Establishing the

Contract

What Is Contract?
An agreement enforceable by law is a
contract.

Contract = Agreement + Legal

Obligation

Agreement: The Indian Contract Act defines the term

agreement as: Every promise and every set of
promises , forming the consideration for each other.

Promise: A proposal(offer), when accepted, becomes

a promise. Thus, a promise implies an accepted offer.

Legal Obligation:

The law of contract seeks to determine and

define the promises to which legal effect is
accorded, whether enforceability or by way of
recognition of a duty of performance.
Thus, to become a contract, an agreement must
have an accompanying legal obligation i.e. it
must be enforceable by law.
All contracts are agreements but all agreements
may not be contracts.

Process Of Contract

Offer or proposal
Acceptance
Promise
Agreement
Contract

Essentials of a Valid Contract

Offer and Acceptance

Intention to create legal relation
Consideration
Capacities of parties
Free Consent
Lawful Object
Void Agreements

Types of Contract
1. Valid Contract

2. Void Contract
3. Voidable Contract
4. Unenforceable Contract
5. Quasi Contract
6. Executed and Executory Contract
7. Express Contracts and Implied Contracts


Valid Contract: A contract that fulfills all the legal requirements,
such as the existence of agreement, intention for creating legal
relations, certainty, etc., is said to be a valid contract.

Void Contract: A void contract has no binding effect in an party.

According to section 2(j), a contract which ceases to be
enforceable by law becomes void.
Voidable Contract: As per section 2(i), an agreement which is
enforceable by law at the option of one or more of the parties
thereto, but not at the option of other or others is a voidable
contract.

Unenforceable Contract: When a contract is valid

otherwise, but cannot be enforced by one or both the
parties because of some technical flaw, it is
described as an unenforceable contract.

Executed Contract: A contract is said to be executed,

where both the parties have done all the contract
required of them.
Executory Contract: An Executory Contract in which
one or both the contracting parties have still to carry
out their respective obligations.

Express Contract:
An Express Contract is the one that very lucidly
conveys the purpose of the agreement.
An Express Contract exists when parties state the
terms and show their intention in words.
An Express Contract can be either oral or written.

Implied Contract:
An implied contract is one in which agreement is by
non-verbal conduct.
In an implied contract, the agreement of the parties
is demonstrated by their actions and roles. Such
contract are formed when one party accepts
something of value knowing that the other party
expects compensation.

Quasi Contract: A Quasi Contract is the act of a

person, permitted by law, by which he/she obligates
himself/herself towards another or by which another
binds himself/herself to him/her, without any
agreement between them. Thus, a quasi contract is
not a contract but an obligation created by law.

Offer and Acceptance

Formation of Agreement required two steps , making of a

proposal by one person and acceptance of this proposal by
other.
Agreement= Offer + their acceptance
The Proposal or Offer Sec. 2 (a) define an offer in these
words:

When one person signifies to another his willingness to do

or to abstain from doing anything, with a view to obtaining
the assent (acceptance) of that other to such act or
abstinence, he is said to make a proposal
Example: R tells S : I am ready to sell my machine for
Rs.9000,are you ready to buy.
This is clear offer from R to S.

Requirements for Valid Offer

1.Offer must be express or implied

2.Offer must intend to create legal relation

3.Offer must be certain and not vague in meaning

4.Offer may be specific or General
5. Offer must be communicated
6.Offer must be distinguished from invitation to offer
7.An Offer should not contain a term forcing an action on
Offeree

Types of Offer
Express offer
Implied offer
Specific offer
General offer
Cross offer
Counter offer
Standing offer

What is difference between Invitation to Offer

and General Offer?
Invitation to Offer: Aims at taking the
customer to the advertiser to start
negotiation.

General Offer: Aims at leading the offeree

(to whom offer made) to the performance
of specified condition which would amount
to acceptance of offer

The Acceptance
Sec. 2 (b) When a person to whom the proposal is made ,
signifies his assent thereto, the proposal is said to be
acceptance.
A proposal , when accepted become a promise.
Requirements for Valid Acceptance:
1.By a proper person-

2.Within proper time

3.Must be absolute and unqualified(total and without condition)
4.Must be Communicated
5.Must be given in a proper Mode.
6.Accepatnce must succeed the offer
7. Offer once rejected can not be accepted

Communication of Offer,
Acceptance and Revocation
1.Communication of Offer
An offer is said to have been made when it
comes to knowledge of the other person for
whom it was intended.

2.Communication of Acceptance
For Acceptance two steps required:
(i) Offeree transmits his acceptance and
(ii) Message reaches the Offeror.
Brogden Vs Metropolitan railways Co.

i. Communication of acceptance from offeree is

binding upon the Offeror as soon as the latter
of acceptance is posted so as to be beyond
the Offerees control.
ii. Communication of acceptance from offeree is
binding upon the offeree himself only when it
comes to the knowledge of the Offeror

Eg : Mr. X sends a letter of offer to Y on August 5

which may reach Y on August 10. Y post his latter
of acceptance on August 15 which may comes to
knowledge of X on August 20.
Offer said to be made on = August 10
Offer said to be accepted for Y on = August 15
Offer said to be accepted for X on = August 20
Position of time gap between August 15 to August
20 = This time is available for Y to withdraw his
acceptance.

