Contract act

MERCANTILE LAW NOTES 5
C h a p t e r 1 INTRODUCTION
We enter into contracts every day. Taking a seat in a bus amounts to entering into a contract.
When you put a coin in the slot of a weighing machine, you have entered into a contract. You go
to a restaurant and take snacks; you have entered into a contract. In such cases, we do not even
realise that we are making a contract. In the case of people engaged in trade, commerce and
industry, they carry on business by entering into contracts. The law relating to contracts is to be
found in the Indian Contract Act, 1872.
1. DEFINITIONS
A. CONTRACT Anson – Legally binding agreement between two or more person
by which rights are acquired by one or more to Act or forbearance
on the part of the other.
Salmond – an agreement creating and defining obligation between
parties
Pollock – Every agreement and promise enforceable at law is a
contract
Sec.2(h)An agreement enforceable by law is a Contract.
“Don’t stop until, you find The GOAL”
B.AGREEMENT Sec.2
(e)
Every promise and every set of promises forming consideration for
each other.
Agreement = Offer + Acceptance of offer
C. ENFORCEABILITY
BY LAW
An agreement is said to be enforceable by law if it creates a legal
obligation on the part of parties.
If an agreement is incapable of creating a duty enforceable by law,
it is not a contract.
D. PROMISE Sec.2 (b) A proposal when accepted becomes a promise.
Example :Ram offers to sell his car for Rs 1,00,000 to Shyam.
Shyam accepts this offer. This offer after acceptance becomes
promise and this promise is treated as an agreement between Ram
and Shyam.
E. CONSIDERATION Price paid by the one party for the promise of the other. Technical
word meaning ‘QUID PRO QUO’ i.e. something in return
“All contracts are agreement but all agreements are not contracts”.
Agreements of moral, religious or social nature are not contracts
 they are not likely to create a duty enforceable by law
 parties never intend to create a legal obligation.
 Ex;
o X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for
the dinner, X cannot go to the court to claim his loss.
o A father promises to pay his son Rs 1000 as pocket allowance. Later he refuses to
pay. The son cannot recover as it is a domestic agreement and there is no intention on
the part of the parties to create legal relations.
o Balfour vs Balfour [(1919) 2 K.B. 571] – A promise by the husband to pay his wife
30 pounds every month was held unenforceable as parties never intended it to be
bound by legal obligations.

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2. ESSENTIAL ELEMENTS OF A VALID CONTRACT
We have seen above that the two elements of a contract are: (1) an agreement; (2) legal
obligation. Section 10 of the Act provides for some more elements which are essential in order to
constitute a valid contract. It reads as follows:
“All agreements are contracts if they are made by 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.”
Thus, the essential elements of a valid contract can be summed up as follows
1. Agreement.
2. Intention to create legal relationship.
3. Free and genuine consent.
4. Parties competent to contract.
5. Lawful consideration.
6. Lawful object.
7. Agreements not declared void or illegal.
8. Certainty of meaning.
9. Possibility of performance.
10. Necessary Legal Formalities.
These essential elements are explained briefly.
1. AGREEMENT
As already mentioned, to constitute a contract there must be an agreement. An agreement is
composed of two elements—offer and acceptance. The party making the offer is known as the
offeror, the party to whom the offer is made is known as the offeree. Thus, there are essentially to
be two parties to an agreement. They both must be thinking of the same thing in the same sense.
In other words, there must be consensus-ad-idem.
Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ for Rs. 30,000. ‘B’, an
acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only car
‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the same.
There is no contract because the contracting parties have not agreed on the same thing at the
same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-ad-
‘Believe in “EFFORTS” rather than miracles’
idem.
Distinction between an agreement and a contract
Agreement
 Offer and its acceptance constitute an
agreement
 An agreement may or may not create a
legal obligation
 Every agreement need not necessarily
be a contract
 Agreement is not concluded or binding
contract
Contract
 Agreement and its enforceability
constitute a contract
 A contract necessarily create a legal
obligation
 All contracts are necessarily
agreements.
 Contract is concluded and binding on
the concerned parties
2. INTENTION TO CREATE LEGAL RELATIONSHIP
There should be an intention on the part of the parties to the agreement to create a legal
relationship. An agreement of a purely social or domestic nature is not a contract.

However, even in the case of agreements of purely social or domestic nature, there may be
intention of the parties to create legal obligations. In that case, the social agreement is intended to
have legal consequences and, therefore, becomes a contract. Whether or not such an agreement is
intended to have legal consequences will be determined with reference to the facts of the case. In
commercial or business agreements an intention to create legal relations is presumed. Thus, an
agreement to buy and sell goods intends to create legal relationship, hence is a contract, provided
other requisites of a valid contract are present. But if the parties have expressly declared their
resolve is not to create a legal obligation, even a business agreement does not amount to a
contract.
Examples
(1) There was an agreement between Rose Company and Crompton Company, where of the
former were appointed selling agents in North America for the latter. One of the clauses included
in the agreement was: “This arrangement is not... a formal or legal agreement and shall not be
subject to legal jurisdiction in the law courts”.
Held that: This agreement was not a legally binding contract as the parties intended not to have
legal consequences [Rose and Frank Co. v. J.R. Crompton and Bros. Ltd. (1925) A.C. 445].
(2) An aged couple (C and his wife) held out a promise by correspondence to their niece and her
husband (Mrs. and Mr. P.) that C would leave them a portion of his estate in his will, if Mrs. and
Mr. P would sell their cottage and come to live with the aged couple and to share the household
and other expenses. The young couple sold their cottage and started living with the aged couple.
But the two couples subsequently quaralled and the aged couple repudiated the agreement by
requiring the young couple to stay somewhere else. The young couple filed a suit against the aged
couple for the breach of promise.
Held: That there was intention to create legal relations and the young couple could recover
damages [Parker v. Clark (1960) 1 W.L.R. 286].
3. FREE AND GENUINE CONSENT
The consent of the parties to the agreement must be free and genuine. The consent of the parties
should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. If the
consent is obtained by any of these flaws, then the contract is not valid.
4. PARTIES COMPETENT TO CONTRACT
The parties to a contract should be competent to enter into a contract. According to Section 11,
every person is competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and
(iii) is not disqualified from contracting by any law to which he is subject. Thus, there may be a
flaw in capacity of parties to the contract. The flaw in capacity may be due to minority, lunacy,
idiocy, drunkenness or status. If a party to a contract suffers from any of these flaws, the contract
is unenforceable except in certain exceptional circumstances.
5. LAWFUL CONSIDERATION
The agreement must be supported by consideration on both sides. Each party to the agreement
must give or promise something and receive something or a promise in return. Consideration is
the price for which the promise of the other is sought. However, this price need not be in terms of
money. In case the promise is not supported by consideration, the promise will be nudum pactum
(a bare promise) and is not enforceable at law.

8 CA NAVEEN BAID
Moreover, the consideration must be real and lawful. Consideration must not be unlawful,
immoral or opposed to the public policy.
Examples:
Unlawful: -A agrees to sell narcotics to B for a sum of Rs. 100000. This agreement is not valid
because the consideration is unlawful.
Immoral: - An agreement for letting a house to a prostitute for carrying on her vocation there.
Opposed to public policy: - Trading with enemy, Agreement in restraint of marriage, trade, legal
proceedings etc.
6. LAWFUL OBJECT
The object of the agreement must be lawful and not one which the law disapproves.
Example
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 because its object is unlawful.
7. AGREEMENTS NOT DECLARED ILLEGAL OR VOID
There are certain agreements which have been expressly declared illegal or void by the law. In
such cases, even if the agreement possesses all the elements of a valid agreement, the agreement
will not be enforceable at law.
Example:- Agreement in restraint of trade, marriage or legal proceedings are expressly declared
void by the law and hence not enforceable.
8. CERTAINTY OF MEANING
The meaning of the agreement must be certain or capable of being made certain otherwise the
agreement will not be enforceable at law. For instance, A agrees to sell 10 metres of cloth. There
is nothing whatever to show what type of cloth was intended. The agreement is not enforceable
for want of certainty of meaning. If, on the other hand, the special description of the cloth is
expressly stated, say Terrycot (80 : 20), the agreement would be enforceable as there is no
uncertainly as to its meaning. However, an agreement to agree is not a concluded contract [Punit
Beriwala v. Suva Sanyal AIR 1998 Cal. 44].
9. POSSIBILITY OF PERFORMANCE
The terms of the agreement should be capable of performance. An agreement to do an act
impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by
magic. The agreement cannot be enforced.
10. NECESSARY LEGAL FORMALITIES
A contract may be oral or in writing. If, however, a particular type of contract is required by law
to be in writing, it must comply with the necessary formalities as to writing, registration and
attestation, if necessary. If these legal formalities are not carried out, then the contract is not
enforceable at law.

