Law of Contract I

 General Introduction.

The word Contract is derived from Latin word Contractus which means “to work on a contract.” The law of contract is based on principle laid down on Pacta Sunt Servanda which means “Agreement to be kept” or pact must be kept.

According to Sir William.

The law of contract is intended to ensure that what has led to expect shall come to pass and what has been promised to him shall be performed.

The law of contract thus not only lay down a number of rights and duties which the law will enforce, it consists of a number of limiting principles subject to which the parties may create rights and duties for themselves which the law will uphold.

The parties to a contract in a sense make a law for themselves.

Essentials of a Valid Contract.

Section 2(h) of the Indian Contract Act 1872 defines the term contract as an “agreement enforceable by law.” As per section 2(e) every promise and every set of promises forming the consideration with each other is called an agreement.

An agreement is a promise, as a promise is an accepted proposal. Thus, every agreement is made up of a proposal or offer from one side and its acceptance by the other.

An agreement is a wider term than a contract. Every contract is an agreement but every agreement is not a contract. An agreement becomes a contract when the condition given in Section 2(h) and Section 10 and other conditions of the contract are satisfied.

1.There should be a proposal from one party and its acceptance by the other.

2.The parties are intended to create a legal relationship between them.

3.There is some consideration i.e., the price for which promise of other is bought.

4.The parties are competent to contract (a minor person or a person disqualified by law are incompetent to contract).

5.There consent is free i.e., not caused by coercion, undue influence, fraud, misrepresentation or mistake.

6.There must be lawful object i.e., not forbidden by law or opposed to public policy or fraudulent.

7.The agreement must not be expressly declared to be void.

Example: Agreement in restraint of trade, marriage etc.

8.The term of the agreement must not be vague or uncertain.

9.The agreement must be capable of performance.

An agreement to do an impossible act is void.

10.Legal formalities → A contract may be oral or in writing but in certain cases Act lays down that the agreement to be valid must be in writing and registered.

  Kinds of Contract.

On the basis of formation.

(a) Express Contract.

This contract is made by the use of words (orally or written).

It includes written or oral contracts. For example, A offers B to sell his bike for ₹50,000 and B agrees to buy and make a written contract, it will be a type of express contract.

(b) Implied Contract.

Contracts made by the use of gesture, sign or action are known as implied contracts. This need not be formal or expressed all the time. For example, bid at auctions, consuming edibles at a restaurant, this creates an implied promise to pay for the benefits enjoyed.

On the Basis of Performance.

(a) Executed Contract.

This is the contract which has already been performed or done. An executed contract is one in which both parties to the contract have performed their respective obligation.

For example, A agrees to paint a portrait of B for ₹500. A painted the portrait and B paid ₹500 to A, the contract is hence said to be executed contract.

(b) Executory Contract.

This is a contract which is yet to be performed. In executory contract both parties’ obligations to perform are not complete.

For example, when A has not painted a portrait and B has not paid the price then it is an executory contract as both parties have yet to execute the contract.

(c) Unilateral Contract.

This is a one-sided contract. It is a contract in which only one party has to fulfill his obligation at the time of formation of the contract.

(d) Bilateral Contract.

This contract is one in which the obligation on the part of both the parties to a contract is outstanding. Thus, it is similar to an executory contract. Both parties are involved in a bilateral contract who promise to implement certain things.

On the Basis of Validity.

(a) Valid Contract.

This is a contract in which essential elements of a contract are present. Section 10 of the Indian Contract Act laid down the essentials that are needed for a valid contract.

A valid contract consists of lawful consideration, free consent, lawful object, competency to contract, etc. Meaning thereby it shall be enforceable by law.

(b) Voidable Contract.

As per Section 2(i) of the Indian Contract Act, an agreement which is enforceable by law at the option of one party but not at the option of other is a voidable contract.

A contract becomes voidable when essential element of a contract, i.e., free consent in a contract, is missing.

When consent of the party is said to be obtained by coercion, undue influence, misrepresentation, fraud etc., the contract is voidable at the option of the party whose consent is not free.

