Revision Notes: Contract Law | Legal Reasoning for CLAT PDF Download

What is a Contract?

A contract is a legally binding agreement between two or more parties that have agreed to fulfill certain obligations. The Indian Contract Act, 1872, Section 2(h) defines the term 'Contract' as an agreement enforceable by law.

What is an Agreement?

Section 2(e) of the Indian Contract Act, of 1872 defines agreement as, "every promise and every set of promises forming the consideration for each other' A promise is defined as an accepted proposal. 

A contract is an agreement, an agreement is a promise and a promise is an accepted proposal.

An agreement becomes a contract when the following conditions are satisfied

• There is some consideration for it.
• The parties are competent to contract.
• Their consent is free.
• Their object is lawful.
• Offer and acceptance (offer from one party and its acceptance by the other).
• Intention to create legal obligations.
• The terms of the agreement must not be vague or uncertain.
• The agreement must be capable of performance.

Essential Conditions of a Valid Offer (Proposal)

1. Expression of Willingness to do/Abstain from Doing and to Obtain Other's Assent- The offer must clearly express the person's willingness to either do or refrain from doing something, with the intention of obtaining the other party's agreement. Mere statements of possibility or contemplation are not considered valid offers.
2. Intention to Contract- While the Indian Contract Act does not explicitly require an intention to create legal relations, it is generally presumed to be present. This differs from English law, which explicitly requires such intention.
3. Express or Implied Offer- An offer can be made explicitly through words or implicitly through actions.
4. Certainty of Offer- The terms of the offer must be clear and specific, without any ambiguity or vagueness. For example, an offer that states multiple prices without specifying which one is applicable would not be considered valid.

Communication of Offer

The proposal must be communicated to the other party. The communication of a proposal is complete regarding the knowledge of the person to whom it is made. e.g. 'A' proposes by letter, to sell a horse to 'B' at a certain price. The communication of the proposal is complete when 'B' receives the letter.

Essential Elements of a Valid Contract

There are two types of offers, namely:

1. General Offer - This type of offer is made to the general public or the entire world. The contract is formed when a person fulfills the conditions of the proposal, as their performance is considered acceptance. There is no requirement for the acceptance to be communicated.
2. Specific Offer - This type of offer is made to a particular individual or a known person.

Offer and Invitation to Treat (Offer)

• An offer is the final declaration of willingness by the offeror to be bound by their offer. Sometimes, a person may not directly offer to sell their goods, but instead make a statement or provide information to invite others to make offers based on that information.
• When a party proposes certain terms for negotiation without expressing their final willingness, it is not considered an offer but an invitation for the other party to make an offer based on those terms. For example, a book seller sends a catalog of books with their prices to multiple people. This is an invitation for the interested party to make an offer, and the book seller can then choose to accept or reject that offer.

Acceptance

Section 2 (b) of the Indian Contract Act, of 1872 defines 'acceptance' as, "When the person to whom the proposal is made signifies his assent thereof, the proposal is said to be accepted. A proposal, when accepted, becomes a promise". Thus, acceptance is the assent given to a proposal.

Consideration

• Consideration is a crucial element in a contract and without it, the agreement is not valid.
• It is what gives value to a promise, and without consideration, a promise is considered empty or meaningless.
• Consideration is the payment or benefit that is exchanged for a promise. For example, if someone agrees to sell their laptop for $10,000, the $10,000 is the consideration for the seller's promise to sell the laptop.

Capacity to Contract

Capacity to contract refers to a person's legal ability to enter into a valid contract and perform the required actions. The essential requirement for entering into a valid contract is that the individual must possess a sound mental state.
The following three persons are parties incompetent to contract

1. Minor Person

A minor cannot make a promise enforceable in law. An agreement made by a minor person is void.
No Estoppel Against Minor

• If a minor falsely claims to be of legal age at the time of making a contract, it raises the question of whether the principle of estoppel can be used against them.
• It is a established legal principle that estoppel cannot be used against a minor, even if they deliberately misled others.

No Liability in Contract or Tort Arising Out of Contract
A minor may be liable in tort generally. However, he will not be liable for a tort arising out of contract, for the reason that such liability is an indirect way of enforcing his agreement.

Doctrine of Restitution
Doctrine of Restitution applies against a minor i.e. when a minor obtains property or goods by false representation, he can be compelled to restore it, but only so long as the same is traceable in his possession.

2. Persons of Unsound Mind

• In order to be considered mentally capable of making a contract, a person must be able to understand it and make a rational judgment about how it will affect their own interests.
• If someone is usually mentally unsound but occasionally has periods of being mentally sound, they are able to make a contract during those periods of soundness. Conversely, if someone is usually mentally sound but occasionally becomes mentally unsound, they are not able to make a contract during those periods of unsoundness.

Examples:

1. A patient in a mental institution, who has occasional periods of mental soundness, can make a contract during those periods.
2. Someone who is delirious from a fever or so intoxicated that they cannot understand the terms of a contract or make a rational judgment about its effect on their interests, cannot make a contract while in that state.

3. Disqualified Persons

The incompetent persons are those who are disqualified from contracting by any law to which they are subject. e.g., alien enemies, foreign sovereigns and ambassadors, convicts, etc.

Free Consent

• 'Consent' is defined under Section 13 of the Indian Contract Act, 1872.
• "Two or more persons are said to consent when they agree upon the same thing in the same sense". This is known as 'Consensus ad-idem'.
• Consent is said to be free when it is not caused by
  -Coercion
  -Under influence
  -Fraud
  -Misrepresentation
  -Mistake

Coercion
An agreement to which the consent is caused by coercion is voidable at the option of the party whose consent was so caused.

