The document discusses key aspects of contract law in India such as the definition of a contract, essential elements, and validity requirements. It provides definitions of a contract from various sources and explains that a valid contract requires [1] agreement between competent parties, [2] lawful consideration, and [3] intention to create legal relations. The document also discusses concepts such as offer and acceptance, free consent, mistake, and effects of coercion, undue influence, and fraud on the validity of agreements.

1. The Law of Contract 1872
Meaning and source of Mercantile Law
The Law of Contract
One of the most important part of Mercantile law in India is the Law of Contract. This
law determines the areas covered by the parties who enter into a contract.
Meaning and source of Mercantile law
Mercantile law is a part of civil law. It governs and regulates the trade and commerce in
the country. Mercantile law deals with the needs of a business man.
What is law and how it come into existence?
It is desired to know why we need law before we learning the meaning of the word
“Law”. We need law to preserve peace and orderliness of every society. So law is
required by the society.
Function of Contracts
 Creates rights and duties between parties.
 Ensures compliance with a promise
 Provides stability and predictability for buyers and sellers in the marketplace
Parties:
 Promisor (makes the promise)
 Promisee (accepts the promise)
 The Offeror (makes the offer)
 The Offeree (accepts the offer).
Definition of Contract
Some definitions are as follows:
Pollack: “Every agreement and promise enforceable at law is a contract.”

2. Sir William Anson: “An agreement enforceable by the law made between two or more
persons, by which rights are acquired by one or more to acts or forbearance on the part of
others or others.”
Sec. 2(h) of Contract Act provides “An agreement enforceable by law is a contract.”
Thus a contract consists of two elements:
(a) An agreement (b) The agreement must be enforceable by law.
1. Agreement
Section 2(e) defines agreement as, “Every promise and set of promises, forming the
consideration for each other, is an agreement.”
Section 2(b) defines promise as, “When the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise.”
A promise comes into existence when one party makes a proposal the other party and that
other party gives his consent. Therefore, a contract is an agreement: an agreement is a
promise and a promise is an accepted proposal.
Example
A offers to sell his car to B for Rs. 8 Lac. B gives acceptance. It is an agreement.
2. Enforceability
An agreement is enforceable if it is recognized by courts. In order to be enforceable by
law, the agreement must create legal obligations between the parties. Thus, the term
agreements is a wider than a contract. “All contracts are agreements but all agreement
are not contracts.” Agreements are of two types:
(a) Social agreements
Social agreements are not enforceable because they do not create legal obligations
between the parties. In such agreements the parties do not intend to create legal relations.
(b) Legal agreements
Legal agreements are enforceable because they create legal obligations between the
parties. In such agreements the parties intend to create legal relations. All business
agreements are contracts as there is an intention to create legal obligations.

3. Examples
(a) A invites B to dinner. B accepts the invitation but does not attend. A cannot sue B
for damages. It is a social agreement.
(b) A promises to sell his car to B for Rs. 2 Lac. It is a legal agreement because it
creates legal obligations. This agreement is a contract.
Requirements of a Contract
A valid, enforceable contract includes:
 Agreement. A legal offer and an acceptance
 Consideration. Something of value given or promised to convince a party to
agree to the deal.
 Capacity. Both parties must be legally competent (i.e. intoxication, mentally
competent)
 Legality. Contract’s purpose must be to accomplish some goals that is legal and
not against public policy.
Essentials of a Valid Contract
A contract is an agreement that can be enforceable by law. An agreement is an offer
and its acceptance. An agreement which can be enforceable by law must have some
essential elements. According to Section 10 "All agreements are contracts if they are
made by the free consent of the parties competent to contract, for a lawful consideration
and with a lawful object, and are not hereby expressly declared to be void" As per the
above section, a contract must have the following elements.
1. Proper offer and it’s acceptance
2. Intention to create legal relationship.
3. Lawful consideration
4. Capacity of parties to contract
5. Free Consent
6. Lawful object
7. Legal formalities

