Textbook: Law of Contract | Legal Studies for Class 12 - Humanities/Arts PDF Download

 Page 1


Law of Contracts
Learning Outcome
Students will be able to
•	 Understand the formation of agreements and contracts.
•	 Understand the essential elements of a contract. 
•	 Distinguish between the types of contracts based on enforceability
•	 Understand and analyse illegal, void and voidable agreements.
•	 Elaborate the process of discharge of contract.
•	 Critically analyse the remedies awarded for Breach of Contract as Damages.
Amritlal was in need of 5 kg rice and exchanged them for 10 kg mangoes with his next-door 
neighbour to avoid going to the market. He soon realised that he has given a rare commodity, as it 
was not the mango season, at a cheap exchange. It has been a common practice to exchange things 
of utility in the ancient times. However, with the advent of money as a common medium of exchange 
that is fair and uniformly valued at a given place, it has become easy to enter into transactions that 
are definite. In the modern times, these definite transactions are known as ‘contract’. The contracts 
regulate the business transactions among parties placed both domestically and internationally.
A. Introduction to Contracts
Contracts are an important part of commercial law because all commercial law transactions usually 
begin with an agreement or a contract. To understand the concept, we may take example of some of 
our everyday activities like buying groceries, booking a cab, eating at a restaurant, paying for internet, 
purchasing clothes in a sale or otherwise and likewise. 
These business transactions involving sale-purchase or exchange of services have become an integral 
part in day-to-day activities that involve contracts. In such instances, an agreement or a contract is 
necessary for determining the rights, obligations and liabilities of parties when they enter into any 
business transaction. The Indian Contract Act is the law governing contracts in India.
B. Formation of Contract
According to the Indian Contract Act, 1872, (referred to as the ICA) an agreement that is enforceable 
by law is a contract [Section 2(h)]. This implies, all agreements per se are not contracts. Agreements 
must meet certain criteria stated as under- An agreement is the result of a proposal or an offer by one 
party and its acceptance by the other.
1. Competent parties: the parties to the agreement must be competent to enter into a contract.
2. Lawful consideration and lawful object: There must be lawful object and lawful 
consideration in respect of the agreement.
3. Free consent: there must be free consent of the parties that is free from coercion, undue 
CHAPTER
3(A)
Page 2


Law of Contracts
Learning Outcome
Students will be able to
•	 Understand the formation of agreements and contracts.
•	 Understand the essential elements of a contract. 
•	 Distinguish between the types of contracts based on enforceability
•	 Understand and analyse illegal, void and voidable agreements.
•	 Elaborate the process of discharge of contract.
•	 Critically analyse the remedies awarded for Breach of Contract as Damages.
Amritlal was in need of 5 kg rice and exchanged them for 10 kg mangoes with his next-door 
neighbour to avoid going to the market. He soon realised that he has given a rare commodity, as it 
was not the mango season, at a cheap exchange. It has been a common practice to exchange things 
of utility in the ancient times. However, with the advent of money as a common medium of exchange 
that is fair and uniformly valued at a given place, it has become easy to enter into transactions that 
are definite. In the modern times, these definite transactions are known as ‘contract’. The contracts 
regulate the business transactions among parties placed both domestically and internationally.
A. Introduction to Contracts
Contracts are an important part of commercial law because all commercial law transactions usually 
begin with an agreement or a contract. To understand the concept, we may take example of some of 
our everyday activities like buying groceries, booking a cab, eating at a restaurant, paying for internet, 
purchasing clothes in a sale or otherwise and likewise. 
These business transactions involving sale-purchase or exchange of services have become an integral 
part in day-to-day activities that involve contracts. In such instances, an agreement or a contract is 
necessary for determining the rights, obligations and liabilities of parties when they enter into any 
business transaction. The Indian Contract Act is the law governing contracts in India.
B. Formation of Contract
According to the Indian Contract Act, 1872, (referred to as the ICA) an agreement that is enforceable 
by law is a contract [Section 2(h)]. This implies, all agreements per se are not contracts. Agreements 
must meet certain criteria stated as under- An agreement is the result of a proposal or an offer by one 
party and its acceptance by the other.
1. Competent parties: the parties to the agreement must be competent to enter into a contract.
2. Lawful consideration and lawful object: There must be lawful object and lawful 
consideration in respect of the agreement.
3. Free consent: there must be free consent of the parties that is free from coercion, undue 
CHAPTER
3(A)
54
influence, fraud, misrepresentation and mistake, when they enter into the agreement.
4. Not expressly declared as void by the law: the agreement must not be the one, which has 
been declared as void by the law in force at the time of entering into the agreement. 
