Law of Contract - Notes

Introduction to Contracts

  • Agreements become contracts when they fulfill conditions in the Indian Contract Act, 1872.
  • Contracts are agreements creating rights and duties.
  • Contracts include commercial and daily agreements.

Essentials of a Contract

  • All contracts are agreements, but not all agreements are contracts.
  • Only legally binding agreements are contracts.
  • Agreements require:
    • Free consent.
    • Competent parties.
    • Lawful consideration.
    • Lawful object.
    • Not expressly voided by the Indian Contract Act.

Free Consent

  • Agreement must be voluntary and unconditional.
  • Force invalidates consent.

Competency

  • Parties must have legal competence.
  • Minors and those of unsound mind are typically barred.

Lawful Consideration

  • Consideration is something of value in the eyes of the law.
  • It means "something for something".
  • Must be lawful.

Lawful Object

  • The purpose of the agreement must be lawful.

Lawfully valid

  • The agreement should not be declared void under the Indian Contract Act (e.g., restraint of trade or marriage).

Privity of Contract

  • Rights are granted only to contract parties; third parties, even if benefiting, cannot typically take legal action.

Multiplicity of Parties

  • A contract requires two or more parties.
  • An individual cannot contract with themself.

Offer

  • Defined under Section 2(1) of the Indian Contract Act.
  • Signifies willingness to do or abstain from doing something to obtain assent.
  • Offeror makes the offer, offeree receives it.

Acceptance

  • Turns an offer into a promise and a valid contract once accepted.
  • Defined under Section 2(b).
  • Requires absolute and unconditional acceptance.

Rules of Communication

  • Mode can be oral, written, post, email, fax etc.
  • Consensus ad idem is essential; technical errors during communication can void the contract.

Kinds of Offer

  • Counter Offer
    • Modifies original terms; rejects prior offer.
  • Cross Offer
    • Identical offers exchanged without knowledge; does not constitute a contract.
    • Requires communication of offer from offeror to offeree.

Invitation to Offer

  • A prospect to a group to make an offer.
  • Not binding; inviter can change their mind.
  • Examples: Advertisements, goods on display, auctions, tenders.

Distinction between offer and invitation to offer

  • An offer must be complete. specific and capable of being accepted and the statement of terms must be of contractually bound. However, an invitation to offer invites the party to make a an offer and its not intended to be binding.

Consideration

  • A universal requirement; agreements without it are void.
  • Means something of value.
  • Defined under Section 2(d) of the Indian Contract Act.
  • Requires act/abstinence at promisor's desire, done by promisee or another person.
  • Essentials:
    • Mutual.
    • Real.
    • Some value in law.
  • Consideration should not be forbidden by law, fraudulent or opposed to public policy and morality

Promissory Estoppel

  • An exception to mutual consideration.
  • An equitable doctrine preventing injustice when one party relies on another's promise.

Object

  • The purpose/design of the agreement.
  • Must be lawful.
  • Can be distinct from consideration.

Unlawful object

  • Includes:
    • Forbidden by law.
    • Defeating legal provisions.
    • Fraudulent.
    • Injurious to person/property.
    • Immoral or against public policy.

Capacity to Contract

  • Defined by Section 11 of the Indian Contract Act.
  • Requires:
    • Majority age.
    • Sound mind.
    • Not disqualified by law.

Minors

  • Contracts are void ab initio (from the beginning).
    Contract for necessaries can be reimbursed from minor's property.
  • Joint contracts with a major are valid against the major only.

Persons of Unsound Mind

  • Defined under Section 12 of the Indian Contract Act.
  • Incapable of understanding contract nature/effects.
    *Those occasionally of sound mind can contract during those periods.

Persons Disqualified by Law

  • Includes prisoners and insolvents.

Mistake

  • Arises from lack of consensus ad idem.
  • Mistake of Fact
    • Renders contract void.
      Can result from misunderstanding the terms or regarding the subject matter of contract.
  • Mistake of Law
    • Generally not a basis to void a contract, unless it's a foreign law.

Free Consent

  • Essential for legal sanctity.

  • Absence due to:

    • Coercion.
    • Undue influence.
    • Fraud.
    • Misrepresentation.

  • Makes contract voidable at aggrieved party's option.

Coercion

  • Prohibited by the Indian penal Code.
  • Involves physical or unlawful pressure. (Section 15 of the Indian Contract Act ).

Undue Influence

  • Dominant party gains unfair advantage (Section 16 of the Indian Contract Act).

Fraud

  • Intentional deception (Section 17 of the Indian Contract Act).
  • Includes:
    • False suggestion.
    • Active concealment.
    • Promise without intention to perform.
    • Other acts to deceive.
    • Act declared fraudulent.

Misrepresentation

  • Incorrect statement without intent to deceive (Section 17 of the Indian Contract Act).
  • Includes:
    • Innocent but incorrect statements.
    • Breach of duty to reveal information.
    • Mistake regrading the substance of the thing.

Special Contracts

  • Agency: Agent represents principal.
  • Bailment: Temporary possession transfer.
  • Partnership: Sharing business profits.

Agency

  • Agent represents the principal to third parties.
    Agent is bound contract the business of his principal according to the directions given by the principal

Bailment

  • Delivery of goods for some purpose, to be returned or disposed of as directed by the deliverer.
  • Reasonable care for goods is to be taken.

Partnership

  • Sharing profits of a business carried on by all or any acting for all.
  • Each partner is an agent of the firm and of each other to third parties.

Contingent Contract

  • Performance depends on a future event.
  • Defined under Section 31 of the Indian Contracts Act:
    If event becomes impossible, contract becomes void.

Contract of Indemnity

  • One party promises to save the other from loss.
  • Defined under Section 124 of the Indian Contracts Act.

Wagering Contract

  • Agreement to pay upon the happening or non-happening of an event.
  • Void.