Law of Contract – I (LLB I Semester)

#

Unit-I: Definition and Essentials of a Valid Contract

#

1. Definition and Essentials of a Valid Contract: A contract is a legally binding agreement between two or more parties. To be valid, a contract must have the following elements:
   • Offer: A proposal made by one party to another indicating a willingness to enter into a contract. English law calls it an offer but in Indian law we call it Proposal.
     • Section 2(a)
     • Proposal: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
   • Acceptance: Unqualified and complete consent to the terms of the offer.
     • Section 2(b)
     • Acceptance: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
     • Promise: A proposal when accepted becomes a promise.
     • Section 2(c)
     • Promisor: The person making the proposal is called the promisor.
     • Promisee: The person accepting the proposal is called the promisee.
   • Consideration: Something of value exchanged between the parties. It can be money, services, or an object.
     • Section 2(d)
     • Consideration: When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
   • Intention to create legal relations: The agreement should be such that it is enforceable by law.
     • In an agreement, both the parties should have the intention to create a legal relationship and this intention can be gathered on the basis of the facts. There is no particular test to examine the particular intention. The test is objective but not subjective. In all commercial and business agreements, presumption is that the parties intended to create a legal relationship and this presumption is rebuttable.
     • In all other agreements, such as social agreements, domestic agreements or a charitable agreement, burden lies on the parties to prove this element.
     • Cases
       • Balfour vs Balfour (1919): Mr Balfour works in Sri Lanka. Mrs Balfour also resides with him in Sri Lanka. They are from England. For vacation, they visit England. During the vacation, Mrs Balfour fell sick. Mr Balfour left Mrs Balfour at her parent’s house promising to pay her GBP 30 per month for her sustenance. After paying for some months, Mr Balfour stops paying. After several months, Mrs Balfour sues Mr Balfour for the arrears. In was held that a promise between husband and wife amounts to a domestic obligation and not a legal obligation, furthermore, there was no intent to create legal relationship and is not enforceable in court. Plaintiff could not succeed in this case as the parties did not have an intention to create legal relationship, therefore, the contract was not enforceable.
       • Jones vs Padavatton (1969): There was nothing to indicate that there was an intention to create legal relationship between the parties as is evident from the fact that neither the agreement was reduced to writing nor the duration for which she was to be maintained had been mentioned.
       • Meritt vs Meritt (1970): In this case, it was held that parties intended to create a legal relationship as is evident from the agreement between them which was in writing and therefore ex-husband was bound by the contract.
     • Section 2(e)
     • Agreement: Every promise and every set of promises forming the consideration for each other is an agreement.
     • Section 2(f)
     • Reciprocal Promises: Promises which form the consideration or part of the consideration for each other are called reciprocal promises.
   • Capacity: Parties must have the legal ability to enter into a contract (they should not be minors or disqualified by law).
     • Section 2(g)
     • An agreement not enforceable by law is said to be void.
     • Example: An agreement with minor is void. An agreement without consideration is void.
     • Section 2(h)
     • An agreement enforceable by law is a contract.
   • Free Consent: The agreement must be made without coercion, undue influence, fraud, or misrepresentation.
     • Section 2(i)
     • Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract.
     • Example: A agrees to sell his car worth 1 crore to B for 20L. If B has used coercion and A can prove the same, the court will set aside the contract as voidable.
   • Lawful Object: The object of the contract must be legal.
     • Section 2(j)
     • Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
     • Example: Contracts with alien enemies.

Definition of Contract

• Various jurists have given definitions for contracts.
• Pollock: Every agreement and promise enforceable at law is a contract.
• Sir William’s Anson: A legally binding agreement between two or more persons by which rights are acquired by one or more to acts or forbearances (abstaining from doing something) on the part of others.
• Salmond: Contract is an agreement creating and defining obligations between the parties.
• Section 10 - Essentials of a Valid Contract
  • Which agreements are contracts?
  • All agreements are contracts if they are made by the free consent of parties, competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
  • The following are considered to be the essential elements of a valid contract i.e. an agreement must have the following elements
    1. Offer and Acceptance - Section 2(a), 2(b)
    2. Intention to create legal relationship
    3. Lawful consideration - Section 2(d), 23, 25
    4. Capacity of Parties - Section 11,12
    5. Free and Genuine Consent - Section 14
    6. Lawful object - Section 23
    7. Agreements not declared to be void - Section 24-30, 56
    8. Certainty and Possibility of Performance - Section 29.
    9. Legal formalities - Section 10 para 2.

