Dr.A.K.
Shukla
CHAPTER 1- LAW OF CONTRACT
The law of contract is that branch of law which
determines the circumstances in which promise made by
the parties to a contract shall be legally binding on them.
All of us enter into a number of contracts everyday
knowingly or unknowingly. Each contract creates some
right and duties upon the contracting parties. Indian
contract deals with the enforcement of these rights and
duties upon the parties. Indian Contract Act, 1872 came
into effect from 1st September, 1872.
CONTRACT [SECTION 2(h)]: A contract is “an
agreement enforceable by law”. Thus,
CONTRACT = AGREEMENT (+)
ENFORCEABILITY BY LAW
“All contracts are agreements but all agreements
are not contracts”
Enforceability is an action which can be made
effective. For example, an agreement or contract
between persons in which either of the parties can
legally compel the performance of the other is
called an enforceable contract.
AGREEMENT [SECTION 2(e)]: An agreement means,
“Every promise or every set of promises, forming
consideration for each other”.
AGREEMENT = PROMISE(S) BY ONE PARTY
(+) PROMISE(S) BY THE OTHER PARTY
Example: x offers to sell his car for Rs 100000 to y,
y accepts this offer. This offer after acceptance
becomes promise and this promise is treated as an
agreement between x and y.
PROMISE [SECTION 2(b)]: “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.”
PROMISE = PROPOSAL / Offer +
ACCEPTANCE
PROPOSAL/OFFER [SECTION 2(a)]: A person is said to
make a proposal when “he signifies to another his
willingness to do or to abstain from doing anything with a
view to obtaining assent of that other to such act or
abstinence”
PROPOSAL = WILLINGNESS TO DO OR ABSTAIN
FROM DOING
(+) WILLINGNESS’ TO OBTAIN ASSENT OF THE
OTHER PARTY TO SUCH ACT OR ABSTINENCE
Acceptance: an acceptance is the consent given
to offer.
Example: x offer to sell his car to y for Rs 1 lack. Y
agrees to buy the car for Rs 1 lakh. Y’s act is an
acceptance of x’s offer.
CONSIDERATION [SECTION 2(d)]: “When, at the
desire of the promisor, the promise or any other person
has done or abstained from doing, or does or abstains
from doing or promises to do or to abstain from doing
something, such act or abstinence is called
consideration”. In other words, consideration is
something in return.
The case of Carlill v. Carbolic Smoke Ball Co. (1893) is a
seminal decision in English contract law, which has significant
implications under the Indian Contract Act, 1872. The Carbolic
Smoke Ball Company advertised that it would pay £100 to anyone
who contracted influenza after using its smoke ball product
according to the specified instructions. To demonstrate their
sincerity, they deposited £1000 in a bank. Mrs. Louisa Carlill used
the product as directed but still contracted influenza. She claimed
the reward, but the company refused, arguing that the
advertisement was not a binding contract but merely an invitation
to treat.
The Court of Appeal held that the advertisement constituted a
unilateral offer to the world at large, which could be accepted by
anyone who performed the conditions stated in the offer. The
court found that Mrs. Carlill’s use of the smoke ball as directed
amounted to acceptance of the offer. The court also dismissed the
company’s argument that there was no consideration, stating that
Mrs. Carlill’s use of the product and subsequent illness provided
sufficient consideration. The court emphasized that the deposit of
£1000 in the bank demonstrated the company’s intention to be
legally bound by the offer123.
This case established important principles regarding unilateral
contracts, offers, and acceptance, highlighting that an offer can
be made to the world at large and that performance of the
conditions of the offer constitutes acceptance. It underscores the
necessity of clear communication and intention in forming binding
contracts, principles that are equally relevant under the Indian
Contract Act, 1872
The case of Lalman Shukla v. Gauri Dutt is a landmark judgment in Indian
contract law, decided by the Allahabad High Court in 1913. The facts of the case
revolve around Gauri Dutt’s nephew, who had gone missing. Gauri Dutt, the
defendant, sent his servant, Lalman Shukla, the plaintiff, to search for the missing
nephew. While Lalman Shukla was away, Gauri Dutt announced a reward of Rs.
501 for anyone who found and brought back his nephew. Lalman Shukla, unaware
of this reward announcement, successfully located the nephew and brought him
back. Upon his return, he was given some money and gifts for his efforts.
However, six months later, after being dismissed from his job, Lalman Shukla
claimed the reward of Rs. 501, arguing that he had fulfilled the conditions of the
offer.
The court had to determine whether there was a valid contract between Lalman
Shukla and Gauri Dutt. The key issue was whether Lalman Shukla’s actions
constituted acceptance of the offer, given that he was unaware of the reward when
he found the nephew. The court held that for a contract to be valid, there must be
an offer, acceptance, and knowledge of the offer. Since Lalman Shukla did not
know about the reward when he found the nephew, there was no acceptance of the
offer, and thus, no contract existed. This case highlights the importance of
communication and knowledge of an offer in forming a valid contract under the
Indian Contract Act, 1872123.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
[Section 10]:
According to Section 10, “All agreements are contracts if
they are made by 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 essential elements of a valid contract are:
Agreement: To constitute a contract there must be an
agreement. There must be two parties to an
agreement, i.e. one party making an offer (offeror) and
the other party accepting the offer (offeree). The terms
of the offer must be definite and acceptance must be
absolute and unconditional. The acceptance must be
according to the mode prescribed and must be
communicated to the offeror.