It is therefore true by virtue of provisions of section 10 I CA that all contracts are enforceable agreements 
while the vice-versa may not be true when an agreement is not enforceable by law for want of lawful 
consideration or lawful object. Thus it is correct to generalise that: 
“All contracts are agreements but all agreements are not contracts”
C. Intention to Contract
In a leading case Balfour v. Balfour (1919, 5 KB 571), the validity of an agreement entered between 
a husband and wife was in question. The husband and wife went on leave to England and the wife 
fell ill in England. The doctors who treated the wife advised her to take full bed rest and remain in 
England in order to continue the treatment. The wife stayed in England. When the leave was over, 
the husband went to Ceylone where he was employed and promised to send a sum of £30 to the 
wife every month for her stay in England. He sent the amount for some time and later on due to 
differences and misunderstanding between them, the husband stopped sending the amount. The 
wife initiated action to recover the arrears due to her. The Court dismissed it on the ground that the 
agreement entered into between the husband and wife was not a contract. The arrangement between 
the husband and wife was only a moral obligation and the parties never intended to create any legal 
relationship.
The decision clearly shows that agreements that create a legal obligation are only contracts and those 
agreements that do not intend to create legal relationship are not contracts.
Offer / Proposal and Acceptance
The offer or proposal is the first step in the formation of a contract. When one person signifies to 
another his willingness to do or not to do certain things, it is called an Offer. [Section 2(a) of ICA]. The 
person making the proposal or offer is called the offeror and the person to whom the offer is made is 
called the offeree. The offer given must be with an intention to create a legal relationship.
An assent or consent given to an offer by the offeree is known as Acceptance [Section 2(b) of ICA]. 
By saying ‘yes’, ‘ok’ or clicking on ‘I agree’ on an offer on a website also amounts to acceptance. An 
offer when accepted becomes an agreement. An agreement is also called as promise.
Offer + Acceptance = Agreement
Illustration
A expresses his willingness to sell his cottage to B for Rs. 5 lakhs. Here, A’s willingness is called 
offer. A is the offeror and B is the offeree. B accepts the offer to purchase the cottage. This is called 
Acceptance. A ’s offer when accepted by B becomes an Agreement. 
An offer and acceptance must be definite and certain. If the offer or acceptance is not clear enough to 
conclude a contract, it is considered invalid. Also, an offer and acceptance must be communicated to 
the other person in order to be valid. A communication in electronic form or over emails also amount 
to communication of offer and acceptance. An offer lapses by revocation or withdrawal. Any offer 
can be revoked before acceptance.
General offer 
In an English case Carlill v. Carbolic Smoke Ball Co. (1893, 1 QB 256), the company was the 
manufacturer of a medicine called smoke ball which was used for the treatment of influenza. The 
company believed that the medicine completely cured influenza. An advertisement was put up 
Page 3


Law of Contracts
Learning Outcome
Students will be able to
•	 Understand the formation of agreements and contracts.
•	 Understand the essential elements of a contract. 
•	 Distinguish between the types of contracts based on enforceability
•	 Understand and analyse illegal, void and voidable agreements.
•	 Elaborate the process of discharge of contract.
•	 Critically analyse the remedies awarded for Breach of Contract as Damages.
Amritlal was in need of 5 kg rice and exchanged them for 10 kg mangoes with his next-door 
neighbour to avoid going to the market. He soon realised that he has given a rare commodity, as it 
was not the mango season, at a cheap exchange. It has been a common practice to exchange things 
of utility in the ancient times. However, with the advent of money as a common medium of exchange 
that is fair and uniformly valued at a given place, it has become easy to enter into transactions that 
are definite. In the modern times, these definite transactions are known as ‘contract’. The contracts 
regulate the business transactions among parties placed both domestically and internationally.
A. Introduction to Contracts
Contracts are an important part of commercial law because all commercial law transactions usually 
begin with an agreement or a contract. To understand the concept, we may take example of some of 
our everyday activities like buying groceries, booking a cab, eating at a restaurant, paying for internet, 
purchasing clothes in a sale or otherwise and likewise. 
These business transactions involving sale-purchase or exchange of services have become an integral 
part in day-to-day activities that involve contracts. In such instances, an agreement or a contract is 
necessary for determining the rights, obligations and liabilities of parties when they enter into any 
business transaction. The Indian Contract Act is the law governing contracts in India.
B. Formation of Contract
According to the Indian Contract Act, 1872, (referred to as the ICA) an agreement that is enforceable 
by law is a contract [Section 2(h)]. This implies, all agreements per se are not contracts. Agreements 
must meet certain criteria stated as under- An agreement is the result of a proposal or an offer by one 
party and its acceptance by the other.
1. Competent parties: the parties to the agreement must be competent to enter into a contract.
2. Lawful consideration and lawful object: There must be lawful object and lawful 
consideration in respect of the agreement.
3. Free consent: there must be free consent of the parties that is free from coercion, undue 
CHAPTER
3(A)
54
influence, fraud, misrepresentation and mistake, when they enter into the agreement.
4. Not expressly declared as void by the law: the agreement must not be the one, which has 
been declared as void by the law in force at the time of entering into the agreement. 
