This document provides an overview of contract law basics in India. It discusses key definitions and concepts in contract law under the Indian Contract Act of 1872, including: - The definition of a contract as an agreement enforceable by law, requiring an offer, acceptance, and consideration. - Essential elements of a valid contract such as capacity of parties, lawful object, free consent, and intention to create legal relations. - Types of contracts such as express contracts, implied contracts, unilateral contracts, and bilateral contracts. - Formation of contracts including offer, acceptance, revocation and lapse of offers, and rules of acceptance. - Other important concepts of privity of contract, consideration, and capacity

1. Contract Law
Basics of contract law
10/26/2020
Rai university,sem-1
Nirav H Bhatt

2. 1
Introduction
The IndianContract Act waspassedinthe year 1872 and italsocame intoforce on the 1st dayof
September,1872.
It consistsof 238 sections.Ithasbeendividedinto10 chapters.ChapterVIIof the Act is wholly
repealedbythe IndiaSale of Goodsact, 1930 (vide section65).The Act dealswithparticular
contracts inseparate chapters.
The IndianContract Act dealswithall facets of contract more particularlythe stagesof formationof
a contract, the elementsof acontract, the performance of the contract,the breachof the contract
and alsothe available remedies whenthereisabreach of contract.
The basic purpose of contract lawisto provide a frameworkwithinwhichindividualscanfreely
contract. The rule of contract isthe Remediesthatare available inacourt of law against a person
whofailsto performhiscontact.
Sanctity of contract: -
Sanctityof Contract is a general ideathatonce partiesdulyenterintoacontract, theymust
honourtheirobligationsunderthatcontract.Whereas,efficientbreachtheoryisthatparties
shouldfeel free tobreachacontract and pay damages,solongas thisresultismore
economicallyefficientthanperformingunderthe contract.
Definations:-
Agreementisdefinedinsection2(e) of the IndianContractAct.
Agreement:- Everypromise andsetof promisesformsthe considerationforeachother.
Agreement=offer+ acceptance.
The term Contract isdefinedinsection2(h) of the IndianContractAct.
Contract: - AnagreementenforceablebyLaw isa contract.
Contract = An Agreement+Enforceability
Definitionshowsthatacontract must have the followingtwoelements:
1) An Agreementand
2) An Agreementmustbe enforceable bylaw.
If one partyfailsto performaspromisedthe otherpartycan use the court systemto enforce the
contract and recoverdamagesor otherremedy.
Nudum pactum
Nudumpactumin Latinliterallymeans'nakedpromise'or'bare promise'.Incommonlaw,it
referstoa promise thatisnot legallyenforceable forwantof consideration.Anexampleof a
Nudumpactumwouldbe an offertosell somethingwithoutacorrespondingofferof value
inexchange.While the offermaybinda personmorally,since the offerhasnotbeencreated
withanyconsideration,itisgratuitousandtreatedasa unilateral contract.The offeris
therefore revocable atanytime bythe Offerorbefore acceptance bythe Offeree.

3. 2
Types of Contracts
Two differentkindsof groupsof contractsare fixedprice contractsandcost-reimbursement
contracts. Differenttypesof contracts,whichare containedwithineachof these twotypesof
groups,may be usedseparatelyorincombinationwithone another.
1. Lump Sum or FixedPrice Contract Type
A lumpsumor fixedprice contractisthe type of contract where all construction-related
activitiesare regulatedwithatotal fixedprice agreement.
Lump sumcontracts are favoured insituationswhenaclearscope and a definedscheduleis
negotiatedandaccepted.Forexample,if itisnecessarytoshiftthe liabilitytothe builder
and to preventchangesinordersforundeterminedwork,thistype of contractisbest
suitable forthe situation.Due topresentrisk,acontractor holdssome percentage cost.
It isessential toconsiderthatif the lumpsumcontract was signed,itwouldbe challenging
to obtainanycreditback for an uncompletedjob.
2. Cost PlusContracts
Cost pluscontractscover:
 Actual cost
 Purchase
 Otherexpensesincurredfromthe constructionwork.
Before the negotiationsbegin,aspecificexpense amountmustbe includedincostplustypes
of contracts.These amountsrepresentapercentage of the material and labourcosts,which
coverthe continuingcostsof operationandthe contractor'sprofit.
Cost can be director indirect,anditmust include all critical costaspectsof a contract.
3. Time and Material Contracts WhenScope is Not Clear
Time and materialscontractsare typesof contracts usedina case where:
 The capacity and quantityof time andmaterialsisundetermined,whichmakesthe
projectrisky.
 The ownerand the contractor are compatible withthe tariff perhourorper day,
includingpossibleadditional costsduringconstruction.
 Periodically,the ownercandetermine durationof the projectwithacontractor,
whichmustbe performedtoreduce the risktoa minimum.
The downfall of thistype of contracts isthat the sellercanincrease anindefinite orunknown
expense amount,whichisthe costthe buyerhas to pay.
4. UnitPricing Contracts
Unit price contracts are commonlycalledhourlyrate contracts.Thistype of contract
combines:
 Reimbursableexpenses
 Fixedprice type of contracts.
Unit pricingcontractscan be adjustedduringthe processinwhichthe ownerofferscertain
quantitiesandpricesforthe predeterminednumberof items.
5. Bilateral Contract

4. 3
Both partiesinvolvedinabilateral contractpromise toimplementcertainthings.
6. Unilateral Contract
In a unilateral contract,one party,whichisthe bidder,requiresperformancefromthe other
party ratherthan a promise.An Offereecannotbe suedfor:
 Abandoningthe project
 Notbeingable tofinishhisorher work.
Thisis because he or she didnotmake a promise.Therefore,onlythe bidderisrequiredby
lawto comply.
7. ImpliedContracts
The contract can eitherbe impliedinfactor impliedinlaw.
o Impliedinfactcontract.
The jointagreementcreatesobligationsandpromisedintentions amongthe
parties,where bothare notexpressedinwords.Thistype of contractisnot
articulateddirectlybutthroughfactsandcircumstances,whichdemonstratesthe
sharedintentiontoachieve anagreement.
o Impliedinlawcontract.
Thisis knownasa quasi-contractbecause the contractdoesnotrepresenta
real legal agreement.
8. ExpressContracts
Duringformationof the expresscontract,partiesare formingconditionseitherorallyorin
writing.Thisofferiswhollyacceptedwiththe termsof an Offeree.
9. Simple Contract
A simple contractisany kindof writtenororal agreement.The followingare notrequiredfor
a simple contractto be legallybinding:
 Witnesses
 Signatures
 Seals
 Contract UnderSeal
Accordingto the traditional principles,the contractrepresentsalegal actonlyif stamped.
The seal is a certaintythatthe legal consequencesare conceivable.
10. Unconscionable Contracts
An unconscionable contractisan unfairtype of contract, made onlyinfavorof the party that
issuperiorinthe negotiations.
11. AdhesionContracts
Adhesioncontractsare createdbyan advantageousbargainingparty.Theyallow the weaker
side onlythe possibilitytoacceptthe contract or to rejectit.It isalsoknownas a "Take itor
leave it"type of deal.
12. Aleatory Contracts
Aleatorycontractsare basedona mutual agreementof the partiesinvolved,anditseffects
are activatedunderthe circumstancesof uncertainevents,while one orbothpartiesaccept
the risk.

5. 4
Proposal and Acceptance and their various form Consideration
Offerandacceptance are the essential elementsof acontract.In eithercase,itshouldbe done out
of one'sfree will andwithanintentiontoenterintoalegallybindingagreement.
Proposal or Offer(sec2c): -
Whensomeone expresseshisor herwillingnesstoenterintoacontract oncertaintermsand intends
to forma bindingcontractif the otherparty acceptsit, suchexpressionof willingnessiscalledan
offeror proposal.
 The expressionof willingnesscanbe invariousformslike aletter,email,fax,oreven
conduct.However,itisimportantthatthe personcommunicatesthe termsonwhichhe is
willingtoenterintoacontract.
 Whetheror notthe personmakinganofferhasthe intentionof enteringintoacontract is
judgedobjectively.Itdoesn'tmatterwhetherthe personhasreal intentions.It'senoughif,
baseduponthe circumstancesof the case, itcan be reasonablymade outthathe intended
to forma bindingcontract.
 A party can eitherexpresslymake anoffer,oritcan evenbe impliedbyitsconduct.Anoffer
can be made to a specificperson,agroupof persons,or eventhe worldatlarge (for
example,announcementtoofferareward).
 An offerisdifferentfromaninvitationtotreat,where apartymerelyinvitesoffers,which
can be acceptedorrejectedbyit.For example,anadvertisementisnotanoffer;it'sonlyan
invitationtotreat.If itwere an offer,thenthe advertiserwouldhave tosupplythe product
to everyone acceptingthe “offer”,irrespective of the stockhe holds.Similarly,anauctionis
alsoan invitationtotreat,where eachbidreceivedbythe auctioneerisanoffer.
Acceptance:-
If a personagreestoall the conditionsof an offermade tohimwithoutplacinganycounter-
condition,the communicationof suchassenttothe offereriscalledanacceptance,providedit's
done withthe intentionof acceptingthe offer.
Sometimes,the conductof the offeree mayconstitute expressionof acceptance.Insuchcases,it
wouldbe nodefence tosaythat the partydid not intendtoenterintoa legallybindingagreement.
Courtsoftenrefertothe correspondence betweenthe partieswhile decidingwhetheran
acceptance has occurred.
It's importantthatthe offeree acceptsthe offerunconditionally.If he makesacounteroffer,the
original offerbecomesirrelevant.
For example,whenyoulistanitemoneBaywitha “buy now”price,withan optiontosell itforthe
bestoffer,everybidplacedonyouritemconstitutesacounteroffer.If youaccepta counteroffer,
thisbecomesthe basisof the contract of sale.
A contract doesnotbecome effective unlessthe offererreceivesacommunicationof acceptance
fromthe offeree.The communicationmaybe instantorat a laterpointintime,sayfor instance,
throughemail orpost.
Althoughsigningacontractis a commonway of acceptingan offer,there are variousotherwaysof
acceptance.For example,if youofferacontractor to paintyourhome for a certainsumof money

