LAW OF CONTRACT
Indian Contract Act 1872
What is a contract?
“Contract is an agreement enforceable by law”. S. 2(h)
Thus to make a contract there must be:
1. An agreement
2. Agreement shall be enforceable by law
3. All agreements are not enforceable by law
4. All agreements are not contracts
Example
• A (shareholder of company X) • B (stock broker) offers to pay C
offers to pay B (stock broker) Rs. (employee of National Stock
10,000 as brokerage charges Exchange) Rs. 10,000 if C
@0.5% if B provides services to provides insider information not
A for selling A’s equity share of available in public domain to B
Company X listed on National on the trading of shares of
Stock Exchange. ‘B’ accepts the company X listed on NSE. ‘B’
offer. accepts the offer.
Example
• A is organizing his 25th marriage anniversary party on 30 October
2024 and invites B for the same on 26 October 2024. B accepts the
invite and confirms his presence through a message on RSVP on 27
October. However, B does not attend the party on 30 October as he
proceeds on a business trip on 29 October without informing A. Can A
take legal action against B ?
DIFFERENCE
Contract Agreement
1. Agreement+ legal obligation 1. Offer + Acceptance
2. Creates legal relationship 2. May not create legal r/s
3. Contract follows agreement 3. Agreement precedes contract
4. Every contract is agreement 4. Every agreement is not
contract
What is an agreement?
• “Agreement is every promise and every set of promises, forming
consideration for each other.” S. 2(e)
• In simpler words, Agreement is a set of two promises, one flowing from the
offeror and other flowing from the acceptor through consideration.
• In an agreement there is a promise from both the sides. For example, A
promises to deliver his radio to B and in return B promises to pay a sum of
Rs. 500 to A , there is said to be an agreement between A and B.
What is a promise?
• “When one person to whom the proposal (offer) is made signifies his
assent thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise”. S. 2 (b)
• Simply, promise is an accepted proposal (offer)
• Agreement= Promise + Promise
What is a proposal (offer)?
• “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” S. 2(a)
• In simpler words, a proposal is a promise of performance conditional upon a
return promise received in exchange for it.
• Example 1: A offers to sell his car to B provided B pays Rs. 5000 to A.
• Example 2: A says to B – “Are you on the lookout to buy a car? I have a Honda City
ZX which drives good”
Process of making a contract
Proposal
Acceptance Promise
(Offer)
Contract Agreement
Offer v Invitation to Offer
• A proposal or an offer is different from an invitation to offer.
• Sometimes a person may make some statements or give some information
with a view to invite others to make offers on that basis.
• Example 1: Advertisements on media are usually invitations to offer, which
allows sellers to refuse to sell products at prices mistakenly marked in the
advertisement. Any word showing intention to make a contract may make
the advertisement to be an offer.
• Example 2: Auction goods
Examples
Display of goods E-commerce platforms
Specific and General Offer
Specific General
• A offers to sell his car to B for Rs. • A, intending to sell his car for Rs.
20,000.
20.000, puts it on Car Dekho
platform.
Express and Implied Offer
Express Implied
• A says to B that he wants to sell • A steps on the bus and starts his
his laptop for Rs. 13,000. journey.
• Other examples?
Cross Offers
Example Analysis
• On 1st January, A offers to sell his phone to B for Rs. • When the offers made by two persons to each other
5000 through a letter sent by post. On the same date B containing similar terms of bargain cross each other in
also writes a letter to A making an offer to purchase A’s post they are known as cross offers. In these cross
phone for Rs. 5000. B receives A letter on 3rd January. A offers, even though both the parties intend the same
receives B’s letter on 3rd January. On 4th January A sells bargain, there arises no contract. A contract could arise
his phone to C for Rs. 6000. B sues A for sale of phone to only if either A or B , after having the knowledge of the
C contending that a valid contract had been created offer, had accepted the same.
between A and B for selling of A’s phone to B through
letters exchanged between them.
Counter Offer
• X enters Y’s shop to buy a suitcase. X says to Y – “I want to buy a
samsonite medium suitcase of upto Rs. 3000. I will make the payment
through credit card”.
• Y replies – “We will sell you the suitcase for Rs. 2500. We accept only
cash”.
