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UNIT – I LAW OF CONTRACT Introduction: Contract law is a very important part of commercial law. We enter into many contracts daily knowingly or unknowingly; for example When we travel in a bus or in a rickshaw, when we give our dresses to press or iron to laundryman, or when we purchase daily routine items from a shop, we enter into a contract. This is an important aspect of human behaviour.

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In India, Indian Contract Act, 1872 (Act IX of 1872) is in force today. This Act came into force on 151 day of September, 1872. At beginning, it contained 11 (eleven) chapters out of which chapter VII (sale of goods) having Section 76 - Section 123 and chapter XI (of Partnership) having 239 are repealed from this Act and two new Legislations dealing with these topics came into existence, the Sale of goods Act, 1930 and Indian Partnership Act, 1932. Indian Contract Act, 1872 has genera! principles of contract (Section 1 to 75) and it deals with some specific contract also such as contracts of Indemnity and contract of guarantee (Section 124-147), Bailment (Section 148-181), Agency (Section 182-238). This paper, contract-I, deals with general principles of contract (Section 1-75) only. In Indian law, it is not necessary that every contract must be in writing. This means a contract may be(i) (ii)

Oral contract Contract in writing.

But if there is a law which requires the agreement in writing, then it must be in writing.

In Indian contract Act, 1872 no form has been prescribed for a valid contract. It is well settled that the court in order to continue an agreement has to look to the substance or essence of it rather than its form but when any law specifically provides a form of contract, then it must be entered into such form. For example: According to Article 299 of the constitution of India, certain formalities are required when a contract is entered into by or with the central or state government. When a contract entered is not in the form required by Article 299(1) of the constitution, it is void. AGREEMENT AND CONTRACT

Agreement: The word "Agreement" implies that there are two or more persons who commit each letter to do a particular thing. A person alone cannot enter into an agreement or contract with himself. Ordinarily two or more persons are required in the formation of an agreement. The first step in the lI:Irr1ation of an agreement is the making of a proposal. One person makes the proposal and another accepts it.

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Proposal

Acceptance

Promise

Promise

Consideration

Agreement

Agreement

Enforceability by law

Contract

The person who makes the proposal is known as proposer and the person who accepts the proposal is known as acceptor. When a proposal is accepted, it becomes promise but to turn a promise into an agreement, consideration is also required. Definition: Section 2(e) of Indian Contract Act 1872 defines an Agreement as –

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"Every promise and every set of promises forming consideration for each other, is an agreement."

Essential Elements: According to the above mentioned definition, there are two essential elements of an agreement – 1. There must be a promise or a set of promises

2. There must be consideration for both the parties.

Now the question arises, what is Promise? As explained earlier Proposal Hence we can say that Proposal

+

Acceptance? Promise.

+ Acceptance + Consideration

?

Agreement

The term "proposal" is defined in Sec. 2(a) of Indian Contract Act, 1872 as -

"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." When a proposal is accepted, it becomes promise. (Section 2(b) of Indian Contract Act 1872) Kinds of Agreement

On the basis of Mode of Creation: 1) Express Agreement, 2) Implied Agreement On the basis of Execution: 1) Unilateral Agreement 2) Bilateral Agreement There are many other kinds of agreement which are not defined in Indian Contract Act. 1872 such as Illegal Agreement, Unenforceable Contract etc. 1. Express agreement: When one person or party proposes to another party orally or in writing and that the other party gives his acceptance accordingly this type of agreement is known as express agreement. For example: A proposes in writing to B to sell his horse for 500 rupees and B accepts the proposal of A. This is express agreement.

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2. Implied agreement: When one person or a party does not put his proposal in words, whether oral or in writing, then it is implied by his conduct or usage or custom of society or trade that he has made the proposal by his conduct then it is called implied agreement. 3. Unilateral agreement: An agreement in which one party fulfills his obligation created under agreement but the other party's obligations remain to be fulfilled in future, is known as unilateral agreement. 4. Bilateral agreement: An agreement in which both parties are under obligation to fulfill their part in future is known as bilateral agreement.