6. 5
and make some advance paymenttohim, the receivingof advance paymentitselfamountstoan
acceptance by the contractor.
Rulesof Acceptance
 There mustbe communicationof acceptance fromthe offeree'sside.
 You can withdrawanofferany time before it'saccepted.
 Onlythe personto whomthe offerismade can accept it.You are notboundby an
acceptance made by someone elseonbehalf of the offeree withouthisauthorization.
 You may doaway withthe requirementof communicatingthe acceptance;sometimesthis
may be obviousfromthe constructionof the contract.
 If an offerrequiresaspecificmethodof acceptance,itcannotbe acceptedthrougha less
effectivemethodthanwhat'sspecified.
 Silence doesnotconstitute anacceptance.
 Accordingto the “mirror image rule”,youmustacceptan offerinits entirety,withoutany
changes.Modifyingthe offerinanymannerconstitutesacounter-offerandnullifiesthe
original offer.
 The offeree can,however,requestforinformation;suchrequestdoesnotamounttomaking
a counter-offer.Youcandraftan inquiryina way that itadds to the original offerwithout
nullifyingit.
 Usually,companiesuse astandardformcontract in business.
 In all caseswhere the contractingpartieshave contemplatedacceptance viapost,the
contract is createdat the momentyoupostthe acceptance.
Revocation or lapse of offer
 By communicationof notice of Revocation.
 By lapse of time
 By non-fulfilmentof precedingconditionstoacceptance
 By deathor insanityof Offeror
 If counter offerismade
 If offerisnot acceptedaccordingto prescribedorusual mode
 Law ischanged
Privities of contact and considerations and the doctrine of consideration
The doctrine of privityof contract in the commonlaw of contract providesthata contract cannot
conferrightsor impose obligationsarisingunderitonanypersonor agentexceptthe partiestothe
contract. The premise isthatonlypartiestocontracts shouldbe able to sue to enforce theirrightsor
claimdamagesincase of breach.The traditional law wasverystrictand thirdpartieshadno redress
of anymannerif theywere affected.However,inmoderntimesthe doctrine of privityhasbeen
relaxedtoa large extent.Nowthirdpartiescanclaimcompensationprovidedhe isanintended
beneficiaryunderthe contract,andinfringementisproved.
The main principle highlightedbythisconceptof Privityof Contractisregardingthe rightsof third
partiesina contract.

7. 6
“Doctrine of Privity”
It can be seenthatpracticessuchas imposingobligationsonotherparty’saffiliates,relativesand
agentswithrespecttotermslike restrictive covenants,non-compete andconfidentialityobligations
are quite commonforthe partiesundera contract these days.Interestof suchthirdpartiessecured
by the contractingpartiesthroughwhichtheyhave beenbenefitedorburdenedbythe contract.
Section2(d) inThe IndianContractAct,1872: When,at the desire of the promisor,the promiseeor
any otherpersonhasclone or abstainedfromdoing,ordoesor abstainsfromdoing,orpromisesto
do or to abstainfromdoing,something,suchActorabstinence orpromise iscalledaconsideration
for the promise.
One of the mostnotable featuresof Section2(d) isthatthe act whichis to constitute aconsideration
may be done by“the promisee oranyotherperson”.It meanstherefore,thataslongas there is a
considerationforapromise,itisimmaterial whohasfurnishedit.Itmaymove fromthe promisee or,
if the promisorhas no objection,thenfromanyotherperson.
PRIVITY OF CONSIDERATION AND THIRD PARTY RULE
Sections2(d),23 and 25, The IndianContract Act.1872.
Presence of considerationisone of the essential foravalidcontract, the general rule inIndian
contract Act is that"an agreementwithoutconsiderationisvoid.The doctrine of considerationhas
got multidimensional significance,underthe contractual obligationsinIndianwelfare state.The
doctrine of considerationhas beeneconomic,social,political,andhasnot beendevisedorarranged
by anyone individual,butslowlyevolvedbythe needsof generations.
Capacity to contract and Legality of contract
• “An Agreementbecomescontractif itisenteredintobetween the partieswhoare
competenttocontract. (sec10)
• Everypersoniscompetent tocontract,(sec11)
o Who isof the age of majorityaccordingto law to whichhe issubject
o Is of soundmind
o Is notqualifiedfromcontractingbyanylaw to whichhe is subject
o A minorisa personwhohasnot completed18years of age.
o Majority at 21.
Minor’s Agreement: Legal Rules
• An agreementwithorbyminorisvoid.(Mohribibi v/sDharmodasGhose case of 1903)
• Promisee orbeneficiary.
• Ratificationbyattainingthe age of majority.
• He can alwayspleadminority
• No specificperformance of the agreement
• contract of partnership
• Insolvency

8. 7
• Necessaries
• Agent
• Parents/Guardiansare not liable forminor’sAct
Offeror:- The party who makesan offerto enter intocontract.
Offeree:- The party to whom offerismade to enter in a contract.
Essential Elementsofa Valid Contract:-
1). OfferandAcceptance:- In orderto create a validcontract,there mustbe a 'lawful offer'byone
party and'lawful acceptance'of the same bythe other party.
2). IntentiontoCreate Legal Relationship: - Incase,there isno such intentiononthe partof parties,
there isno contract. Agreementsof social ordomesticnature donot contemplate legal relations.
Example:A husbandpromisedtopayhiswife ahouse holdallowance of Rs10000 per
months.Laterthe partiesseparatedandthe husbandfailedtopaythe amount.The wife
suedforthe allowance.Heldagreementssuchasthese were outsidethe realmof contract.
3). Lawful Consideration (sec2d,23 & 25):- Considerationhasbeendefinedinvariousways.
Considerationmeansanadvantage orbenefitmovingfromone partyto the other.It isthe essence
of a bargain.Insimple wordsconsiderationisknownasquidpro-quoorsomethinginreturn.
[section2(d) 23 and 25 ]
4). Capacityof parties (sec11 & 12):-The partiestoan agreementmustbe competenttocontract.If
eitherof the partiesdoesnothave the capacityto contract, the contract isnot valid.
Accordingthe followingpersonis incompetenttocontract.(sec.11 and 12)
(a) Minority,
(b) Personsof unsoundmind,lunacy,idiocy,drunkennessand
(c) Persons disqualifiedby lawtowhichtheyare subject.
5). Free Consent (sec13&14):- 'Consent'meansthe partiesmusthave agreeduponthe same thingin
the same sense.AccordingtoSection14, Consentissaidto be free whenitisnot causedby-
(1) Coercion,or
(2) Undue influence,or
(3) Fraud,or
(4) Misrepresentation,or
(5) Mistake.
An agreementshouldbe made bythe free consentof the parties.
6). Lawful Object(sec.23):- The objectof an agreementmustbe valid.Objecthasnothingtodo with
consideration.Itmeansthe purpose ordesignof the contract.
Example:Thus,whenone hiresahouse foruse as a gamblinghouse,the objectof the
contract is to runa gamblinghouse.
The Objectis said to be unlawful if:-
(a) it isforbiddenbylaw;
(b) it isof such nature that if permitteditwoulddefeatthe provisionof anylaw;
(c) it isfraudulent;
(d) it involvesaninjurytothe personor propertyof any other;
(e) the court regardsit as immoral oropposedtopublicpolicy.