It is therefore true by virtue of provisions of section 10 I CA that all contracts are enforceable agreements 
while the vice-versa may not be true when an agreement is not enforceable by law for want of lawful 
consideration or lawful object. Thus it is correct to generalise that: 
“All contracts are agreements but all agreements are not contracts”
C. Intention to Contract
In a leading case Balfour v. Balfour (1919, 5 KB 571), the validity of an agreement entered between 
a husband and wife was in question. The husband and wife went on leave to England and the wife 
fell ill in England. The doctors who treated the wife advised her to take full bed rest and remain in 
England in order to continue the treatment. The wife stayed in England. When the leave was over, 
the husband went to Ceylone where he was employed and promised to send a sum of £30 to the 
wife every month for her stay in England. He sent the amount for some time and later on due to 
differences and misunderstanding between them, the husband stopped sending the amount. The 
wife initiated action to recover the arrears due to her. The Court dismissed it on the ground that the 
agreement entered into between the husband and wife was not a contract. The arrangement between 
the husband and wife was only a moral obligation and the parties never intended to create any legal 
relationship.
The decision clearly shows that agreements that create a legal obligation are only contracts and those 
agreements that do not intend to create legal relationship are not contracts.
Offer / Proposal and Acceptance
The offer or proposal is the first step in the formation of a contract. When one person signifies to 
another his willingness to do or not to do certain things, it is called an Offer. [Section 2(a) of ICA]. The 
person making the proposal or offer is called the offeror and the person to whom the offer is made is 
called the offeree. The offer given must be with an intention to create a legal relationship.
An assent or consent given to an offer by the offeree is known as Acceptance [Section 2(b) of ICA]. 
By saying ‘yes’, ‘ok’ or clicking on ‘I agree’ on an offer on a website also amounts to acceptance. An 
offer when accepted becomes an agreement. An agreement is also called as promise.
Offer + Acceptance = Agreement
Illustration
A expresses his willingness to sell his cottage to B for Rs. 5 lakhs. Here, A’s willingness is called 
offer. A is the offeror and B is the offeree. B accepts the offer to purchase the cottage. This is called 
Acceptance. A ’s offer when accepted by B becomes an Agreement. 
An offer and acceptance must be definite and certain. If the offer or acceptance is not clear enough to 
conclude a contract, it is considered invalid. Also, an offer and acceptance must be communicated to 
the other person in order to be valid. A communication in electronic form or over emails also amount 
to communication of offer and acceptance. An offer lapses by revocation or withdrawal. Any offer 
can be revoked before acceptance.
General offer 
In an English case Carlill v. Carbolic Smoke Ball Co. (1893, 1 QB 256), the company was the 
manufacturer of a medicine called smoke ball which was used for the treatment of influenza. The 
company believed that the medicine completely cured influenza. An advertisement was put up 
55
offering a reward of £100 to anyone who got influenza again after using the smoke ball medicine 
continuously for fifteen days. In the advertisement, it was also stated that £1000 was deposited in a 
Bank, namely, Alliance Bank for paying the reward if such situation arose. Seeing the advertisement, 
Mrs. Carlill bought the smoke ball medicine and used it as per the directions provided. Mrs. Carlill got 
a fresh episode of influenza. Mrs. Carlill sued the company for the reward of £100. The manufacturing 
company stated that: (1) there was no intention to enter into a legal relationship with anyone through 
the advertisement, and the advertisement was put up only to boost the marketing of the smoke ball 
medicine; (2) the advertisement was not an offer as it was not made to any particular person and an 
offer cannot be made to the public at large or to the whole world; (3) acceptance by the offeree had 
not been communicated, and so there was no binding contract. The Court rejected these contentions 
of the company and allowed Mrs. Carlill’s claim for £100. The Court also stated that deposit of £1000 
in the Alliance Bank by the Smoke Ball Company was evidence that the company had real intention 
to enter into a legal relationship with anyone who accepted the offer. An offer can also be made to the 
world at large. It is called a general offer and it is valid. In the case of general offer, there is no need 
for communicating acceptance to the offeror. Merely fulfilling the conditions of the offer itself is treated 
as acceptance to create a contract.
D. Consideration 
Consideration is an important element in a contract. A contract without consideration is not valid. 
Consideration means ‘something in return’ for the offer. Consideration can be in the nature of an 
act or forbearance. The general rule is that, an agreement without consideration is void and not 
enforceable by law because in such cases, one party is getting something from the other without 
giving anything to the other. There should always be a mutual consideration. In other words, each 
party must give and also take. There are exceptions to this general rule in certain situations such as 
a written and registered agreement out of natural love is not void, even if it is without consideration. 
Consideration need not be adequate, but should be real. It may be past, present or future and should 
not be illegal, immoral or opposed to public policy.
Illustration: 
A offers to sell his car for ` 50,000/- to B. B accepts the offer. In this case, the consideration of A is his 
car and the consideration of B is ` 50,000/.
Illustration: 
A, for natural love and affection, promises to give his son, B, ` 1,000/- to Bin writing and registers it. 
This is a contract and absence of consideration does not make it void.
