Learning

Outcomes
After this lecture, you will be able to

 illustrate the difference between agreement and

contract.

 explain the essentials of a valid contract.

Introduction

The law relating to contracts is contained in the

Indian Contract Act, 1872. For business
executives, contract law is tremendously
significant because it underlies or is related to all
major areas of law affecting business.
The Indian Contract Act, 1872

• It is applicable to all states of India.

• It does not affect any usage or custom of trade.

• It is the most important part of commercial law because

every commercial transaction starts from an agreement
between two or more persons.

• The main objective of law of contract is to bring

definiteness in commercial and other transactions.

• This act came into force on September 1, 1872.

The Indian Contract Act, 1872

The Act is not exhaustive

The act does not profess to be a complete and

exhaustive code.
The Indian Contract Act, 1872

It creates Jus in Personam NOT Jus in Rem

A Jus in Personam: means a right against or in respect

of a specific person. It is available only against
particular persons.

A jus in rem: means a right against or in respect of a

thing. It is available against the world at large.
Examples

• Mr. Amit owes an amount of ₹ 80,000 to Mr. Bhasin.

Mr. Bhasin has the right to recover this amount from
Mr. Amit only, not from anybody else. This right is
known as Jus in Personam.

• Mr. Sahil owns 50 acres of land. In this case, Mr. Sahil

has the full liberty to enjoy the land against every
member of the public. This right is known as Jus in
Rem.
Meaning of Valid Contract

A contract is an agreement, enforceable by law,

made between at least two parties to do a
particular act or abstain from doing a particular
act. When parties create a contract, they create
legal rights and obligations between themselves.
If the party, which had agreed to do something,
fails to do that, then the other party has a remedy.
Definition of Contract

“Contract is an agreement, enforceable by law”

-Sec.2(h) of Indian Contract Act, 1872

“A contract is an agreement, creating and defining the

obligation between Parties.”
- Salmond
Contract and its Elements
Agreement

“Every promise and every set of promises forming

the consideration for each other is an agreement”.

-Sec.2(e)
Agreement

“A proposal, when accepted becomes a

promise”.

- [S.2(b)]
Agreement

The person making the proposal is called

‘promisor’ and the person accepting the proposal
is called the ‘promisee’.

- [S.2(c)]
Agreement

• Thus, an agreement is an accepted proposal.

Offer

Agreement

Acceptance
Example

Ritu offered to sell his car to Shruti for ₹ 2,00,000.

Shruti accepted this offer. Now, this offer to sell and
acceptance to purchase can be treated as an agreement.
Notes to Remember

• There should be 2 parties for making a valid

agreement.

• Consensus ad idem (Similarity of Minds)

Enforceability at Law

The agreement must be such which is

enforceable by law to become a contract.
Enforceability at Law (Example)

An agreement to go for a stroll together or a picnic does

not become a contract, and therefore, neither rights nor
obligations are created on the part of the parties to the
agreement.
Notes to Remember

There is no legal obligation for moral, religious

or social agreements.
Notes to Remember

All business agreements are created with an intention to

create legal obligations.

Example

Tom agrees to sell his car to Bruno for ₹ 50,000. The

agreement gives rise to an obligation on the part of Tom
to deliver the car to Bruno and on the part of Bruno to
pay ₹ 50,000 to Tom.
Notes to Remember

“All contracts are agreements but all agreements

are not necessarily contracts”
Essential Elements of a Valid Contract

“All agreements are contracts if they are made by

free consent of the parties competent to contract,
for a lawful consideration and with a lawful object,
and are not hereby expressly declared to be void.”

-Sec. 10
Essential Elements of a Valid Contract

Offer and Acceptance

Intention to Create Legal Relationship

Lawful Consideration

Capacity of Parties

Free or Genuine Consent

Essential Elements of a Valid Contract

Lawful Object

Agreement Not Expressly Declared Void

Certainty of Meaning

Possibility of Performance

Legal Formalities
1. Offer and Acceptance

For creating a valid contract:

•There must be 2 parties. (Offeror and Offeree)

•Terms of offer must be definite and properly

communicated to other party.

•The acceptance must be absolute and unconditional.

•Acceptance must also be according to the mode

prescribed and must be communicated to the offeror.

2. Intention to Create Legal Relationship

I. Domestic and Social Relationships

Presumption: Domestic and Social agreements are not

intended to have legal force.
2. Intention to Create Legal Relationship

Case

A husband promised to pay his wife a household

allowance of ₹ 5,000 every month. Later, the parties
separated and husband failed to pay the amount. The
wife sued for an allowance.

Point of Discussion

Will she succeed in the lawsuit?

2. Intention to Create Legal Relationship

Rebutting the Presumption

Case:
A resident of India invited her daughter who lived and worked in
the US to move to India to study. They agreed that the mother
would let the daughter stay in the house without any expectation
of house rent from her daughter. A dispute arose and the mother
took an action to evict the daughter from the house.
2. Intention to Create Legal Relationship

Point of Discussion

Will such an agreement bind the mother and daughter

legally?
2. Intention to Create Legal Relationship

II.Commercial Agreements

Presumption: Where parties negotiate and agree in a

business setting, it is assumed that they intend the
agreement to have legal consequences.