For example, A promises to sell a plot to B for ₹1,00,000. If his consent was caused by coercion, such contract is said to be voidable at the instance of B.

(c) Void Contract.

As per Section 2(g), a contract not enforceable by law is said to be void.

For example, a contract is made to import goods from a foreign country. It is valid, but if war breaks out between them and an agreement is made, then the contract will be void after the war.

Void Agreement.

A void agreement is void from the beginning itself, i.e., it is void ab initio.

For example, a minor’s agreement is void ab initio.

Proposal/Offer [Section 2(a)].

Definition.

Proposal in the Indian Contract Act is synonymous with “offer” in English law. Proposal lies at a very root of the formation of the contract.

As per Section 2(a), Indian Contract Act, 1872: “When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”

Essentials of a Valid Proposal.

1.There must be two parties, namely proposer (offeror) and proposee (offeree).

2.Willingness → It implies an intention (a voluntary one) to do or to abstain from doing something.

3.It must be communicated (the word “signifies” suggests communication).

4.Objective of the proposal → It should be made in order to obtain the assent of the other.

Intention to Create a Legal Relationship.

There is no provision in the Indian Contract Act requiring that an offer or its acceptance should be made with the intention of creating a legal relationship.

But in English law, it is a settled principle that to create a contract, there must be a common intention of the parties to enter into a legal obligation.

The intention at the time of making a proposal is what is material for the creation of a valid proposal. For example, in an agreement to go for a walk, to go for a movie, etc. there is no intention to create a legal relationship.

                    Case Law.

Balfour v Balfour – 1919, 2 KB 571.

In this case the defendant and his wife were on a holiday. Husband had to return to work and wife had to stay back because of health issue.Husband promised to pay her monthly expenses. He did pay for few months, but later on difference arose which resulted in their separation.Wife brought an action to recover the agreed sum as monthly expenses. In this case Lord Atkin dismissed the action and observed that these arrangements b/w the husband and the wife do not result in contract even though they constitute consideration because the parties did not intend that they shall be attended by legal consequences.

Rose & Frank Co. vs Crompton and Bros. Ltd – 1925, AC 445.

In this case the court has held that intention of the parties is naturally to be ascertained from the terms of the agreement and the surrounding circumstance. 

It is on the court, in each case, to find out whether the parties must have intended to enter into legal obligations. The court has observed that in the arrangements regulating social relations, it is seldom almost as a matter of course that the parties do not intend legal consequences to follow. In the case of arrangements relating to business relations, it equally follow as a matter of course that the parties intend to legal consequences to follow. But this does not however mean that in family or social matter there can’t be a legally binding contract. All that the law requires is that the parties must intend legal consequences.

Mc Gregor vs Mc Gregor – 1888.

Wife withdrew their complaint by agreement and husband promised to pay allowance and she was to refrain from pleading.

The court has held the agreement was held to be binding contract. Later on the principle of intention to create a legal relationship was extend to other close relationship (for example, parents & children, etc.).

Jones v Padavatton – 1969.

In this case mother persuaded daughter to pursue studies and undertook to bear all expenses related to that. Daughter could not complete the education in 5 years, mother stopped payment of expenses and commenced proceeding to evict the daughter. The court has held that parties had intention to contract although the matter is one of the family. The engagement did result in contract but the agreement could last for a reasonable period only.

Indian Case Law.

Banwari Lal and Ors. Vs. Sukhdarshan Dayal – [(1973) 1 SCC 294].

In this case the Supreme Court gave a limited recognition to requirement of intention as one of essential element of contract.

Communication of Proposal.

The first part of definition of proposal lays emphasis upon the requirement that the willingness to make a proposal should be signified.

To signify means to indicate or declare. It means that the proposal should be communicated to the other party. The process of making a mere proposal is completed by the act of communicating to the other party.

Section 3 of the Indian Contract Act recognises the modes of communication. According to section 3, a proposal may be communicated by any act or omission of the party proposing by which he intends to do or to abstain from doing. It may be done by words of mouth or by writing or even by conduct.

When Communication of Proposal is Complete?

As per section 4 of Indian Contract Act, 1872 the communication of proposal is complete when it comes to the knowledge of the person to whom it is made. For an instance, A proposes by letter to sell house to B at a certain price.