• X replies – “I will buy the suitcase for Rs. 2500 and will pay in cash”
Standing 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.
• For 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 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 and the offeror becomes bound to supply
those 100 bags of wheat.
Communication of Offer
“ the communication of a proposal (offer) is complete when it comes to
the knowledge of the person to whom it is made.”
– Section 04 of the Contract Act
Case: Lalman Shukla Vs. Gauri Dutt (1913)
• In this case the A’s nephew absconded from home. A sent his servant
to search the missing boy. After the servant had left in search of the
boy, A issued handbills announcing a reward of Rs. 501 /- to anyone
who might find the boy. The servant who was ignorant of this reward,
was successful in searching the boy. When he came to know of the
reward, he wanted to claim it but was denied. Servant brought an
action against A to claim this reward.
• Judgment: Servant was not entitled to the reward. If an offer has not
yet been communicated, even if somebody acts according to the
terms of the offer, he cannot be deemed to be the acceptor of the
offer.
Case: Williams Vs. Carwardine (1833)
• The plaintiff knew that the reward had been announced to be given to anyone
who gave information leading to the conviction of an assailant for murder, gave
the necessary information. While giving the information the plaintiff mentioned
that she had given the information ‘to ease her conscience’. At that time she
did not intend to claim the reward, but later claimed it.
• Judgment: It was held that since the offer had been accepted with its knowledge,
there was a valid contract and, therefore, she was entitled to claim the reward.
If the plaintiff has the knowledge of the offer, his acting in accordance with the
terms thereof amounts to the acceptance of the same. In such a case it is
immaterial that at the time of accepting the offer the acceptor does not intend to
claim the reward mentioned in the offer.
Essentials of Contract
1. Agreement should be between two parties.
2. Parties should be competent to contract.
3. Lawful consideration and lawful object in respect of that agreement.
4. Free consent of parties.
5. The agreement must not be one, which has been declared to be void.
Competence of parties
1. Major
2. Sound Mind
3. Not disqualified from contracting by any law
Consideration
• “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 abstains from doing, something, such act
or abstinence or promise is called consideration for the promise” S.
2(d)
• Simply, consideration is the incentive for making the contract.
• Subjectivity in valuation of consideration is important for contract to
happen.
• Example: A offers to sell his car to C for Rs. 1 lac which C agrees.
Void contracts
• Example: On 1 January A & C enter into a contract for sale of A’s car
for Rs. 1 lac. The contract is to be performed on 15 January 2024. On
13 January 2024, C dies.
• Other examples?
Types of Contracts
1. Executed
2. Executory
3. Standard form of contracts
4. Aleatory
5. Voidable
Why ‘Contract’ Needs ‘Law’
To protect the party exposed to uncertainty in executory contract
Example
• On 20 October, A (car dealer) contracts with B (buyer) to sell an old car lying in his
garage. B makes full payment of Rs. 5000 to A on 20 October. Delivery is to be done on
30 October. Meanwhile, on October 25, C visits A’s garage and offers to buy the same
car for Rs. 8,000.
• Situation 1: If there is no law, then it will be convenient for A to sell the car to C for Rs.
8000 and return the B’s money.
• Situation 2: If there is weak law, and if A sells the car to C, then A has to pay Rs. 2000 as
compensation to B for breaching the contract.
• Situation 3: If there is strong law, and if A sells the car to C, then A has to pay Rs. 3500
as compensation to B for breaching the contract.
Advantages of Contract
1. Mutual Benefit
2. Increase in wealth of society
3. Economic efficiency
4. Self Law making
1. Mutual Benefit for Parties
• If A owns an car that is worth only $100 to him but $150 to B,
both will be made better off by an exchange of A's car for B's
money of $120, and if they realize this, they will make the
exchange.
• For A, 120$ > 100$ (value of car)
• For B, 120$ < 150$ (B’s valuation of car)
2. Increase in wealth of society
• Before the exchange, A had a car (100$) and B had cash (120$)
• Total wealth of A & B= 220$
• After the exchange, A has cash (120$) & B has car (150$)
• Total wealth of A & B = 270$
• Increase 50$
3. Promotes Economic efficiency
If voluntary exchanges are permitted, resources gravitate towards their
most valuable users.
4. Self law making
Parties make their own law to which they are subjected to