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5. Illegal agreement: The term 'illegal agreement' is not defined in Indian Contract Act 1872. Illegal agreement is one which is expressly declared illegal by law of the land or which defeats the provisions of any law. All illegal agreements are void but all void agreement are not illegal. Hence "Void agreement" is a wider term than "illegal agreement". 6. Unenforceable agreement: unenforceable agreements are those agreements in which lawful rights and duties are created but due to some technical defect, the courts are unable to enforce those rights and duties. These agreements are not void or voidable. Under certain circumstances the law gives permission to remove those defects and after such removal of defects the law enforces them. For Example : Time barred-claim, insufficient stamps under stamps Act etc.

Contract: A contract is a bilateral transaction between two or more than two parties. Every contract has to go through several stages starting from proposal. Definition: Anson has defined the term "Contract" in his book LAW OF CONTRACT as - "A contract consists in an actionable promise or promises. Every such promise involves two parties, a promisor and a promisee, and an expression of a common intention and of expectation as to the act or forbearance promised." Essential Elements of Contract: According to the above mentioned definition of contract in Indian Contract Act 1872, a contract has following essentials 1. There must be a promise or a set of promises

2. There must be consideration for both the parties.

As we know agreement is a promise or set of promises forming consideration for each other. But the question arises - what kinds of agreement are enforceable by law? An agreement to be enforceable by law must fulfill the conditions laid down in Section 10 of the Indian Contract Act 1872. According to Section 10 of Indian Contract Act, 1872'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." 3

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Nothing herein contained shall affect any law in force in India and not hererby expressly repealed, by which any contract is required to be made in writing or in the presence of witness, or any law relating to tile registration of documents. At last, On the basis of Combined Analysis of Section 2(h) and Section 10 we can say that the following are the elements of a valid contract 1. Promise or a set of promises. 2. Consideration for both the parties. 3. Parties must be competent to contract.

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4. Free consent of the parties to the agreement. 5. Consideration and object must be lawful.

6. The agreement must not have been expressly declared to be void under the contract Act or any other Act.

7. Must be in writing or registered, if necessary.· Kinds of Contract: There are two kinds of contract 1) Voidable Contract [Section 2(i)] 2) Void Contract [Section 20)]

According to Section 2(i) of Indian Contract Act, 1872/ a voidable contract is -

"An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the others, is a voidable contract." Section 20) defines "Void contract" as "A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable." On the basis of both the definitions we may differentiate between two as : Difference between void and voidable contract 1.

An agreement which can not be enforced law.

The agreement which is enforceable by law at the by option of the aggrieved party but not on the option of the other party.

2.

It is void from the very beginning and remains void till last.

It is lawful at the very beginning but becomes void after declaration at the option of the party aggrieved.

3.

The parties of such contract can not make it valid by their consensus.

It the aggrieved party does not object to the contract then it remains valid and enforceable.

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4.

Under void contract, no party can claim damages.

The aggrieved party can claim damages.

5.

Agreement which ceases to be enforceable by law. No party can enforce it.

Enforceable at the option of one or more parties.

6.

It has no contract of legality when it ceases

It is enforceable till aggrieved party does not get it declared void.

7.

It can not become legal by consent of both legal as he wishes.

The aggrieved party may make it void or the parties.

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There may be other different kinds of contract also On the basis of Parties -

1) Unilateral Contract 2) Bi-Iateral Contract

On the basis of Expression -

1) Express Contract 2) Implied Contract

On the basis of Execution FORMATION OF CONTRACT

1) Executed Contract 2) Executor Contract

Generally, two or more persons are required to make a contract. The first step in the formation of contract is proposal. One person proposes to other and the other accepts that proposal. then promise occurs. And a promise coupled with consideration and enforceability by law becomes contract. PROPOSAL

In English Law, proposal is known as "Offer". In Indian Contract Act, 1872 Section 2(a) defines proposal as -

"When one person signifies to another hi~ 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." Essentials of Proposal: According to the abovementioned definition, the essentials of a valid proposal are – 1. The proposal must be communicated by the proposer to the acceptor.