The communication of the proposal is complete when he (B) receives the letter.

In order to constitute a valid proposal, the communication of the proposal must be complete against the proposee.

Therefore, an offer can’t be accepted unless and until it has been brought to the knowledge of the person to whom it is made. Acting in ignorance of the proposal does not amount to the acceptance of the same.

Case Law.

Lalman Shukla vs. Gauri Dutt, 1913 40 ALJ 489.

The defendant’s nephew absconded from home. The plaintiff was the servant of the defendant and was sent to search a missing boy. Later on the defendant issued handbills announcing to reward ₹501 to anyone who might find out the boy. The plaintiff who was ignorant of the proposal, found the boy. He brought an action to claim the reward.

It was held that he was ignorant of the proposal, the communication of the proposal was not completed and hence there was no question of a binding contract even if other conditions were satisfied and therefore the claim of the plaintiff was rejected by the court.

Williams vs. Carwardine (1833) 110 ER 590.

The plaintiff who knew that a reward had been announced to be given to anyone who gave information leading to the conviction of an assailant for murder, gave the necessary information in order to ease her conscience and not intending to claim the reward. But later on, she brought an action to claim the reward.

It was held that since the acceptance has been made with the knowledge of the offer, there was a valid contract and therefore she was entitled to claim the reward.

Proposal: Express or Implied.

Section 9 of the Indian Contract Act further lays down that proposal can be express or implied. If it is made in words it is said to be express, whereas if it is made by conduct i.e., otherwise than by words, it is said to be implied.

Case Law.

Upton on Severn RDC vs. Powell (1942) All ER 220 (King’s Bench, England).

Upon a fire broke out in the defendant’s farm. He believed that he was entitled to free services of Upton fire brigade and therefore summoned it. The fire brigade put out the fire, it then turned out that the defendant’s farm was not within the service zone of the Upton which therefore claimed compensation for service held.

It was held that the defendant asked for the service and the service was provided. Here the service was rendered on the implied promise to pay for them and therefore the defendant is held liable to pay the compensation to the Upton Fire Brigade for the service rendered.

Haji Mohd. Ishaq vs. Mohd. Iqbal and Mohd. Ali (1978) 4 SCC 323 (Supreme Court of India).

Certain goods were supplied by the plaintiff on his own account to the defendant. He accepted the goods and partly paid to them. The liability to pay the balance arise. The court has held that the defendant by their clear conduct of accepting the goods and paying the part price accepted the offer and therefore the defendants are liable to pay for the remaining amount.

Kinds of Proposal/Offer.

(a) Particular Offer.

Particular offer is made to specific ascertained person.

(b) General Offer.

Offer which is made to a public at large.

In the case of Weeks vs Tybald, whereby the defendant announce to the public that he would give 100 pound to him that should marry his daughter to his consent. The plaintiff that he did that and sued the defendant. The court by rejecting the action said that it is not ascertained nor declared to whom the words spoken. The court further observed that if the offer this kind addressed to several person could be accepted the offerer would bound himself bound in innumerable contract. In this case the court was of the view that the offer must be made to a definite person and to the world at large.

However, this view of the court over ruled later.The current position is that the offer may be made to world at large but the contract is not made will all the world. Contract is made only with that person who comes forward and perform the condition of it. In words of Anson an offer need not be made to ascertained person but no contract can be arisen until it has been accepted by an ascertained person.

Case Law

Carlill v. Carbolic Smoke Ball Co. [1891-4] All ER 127.

The Carbolic Smoke Ball company was a manufacturer of a medicine to prevent influenza. Company offered to pay 1000 pound to anyone who contacts influenza after consuming the medicine in the prescribed manner. The company further stated that they have deposited the amount in the bank showing their sincerity in the matter. Plaintiff used the smoke Ball a/c to direction but nevertheless he suffered from influenza.

One of the contention of the company was that a general offer is not a good offer and it does not constitute a contract. The company further contended their was no legal intention to create a contract and offer was not made to any particular person and further had not communicate the intention to acceptance.Held the court while rejecting the contention of the defendant company laid down following law.