9. 8
7). Certainty of Meaning(sec29):- AccordingtoSection29,"Agreementmustbe certainandnot
vague or indefinite”.If itisvague and itis notpossible toascertainitsmeaningitcannotbe
enforced.
8). Possibilityof Performance: - If the act isimpossibleinitself,physicallyorlegally,if cannotbe
enforcedatlaw.
Example:- Mr A agreeswithB to discovertreasure bymagic.
Such Agreementsisnotenforceable.
9). NotDeclaredto be voidor Illegal (sec24 to30 ):-The agreementthoughsatisfyingall the
conditionsfora validcontractmustnot have beenexpresslydeclaredvoidbyanylaw inforce inthe
country.AgreementsmentionedinSection24 to 30 of the Act have beenexpresslydeclaredtobe
voidforexample agreementsinrestraintof trade,marriage,legalproceedingsetc.
10). Legal Formalities(sec. 10):- Anoral Contract isa perfectlyvalidcontract,expectinthose cases
where writing,registrationetc.isrequiredbysome statute.InIndiawritingisrequiredincasesof
sale,mortgage,lease andgiftof immovableproperty,negotiableinstruments;memorandumand
articlesof associationof a company,etc.Registrationisrequiredincasesof documentscoming
withinthe scope of section17 of the RegistrationAct.
Classificationaccording to validityor enforceability:-
a) Validcontract:
A contract whichsatisfiesall the conditionsprescribedbylaw isa validcontract.
b) VoidContract:
The term voidcontract isdescribedasundersection2(j) of I.CA,1872, A contract which
casesto be enforceablebylawbecomesvoidwhenitceasestobe enforceable.Inother
words,a voidcontract isa contract whichisvalidwhenenteredintobutwhichsubsequently
became voiddue toimpossibilityof performance,change of law orsome otherreason.
If one partyto the contract hasthe optionof enforcingacontract by law,butnot at the
optionof the otheror others,itisa voidable contract.Inthose caseswhenthe consentis
not givenfreelybutcoercionhasbeenusedthe partyhasthe optiontocontinue withthe
contract or rescindit.
These contractsare enforceable whenthe agreementismade butdue tocertainlapsesthey
become unenforceableata laterdate.The agreementbecomesunenforceable forthe
followingreasons:
• Accordingtosection56 if a contract isillegal orimpossibletoconductitbecomes
void.
• The contract becomesvoidif itisvoidable innature andthe party whocould
exercise the optionof avoidingitdecidestodoso.
• Anycontract, whichhasa contingencyclause andit,becomesimpossible to
Conductit eitheronthe happeningornothappeningof aparticulareventisa void
Contract.This isexplainedin(section32).
Illustration1:Anil made anagreementwithSumantosell house noP-21in SushantLokin
Gurgaon.The termsand conditionswere finalized.Beforethe due date forthe transaction

10. 9
to take place there wasan earthquake andthe house fell down.Anil couldnotkeephis
promise because the house didnotexistanymore.Thiscontractisvoidbecause the
agreementwasmade onthe basisof the house inpossession.Since Anildidnothave the
house afterthe natural calamityitwas a near impossibilitytodeliverthe goodstoSuman.
E.g. X offerstomarry Y, Y accepts X offer.Lateron Y diesthiscontract wasvalidat the time
of itsformationbutbecame voidatthe deathof Y.
c) VoidAgreement:
Accordingto Section2(g),anagreementnotenforceablebylaw issaidto be void.Such
agreementsare void.Thismeansthattheyare unenforceablerightfromthe time theyare
made.
Section2(g) describesvoidagreementsasthose thatare unenforceable fromthe inception
of the agreement.Inotherwordsthese agreements are void.A mistake betweenthe two
partiestoan agreementof amaterial factmakesthe agreementvoid.Therefore void
agreementsdonotcreate any legal rightsbetweenthe partiestothe contract.It alsodoes
not create any obligations.There isaflaw inthe agreementitself.
E.g. inagreementwithaminoror a personof unsoundmindisvoidbecause aminoror a
personof unsoundmindisincompetenttocontract.
d) Voidable contracttosection2(i) :
Accordingof the Indiancontractact, 1872, A voidable contractisone whichcan be setaside
or avoidedatthe optionof the aggrievedparty.Until the contractis setaside bythe
aggrievedparty,itremainsavalidcontract.
Example of a voidable contractiswhenapersonhas promisedtodelivercertaingoodsona
certaindate and he doesnot deliverit,itisthe optionof the buyertocontinue or to rescind
the contract (section55).
Illustration1:Ruhi wantedtobuy a goldchainfor hermother’sbirthday.The goldsmith
promisedtodeliveritonthe 20th of May. On the due date the chainwasnot ready.Ruhi
rescindedthe contractand decidedtobuysomethingelse.The goldsmithwanted
compensation.Ishe right?The goldsmithisnotcorrect.If he didnotdeliverthe goodson
time Ruhi hasthe rightto rescindthe contract.
Thus ina voidable contractthe aggrievedpartycantake benefitof the situation.He/shemay
decide togo aheadwiththe contract as well.Thusina voidable contracta flaw can create a
benefitforaparty. Howeverif the partydecidestocontinue withthe contract,the terms
and agreementswill continue tobe validandthe contract will alsobe a validone.
For e.g.a contract is treatedasvoidable atthe optionof the party whose consenthasbeen
obtainedunderinfluence orfraudor misinterpretation.
E.g. X threatenstokill Y,if the doesnot sell hishouse forRs.1 lakhto X. Y sellshishouse toX
and receivespayment.Here, Yconsenthasbeenobtainedbycoercionandhence this
contract is voidable atthe optionof Y the aggrievedparty.

11. 10
d) Illegal Agreement:
An illegal agreementisone the objectof whichisunlawful.Suchanagreementcannotbe
enforcedby law. Thus,illegal agreementsare alwaysvoid. (i.e.voidfromthe verybeginning)
e.g.X agreesto y Rs.1 lakh if Y killsZ. Y kill andclaimsRs.1 lakh. Y cannot recoverfromX
because the agreementbetweenXand Y is illegal andalsoitsobjectisunlawful.
e) Unenforceable contract:
It iscontract whichisactuallyvalidbutcannotbe enforcedbecause of some technical defect
(suchas not inwriting,understamped).Suchcontractscanbe enforcedif the technical
defectinvolvedisremoved.
VoidAgreementand VoidContract: Distinction
A voidagreementisvoidfromthe beginningof the contract.A voidcontract is validwhenitismade
but due to certainlapsesitbecomesunenforceablebylaw subsequently.
A voidagreementwill have the followingeffects:
• It will be unenforceable bylaw
• If both partiesknowthatthe agreementisvoidmoneywillnotbe recoverable if already
paid.
• Collateral transactionwill be legalunlessthe agreementitself isillegal.
• All legal promises are enforceable if the agreementcanbe provedto be severable.
The difference betweenvoidagreementandvoidcontractcan be discussedonthe basisof
(i) enforceability
(ii) Compensationandrestitutionand
(iii) The effecton collateral agreement.
o Enforceable:
Voidagreementsare notenforceable fromthe time of theirformation.
Theyare saidto be void.
Voidcontractsare enforceable whentheyare formedbuttheybecome
unenforceable if the partywhohasthe optionto rescindthe contract doesso.It isa
validcontract if itis notrepudiated.
A voidagreementisnotenforceable atall buta voidcontract can be enforcedif the
partiesagree tocomplete the contractand exercise the optionaccordingly.
o Compensationandrestitution:
In a voidagreement there isnocompensation because the agreementisnot
enforceable bylaw.
In a voidable contractthe person whoexercisesthe optionof rescindingthe
contract can get compensationif he has rightlytakenthe optionof notgoingahead
withthe contract.

12. 11
It followsthereforethatrestitutionisallowedinavoidable contractunlessthe
parties knewof the illegalityof the agreementatthe time of formation.
o Collateral agreement:
An agreementthatisvoiddue toillegalityhasaneffecton collateral agreementsas
well.
Such agreementswill be correspondinglyvoidbecause of illegalityinconsideration
or objectinthe agreement.
A voidable contracthoweverhasnoeffectoncollateral contracts.
Classificationaccording to Formation:-
 Expresscontract:
Expresscontract isone whichismade by wordsspokenor written.
Example No.1: X saysto Y, will youbuya car for Rs.100000. Y saysto X, I am
readyto buyyour car forRs. 100000. It isan expresscontractmade rally.
Example No.2: X writesaletterto Y, I offertosell mycar forRs. 100000 to
you.Y senda lettertox,I am readyto buy yourcar for Rs.100000. It isan
expresscontractmade inwriting.
 An implied/tacticcontract :-
It isa contract whichismade otherwise thanbythe wordsspokenorwritten.Itcame into
existence onaccountof an act or conduct of the parties.
Example:- A stopsa taxi by wavinghishandandboards it.There isan
impliedcontractthatA will paythe prescribedfare onreachinghis
destination.Withdrawal of cashfromthe ATMof a bank.
 Quasi or constructive contract:
It isa contract inwhichthere isno intentioneithersidetomake a contract, butthe law
imposescontract.Insuch a contract eightsandobligationsarise notbyanyagreement
between the practice butbyoperationof law.
 E- Contract :-
An e-contractisa contract made through the electronicmode.
Performance of a contract
• Performance of acontract whenpartiestothe contract fulfilltheirobligationundercontract.
• Partiestocontract must eitherperformoroffertoperformtheirrespective promise.
• Whenpromisorofferstoperformhisobligationunderthe contractat the propertime and
place but the promisee doesnotacceptthe performance.ThisisknownasTender.