In an Indian case - Durga Prasad V. Baldeo (1880, 3All 221), the plaintiff constructed some shops at 
the request of the District Collector in a town. The constructed shops were given on rent for doing 
business to the defendant, the  shopkeeper. The defendant, apart from the rent, promised to give 5% 
commission to the plaintiff on all articles sold through the shop in consideration of the huge amount 
spent by the plaintiff in the construction of the building. The defendant failed to pay the commission 
and the plaintiff initiated action to recover the commission. The Court rejected the action of the 
plaintiff on the ground that the construction of shop was done at the desire of the District Collector 
and not on the desire of the defendant and hence there was no consideration to give commission. 
Accordingly, there is no valid contract to pay commission to the plaintiff.
E. Capacity to Contract
One of the essentials of a valid contract as mentioned under section 10 ICA is that the parties must 
be competent to contract. Following are not competent to contract :
•	 Minor - Persons who are less than 18 years of age;
•	 Persons with unsound mind 
•	 Persons disqualified by law - Alien enemies, Foreign sovereign etc.
Page 4


Law of Contracts
Learning Outcome
Students will be able to
•	 Understand the formation of agreements and contracts.
•	 Understand the essential elements of a contract. 
•	 Distinguish between the types of contracts based on enforceability
•	 Understand and analyse illegal, void and voidable agreements.
•	 Elaborate the process of discharge of contract.
•	 Critically analyse the remedies awarded for Breach of Contract as Damages.
Amritlal was in need of 5 kg rice and exchanged them for 10 kg mangoes with his next-door 
neighbour to avoid going to the market. He soon realised that he has given a rare commodity, as it 
was not the mango season, at a cheap exchange. It has been a common practice to exchange things 
of utility in the ancient times. However, with the advent of money as a common medium of exchange 
that is fair and uniformly valued at a given place, it has become easy to enter into transactions that 
are definite. In the modern times, these definite transactions are known as ‘contract’. The contracts 
regulate the business transactions among parties placed both domestically and internationally.
A. Introduction to Contracts
Contracts are an important part of commercial law because all commercial law transactions usually 
begin with an agreement or a contract. To understand the concept, we may take example of some of 
our everyday activities like buying groceries, booking a cab, eating at a restaurant, paying for internet, 
purchasing clothes in a sale or otherwise and likewise. 
These business transactions involving sale-purchase or exchange of services have become an integral 
part in day-to-day activities that involve contracts. In such instances, an agreement or a contract is 
necessary for determining the rights, obligations and liabilities of parties when they enter into any 
business transaction. The Indian Contract Act is the law governing contracts in India.
B. Formation of Contract
According to the Indian Contract Act, 1872, (referred to as the ICA) an agreement that is enforceable 
by law is a contract [Section 2(h)]. This implies, all agreements per se are not contracts. Agreements 
must meet certain criteria stated as under- An agreement is the result of a proposal or an offer by one 
party and its acceptance by the other.
1. Competent parties: the parties to the agreement must be competent to enter into a contract.
2. Lawful consideration and lawful object: There must be lawful object and lawful 
consideration in respect of the agreement.
3. Free consent: there must be free consent of the parties that is free from coercion, undue 
CHAPTER
3(A)
54
influence, fraud, misrepresentation and mistake, when they enter into the agreement.
4. Not expressly declared as void by the law: the agreement must not be the one, which has 
been declared as void by the law in force at the time of entering into the agreement. 
It is therefore true by virtue of provisions of section 10 I CA that all contracts are enforceable agreements 
while the vice-versa may not be true when an agreement is not enforceable by law for want of lawful 
consideration or lawful object. Thus it is correct to generalise that: 
“All contracts are agreements but all agreements are not contracts”
C. Intention to Contract
In a leading case Balfour v. Balfour (1919, 5 KB 571), the validity of an agreement entered between 
a husband and wife was in question. The husband and wife went on leave to England and the wife 
fell ill in England. The doctors who treated the wife advised her to take full bed rest and remain in 
England in order to continue the treatment. The wife stayed in England. When the leave was over, 
the husband went to Ceylone where he was employed and promised to send a sum of £30 to the 
wife every month for her stay in England. He sent the amount for some time and later on due to 
differences and misunderstanding between them, the husband stopped sending the amount. The 
wife initiated action to recover the arrears due to her. The Court dismissed it on the ground that the 
agreement entered into between the husband and wife was not a contract. The arrangement between 
the husband and wife was only a moral obligation and the parties never intended to create any legal 
relationship.
The decision clearly shows that agreements that create a legal obligation are only contracts and those 
agreements that do not intend to create legal relationship are not contracts.
Offer / Proposal and Acceptance
The offer or proposal is the first step in the formation of a contract. When one person signifies to 
another his willingness to do or not to do certain things, it is called an Offer. [Section 2(a) of ICA]. The 
person making the proposal or offer is called the offeror and the person to whom the offer is made is 
called the offeree. The offer given must be with an intention to create a legal relationship.
An assent or consent given to an offer by the offeree is known as Acceptance [Section 2(b) of ICA]. 
By saying ‘yes’, ‘ok’ or clicking on ‘I agree’ on an offer on a website also amounts to acceptance. An 
offer when accepted becomes an agreement. An agreement is also called as promise.
