Law of Contracts Chapter Notes | Legal Studies for Class 12 - Humanities/Arts PDF Download

Introduction to Contracts

Contracts are an important part of commercial law because all commercial law transactions usually begin with an agreement or a contract. 

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)]. 
• An agreement, in simple words, is a promise. All agreements are not contracts. 
• Agreements must meet certain criteria - like consideration, parties must be competent, free consent between parties, lawful object, and, not expressly declared void by law, in order to qualify as a contract. 
• It is important that the persons to a contract should also have the intention and mindset to enter into contract.

The Making of an Agreement: General Principles

Offer/Proposal and Acceptance

• The offer or proposal is the first step in the formation of a contract. 
• The 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.

• An assent or consent given to an offer by the offeree is known as Acceptance [Section 2(b) of ICA]. 
• An offer when accepted becomes an agreement. An agreement is also called as promise.

Consideration

• Consideration is an important element in a contract.  A contract without consideration is not valid. 
• Consideration means 'something in return' for the offer. 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. 
• Consideration may be past, present or future and should not be illegal, immoral or opposed to public policy.

Example: A offers to sell his car for ` 5, to B. B accepts the offer. In this case, the consideration of A is his car and the consideration of B is ` 5. 

Capacity to Contract

The following persons are not competent to enter into a contract: 

• Minor- Persons who are less than 18 years of age; The exception to this rule is that, if a minor enters into a contract and the enforcement of such contract is beneficial for the minor then it will not be held to be void.
• Persons with unsound mind- (a) Idiots, (b) Lunatics, (c) Drunkards;
• Persons disqualified by law- (a) Alien enemies, (b) Foreign sovereign, 2 (c) Insolvents, (d) Convicts, (e) Corporation, (f) Barristers.

Example: A major offers to sell his coat for `  to B minor). B accepts the offer and pays ` . 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.

Consent 

• Consent is an important criterion while entering into a contract. 
• When two persons agree on the same thing in the same sense, 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. 

Example: 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. 

Unlawful Agreements

• If the object of the agreement is to perform an unlawful act, then the contract is unenforceable. 
• The object of the agreement should not be illegal, immoral or opposed to public policy.  
• As per the Indian Contract Act, agreements entered into which are against public policy of the State are said to have an unlawful object and hence are unlawful agreements making them unenforceable. 
• As per the Indian Contract Act, agreements entered into by way of wager are not enforceable. Wager is a contract where one person promises to pay the other money on the happening of an uncertain future event and the other person promises to pay on the non-happening of the event.

Contingent Contract

• Contingent contract, also called as Conditional contract, is a contract to do something or not to do something on the happening or non-happening of an event, which is collateral to the contract. 
• Contingent contracts cannot be enforced until the uncertain future event happens. 
• If the uncertain future event becomes impossible, contingent contracts become void. 

Example: e A agrees to sell his farm land to B if he wins the case involving his farm land. This is a case of contingent contract because the performance of the contract is based on the happening of an uncertain event. The uncertain future event is winning the case. 

Differences Between Wager and Contingent Contract

Discharge of Contract 

When the mutual obligations of the parties are fulfilled, the contract comes to an end. Discharge means termination of the contractual relations of the parties to the contract. 

• Discharge by Performance: When parties to a contract perform their obligations and fulfil their promises, the contract gets discharged by performance. 
• Discharge by Agreement or: 
  (a) Novation - A new contract is substituted for an old contract. 
  (b) Rescission - Certain terms or all terms of a contract are cancelled. 
  (c) Alteration - When certain terms of a contract are altered or modified with the mutual consent of the parties. 
  (d) Remission - Acceptance is made to a promise but not on the complete terms of the promise but to a lesser fulfilment of the promise. 
  (e) Waiver - Parties to a contract abandon their mutual rights. 
  (f) Merger - Certain terms of a contract or all the terms of a contract are merged into another contract with the consent of the parties. 
  Example: A enters into an agreement with B for buying certain machine parts for their project. Before the agreement ends, A and B change certain terms of the 44 agreement and include those terms in the agreement. This is a case of Discharge by agreement.
• Discharge by Impossibility of Performance: Performance of a contract can become impossible with or without the knowledge of the parties to the contract. It can also become impossible subsequently after the parties have entered into a contract. It can also happen by Supervening impossibility (Section 56). Supervening impossibility takes place by the following: Destruction of the subject matter;  Death or incapacity;  Non-existence of state of things having an effect directly or indirectly on the contract; Outbreak of war; Change or amendments in law. 
  Example: ; agreed to sell his car to < for Rs.  lakh and deliver it after two months. After a week, ; met with an accident and car got completely destroyed. The contract gets discharged by impossibility of performance as the car was completely destroyed. 
• Discharge by Lapse of Time: Time is very significant while entering into a contract. According to the Limitation Act, a contract should be performed within a specified time called period of limitation. If the contract is not performed within the specified time and the other party does not resort to any action within the limitation period, then he is deprived of his remedy and the contract gets discharged by lapse of time. 
• Discharge by Operation of Law: The following are instances where a contract gets discharged by operation of law: Death of either of the parties; 2 Insolvency; 2 Merger; 2 Unauthorized alteration of the terms of the agreement
• Discharge by Breach of Contract: Breach means failure to perform the obligation by a party. When a party to a contract does not perform his part of the obligation due to which the contract becomes broken, the person who suffers because of the breach is entitled to receive compensation or damages from the party who has breached the contract (Section 73). 
  Example: A agrees to supply  litres of oil to B on st -une . 2n st -une , A does not supply the oil. Then A has breached the contract. Suppose A has supplied the oil but B does not accept the oil, then B has breached the contract. In the first instance, B is entitled to receive compensation from A. In the latter instance, A is entitled to receive compensation from B. 

Damages

• Remedy is a means given by law for the enforcement of the right of a person. 
• A common remedy for breach of contract is awarding damages to the affected party. 
• Monetary compensation given to the affected party for the loss or injury caused to him due to the breach is called damages. 
• The objective of awarding damages by the court is to put the injured party in the same position as he would have been if the contract had not been breached. 
• This, under the contract law, is called the Doctrine of Restitution.