13. 12
Performance By whom ?
• Promisorhimself
• Agent
• Legal Representatives
• ThirdPersons
• JointPromisors
Classification according to Performance / Obligation:-
 Executed Contract:-
In an executedcontractboththe partieshave performedtheirpromisesundera contract.It
isa contract where,underthe termsof contract,nothingremainstobe done by the parties.
Example A sellshiscarto B for1 lakh.A deliveredthe carandB paidthe
price. Thisisan executedcontract.
 ExecutoryContract:-
In an executorycontractboththe partiesare yet to performtheirpromises.Inotherwords,
it isa contract where partieshave tostill performtheirobligationinthe future.
Example A sellshiscarto B for1 lakh.If A is still todeliverthe car andB is
yetto pay the price,itis an executorycontract.
 Bilateral Contract:-
In a bilateral contractboththe partieshave to performtheirrespective promises.Itisalso
knownas a two-sidedcontract.Here,the obligationisoutstandingonthe part of boththe
parties.
Example:- X promisesytopay Rs 1000 for hiscycle.Neitherof themhas
performedhisobligation.
 Unilateral Contract:-
A unilateral contractisalsoknownas a one-sidedcontract.Itisa contract where onlyone
party has toperformhispromise.Insucha contract,the promise onone side isexchanged
for an act on the otherside. Afterthe formationof aunilateral contract,onlyone party
remainsliable toperformhisobligationbecause the otherpartyhasalreadyperformedhis
obligation.
Example A promisestopay1000 to anyone whofindshislost cell phone.B
findsandreturnsit to A.From the time B foundthe cell phone,the contract
came intoexistence.Now A hastoperformhispromise,i.e.,the paymentof
1000.
Discharge of contract
• Discharge meanstermination.
• A Contract can be dischargedby,
o By performance
o By death
o By refusingtenderof performance

14. 13
o By breach of contract
 Actual breach
 anticipatorybreachof contract
o By impossibilityof performance
 Doctrine of Frustration
o By agreementorbyconsent
 by novation
 by accord & satisfaction
 by remission& waiver
 by rescission
o By promise ailingtofacilitiesforperformance
o By operationof law
o By unauthorizedmaterialalterationof acontract
7. Discharge bylapse of time.
Doctrine of Frustration
Due to some eventsubsequentlyhappensperformance underacontract becomes
impossible orunlawful.
Some grounds of frustration
 Destructionof subjectmatter
 Deathor personal incapacityof parties
 Change of law
 Declaration of war
 By an act of God
Remedies to Aggrieved party
 Suitfor specificPerformance
 Suitfor injunction
 Suitfor damages,forthe losssustained
 SuituponQuantumMeruit
o Means as muchas earned.
 A claimcan be made for part of performance.
o The injured partycan claimreasonable compensation
o 2.Whencontract is void, compensationcanbe askedfrombenefitingparty
o Where a contract is divisible,partyindefaultmaysue onquantummerit.
o Whenan indivisible contractforlumpsumis completelyperformedbutbadly,party
can claim forlumpsum lessdeduction

15. 14
CONSIDERATION
DEFINITION OFCONSIDERATION Section2(d) of the ContractAct definesconsideration
as
“Whenat the desire of the promisor,promisee of anyotherpersonhasdone or
abstainedfrom doing,doesorabstainsfromdoing,orpromise todo or abstainfrom
doing,something,suchanactor abstinence iscalledconsideration.
”Illustration:Manupromisedtogive Tinamoneytostudy.There wasno
considerationattachedtoit.Manu can revoke the offerasitis notbindingin
law.
ESSENTIAL ELEMENTS OF CONSIDERATION
There are five essential elementsof consideration.
 Act or abstinence:Considerationisapromise todosomethingorto abstainfromdoing
something(accordingtosection2d).
o Case Law Curie vs.Misa Considerationmaybe apromise todo somethingor
not to dosomething.Itmaybe positive ornegative.Itissome right,interest,
profitor benefitaccruingtoone partycorrespondingtoforbearance
sufferedorundertakenbythe other.
 It ismovedat the desire of the promisor.The promisormustmove the requestfor
consideration.If itismovedatthe desire of a thirdpersonitwill notformgood
considerationevenif promisordesiredit.Thereforethe promisormustfirstgive
consideration
o Durga Prasad VsBaldeo:Onthe order of the collectorof a townbuiltsome
shops on hisownexpense inamarket.The shopkeeperswhooccupiedthese
shopspromised topayto D commissionontheirsales.Dsuedthe
shopkeeperswhenhe didnot receive the commission.The courtheldthat
the promise wasnot supportedbyany considerationasthe shopswere built
on the collectorsorderandnot at the requestof the shopkeepers.Therefore
there couldnotbe a recovery.
 It may move bythe promisee oranotherperson whenapromisorgivesapromise,the
promisee oranyotherpersonmay provide a validconsiderationinreturn.
 Case Law ChinnayavsRamaya Anold lady,made anagreementwithher
daughterthat she wouldgifthersome landedpropertybutthe condition
was thatthe daughterwould payhersistersome annual paymentregularly
as maintenance allowance.The daughterpromisedheraunt(mother’s
sister),the maintenance money.However, lateronshe didnotpaythe
moneytoher aunt.The auntfileda case for recoveryof the amount.The
decisionwasina perfectlygenuineconsideration.The promisee had agreed
to carry out the instructionsof the promisorinreturnforreceivingland.
 Considerationcanbe past,presentorfuture. One of the important elementsof
considerationisthatitcan be past, presentorfuture.
 Past consideration:Whenconsiderationisprovidedbefore aperson
becomesapromisor.itiscalledpastconsideration.Suchasituationcanarise
whena personhas done some workthat is desiredbyanotherbutis
compensatedlateron.He doesnot receive the benefitimmediately.English

16. 15
Law doesnotconsiderpastconsiderationto be good.Howeveritaccepts
time barreddebtsas goodpast consideration.
o Illustration:Sonam goestoafriend’shouse.She suddenlyhasa
severe stomach ache. A doctor inthe neighbourhoodexaminedher
and administeredsome medicine.At thattime there wasnotalkof
compensationforservicesof the doctor.LaterSonamwent to the
doctor’sclinicexpressedherthankstohimand alsogave himRs 500
as hisfeesforhisservices.Thisispastconsideration.The doctor
receivedthe feesforservicesthatwere renderedbyhimearlier.
 Presentconsideration:Whenanagreementismade andconsideration ispaid
for itor a promise ismade forthat workat the time of makingthe contract it is
calledpresentConsideration.Thissituationariseswhenthe promisormakesan
offerandit is immediatelyacceptedwithconsiderationatthat particulartime.
Thisis alsocalled executedconsideration.
o IllustrationReenaofferstosell heroldcomputertoherfriendAnjaliif
she pays Rs7500 for herold computeratthe time thatshe accepts the
offer.Anjali bringsthe moneyimmediatelyandpaysReenathe full
money.Now Reenashoulddeliverher computer.Acceptanceof the
offerandconsiderationare bothinthe present.
 Future Consideration:Whenpromiseistobe executedonafuture date it is
calledexecutoryconsiderationorfuture consideration.Inthisthe promisor
makesan offerfora future date and the promisee promisestoacceptand
execute the contract afterthat itis future consideration.Inthismannerboth
partiesmove the consideration toa future date.The liabilitybecomes
outstandingonbothpartiesona future date.
o Illustration:Ruhi promisestosell anddeliveranew wristwatchtoRekha
aftera week.Rekhaacceptsthe offerandpromisestopayafterone
monthof receivingthe watch.Thisisexecutoryorfuture consideration.
 Considerationneed notbe adequate:Considerationmeanssomethinginreturn. Thismay
not be equal tothe value of the promise thatisgiven.Aslongas there is some consideration
courts supportitand are not concernedaboutitsadequacy.The partiestothe agreement
shouldhave beensatisfiedwiththe considerationwhenthey made the contract.The
considerationmaynotbe adequate butitshouldbe lawful.
o Illustration:Madhusoldheroldcar to Meera forRs 25000. The value of the car was
Rs 200,000. The considerationwaslawful andwiththe free consentof Madhuwho
knewthatthe marketvalue wasmuchhigher.Therefore itwasavalidagreement
eventhoughconsiderationwasnotadequate.
 Considerationmustbe real andnotillusoryorimpossible.
Real considerationmeans thatthe considerationshouldnotbe physicallyorlegally
impossible.Considerationisnotreal inthe followingcasesbecause of physical and legal
impossibilityoruncertainty7.
 Considerationmustbe lawful. Considerationshouldbe lawful otherwise the agreement
becomesvoid.

