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CLAT : Contract of Law - Notes

Introduction:
Our day to day life is interspersed with many rights,duties, obligations through which we
interact with society. The laws which lay down rules and provide strength to the
agreement and support of arm of law for their implementation, are adjudged as civil
laws. 
The law which provide the procedure to be followed at the time of filing of any case is
the Code of Civil Procedure.
The number of civil laws is innumerable but the most important of these is the law of
contract.
Law of Contract:
Not exhaustive (not limited) and not retrospective Contract are probably the most
familiar legal concept in our society because it is so central to the essence of our
political, economic and social life. The law relating to contract constitute the most
important branch of commercial law. 
This is governed by the Indian Contract Act 1872. The contract Act defines contract as an
agreement enforceable by law. All agreements are not enforceable by law and therefore
all agreements are not contracts.
Example: - An agreement to go to see a movie may be a mere agreement not enforceable
by law. Thus all agreements are not contracts.
AGREEMENT:
Every promise and every set of promises forming the consideration for each other is an
agreement. An agreement arises by an “offer or proposal” by one of the parties and the
“acceptance” of such offer by the other. In other sense, in an agreement there is a
promise from both sides.
Example :- A promises to deliver his watch to B and in return B promises to pay a sum of
Rs. 200 to A. There is said to be an agreement between A & B.
PROPOSAL/OFFER - When one person signifies to another his willingness to do, to
abstain from doing anything, with a view of obtaining the assent of that other to such act
or abstinence, he is said to make a proposal. 
For example :- A’s willingness to sell his radio set to B for Rs. 500 if B accepts to
purchase the same, amounts to proposal by A for the sale of the radio set.
 If a statement is made without any intention to obtain the assent of the other party, it
cannot be termed as proposal.
Generally the offer should be made with an intention to create legal relationship.
Promise in the case of social engagements is generally without an intention to create
legal relationship.

OFFER AND INVITATION TO OFFER (DISTINGUISHED)

OFFER : - When one person expresses his will to another person to do or not to do
something, to take his approval is known as an offer. An offer must be definite, certain
and complete in all respects. It must be communicated to the party to whom it is made.
EXAMPLE :- A tells to B, “I want to sell my motorcycle to you at Rs. 30,000, will you
purchase it?”
x says to y, “I want to purchase your car for Rs. 2,00,000 will you sell it to me?
INVITATION TO OFFER:-
It is an act prior to an offer, in which one person induces another person to make an offer
to him. The invitation to offer is made to inform the public the terms and conditions and
also in which a person is interested to enter into a contract with the other party.
Example Menu card of a restaurant showing the prices of food items.
A company invites applications from public to subscribe for its shares.

In a leading case, company A advertised a sale by action. B travelled to the advertised