Offer + Acceptance = Agreement
Illustration
A expresses his willingness to sell his cottage to B for Rs. 5 lakhs. Here, A’s willingness is called 
offer. A is the offeror and B is the offeree. B accepts the offer to purchase the cottage. This is called 
Acceptance. A ’s offer when accepted by B becomes an Agreement. 
An offer and acceptance must be definite and certain. If the offer or acceptance is not clear enough to 
conclude a contract, it is considered invalid. Also, an offer and acceptance must be communicated to 
the other person in order to be valid. A communication in electronic form or over emails also amount 
to communication of offer and acceptance. An offer lapses by revocation or withdrawal. Any offer 
can be revoked before acceptance.
General offer 
In an English case Carlill v. Carbolic Smoke Ball Co. (1893, 1 QB 256), the company was the 
manufacturer of a medicine called smoke ball which was used for the treatment of influenza. The 
company believed that the medicine completely cured influenza. An advertisement was put up 
55
offering a reward of £100 to anyone who got influenza again after using the smoke ball medicine 
continuously for fifteen days. In the advertisement, it was also stated that £1000 was deposited in a 
Bank, namely, Alliance Bank for paying the reward if such situation arose. Seeing the advertisement, 
Mrs. Carlill bought the smoke ball medicine and used it as per the directions provided. Mrs. Carlill got 
a fresh episode of influenza. Mrs. Carlill sued the company for the reward of £100. The manufacturing 
company stated that: (1) there was no intention to enter into a legal relationship with anyone through 
the advertisement, and the advertisement was put up only to boost the marketing of the smoke ball 
medicine; (2) the advertisement was not an offer as it was not made to any particular person and an 
offer cannot be made to the public at large or to the whole world; (3) acceptance by the offeree had 
not been communicated, and so there was no binding contract. The Court rejected these contentions 
of the company and allowed Mrs. Carlill’s claim for £100. The Court also stated that deposit of £1000 
in the Alliance Bank by the Smoke Ball Company was evidence that the company had real intention 
to enter into a legal relationship with anyone who accepted the offer. An offer can also be made to the 
world at large. It is called a general offer and it is valid. In the case of general offer, there is no need 
for communicating acceptance to the offeror. Merely fulfilling the conditions of the offer itself is treated 
as acceptance to create a contract.
D. Consideration 
Consideration is an important element in a contract. A contract without consideration is not valid. 
Consideration means ‘something in return’ for the offer. Consideration can be in the nature of an 
act or forbearance. The general rule is that, an agreement without consideration is void and not 
enforceable by law because in such cases, one party is getting something from the other without 
giving anything to the other. There should always be a mutual consideration. In other words, each 
party must give and also take. There are exceptions to this general rule in certain situations such as 
a written and registered agreement out of natural love is not void, even if it is without consideration. 
Consideration need not be adequate, but should be real. It may be past, present or future and should 
not be illegal, immoral or opposed to public policy.
Illustration: 
A offers to sell his car for ` 50,000/- to B. B accepts the offer. In this case, the consideration of A is his 
car and the consideration of B is ` 50,000/.
Illustration: 
A, for natural love and affection, promises to give his son, B, ` 1,000/- to Bin writing and registers it. 
This is a contract and absence of consideration does not make it void.
In an Indian case - Durga Prasad V. Baldeo (1880, 3All 221), the plaintiff constructed some shops at 
the request of the District Collector in a town. The constructed shops were given on rent for doing 
business to the defendant, the  shopkeeper. The defendant, apart from the rent, promised to give 5% 
commission to the plaintiff on all articles sold through the shop in consideration of the huge amount 
spent by the plaintiff in the construction of the building. The defendant failed to pay the commission 
and the plaintiff initiated action to recover the commission. The Court rejected the action of the 
plaintiff on the ground that the construction of shop was done at the desire of the District Collector 
and not on the desire of the defendant and hence there was no consideration to give commission. 
Accordingly, there is no valid contract to pay commission to the plaintiff.
E. Capacity to Contract
One of the essentials of a valid contract as mentioned under section 10 ICA is that the parties must 
be competent to contract. Following are not competent to contract :
•	 Minor - Persons who are less than 18 years of age;
•	 Persons with unsound mind 
•	 Persons disqualified by law - Alien enemies, Foreign sovereign etc.
56
Who is a minor under Indian Law?
It was the Indian Majority Act that laid down the age of majority as 18 years except in cases where 
guardian has been appointed by the Court, it was 21 years. An amendment to the said Act has 
amended the majority age to 18 years for all cases. 
Illustration: 
A (major) offers to sell his coat for ` 3,000/- to B (minor). B accepts the offer and pays ` 3,000/-. A 
states that the contract is entered into with a minor and hence void. In this case, even if the contract 
is entered into with a minor, it is enforceable because it is beneficial to the minor and the minor has 
performed his part of the obligation in the contract.