17. 16
Accordingto section23 considerationsisnotlawful inthe followingsituations:
1. Whenit isfraudulent
2. Whenit ismade of an act forbiddenbylaw.
3. Whenit causesinjurytoa personor propertyof anotherperson.
4. Whenit is declaredasimmoral or opposedtopublicpolicy.
Whena part of the agreementisunlawful the whole agreementwillbecome void exceptinthose
caseswhenthe unlawful partcan be separatedfromthe lawful one. Thenthe unlawful partwill
become voidandthe otherpart can be carriedout.
STRANGER TO CONSIDERATION AND STRANGER TO CONTRACT
Consideration hastomove fromthe promisee andif anyother personmovesit,the promisee
becomesastranger toconsiderationandcannot enforce the promise.A person becomesastranger
to a contract whenhe is nota party toa contract eventhoughitismade for hisbenefit.He isa
strangerto the contract and cannot claimany rightsunderit.
Strangerto considerationandstrangertocontract are calledPrivityof consideration and
Privityof contract.In IndiaPrivityof considerationisnotapplicable because Section2(d)
has the provisionthatprovidesthatthe promiseeoranyotherpersoncan move a
contract. AccordinglyinIndiaastrangerto considerationcansue andenforce an
agreementif he isa party to the contract.
EXCEPTIONS TO THE RULE OF STRANGER TO CONTRACT
There are certainexceptionstothe rule thata strangercannotsue.In the following cases
the court doesnot preventastrangerfrom enforcing acontract that ismade for hisbenefit
but he isnot a party to it.
a) Trust or a charge:
In the case of a trust or a charge createdin favourof another personthe beneficiarycan
enforce the rightsconferreduponhimbythe trusteven thoughhe isnot a party to the
contract betweenthe settlerandthe trustee.
o Illustration:Sunitamade atrust forthe benefitof hersonSushantandappointed
Raja, Maheshand Arjuntobe the trustees.Sushantwasnotbeinggiventhe
propertybythe trustees.Canhe claimall the property inhisfavour? He can claim
that wasgiveninhis favoureventhoughhe wasnot a party to the benefitscreated
for himbyhis mother.
b) Marriage settlementpartitionorotherfamilyissues:
Whenan agreementis made relatingtomarriage,partitionoranyotherfamilyissues
withsome provisionforthe benefitof anyperson,the beneficiarycanenforce the
agreement.Thisispossible eventhoughhe isnota party to the agreement.
c) Acknowledgementof paymentorestoppel:
Thisis an agreementbetweentwo partiesthatone of themwouldgive abenefittoa
thirdperson.If the promisorexpressesorimpliesbywordsoractionsand acknowledges

18. 17
that he has a liability towardsathirdpersonitissufficientforthe thirdpersonto
recoverthe benefitashis right.
o Illustration:Anuisthe subtenantof Prembutshe paysthe rentdirectlyto
Anil.Anu stopspayingthe rent.Anil hasthe rightto recoverthe amount
fromAnu as thisisan exceptiontothe law of privityof contract.
D) Contract throughagents:
The principal can enforce Contractsthatare enteredintoby agentsonbehalf of him
if the agent hasacted withinthe scope of hisdutyand inthe name of the principal.
The rights of the principal are intacteventhoughhe isnot party to the contract.
o Illustration. MrJaiswal soldtelevisionsetsonbehalf of L.G. Company.He
sold35televisionsetstoReenaandshe didnot paythe money.L.G.
Company wenttocourt because theycouldenforce theirrightsasJaiswal
had actedas an agent of L.G. even thoughthe companywasnot directly
involvedinthe contract.
E) Agreementsrelatingtoland:
Whena personpurchaseslandand he knowsthat certainrightsand obligations
bindthe seller,the buyerhastohonourthe commitmentsof anycovenantsby
whichthe sellerisbound.The rule of privityof contractdoesnot applyinthiscase.
The buyermay not be a party to the contract but he is boundbythe principles
relatingtoimmovable property.
o Case Law Smithand Snipe Hall FarmLtd vs RiverDouglasCatchmentBoard:
A boardagreedwithlandownersnearthe streamtoimprove the banksof
streamsand maintainthemingoodcondition.Landownerspaid
proportionate costsformaintenance.Subsequentlylandownersoldthe land
to someone whofurthersoldittoanotherperson.Due tonegligence of the
board the banksof the streambroke and the landgot flooded.The
subsequentownersfiledasuitagainstthe boardfor negligence. Though
theywere notparty to the contract theywere entitledtosue because they
were boundbythe original owner’s agreementwiththe board.
F) AN AGREEMENT WITHOUT CONSIDERATION ISVOID-EXCEPTIONSTOTHE RULE
The general rule is“no considerationnocontract”or “an agreementwithout
considerationisvoid”butthere are exceptionstothe rule.Accordingtosection25,
inthe followingcasesthe rule doesnotapply
(a) Natural love andaffection:A writtenandregisteredcontractwithout
consideration,basedonnatural love andaffectionbytwoparties
relatedtoeach otherisa validcontract. [section25(1)]Note:Closeness
of relationship needsnotnecessarymeanloveandaffection.
 Case Law RajlukhyVs Bhootnath:A husbandagreedtopay a fixed
sumand maintenance to hiswife forlivinginaseparate residence
due to frequentquarrelsbetweenthem.He registeredthe written
document.Since he didnotpaythe amountthe wife wentto court
.She wasunable toget any relief becausethe agreementwasnot
made with natural love andaffection. Thisisanenforceable contract
eventhoughthere isnoconsideration.
(b) Voluntarycompensation:A promise tocompensateapersonwhollyor
partlyfor servicesdone voluntarily,orfordoingvoluntaryservicesthat

19. 18
are legallycompellableisavalidcontract evenwithout
consideration.[Section 25(2)]
 Illustration:A thief snatchedLeela’sgoldchain.Meera,anonlooker,
rushedto help, retrievedthe chainandgave itback to Leela.On
receivingthe chainLeelagave MeeraRs2000/-. Thisis a valid
contract evenwithoutconsideration.
G) Time barreddebt:
A writtenandregistereddocumentbythe debtorsigninghimself or hisagentwitha
promise topay a time barreddebt,isa validcontract and doesnot require anyfresh
consideration.[Section25(3)]43The intentionshouldbe clearly expressed.Itmaybe the
full amountor part of the amount of the debtthat is to be returned. Note:Anoral
promise isnotacceptable.
 Illustration:Sitatookaloanof Rs 5000 fromGeeta.She couldnot
pay intime andit became time barredunderthe LimitationAct.She
made a signedandwrittenpromise toGitathat she wouldreturnRs
3000 on account of the debt.Thisis a validcontract. No new
considerationisrequired.
Agency:
No Considerationisrequiredtocreate anagency betweenthe principal and agentaccordingto
section185. If a personvolunteerstoworkonbehalf of another personashisagentwithoutany
remuneration,arelationshipof agencywill be created evenif there isnoconsideration.The
agentcan work on behalf of the principal and bindthe principal onanycontractsthat are taken
by the agenton hisbehalf. Note:Before the executionof the agreementthe contractwill be
voidsince there isno consideration.
Completedgift:
No considerationisrequiredbetweenthe donorandthe donee of any giftsalreadymade.The
personwhoreceivesthe giftbecomesitsowner.agiftor a donationalreadygivencannotbe
undone onthe groundsthat there wasno consideration.There isnoneedfornatural love and
affectionbetweenthe partiesbut there shouldnotbe anyprioragreementtogive agift. Note A
promise togive a gift,ona future date isvoidif itdoesnot have any consideration.
o Illustration:Vibhahasgiftedawatchto Nirmalyaonhisbirthday.Thisisa
validcontract eventhough there isnoconsideration.
Remissionofa promise:
A promise bythe promisee tothe promisortogive a concession(section63) inthe performance
of hisobligationsiscalledremission.This remissionof apromise can be withoutconsideration.
CAPACITY OF PARTIES
In Indiapeople canmake agreementswiththeirfriends, neighbours,colleaguesbutnot all
agreementscanbe termedascontract. An agreementbecomesacontract only whenitfulfils
the requirements.One of the veryimportantrequirementsis competencytocontract.

20. 19
WHO IS COMPETENT TO CONTRACT?
Section11 of the Indiancontract Act providesthata personiscompetenttocontract if:
1 He or she isof the age of majorityaccordingto the law
2 He or she isof soundmind
3 He or she isnot disqualifiedbythe law he or she issubjectto.
Thus inorderto enterintoa validcontract one has to have all the three requirements andif anyof
these requirementsisnotfulfilledthenhe orshe isincapable toenter intoa validcontract,a
contract to be recognizedandenforceablebylaw.
Who is not competent to contract
The people whoare not competenttocontract are:
(a) Minor
(b) Personwithunsoundmind
(c) Persondisqualifiedbylaw
WHO IS A MINOR?
Section11 of the Indian Contract Act providesthattobe competenttocontract a personshould
be a major.However,section11doesnotsay that a minor’scontract is void.To put itin other
wordssection11 of the IndianContract Act issilentaboutthe legalityof minor’scontract.
PrivyCouncil inMohiri Bibi vs.DharamdasGhose clarifiedthispositionforthe firsttime
WHAT IS THE POSITION OF AGREEMENTS WITH A MINOR?
The law isquite protective towardsthe minors.The positionof agreementswithaminoris
givenbelow:
 VoidAgreement:
Agreementwithaminorisvoid.Anagreementwithaminorisnot enforceable bylaw
fromthe verybeginning. Anagreementbetweentwopeoplewhoare bothminorsis
void. Boththe partiescannotenforce the agreementinthe Courtof law.
o Illustration:GeetaandPriyankawere classmatesandGeetadidnothave
moneytobuy hergeographytextbooksoshe borrowedrupeestwohundred
fromPriyankaand promisedtoreturnitina week.Afteraweekwhen
Priyankaaskedforhermoney Geetarefusedtoreturnit.In thiscase
Priyankacannotsue Geetafor the breach of contract because the
agreementtheyhadbetweenthemcannotbe enforcedinthe Courtof law.
An agreementbetweentwopeople of whichone isamajor andthe otherisa minor is
void. Insuch casesthe minorcan be a beneficiaryorapromisee.The minorcanenforce
the contract and if the minorhasbenefitedfromthe otherpartythenhe or she may be
askedto restore (rectitude) the benefitshe/she hasobtainedfromsuchagreementto
the otherparty. Howeverrestitutionisallowedonlyif the moneyorproperty(benefit)
couldbe traced. For instance if the minorhasborrowedmoneyfromamajor and used it
all thenhe/she cannotbe askedtorestore it.
o Illustration1:Rama seven-year-oldboyaskedRaghuvanshamacricketcoach
to give himcoachingclassesandRaghuvanshamagreedtogive coaching.
Ram paidin advance the tuitionfee.Raghuvanshamgave coachingonlyfora
day andthen discontinuedonthe pretextthatthe agreementisvoid.Ram