TYPES OF CONTRACTS
ENFORCEABILITY CREATION
 EXP
RESS
CONTRAC
TS
 IMPL
IED
CONTRAC
TS
 QUA
SI
COVALID
CONTRAC
TS
 VOID
CONTRAC
T
 VOID
AGREEME
NTS
 VOID
ABLE
CONTRAC
TS
 UNF
ORCEABL
E
CONTRAC
TS
 ILLE
GAL
CONTRAC
TS
 NTR
ACTS
EXECUTION ENGLISH LAW
CONTRACT
OF RECORD
JUDGEMENT
OF COURT
3.
*VALID *EXECUTED
*VOID *IMPLIED *EXECUTORY
*VOIDABLE *EXPRESS *BILATERAL
*UNENFORCEABLE *UNILATERAL
*ILLIGAL
1. VALID CONTRACT
CLASSIFICATION
 EXECUTO
RY CONTRACTS
 EXECUTED
CONTRACTS
FORMAL
CONTRACTS
SIMPLE
CONTRACTS
CONTRACT
UNDER SEAL
RECOGNISANCE
A contract to constitute a valid contract must have all the essential elements discussed earlier. If
one or more of these elements is/are missing, the contract is voidable, void, illegal or
unenforceable.
2. VOID CONTRACT
An agreement which is not enforceable by either of the parties to it is void [Section 2(i)]. Such an
agreement is without any legal effect ab initio (from the very beginning). Under the law, an
agreement with a minor is void (Section 11).*
A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable
[Section 2(i)].
Examples
(1) A and B contract to marry each other. Before the lime fixed for the marriage, A goes mad.
The contract becomes void.
(2) A contracts to take indigo for B to a foreign port. A’s government afterwards declares war
against the country in which the port is situated. The contract becomes void when war is declared.
In the above two examples, the contracts were valid at the time of formation. They became void
afterwards. In example (1) the contract became void by subsequent impossibility. In example (2)
the contract became void by subsequent illegality.*

10 CA NAVEEN BAID
It is misnomer to use ‘a void contract’ as originally entered into. In fact, in that case there is no
contract at all. It may be called a void agreement. However, a contract originally valid may
become void later.
* Other instances of void agreements are:
(a) Agreements entered into through a mutual mistake of fact between the parties (Section 20).
(b) Agreements, the object or consideration of which is unlawful (Section 23).
(c) Agreements, part of the consideration or object of which is unlawful (Section 21).
(d) Agreements made without consideration (Section 25).
(e) Agreements in restraint of marriage (Section 26).
(f) Agreements in restraint or trade (Section 27).
(g) Agreements in restraint of legal proceedings (Section 28).
(h) Uncertain agreements (Section 29).
(i) Wagering agreements (Section 30).
(j) Impossible agreements (Section 56).
(k) An agreement to enter into an agreement in the future.
3. VOIDABLE CONTRACTS
As per Section 2 (i) a voidable contract is one which may be repudiated at the will of one of the
parties, but until it is so repudiated it remains valid and binding. It is affected by a flaw (e.g.,
simple misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these
defects enables the party aggrieved to take steps to repudiate the contract. It shows that the
consent of the party who has the discretion to repudiate it was not free.
Example
Mr. A, at knife - point, asks B to sell his scooter for Rs. 50. Mr. B gives consent. The agreement
is voidable at the option of B, whose consent is not free.
A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical
attendant to agree to pay B an unreasonable sum for his professional services. B employs undue
influence. A’s consent is not free; he can take steps to set the contract aside.
4. ILLEGAL CONTRACTS
An illegal agreement is one the consideration or object of which (1) is forbidden by law; or (2)
defeats the provisions of any law; or (3) is fraudulent; or (4) involves or implies injury to the
person or property of another; or (5) the court regards it as immoral, or opposed to public policy.
Examples
(1) 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 illegal.
(2) A promises to obtain for B an employment in the public service, and B promises to pay Rs.
1,000 to A. The agreement is illegal.
Every agreement of which the object or consideration is unlawful is not only void as between
immediate parties but also taints the collateral transactions with illegality.
5. UNENFORCEABLE CONTRACT
An unenforceable contract is neither void nor voidable, but it cannot be enforced in the court
because it lacks some item of evidence such as writing, registration or stamping. For instance, an

agreement which is required to be stamped will be unenforceable if the same is not stamped at all
or is under-stamped. In such a case, if the stamp is required merely for revenue purposes, as in
the case of a receipt for payment of cash, the required stamp may be affixed on payment of
penalty and the defect is then cured and the contract becomes enforceable. If, however, the
technical defect cannot be cured the contract remains unenforceable, e.g., in the case of an
unstamped bill of exchange or promissory note.
6. EXPRESS CONTRACT
A contract which is created either by word spoken or written.
Example: - If ‘A’ of Agra offers to sell his car for Rs. 150000 to ‘B’ of Delhi by a letter and ‘B’
accepts the offer by writing a letter. Thus the contract between ‘A’ and ‘B’ is said to be an
express contract.
7. IMPLIED CONTRACTS
The terms of a contract may be inferred from the conduct of the parties or from the circumstances
of the case. This is an implied contract (Section 9).
Example
If A enters into a bus for going to his destination and takes a seat, the law will imply a contract
from the very nature of the circumstances, and the commuter will be obliged to pay for the
journey.
We have seen that the essence of a valid contract is that it is based on agreement of the parties.
Sometimes, however, obligations are created by law (regardless of agreement) whereby an
obligation is imposed on a party and an action is allowed to be brought by another party. These
obligations are known as quasi-contracts. The Indian Contract Act, 1872 (Chapter V Sections 68–
72) describes them as “certain relations resembling those created by contract”.
Examples
(1) A supplies B, a minor, with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
(2) A supplies the wife and children of B, a minor, with necessaries suitable to their condition in
life. A is entitled to be reimbursed from B’s property.
(3) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. B is
bound to pay A for them.
In all the above cases, the law implies a contract and a person who has got benefit is under an
obligation to reimburse the other.
A contract which is inferred from the conduct of the parties is said to be tacit contract.
For example: - Obtaining cash form ATM
8. E-CONTRACT
An e-contract is one, which is entered into between two parties via internet.
9. EXECUTED CONTRACT
An executed contract is one wholly performed. Nothing remains to be done in terms of the
contract.
Example

12 CA NAVEEN BAID
A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.
10. EXECUTORY CONTRACT
An executory contract is one which is wholly unperformed, or in which there remains something
further to be done.
Example
On June 1, A agrees to buy a bicycle from B. The contract is to be performed on June 15. The
executory contract becomes an executed one when completely performed. For instance, in the
above example, if both A and B perform their obligations on June 15, the contract becomes
executed. However, if in terms of the contract performance of promise by one party is to precede
performance by another party then the contract is still executory, though it has been performed by
one party.
11. UNILATERAL CONTRACT
A Unilateral Contract is one wherein at the time the contract is concluded there is an obligation
to perform on the part of one party only.
Example
A makes payment for bus fare for his journey from Bombay to Pune. He has performed his
promise. It is now for the transport company to perform the promise.
12. BILATERAL CONTRACT
A Bilateral Contract is one wherein there is an obligation on the part of both to do or to refrain
from doing a particular thing. In this sense, Bilateral contracts are similar to executory contracts.

Chapter 2
OFFER & ACCEPTANCE
PROPOSAL [Sec 2(a)]:-
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
either to such act or abstinence,
He is said to make a proposal.
Examples
(1) A proposes, by letter, to sell a house to B at a certain price. This is an offer by an act by
written words (i.e., letter). This is also an express offer.
(2) D said to E, “I want to sell my bike to you.” This is an offer “to do something”.
(3) A owns a motor boat for taking people from Bombay to Goa. The boat is in the waters at the
Gateway of India. This is an offer by conduct to take passengers from Bombay to Goa. He need
not speak or call the passengers. The very fact that his motor boat is in the waters near Gateway
of India signifies his willingness to do an act with a view to obtaining the assent of the other. This
is an example of an implied offer.
(4) A offers not to file a suit against B, if the latter pays A the amount of Rs. 200 outstanding.
This is an offer by abstinence or omission to do something.
Essential Requirements of a Valid Offer
1. Must be made with a view to obtain acceptance.
2. Must be made with the intention of creating legal relations.
3. Terms of offer must be definite, unambigous and certain or capable of being made certain.
4. It must be distinguished from mere declaration of intention or an invitation to offer.
5. It must be communicated to the offeree.
6. The offer must not contain a term the non-compliance of which may be assumed to amount to
acceptance.
7. A tender is an offer as it is in response to an invitation to offer.
8. The Special terms, forming part of the offer, must be duly brought to the notice of the offeree
at the time the offer is made.
9. Two identical cross-offers do not make a contract.
Examples for point 3:
(1) A offers to sell to B “a hundred quintals of oil”. There is nothing whatever to show what kind
of oil was intended. The offer is not capable of being accepted for want of certainty.
(2) A who is a dealer in coconut oil only, offers to sell to B “one hundred quintals of oil”. The
nature of A’s trade affords an indication of the meaning of the words, and there is a valid offer.