4. 8. Certainty of meaning.
9. Possibility of performance
10. Agreement not expressly declared void
Proper offer and it’s acceptance: For an agreement, there must be a
lawful offer by one party and lawful acceptance of that offer from the other party. The
term lawful means that the offer and acceptance must satisfy the requirements of Contract
Act.
Example
A says to B that he will sell his cycle to him for Rs. 2000. This is an offer. If B accepts
this offer, there is an acceptance.
An offer requires:
 Reasonably definite terms.
 Communication to Offeree.
Modes of Offer
 Time table
 Tenders and Auctions [Harris v Nickerson]
 Restaurant menu card
 ATM or vending machines
Termination of Offer.
 Time lapses, offer expires
 By Act of the Parties.
 Destruction of Subject Matter
 Revocation by Offeror (unless irrevocable).
 Rejection by Offeree (or counteroffer).
 Operation of Law (destruction, death).
Acceptance
This will normally mean that the offer is no longer available to anyone else, as the
stock may be exhausted, such as where a person has a bicycle for sale.

5. Refusal
An offeree may refuse an offer, in which case the offer ends, so it cannot be
accepted later by the offeree.
Counter-offer
Sometimes a reply from an offeree comes in the form of a new proposal, or
counter-offer. It may simply be that the offeree is not happy with one or more of
the terms and makes changes accordingly. Since this is not an agreement to all the
terms of the offer, it is not acceptance, and is known as a counter-offer. It is really
a new offer, which is then open to acceptance or termination in some other way.
The effect of a counter-offer is to destroy the original offer. This can be seen in
the following case.
Communication of Acceptance.
 Authorized Means of Communication is either express or implied by form of offer
(e.g., U.S. mail, fax, email).
“Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to
Offeror in the form it was received, unless offer requires a different method (e.g.,
Fed-Ex, or receipt by Offeror).
Offer and Acceptance: Where the contract is made?
 It determines the time of forming the contract
 It stipulates the jurisdiction of the court; and
 It affixes the rights and obligations of parties.
 Is the contract complete at the instance and place of the acceptor or offeror?
Intention to create legal relationship: The parties entering into a
contract must have an intention to create a legal relationship. If there is no intention to
create a legal relationship, that agreement cannot be treated as a valid contract. Generally
there is no intention to create a legal relationship in social and domestic agreements.
Invitation for lunch does not create a legal relationship. Certain agreements and
obligation between father and daughter, mother and son and husband and wife does not
create a legal relationship. An agreement wherein it is clearly mentioned that "This
agreement is not intended to create formal or legal agreement and shall not be subject to
legal jurisdiction in the law of courts." cannot be treated as a contract and not valid.
Examples
(a) A father promises to pay his son Rs. 500 as pocket money. Later, he refuses to pay.
The son cannot recover as it is a social agreement.

6. (b) A offers to sell his watch to B for Rs. 200. B agrees to buy. It is a contract as it creates
legal relationship.
Lawful consideration: An agreement must be supported by a consideration
of something in return. That is, the agreement must be supported by some type of service
or goods in return of money or goods. However, it is not necessary the price should be
always in terms of money. It could be a service or another goods. Suppose X agrees to
buy books from Y for $50. Here the consideration of X is books and the consideration of
Y is $50. It can be a promise to act (doing something) or forbearance (not doing
something). The consideration may be present, future or can be past. But the
consideration must be real.
Example
If John agrees to sell his car of $ 50000 to Peter for $20000. This is a valid contract if
John agrees to sell his car not under any influence or force. It can be valid only if the
consideration of John is free. An agreement is valid only when the acts are legal. Illegal
works like killing another for money, or immoral works or illegal acts are cannot be
treated as a valid agreement. So, illegal works will not come under the contract act.
Exceptions to Consideration
 Law of Trust/ Insurance
Klause Mittelbachert v East India Hotels [pilot, head injuries during a dive
at the swimming pool, contract between Lufthansa and hotel Oberoi, can
the pilot claim damages, though the consideration was not moving from
him ?]
 Conduct, Acknowledgment or Admission
Narayani Devi v Tagore Commercial Corporation [If the defendants start
the payment and then withdraws]
 Provision for marriage expenses or maintenance under family arrangement/
Veeramma v Appayya [daughter agreed to take care of the father for
which the father promised to convey property to her. Later when the father
refused, the daughter sued successfully.
Sundaraja Aiyangar v Lakshmiammal [partition deed between brothers to
provide for marriage expenses of the sister, is enforceable by the sister]
 Subscription for a charitable purpose