21. 20
couldenforce the agreementthoughvoidforbreachof contract.In thiscase
Ram a minorwas a beneficiary/ promisee andtherefore hadaright to
enforce the agreementinthe Courtof law
 Partnership/companyMinorcannot enterintoa partnershipagreementtherefore he /she
cannot be made a partner buthe / she can be admittedtothe benefitsof partnershipwith
the consentof all the partners.Similarlyaminorcannotbecome a shareholderina
company,as he is incompetenttoenterintoa contract.In case a minorinheritsshares(fully
paid) thenhe can become a shareholderactingthrougha lawful guardian.Here againa
minorenjoysonlythe benefitsof shareholding.He cannotbe made liable forpaymentof call
money.
o Illustration:Devendraruna businesswithfourpartners.Devendradiedinaroad
accident.A fifteen-year-oldsonGajendrasurvivedhim.AsGajendrawasaminorso
He couldnotbe made a partnerin place of hisfatherbut withthe consentof all the
partnershe was admittedtothe benefitsof the partnershipfirm.He wasentitledto
all the benefits,whichaccruedtothe firmbut was notliable foranylosses.
 Ratification:Ratificationmeansapproval orconfirmation.If aminorhas entered intoan
agreementhe orshe cannot ratifythe same agreementafterattainingthe age of majority.It
isbecause an agreemententeredintobyaminoris voidanda void agreementcannotbe
made validafterminorhasattainedthe age of majority.If he or she wishestocontinue then
theywill have to make a freshagreementwithafresh consideration.
o Illustration:Gajendraafifteen-year-oldboywasadmittedintothe benefitsof
partnershipafterhisfatherdied.AfterattainingmajorityGajendracannotratify the
same agreementorcontinue withthe agreement,whichhe hadenteredbefore
attainingmajority.If Gajendrastill wantstocontinue enjoyingthe benefitsof
partnershipthenhe will have tomake afreshagreement.
 AgencyMinorcan be appointedasan agent.He is notliable foranyof his/ heracts rather it
isthe principal whowouldbe heldresponsible tothe thirdpartyfor the acts of the minor
o Illustration:Sylviaasix-year-oldgirl wentwithapiece of clothtothe tailorand
askedhimto stitcha blouse forhermother.The tailorstitchedthe blouse but
Sylvia’s motherrefusedtopaythe moneyonthe pretextthatthe agreementwas
void.Thiswas not a voidagreementbuta contract of agency where the tailorcould
enforce the agreementandSylvia’smotherwhowasthe principal wouldbe liableto
pay.
 NegotiableInstrumentMinorcandraw a negotiable instrumentandcan enforce
instrumentdrawninfavourof him/her.He/she cannotbe made personallyliablethus a
minorcan be a promisee ora payee andhe /she can alsobecome indorse bytransferof
negotiable instruments.
o Illustration:Shyamisasixteen-year-oldboywhohasbeenhiredbyKrishnato
cleanhiscars everydayin the morning.KrishnapaysShyambydrawinga
cheque inhis name for rupees1000. Shyam depositsthe cheque inhis bankand
the bank dishonours the cheque.Shyamcansue Krishnafor dishonouringof the
cheque anddemanda fresh one withcompensation.
 NecessariesThe Personwhohassuppliednecessariestoa minoror to his/her
dependentsisentitledtobe reimbursedfromthe propertyof the minor.Accordingto
section68 the termnecessariesinclude goodsandservices,whichare requiredto
maintain a personina condition,state anda stationinlife inwhichhe/she is.Station in

22. 21
life meansthe standardof livingthe personhas.Necessariesinclude food,clothing,
shelter,educationandmarriage of a female.Minorhasto reimburse the suppliesof
such necessariesandthe loansforsuch necessaries.Claimforpaymentfornecessaries
can be made againstthe minor’sproperty.Minorcannotbe heldpersonallyliablefor
such necessaries.
 Education- A Necessity Educationisconsideredanecessityandthereforeaminoris
liable forsuchnecessary howeverhe isnotpersonallyliablethe paymentforsuch
necessariesare made againsthis/herproperty.
o Illustration:PriyawholostherparentsinanaccidentstudiedinaSchool in
Delhi. She failedtopayher tuitionfee fortwoconsecutivemonths.She was
liable topayher fee because educationisanecessity.Howevershe isnot
personallyliable.She will payoutof her property.
 Medicine- A Necessity A minorisalsoliable foranymedicinalservicehe hasprocured.It
can be the doctor’s consultationfee oritcan be the paymentformedicinesorthe
treatment.
o Illustration:Cindiaafourteen-year-oldorphangirl wassufferingfrom
appendicitis. She wastakentothe hospital andwasoperatedupon.Cindiawas
liable topaythe hospital chargesas itwas a necessity.Againshe wasnot
personallyliable.Eitherher guardianswouldpayorit wouldbe paidoutof her
property.
 Shelter- A Necessity.Home isveryessential foranyhumanbeinganda minoris notan
exception.He/she isliable forthe paymentforhis/hershelter.If he/shehastakenhouse
on renthe/she is liable foritsrent.
o Illustration:Srikantaseventeen-year-oldnative of Hyderabadcame toDelhi and
tookadmissioninDelhi Universitytodohisgraduation.Srikanthadnohostel in
hiscollege anddidnothave any relativessohe tooka payingguest
accommodation andagreedto paya monthlyrentof Rs.4000 to his landlady.
Afterstayingforthree monthsSrikantrefusedtopaythe rent.Srikantcannot
pleadminorityhere becausehome isanecessityandhe isliable forthe
necessity.
 Torts Minor isheldliable for tort(civil wrong).A minorcannotbe heldliableunder a
contract because an agreementwithaminorisab initiovoid.If aminorhas been
negligentinacontract he/she cannotbe made liable henceitcannotbe treatedas a
tort. Tort meansa civil wrong whose formationisnotonthe basisof a contract. Stealing,
abusinganddestroyingpublicpropertyisacivil wrongandtherefore minor isliable for
it.
o Illustration1:Nehaa sixteen-year-oldhiredamusicsystemforherbirthday
party fromRamesh.She promisedtouse the musicsystemproperlyandreturn
it to himonce the party was over.Nehausedthe systemnegligentlyand
corruptedit.Nehawas notliable fortort.
 InsolvencyMinorcanneverbe declaredinsolventbecause he/she isnotcapable of
enteringintoavalidcontract.Agreementswithaminorare voidtherefore he/she does
not incurany liabilityunderanyagreement.
o Illustration:Pradeepafourteen-year-oldboyhadtakenloanfromSatishfor
payinghisschool fees.Asthiswasa necessitytherefore he wasliable topaythe
loanmoney back outof hisproperty.He didnot have enoughpropertytopay

23. 22
the full amountso he paidonlypartly.Inthiscase SatishcouldnotholdPradeep
personallyliableforthe unpaidmoneyandthereforePradeepcouldnotbe
declaredinsolvent.
WHO IS OF UNSOUND MIND?
Let’sus firstanswerthe question‘Whoisa personwithasoundmind?’ Accordingtosection12 a
personisof soundmindwhenhe /she is capable to
(a) Understandthe termsof a contract
(b) Form a rational judgmentaboutthe effectsof the termsof contracton his/ her interestIf a
persondoesnotsatisfyboththe above conditionsthenhe orshe isof unsound mind.
Unsoundnessof mindcanbe PermanentorTemporary
Permanentunsoundnessof mindisfoundamongst
(1) IdiotsTemporaryunsoundnessof mindisfoundamongst
(1) Lunatics
(2) Drunkards/ personsunderintoxication
Who is an idiot?
As perthe Englishdictionaryanidiotisan utterlyfoolishora senselessperson.A person,who
lacksthe normal powerof thinkingandisdevoidof ahealthymental development.He /she has
a mental age belowthree yearsandgenerallyisunableto learnconnectedspeechorguard
againstcommondangers.Thisproblemisgenerally bybirthanditsrecoveryisalmostimpossible
therefore itisconsideredtobe a permanentunsoundnessof mind.
o Illustration:RamandShyamwere twin brothers whowere mentallychallenged.
They were twentyyearsoldbuttheirmindswere thatof a three-year-oldchild.They
were like thisrightfromtheirbirth.Onlyamiracle couldhave curedthemotherwise
innormal circumstancestheycouldneverbe cured.Asa resulttheywere
permanently incapable toenterintoacontract.Any agreementwiththemwouldbe
void.
Positionof agreementswithanIdiot.
An idiotispermanentlyof anunsoundmindthereforehe /she isincapable of entering intoany
validcontract.Anyagreemententeredintowithanidiotisvoid.
o Illustration:Gyaneshwaratwenty-year-oldmanwasbornan idiot.He wenttoa five
star hotel andordereda lavishdinnerforhimself.Afterthe dinnerhe failedtopay
the bill.Gyaneshwarcouldnotbe heldliablebecause he wasof unsoundmind.
Who is a Lunatic?
As perthe Englishdictionaryalunaticisa personwhois mentallyill,dangerous, foolishor
unpredictable.He orshe losesthe normal powerof thinkingdue tomental strain,accidentora
tragic incidentinlife.Lunaticsare notborn insane.Theysuffer fromintervalsof sanityand
insanity.
o Illustration:Gayatri wasa 54-year-oldladywholostherhusbandina car accident.
Ever since she lostherhusbandshe wentintoa depression.Herhusbandwasa
businessmanandsoduringthattime she enteredintoanagreementwithone of her
husband’sclient.The agreementcouldbe declaredvoidbecause she signeditwhile
hermental conditionwasnotnormal. Positionof agreementswithaLunatic.A