Coercion leads to consent when it is acquired through:- 

• Engaging in or threatening to engage in any activity prohibited by the Indian Penal Code.
• Illegally detaining or threatening to detain someone's belongings.
  For example, if 'A' threatens to harm 'B' unless 'B' agrees to sell their property to 'A' at a specified price, 'B's agreement is obtained by coercion.

Under Influence

When one party has control over the other party and uses that control to gain an unfair advantage, it is known as undue influence.e.g.
'A', having advanced money to his son,
'B', during his minority, upon 'B's coming of age obtains, by misuse of parental influence, a bond from 'B' for a greater amount than the sum due to respect of the advance. 'A' employs undue influence.

Fraud

• A contract can be voided if one party's consent was obtained through fraud.
• Fraud includes acts committed by a party or their agent with the intention to deceive or induce the other party into the contract.
• Examples of fraud include falsely suggesting a fact, actively hiding a fact, making a promise without intending to fulfill it, engaging in any act to deceive, or any act specified by the law as fraudulent.
• Fraud requires a false statement of fact made by someone who knows it is false and has a wrongful intention.

Misrepresentation

• If someone is deceived into entering a contract due to misrepresentation, they have the choice to void the contract.
• Misrepresentation refers to providing false information that is important to the contract. If someone unintentionally provides false information that they believe to be true and they don't intend to deceive the other party, it is considered misrepresentation.
  For example, if the government auctions off forest land and fails to disclose that some of the land is occupied by tenants, the contract is affected by misrepresentation.

Mistake

Mistake refers to having a wrong belief about something. When a mistake occurs in a contract, it renders the contract unenforceable, allowing either party to choose not to fulfill their obligations. Mistakes can affect a contract in two ways.

• Firstly, a mistake can completely invalidate consent, meaning that the parties did not truly agree to the terms of the contract. 
• Secondly, a mistake can mislead the parties about the intended purpose of the contract.
  For example, if 'A' agrees to purchase a specific horse from 'B', but it is later discovered that the horse was already dead at the time of the agreement, despite both parties being unaware of this fact, the contract becomes void due to the mistake.

Limitation on Freedom of Contract

• For the validity of a contract, it is essential that the consideration and object should be lawful.
• If the money is borrowed for the purpose of the marriage of a minor, the consideration for the contract is the loan and the object is the marriage.

The consideration or object of an agreement are lawful unless

• It is forbidden by law.
• It is of such a nature that it would defeat the provision of law.
• It is fraudulent.
• It involves or implies injury to the person or property of another.
• The court regards it as immoral or opposed to public policy.

Void Agreements

An agreement not enforceable by law is said to be void. There are some agreements which have been specifically or expressly declared as void by the Indian Contract Act. These are as follows

• Agreements of which the consideration or object is unlawful.
• Agreement without consideration.
• Agreement in restraint of marriage.
• Agreement in restraint of trade.
• Agreement in restraint of legal proceedings.
• Agreement which are uncertain and ambiguous.
• Agreement by way of wager.
• Agreements to do impossible acts.

Discharge of Contract

• When the contract becomes impossible to fulfill, it frustrates the original purpose intended by the parties involved.
• If the performance of the contract becomes impossible due to an unforeseen event, the person who made the promise is released from their obligation to fulfill the contract. This is referred to as the doctrine of frustration.
• Any agreement to perform an act that is inherently impossible is considered invalid.

Revocation of Offers and Acceptance

An offer may be revoked at any time before it is accepted and an acceptance made at time before communication of acceptance is complete as against the offeror.

Invitation to Offer and Counter-Offers

Sometimes certain exchange of communication or willingness to eventually enter into a contract is mistaken for offer and acceptance. In spite of their language which is similar to an offer or acceptance, no agreement is born.

Invitation to Offer

Where a person aspires his/her willingness to enter into a contract but does not make an out right offer it constitutes an invitation to offer.

The best example of an invitation to offer is displaying goods for sale. In this case, the seller is not making an offer but is inviting you to come and purchase a good. When you express willingness to purchase, your willingness constitutes an offer. The shopkeeper is within his rights to accept or reject your offer.

Counter-Offers

Where instead of giving acceptance a person responds to an offer by making a counter-offer, giving partial acceptance or conditional acceptance, the act constitutes a counter-offer rather than acceptance. Bargaining, negotiations, cross-offers are good examples of counter offers.

Indian Contract Act, 1872

The Indian Contract Act, 1872 is the law codifying contracts in India. Contract under the Indian Contract Act, 1872 under Section 2(b) is defined as 'an agreement enforceable by law'. As to which agreements are enforceable by law, we look at Section 10 which states that,

"All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void." In other words, for a contract we require

• Formation of a valid agreement.
• The agreement be entered by free consent.
• The contracting parties have the capacity to contract.
• The contract requires exchange of lawful consideration.
• The contract has a lawful object and is not declared void.

If these five requirements are present then an agreement qualifies for a contract.

Position of Minors in Contracts

• A minor is a person under 18 years old, but if they have a court-appointed guardian, they cannot enter into a contract until they are 21.
• Generally, contracts with minors are completely void and unenforceable, similar to contracts with mentally unsound individuals. This is because minors lack the maturity to fully understand the consequences of a contract. Even if a minor misrepresents their age, the contract is still considered void.
• However, a minor can enforce a contract if it is beneficial to them. This is an exception to the general rule, but it is not commonly applied.
• If a person enters into a contract with a minor in good faith, providing them with necessaries (basic necessities for their well-being, such as food), they can seek reimbursement from the minor's legal guardian.