda for the class

July 24, 2024
Definitions

• Anson: “Legally binding agreement

between two or more person by which
rights are acquired by one or more to Act
or forbearance on the part of the other.”
• Salmond: “An agreement creating and
defining obligation between parties.”
• Pollock: “Every agreement and promise
enforceable at law is a contract.”

11
Definitions - Contract

• Section - 2(h):
• “An agreement enforceable by law is contract”
• Contract = agreement + enforceability
• Eg. = A agreed to buy 100 pen at 50 Rs/- from B
• An agreement is said to be enforceable by law if it
creates a legal obligation.
• If an agreement is not capable of creating a duty
enforceable by law, it is not a contract.
• Thus, All contracts are agreement; but all agreements
are not contracts.
12
Definitions

• Proposal / Offer:
• Section – 2(a)
• 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.

13
Definitions

• Promise
• Section- 2(b)
• When the person to whom proposal is made signifies
his assent thereto, the proposal is said to be accepted.
• A proposal when accepted becomes a promise.
• Promisor and Promisee [Section 2 (c)] – The person
making the proposal is called the ‘promisor’ and
• the person accepting the proposal is called the
‘promisee’.

14
Offer and Acceptance

15
Definitions

• Consideration
• As per Section 2(d)
• When at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or
does or abstains from doing, or promises to do or to
abstain from doing something, such act or abstinence
or promise is called a consideration for the promise.”

16
Definitions

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

• Consensus ad idem =>Lord Hannen in Smith v.

Hughes held that – “It is essential to the creation of a
contract that both parties should agree to the same
thing in the same sense”.

17
Formation of contract

18
 DISTINCTION BETWEEN
AN AGREEMENT AND A
CONTRACT
Agenda for the class
Types/Forms of Contract
July 25, 2024
DISTINCTION BETWEEN AN AGREEMENT AND A
CONTRACT

Agreement Contract

Offer and its acceptance Agreement and its

constitute enforceability constitute a
An agreement. contract.
An agreement may not create a A contract necessarily creates a
legal legal obligation.
obligation.
Every agreement may not be a All contracts are agreements.
contract
Agreement is not a concluded Contract is concluded and
or a binding on the
Binding contract. concerned parties 20
Types/Forms of Contract

1. On the Basis of Creation

• A contract may be:
• (i) made in writing or by word of mouth or
• (ii) inferred from the conduct of the parties or circumstances of the case.
• The first category of contract is termed as 'express contract’ and the second as
'implied contract’
• i) Express Contract: An express contract is one where the terms are clearly
stated in words, spoken or written.
• For example, A wrote a letter to B stating "I offer to sell my car for Rs. 30,000 to
you.” B accepts the offer by letter sent to A. This is an express contract.
• Similarly, when A asks a scooter mechanic to repair his scooter and the mechanic
agrees, it is an express contract made orally by spoken words.
21
Types/Forms of Contract
ii) Implied Contract
• A contract may be created by the conduct or acts of parties (and not by their words spoken or
written). It may result from a continuing course of conduct of the parties.
• For example: where a coolie in uniform carries the luggage of A to be carried out of railway
station without being asked by A to do so and A allows it, the law implies that A has agreed to
pay for the services of the coolie. This is a case of an implied contract between A and the coolie.
• Similarly, when A boards a D.T.C bus, an implied contract comes into being. A is bound to pay the
prescribed fare.
• There is another category of implied contracts recognized by the Contract Act known as quasi-
contracts (Sections 68 to 72).
• Strictly speaking, a quasi-contract cannot be called a contract. It is regarded as a relationship
resembling that of a contract. In such a contract the rights and obligations arise not by an
agreement between the parties but by operation of law.
• For example: A, a trader, left certain goods at B's house by mistake. B treated the goods as his
own and consumed it. In such a situation, B is bound to pay for the goods even though he has
not asked for the goods.
22
Types/Forms of Contract

2. On the Basis of Execution

• On the basis of the extent to which the contracts have been performed, we may
classify them as
• (i) executed contracts
• (ii) executory contracts
• i) Executed Contracts:
• It is a contract where both the parties have fulfilled their respective obligations
under the contract.
• For example: A agrees to sell his book to B for Rs. 30. A delivers the book to B
and B pays Rs. 30 to A. It is an executed contract.