24. 23
lunaticisincapable of enteringintoavalidcontract.HoweverLunacyisa curable
ailmenttherefore afterrecoveringfrominsanityhe /she can enterintoa valid
contract. A contract witha personbefore he /she turneda lunaticisa validcontract
and a contract witha personafterhe / she recoveredfromlunacyisalsoa valid
contract.
o Illustration:Gayatri whohadlosther husbandinan accidentwentintodepression
but afterfewmonthsshe recoveredandenteredintoanagreementtosell her
house toLakshman.The agreementwithLakshmanwasvalidandwasverymush
enforceable.
Who is a Drunkard / Person under intoxication?
A drunkardisa personwhoisunderthe influence of alcohol andtherefore cannot properlythink
and make rational judgments.A personissaidtobe underintoxication.
o Illustration:Gyaneshwaratwenty-year-oldmanwasbornan idiot.He wenttoa five star
hotel andordereda lavishdinnerforhimself.Afterthe dinnerhe failedtopay the bill.
Gyaneshwarcouldnotbe heldliable because he wasof unsoundmind.
WHOM DOES LAW DISQUALIFY?
There are people whoare physicallyandmentallysoundyettheyare disqualifiedbylaw toenterinto
any validcontract.The people whoare disqualifiedbylaw are the following:
 Alienenemy:
An alienenemycannotenterintoacontract while his/her countryis at war withour
country.A contract witha foreignnational isvalidbutbecomesvoid assoonasthe war
starts.These contracts may againbe revivedafterthe warendsif the central governmentis
of the opinionthatthe contract isnot againstthe public interestof the country.A new
contract can also be enteredintowithanalienenemy afterthe warendsif itis not against
publicinterest.
o Illustration:MirZafaran Afghani businessmanhadanAmericanbusinessassociate by
the name of Tom.They bothenteredintoabusinesscontractbutbefore theycould
execute the contractAmericaattackedAfghanistan.Asaresulttheircontractbecame
voidbutafter the war endedtheycouldeasilyrevivethe oldcontractor couldenter into
a newcontract because theywere nolongeralienenemies.
 ForeignSovereignandAmbassador:
ForeignSovereignsandtheirrepresentatives are citizensof foreigncountries.Theycanbe
tourists,ambassadorsanddelegateswho visitourcountryfora specificpurpose and
duration.
o Illustration:SuzanneisaCanadianambassadorinIndia.While she wasdrivingin the
streetsof Delhi she happenedtohitamotorcyclist.AsSuzanne wasa foreign national
she couldnot be triedinthe IndianCourt. ForeignSovereignsandDiplomatsare free to
enterintoa validcontract inour Countryand can enforce those contractsinour Courts
but the problemisthatwe cannot sue theminour Courts withoutthe sanctionof the
governmentunlessthey wishtosubmitthemselvestothe jurisdictionof ourCourts.If
the foreignnational has enteredintoacontractthroughan agentresidinginIndiathen
inthat case the agent can be heldresponsibleandcanbe suedinthe Court of law.

25. 24
o Illustration:JohnanAmericantouristcame toIndiaandstayedina five starhotel forfive
daysbut whenhe was leavingthe hotel he didnothave moneytopayhisbills. AsJohn
was a touristso he couldnot be triedinour Court.He couldnot be suedforrecoveryof
the bills.
 Convict:
Convictcannotenterintoa validcontract while undergoingimprisonment. Assoonasthe
convict’stenure of imprisonmentfinisheshe /she isno longer disqualifiedtoenterintoa
contract.
o Illustration:Radhawasfoundguiltyof crime of theftandwasundergoing
imprisonment.Duringthe yearsof imprisonmentshe wasnotcompetenttoenterin
to any contract butas soonas herterm inthe prisongetsovershe will be
competenttoenterintoa validcontract.
 Insolvent:
The Court declaresthose peopleinsolventwhoare unable todischarge theirliabilities.Their
debtsexceedtheirassetstherefore theyare unable topaytheir creditors.Afterthe Court
declarestheminsolventtheirpropertystandsvestedwiththe official assignee oranOfficial
receiver.
o Illustration:Shambhuabusinessmanwasrunning intohuge lossesforthe pastfive
years.He wasunable topay hiscreditorsandso hiscreditorssuedhim.The Court
declaredShambhuinsolventandhispropertywasvestedwiththe official assignee.
 Company:
The contractual capacityof a companyis normallymentionedinthe objectclause of the
Memorandumof Association.Anyactdone outside the purview of the memorandumisultra
viresandany agreemententeredintoforthe executionof suchanact isvoid.
o Illustration:RamandShyamCompany were inthe businessof manufacturingleather
bags.The objectclause inthe Memorandumof Associationprovidedthatthe
companyisto manufacture leatherbags.One daythe directorof the company
entered intoanagreementwithabuyerforsellingthemleathershoes.The
agreementwas voidbecause itwasbeyondthe scope of business.The companyas
perits memorandumwastosell onlyleatherbagsandnotleathershoes.Therefore
the agreementwasnotvalid.
FRAUD
Fraud isfalse representationof factsmade will fullytodeceive anotherperson. Section17of the
IndianContractAct statesthat if any of the followingactsare committedbyanyparty to a
contract or withhisagent’sconnivance,will fully withintenttodeceiveorinduce another
personor hisagent to enterthe contract it will resultintofraud.
1. It isa suggestionof afact whichisnot true by a personwhodoesnot believe thatit is
true.
2. It is an active concealmentof factsbya personwhohas knowledge orbelief of the facts.
3. It is a promise inwhichthere isnointentionof performance of the contract.
4. Any otheractionwhichhas the intentof deceivingthe otherperson.
5. Any act or omissionwhichisdeclaredfraudulentbylaw.

26. 25
Essentials of Fraud
The above descriptionof definitionof fraudcanbe explainedthroughthe essentialsof fraud.
1. False Suggestions:Fraudmuststate factswhichare false andthe personmaking the
Suggestion knowsthathe ismakinga false representationorfalse statementof facts.
The false suggestionismade intentionallytoinduce ordeceive the otherpartytoenter
intoa contract. This issupportedbythe followingcase law:
2. Active Concealmentof aFact: Active concealmentiswhenapersonhasthe knowledge
or belief of the factwhichhe knows isnot true.Thisamountsto fraud. Passive
concealmentiswhenapersonmakesanincorrectstatementthinkingthatthe
statementiscorrect.
3. Making a Promise withoutIntentionof fulfillingit:If a personmakesapromise buthe
doesnotintendtokeepit.It isa clearcase of fraud because atthe outsetthe intention
was to make a false promise.
4. Anyotheract fittedtodeceive:Anactusedtotrick or chit someone byunfair meansis
consideredtobe fraud.Thisisan act whichisdone withthe intention of committinga
fraud.
5. Anyotheract consideredbylaw tobe fraudulent:Accordingtothe law itis obligatory
that all material factsare disclosedwhilesellinganimmovableproperty. Otherwise it
amountsto fraud.
6. The Party that ismisledbyFraudshouldhave sufferedsomeloss:There cannot be fraud
withoutanydamage.The lossmustbe intermsof moneyormoney’sworth, orlossof
some tangible assets.Fraudwithoutdamage doesnotgive rise toanydeceit.
7. Half Truths: Whena personspeaksa half truth,it meansdisclosingsome portionsof
relevantmaterial leavingthe otherportionundisclosed.Accordingtolaw a half truth is
worse thanfull falsehoodasitmisleadsthe otherperson.Therefore if a personspeaks
he must give all the factsand not just half-truth.Otherwisesilence amountstofraud.
8. Change inSituation:Sometimeswhenastatementismade itisthe truth but
circumstancesbringa change insituationandwhenitisactuallyacted upon,it becomes
false.Itbecomesthe dutyof the person to immediatelycommunicate the change in
situation.Thisissupportedbythe followingcase.
Remedies of Fraud According to Section 19
Whenconsentistakenby fraudfromanotherpersonhe has the followingremediesavailable tohim.
 Rescindthe Contract:
The party whose consentwasreceivedbyfraudhasthe right to avoidthe contract because
it isvoidable atthe optionof the persondefrauded.
 Performance of Contract:The persondefraudedcanaskfor completionof the contractbut
withrestitutionwhichmeansthathe wouldlike tobe putinthat position inwhichhe would
actuallybe inif the representationsweretrue.
 Compensation:The defraudedpartyhasthe rightto demandcompensationforthe lossthat
iscausedto him byfraud.He has the rightto claimdamagesevenif he opts to continue with
the contract.
 MISREPRESENTATION:Misrepresentationisafalse ormisleadingstatementthata person
honestlybelievesit tobe true.He makesthisstatementwithoutanyintentiontocheator