14 CA NAVEEN BAID
(3)‘A’ has two Maruti cars, one is red and other blue. He offers to sell his car to ‘B’. In this case,
which car he is offering to sell is not clear. Therefore the offer is not valid one.
Example for point 4:
(4) Examples of Invitation to Offer
1. Window display of goods by a shopkeeper.
2. Quotations, Catalogue, Price list.
3. Advertisement in a newspaper for sale of an article.
Example:- Goods are sold in a shop under ‘self service’ system. Customer selects the goods in
the shop and takes them to the cashier for payment of price. Cashier refuses to accept the
payment. Held that customer cannot bind the shopkeeper for delivery of goods.
(Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. )
G sent S, his servant, to trace his missing nephew. Subsequently, G announced a reward for
information relating to the boy. S, traced the boy in ignorance of the announcement regarding
reward and informed G. Later, when S came to know of the reward, he claimed it. Held, he was
not entitled to the reward on the ground that he could not accept the offer unless he had
knowledge of it [Lalman Shukla v. Gauri Dutt, II, A.L.J. 489].
A tells B ‘I offer to sell my dog to you for Rs. 45. If you do not send in your reply, I shall assume
that you have accepted my offer’. The offer is not a valid one.
A invites tenders for the supply of 10 quintals of sugar. B, C, and D submit their tenders. B’s
tender is accepted. The contract is formed immediately the tender is accepted.
P, a passenger deposited a bag in the cloakroom at a Railway Station. The acknowledgement
receipt given to him bore, on the face of it, the words “See back”. One of the conditions printed
on the back limited the liability of the Railways for any package to £10. The bag was lost, and P
claimed £24. 10s, its value, pleading that he had not read the conditions on the back of the
receipt.
Held: P was bound by the conditions printed on the back as the company gave reasonable notice
on the face of the receipt as to the conditions at the back of the document [Parker v. South
Eastern Rly. Co. (1877) 2 C.P.D. 416].
In (Tinn Vs. Hoffmann 1873), A wrote to B indicating his willingness to sell 800 tons of iron at
69 s. per ton. On the same day B also wrote to A offering to buy 800 tons of iron at the same
rate of 69 s. per ton. The two letters crossed each other in post. B brought an action against A
for the supply of iron contending that a valid contract had been created between the two parties.
It was held that in this case there were only two cross offers and the offer of neither of the parties
having been accepted by the other, there was no contract which could be enforced
TYPES OF OFFER
SPECIFIC AND GENERAL OFFER

An offer can be made either:
1. to a definite person or a group of persons, or
2. to the public at large.
The first mode of making offer is known as specific offer and the second is known as a general
offer. In case of the specific offer, it may be accepted by that person or group of persons to whom
the same has been made. The general offer may be accepted by any one by complying with the
terms of the offer.
Examples
(1) A offers to sell his house to B at a certain price. The offer has been made to a definite person,
i.e., B. It is only B who can accept it [Boulton v. Jones (1857) 2H. and N. 564].
(2) In Carbolic Smoke Ball Co.’s case (supra), the patent-medicine company advertised that it
would give a reward of £100 to anyone who contracted influenza after using the smoke balls of
the company for a certain period according to the printed directions. Mrs. Carlill purchased the
advertised smoke ball and contracted influenza in spite of using the smoke ball according to the
printed instructions. She claimed the reward of £100. The claim was resisted by the company on
the ground that offer was not made to her and that in any case she had not communicated her
acceptance of the offer. She filed a suit for the recovery of the reward.
Held: She could recover the reward as she had accepted the offer by complying with the terms of
the offer.
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. For example, on 1st January A offers to sell his
radio set to B for Rs. 500/- through a letter sent by post. On the same date B also writes to A
making an offer to purchase A’s radio set for Rs. 500 /- When A or B send their letters they
do not know about the offer which is being made by the other side. In these cross offers, even
though both the parties intend the same bargain, there arises no contract. A contract could arise
only if either A or B , after having the knowledge of the offer, had accepted the same.
COUNTER OFFER
A qualified acceptance to the offer subject to modifications and variations in the terms of original
offer. Counter offer amounts to rejection of the original offer.
When in place of accepting the terms of an offer as they are, the offeree accepts the same subject
to certain condition or qualification, he is said to make a counter-offer. The following have been
held to be counter-offers:
(i) Where an offer to purchase a house with a condition that possession shall be given on a
particular day was accepted varying the date for possession [Routledge v. Grant (1828)].
(ii) An offer to sell rice was accepted with an endorsement on the sold and bought note that
yellow and wet grain will not be accepted [All Shain v. Moothia Chetty, 2 Bom L.R. 556].
STANDING, OPEN OR CONTINUING OFFER
An offer which is allowed to remain open for acceptance over a period of time is known as a
sanding, 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

16 CA NAVEEN BAID
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. So far as the remaining quantity is concerned
this offer can be revoked just like any other offer.
Tender for supply of goods is a kind of standing offer. An advertisement inviting tenders is
merely invitation for quotations. When the tender is approved it becomes a standing offer.
In Bengal Coal Co. Vs. Homie Wadia & Co., the defendants (Bengal Coal Co.) agreed to
supply coal to the plaintiff (Homie Wadia & Co. ) up to a certain quantity at an agreed price for a
period of 12 months, as may be required by the plaintiffs from time to time. The plaintiffs placed
orders for the supply of coal and the same were complied with. Before the expiry of 12 months,
the defendants withdrew their offer to supply further coal, and refused to comply with the orders
to supply further coal, and refused to comply with the orders placed thereafter. They were sued
for breach of contract. There was simply a continuing offer to supply coal. They were bound to
supply coal only as regards orders which had already been placed, but were free to revoke their
offer for supply of coal thereafter
LAPSE (Revocation) OF AN OFFER
On expiry of stipulated or reasonable time.
By not accepting in mode prescribed.
By rejection by the offeree.
By death or insanity of the offerer or offeree before acceptance.
By revocation by the offeror at any time before acceptance.
Revocation of standing offer at any time by giving notice to the offeree.
Revocation by non fulfillment of condition precedent to acceptance.
By subsequent illegality or destruction of subject matter.
In case of sale by auction the bids made at the auction are offers, and the highest offer may be
accepted by the auctioneer. In such a case the sale is complete when the auctioneer announces its
completion by the fall of the hammer or in any other customary manner ; and , until such
announcement is made, any bidder may retract his bid.
Submission of a tender to supply or purchase goods at a stated price is making an offer. Person
submitting the tender may withdraw his tender before the same has been approved. Even after
the tender has been approved that remains only a standing offer, which is capable of being
revoked before a contract arises by placing of orders. In Rajendra Kumar Verma Vs. State of
Madhya Pradesh AIR 1972.
ACCEPTANCE:- Sec.2(b)
 When the person to whom proposal is made signifies his assent thereto, the proposal is
said to be accepted. A proposal when accepted becomes a promise
LEGAL RULES AS TO VALID ACCEPTANCE

Acceptance must be
absolute and unqualified
Offeree should be assented to all terms & conditions of the offer. A
qualified acceptance amounts to counter offer.
Acceptance must be
communicated
Mere mental acceptance is not acceptance. Acceptance cannot be
made in ignorance of the offer. Mere silence is not acceptance.
Acceptance to Whom Acceptance must be communicated to the offeror i.e. the person who
made the offer.
Mode of Acceptance Acceptance must be in the mode prescribed in the proposal. If no
mode prescribed in the proposal, the acceptance must be according to
some usual and reasonable mode.
Time for Acceptance Acceptance must be given within specified time limits given in the
offer. In case no time is specified in the offer, offer must be accepted
within reasonable time and before the offer lapses.
Example:- A person applied for shares in a company in june. He
cannot be bound by the allotment made late in November since
delay of 6 months in acceptance of application for shares was
unreasonable.(Ramsgate Victoria Hotels v. Montefiore )
Acceptance by conduct By performance of an act intended by the proposer.
COMMUNICATION OF OFFER & ACCEPTANCE ( Section 4 )
Communication of Offer The communication of offer is complete when it comes to the
knowledge of the person to whom it is made.
(B) Communication of
Acceptance
The communication of acceptance is complete-
(a) As against the
Proposer
When it is put into the course of transmission to
him so as to be out of power of the acceptor to
withdraw the same .
(b) As against the
Acceptor
When it comes to the knowledge of the
proposer.
 For instance in response to my offer sent by post to you, you post the letter of acceptance
to me. As soon you have posted the letter my power to revoke comes to an end. This
may be made further clear by referring to the following illustration:
 A proposes, by a letter sent by post, 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.
 B accepts A’s proposal by a letter sent by post. The communication of the acceptance is
complete, --
As against A :- when the letter is posted ;
As against B :- when the letter is received by A.
 In Dunlop Vs. Higgins (1848), Dunlop & Co. offered to sell 200 tons of pig iron at 65 sh.
Per ton to Higgins & Co. through their letters dated 22nd and 28th January, Higgins &
Co. received the letters on 28th and 30th January and replied on the same indicating their
acceptance to purchase the pig iron in accordance with the offer. Due to frosty weather
there was disruption in the train services and the letter of acceptance instead of reaching
on 31st January reached Dunlop & Co. on 1st February. Dunlop & Co. refused to supply
pig iron on the ground that the receipt of the letter of acceptance by them had been