2. Offer and Acceptance:

   • Offer: Must be communicated and should be clear, definite, and complete.
   • Acceptance: Must mirror the terms of the offer exactly and must be communicated to the offeror.
   • Communication of Offer and Acceptance: The communication of an offer or acceptance can be through various modes like verbal, written, or electronic. The timing of communication (when it is effective) is essential for determining when a contract is formed.
   • Revocation of Offer and Acceptance: Offers can be revoked before acceptance, and acceptance can be revoked before it is communicated, depending on the mode (including electronic medium).

3. Consideration:

• Salient features: Consideration must be lawful, of value, and sufficient but need not be adequate. There must be something received in return in a contract. Quid pro quo. If it lacks the consideration, it is a void agreement. It never becomes a contract. Consideration can be - act - abstinence - forbearance - return promise
  • Consideration must not be
    • unlawful
    • immoral (e.g. Prostitution)
    • opposed to public policy
  • It maybe an advantage or a benefit moving from one party to the other, it may exist in the form of a benefit, advantage, disadvantage, loss or detriment.
  • Exceptions to Consideration: Contracts without consideration can still be valid in some cases (e.g., contracts made out of love and affection, voluntary services, or those involving charity).

4. Doctrine of Privity of Contract: Only the parties involved in the contract can sue or be sued. Exceptions include:

   • Beneficiary of a trust
   • Family settlements
   • Third parties in some cases (like insurance contracts).

5. Standard Form of Contracts: These are pre-drafted contracts where terms are generally not negotiable by the weaker party (e.g., contracts for mobile services or utilities).

Unit-II: Capacity and Consent

#

1. Capacity of the Parties: Every person is capable of entering into a valid contract as long as he is in the age of majority, is of sound mind, and is not disqualified from contracting by any law to which he is subject to. For a contract to be valid, the parties must have the legal ability to enter into a contract. This includes:
   • Minors: Contracts with minors are generally void.
   • Insane Persons: Contracts with persons of unsound mind are void if the other party was aware of their mental state.
   • Persons Disqualified by Law: Some individuals, like bankrupts or criminals, may not have the capacity to contract.
   • Covered in Section 11.
   • Who is competent?
     • Major (Above 18 in India)
     • Of sound mind.
     • Who are not disqualified by law

• Who is not competent?
  • Minors
  • Persons unsound mind such as - Idiot - Lunatic - Drunkard
  • Persons disqualified by law - Alien enemy, - Sovereign, Ambassador, Diplomats as they are covered by immunity protections. It may be imprudent to contract with them as it maybe difficult to seek legal protection. - Insolvents - Convicts - Corporations - Others
• Test of Soundness as laid down in Section 12
  • It is your duty to ensure that the other party with whom you are contracting passes the Test of Soundness and you are not contracting with any disqualified person. This is important.

2. Free Consent: For a contract to be enforceable, the consent of the parties must be free. It should not be influenced by:

   • Coercion: Threat or use of force to get consent.
   • Undue Influence: Excessive pressure by one party on the other.
   • Misrepresentation: False representation of facts.
   • Fraud: Deception intended to gain a benefit.
   • Mistake: Erroneous belief about facts or law.

3. Lawful Object: A contract must have a legal purpose. Contracts with immoral purposes or those against public policy (like illegal contracts) are void.

4. Void and Voidable Contracts:

   • Void Contracts: These are unenforceable by law (e.g., agreements without consideration).
   • Voidable Contracts: These can be annulled by one party due to factors like coercion, undue influence, etc.