Consensus-ad-idem (meeting of minds): To
constitute a valid contract, there must be meeting of
minds i.e. consensus-ad-idem. The parties should agree
to the same thing in the same sense and at the same
time.
Intention to create legal relationship: When the
two parties enter into an agreement, there must be an
intention by both parties to legally bind the other as a
result of such agreement. Thus, agreements of social or
household nature are not contracts.
Capacity of parties (competence): The parties to
the agreement must be capable of entering into a valid
contract. According to Section 11, every person is
competent to contract if he or she,
1. is of the age of majority;
2. is of sound mind; and
3. is not disqualified from contracting by any law to
which he is subject.
Lawful Consideration: An agreement to form a valid
contract should be supported by consideration.
Consideration means “something in return” (quid pro
quo). It can be cash, kind, an act or abstinence. It can
be past, present or future. However, consideration
should be real and lawful.
Free consent: To constitute a valid contract there
must be free and genuine consent of the parties to the
contract. It should not be obtained by
misrepresentation, fraud, coercion, undue influence or
mistake.
Lawful object: The object of the agreement must not
be illegal or unlawful.
Section 23: According to Section 23, the consideration
or object of an agreement is lawful, unless-
• It is forbidden by law; or
• Is of such nature that, if permitted it would defeat
the provisions of any law or is fraudulent; or
• Involves or implies, injury to the person or property
of another; or
• The court regards it as immoral, or opposed to
public policy.
Agreement not declared void or illegal:
Agreements which have been expressly declared void
or illegal by law are not enforceable at law; hence does
not constitute a valid contract.
Certainty and possibility of performance: The
terms of agreement must be certain and not vague. If it
is not possible to ascertain the meaning of the
agreement, it is not enforceable at law. Also,
agreements to do impossible acts cannot be enforced.
Legal formalities: A contract may be oral or in
writing. If, however, the law requires for a particular
contract, it should comply with all the legal formalities
as to writing, registration and attestation.
TYPES OF CONTRACTS:
CLASSIFICATION OF CONTRACTS
On the basis of On the basis of On the basis of
Validity Formation Performance
1. Valid contract 1. Express contract 1.
Executed contract
2. Void contract 2. Implied contract 2.
Executory contract
3. Voidable contract 3. Quasi Contracts 3.
Unilateral contract
4. Void agreement 4. Bilateral contract
• Valid contract: An agreement which has all the
essential elements of a contract is called a valid
contract. A valid contract can be enforced by law.
• Voidable contract [Section 2(i)]: 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. If the essential
element of free consent is missing in a contract, the
law confers right on the aggrieved party either to
reject the contract or to accept it. However, the
contract continues to be good and enforceable
unless it is repudiated by the aggrieved party.
• Void contract [Section 2(j)]: A void contract is a
contract which ceases to be enforceable by law. A
contract when originally entered into may be valid
and binding on the parties. It may subsequently
become void.
• Void agreement: An agreement not enforceable by
law is said to be void. Such agreement does not
confer any right to any of the parties to it. The
agreement, in such a case, is void-ab-initio (from the
very beginning). Such an agreement does not result
in a contract at all.
• Unenforceable contracts: Where a contract is good
in substance but because of some technical defect
cannot be enforced by law is called unenforceable
contract. These contracts are neither void nor
voidable.
• Illegal agreement: An agreement is illegal if it is
forbidden by law; or is of such nature that, if
permitted, would defeat the provisions of nay law or
is fraudulent; or involves or implies injury to a person
or property of another, or court regards it as immoral
or opposed to public policy. These agreements are
punishable by law. These are void-ab-initio.
“All illegal agreements are void agreements
but all void agreements are not illegal.”
• Express contract: Where the terms of the contract
are expressly agreed upon in words (written or
spoken) at the time of formation, the contract is said
to be express contract.
• Implied contract: An implied contract is one which
is inferred from the acts or conduct of the parties or
from the circumstances of the cases. Where a
proposal or acceptance is made otherwise than in
words, promise is said to be implied.
• Quasi contracts: A quasi contract is created by law.
Thus, quasi contracts are strictly not contracts as
there is no intention of parties to enter into a
contract. It is legal obligation which is imposed on a
party who is required to perform it. A quasi contract
is based on the principle that a person shall not be
allowed to enrich himself at the expense of another.
• Executed contract: An executed contract is one in
which both the parties have performed their
respective obligation.
• Executory contract: An executory contract is one
where one or both the parties to the contract have
still to perform their obligations in future. Thus, a
contract which is partially performed or wholly
unperformed is termed as executory contract.
• Unilateral contract: A unilateral contract is one in
which only one party has to perform his obligation at
the time of the formation of the contract, the other
party having fulfilled his obligation at the time o the
contract or before the contract comes into existence.
• Bilateral contract: A bilateral contract is one in
which the obligation on both the parties to the
contract is outstanding at the time of the formation
of the contract. Bilateral contracts are also known as
contracts with executory consideration.
Cross Offer: When two offers which are similar in all
respect made by two parties to each other in
ignorance of each other’s offer are known as ‘cross
offer’. Cross offer do not amount to acceptance of
one’s offer by the other. Hence no contract is
entered in to on cross offer.
Specific offer: A specific offer is one which is made to
a definite person, or particular group of persons. A
specific offer can be a accepted only by that definite
person/ that particular group of persons to whom it
has been made.
General Offer: A general offer is one which is not
made to a definite person,but to the world at large or
public in general. A general offer can be accepted by
any person by fulfilling the terms of offer. In case of
general offer, the contract is made with person who
having the knowledge of the offer comes forward and
acts according to the conditions of the offer.