18 CA NAVEEN BAID
delayed. It was held that Dunlop & Co. had become bound by the contract as soon as the
letter of acceptance was posted to them.
COMMUNICATION OF ACCEPTANCE TO A WRONG PERSON
It has already been seen that the offeror becomes bound as soon as the letter of acceptance is
posted to him. If the letter of acceptance is posted at the wrong address or to a wrong person, that
will not bind the offeror. In this connection reference may be made to the decision of the court in
the case of Karan Singh Vs. The Collector, Chhatarpur to explain the point. In that case in an
auction of the quarry lease the petitioner’s bid of Rs. 1,800 was the highest bid. In accordance
with the auction conditions the petitioner deposited the security deposit and earnest money of Rs.
540. The bid was not accepted at the auction. The bid was subsequently accepted by the collector,
but instead of sending the communication of acceptance to the petitioner the same was wrongly
sent to somebody else. The officer concerned realised the mistake after the expiry of the period
of lease. Then a demand notice was sent to the petitioner asking him to pay the lease money.
The petitioner, on the other hand, demanded the refund of the security deposit of Rs. 540.
It was held that the petitioner’s bid, which was an offer, although accepted on file, did not
result in a contract as no intimation was sent to the petitioner which was received by him. The
demand notice for recovering the lease money was quashed and the respondents were directed to
refund the security deposit.
REVOCATION OF OFFER & ACCEPTANCE ( Section 4 )
The communication of revocation is complete-
As against the person who
makes it
When it is put into the course of transmission to the person to
whom it is made so as to be out of power of the person who
makes it.
As against the person to whom
it is made
When it comes to his knowledge.
REVOCATION OF ACCEPTANCE (INDIA)
In India, since the acceptor does not become bound immediately on posting his letter of
acceptance, he is free to revoke the acceptance by adopting speedier mode of communication,
whereby his communication of revocation of acceptance may reach earlier than his letter of
acceptance. Section 5 expressly permits the revocation of acceptance through the following
provision :
“An acceptance may be revoked at any time before the communication of the acceptance is
complete as against the acceptor, but not afterwards.”
Illustration : A proposes, by a 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.
REVOCATION OF ACCEPTANCE (ENGLAND)
Under the English law, once the letter of acceptance is posted it binds both the parties and
there appears to be no scope of revocation of acceptance by sending a telegram or through a

phone call. Although there are no English cases on the subject are of the view that the posting of
the letter of acceptance once posted cannot be revoked.
TIME FOR REVOCATION ( Section 5 )
Revocation of Offer An offer can be revoked at any time before the communication
Chapter 3
of acceptance is complete as against the proposer.
Revocation of Acceptance An acceptance can be revoked at any time before the
communication of acceptance is complete as against the
offeree.
CONSIDERATION
CONSIDERATION: - “QUID PRO QUO” – i.e. something in return. Consideration is the
price agreed to be paid by the promisee for the obligation of the promisor.
 When, at the desire of the promisor,
 the promisee or any other person
 has done or abstained from doing or
 does or abstains from doing or
 promise to do or to abstain from doing something,
 such act or abstinence or promise is called consideration for the promise.[Section2(d)]

20 CA NAVEEN BAID
LEGAL REQUIREMENTS REGARDING CONSIDERATION
A. Consideration must
move at the desire of the
promisor
Consideration must move at the desire or request of the promisor. Any act
done at the desire of a third party is not consideration.
Example:- D constructed a market at the desire of the collector of the district.
B, a shopkeeper of the market promised to pay commission to D on the sales
effected by him. Later on B denies to pay the promised amount. D filed a suit
in the court for the recovery of the amount.
The court held that D cannot recover the amount from B because D has
constructed the market at the desire of the collector , not at the desire of the
promisor i.e. B. ( Durga Prasad V. Baldeo )
B. Consideration may
move from the promisee
or any other person
Consideration may move from the promisee or any other person who is not a
party to the contract. Thus, there can be a stranger to a consideration.
Example:- A, by a deed of gift transferred certain property to her daughter
with the direction that daughter should pay an annuity to her sister .
The daughter executed a writing in favour of her sister agreeing to pay the
annuity.
Later on, she refused to pay the amount to her sister taking a plea that no
consideration is given to her in return from her sister.
The court held that consideration need not necessarily move from the
promisee. Hence, she is bound to pay the promised amount to her sister.
( Chinnayya V. Rammayya )
C. Executed and
Executory consideration
If consideration under the contract has been given, it is said to be executed. If
consideration under the contract is to be moved in future, it is called
executory consideration.
D. Consideration may
be past, present or future
Past
consideration
The words “has done or abstained from doing” indicates
past consideration. Past consideration is no consideration
in England.
Present
consideration
The words “does or abstains from doing” indicates present
consideration. Consideration which moves simultaneously
with the promise.
Example:- Cash Sales.
Future
consideration
The words “promise to do or to abstain from doing”
indicates future consideration. Consideration which is to
be performed in future.
Example:- A get booked an air ticket from Delhi to Goa.
The flight is to be take off on the next day. In this case the
consideration from A is a Past consideration and
consideration is pending on the part of Airlines which is to
be performed in future.
E. Consideration should be real, not illusory If consideration is an illusory one, then it is not valid.
F. Consideration need not be adequate Though consideration is an essence of contract, adequacy of
consideration is not regarded as an essence of contract. Courts
do not regard the adequacy of consideration, it is at the part of
promisor to consider that whether he is receiving adequate
consideration or not.
G. The performance of an act what one is legally bound to perform is not consideration for the contract
Example:- Promise to pay money to a witness.
H. Consideration must not be unlawful, immoral or opposed to the public policy
A THIRD PARTY OR A STRANGER TO A CONTRACT CANNOT SUE
A stranger to a contract means a person who is not a party to the contract. There is a privity
of contract between the parties. Therefore only a party to the contract can enforce its rights

BASED ON
NATURAL LOVE
AND AFFECTION
PARTIES
STANDING IN
NEAR RELATION
under the contract.
EXCEPTIONS:-
i. Trust In case of trust, a beneficiary can sue upon the contract.
Example:- H sued her father in law K to recover Rs 15000 being the
arrears of allowance payable to her by K. K under an agreement made
between K and H’s father, in consideration of H’s marriage to K’s son D.
Held that she can recover the amount because she is a beneficiary under the
contract. (Khwaja Muhammad V. Hussaini Begum)
ii. Family Settlement In case of family settlement, if the terms of settlement are reduced into
writing, members who were not originally party to the contract can
also sue upon it.
iii. Marriage
Contracts
A female member can enforce a provision for marriage expenses made
on partition of HUF between male members.
iv. Acknowledgement
of Liability
Where a person admits his liability, thereafter, if he refused, he will be
estopped from denying his liability.
Example:- Where A receives money from B for paying it to C and A
admits C the receipt of that amount. Later on if he refuses, he will be
stopped from denying his liability to pay the amount.
v. Assignment In case of assignment of a contract, Where the benefit under the contract
has been assigned, the assignee (the person to whom benefits of contract
are assigned) can enforce upon the contract.
vi. Covenant running
with land
The person who purchases land with notice that the owner of land is bound
by certain duties affecting land, the covenant affecting the land may be
enforced against the successor of the seller.
NO CONSIDERATION, NO CONTRACT
The general rule of law is that an agreement without consideration is void.
EXCEPTIONS
(i) Agreement on account of Natural love and Affection
WRITTEN AND
REGISTERED
AGREEMENT
Example:- A husband by a registered document after referring to quarrels and disagreements
between himself and his wife, promised to pay his wife a sum of money for her maintenance and
separate residence, it was held that the promise was unenforceable. (Rajlukhy Devi V. Bhootnath )
(ii) Compensation for past voluntary services {Section 25 (2)}
 Services rendered voluntarily.
 Services rendered for the promisor.
 Promisor must be in existence at the time of rendering services.
 Promisor must have intended to compensate the promisee.
Example:- X finds Y’s purse and gives it to him. Y promises to give X Rs 1000. This is a valid
contract.

22 CA NAVEEN BAID
Chapter 4
(iii) Promise to pay time barred debt {Section 25 (3)}
A promise to pay, wholly or in part a debt which is barred by law of limitation can be
enforced if it is :-
 In writing and
 Signed by the person making it or his authorized agent.
(iv) Agency
 According to Section 185 of the Indian Contract Act, no consideration is necessary to
create an agency.
(v) Completed Gifts
Gifts do not require any consideration. ( Explanation 1 to Section 25)
(vi) Charity
 A promise to contribute to charity, though gratuitous, would be enforceable, if on the
faith of the promised subscription, the promisee takes definite steps in furtherance of
the object and undertakes a liability, to the extent of liability incurred, not exceeding
the promised amount of subscription.(Kedarnath V. Gorie Mohammad)
(vii) Bailment
 Consideration is not necessary to effect bailment.(Section 148)
Examples for Consideration:
(a) A agrees to sell his house to B for 10,000 rupees. Here B’s promise to pay the sum of 10,000
rupees is the consideration for A’s promise to sell the house, and A’s promise to sell the house is the
consideration for B’s promise to pay the 10,000 rupees. These are lawful considerations.
(b) A promises to pay B 10,000 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.
(c) A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is
wrecked on a certain voyage. Here A’s promise is the consideration for B’s payment, and B’s
payment is the consideration for A’s promise, and these are lawful considerations.
(d) A promises to maintain B’s child and B promises to pay A 1,000 rupees yearly for the purpose.
Here the promise of each party is the consideration for the promise of the other party. They are lawful
considerations.
(e) A, B and C enter into an agreement for the division among them of gains acquired, or to he
acquired, by them by fraud. The agreement is void, as its object is unlawful.
(f) A promises to obtain for B an employment in the public service, and B promises to pay 1,000
rupees to A. The agreement is void, as the consideration for it is unlawful.
(g) A promises B to drop a prosecution which he has instituted against B for robbery, and B promises
to restore the value of the things taken. The agreement is void, as its object is unlawful.
(h) A, who is B’s power of attorney holder promises to exercise his influence, as such, with B in
favour of C, and C promises to pay 1,000 rupees to A. The agreement is void, because it is immoral.
CAPACITY TO CONTRACT
One of the essentials of a valid contract is the competency of the parties to make contract. Law
has laid down certain rules as to who are competent to enter into a valid contract. As per Section
11 every person is competent to contract who is of the age of majority according to the 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.
Three tests of Competency:
 Age
 Soundness