27. 26
misleadanotherperson.The falsestatementisseriousbutnotasseriousasfraud. According
to Section18 of the contract act misrepresentationthe meaningof them isrepresentationis
givenbelow:
o It isa positive assertionof informationbya personwhichisnottrue but the person
believesittobe true.
o It isa breachof dutywithoutanyintentiontodeceive.However,the persongains an
advantage bymisleadinganotherperson.
o The statementinnocentlycausesapartyto an agreementtomake a mistake tothe
subjectof the agreement.
Misrepresentationoccursinthe followingcases:
o UnwarrantedStatements:Whenaparty makesa positive assertionthatthe
informationfromwhichhe ismakingastatementistrustworthyhe meansthat
he is makinga warranted statement.Unwarrantedstatementmeans
informationfrom untrustworthysource.Therefore,whenapersonbelievesthat
the informationistrue butitis incorrect.It ismisrepresentation.Thisis
supportedbythe case
o Case Law 8In OceanicSteamNavigationCompanyV Soonderdas.61The
plaintiff fromwhomapersoncharteredashipstatedthat the shipwas
of 2800 tonnage register.However, the shipwas3000 tonnage register.
The plaintiff didnothave anybasisto believe the factstatedbywhom.
The contract wasthe cancelleddue tomisrepresentation.
o Breach of Duty: Whena party doesnotintendtocheat anotherpersonbutthe
circumstancesshowthathe has not done hisdutycorrectlybecause of
nondisclosureof essential information.He hasusedthe situationtohis
advantage thusbringinghim certainbenefits.Thistype of situationiscalled
constructive fraud.The partymaking such statementswill be guiltyof
misrepresentation.Thisissupportedbythe following case.
o Case lawBannermanv White 1861.62 The plaintiff wantedtosell the
defendanthopsonthe understandingthatsulphurwasnotusedintheir
growth.The defendantwasclear thathe wasnot interestedinsulphur
usage incultivationof Hops.Althoughsulphur wasusedin5 out of 300
acres the plaintiff hadforgotten.The courtheldthatthe contract could
be avoidedonthe groundof misrepresentationalthoughrepresentation
was notdone.
o InnocentMistake:If one partyleadsthe otherone to make a mistake in the
quality orsubjectmatterit isa case of misrepresentation.Thisclause includes
the cases where vital factsare suppressedandamistake hasbeenmade.
Essentials of Misrepresentation
Misrepresentationasalreadystatedisafalse representation of factswhichthe person makes
withoutknowingthatitisfalse.He makesthe statementsbelievingthemtobe true.The
followingessentialselementsrepresentmisrepresentation.

28. 27
 Material Facts: Misrepresentationmustbe of those factswhichare importantinthe
formationof a contract. Some expressionsorpassingstatementsthatare notrelevant
will notbe enoughforavoidingacontract.
 Statementpriortoexecutingthe contract:The misrepresentationof factsmustbe
before the contractis executedbythe partiestothe contract.
 Misrepresentationbyaparty to the contract: Misrepresentationof factshasto be made
by a party or hisagentto the contract. A statementmade bya strangerto the contract
doesnothave any effectonthe validityof the contract.
 Objective of misrepresentation:The statementsmade bymisrepresentationof facts
shouldbe of the intentiontodeceive the otherpartyandto induce himto enter the
contract.
 Reactionof otherparty: Asa resultof the misrepresentationthe otherpartyinthe
contract shouldhave actedon the faithof the factsrepresented. Effectof
Misrepresentation AccordingtoSection19 of the IndianContractAct if on the
misrepresentationof statementsapersontothe contract hasbeenaffected,he can
avoidthe contract because itbecomesavoidable contractat hisoption.The person
whose consenthasbeentakenbymisrepresentationhasthe rightto rescindto the
contract. He hasa rightto ask forcompletionof the performance of the contractand He
can alsoask for beinggiventhe positionwhichhe wouldhave if the representationof
facts wastrue at the time of askingfor performance of the contract.
The right to rescind the contract is in the following three cases.
 Time Period:The contract hasto be rescindedwithinareasonable timeotherwisethe
rightto rescindthe contract will be lost.
 Affirmation:The aggrievedpartyshouldnotmake anaffirmationtothe contract
otherwise he willlose the righttorescind.
 ThirdParty Rights:The aggrievedpartyshouldbe careful tofindoutthat third party
rightsare not acquiredwhile he asksforrescissionof the contract. Exceptionstothe
Rightto Rescindthe Contract.
In the followingcasesthe partywhose consentwasreceivedby misrepresentation cannotgetrelief
of rescindingthe contract.
1 Where the affectedpersonhadthe possibilityof findingoutthe truthwithordinarydiligence.
2 Where the affectedpartyisignorantthathe gave hisconsentdue tomisrepresentationof facts.
3 Where the affectedpartybecomesaware of misrepresentationbutstill decidestoreceive the
Benefits underthe contract.
4 Where a thirdparty innocentlyentersintobenefitsof the contractbefore the contractwas
rescinded.
5 Where itis difficulttorestore the rightsof the affectedpartyto the original position.

29. 28
MISTAKE
Mistake can be definedasan incorrectstatementwhichcreatesmisunderstanding betweenthe
parties.Suchmistakestake place whenthe partiestothe contractare not aware of the termsof the
contract in agreementwitheachother.Anagreement betweentwopartiesaccordingtothe Indian
Contract Act isvalidonlywhenboththe partiesagree uponthe same thingandin the same sense.
Accordingto section20 the agreementbecomesvoidwhenthere isamistake inagreement.In
normal circumstanceslawdoesnotgive the rightto anyone toavoida contract because he was
mistakenaboutsome factinthe contract.However,some mistakesare fundamental tothe contract
insuch a mannerthat the verybasisof the formationof the contract becomesfaultyandthere isno
contract at all.In such casesthe agreement isconsideredtobe voiddue toconsensusadidem.
Typesof Mistake can be of two types.
These are mistake of facts andmistake of law.
(1)Mistake of fact can be bilateral orunilateral and
(2) Mistake of lawcan be mistake of law inIndiaand mistake asto foreignlaw.
 Mistake of Fact: Mistake of fact can occur whenboththe partiestothe agreementare under
a mistake or onlyone of the partiesisundera mistake tothe essentialelementsof the
contract. Whenbothpartiesare undera mistake itiscalled bilateral mistake and whenonly
one party to the contract is undera mistake itiscalleda unilateral mistake.
Bilateral Mistake:A bilateral mistake ismade inthe followingcases:
(i) Mistake of existence of subjectmatter:The agreementisvoidif itisagreedupon a
subjectmatterwhichdoesnotexistandthe partiestothe agreementdonothave any
knowledge about it.Thisisbilateralmistake because bothpartiesdidnotknow this
material factat the time of makingan agreement.
(ii) Mistake of identityof subjectmatter:The agreementisvoidif twopartiestothe
contract have confusionaboutthe identityof the subjectmatter.The agreementis void
due to wantof consensus.
(iii) Mistake regardingquality/descriptionof subjectmatter:Whentwoparties make an
agreementtheyshouldunderstandthatthe qualityof the product.If both partiesmake
a mutual mistake aboutthe descriptionof the product,itisbilateral mistakeandthe
agreementisvoid.
Mistake regardingtitle of the product:Anagreementof sale isvoidif there isa mistake of mistake
overthe entitlementof goods.
1) Mistake regardingsubstance of subjectmatter:If bothpartiestoan agreement
make a mutual mistake of factswhichis the essential partof the subjectmatterthe
agreementisvoid.
2) Mistake regardingquantityof subjectmatter:If twopartiesare mistakenabout the
quantityof subjectmatterto be supplied,thenthe agreementisvoid.Quantityis an
essential factof anagreement;if itisnot correct the agreementtobuy/ sell cannot
be held.
3) Mistake regardingprice of the subjectmatter:Price isan essential feature inthe sale
of a product.If there is a genuine mistakeregardingprice the agreementisvoid.
4) Mistake aboutpossibilityof performance:If there isabilateral mistake regardingthe
possibilityof performance the agreementisvoid.Impossibilityof performance can
be due to physical reasonor legal impossibility.

30. 29
Effectof Bilateral Mistake:Whenthere isa bilateral mistake in understandingthe essentialfactsof
the agreement,the contractbecomesvoidab initio.Thisagreementisvoidfromthe beginning,does
not have anylegal significance.Itcannotbe enforcedatthe optionof any of the partiestothe
contract."
Unilateral Mistake:Accordingtosection22, unilateral mistake occurswhen one partytothe
agreementmakesamistake.The contractis notvoidable because one of the partiestoit isundera
mistake.However,there are certainexceptionstothe rule.These are due to the followingreasons:
 Mistake of identityof a party:A veryfundamental mistake occursif anagreement ismade
witha wrongperson.Whena party desirestodeal withacertainpersonand he doesnot do
so due to false representationof anotherpersonitisanerror in consensus.
 Mistake aboutnature of transaction:If a personmakesa transactionwithout understanding
nature of the transaction, itcannot be executed.Thismistake is possiblewhenaperson
doesnotdisclose tothe otherthe true nature of the document.