Unit-III: Discharge of Contracts

#

1. Discharge by Performance

#

Contracts are generally discharged when both parties fulfill their respective obligations under the terms of the agreement. This is called discharge by performance.

1.1 Types of Performance

#

1. Actual Performance: When both parties have completely performed their respective duties, the contract is said to be discharged by actual performance.

   Example:

   • A contracts to sell 10 tons of rice to B for ₹2,00,000. Both A and B complete their obligations—A delivers the rice, and B pays the agreed price. The contract is discharged by actual performance.

2. Attempted Performance (Tender): If a party offers to perform their obligation and the other party refuses to accept it, the first party is discharged from further obligations under the contract.

   Example:

   • A agrees to paint B’s house. On the agreed date, A brings the required materials and arrives at B’s house to begin work. However, B refuses to allow A to start the work. A’s obligation is discharged by tendering performance.

2. Contracts Which Need Not Be Performed

#

1. Substitution, Rescission, or Alteration (Section 62): When parties agree to:

   • Substitute a new contract in place of an existing one.
   • Rescind (cancel) the existing contract.
   • Alter the terms of the existing contract.

   Example:

   • A agrees to supply 100 units of machinery to B by January 1. Due to logistical issues, both agree to substitute the contract for a supply of 50 units by March 1. The original contract is discharged by substitution.

2. Impossibility of Performance (Section 56): When the performance becomes impossible due to factors beyond the control of the parties.

   Example:

   • A agrees to supply goods to B from a specific warehouse. Before delivery, the warehouse burns down, and the goods are destroyed. The contract is discharged due to impossibility.

3. Dispensation or Remission by Promisee (Section 63): The promisee:

   • Dispenses with or remits (wholly or partly) the performance of the promise made to them.
   • Extends the time for such performance.
   • Accepts any satisfaction in place of the promised performance.

   Example:

   • A owes B ₹10,000. B agrees to accept ₹8,000 in full satisfaction. A pays ₹8,000, and the contract is discharged by remission.

4. Voidable Contract (Section 64): If a contract is voidable at the option of one party, the contract can be rescinded.

   Example:

   • A induces B to enter into a contract through fraud. Upon discovering the fraud, B rescinds the contract. The contract is discharged.

5. Neglect by Promisee (Section 67): If the promisee neglects or refuses to provide reasonable facilities for performance, the promisor is excused from fulfilling the obligation.

   Example:

   • A agrees to repair B’s machinery at B’s factory. B refuses to allow A access to the factory. A is excused from performance due to B’s neglect.

6. Illegality: If the contract becomes illegal, it is discharged.

   Example:

   • A agrees to sell goods to B for export to a country. Before the goods are shipped, the government bans exports to that country. The contract is discharged due to illegality.

3. By Whom Should the Contracts Be Performed?

#

1. Promisor (Section 40): The person who made the promise is primarily responsible for its performance.

   Example:

   • A, a carpenter, agrees to build a table for B. A must personally perform the contract unless otherwise agreed.

2. Agent (Section 40): An authorized agent may perform the promise.

   Example:

   • A agrees to deliver goods to B. A’s authorized agent delivers the goods. The contract is discharged.

3. Legal Heir: If the promisor dies, their legal heir is bound to perform, but only if they have received a benefit from the contract.

   Principle: Actio personalis moritur cum persona—Personal obligations die with the person.

   Example:

   • A agrees to pay ₹5,000 to B. After A’s death, A’s heir, who inherited the estate, is bound to pay B.

4. Third Party: In some cases, performance by a third party may be allowed.

   Example:

   • A contracts to pay ₹10,000 to B. C, on behalf of A, pays the amount to B. The contract is discharged by performance through a third party.

5. Joint Promisors: If there are multiple promisors, all are collectively responsible.

   Example:

   • A, B, and C jointly promise to pay ₹30,000 to D. If A defaults, B and C are liable to contribute proportionately.