Interesting Facts
A minor is incompetent to contract because he is below 18 years of age. Indian Contract Act does 
not answer whether an agreement by a minor is void or voidable? Nature of minor’s agreement has 
been analyzed by the courts from time to time based on the facts and circumstances of the case in 
light of general principles of equity and natural justice. Initially, the controversy was set at rest by the 
decision of Privy Council in Mohori Bibee v Dharmodas Ghose. The minor Plaintiff mortgaged 
his property in favour of the defendant who was a money lender, to secure his loan. The money 
lender had knowledge about the minority of the Plaintiff. The court held against the contentions of 
the defendant that no estoppel could apply against the Plaintiff as both the parties were aware of 
the minor’s minority. Also, the defendant asked for the refund of loan taken under the provisions of 
ICA if mortgage is cancelled. Court held that an agreement by a minor is void ab initio. 
In another case, Kalus Mittelbachert v East India Hotels Ltd., there was a contract between 
Lufthansa, a German airline and Hotel Oberoi, New Delhi that crew of the airline will stay in latter’s 
hotel.  The plaintiff, a co-pilot of the airline stayed in the hotel and sustained serious head injuries 
on diving in the swimming pool of the hotel. This resulted in paralysis and after a battle of 13 years 
with his health conditions he died. Though he had no direct contract with hotel but he succeeded 
as a beneficiary and was awarded compensation for the damage caused. Being a 5-star hotel 
extra care and caution was expected out of the hotel and thus exemplary damages of 50 lac were 
awarded.
F . Consent
Consent is an important criterion while entering into a contract. When two persons agree on the same 
thing in the same sense (consensus ad idem), it is termed as consent (Section 13). Consent should 
be free and not caused by coercion, undue influence, misrepresentation, fraud or mistake. If consent 
is obtained by the influence of any one of the above said, then the consent so obtained is not free. It 
becomes voidable (avoid enforcement of contact) for the person whose consent is not free.
Illustration: 
A threatened to kill B if he does not sell his house to A. B out of fear signs the contract for selling his 
house to A. Here, the consent of B is not free. B can later avoid the sale on the ground that he was 
compelled to agree to the sale and the consent given was not free consent.
G. Types of Contracts/ Agreements
As discussed above, all agreements may not be contracts and vice versa. There are situations when 
agreements turn into contracts at their inception but at a later stage due to change in any of the 
essential conditions of a contract, a contract ceases to be enforceable under the law and thus becomes 
void at the option of any of the parties to the contract. Also, when the consent obtained for the 
agreement is not free, it is voidable. 
The concept of validity or enforceability of a contract is not defined in Indian Contract Act however, it 
Page 5


Law of Contracts
Learning Outcome
Students will be able to
•	 Understand the formation of agreements and contracts.
•	 Understand the essential elements of a contract. 
•	 Distinguish between the types of contracts based on enforceability
•	 Understand and analyse illegal, void and voidable agreements.
•	 Elaborate the process of discharge of contract.
•	 Critically analyse the remedies awarded for Breach of Contract as Damages.
Amritlal was in need of 5 kg rice and exchanged them for 10 kg mangoes with his next-door 
neighbour to avoid going to the market. He soon realised that he has given a rare commodity, as it 
was not the mango season, at a cheap exchange. It has been a common practice to exchange things 
of utility in the ancient times. However, with the advent of money as a common medium of exchange 
that is fair and uniformly valued at a given place, it has become easy to enter into transactions that 
are definite. In the modern times, these definite transactions are known as ‘contract’. The contracts 
regulate the business transactions among parties placed both domestically and internationally.
A. Introduction to Contracts
Contracts are an important part of commercial law because all commercial law transactions usually 
begin with an agreement or a contract. To understand the concept, we may take example of some of 
our everyday activities like buying groceries, booking a cab, eating at a restaurant, paying for internet, 
purchasing clothes in a sale or otherwise and likewise. 
These business transactions involving sale-purchase or exchange of services have become an integral 
part in day-to-day activities that involve contracts. In such instances, an agreement or a contract is 
necessary for determining the rights, obligations and liabilities of parties when they enter into any 
business transaction. The Indian Contract Act is the law governing contracts in India.
B. Formation of Contract
According to the Indian Contract Act, 1872, (referred to as the ICA) an agreement that is enforceable 
by law is a contract [Section 2(h)]. This implies, all agreements per se are not contracts. Agreements 
must meet certain criteria stated as under- An agreement is the result of a proposal or an offer by one 
party and its acceptance by the other.
1. Competent parties: the parties to the agreement must be competent to enter into a contract.
2. Lawful consideration and lawful object: There must be lawful object and lawful 
consideration in respect of the agreement.
3. Free consent: there must be free consent of the parties that is free from coercion, undue 
CHAPTER
3(A)
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influence, fraud, misrepresentation and mistake, when they enter into the agreement.
4. Not expressly declared as void by the law: the agreement must not be the one, which has 
been declared as void by the law in force at the time of entering into the agreement. 