1. The offer can be made to a world at large and contract is made with the person who comes forward and accepts the offer.

2. In general, an offer, the communication of acceptance is not necessary. Performance of condition is a sufficient acceptance without communication. This principle has been recognized under Section 8 of the Indian Contract Act.

3. General offer is continuing in nature and it is open for acceptance to any number of people until it is revoked.

Har Bhajan Lal vs Har Charan Lal And Anr. on 8 May, 1925.

In this case, the court has held that there can be an offer made to the world at large. Here, a boy went missing and his father issued a handbill to find the boy and offered a reward of ₹500 to anyone who finds the boy.

The plaintiff got to know of the offer and on seeing the boy he took him to the defendant. The court has further observed that the handbills were a general offer open to the world at large. It was capable of acceptance by anyone who comes forward and accepts the condition of the offer. Since the plaintiff has performed the condition, he was entitled to claim the reward.

(c) Invitation to Offer.

An offer is a final willingness by the offeror to be bound by his offer should the other party accept it.

When a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he is said to make an invitation to offer. 

Case Law.

Harvey v Facey [1893] AC 552.

Plaintiff → Will you sell me the bumper hall pen? Tell me the lowest price?

Defendant → The lowest price is 900 pounds.

The plaintiff immediately sent a telegram stating he agreed to buy the bumper hall pen at 900 pounds as asked by you. The defendant refused to sell the pen. The court held that a mere quotation of a lowest price does not amount to an offer. It is at best an invitation of offer.

M.C. Pherson vs Appanna.

In this case, the plaintiff offered to purchase a lodge, owned by the defendant, for Rs. 6000. He wrote to the defendant asking whether this offer has been accepted and saying that he is ready to accept if any higher price is found reasonable.

The agent replied, "will not accept less than Rs. 1000". The plaintiff accepted it and brought a suit for specific performance.

The court has held that a mere statement of the lowest price at which a person would sell does not amount to a contract. It is only an invitation to the contract.

Badri Prasad v. State of Madhya Pradesh & Anr.1969 SCR (2) 380.

In this case, the DFO wrote to the plaintiff to communicate whether he agreed to pay a sum of Rs. 17,000 for the contract of trees. The plaintiff replied that he agreed to pay provided that his earlier claim for a refund of 17,000 was accepted. The court has held that firstly, the DFO's letter was a mere invitation to offer and secondly, even if it were considered to be an offer, the plaintiff's acceptance was a conditional acceptance and therefore there was no contract in the above case.

Example: Display of goods in a self-service shop, Auction, tender, etc.

(d) Counter Offer.

It is an offer made in response to a previous offer by the other party during negotiation/bargaining for a final contract, making a final contract. A counter offer automatically terminates the prior offer.

Case Law.

Hyde v Wrench (1840) 49 ER 132.

In this case, Wrench offered to sell a farm to Hyde for 1000 pounds. Hyde rejected this offer and offered to pay 950 pounds. Wrench rejected Hyde's offer.

In the meantime, Wrench sold the farm to the third party.Hyde attempted to accept the original offer price of 1000 pounds and sued Wrench for breach of contract. Held that if the offer had been unconditionally accepted, there would undoubtedly have been a perfect binding contract. Instead of that, the plaintiff made an offer of his own, to purchase the farm for 950 pounds, and he thereby rejected the offer previously made by the defendant and, therefore, it was not afterwards competent for him to revive the proposal of the defendant by tendering an acceptance of it.

(e) Cross Offer.

These are the offers that arise when two parties make identical offers to each other in ignorance of each other's offer. Such offers do not constitute acceptance of one's offer.

Case Law.

Tinn v Hoffman and Co. 1873

A wrote a letter to B indicating his willingness to sell 800 tons of iron. On the same day, B wrote a letter to A, offering to buy 800 tons of iron. The two letters crossed at each other in the post. Later on, B sued for specific performance of contract. It was held that the two offers were only cross offers and there was no binding contract.

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This article has been authored by Karan Kumar Saroj, a third-year B.A. LL.B. (Hons.) student at the University of Allahabad.