3.Communication for Revocation

Sec 5 provide rule about revocation of offer and
acceptance. It states:
A proposal may be revoked at any time before
the communication of its acceptance is complete
from acceptor as against the proposer, but not
afterward.

An acceptance may be revoked at any time

before the communication of the acceptance is
complete as against the acceptor ,but not afterward

Loss of letter of Acceptance in the Postal transit

Acceptance is complete as against Offeror as
soon as the letter of acceptance is posted. The
contract is completed even if the latter of
acceptance lost in the post.
But it is important that the latter of acceptance
is correctly addressed, sufficiently stamped and
posted.

Contract over telephone or telex or oral

communication
The offeree must make sure that his acceptance
is properly received i.e. heard and understood
by the Offeror.

When does an offer come to an end?

An offer come to end by Two Revocation or lapse
and Rejection of Offer.
A. Revocation or lapse or Withdrawal of Offer
(Sec.6)
1.By communication of notice of revocation by
Offeror before its acceptance is completed
against him
2. By lapse of time
3. By non-fulfillment of condition by offeree
4.By death of Offeror
5. If counter offer is made
6.If Offer is not accepted according to prescribed

B.

Rejection of Offer by Offeree

1. Express Rejection i.e. by words written or
spoken
2.Implied rejection
-when offeree make counter offer
-When offeree make conditional acceptance
-Not following prescribed time

CONSIDERATION
The life blood of
every contract

It is Quid pro Quo, i.e. something in return.

It is the price of promise.

X agrees to sell his TV to Y, for INR8000/-.

TV-Set is the consideration of Y and INR8000/is the consideration of X.

The Definition

Sec. 2 (d) of the Indian Contract Act;

When at the desire of the Promisor, the
Promisee or any other person has done or
abstained from doing, or does or abstains from
doing, the Promises to do or abstain from doing
something, such act or abstinence or promise is
called Consideration.

 Consideration May be:

An act Means of doing something.

An abstinence Promising not to do
something.
A promise The Promise of each party is the
consideration for each other.

Essentials of Valid Consideration

Must move at the desire of the Promisor Xs

house catches fire, and Y helps in
extinguishing it without being requested to do
so by X. Y cannot demand any payment for his
voluntary service.
It must move from Promisee or any other
person for making a valid contract a
Consideration must be there; it is immaterial
who furnishes it.

 May be Past, Present or Future:

1.

2.

Past Award in cash for saving the house from

fire.

Present Cash sales.

3.
Future X promises to deliver 100 Quintals of
rice to Y after a month, and Y promises to make the
payment a month after deliver of Rice.

 Must be Real It must have some value in the

eyes of Law. It should not be:

1.

Physically impossible: Making a dead person

alive.
2. Legally impossible: X files a suit against Y for non
payment of debt. Y approaches Xs brother Z,
and he promises to withdraw the suit for a
Consideration of INR500/-. It is legally impossible.

 Consideration must be legal: consideration may

not be adequate but must invariably be legal ie it
must not involve an illegal act.

Eg promising to pay money to a witness to turn

hostile. An illegal consideration makes the whole
contract invalid.
Consideration must have some value: something
of valuemust be given for a promise in order to
make it enforceable as a contract. An informal
promise therefore does not amount to a contract.

Must be Lawful Smuggling, murder.

Must be something which the promisor is already

not bound to do Where a person who buy his
official status or by operation of law is under a
public duty to act, the discharging of that duty
cannot be regarded as consideration.

SUMMARY
Consideration is fundamental to the formation of
any contract. (Excluding Deeds)
Consideration is the Primary rule in a simple
contract.
An illegal consideration makes the whole contract
Invalid.
In India a Promise/Agreement without
consideration is Valid and Binding. However it is
considered Void in general.

Competency of the parties

competent to the contract

Section10 of the contract Act requires that

the parties must be competent to contract.

Section 11 of the Indian contract act states

that every person is competent to contract ,
who is:

The age of majority

Who is of sound mind
Who is not disqualified from contracting by
law

Incapacity

Minor

Lunatic

Person
disqualified
by law

Unsound
mind

Idiot

Drunkard

Alien

Convict

Corporation

Persons incapable of competing

to a contract

A minor,
Person of unsound mind
Person disqualified by the law

Minors

A person who has not attained 18yrs of age is

considered to be a minor
Two cases, a minor attainsmajority after
21years of age;
1. Where a guardian of minors person or
property has been appointed
2. Where the superintendence of minors
property is assumed by a Court of Wards

Position of minors contract

A contract with or by a minor is void and

a minor
A minor can be a promisee or a
beneficiary
No ratification on attaining the age of
majority
minor can always plead minorit

 Minors parents/guardians are not liable to

aminors creditor for the breach of contract
by the minor

A minor can act asan agent and bind his

principal by his acts without incurring any
personal liability
A minors estate is liable to a person who
supplies necessaries of life to a minor

Person of unsound mind

A person is said to beof unsoundmind for the

purpose of makinga contract, if at the time
when he makes it, he is incapable of
understanding it, and offorming a rational
judgement as to its effect upon hisinterests.