 Disqualification
All the three tests must be applied to determine whether a person is competent to contract or not.
From the above provisions of the section it means the following types of persons are not
competent to contract.
(a) A person who has not attained the age of majority, i,e minor.
(b) A person of unsound mind
(c) A person who is disqualified from contracting by some law.
POSITION OF MINOR:
As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he has not
attained the age of 18 years of age. However in case of a minor of whose person or property or
both a guardian has been appointed under the Guardian and Wards Act, 1890 or whose property
is under the superintendence of any court of wards before he attains 18 years if age is 21 years.
The position of Minor’s agreement and effect thereof is as under;
(a) An agreement with a minor is void ab-initio. A minor’s contract being void, any money
advanced to a minor cannot be recovered. {Mohiri Bibi V. Dharmodas Ghose (1903)}
(b) The law of estoppels does not apply against a minor. It means a minor can always his
plead his minority despite earlier misrepresenting to be a major. In other words he can not be
held liable on an agreement on the ground that since earlier he had asserted that he had attained
majority.
Example:- A, a minor by fraudulently representing himself to be a major, induce B to lend him
Rs.2000. He refused to repay it and B sued him for the money. Held that the contract was void
and A was not liable to repay the amount due.
(c) Doctrine of Restitution does not apply against a minor.
Lahore High Court held that where the contract is set aside the status quo ante should be restored
and the court may direct the minor, on equitable grounds, to restore the money or property to the
other party. Thus, in such cases, if money could be traced, the court would, on equitable grounds,
ask the minor for restitution. [KHAN GUL V. LAKHA SINGH]
(d) No Ratification on Attaining Majority. Ratification means approval or confirmation. A
minor cannot confirm an agreement made by him during minority on attaining majority. If he
wants to ratify the agreement, a fresh agreement and fresh consideration for the new agreement is
required.
Example: ‘A’, a minor makes a promissory note in favour of ‘B’. On attaining majority, he
makes out a fresh promissory note in lieu of old one. Neither the original, nor the fresh
promissory note is valid.
(e) Contract beneficial to Minor. A minor is entitled to enforce a contract which is of some
benefit to him. Minority is a personal privilege and a minor can take advantage of it and bind
other parties.
A promissory note executed in favour of a minor is valid and can be enforced by the minor. A
minor can be payee of a cheque or other negotiable instrument.
(f)A Minor cannot become a partner in a firm but he can be admitted to the benefits of the
partnership with the consent of all partners.( Section 30 of Indian Partnership Act, 1932)
(g) Minor as an agent. A minor can be appointed an agent, but he is not personally liable for any
of his acts.

24 CA NAVEEN BAID
(h) Minor’s liability for necessities. If somebody has supplied a minor or his dependents with
necessities, minor’s property is liable.
(i)Contract by minor’s guardian: A contract may be entered into on behalf of a minor by his
guardian or manager of his estate. In such a case the contract can be enforced by or against the
minor provided that the contract
(a) is within the scope of the authority of the guardian or manager, and
(b) is for the benefit of the minor.
WHAT IS A SOUND MIND FOR THE PURPOSES OF CONTRACTING? (Sec. 12)
A person is said to be of sound mind for the purposes 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 drunken-ness lasts.
Going by the spirit of the section it is clear that a person is sound mind if he fulfills the following
two conditions.
(a) He/she is capable of understanding the contract.
(b) He/she is capable of forming a rational judgment about the effects of such contract on his
interest.
A person not satisfying any of these two conditions is not treated a person of sound mind.
UNSOUND MIND PERSONS

Other Disqualified Persons
The persons who are disqualified from entering into contract due to certain other reasons may be
from legal status, political status or corporate status. Some of such categories of persons are given
below;
(a) Alien Enemy: An agreement with an Alien Enemy is void.
(b) Foreign Sovereign and Ambassadors: Foreign sovereigns and their representatives enjoy
certain privileges and immunities in every country. They cannot enter into contract except
through their agents residing in India.
(c) Convicts: A convict can not enter into a contract while he is undergoing imprisonment.
(d) Insolvents: An insolvent person is one who is unable to discharge his liabilities and therefore
has applied for being adjudged insolvent or such proceedings have been initiated by any of his
creditors. An insolvent person cannot enter into any contract relating to his property.
(e) Company or Statutory bodies: A contract entered into by a corporate body or statutory body
will be valid only to the extent it is within its Memorandum of Association.
(f) Municipal Bodies: Municipal bodies cannot enter into acts which are beyond their statutory
powers.
Chapter 5
FREE CONSENT

26 CA NAVEEN BAID
One of the essential elements of a valid contract is that there should be free consent of the
concerned parties to the contract. ‘Two or more persons are said to consent when they agree upon
the same thing in the same sense.’
Consent is said to be free when it is not caused by—
(1) Coercion, or
(2) Undue influence, or
(3) Fraud, or
(4) Misrepresentation, or
(5) Mistake, subject to provisions of sec 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for the existence of such
coercion, undue influence, fraud, misrepresentation or mistake.
(1) COERCION [See 15]
“Coercion” is the committing or threatening to commit, any act forbidden by the Indian Penal
Code (45 of 1860), 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.
Examples
1. Consent obtained at gun point is caused by coercion.
2. A threats to kill B or threats to detain B's property is committing or threatening to commit an
unlawful act. Hence the consent is caused by coercion.
Effect of coercion:
A contract induced by coercion is voidable at the option of the party whose consent was caused
by coercion.
Sec.72 states, "A person to whom money has been paid or anything delivered by mistake or
under coercion, must repay or return it."
Threat to commit suicide: Committing suicide is unlawful and forbidden by law, and hence
threatening to commit suicide is threatening to commit unlawful act. Thus, a threat to commit
suicide amounts to coercion.
(2) UNDUE INFLUENCE [See 16]
(1) A contract is said to be induced by “undue influence” where the relations subsisting between
the parties are such that one of the parties is in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the forgoing principle, a person is
deemed to be in a position to dominate the will of another—
(a) Where he holds a real or apparent authority over the other, or where he stands in a fiduciary
relation to the other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person, who is in a position to dominate the will of another, enters into a contract
with him, and the transaction appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was not induced by undue influence
shall lie upon the person in a position to dominate the will of the other.
Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act,
1872 (1 of 1872).
There is presumption of undue influence in the following relationships:
(i) Parent and child

(ii) Guardian and ward
(iii) Doctor and patient
(iv) Solicitor and client
(v) Trustee and beneficiary
(vi) Religious advisor and disciple
(vii) Fiance and fiancée
There is however no presumption of undue influence in case of relationship of— (i) landlord and
tenant (ii) debtor and creditor (iii) husband and wife. The wife has to be pardanashin for such
presumption. In these relationships undue influence has to be proved.
Illustrations
(a) A, having advanced money to his son, B, during his minority, upon B’s coming of age
obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in
respect of the advance. A employs undue influence.
(b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical
attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue
influence.
(c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which
appear to be unconscionable. It lies on B to prove that the contract was not induced by undue
influence.
(d) A applies to a banker for a loan at a time when there is stringency in the money market. The
banker declines to make the loan except at an unusually high rate of interest. A accepts the loan
on these terms.
This is a transaction in the ordinary course of business, and the contract is not induced by undue
influence.
(3) FRAUD [See 17]
“Fraud” means and includes any of the following acts committed by a party to a contract, or with
his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to
induce him 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 fitted to deceive;
(5) Any such act or omission as the law specially declares to be fraudulent.
Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being had to them,
it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to
speech.
Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the
horse’s unsoundness. This is not fraud in A.
(b) B says to A - “If you do not deny it, I shall assume that the horse is sound”. A says nothing.
Here, A’s silence is equivalent to speech.
(c) A and B, being traders, enter upon a contract. A has private information of a change in prices
which would affect B’s willingness to proceed with the contract. A is not bound to inform B.
(4) MISREPRESENTATION [See 18]

28 CA NAVEEN BAID
“Misrepresentation” means and includes—
(1) The positive assertion, in a manner not warranted by the information of the person making it,
of that which is not true, though he believes it to be true;
(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him, by misleading another to his prejudice or to the
prejudice of anyone claiming under him ;
(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance
of the thing which is the subject of the agreement.
(5) MISTAKE
Mistake means an erroneous belief about something.
Mistake can be -
(a) Mistake of law, or
(b) Mistake of fact.
(a) MISTAKE OF LAW
When a party enters into a contract, without the knowledge of law in the country, the contract is
affected by such mistake but it is not void. A contract is not voidable because it was caused by a
mistake as to any law in force in India. The reason here is that ignorance of law is not an excuse
at all. However if a party is induced to enter into a contract by the mistake of law then such a
contract is not valid.
Illustration
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.
(b) MISTAKE OF FACT
Where both the parties to an agreement are under a mistake as to a matter of fact essential to the
agreement, the agreement is void.
Explanation: An erroneous opinion as to the value of the thing which forms the subject-matter of
the agreement is not to be deemed a mistake as to a matter of fact.
Illustrations
(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Bombay. It turns out that, before the day of the bargain-, the ship conveying the cargo had been
cast away and the goods lost. Neither party was aware of the facts. The agreement is void.
(b) 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.
(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of
the agreement, but both parties were ignorant of the fact. The agreement is void.
CONTRACT CAUSED BY MISTAKE OF ONE PARTY AS TO MATTER OF FACT
(Section 22)
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.

