Introduction to General

Principle of Contract

1. Meaning and Essentials of a Contract Meaning of Contract

2. Key Components to Form a Contract Essentials of a Valid Contract

3. Contract Act and Banking

Introduction
 Came into force on the first day of September 1872 and applies
to whole India

 The Partnership Act 1932 and Sale of Goods Act 1930 are
outside the scope of the Indian Contract Act

General Principle of • Section 1-75

Contract

Special Principle of • Section 124-238

Contract
Formula of Contract & its Key Components

Offer +Acceptance

Promise (Agreement)

Law Enforceability

(Consideration)

CONTRACT
Key Component to form Contract
When one person signifies to another person, his willingness to do or
not to do something, with a view to obtaining the consent of that
other person, he is said to make a proposal.

When a person to whom the proposal is made, signifies his assent

(consent), the proposal is said to be accepted.

A proposal becomes a promise when it is accepted.

The person making the proposal is called the ‘promisor’.

The person accepting the proposal is called ‘promisee’.

Section 10 of Indian Contract Act

“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.”

Therefore, a Contract =Agreement Enforceability.

Thus all contracts are agreements but all agreements are not
necessarily contracts.
Essential Points of Contract

1. There must be an offer (clear , define, communicated to offeree)

and its acceptance (absolute and unconditional) (Invitation to
offer is not offer)

Illustration

(a)A proposes by a letter to B to sell his car for Rs. 10,000. This is known
as a proposal. A is the promisor. If B accepts the proposal then he
becomes the promisee. This results into a contract.

(b) A letter asking for quotation of goods is an invitation to offer. When a

quotation is being sent, an offer is being made to buy goods at the quoted
price. In case the quotation is accepted by placing an order a promise is
being made to pay the price on the consideration that the seller would
deliver the specified
2. Proper offer and proper acceptance with intention to create legal
relationship

For example, in the case of Balfour vs Balfour , a husband promised to

pay his wife a household allowance of GBP 30/- per month. Later the parties
separated and the husband failed to pay the amount. The wife sued him for
the allowance. However, the court held that agreements such as these were
outside the realm of contracts altogether.

3. Mutual consent of the parties i.e. consensus -ad- idem (same thing in
same sense)

4. Free Consent
a) Coercion (Section 15)
b) Undue Influence (Section 16)
c) Fraud (Section 17)
d) Misrepresentation (Section 18)
e) Mistake (Section 20,21 and 22)
5. Parties must be Competent to Contract (Section 11)

a) Major
b) Sound Mind
c) Not disqualified by law
Persons not qualified to enter into a contract
a) Minor
b) Lunatic
c) Persons disqualified by Law (Convict person/Foreign Sovereign/Diplomatic
staff)

The leading case as regards a minor’s capacity to contract is that of Mohiri

Bibi vs Dharmodas Ghose which settled this law. In this case a minor
borrowed a certain sum and as a security to repay it, he gave a mortgage of
certain immoveable property. Later on, the minor sued for setting aside the
mortgage. The mortgagee demanded the return of the money given by him
to the minor.

The Court held that the agreement made by the minor was void ab initio
and there was no question of refunding the money.
In terms of Section 12 dealing with ‘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, but 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.

Illustrations
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may
contract during those intervals.
(b) A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its
effect on his interests, cannot contract whilst such delirium or drunkenness
lasts.”
6. Lawful Consideration

a) Something for something

b) It means price of the promise
c) Section 25 - An agreement without consideration is void.

It has to be remembered that an agreement without consideration is void. (Void

means, it is of no legal effect and is not enforceable by law.)

However, in the following cases an agreement without consideration is valid:

• An agreement made out of natural love and affection.
• Between parties standing in near relation to each other.
• Which is in writing and registered.

Illustration
1. Mr A out of his natural love and affection, promises to give to his son B, a sum of Rs.
1000. A puts his promise in writing and registers it. This is a valid contract even
though there is no consideration from B.
2. A promise to compensate a person, who has already done something voluntarily for
the promisor (or done something voluntarily, that the promisor was legally bound to
do) is enforceable at law.
7. Performance must not be impossible

8. Agreement must be certain

9. The agreement should not expressly be declared to be void

Void agreement Void-ab-initio Void from the very be beginning

Examples
a) Agreements without consideration
b) Agreements in restraint of marriage
c) Agreements in restraint of trade
d) Agreements in restraint of legal proceedings
e) Agreements void for uncertainty
f) Agreements by way of wager
g) Agreements to do impossible act

10. Lawful Object.

Discharge of Contract

a) Discharge by Performance

b) Discharge by Impossibility

c) Discharge by Agreement

d) Discharge by Lapse of Time

e) Discharge by Operation of Law

f) Discharge by Breach of Contract

Terms of Contract
1. Valid Contract (PERFECT ONE)

2. Void Agreement (Shuruwat se null)

3. Void Contract (Initial -Valid, Later -Void)

4. Illegal Agreement (Forbidden by law)

5. Voidable Contract (One party hv option)

6. Wagering Agreement (Betting)

7. Contingent Contract (Valid Contract collateral to event)

8. Quasi Contract (Initial no intention but later on hv to enter)

 Contract & Banking
It obviously means that to become a customer account
relationship is must.