place of action and found that the defendant had cancelled the action sale. He bought an
action against the defendant to recover the expenses of his travel. It was held that he
was not entitled for the same as there was yet no contract between the parties.
Express and Implied Offer:
An express offer is expressed by words written or spoken. An implied offer is an offer
made otherwise than in words. It may be made by conduct.
Example: - A person who boards a bus or who hires a taxi, undertakes to pay the fare at
his destination, even though he makes no express promise to do so.
PROMISE
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. The person making the proposal is called
the promiser and the person accepting the proposal is called the promisee.
CROSS OFFERS:
When the offers made by two persons to each other containing similar terms of bargain
cross each other in post, they are known as cross offers.
Example:- A offered to sell his watch to B for Rs. 2000 through a letter sent by post. On
the same date B also wrote to A making an offer to purchase A’s watch for Rs. 2000.
When A or B sent their letters they did not know about the offer which was being made by
the other side. In these cross offers, even though both the parties intended the same
bargain, there would arise no contract. A contract could arise only if either A or B after
having the knowledge of the offer, had accepted the same.
SPECIFIC AND GENERAL OFFERS: 
When the offer is made to a specific or an ascertained person it is known as a specific
offer but when the same is not made to any particular person but to the public at large, it
is known as general offer.
Example:- An offer to give reward to anybody who finds a lost dog is general offer.
STANDING, OPEN OR CONTINUING OFFER:
An offer which is allowed to remain open for acceptance over a period of time is known
as a standing, open or a continuing offer.
Example :- An offer to supply 1,000 bags of wheat from 1st January to 31st December, in
accordance with the orders which may be placed from time to time is a standing offer. As
and when the orders are placed that amounts to acceptance of the offer to that extent. In
the above stated illustration if an order for the supply of 100 bags of wheat is placed on
15th January, there is acceptance of the offer to that extent. So far as the remaining
quantity is concerned, this offer can be revoked just like any other offer.
COMMUNICATION OF OFFER:
The communication of a proposal is complete when it comes to the knowledge of the
person to whom it is made. Hence, as offer cannot be accepted unless and until it has
been brought to the knowledge of the person to whom it is made.
Example: - Mr. X makes an offer that whoever finds his lost dog, will get Rs, 10,000 from
him; through a newspaper advertisement. If Mr. Y reads the advertisement and finds his
lost dog, he is entitled to get the said amount. But suppose Mr. Y did not read the
advertisement, he found the dog moving astray on the road and submitted it to the police.
Or suppose, Mr. 
Y happens to be the neighbor of Mr. X and he finds the dog during his morning walk and
takes it to the owner, he will not be entitled to the reward amount. In this scenario, Mr. Y
has come to know of the reward of 10,000 after the dog has been found. In both the
situations Mr. Y will not be entitled to claim the amount from X because there was no
communication of the offer to Mr. Y. Hence there cannot be a valid acceptance of the
offer and hence no contract is formed.
ESSENTIALS OF A VALID CONTRACT
1. An agreement between the two parties an agreement is a proposal or an offer by
one party and its acceptance by the other.
2. Agreement should be between the parties who are competent to contract.
3. There should be a lawful consideration and lawful object in respect of that
agreement.
4. There should be a free consent of the parties.
5. The agreement must not be one which has been expressly declared to be void.
VOID AGREEMENTS:
An agreement not enforceable by law is said to be void. These agreements include an
agreement without consideration, an agreement in restraint of trade, etc.
VOIDABLE CONTRACTS:
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 other is a voidable contract. Thus a voidable contract
is one which could be avoided by one of the parties to the contract at his option.
Example:- When the consent of a party to a contract has been obtained by coercion,
undue influence, fraud or misrepresentation the contract is voidable at the option of the
party whose consent has been so obtained.
ACCEPTANCE:
When the person to whom the proposal is made signifies his assent, the proposal is said
to have been accepted.
A proposal when accepted becomes a promise. It is only after the acceptance of the
proposal that a contract between the two parties can arise.
EFFECT OF ACCEPTANCE:
A contract comes into effect only after the offer is accepted. Before its acceptance,
neither party is bound by it.
ESSENTIALS OF A VALID ACCEPTANCE:
1. Acceptance should be communicated by the offeree to the offeror. It means that
the offeree must signify his assent or communicate the acceptance.
2. Acceptance should be absolute and unqualified. Thus conditional acceptance is not
the proper acceptance for the creation of a valid contract. 
For example: If I offer to sell my radio to you for Rs 500 and you convey that you are
willing to pay only Rs 400 for the same, there is no contract in this case.
3. Acceptance should be made in some usual and reasonable manner, unless the
proposal prescribes the manner of acceptance.
4. Acceptance should be made while the offer is still subsisting. Acceptance offer the
lapse of the offer cannot give rise to a contract.

WHEN IS ACCEPTANCE COMPLETE?

In case the parties to the contract are present at the same place, one making the offer
and the other communicating the acceptance, both the parties become bound
immediately. But the problem arises when the parties are at different places at the time
of communication of offer and acceptance is made by post or telephone etc. The law has
laid down the following rules when the communication of acceptance is made by
post/telegram :-
 1. The communication of acceptance is complete as against the proposer, when it is
put in the course of transmission to him so to be out of the power of the acceptor.
2. The communication of acceptance is complete as against the acceptor, when it
comes to the knowledge of the proposer.

EXAMPLE :-
B accepts A’s proposal by a letter sent by post. The communication of the acceptance is
complete –
As against A when letter is posted.
As against B, when letter is received by A.
REVOCATION OF OFFER & ACCEPTANCE
A proposal may be revoked at any time; before the communication of acceptance is
complete as against the proposer but not afterwards and in case of acceptance, it is at
any time before the communication of the acceptance is complete as against the
acceptor but not after wards.
MODES OF REVOCATION OF OFFER:
1) By communication of notice of revocation by proposer.
2) By lapse of time.
3) By failure of acceptor to fulfill a condition precedent.
4) By death / insanity of proposal.

CONSIDERATION:
Consideration means to do something in return i.e. quid Pro quo under Indian contract
Act.
Consideration is defined as: - when at the desire of the promisor, the promise has done or
abstained from doing or does or abstains from doing or promises to do or abstain
something, such an act or abstinence or promise is called consideration for the promise.
An agreement must be supported by a lawful consideration on both sides.
ESSENTIALS:
1. Consideration to be given at the desire of the promisor.
2. Consideration to be given by the promise or any other person.
3. Consideration may be past, present or future.
4. There should be some act, abstinence or promise by the promise which constitutes
consideration for the promise.