MISTAKE
MISTAKE OF
FACT
VOIDABILITY OF AGREEMENTS WITHOUT FREE CONSENT (Section 19)
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement
is a contract voidable at the option of the party whose consent was so caused. A party to a
contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that
the contract shall be performed, and that he shall be put in the position in which he would have
been, if the representations made had been true.4
Exception : If such consent was caused by misrepresentation or by silence, fraudulent within the
meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was
so caused had the means of discovering the truth with ordinary diligence.
Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the
party on whom such fraud was practiced, or to whom such misrepresentation was made, does not
render a contract voidable.
Illustrations
(a) A, intending to deceive B, falsely represents that five hundred mounds of indigo are made
annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the
option of B.
(b) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo
are made annually at A’s factory. B examines the accounts of the factory, which show that only
four hundred mounds of indigo have been made. After this B buys the factory. The contract is not
voidable on account of A’s misrepresentation.
(c) A fraudulently informs B that A’s estate is free from encumbrance. B thereupon buys the
estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its
being carried out and the mortgage-debt redeemed.
(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does
conceal, the existence of the ore from A. Through A’s ignorance B is enabled to buy the estate at
an under value. The contract is voidable at the option of A.
(e) A is entitled to succeed to an estate at the death of B; B dies; C, having received intelligence
of B’s death, prevents the intelligence reaching A, and thus induces A to sell him his interest in
the estate. The sale is voidable at the option of A.
UNILATERAL
ONE PARTY
UNDER
MISTAKE
OF FACT
THE
CONTRACT IS
VALID
BILATERAL
MISTAKE OF
LAW
MISTAKE OF
INDIAN LAW
MISTAKE OF
FOREIGN LAW
BOTH PARTIES
UNDER
MISTAKE OF
FACT
THE
AGREEMENT
IS VOID
THE
CONTRACT IS
VALID
SAME AS
MISTAKE OF
FACT

30 CA NAVEEN BAID
Chapter 6
AGREEMENTS EXPRESSLY DECLARED VOID
Agreements by incompetent parties (Sec. 11)
Agreements with unlawful object or consideration (Sec. 23)
Agreement made under mutual mistake of fact (Sec. 20)
Agreements without consideration (Sec. 25)
Agreements in restraint of marriage, trade or legal proceedings etc.
Agreements to do impossible Acts (Sec. 56)
Example:- An agreement to discover treasure by magic is void.

LAWFUL CONSIDERATION OR OBJECT [Section 23]
Consideration or object is unlawful if it is: -
A. Forbidden by
law
Acts forbidden by law are those which are punishable under any statute as well
as those prohibited by regulation or orders made in exercise of the authority
conferred by the legislature.
Example:- A promises to drop prosecution which he has instituted against B for
robbery and B promises to restore the value of the things taken. The agreement
is void, as its object is unlawful.
Example:- A loan granted to the guardian of a minor to enable him to celebrate
the minor’s marriage in contravention of the Child Marriage Restraint Act is
illegal and cannot be recovered back.
Example:- A license to cut the grass is given to X by forest department under
Forest Act. The license provides for imposition of penalty in the event of X
choosing to assign his right. However if X assigns his right, the agreement
would still be valid since there is no prohibition for such assignment as the
consideration stipulating penalty is only to regulate the matter of administrative
measure.
B. Defeat the
provisions of any
law
The term ‘Law’ includes any legislative enactment or rule of the Hindu and
Muslim Laws or any other rule for the time being in force in India.
Example:- Agreement in restraint of parental rights is in violation of Hindu
Law.
C. Fraudulent Where object or consideration is unlawful on ground of fraud.
Example:-A, B and C enter into agreement for the division among them of gains
acquired or to be acquired, by them for fraud. The agreement is void as its object
is unlwful.
D. Injury to the
person or property
of another
The general term “injury” means criminal or wrongful harm. Where the object of
an agreement is to cause injury to the person or property of another.
Example:-An agreement to print a book in violation of another’s copyright is
void.
Example:-A borrowed Rs. 1000 from B. A executed a bond promising to work
for B without pay for 2 years and in case of default agreed to pay interest at a
very exorbitant rate and the principal amount at once. Held, the contract was
void (Ram Swaroop v. Bansi)
E. Immoral/opposed
to the public policy
Example: - Letting house to a prostitute knowingly.
Partial Illegality :-( Section 24) if any part of a single consideration for one or more objects, or any one
or any part of any one of several considerations for a single object, is unlawful, the agreement is void.
Example:-A promises to survive the business on behalf of B, a licensed manufacturer of some
permissible chemicals and some contraband items. B promises to pay A a salary of Rs. 100000 per
month. The agreement is void, the object of A’s promise and the consideration for B’s promise being in
part unlawful.

32 CA NAVEEN BAID
AGREEMENTS OPPOSED TO THE PUBLIC POLICY
These are the agreements which are against the moral laws of the society and contravene any
established interest of society. Following agreements are opposed to the public policy:-
(a) Trading with
enemy
Any trade with person owing allegiance to a Government at war with India
without the license of the Government of India is void, as the object is
opposed to public policy.
(b) Stifling
prosecution
An agreement to stifle prosecution tends to be a preservation or an abuse of
justice; therefore, such an agreement is void. The principle is that one should
not make a trade of felony (crime).One should not convert a crime into into
a source of profit.
Compromise of public offence is illegal.
To drop uncompoundable offence without permission of court.
Example: - A Knew that B has committed a crime. He obtains a promise
from B to pay him Rs. 20000 in consideration of not exposing B. This is a
case of stifling prosecution & therefore illegal & void.
(c) Champerty &
maintenance
Maintenance It is the promotion of litigation in which one had no interest.
Example:- A promises to pay B a sum of Rs. 10000 if B filed
a suit against C in the court. This agreement is in the nature
of maintenance and hence void.
Champerty
It is bargain whereby one party agrees to assist the other in
recovering property, with a view to sharing the profits of
litigation.
Example:- An agreement to give assistance(monetary or
otherwise) to another person to recover the property by legal
action and to share the proceeds of litigation is a champertous
agreement.
(d) Interference
with the course of
justice
An agreement whose object is to induce any judicial officer of the state to
act partially or corruptly is void.
(e) Marriage
brokerage
contracts
An agreement to negotiate marriage for reward, which is known as a
marriage brokerage contract, is void, as it is opposed to public policy.
For Example:- An agreement to pay money to a person hired to procure a
wife is opposed to public policy and therefore void.
(f) Interest
(benefit) against
obligation
Taking a benefit against the obligation.
Example:- A, who is the manager of a firm, agrees to pass a contract to X if
X pays to A Rs. 20000 privately; the agreement is void.
(g) Sale of public
office
Bribe for appointment in a public office as it interfere with the appointment
of a person best qualified for the service of public.
An agreement to pay money to a public servant in order to induce him to
retire from his office so that another person may secure the appointment is
void.
An agreement to procure a public recognition like Padma Vibhushan for
reward is void.
(h) Agreements
for creation of
monopolies
void
Agreements having their object the establishment of monopolies are
opposed to the public policy and hence void. It is also hit by MRTP Act.
Example: - A local body granted a monopoly to A to sell vegetables in a
particular locality. Held that the agreement was void.