It is therefore true by virtue of provisions of section 10 I CA that all contracts are enforceable agreements 
while the vice-versa may not be true when an agreement is not enforceable by law for want of lawful 
consideration or lawful object. Thus it is correct to generalise that: 
“All contracts are agreements but all agreements are not contracts”
C. Intention to Contract
In a leading case Balfour v. Balfour (1919, 5 KB 571), the validity of an agreement entered between 
a husband and wife was in question. The husband and wife went on leave to England and the wife 
fell ill in England. The doctors who treated the wife advised her to take full bed rest and remain in 
England in order to continue the treatment. The wife stayed in England. When the leave was over, 
the husband went to Ceylone where he was employed and promised to send a sum of £30 to the 
wife every month for her stay in England. He sent the amount for some time and later on due to 
differences and misunderstanding between them, the husband stopped sending the amount. The 
wife initiated action to recover the arrears due to her. The Court dismissed it on the ground that the 
agreement entered into between the husband and wife was not a contract. The arrangement between 
the husband and wife was only a moral obligation and the parties never intended to create any legal 
relationship.
The decision clearly shows that agreements that create a legal obligation are only contracts and those 
agreements that do not intend to create legal relationship are not contracts.
Offer / Proposal and Acceptance
The offer or proposal is the first step in the formation of a contract. When one person signifies to 
another his willingness to do or not to do certain things, it is called an Offer. [Section 2(a) of ICA]. The 
person making the proposal or offer is called the offeror and the person to whom the offer is made is 
called the offeree. The offer given must be with an intention to create a legal relationship.
An assent or consent given to an offer by the offeree is known as Acceptance [Section 2(b) of ICA]. 
By saying ‘yes’, ‘ok’ or clicking on ‘I agree’ on an offer on a website also amounts to acceptance. An 
offer when accepted becomes an agreement. An agreement is also called as promise.
Offer + Acceptance = Agreement
Illustration
A expresses his willingness to sell his cottage to B for Rs. 5 lakhs. Here, A’s willingness is called 
offer. A is the offeror and B is the offeree. B accepts the offer to purchase the cottage. This is called 
Acceptance. A ’s offer when accepted by B becomes an Agreement. 
An offer and acceptance must be definite and certain. If the offer or acceptance is not clear enough to 
conclude a contract, it is considered invalid. Also, an offer and acceptance must be communicated to 
the other person in order to be valid. A communication in electronic form or over emails also amount 
to communication of offer and acceptance. An offer lapses by revocation or withdrawal. Any offer 
can be revoked before acceptance.
General offer 
In an English case Carlill v. Carbolic Smoke Ball Co. (1893, 1 QB 256), the company was the 
manufacturer of a medicine called smoke ball which was used for the treatment of influenza. The 
company believed that the medicine completely cured influenza. An advertisement was put up 
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offering a reward of £100 to anyone who got influenza again after using the smoke ball medicine 
continuously for fifteen days. In the advertisement, it was also stated that £1000 was deposited in a 
Bank, namely, Alliance Bank for paying the reward if such situation arose. Seeing the advertisement, 
Mrs. Carlill bought the smoke ball medicine and used it as per the directions provided. Mrs. Carlill got 
a fresh episode of influenza. Mrs. Carlill sued the company for the reward of £100. The manufacturing 
company stated that: (1) there was no intention to enter into a legal relationship with anyone through 
the advertisement, and the advertisement was put up only to boost the marketing of the smoke ball 
medicine; (2) the advertisement was not an offer as it was not made to any particular person and an 
offer cannot be made to the public at large or to the whole world; (3) acceptance by the offeree had 
not been communicated, and so there was no binding contract. The Court rejected these contentions 
of the company and allowed Mrs. Carlill’s claim for £100. The Court also stated that deposit of £1000 
in the Alliance Bank by the Smoke Ball Company was evidence that the company had real intention 
to enter into a legal relationship with anyone who accepted the offer. An offer can also be made to the 
world at large. It is called a general offer and it is valid. In the case of general offer, there is no need 
for communicating acceptance to the offeror. Merely fulfilling the conditions of the offer itself is treated 
as acceptance to create a contract.
D. Consideration 
Consideration is an important element in a contract. A contract without consideration is not valid. 
Consideration means ‘something in return’ for the offer. Consideration can be in the nature of an 
act or forbearance. The general rule is that, an agreement without consideration is void and not 
enforceable by law because in such cases, one party is getting something from the other without 
giving anything to the other. There should always be a mutual consideration. In other words, each 
party must give and also take. There are exceptions to this general rule in certain situations such as 
a written and registered agreement out of natural love is not void, even if it is without consideration. 
Consideration need not be adequate, but should be real. It may be past, present or future and should 
not be illegal, immoral or opposed to public policy.
Illustration: 
A offers to sell his car for ` 50,000/- to B. B accepts the offer. In this case, the consideration of A is his 
car and the consideration of B is ` 50,000/.
Illustration: 
A, for natural love and affection, promises to give his son, B, ` 1,000/- to Bin writing and registers it. 
This is a contract and absence of consideration does not make it void.