A executed an agreement with B who was a minor age 17 years at the time of execution
of agreement. After attaining majority, the erstwhile minor cannot ratify the agreement.
Past Consideration means that the consideration for any promise was given earlier and the
promise is made thereafter.
Example:- I request you to find my lost dog. After you have done the same, if I promise to
pay you Rs. 100 for that, it is a case of past consideration under this the act recognizes
only such consideration which has been given at the desire of the promisor, rather than
voluntarily.
Executed or Present Consideration – when one the parties to the contract has
performed his part of the promise, which constitutes the consideration for the promise
by the other side. In other words consideration is provided simultaneously along with
the making of the contract.
Executory or Future Consideration - When one person makes a promise in exchange for
the promise by the other side, the performance of the obligation by each side to be
made subrequest to the making of the contract, the consideration is known as
executory.

For example: A agrees to supply certain goods to B and B agrees to pay for them on a
future date, this is a case of executory consideration.
WHO ARE COMPETENT TO CONTRACT
Every person is competent to contract who is of the age of majority according to the law
of land of which he is a subject and who has not been disqualified from entering into a
contract is competent to contract.
Therefore the following persons are parties incompetent to contract :-
1. A minor i.e. a person below the age of 18 years.
2. A person of unsound mind or insane.
3. A person disqualified by any law to contract.
Thus an agreement with a minor is absolutely void.
AGREEMENT WITHOUT CONSIDERATION AS VOID
Exceptions:
1) Natural love and affection.
2) Compensation for past voluntary services.
3) Promise to pay time barred debt.

In a very popular case, Mohiri Bibee in Dharmodas Ghose (ILR 1903) 30 cal 539 a minor
mortgaged his house in favour of a money lender and received certain amount from him.
The privy council held that the money lender is not entitled to get the money back which
was advanced to a minor. This is because only a person capable of entering into a
agreement can make a contract.
MINOR AND RULE OF ESTOPPEL
Further a situation may arise where a minor has declared or intentionally caused or
permitted another person to believe him to be a person who has
attained the age of majority upon such belief, if the money lender advances some money
to the minor, can the minor be held liable to pay? The Mohiri Bibee case clearly ruled out
that the rule of estoppels does not apply against minor. It means a minor cannot be held
liable to repay a loan even if he has procured it by misrepresenting him as a major
person.
MINOR AND RULE OF RESTITUTION
Again a question arises as to the rule of restitution applying against a minor. Restitution
means to restore or return the benefit received by a minor under an agreement. A minor
is not liable to restore the benefits received under a void contract except under certain
cases. 
A minor who has obtained money or goods by misrepresenting him to be major, can be
compelled to restore the benefit to the extent, he or his estate has benefited. If some
benefit of permanent nature has been accrued to him, he has to restore it.
Example:- A minor has to restore a car or a house purchased from a loan amount. But he
cannot be forced to repay any money used by him for temporary employment e.g. on
eating, drinking, movies etc. A minor’s liability for necessaries supplied to him for his
living e.g. food cloth, lodging, medicine and health care etc under an agreement can be
enforced against his property. 
Therefore, if a minor meets an accident and a person expends money on his hospital
expenses, he would be reimbursed from minor’s property.A minor’s parents are out of
station. His neighbor lends him money to buy food and clothes for himself  his claim of
repayment would lie against minor’s property.
What is a sound mind for the purposes of contracting:- A person is said to be of sound
mind for the purpose of making a contract, if at the time when he makes it, he is capable
of understanding it and of forming a rational judgment as to its effect upon his interests.
A person who is usually of unsound mind out occasionally of sound mind may make a
contract when he is of sound mind.
A person who is usually of sound mind but occasionally of unsound mind may not make a
contract when he is of unsound mind.
Example: A patient in a lunatic asylum, who is at intervals, of sound mind may contract
during intervals.
A person, who is delirious from fever or who is so drunk that he cannot understand the
terms of a contract or form a rational judgments as to its effect on his interests cannot
contract whilst such delirium or drunkenness lasts.
CONSENT DEFINED:
Two or more persons are said to be consented when they agree upon the same thing in
the same sense.
FREE CONSENT
Consent is said to be free when it is not caused by coercion, undue-influence, fraud,
misrepresentation and mistake.
COERCION:
Coercion is the committing or threatening to commit any act forbidden by the Indian
Penal code or the unlawful detaining, or threatening to detain any property, to the
prejudice of any person whatever, with the intention of causing any person to enter into
an agreement.
For example : - A threatens to shoot B is B does not agree to sell his property to A at a
stated price. B’s consent in this case has been obtained by coercion.
UNDUE INFLUENCE
Undue influence takes place where two persons stand in such a relation that one party is
in a position to dominate the will of the other. When such person uses his position to
obtain an unfair advantage over the other, any agreement entered into is vitiated by
undue influence a person can be said to dominate the will of other or able to exercise
undue influence over the other if –
1. He has real or apparent authority over the other or he stands in a fiduciary relation with
him and
2. He makes a contract with a person whose mental capacity is temporarily or
permanently affected due to old age, illness or mental or bodily distress.
Example : Mr A is heavily indebted to Mr. B the money lender of the village. B gets on
agreement signed by A in which he sells all his land to B at a price much below, say one-
fourth of the existing market price of the land can A challenge the agreement on the
ground of being induced by undue influence? The answer is yes. It lies upon B to prove
that the contract was not induced by influence.
Fraud:
Fraud means and includes any of the following acts committed by a party to a contract,
or with his connivance, or by his to enter into the contract :-
1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be
true.
2. The active concealment of a fact by one having knowledge or belief of the fact.
3. A promise made without any intention of performing it.
4. Any other act failed to deceive.
5. Any such act or omission as the law specially declares to be fraudulent. Mere silence
as to facts likely to affect the willingness of a person to enter into a contract is not fraud,
except in two cases –
a) where there is a duty to speak.
b) where silence is equivalent to speech.
For example: B says to A – if you do not deny it, I shall assumes that the horse is sound”.
A says  nothing mere A’s silence is equivalent to speech and if the horse is found
unsound, he would be guilty of fraud.
MISREPRESENTATION
Misrepresentation means misstatements or unwarranted statements which are not true
though the person believes it to be true. The statement believes it to be true. Whereas,
‘fraud’ is also called a wildful misrepresentation where makes of the statement known
and believes it not to be true.
VOIDABILITY
In contracts, voidable is a term typically used with respect to a contract that is valid and 
binding unless avoided or declared void by a party to the contract who is legitimately
exercising a power to avoid the contractual obligations.
MISTAKE
Mistake as to matter of fact:-
1. Where both the parties to an agreement are under a mistake as to a matter of that
essential to the agreement, the agreement is void.
Example:- A agrees to buy from B a certain horse. It turns out that the horse was dead at
the time of the bargain, though neither party was aware of the fact. The agreement is
void.
1. A contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to a matter of fact. In other words if any one party is under
mistake as to a matter of fact, then that would be considered as a valid contract.
EFFECT OF MISTAKES AS TO LAW
A contract is not voidable because it was caused by a mistake as to any law in force in
(India), but a mistake as to a law not in force in (India) has the same effect as a mistake
of fact.
Example :- A and B make a contract grounded on the erroneous belief that a particular
debt is barred by the Indian law of limitation, the contract is not voidable.
1. What consideration and objects are lawful and what not - The consideration or object
of an agreement is lawful unless