Rebutting the presumption: The intention not to create

legal relations may be evident in a number of different
ways.
2. Intention to Create Legal Relationship

Example:

The agreement may contain an express clause that no

legal consequences flow from the document.
3. Lawful Consideration

An agreement must be supported by a consideration of

something in return.
3. Lawful Consideration

Example

Samiksha agreed to buy a Hindi Literature book from

Yuvan for ₹ 500. Here, the consideration of Samikhsa is
book and the consideration of Yuvan is ₹ 500.
4. Capacity of Parties

As per Sec. 11, every person is competent to contract

who is of the age of majority according to law to which
he is subject, and who is of sound mind and is not
disqualified from contracting by any law to which he is
subject.
4. Capacity of Parties

Case

Trinum agreed to sell a government property to Bittu,

Bittu agreed to buy that property.

Point of Discussion

Is this a valid agreement?

5. Free or Genuine Consent

As per Sec. 14, consent is said to be free when it

is not caused by
Coercion

Undue Influence

Fraud

Misrepresentation

Mistake
5. Free or Genuine Consent

Implications in case of consent induced by mistake:

• If an agreement is induced by unilateral mistake---

Voidable at option of aggrieved party.

• If an agreement is induced by mutual mistake---Void

or cancelled.
6. Lawful Object

The objective of the agreement must be lawful. Any act

prohibited by law will not be valid and such agreements
can not be treated as a valid contract.
6. Lawful Object

Example

Anand and Krish agree that Anand shall pay him ₹

10,000 if Krish shall deliver Anand Opium afterwards.

Point of Discussion

Is it a Valid Contract?
6. Lawful Object

Case

A promised to pay B ₹ 1,000 at the end of 6 months, if

C, who owed that sum to B, failed to pay it. B promised
to grant time to C accordingly.

Point of Discussion

Examine the legality of the consideration in these

agreements.
7. Agreement Not Expressly Declared Void

Sec.24-30 of the Act specify certain types of agreement

that have been expressly declared void. Like: an
agreement in restraint of legal proceedings, agreement
in restraint of trade, agreement in restraint of marriage
(Sec.26) and agreement by way of wager.
7. Agreement Not Expressly Declared Void

Example

Anil promised to pay ₹ 5,00,000 to Rita, if she did not

marry throughout her life. Rita promised not to marry at
all.

Point of Discussion

Can this agreement be treated as a valid contract?

7. Agreement Not Expressly Declared Void

Case: Carew Co Ltd. V North Bengal

Two sugar manufacturers had entered into an agreement

allocating zones to procure sugar for meeting the needs of their
respective factories. It was agreed between the parties that none of
them would draw any cane from the zones allotted to the factory
of other party.

Point of Discussion

Is the agreement between the sugar manufacturers enforceable by

law?
8. Certainty of Meaning

Wording of the agreement must be clear and not

uncertain or vague.

Example

Johny agrees to sell 500 tones of oil to Mathew. But,

what kind of oil is not mentioned clearly. So on the
ground of uncertainty, this agreement stands void.
9. Possibility of Performance

As per Sec. 56, if the act is impossible of performance,

physically or legally, the agreement cannot be enforced
by law.
9. Possibility of Performance

Example

Ananya agreed with Bhushan to put life into Bhushan’s

dead wife, the agreement is void as it is not possible to
perform.
10. Legal Formalities

The contract act does not insist that the agreement must
be in writing, it could be oral.

But, in some cases, the laws strictly insist that the

agreement must be in writing.
10. Legal Formalities

Example:

An agreement to sell immovable property must be in

writing and should be registered under the Transfer of
Property Act, 1882.
MCQ

1. As per Sec. 2(h), a contract is:

a) A promise enforceable by law

b) An acceptance enforceable by law

c) An agreement not enforceable by law

d) An agreement enforceable by law

MCQ

2. One of the following is not an essential element of a

valid contract:

a) Capacity

b) Free Consent

c) Illegal Consideration

d) Intention to create legal relationship

Cont.

3. In a contract, the parties should have intention to

create:

a)A moral obligation between them

b)A legal obligation between them

c)An ethical obligation between them

d)All of above
Cont..

4. An agreement enforceable at law is a/an

a)Enforceable acceptance

b)Accepted offer

c)Approved promise

d)Contract
Cont..

5. Every promise and set of promises, forming the consideration

for each other, is an:

a)Agreement

b)Contract

c)Offer

d)Acceptance
Question

My grandmother invited my brother to come and

stay with her for a week. My brother accepts the
invitation but when he reaches at grandmother’s
house, she could not accommodate him because
of no room availability.

Can my brother claim compensation from her?

Give reasons.
Question

• A invites B to a dinner at his house on Sunday. B

hires a taxi and reaches A’s house at the appointed
time, but A fails to perform his promise. Can B
recover any damages from A?
That’s all for now…