2. It must be made with a view to take consent of acceptor and to create legal relations.

3. The proposal must be to do an act or to abstain from doing anything. This means it must be certain and definite.

Communication of Proposal: A promise is the result of meeting of two minds. When the proposal comes to the knowledge of the person to whom it is made, then he may give his assent to it. This means communication of proposal to the person to whom it is made is compulsory. A proposal can be accepted then. Communication may be expressed or implied. This fact can be gathered from Sec. 9 of the Indian Contract

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Act 1872. 1. According to Section 9 of I.C. Act, 1872- "In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied." Communication of Proposal completes when it comes to the knowledge of the person to whom it is made. In this case, the plaintiff filed the suit to claim the reward of RS.501 from defendant as he discovered the defendant's nephew having absconded from home. Plaintiff was the servant of defendant. The defendant announced the reward of RS.501 to anyone who discovered his nephew but this fact came to the knowledge of plaintiff only after he had already handed over the boy to the defendant.

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The court held that the proposal was not communicated to the servant and he came to know of it after he had already discovered the boy hence he is not entitled to any reward. Suit dismissed accordingly. 2. To Create Legal Relations: The intention in the proposal is very important. The proposal should be made with intent to create legal relations. In the case of Balfour vs. Balfour (1919) 2 K. B. 571

Lord Atkin held that the wife is not entitled to recover the arrears because there was no intention to create legal relations. The objective test is applied to judge whether the parties intended to create legal relations.

3. The Proposal must be certain and definite: The terms of the contract should not be vague. If there is some ambiguity in the contract, the court has to interpret it but the court can not make contract between the parties. If the meaning of the agreement is uncertain or unable to make it certain, the Agreement is void under Section 29 of Indian Contract Act, 1872. Kinds of Proposal – The proposal may be – 1) Generla 2) Specific

General Proposal: A proposal that is not made to an ascertained person but it is made to the general public is called general proposal. But it is necessary that it should be accepted by an ascertained person. In this case, the court held that the plaintiff lady is entitled to claim the reward because the advertisement is made to the whole world and it becomes a promise only when it is accepted by an ascertained person and the court also held that the notification of acceptance in such cases is not necessary. In India, the decision of this case is followed in the case of Hindustan Insurance Corporation Society vs. Shyam Sunder AIR (1952) Cal. 691 and in the case of Union of India vs. M/s. Rameshwar Lal Bhagchand AIR 1973 Gauhati 111.

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Specific Proposal: When a proposal is made to an ascertained person then it is called specific proposal. This proposal can be accepted by that person only to whom it is made and none else. Acceptance: When a proposal is made to the general public or to an ascertained person, it must be accepted to convert it into promise. Anson has said - "Acceptance is to offer what a lighted match is to a train of gunpowder." According to Sec. 2 (b) of I.C. Act, 1872- "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. Communication of Proposal: According to Sec. 2(a) of I.C. Act, 1872, the proposal must be signified to another i.e. must be communicated to another it may be express or implied. A proposal can be accepted only when it comes to the knowledge of the person to whom it is made. Hence communication of proposal is complete when it comes to the knowledge of the person to whom it is made.

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Communication of Proposal: When complete

A proposal is not converted into a promise until and unless it is accepted by the person to whom it is made and the offeree can accept it when it comes to his knowledge. According to Section 4 of I.C. Act, 1872- "The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. For Example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. Thus the first essential of a valid proposal is that it must be communicated. Revocation of Proposal REVOCATION OF PROPOSAL

When a proposal is communicated by the offeror to the offeree, it becomes agreement as and when it is accepted but a proposal can be taken back or revoked before its acceptance. Section 4 of I.C. Act, 1872 deals with the communication of revocation of proposal.

According to Section 4 of I.C. Act, 1872 'The communication of a revocation is complete-

As against the person who makes it, when it is put into a course of transmission to the person to whom it is made as to be out of the power of the person who makes it. As against the person to whom it is made when it comes to his knowiedge. Mode of Revocation: The proposal may be revoked by any mode given in Section 6 of IC Act, 1872. According to Section 6 of I.C. Act, 1872- A proposal is revoked1. by the communication of notice of revocation by the proposer to the other party. 2. by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, 7

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by the lapse of reasonable time, without communication of the acceptance; 3. by the failure of the acceptor to fulfil a condition precedent to acceptance; or 4. by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. Acceptance: When a proposal is given to a person, the other party must accept it in the mode and manner which is prescribed by the proposer. An acceptance is necessary to convert a proposal into a contract. Acceptance must be absolute; this means the person to whom the proposal is made can not put a condition in acceptance. If he puts the condition or changes the terms and conditions of the proposal then he is said to be making a counter proposal.