Account relationship is a contractual relationship. Banking is a

trust-based relationship.

There are numerous kinds of relationship between the bank and

the customer.

The relationship between a banker and a customer depends on the

type of transaction.

Thus the relationship is based on contract, and on certain terms and

conditions.
 1. Debtor & Creditor

a. When a ‘customer’ opens an account with a bank, he

fills in and signs the account opening form. By signing the
form he enters into an agreement/contract with the bank.

b. When customer deposits money in his account the bank

becomes a debtor of the customer and customer a
creditor.
 2. Creditor & Debtor

a. Lending money is the most important activities of a

bank. The resources mobilized by banks are utilized for
lending operations.

b. Customer who borrows money from bank owns money to

the bank. In the case of any loan/advances account, the
banker is the creditor and the customer is the debtor.

c. The relationship in the first case when a person deposits

money with the bank reverses when he borrows money from
the bank. Borrower executes documents and offer security to
the bank before utilizing the credit facility.
 1. Trustee and Beneficiary

(Bank as a Trustee and Customer as a Beneficiary)

• When a person entrusts valuable items with another person

with an intention that such items would be returned on
demand to the keeper the relationship becomes of a trustee
and trustier.
• Customers keep certain valuables or securities with the
bank for safekeeping or deposits certain money for a
specific purpose (Escrow accounts) the banker in such cases
acts as a trustee. Banks charge fee for safekeeping
valuables
 2. Bailee and Bailor

(Bank-Bailee and Customer- Bailor)

Banks also keeps articles, valuables, securities

etc., of its customers in Safe Custody and acts
as a Bailee. As a bailee the bank is required to
take care of the goods bailed.
 3. Lessor and Lessee
(Bank- Lessor and Customer- Lessee)

 Banks lease (hire lockers to their customers) their

immovable property to the customer and give them the
right to enjoy such property during the specified period i.e.
during the office/ banking hours and charge rentals.

 Bank has the right to break-open the locker in case the

locker holder defaults in payment of rent. Banks do not
assume any liability or responsibility in case of any damage
to the contents kept in the locker.
 4. Agent and Principal
(Bank- Agent and Customer- Principal)

 Banks collect cheques, bills, and makes payment to various

authorities’ viz., rent, telephone bills, insurance premium
etc., on behalf of customers.
 Banks also abides by the standing instructions given by its
customers. In all such cases bank acts as an agent of its
customer, and charges for these services
 5. Indemnity holder and
Indemnifier

(Bank-Indemnity holder and Customer-Indemnifier)

 In case of banking, the relationship happens in

transactions of issue duplicate demand draft, deceased
account payment etc.
 In that case indemnifier will compensate any loss arising
from the wrong or excess payment.
 In these case banks is Indemnity Holder (Promisee) and
customer is Indemnifier (Promisor).
 6. Hypothecator and
Hypothecatee
(Bank- Hypothecatee and Customer-
Hypothecator)

This happens when the customer hypothecates

certain movable or non-movable property or assets
with the banker in order to get a loan. In this case,
the customer became the Hypothecator, and the
Banker became the Hypothecatee.
 7. Pledger and Pledgee

(Bank- Pledgee or Pawnee and Customer- Pledger or

Pawnor)

This happens when customer pledges (promises) certain assets

or security with the bank in order to get a loan. In this case,
the customer becomes the Pledger or Pawnor, and the bank
becomes the Pledgee or Pawnee. Under this agreement, the
assets or security will remain with the bank until a customer
repays the loan.
 8. Mortgagor and Mortgagee

(Bank- Mortgagee and Customer- Mortgagor)

In this case, the customer became the Mortgagor, and the

Banker became the Mortgagee.
 9. As a Custodian

A custodian is a person who acts as a caretaker of

something. Banks take legal responsibility for a customer’s
securities.

While opening a D-Mat account bank becomes a custodian.

 10. As a Guarantee

Banks give guarantee on behalf of their customers and enter in

to their shoes. Guarantee is a contingent contract.

As per sec 31,of Indian contract Act guarantee is a “contingent

contract”.

Contingent contract is a contract to do or not to do something,

if some event, collateral to such contract, does or does not
happen.
 11. Advisor & Client

(Bank- Advisor and Customer- client)

When a customer invests in securities, the banker acts as an advisor. The advice
can be given officially or unofficially. While giving advice the banker has to take
maximum care and caution. Here, the banker is an Advisor, and the customer is
a Client.