23
Types/Forms of Contract - Executory Contracts

• ii) Executory Contracts

• It is a contract where both the parties to the contract have
still to perform their respective obligations.
• For example: A agrees to sell a book to B for Rs. 30. If the
book has not been delivered by A and B has not paid the
price. The contract is executory.

24
Types/Forms of Contract - Unilateral & Bilateral Contract

• A contract may sometimes be partly executed and partly executory.

• It happens where only one of the parties has performed his obligation.
• In the example given above, if A has delivered the book to B but B has not paid the
price. the contract is executed as to A and executory as to B.
• On the basis of execution, a contract can also be classified as unilateral or bilateral.
• A unilateral contract is one in which only one party has to perform his obligation,
the other party had fulfilled his part of the obligation at the time of the contract
itself.
• For example, A buys a ticket from the conductor and is waiting in the queue for the
bus. A contract is created as soon as the ticket is purchased. The other party is now
to provide a bus wherein he could travel.
• A bilateral contract is one in which the obligations on the part of both the parties
are outstanding at the time of the formation of the contract.
25
Agenda for the class Types/Forms of Contract
July 29, 2024
Types/Forms of Contract
3. On the Basis of Enforceability
• From the point of view of enforceability, a contract may be
• (i) valid
• (ii) void
• (iii) voidable
• (iv) unenforceable.
• i) Valid Contract
• A contract which satisfies all the conditions prescribed by law is a valid contract.
If one or more of these elements is/are missing, the contract is either void,
voidable, illegal or unenforceable.

27
Types/Forms of Contract
• ii) Void Contract
• According to Section 2 (j) A contract which ceases to be enforceable by law becomes void.
• It is a contract without any legal effects and is a nullity.
• You should note that a contract is not void from its inception. It is valid and binding upon the parties
when made, but subsequent to its formation, due to certain reasons, it becomes unenforceable and
so treated as void.
• A contract may become void due to impossibility of performance, change of law or some other
reasons.
• For example, A promised to marry B. Later on, B dies. This contract becomes void on the death of B.
• A void contract should be distinguished from void agreement.
• Section 2(g) says that an agreement nor enforceable by law is said to be void. In the case of void
agreement, no contract comes into existence. Such an agreement confers no rights on any person
and creates no obligations. It is void ab-initio i.e., from the very beginning.
• For example: an agreement with a minor is void because a minor is incompetent to contract.
28
• Now it should be clear that a void agreement is not the same thing as
a void contract.
• A void agreement never matures into a contract, it is void from the
very beginning.
• A void contract, on the other hand, was valid when it was entered
into, but subsequently, because of one reason or the other, became
void.
• A contract cannot be void ab-initio, it is only an agreement which can
be void ab-initio.

29
Types/Forms of Contract

iii) Voidable Contract:

• According to Section 2(i) of the Contract Act, An agreement which is enforceable by
law at the option of one or more of the parties thereon, but not at the option of the
other or others, is a voidable contract.
• Thus, a voidable contract is one which can be set aside or repudiated at the option of
the aggrieved party. Until it is set aside or avoided by the party entitled to do so, it
remains a valid contract.
• A contract is usually treated as voidable when the consent of a party has not been free
i.e., it has been obtained either by coercion, undue influence, misrepresentation or
fraud.
• The contract is voidable at the option of the party whose consent has been so caused.
• For example, A threatens to shoot B if he does not sell his new scooter to A for Rs.
5,000. B agrees. Here the consent of B has been obtained by coercion. Hence, the
contract is voidable at the option of B, the aggrieved party.
30
 Types/Forms of Contract
Void Agreement Voidable Contract

