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

Introduction to Contracts

Contracts are fundamental to commercial and everyday life. Most transactions-buying groceries, booking transport, dining at a restaurant, subscribing to a service, or purchasing clothes-involve agreements that determine the rights, obligations, and liabilities of the parties. Without a contract, parties would not know what is expected of them or what remedies are available if something goes wrong.

In India, contract law is governed primarily by the Indian Contract Act, 1872, which lays down the rules for formation, performance, breach and remedies of contracts.

Formation of a Contract

What is a Contract?

• A contract under the Indian Contract Act is an agreement that is enforceable by law. An agreement becomes a contract only if it satisfies certain conditions required by law.

Essential Elements of a Valid Contract

• Offer and acceptance: The contract arises from a proposal (offer) by one party and its acceptance by another.
• Competent parties: Parties must be legally competent to contract.
• Lawful consideration and lawful object: The purpose and consideration must be lawful.
• Free consent: Consent must not be vitiated by coercion, undue influence, fraud, misrepresentation or mistake.
• Not void by law: The agreement must not be one declared void by law at the time of its formation.

Relationship between Agreement and Contract

• All contracts are agreements, but not all agreements are contracts. An agreement lacking any essential element (for example, lawful consideration) is not enforceable as a contract.
• Common formulation: "All contracts are agreements, but not all agreements are contracts."

Intention to Create Legal Relations

• Balfour v. Balfour (1919): The court held that a domestic arrangement (husband promising to send money to his wife) was not a contract because there was no intention to create a legal relationship. This case illustrates that for an agreement to be enforceable as a contract there must be an intention to be legally bound.
• Key point: Social or domestic arrangements are presumed not to have legal intention unless circumstances show otherwise. Commercial agreements are generally presumed to have legal intention.

Offer (Proposal) and Acceptance

Offer / Proposal

• An offer is an expression of willingness by one person to do or to abstain from doing something, with the intention that it shall become binding upon acceptance by the person to whom it is made (the offeree).
• The person who makes the offer is the offeror. Example: If A offers to sell his cottage to B for ₹5 lakhs, A is the offeror and B is the offeree.

Acceptance

• Acceptance is the assent by the offeree to the terms of the offer in the manner required or permitted by the offer. Acceptance may be by words, conduct, or performance.
• Acceptance must be absolute, unconditional and communicated to the offeror unless the offer prescribes otherwise.
• An offer can be revoked by the offeror before acceptance, provided revocation is communicated to the offeree.

General (Bilateral) Offer and Offer to the World

• A general offer or an offer to the world is one made to the public at large and may be accepted by anyone who fulfils its terms.
• Carlill v. Carbolic Smoke Ball Co. (1893): The company promised a reward to anyone who used their smoke ball as directed and still contracted influenza. Mrs Carlill used the product and fell ill. The company argued the advertisement was not a binding offer to individuals and acceptance had not been communicated. The court held for Mrs Carlill: the company's deposit of money in bank showed genuine intention to be bound; performance of the conditions constituted acceptance; an offer to the world can be accepted by performance.
• Legal consequence: Acceptance of a general offer may be by performance and need not be communicated in the ordinary sense where the offer expressly or impliedly indicates acceptance by performance.

Consideration

Consideration means something in return; it is the price for which a promise is bought and the essential element to make a promise enforceable as a contract.

• Generally, agreements without consideration are void and unenforceable because one party receives a benefit without giving anything in return.
• Mutuality: Consideration must move from the promisee, and there must be consideration for each party's promise (mutual consideration).
• Nature: Consideration may be in the form of an act, forbearance, or a return promise. It may be past, present or future. It must be real, though it need not be adequate.
• Consideration must be lawful; it must not be illegal, immoral or opposed to public policy.

Exceptions to the Rule of Consideration

• Certain agreements without consideration are valid where they fall under statutory exceptions, for example a written and registered agreement made out of natural love and affection between parties standing in near relation (as provided under the Indian Contract Act), or a promise to compensate for past voluntary services under specified conditions.