4. Appropriation of Payments (Sections 59–61)

#

When a debtor owes multiple debts and makes a partial payment, the following rules determine how the payment is applied:

1. Section 59: If the debtor specifies which debt the payment is for, the creditor must apply it accordingly.

   Example:

   • A owes B ₹5,000 for rent and ₹3,000 for groceries. A pays ₹3,000 and specifies it is for groceries. B must apply it toward the grocery debt.

2. Section 60: If no specification is made, the creditor may apply the payment to any lawful debt, including one barred by limitation.

   Example:

   • A owes B ₹10,000, one of which is time-barred. A makes a payment without specifying. B may apply it to the time-barred debt.

3. Chronological Order: If neither party specifies, payments are applied in the order of debt creation.

   Example:

   • A owes B ₹5,000 from January and ₹10,000 from February. A pays ₹5,000. In the absence of specification, it is applied to the January debt first.

5. Clayton’s Rule (1816)

#

Principle: For current accounts, payments are applied to discharge debts in the order in which they were incurred. This is based on the presumption that parties intend to settle older debts first.

Case Reference: Devaynes v. Noble (1816)—also known as Clayton’s Case.

• The case involved the account of a deceased banker and the application of funds deposited post-mortem. It established that payments are applied to the earliest outstanding debts unless explicitly directed otherwise.

Expanded Example:

#

• A has a running account with B and owes ₹50,000 accrued over five transactions:

  1. ₹10,000 on January 1
  2. ₹15,000 on February 1
  3. ₹10,000 on March 1
  4. ₹5,000 on April 1
  5. ₹10,000 on May 1

• A makes a payment of ₹10,000 on June 1 without specifying which debt it is for. Under Clayton’s Rule, this payment will be applied to the January 1 debt first. Once that debt is cleared, any balance will be applied to the February 1 debt, and so on.

• If A specifies that the payment is for the May 1 debt, the creditor must apply it accordingly, overriding Clayton’s Rule.

6. Assignment of Contracts

#

To assign means to transfer. Assignment of a contract refers to the transfer of contractual rights and liabilities under a contract to a third party. This can happen with or without the concurrence of the third party. The assignment may take place in the following ways:

6.1 By Act of the Parties

#

This occurs when the parties themselves initiate the assignment. The rules governing the assignment differ for obligations and rights.

1. Assignment of Contractual Obligations:

   • Obligations involving personal skill or ability cannot be assigned.
   • Example: A contracts to sing at B’s concert. A cannot assign this obligation to another singer.

2. Assignment of Contractual Rights:

   • Rights not involving personal skill can be assigned.
   • Example: A is entitled to receive ₹1,00,000 from B under a contract. A can assign this right to C, who can then claim the amount from B.

6.2 By Operation of Law

#

1. Death:

   • Rights and liabilities pass to legal representatives.
   • Example: A contracts to sell land to B. Upon A’s death, the right to sell the land passes to A’s legal heirs.

2. Insolvency:

   • Rights and liabilities are assigned to an official receiver.
   • Example: A owes ₹5,00,000 to B. The court assigns A’s assets to a receiver for repayment.

7. Discharge by Agreement or Consent (Sections 62–64)

#

Contracts can be discharged by mutual agreement between the parties. This discharge can happen in the following ways:

7.1 Novation (Section 62):

#

• Substituting a new contract in place of an existing one with the agreement of all parties.
• Novation can occur by:
  1. Substituting the parties to the contract.
  2. Changing the obligations under the contract.
• Example: A owes B ₹1,00,000. B agrees with A and C that C will pay the debt instead of A. The original contract between A and B is discharged, and a new contract between B and C is created.

7.2 Rescission (Section 62):

#

• Canceling the contract through mutual agreement between the parties.
• Rescission occurs when neither party has performed, and both agree to terminate the contract.
• Example: A agrees to sell 100 books to B. Before performance, both agree to cancel the contract. The contract is discharged by rescission.