It is void from the very beginning. It remains valid till it is repudiated

by the aggrieved party.
A contract is void if any essential element A contract is voidable if the consent
of a of a party is not free.
valid contract (other than free consent) is
missing.
It cannot be enforced by any party. If the aggrieved party so decide, the
contract
may continue to be valid and
enforceable.
Third party does not acquire any rights. An innocent party in good faith and for
consideration acquires good title before
the
contract is avoided.
Lapse of time will not make it a valid If it is not avoided with in reasonable 31
contract, time, it
Unenforceable contract

• It is a contract which is actually valid but cannot be enforced because of some

technical defect.
• This may be due to non-registration of the agreement, nonpayment of the
requisite stamp fee, etc.
• Sometimes, the law requires a particular agreement to be in writing. If such
agreement has not been put in writing, it becomes unenforceable.
• For example, an oral agreement, for arbitration are unenforceable because the
law requires that an arbitration agreement must be in writing.

32
Agenda for the class Essentials of valid
July 30, 2024 contract
Proposal/offer and
Invitation to offer
Intention to create legal
relationship
Essentials of valid contract
• 1) Proper offer and its proper acceptance
• 2) Intention to create legal relationship
• 3) Free consent
• 4) Capacity of parties to contract
• 5) Lawful consideration
• 6) Lawful object .
• 7) Agreement not expressly declared void
• 8) Certainty of meaning
• 9) Possibility of performance
• 10) Legal formalities

34
Intention to create legal
relationship

• There must be an intention among the parties to create a legal relationship, If an

agreement is not capable of creating a legal obligation it is not a contract.
• In the case of Balfour v. Balfour (1919), intention not to create legal relationship was
found to be implied.
• Therein, the defendant, a husband employed in Ceylon, had promised to send 30
pounds to his wife, the plaintiff till she was in England (on account of illness).
• The husband failed to send the money and the wife sued for the same.
• Atkin, LJ delivered the judgment. He held that the agreement in the case was not
intended to create a legal relationship.
• There are certain agreements which are not contracts in the legal sense viz. an
agreement to go for a walk etc. An agreement between a husband and a wife generally
lacks such an intention (to create legal relationships) as the parties (husband and wife)
can be presumed not to have intended to be attended by legal consequences.
35
Jones v. Padavatton (1969)

• Later on, the above rule (between husband and wife) was extended to other close
relationships in the case of Jones v. Padavatton (1969).
• Therein, Mrs. Jones persuaded her widowed daughter to leave her job at Washington
and offered to pay her a monthly allowance for the study in England.
• The daughter got admitted at the bar in 1962.
• In 1964, Mrs. Jones bought a house in England and rented a part of it, the other part
being occupied by the daughter. The rent was to go to the daughter as her allowance.
• Later on, on account of some difference, Mrs. Jones sued her daughter for eviction.
The daughter contended that on account of her promise Mrs. Jones was legally
bound to pay the allowance till she completed her studies.
• It was held that as the contract had not been reduced to writing nor the duration for
which she was to be maintained had been mentioned  No intention to create a legal
relationship could be implied.
36
Merrit v. Merrit (1970)

• However, there is nothing that prevents persons in close relationship from

entering into a legal relationship.
• In Merrit v. Merrit (1970) the husband and wife were joint owners of a house
which was subject to mortgage to a building society.
• Husband went to live with another woman and by signing a note agreed to
transfer the house property to wife if she cleared all outstanding amount with
respect to the house.
• Here, it was held that there was a clear intention to create a legal relationship.
• Conclusion – Thus, it is the intention (to be tested on the criterion of objectivity)
that is material. The intention can be inferred from a variety of facts. But
generally in case of social relationships (particularly close relationships), such
intention is presumed to be lacking unless the contrary is proved.

37
• Tests
• (1) Intention important - To create legal relationship.
• (2) Objective test - Facts to be seen.
• (3) Intention at the time of the agreement is important.