Illustrations and Case Law

• Illustration 1: If A offers to sell a car to B for ₹50,000, A's consideration is the car; B's consideration is ₹50,000.
• Illustration 2: A promise to give a son ₹1,000 out of natural love and affection may be enforceable if the promise is in writing and registered (exception to the rule requiring consideration).
• Durga Prasad v. Baldeo (1880): The plaintiff built shops at the request of the District Collector and rented them to the defendant, who promised to pay plaintiff 5% commission on sales. The court held there was no valid contract for commission because the plaintiff's construction was at the Collector's request, not the defendant's-hence no consideration moved from the defendant to the plaintiff.

Capacity to Contract

• Under Section 10 of the Indian Contract Act, parties must be competent to contract for a contract to be valid.
• Categories of persons not competent to contract include: minors (persons below 18 years), persons of unsound mind, and persons disqualified by any law (such as alien enemies and certain other categories specified by law).

Who is a Minor?

• Under the Indian Majority Act, a person attains majority at 18 years of age for most purposes. A minor is therefore ordinarily a person below 18 years of age.
• Agreements entered into by minors are treated differently because a minor is incompetent to contract. The Indian Contract Act does not explicitly label a minor's agreement as void or voidable, but judicial decisions clarify the position.
• Mohori Bibee v. Dharmodas Ghose: The Privy Council held that agreements by minors are void ab initio-i.e., void from the beginning.

Examples Relating to Minors

• If A (major) sells a coat to B (minor) for ₹3,000 and B pays, questions may arise about the enforceability of contract against the minor. Generally, contracts with minors are void, but courts may protect minors where the contract is for their benefit or in respect of necessaries supplied to them.
• Courts examine each case on its facts, guided by equity and public policy, to protect minors from exploitation while allowing reasonable transactions for their benefit.
• Notable related decision: Kalus Mittelbachert v East India Hotels Ltd. (mentioned for context): a co-pilot of Lufthansa who sustained injuries while staying at a hotel was awarded compensation despite not having a direct contract with the hotel-illustrating that liability/exceptions can arise outside strict privity in particular circumstances.

Consent

Consent means the parties agree on the same thing in the same sense; legal term: consensus ad idem (Section 13). Consent must be free and not obtained by coercion, undue influence, fraud, misrepresentation or mistake.

• If consent is not free, the agreement is voidable at the option of the aggrieved party. For example, consent obtained by threat or coercion (threat to kill unless property is sold) is not free, and the contract can be rescinded by the aggrieved party.
• Vitiating factors:

• Coercion - unjust pressure or threats;
• Undue influence - abuse of dominant position to obtain consent;
• Fraud - deliberate deception;
• Misrepresentation - innocent or negligent false statement;
• Mistake - error as to facts or law affecting the agreement.

Types of Contracts / Agreements

Contracts may be classified in several ways depending on their nature, enforceability and subject matter. Below are categories often discussed in the syllabus.

(a) Void and Voidable Contracts

(b) Contingent and Wagering Contracts

(c) Illegal / Unlawful Agreements

• Section 10 of the Indian Contract Act requires a contract to have lawful consideration and lawful object. If either object or consideration is prohibited by law, the agreement is illegal and void.
• Illegal contracts are void ab initio and not enforceable. Agreements to commit crimes, fraud or acts opposed to public policy are void (for example, agreements involving drug trafficking or human trafficking).
• If the object or consideration becomes illegal after formation, the contract may become void depending on circumstances.
• Examples of unlawful agreements:
  • Cheating agreement: An agreement to obtain money by false assurances of job placements is illegal and void as it involves cheating.
  • Penalty against public policy: An agreement to pay money if a minor daughter is not given in marriage to A is against public policy and not enforceable.

Discharge of Contracts

A contract is discharged when the parties' obligations come to an end. Discharge terminates the contractual relationship.