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According to Section 7 of the Indian Contract Act, 1872 - "In order to convert a proposal into a promise, the acceptance must 1. be absolute and unqualified;

2. be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. A proposal will be accepted by performing conditions or by receiving consideration. This means the acceptance may be by conduct it is not necessary to accept the proposal in words, whether oral or in writing. According to Section 8 of Indian Contract Act, 1872 - Performance of the conditions of proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. Communication of Acceptance: The first rule of acceptance is that the acceptance must be communicated to the proposer or to his agent then it becomes binding on proposer. An intention to accept or even a mental resolve to accept a proposal does not give rise to a contract. Expression of Acceptance is necessary. In the case of Felt house vs. Bindley (1863) 7 L.T. 835 the court held that communication of acceptance must be made to the proposer himself or to his agent. The communication of acceptance to stranger will not be a valid communication. In this case it is also held that the proposer can not impose upon the offeree the obligation of refusal. The decision of this case is followed in India in the famous case of Bhagwan Das vs. Girdhari Lal & Co. AIR 1966 SC 543. The second rule is that the acceptance must be communicated by the offeree himself or by his authorized agent. In the case of Powell Vs. Lee (1908) 99 L.T. 284 The court held that communication of acceptance from an unauthorized person will not be valid.

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But the offerer may waive the communication of acceptance in his benefit as in the case of Carlill vs. Carbolic Smoke Ball Co. (1893) 1 O.B. 256 The third rule of acceptance is that the acceptance must be absolute and unconditional. According to Sec. 7(1) of Indian Contract Act 1872 "In order to convert a proposal into a promise, the acceptance must be absolute and unqualified." Revocation of Acceptance: When the acceptance of the offeree comes within the knowledge of the proposer, it turns the whole transition into agreement but an acceptance may also be revoked.

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According to Section 5 of I.C. Act 1872- "An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. For Example: A, proposes by letter sent by post to sell his house to B. B accepts the proposal by a letter sent by post. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

In the case of Baroda Oil Cakes Traders Vs Purushottam Narain Das Bagulia AI R 1954 Born. 491, the Supreme Court held that so far as the making of the contract is concerned, the proposer is bound as soon as the acceptance is posted subject to the right of the acceptor to revoke his acceptance.

The decision of this case is followed and approved later on by the Hon'ble Supreme Court in the case of Bhagwan Das Vs Girdharilal AIR 1966 SC 543. Till the offer was accepted, there was no contract between the parties and the proposer may withdraw his offer. The proposer is not bound to keep the offer open indefinitely. According to Section 5 I.C. Act, 1872 –

'A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards."

Illustration: A proposer, by a letter sent by post proposes to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. In the case of Payne Vs Cave (1789) 3 TR 148, the court held that in case of an auction, the bidder is entitled to revoke his bid at any time before the fall of the hammer or before the property is finally knocked down.

In the case of MIs J.K. Enterprises Vs State of M.P. AIR 1997 MP 68, the M.P. High Court held that the revocation of proposal must be communicated to the offeree, not to the' other person. Where the communication of revocation is sent by fax message on wrong number, the revocation would not be effective.

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IMPORTANT QUESTIONS Q.1. When does an agreement become a contract? Q.2.

"Acceptance must be absolute and unqualified". Explain.

Q.3.

Define 'Proposal'. Also explain the different legal rules relating to it with the help of case law.

Q.4.

Define a Contract. Discuss the essential elements of a valid Contract.

Q.5.

Distinguish between the following

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i. Void and voidable Contracts. ii. Illegal and unenforceable contracts. Q.6.

"All contracts are agreements but all agreements are not contracts." Explain.

Q.7.

Define 'Proposal'. Discuss essential features of a valid proposal offer. What is the difference between proposal and invitation to offer? Explain.

Q.8.

Define Acceptance. Discuss the essentials of a valid acceptance. "Acceptance to an offer is what a lighted match is to a train of gun powder." comments. How is a communication of an offer and acceptance complete? And how and when are their revocation made? Explain.

Q.9.

Q.10. "An agreement enforceable by law is a contract." Comment. Discuss the essentials of a valid contract in brief.

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