38
 Invitation to treat/offer

General Offers and

Specific offer
Agenda for the class
July 31, 2024 Cross Offers
Proposal/offer and Invitation to offer
• Sometimes, owing to the nature of the business of some other factors, a person
may not make an offer but make some statement or give some information with
a view to inviting offers on that basis
• e.g. Government tenders
• e.g. A catalogue of goods sent to a customer by a shopkeeper etc.
• Such cases are an invitation to make an offer
• In Harris v. Nickerson (1873), the defendant advertised an auction sale and the
plaintiff travelled a long distance to the venue of auction.
• There he found that the auction had been cancelled. He brought an action
against the auctioneer to recover the travel expenses.
• It was held that advertisement of the auction was a mere invitation to treat and
its acceptance did not amount to a binding contract.
• Thus, the defendant was not liable.

40
Harvey v. Facey (1893)

• In Harvey v. Facey (1893), the plaintiffs interested in purchasing a plot of land called
Bumper Hall Pen, owned by the defendants, sent a telegram to the defendant:
“Will you sell us B.H.P.? Telegraph the lowest cash price.”
• Reply of the defendant was: “Lowest price for B.H.P. is 900 pounds.”
• The plaintiff again sent a telegram: “We agree to buy B.H.P. for 900 pounds, asked
by you. Please send us your title deeds.”
• The question was whether the telegram of the defendants amounted to an offer.
• The judicial committee of the Privy Council held that the defendants had replied to
only the second question of the plaintiff’s first telegram.
• It amounted only to an invitation to treat, and the plaintiff’s second telegram
amounted only to an offer by the plaintiffs and not an acceptance to an offer.
• For a binding contract there was needed a further acceptance of this offer by the
defendants.
41
Mac Pherson v. Appanna (AIR 1951 SC 184)

• In Mac Pherson v. Appanna (AIR 1951 SC 184), the plaintiff offered to pay Rs.
6000 to the defendant for his property.
• He again wrote to the defendant’s agent asking whether the earlier offer had
been accepted and also offering to pay a higher price if found reasonable.
• The agent replied that the defendant would not accept anything less than Rs.
10000.
• The plaintiff wrote that he was willing to pay Rs. 10000.
• It was held that the agent’s letter only amounted to an invitation to treat and the
defendant needed to accept the ‘offer’ made by the plaintiff in the second letter
in order to constitute a binding contract.

42
General offer
• A general offer is an offer to the public at large and anyone who performs the
conditions of the offer is deemed to have accepted the offer
• e.g. A makes an offer that he would reward any person who finds his lost child.
This is general offer.
• Anyone who finds the child is deemed to have accepted the offer and there
ensues a valid contract.
• There is no need to communicate the acceptance of such an offer.
• The offeror can be informed after the conditions have been fulfilled.
• As per Section 8, ICA, “Performance of the conditions of a proposal.....is an
acceptance of the proposal.”
• This section by implication talks of a general offer, for in specific offers,
communication of acceptance is a must. Though the offer is made to the public
at large, the contract is concluded only with the person or persons who act(s)
upon the terms of the offer 43
Carlill v. Carbolic Smoke Ball Co. [(1893) 1 QB 256],
• In Carlill v. Carbolic Smoke Ball Co. [(1893) 1 QB 256] the defendants had
advertised in the newspaper to reward any person a sum of 100 pounds, who
contacted influenza or any other disease due to cold after having used ‘Smoke
Balls’ of the Company for the prescribed period.
• The plaintiff has contacted influenza despite having used the smoke balls for the
prescribed period.
• She sued the Co. for the reward.
• The Co. claimed that there was no communication of the acceptance of the offer.
• Lord Bowen LJ, observed that it was an offer to all the world, an offer to become
liable to anyone who, before it is retracted, perform the conditions.
• The contract is made with that limited portion of the public who come forward
and perform the condition on the faith of the advertisement.
• Thus, it was held that the defendants were liable.
44
In Lalman Shukla v. Gauri Dutt [(1913) 11 All LJ 489]

• The knowledge of the general offer is a must.