Modes of discharge include:

• Discharge by performance
• Discharge by agreement or consent
• Discharge by impossibility of performance (supervening impossibility)
• Discharge by lapse of time (limitation)
• Discharge by operation of law
• Discharge by breach of contract

(a) Discharge by Performance

When the parties fulfil their contractual obligations as promised, the contract is discharged by performance.

Example: A agrees to sell a dining set to B for ₹10,000. B pays ₹10,000 and A delivers the dining set. Both parties have performed and the contract is discharged.

(b) Discharge by Agreement or Consent

Parties may validly agree to terminate the contract before full performance. Methods include novation, rescission, alteration, merger, waiver and remission.

• Novation: Substituting a new contract in place of an old one by mutual consent. Example: A owes B; B owes C; parties may agree that A becomes debtor to C and old obligations are cancelled.
• Rescission: Cancelling certain or all terms of a contract by mutual consent.
• Remission: Accepting a lesser performance in satisfaction of a debt (for instance accepting ₹2,000 in full settlement of ₹5,000).
• Merger: When the rights under a contract merge into a higher contract with consent of parties.

(c) Discharge by Impossibility of Performance

Supervening impossibility arises when performance becomes impossible after contract formation due to events beyond parties' control. The contract becomes unenforceable in such cases.

• Common causes: destruction of the subject matter, death or incapacity of a party where personal performance is essential, non-existence of a required state of affairs, outbreak of war, or change in law making performance illegal.
• Example: X agrees to sell his car to Y and deliver in two months, but the car is destroyed in an accident before delivery. The contract is discharged by impossibility of performance.

(d) Discharge by Lapse of Time

If a party does not enforce contractual rights within the statutory limitation period, the remedy is lost and the contract may be treated as discharged for practical purposes.

(e) Discharge by Operation of Law

• Operation of law may discharge contracts due to death, insolvency, merger, or where alteration of contract is unauthorised.

(f) Discharge by Breach of Contract

A breach occurs when a party fails to perform contractual obligations. The innocent party can seek remedies for the breach.

• If A agrees to supply 20 litres of oil to B on a specified date and A fails to deliver, A commits a breach and B may claim damages.
• If A delivers the oil but B wrongfully refuses to accept, B commits a breach and A may claim damages.

Remedies for Breach of Contract

When a contract is broken, law provides remedies to protect the injured party and, where possible, to put the injured party in the position he would have been in had the contract been performed.

Specific Performance

Specific performance is an equitable remedy whereby a court orders the party in breach to perform the contract according to its terms. It is granted where monetary compensation is inadequate-commonly in contracts concerning unique goods or immovable property.

Damages

Damages are monetary compensation awarded to the injured party to cover losses caused by breach. Section 73 of the Indian Contract Act deals with compensation for loss or damage caused by breach of contract.

• Aims of damages: to compensate the injured party and, where possible, to place him in the position he would have occupied had the contract been performed.
• Example 1: A agrees to deliver 40 bags of rice to B for ₹20,000 on 15 July 2022. If A delivers only 20 bags on that date, B may claim damages for the loss arising from non-delivery of remaining 20 bags.
• Example 2: A is paid in advance to repair B's house in a particular manner. If repairs are not carried out as agreed, B can recover costs to make the repairs conform to the contract or claim damages.

Concluding Notes

• Understanding the essential elements-offer and acceptance, consideration, capacity, free consent and lawfulness-is crucial to determine whether an agreement constitutes a valid contract under the Indian Contract Act.
• Case law (for example, Balfour v. Balfour, Carlill v. Carbolic Smoke Ball Co., Durga Prasad v. Baldeo, and Mohori Bibee v. Dharmodas Ghose) illustrates application of principles such as intention to create legal relations, acceptance by performance, consideration, and incapacity of minors.
• Modes of discharge and remedies (specific performance and damages) determine the parties' rights when obligations are performed, breached or rendered impossible.