In an Indian case - Durga Prasad V. Baldeo (1880, 3All 221), the plaintiff constructed some shops at 
the request of the District Collector in a town. The constructed shops were given on rent for doing 
business to the defendant, the  shopkeeper. The defendant, apart from the rent, promised to give 5% 
commission to the plaintiff on all articles sold through the shop in consideration of the huge amount 
spent by the plaintiff in the construction of the building. The defendant failed to pay the commission 
and the plaintiff initiated action to recover the commission. The Court rejected the action of the 
plaintiff on the ground that the construction of shop was done at the desire of the District Collector 
and not on the desire of the defendant and hence there was no consideration to give commission. 
Accordingly, there is no valid contract to pay commission to the plaintiff.
E. Capacity to Contract
One of the essentials of a valid contract as mentioned under section 10 ICA is that the parties must 
be competent to contract. Following are not competent to contract :
•	 Minor - Persons who are less than 18 years of age;
•	 Persons with unsound mind 
•	 Persons disqualified by law - Alien enemies, Foreign sovereign etc.
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Who is a minor under Indian Law?
It was the Indian Majority Act that laid down the age of majority as 18 years except in cases where 
guardian has been appointed by the Court, it was 21 years. An amendment to the said Act has 
amended the majority age to 18 years for all cases. 
Illustration: 
A (major) offers to sell his coat for ` 3,000/- to B (minor). B accepts the offer and pays ` 3,000/-. A 
states that the contract is entered into with a minor and hence void. In this case, even if the contract 
is entered into with a minor, it is enforceable because it is beneficial to the minor and the minor has 
performed his part of the obligation in the contract.
Interesting Facts
A minor is incompetent to contract because he is below 18 years of age. Indian Contract Act does 
not answer whether an agreement by a minor is void or voidable? Nature of minor’s agreement has 
been analyzed by the courts from time to time based on the facts and circumstances of the case in 
light of general principles of equity and natural justice. Initially, the controversy was set at rest by the 
decision of Privy Council in Mohori Bibee v Dharmodas Ghose. The minor Plaintiff mortgaged 
his property in favour of the defendant who was a money lender, to secure his loan. The money 
lender had knowledge about the minority of the Plaintiff. The court held against the contentions of 
the defendant that no estoppel could apply against the Plaintiff as both the parties were aware of 
the minor’s minority. Also, the defendant asked for the refund of loan taken under the provisions of 
ICA if mortgage is cancelled. Court held that an agreement by a minor is void ab initio. 
In another case, Kalus Mittelbachert v East India Hotels Ltd., there was a contract between 
Lufthansa, a German airline and Hotel Oberoi, New Delhi that crew of the airline will stay in latter’s 
hotel.  The plaintiff, a co-pilot of the airline stayed in the hotel and sustained serious head injuries 
on diving in the swimming pool of the hotel. This resulted in paralysis and after a battle of 13 years 
with his health conditions he died. Though he had no direct contract with hotel but he succeeded 
as a beneficiary and was awarded compensation for the damage caused. Being a 5-star hotel 
extra care and caution was expected out of the hotel and thus exemplary damages of 50 lac were 
awarded.
F . Consent
Consent is an important criterion while entering into a contract. When two persons agree on the same 
thing in the same sense (consensus ad idem), it is termed as consent (Section 13). Consent should 
be free and not caused by coercion, undue influence, misrepresentation, fraud or mistake. If consent 
is obtained by the influence of any one of the above said, then the consent so obtained is not free. It 
becomes voidable (avoid enforcement of contact) for the person whose consent is not free.
Illustration: 
A threatened to kill B if he does not sell his house to A. B out of fear signs the contract for selling his 
house to A. Here, the consent of B is not free. B can later avoid the sale on the ground that he was 
compelled to agree to the sale and the consent given was not free consent.
G. Types of Contracts/ Agreements
As discussed above, all agreements may not be contracts and vice versa. There are situations when 
agreements turn into contracts at their inception but at a later stage due to change in any of the 
essential conditions of a contract, a contract ceases to be enforceable under the law and thus becomes 
void at the option of any of the parties to the contract. Also, when the consent obtained for the 
agreement is not free, it is voidable. 
The concept of validity or enforceability of a contract is not defined in Indian Contract Act however, it 
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is through the various judgements of the courts that enforceability of contracts was decided based on 
their validity. Some important valid and enforceable contracts are explained as under:
a. Void and Voidable Contracts
BASIS OF DIFFERENCE VOID CONTRACT VOIDABLE CONTRACT
LEGAL PROVISION Section 2(j) ICA Section 2(i) ICA
MEANING A contract which ceases to be 
enforceable by law becomes 
void when it ceases to be en-
forceable
It is a contract which may either 
be affirmed or rejected at the op-
tion of one of the parties to the 
contract on ground of coercion, 
undue influence, fraud or misrep-
resentation.
NATURE It is valid at its inception but 
later culminates into a void 
contract
It remains enforceable till it is not 
declared void by a competent 
court
CLAIM FOR DAMAGES It is allowed only to the extent 
to restore any benefit received 
by the party, on the grounds of 
equity
The injured has the right to initiate 
action for damages
VALIDITY Any contract when turns void, 
cannot thereafter become valid 
A voidable contract may become 
valid upon lapse of time, affirma-
tion, ratification, waiver of right, 
acquiescence of the party whose 
consent was not free