• In Lalman Shukla v. Gauri Dutt [(1913) 11 All LJ 489], the defendant sent his
servant to search his lost nephew.
• Then, he advertised, through handbills, to reward with Rs. 501, anyone who
found the lost boy.
• The plaintiff, the servant, was successful in finding the boy though he was
ignorant of the offer.
• Later on, on knowing the offer, he sued the defendants for the reward.
• It was held that as he was ignorant of the offer, his performance of the condition
did not amount to an acceptance, and hence there was no contract. The
defendant was not liable.

45
General offer

• In Har Bhajan Lal v. Har Charan Lal (AIR 1925 All 539), it has been held that if the
plaintiff had the knowledge of the advertisement/announcement, and he finds
out the lost son of the defendant, he can successfully claim the reward.

46
Cross offer

• When two parties make an identical offer to each other, in ignorance to each
other’s offer, they are said to make cross offers.
• Cross offers are not valid offers.
• For example- if A makes an offer to sell his car for 7 lakhs to B and B in ignorance
of that makes an offer to buy the same car for 7 Lakhs, they are said to make a
cross offer, and there is no acceptance in this case, hence it cannot be a mutual
acceptance.
• It is also notable that to be a cross offer, it is not necessary that the two offers
should have been posted on the same date, one should have been posted before
the communication of the first offer was completed. (There can be changed
terms also).
• Cross offers do not cancel each other.

47
Tinn v. Hoffmann (1873)

• In Tinn v. Hoffmann (1873), A wrote a letter to B indicating his willingness to sell

800 tons of iron at 69 sq. per ton.
• On the same day, B wrote a letter to A offering to buy 800 tons of iron at 69 sq.
per ton. The two letters crossed each other in post.
• Later on, B sued for specific performance of contract.
• It was held that the two offers were only cross offers and there was no binding
contract.

48
 Counter Offer
Agenda for the class
Aug 1, 2024 Standing Offer
Counter offer
• When the offeree offers a qualified acceptance of the offer subject to
modifications and variations in terms of the original offer, he is said to have
made a counter offer.
• An example of this would be if A offers B a car for 10 Lakhs, B agrees to buy for 8
Lakhs, this amounts to a counter offer and it would mean a rejection of the
original offer.
• Sir Jenkins CJ in Haji Mohd Haji Jiva v. Spinner, held that any departure from
original offer vitiates acceptance.
• In other words, an acceptance with a variation is not acceptance, it is simply a
counter proposal which must be accepted by the original offeror, for it to
formulate into a contract.

50
Standing Offer/Open/Continuing Offer

• An offer may be allowed to remain open for acceptance over a certain period of
time. Such an offer is a standing/open/continuing offer.
• In Union of India v. Maddala Thathiah (AIR 1966 SC 1724), the railways, invited
tenders for the supply of 14000 maunds of cane jaggery to the railway grain
shops.
• Tender of the plaintiffs was accepted in the form of a standing offer.
• In the tender there was a stipulation that the plaintiffs/appellants could cancel
the agreement as regards the supplies of jaggery about which no formal order
has been placed.
• This stipulation was held to be a valid one.
• It was held that the appellants are bound only for such quantities for which
specific orders have been placed.
51
Withdrawal of Offer
• A proposal can be withdrawn by the offeror at any time before it is accepted by
the offeree.
• Bidding at an auction is merely an offer which can be withdrawn by the bidder
until it is accepted.
• The Supreme Court has in Madhya Pradesh State Road Transport Corporation v.
Manoj Kumar held that an offer may be withdrawn at any time before it is
accepted and this rule applies even though the offeror has promised to keep the
offer open for a specified time, for such a promise is unsupported by
consideration.

52
Thank you.