7. Kedar Nath v Gorie Mahomed
When Agreement without consideration is valid
 Natural love and affection
 Compensation for past voluntary services
 Promise to pay a time barred debt
 Creation of Agency does not require consideration
PRIVITY DOCTRINE
 trust Used in states that don’t accept Restatement of Torts
 Established in Ultramares Corp v. Touche (1931)
 Auditors liable to 3rd parties for fraud
 Reaffirmed in Credit Alliance
 Established linkage test to link auditor to plaintiff.
Capacity of parties to contract: Parties entering into an agreement must
be competent and capable of entering into a contract. If "A" agrees to sell a Government
property to B and B agrees to buy that property, it could not treated as a valid agreement
as A is not authorized or owner of the property. If any of the party is not competent or
capable of entering into the agreement, that agreement cannot be treated as a valid
contract. According to Section 11 of the Act which says that every person is competent to
contract who is of the age of majority according to the law to which he is subject and
who is of sound mind, and is not disqualified from contracting by any law to which he is
subject. So it is clear that the party must be of sound mind and of age to enter into a valid
agreement which can be treated as a valid contract.
Examples
(a) M, a person of unsound mind agrees to sell his house to S for Rs. 2 Lac. It is not a
valid contract because M is not competent to contract.
(b) A, aged 20 promises to sell his car to B for Rs. 3 Lac. It is a valid contract because A
is competent to contract.
Free Consent: Consent means that the parties must agree upon the same thing in
the same sense. For a valid contract, it is necessary that the consent of parties must be
free. Consent is free when it is not obtained by coercion, undue influence, fraud,
misrepresentation or mistake. If the consent of either of the parties is not free, the
agreement cannot become a contract. (Sec. 14)

8. Example
A compels B to enter into a contract on the gun point. It is not a valid contract as the
consent of B is not free.
Effect of Coercion
1. Contract is Voidable
A contract to which the consent is obtained by coercion is voidable at the option of the
party whose is so obtained. (Section 19).
2. Restoration of Benefit.
If the aggrieved party rescinds the contract, he must restore any benefit received by him
under the contract to the person from whom such benefit was received. (Section 64)
Effect of Undue Influence
1. Contract is Voidable
When consent to an agreement is caused by undue influence, the agreement is a contract
voidable at the option of the party whose consent was so caused. (Section 19-A)
2. Discretion of the Court
Any such contract may be set aside either absolutely or, if the party who is entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as to the
court may seem just. (Section 19-A)
Illustration
A, a money lender, advances Rs. 1,000 to B, an agriculturist, and by undue influence
induces B to executes a bond for Rs. 2,000 with interest at 6 percent per month. The
court may set the bond aside, ordering B to repay Rs. 1,000 with such interest as may
seem just.
Effect of Fraud
1. Contract is Voidable
When consent to an agreement is caused by fraud, the agreement is a contract voidable at
the option of the party whose consent was so caused. (Section 19)

9. 2. Restitution of Position.
The party whose consent was caused by fraud may insist that the contract shall be
performed, and that he shall be put in the same position in which he would have been if
the representation mads had been true. (Section 19).
3. Suit for Damages.
The aggrieved party can sue for damages.
4. Restoration of Benefit.
If the aggrieved party rescinds the contract, he must restore any benefit received by him
under the contract to the person from whom such benefit was received. . (Section 64).
Effect of Misrepresentation.
1. Contract is Voidable
When consent to an agreement is caused by misrepresentation, the agreement is a
contract voidable at the option of the part6y whose consent was so caused. (Section 19).
2. Restitution of Position.
The party whose consent was caused by misrepresentation may insist that he shall be put
in the same position in which he would have been if the representation made had been
true. (Section 19).
3. Restoration of Benefit.
If the aggrieved party rescinds the contract, he must restore any benefit received by him
under the contract to the person from whom such benefit was received. (Section 64).
Mistake
 A state of affairs in which a party (or both parties) has formed an erroneous
opinion as to identity of subject matter, or some other important term.
 Contract does not express their true intentions.
Types of Mistake
1. Mistake of law
2. Mistake of fact