Within specified local limits

Reasonable










SEPARABLE
LEGAL PART VALID
ILLEGAL PART VOID
INSEPARABLE CONTRACT IS
ALTOGETHER
VOID
(i) Agreement in
restraint of
marriage
Every agreement in restraint of marriage of any person, other than a minor,
is void (Sec. 26).
Example:-A promised to marry no one else except Miss B and in default pay
her a sum of Rs.100000. A married some one else and B sued A for recovery
of the sum. Held, the contract was in restraint of marriage, and as such void.
(j) Agreement in
restraint of trade
An agreement by which any person is restraint from exercising a lawful
profession, trade or business of any kind, is to that extent void.
Exceptions (i) Sale of goodwill
(ii) An agreement among the sellers of a particular commodity not to sell the
commodity for less than a fixed price is not an agreement in restraint of
trade.
(iii) An agreement between partners not to carry on competing business
during the continuance of partnership is valid. ( Section 11 of Indian
Partnership Act, 1932)
(iv) Agreement with outgoing partner not to carry on competing business for
a reasonable time will be valid.( Section 36 of Indian Partnership Act, 1932)
(v) An agreement of service by which an employee binds himself, during the
term of his agreement, not to complete with his employer is not in restraint
of trade.
Example:- B, a physician and surgeon, employs A as an assistant for a term
of three years and A agrees not to practice as a surgeon and physician
during these three years. The agreement is valid and A can be restrained by
an injunction if he starts independent practice during this period.
(vi) An agreement by a manufacturer to sell during a certain period his entire
production to a wholesale merchant is not in restraint of trade.
(k) Agreement in
restraint of legal
proceedings
It is one by which any party thereto is restricted absolutely from enforcing
his rights under a contract through a court or which abridges the usual
period for starting legal proceedings. It is void.
Exceptions –
Settlement of dispute through arbitration.
Question already arisen or which may arise in future refer to arbitration
such a contract must be in writing.
CONSIDERATION
UNLAWFUL IN
PART
CONTRACT
AGREEMENTS VOID FOR UNCERTAINTITY (Section 29)
Agreements, the meaning of which is not certain, or capable of being made certain, are void.
Example:
(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of
oil was intended. The agreement is void for uncertainty. A, who is a dealer in coconut oil only,

34 CA NAVEEN BAID
agrees to sell to B “one hundred tons of oil”. The nature of A’s trade affords an indication of the
meaning of the words, and A has entered into a contract for the sale of one hundred tons of
coconut oil.
(b) A agrees to sell to B “all the grain in my granary at Ramnagar”; there is no uncertainty here to
make the agreement void.
AGREEMENTS BY WAY OF WAGER ARE VOID (Section 30)
Agreements by way of wager are void; and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to a person to abide by the result of any game or
other uncertain event on which any wager is made.
Exception in favour of certain prizes for horse-racing.—This section shall not be deemed to
render unlawful a subscription, or contribution, or agreement to subscribe or contribute, made or
entered into for or toward any plate, prize or sum of money, of the value or amount of five
hundred rupees or upwards, to be awarded to the winner or winners of any horse-race.

Chapter 7
THE PERFORMANCE OF CONTRACTS
Every Contract creates certain obligation on each of the parties involved in it. When both the
parties to the Contract fulfill their obligations towards each other, the contract is said to be
performed. When both the parties to the contract have performed their obligations, the contract is
said to be discharged by performance.
OBLIGATION OF PARTIES TO CONTRACTS (Section 37)
The parties to a contract must either perform, or offer to perform, their respective promises,
unless such
Performance is dispensed with or excused under the provisions of this Act, or of any other law.
By Whom Contract May be Performed
1. Promisor himself: If there is something in the contract to show that it was intention of the
parties that the promise should be performed by the promisor himself, such promise must be
performed by the promisor.
This means contracts which involves the exercise of personal skill & diligence or which are
founded on personal confidence between the parties must be performed by the promisor himself.
2. Agent: Where personal consideration is not the foundation of the contract, the promisor or his
representative may employ a competent person to perform it.
3. Representatives: Promises bind the representatives of the promisor in case of the death of
such promisor before performance, unless a contrary intention appears from the contract.
Illustrations
(a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that
day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to
A’s representatives.
(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day.
The contract cannot be enforced either by A’s representatives or by B.
4. Third persons: Where the promisee accepts performance of the promise from a third
person, he cannot afterwards enforce it against the promisor.
5. Joint Promisors: When two or more persons have made a joint promise, then unless a
contrary intention appears from the contract, all such persons must jointly fulfill the promise.
If any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the
promise. If all of them dies, the legal representatives of all of them must fulfill the promise jointly
(Sec.42).
Illustrations
(a) A promises to pay B a sum of money. A may perform this promise, either by personally
paying the money to B or by causing it to be paid to B by another; and, if A dies before the time
appointed for payment, his representatives must perform the promise, or employ some proper
person to do so.
(b) A promises to paint a picture for B: A must perform this promise personally.

36 CA NAVEEN BAID
SUCCESSION & ASSIGNMENT
(a) Succession (b) Assignment
When the benefits of a contract are succeeded to by
process of law, then both burden and benefits
attaching to the contract, may sometimes devolve on
legal heir.
EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE (Section 38)
Where a promisor has made an offer of performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights
under the contract.
Every such offer must fulfill the following conditions:—
(1) it must be unconditional
(2) It must be made at proper time and place. (3 If the offer is to deliver anything to the
promisee, promisee must have reasonable opportunity to check the goods.
An offer to one of several joint promisees has the same legal consequences as an offer to all of
them.
Illustrations
A contract to deliver to B at his warehouse, on the first March, 1873,100 bales of cotton of a
particular quality. In order to make an offer of a performance with the effect stated in this section,
A must bring the cotton to B’s warehouse, on the appointed day, under such circumstances that B
may have a reasonable opportunity of satisfying himself that the thing offered is cotton of the
quality contracted for, and that there are 100 bales.
EFFECT OF REFUSAL OF PARTY TO PERFORM PROMISE [Section 39]
When a party to a contract has refused to perform, or disabled himself from performing his
promise in its entirety, the promisee may put an end to the contract, unless he has signified, by
words or conduct, his acquiescence in its continuance.
Rights to the aggrieved party
 To terminate the contract.
 To indicate, by words or by conduct, that he is interested in his continuance.
 Right to claim damages.
Illustration
A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two
nights in every week during the next two months, and B engages to pay her 100 rupees for each
night’s performance. On the sixth night A willfully absents herself from the theatre. B is at liberty
to put an end to the contract.
LIABILITY OF JOINT PROMISORS
Promisee may compel any one or more of such joint promisors to perform the whole of the
promise.
If one of the joint promisors is made to perform the whole contract, he can call for a contribution
from others.
If any of the joint promisors make a default in making his contribution the remaining joint
promisors must bear the loss arising from such default in equal shares.
Illustrations
Benefits of a contract can only be
assigned but not the liabilities there
under.

(a) A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay
him 3,000 rupees.
(b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the
whole. A is insolvent, but his assets are sufficient to pay one-half of his debts, C is entitled to
receive 500 rupees from A’s estate, and 2,250 rupees from B.
(c) A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything, and
A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B.
(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being only sureties for
C. C fails to pay. A and B are compelled to pay the whole sum. They are entitled to recover it
from C.
RIGHTS OF JOINT PROMISEES
All of them jointly have right to claim performance.
If any one of joint promisees dies, Survival promisee + Representatives of deceased promisee.
If all of them dies. Representatives of deceased promises.
Illustration
A, in consideration of 5,000 rupees, lent to him by B and C, promises B and C jointly to repay
them that sum with interest on a day specified. B dies. The right to claim performance rests with
B’s representative jointly with C during C’s life, and after the death of C with the representatives
of B and C jointly.
TIME & PLACE FOR PERFORMANCE OF THE PROMISE
 No time specified for performance of promise, promise must be performed within
reasonable time.
 If promise is to be performed on a specified date but hour is not mentioned, the promisor
may perform it any time during the usual hours of business, on such day .
 Delivery must be made at the usual place of business.
 When no place is fixed for performance of promise, it is the duty of the promisor to ask
promisee to fix a reasonable place for the performance of promise.
 When the promisor has not undertaken to perform the promise without an application by
the promisee and the promise is to be performed on a certain day, it is the duty of the
promisee to apply for performance at a proper place and within the usual hours of
business.
Illustrations
(a) B owes A 2,000 rupees. A desires B to pay the amount to A’s account with C, a banker. B,
who also banks with C, orders the amount to be transferred from his account to A’s credit, and
this is done by C.
Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B.
(b) A and B are mutually indebted. A and B settle an account by setting off one item against
another, and B pays A the balance found to be due from him upon such settlement. This amounts
to a payment by A and B respectively of the sums which they owed to each other.
(c) A owes B 2,000 rupees. B accepts some of A’s goods in deduction of the debt. The delivery of
the goods operates as a part payment.
(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is
discharged as soon as B puts into the post a letter containing the note duly addressed to A.

38 CA NAVEEN BAID
(e)A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to
appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.
TIME IS ESSENCE OF THE CONTRACT (Section 55)
When a party to a contract promises to do a certain thing at or before a specified time, or certain
things at or before specified times, and fails to do any such thing at or before the specified time,
the contract, or so much of it as has not been performed, becomes voidable at the option of the
promisee, if the intention of the parties was that time should be of the essence of the contract.
Effect of such failure when time is not essential—If it was not the intention of the parties that
time should be of the essence of the contract, the contract does not become voidable by the failure
to do such thing at or before the specified time; but the promisee is entitled to compensation from
the promisor for any loss occasioned to him by such failure.
Effect of acceptance of performance at time other than that agreed upon.—If, in case of a
contract voidable on account of the promisor’s failure to perform his promise at the time agreed,
the promisee accepts performance of such promise at any time other than that agreed, the
promisee cannot claim compensation for any loss occasioned by the non-performance of the
promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor
of his intention to do so.
PERFORMANCE OF RECIPROCAL PROMISES
Reciprocal Promises: When a contract consists of two promises, one being consideration for the
other, such promises are called Reciprocal promises.
Example – A promises to deliver 500 quintals of rice and B promises to pay the price on delivery,
the contract would consist of reciprocal promises.
Simultaneous performance of Reciprocal promises: Reciprocal promises may have to be
performed simultaneously or one after another.
Example – Where A promises to deliver 500 quintals of rice and B promises to pay the price on
delivery, both the promises are to be performed simultaneously.
Performance of Reciprocal promises where order of performance is expressly fixed
When the order of performance of the reciprocal promises is expressly fixed by the contract, they
must be performed in that order.
Example –A and B contract that A shall build a house for B at a fixed price. A’s promise to build
the house must be performed before B can be called upon to perform the promise to pay for it.
Performance of Reciprocal promises when the order of performance is fixed by implication:
The order of performance may sometimes be indicated not expressly, but by the nature of the
transaction.
Ex – A promises to make over stock for B and B promises to give security for the payment of
price. A’s promise to make over stock need not to be performed until the security is given by B.
Effect of one party preventing other from performing promise
 Contract becomes voidable
 Another party is entitled to claim compensation on A/c of by suffered due to non-performance.