- it is forbidden by law, or
- is of such a 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.

In each of these cases, the consideration or object of an agreement is said to be

unlawful. Every agreement of which the object or consideration is unlawful is void.
Example :-
A promises to pay B 1000 rupees at the end of six months, if C who owes that sum to B, fails
to pay it. B promises to grant time to C accordingly. Here the promise of each party is the
consideration for the promise of the other party and they are lawful considerations.
A, B and C enter into an agreement for the division among them of gains acquired or to be
acquired by them by fraud. The agreement is void, as its object is unlawful.

CONTINGENT CONTRACTS
A contingent contract is a contract to do or not to do something, if some event, collateral
to such contract, does not happen
For example :- A contracts to pay to B Rs. 10000 if B’s horse is burnt. This is a contingent
contract.

SOME IMPORTANT POINTS:

When consent to an agreement is caused by coercion, fraud or misrepresentation the
agreement voidable at the option of the party whose consent   was so caused.
If any part of a single consideration for one or more objects or nay one or any part of
any one of several considerations for a single object is unlawful, the agreement is void.
Agreement without consideration, void, unless is in writing and registered or is a
promise to compensate for something done or is a promise to pay a   debt barred by
limitation law.
Every agreement in restraint of the marriage any person other than a minor, is void.
Every agreement by which any one is res rained from exercising a lawful profession,
trade or business of any kind is to that extent void.
Agreements, the meaning of which is no certain, or capable of being made certain, are
void
Agreements by may of wages are void and no suit shall be brought for recovering
anything alleged to be won on any wager or entrusted to any person to abide the result
of any game or other uncertain event on which any wager is made.

NOVATION: Substitution of an existing contract with a new one.

1. Change in terms of contract
2. Change in parties of contract
REMEDIES FOR BREACH OF CONTRACT
1. Damages
2. Quantum merit
3. Specific performance
4. Injunction

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