10. Mistake of Law
 Presumed to know the law
 Usually no relief provided
 Exception: if statute provided for recovery
Mistake of Fact
 Mistake as to the existence of the subject matter of the contract or the identity of a
party
Court may provide relief
 Mistake as to subject matter of contract
 General rule contract is void
 Mistake as to identity of the Party
 Depends if the identity of the person is an essential element of the
agreement
 If essential may not be enforceable
 If not essential – it will be enforceable
 Non Est Factum
• A defense that may allow illiterate or infirm persons to avoid liability on a
written agreement if they can establish that they were not aware of the true
nature of the document, and were not careless in execution
• Narrow form of mistake
• Applies only to type of agreement being signed not to the terms of the
agreement
Unilateral and Mutual Mistake
 Unilateral Mistake
 A mistake by one party to the agreement
 Mutual Mistake
 A mistake where both parties have made mistaken assumptions as to the
subject matter of the agreement
o Can be same mistake or different mistakes

11.  Courts will not enforce agreements when the other party is aware of the
mistake being made.
Lawful Object: The objective of the agreement must be lawful. Any act
prohibited by law will not be valid and such agreements cannot be treated as a valid
contract.
Example:
A rents out his house for the business of prostitution or for making bomb, the acts
performing there are unlawful. Hence such agreement cannot be treated as a valid
contract. Therefore the consideration as well as the object of the agreement should be
lawful.
Legal formalities: The contract act does not insist that the agreement must be in
writing, it could be oral. But, in some cases the law strictly insist that the agreement must
be in writing like agreement to sell immovable property must be in writing and should be
registered under the Transfer of Property Act, 1882. These agreement are valid only
when they fulfill the formalities like writing, registration, signing by the both the parties
are completed. If these legal formalities are not completed, it cannot be treated as a valid
contract.
Examples
(a) The Transfer of Property Act requires that contracts of sale, lease or mortgage of
immovable property must be written on stamp paper, made in the presence of witnesses,
and must be registered.
(b) The Companies Ordinance 1984 requires that a Memorandum of Association and an
Articles of Association must be printed and signed by each subscriber in the presence of
at least one witness.
Certainty of meaning: Wording of the agreement must be clear and not
uncertain or vague. Suppose John agrees to sell 500 tones of oil to Mathew. But, what
kind of oil is not mentioned clearly. So on the ground of uncertainty, this agreement
stands void. If the meaning of the agreement can be made certain by the circumstances, it
could be treated as a valid contract.
Example
If John and Mathew are sole trader of coconut oil, the meaning of the agreement can be
made certain by the circumstance and in that case, the agreement can be treated as a valid

12. contract. According to Section 29 of the Contract Act says that Agreements, the meaning
of which is not certain or capable of being made certain, are void.
Possibility of performance: As per section 56, if the act is impossible of
performance, physically or legally, the agreement cannot be enforced by law. There must
be possibility of performance of the agreement. Impossible agreements like one claims to
run at a speed of 1000km/hour or Jump to a height of 100feet etc. would not create a
valid agreement. All such acts which are impossible of performance would not create a
valid contract and cannot treated as a valid contract. In essence, there must be possibility
of performance must be there to create a valid contract.
Examples
(a) A agrees with B to discover a treasure by magic, the agreement is not enforceable.
(b) A agrees with B to put life into B’s dead brother. The agreement is void as it is
impossible to perform.
Agreement not expressly declared void: Section 24 to 30 specify
certain types of agreement which have been expressly declared void.
Example
Restraint of marriage which has been expressly declared void under Section 26. If John
promises to pay $50 to Mary if she does not marry throughout her life and Mary promise
not to marry at all. But this agreement cannot be treated as a valid contract owing to the
fact that, under section 26 restraint of marriage expressly declared void. Some of the
agreement which have been expressly declared void are agreement in restraint of legal
proceedings, agreement in restraint of trade, agreement in restraint of marriage and
agreement by way of wager.
Most important essentials of a valid contract are mentioned above. These elements
should be present in a contract to make it a valid contract. If any one of them is
missing we cannot treat that agreement as a valid contract.