7.3 Alteration (Section 62):

#

• Changing the terms of the contract with the consent of all parties.
• Alteration discharges the original terms and replaces them with new ones.
• Example: A contracts to build a house for B with a specific design. Later, both agree to change the design. The contract is discharged by alteration.

7.4 Remission (Section 63):

#

• Acceptance of lesser performance than what was agreed upon or extension of time for performance.
• The promisee may dispense with or remit wholly or partially the performance of the promise.
• Example: A owes B ₹5,000. B agrees to accept ₹3,000 in full settlement. The contract is discharged by remission.

7.5 Waiver (Section 63):

#

• Waiver occurs when one party voluntarily gives up a right under the contract, discharging the other party from their obligation.
• Example: A is obligated to deliver goods to B. B waives the delivery. The contract is discharged by waiver.

7.6 Accord and Satisfaction:

#

• Accord is an agreement to accept a different performance than originally agreed.
• Satisfaction occurs when the agreed alternative performance is completed.
• Example: A owes B ₹50,000. They agree that A will instead transfer a car worth ₹50,000 to B. The transfer of the car discharges the debt by accord and satisfaction.

8. Discharge by Impossibility of Performance (Section 56)

#

8.1 Types of Impossibility

#

1. Initial Impossibility (Pre-Contractual):

   • Exists at the time of entering into the contract.

   a. Known to the Parties:

   • The agreement is void ab initio.
   • Example: A agrees to discover treasure by magic for B. Such an agreement is void due to absolute impossibility.

   b. Unknown to the Parties:

   • The contract is void due to mutual mistake.
   • Example: A agrees to sell goods to B, unaware that the goods were destroyed before the agreement. The contract is void.

2. Supervening Impossibility (Post-Contractual):

   • Occurs after the contract has been entered into.

   a. Excusable Grounds:

   1. Destruction of Subject Matter:
      • Example: A contracts to sell a specific house to B. The house is destroyed in an earthquake. The contract is discharged.
   2. Non-Existence of a State of Things:
      • Example: A agrees to hold a concert in a hall. The hall is destroyed in a fire. The contract is discharged.
   3. Death or Incapacity:
      • Example: A agrees to paint a portrait for B. A dies before completing the work. The contract is discharged.
   4. Change of Law:
      • Example: A contracts to sell goods to B for export to a country. The government later bans exports to that country. The contract is discharged.
   5. Outbreak of War:
      • Example: A contracts to trade with a country. War breaks out, and trade is prohibited. The contract is discharged.

   b. Non-Excusable Grounds:

   1. Difficulty of Performance:
      • Example: A contracts to supply goods but faces increased transportation costs. The contract is not discharged.
   2. Commercial Impossibility:
      • Example: A contracts to supply goods at a fixed price. Due to inflation, A incurs losses. The contract is not discharged.
   3. Failure of a Third Party:
      • Example: A contracts to supply goods to B but fails to procure the goods from a supplier. The contract is not discharged.
   4. Strikes, Lockouts, and Civil Disturbances:
      • Example: A contracts to deliver goods to B. A worker strike delays the delivery. The contract is not discharged.
   5. Failure of One of the Objects:
      • Example: A agrees to organize a festival, including a concert and an exhibition. The exhibition is canceled, but the concert proceeds. The contract is not discharged.

9. Discharge by Lapse of Time

#

If the time prescribed for performance expires and no action is taken, the contract is discharged.

Example:

• A agrees to pay B within three years. After three years, the debt becomes time-barred, and the contract is discharged.

10. Discharge by Breach of Contract

#

10.1 Actual Breach

#

1. At the Time of Performance:

   • Example: A fails to deliver goods to B on the due date.

2. During the Performance:

   • Example: A stops work midway through a construction contract with B.

10.2 Anticipatory Breach

#

1. Implied Repudiation:

   • Example: A contracts to deliver goods to B but sells them to C before delivery.

2. Express Repudiation:

   • Example: A informs B before the due date that they will not deliver the goods.

Not Yet Covered

#

Unit-IV: Quasi-Contract and Remedies for Breach

#

Unit-V: Specific Relief

#