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Law of Contract – I LLB 3YDC Semester 1

·2000 words·10 mins
PRRLC Law School Contracts Law of Contracts Osmania University LLB 3YDC Semester 1
Prithvi Raj Kunapareddi
Author
Prithvi Raj Kunapareddi
Solving problems for things I care about.

Law of Contract – I (LLB I Semester)
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Unit-I: Definition and Essentials of a Valid Contract
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  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.

  1. 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).

  2. 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).

  1. 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).

  2. 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.

  1. 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.

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

  3. 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
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  1. Discharge by Performance: Contracts are typically discharged when both parties perform their obligations.

  2. Appropriation of Payments: If a debtor owes multiple debts, the debtor can specify which debt the payment is to be applied toward. (e.g. Credit card debts being debited from Savings A/c, Current A/c overdraft default is recovered from Savings A/c)

  3. Discharge by Novation: Substituting an old contract with a new one, which cancels the old obligations.

  4. Discharge by Impossibility (Doctrine of Frustration): A contract may be discharged if unforeseen events make it impossible to perform (e.g., natural disasters, a class is going on and a snake enters the classroom and the class could not continue).

  5. Discharge by Breach: If one party fails to fulfill their obligations, the other party may treat the contract as discharged. Breach can be:

    • Anticipatory Breach: Breach before performance is due.
    • Actual Breach: Breach when the performance is due.

Unit-IV: Quasi-Contract and Remedies for Breach
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  1. Quasi-Contracts: These are obligations imposed by law even though there is no formal contract. Examples include:

    • Necessaries supplied to incapable persons: The supplier can claim reimbursement.
    • Payment by an interested person: If one pays for another under legal obligation, they can claim reimbursement.
    • Rights of Finder of Lost Goods: The finder of lost goods has rights similar to the owner until the owner is found.
    • Mistaken Delivery: If something is delivered by mistake, the receiver must return it.

  2. Remedies for Breach of Contract:

    • Damages: Compensation for loss caused by breach. They can be:
      • Liquidated Damages: Pre-agreed upon damages in the contract.
      • Unliquidated Damages: Assessed by the court.
    • Quantum Meruit: Payment for the value of work done when a contract is discharged before completion.
    • Duty to Mitigate: The injured party must take reasonable steps to minimize their loss.

Unit-V: Specific Relief
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  1. Specific Relief Act:
    • Specific Performance: Enforcing actual performance of the contract, used when damages are not adequate.
      • Recovery of Immovable Properties
    • Rescission of Contracts: Canceling the contract when one party defaults.
    • Injunctions: Court orders to prevent certain actions. Injunctions can be:
      • Temporary: Granted before or during a trial.
      • Perpetual: Granted as part of the final judgment.
      • Mandatory Injunction: Compels a party to do something.
      • Prohibitory Injunction: Restrains a party from doing something.
      • Injunctions for Negative Covenants: Prevents one party from doing something they have agreed not to do.