IMPOSSIBILITY OF
PERFORMANCE
Impossibility
existing at the
time of contract
Supervening
Impossibility
APPROPRIATION OF PAYMENTS
Appropriation by Debtor (Section 59): Where a debtor, owing several distinct debts to
one person, makes a payment to him, either with express intimation, or under circumstances
implying that the payment is to be applied to the discharge of some particular debt, the payment,
if accepted, must be applied accordingly.
Illustrations
(a) A owes B, among other debts, 1,000 rupees upon a promissory note which falls due on the
first June. He owes B no other debt of that amount. On the first June A pays to B 1,000 rupees.
The payment is to be applied to the discharge of the promissory note.
(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment
of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the debt of
which B had demanded payment.
Appropriation by Creditor (Section 60): Where the debtor has omitted to intimate and
there are no other circumstances indicating to which debt the payment is to be applied, the
creditor may apply it at his discretion to any lawful debt actually due and payable to him from the
debtor, whether its recovery is or is not barred by the law in force for the time being as to the
limitation of suits.
APPLICATION OF PAYMENT WHERE NEITHER PARTY APPROPRIATES
(Section 61)
Where neither party makes any appropriation the payment shall be applied in discharge of the
debts in order of time, whether they are or are not barred by the law in force for the time being as
to the limitation of suits. If the debts are of equal standing, the payment shall be applied in
discharge of each proportionately.
Known to
Parties
Void
Unknown to
Parties
Void
Known to the
promisor only
Promisee is entitled to
claim compensation for
any loss suffered on a/c
of non-performance
Contract
becomes void

40 CA NAVEEN BAID
CONTRACTS WHICH NEED NOT BE PERFORMED EFFECT OF NOVATION,
RESCISSION AND ALTERATION OF CONTRACT (Section 62)
Novation When parties to a contract substitute a new contract for old. On novation, old contract
is discharged and consequently it need not to be performed. There may be change in parties.
Rescission When A contract may be discharged, before the date of performance by agreement
between the parties to the effect that it shall no longer bind them In this case, only old contract is
cancelled no new contract is formed.
Alteration Alteration of a contract means change in one or more of the material terms of a
contract, the original contract is discharged by alteration:
-No change in parties to the contract.
-Change in terms & conditions of original agreement.
PROMISEE MAY DISPENSE WITH OR REMIT PERFORMANCE OF PROMISE
(Section 63)
Every promisee may dispense with or remit, wholly or in part, the performance of the promise
made to him, or may extend the time for such performance, or may accept instead of it any
satisfaction which he thinks fit.
Illustrations
(a) A promises to paint a picture for B. B afterwards forbids him to do so A is no longer bound to
perform the promise.
(b) A owes B 5,000 rupees. A pays to B, and B accepts in satisfaction of the whole debt, 2,000
rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is
discharged.
(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in satisfaction of his
claim on A. This payment is a discharge of the whole claim.
(d) A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A
without ascertaining the amount gives to B, and B, in satisfaction thereof, accepts the sum of
2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.
(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with
his creditors, including B, to pay them, a composition of eight annas in the rupee upon their
respective demands. Payment to B of 1,000 rupees is a discharge of B’s demand.
CONSEQUENCES OF RESCISSION OF VOIDABLE CONTRACT (Section 64)
Where a person at whose option a contract is voidable rescinds it, the other party thereto need not
perform any promise therein contained in which he is promisor. The party rescinding a voidable
contract shall, if he has received any benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from whom it was received.
OBLIGATION OF PERSON WHO HAS RECEIVED ADVANTAGE UNDER VOID
AGREEMENT OR CONTRACT THAT BECOMES VOID (Section 65)
When an agreement is discovered to be void, or when a contract becomes void, any person who
has received any advantage under such agreement or contract is bound to restore it, or to make
compensation for it, to the person from whom he received it.
Illustrations

(a) A pays B 1,000 rupees in consideration of B’s promising to marry C, A’s daughter. C is dead
at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.
(b) A contracts with B to deliver to him 250 maunds of rice before the 1st of May. A delivers 130
maunds only before that day, and none after. B retains the 130 maunds after the first day of May.
He is bound to pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in
every week during the next two months, and B engages to pay her a hundred rupees for each
night’s performance. On the sixth night, A wilfully absents herself from the theatre, and B, in
consequence, rescinds the contract. B must pay A for the five nights on which she had sung.

42 CA NAVEEN BAID
Chapter 8
DISCHARGE OF CONTRACT
Discharge of Contract implies termination of contractual relationship among parties. When we
say a contract is discharged it means it ceases to operate and rights and obligation under it comes
to an end. A contract may be discharged by any of the following ways;—
(i) performance,
(ii) mutual consent,
(iii) subsequent impossibility of performance,
(iv) lapse of time,
(v) operation of law,
(vi) breach of contract.
1. Discharge by performance is the most usual form of discharge of a contract. A contract is said
to be performed when the parties fulfill their respective obligations.
2. A contract may be discharged by a further agreement among parties which may be expressed
or implied.
3. A contract to perform an impossible act is void ab initio. A contract is discharged if subsequent
performance becomes impossible due to factors beyond the control of the parties. Supervening
impossibility occurs in the following circumstances;-
(a) When subject matter of contract is destroyed.
(b) When state of things which form basis of contract changes.
(c) When performance depends on personal skill, incapacity of that party renders the contract
discharged.
(d) Change of law may render the performance impossible.
(e) Out break of war may make a party alien enemy. Contract with alien enemy is unlawful and
such contracts are suspended during duration of war.
It should however be noted that ‘impossibility of performance’ as a rule cannot be an excuse for
non-performance unless performance becomes absolutely impossible.
4. As per Law of Limitation, a contract should be performed within a specified time period,
called period of limitation. If not performed within ‘period of limitation’ and no action is taken
by the promisee, the contract is terminated.
5. A contract may be discharged due to operation of law by death of a party, merger, and
insolvency of a party, unauthorized alteration in terms of contract, rights and liabilities getting
vested in the same person.
6. If a party to a contract breaks his obligation under the contract , he is said to have committed
breach .
Breach of contract may be actual or anticipatory. Actual breach may occur when performance is
due or during performance. Anticipatory breach of contract occurs when a party refuses to
perform before the time of performance.

BREACH OF CONTRACT
• When the promisor refuses altogether to
perform his promise and signifies his
unwillingness, even before the time of
performance has arrived, it is called
Anticipatory Breach.
ANTICIPATORY BREACH OF
REMEDIES FOR BREACH OF CONTRACT
In case of breach of contract, the injured party may:
(i) Rescind the contract and refuse further performance of the contract;
(ii) Sue for damages;
(iii) Sue for specific performance;
(iv) Sue for an injunction to restrain the breach of a negative term; and
(v) Sue on quantum meruit
(i) Rescission of Contract
When a party to a contract has broken the contract, the other party may treat the contract as
rescinded and he is absolved from all his obligations under the contract. Under Section 75 of the
Indian Contract Act, if a person rightfully rescinds a contract, he is entitled to a compensation for
any damage which he has sustained through the non-fulfilment of the contract by the other party.
(ii) Damages for Breach of Contract
Under Section 73 of the Indian Contract Act, when a contract has been broken, a party who
suffers by such breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage, caused to him thereby, which naturally arose in the usual
course of things from such breach or which the parties knew, when they made the contract to be
likely to result from the breach of it. Such compensation is not to be given for any remote and
indirect loss or damage sustained by reason of the breach.
Liquidated and Unliquidated damages: Where the contracting parties agree in advance the
amount payable in the event of breach, the sum payable is called liquidated damages.
Where the amount of compensation claimed for a breach of contract is left to be assessed by the
Court, damages claimed are called unliquidated damages.
Ordinary Damages
These are restricted to pecuniary compensation to put the injured party in the position he would
have been had the contract been performed. It is the estimated amount of loss actually incurred.
Thus, it applies only to the proximate consequences of the breach of the contract and the remote
consequences are not generally regarded. For example, in a contract for the sale of goods, the
CONTRACT
• Where the promisor refuses to perform
promise on the scheduled date. When
one of the parties breaks the contract by
refusing to perform the promise when it
falls due, it is Actual Breach.
ACTUAL BREACH OF
CONTRACT

Contract act

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