Idiot
Lunatic
Drunkards
Mental decay
Hypnotized persons

Disqualified by law to enter

into contract

Alien enemy
Convicts
Undischarged solvents
Foreign sovereigns and ambassadors
Joint stock companies and statutory
Corporations

FREE CONSENT

What is Consent?

According to section 13, two or more person are

said to have consented when they agree upon same
thing in the same sense.

What is Free Consent?

According to section 14, consent is said to be free
when it is not cause by coercion, undue influence,
fraud, misrepresentation and mistake.

Coercion
(Voidable)

Mistake
(Void)

Flaws in
Consent
&
Their effects

Misrepresentat
ion
(Voidable)

Undue
Influence
(Voidable)

Fraud
(Voidable)

Coercion

According to section 15, coercion is the

committing, or threatening to commit, any act
forbidden by the IPC or the unlawful detaining, or
threatening to detain, any property, to the
prejudice of any person whatever, with the
intention of causing any person to enter into any
agreement

Undue Influence

According to 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 was in a position
to dominate the will of the other and used that
position to obtain an unfair advantage over
the other.

Fraud

Section 17 defines the term as : 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 intend to
deceive another party thereto or his agent, or
to induce him to enter into the contract.

Fraud

1. The suggestion, as a fact of that which is not

true by one who does not believe it to be
true.
2. The active concealment of a fact by one
having knowledge or belief of the fact.
3. A promise made without any intention of
performing it.
4. Any other act fitted to deceive.
5. Any such act or omission as the law specially
declares to be fraudulent.

Misrepresentation

According to section 18, misrepresentation

means and includes the following:
1. The positive assertion, in a manner not
warranted by the information of the person
making it, of that which is not true, though he
believes it to be true.
2. Any breach of the duty, that without an intent
to deceive, gains an advantage of the person
committing it, or any one claiming under him,
by misleading other to his prejudice, or to the
prejudice of anyone claiming under him.

Misrepresentation

3. Causing, however innocently, a party to an

agreement to make a mistake as to the
substance of the thing, which is subject of
the agreement.

Mistake

The term mistake literally means

incorrect, or wrong idea or opinion
about something caused by lack of
attention, skill, or knowledge, etc.

Types of Mistake

1. Mistake of Law
1. Mistake of law of the country
2. Mistake of the foreign law
2. Mistake of Fact
1. Bilateral mistake
2. Unilateral mistake

Legality of Object

What is a lawful object ?

The consideration, or object of an agreement, is

lawful unless it :
1. is forbidden by law, or
2. is of such a nature that, if permitted, it would
defeat the provisions of any law, or
3. is fraudulent, or
4. involves or implies injury to the person or
property of another, or
5. is regarded as immoral by a court, or is
opposed to public policy.

Forbidden by law

[Case: Srinivas
Mohan]

v.

Raja

Ram

A loan granted to the guardian of a minor to

enable him to celebrate the minors marriage.
It is in contravention of the Child Marriage
Restraint Act and is illegal and cannot be
recovered

Defeats the purpose of any law

[Case: Alexander v. Rayson]

A let a flat to B at a rent of 1200 a year.
With a view to reduce the municipal tax A made
two agreements with B. One, by which the rent was
stated to be 450 only and the other, by which B
agreed to pay 750 for services in connection with
the flat.
Held : A could not recover 750 since the
agreement was made to defraud the municipal
authority and thus void

Fraudulent

Example: A, B and C enter into an agreement

for the division among them of gains acquired
or to be acquired, by them by fraud. The
agreement is void as its object is unlawful

Injurious to person or property

[Case: Ram Saroop v. Bansi]

A borrowed Rs. 100 from B. He (A) executed a
bond promising to work for B
without pay for 2 years and in case of default
agreed to pay interest at a very
exorbitant rate and the principal amount at
once.
Held : The contract was void

Immoral

[Case: Baivijli v. Hamda Sagar]

M advanced money to R , a married woman to
enable her to obtain a divorce from her
husband. M agreed to marry her as soon as
she could obtain a divorce.
Held : M could not recover advanced money
because the object of agreement was
immoral.

Agreements opposed to public

policy

1.
2.
3.
4.
5.

Trading with an alien enemy

Interference with administration of justice
Marriage brokerage agreements
Trafficking in public offices
Unfair or unreasonable dealings

Effect of partial illegality

[Case: Gopal Rao vs Kalllappa]

A acquired license to sell opium and marijuana with the

restriction that he would not take any partner in his
ganja business without permission from the collector
He, however admitted B into the whole business on
receiving from him a fixed sum of money as his share
of capital, without seeking the collectors permission
Later on because of some disagreement between the
two, B sought a dissolution and refund of his capital
Held : the contract as to partnership is void and Bs
claim was dismissed.