UNIT 4: CONTRACTS AND E – CONTRACTS

Definition of contract

Contracts as Defined by Eminent Jurists

1. “Every agreement and promise enforceable at law is a contract.” – Pollock
2. “A Contract is an agreement between two or more persons which is intended to be
enforceable at law and is contracted by the acceptance by one party of an offer made to him by
the other party to do or abstain from doing some act.” – Halsbury
3. “A contract is an agreement creating and defining obligation between the parties” – Salmond

Essential elements of a contract

1. Proper offer and proper acceptance with intention to create legal relationship.
Cases;- A and B agree to go to a movie on coming Sunday. A does not turn in resulting
in loss of B’s time B cannot claim any damages from B since the agreement to watch a
movie is a domestic agreement which does not result in a contract. In case of social
agreement there is no intention to create legal relationship and there the is no contract
(Balfour v. Balfour)

1 In case of commercial agreements, the law presume that the parties had the intention to
create legal relations.
2 [an agreement of a purely domestic or social nature is not a contract ]

2. Lawful consideration: - consideration must not be unlawful, immoral or opposed to the

public policy.
3. Capacity: - The parties to a contract must have capacity (legal ability) to make valid contract.
Section 11:- of the Indian contract Act specify that every person is competent to contract
provided.
(i) Is of the age of majority according to the Law which he is subject, and
(ii) Who is of sound mind and
(iii) Is not disqualified from contracting by any law to which he is subject.

1 Person of unsound mind can enter into a contract during his lucid interval.
2 An alien enemy, foreign sovereigns and accredited representative of a foreign state.
Insolvents and convicts are not competent to contract.

4. Free consent: - consent of the parties must be genuine consent means agreed upon samething
in the same sense i.e. there should be consensus – ad – idem. Consent is said to be free
when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.

5. Lawful object
1 The object of agreement should be lawful and legal.
2 Two persons cannot enter into an agreement to do a criminal act.
3 Consideration or object of an agreement is unlawful if it
(a) is forbidden by law; or
 (b) is of such nature that, if permitted, would defeat the provisions of any law; or
(c) is fraudulent; or
(d) Involves or implies, injury to person or property of another; or
(e) Court regards it as immoral, or opposed to public policy.

6. Possibility of performance:
1 The terms of the agreement should be capable of performance.
2 An agreements to do act, impossible in itself cannot be enforced.
Example: A agrees to B to discover treasure by magic. The agreement is void because
the act in itself is impossible to be performed from the very beginning.

7. The terms of the agreements are certain or are capable of being made certain [29]
Example: A agreed to pay $5 lakh to B for ultra-modern decoration of his drawing room.
The agreement is void because the meaning of the term “ultra – modern” is not certain.

8. Not declared Void

1 The agreement should be such that it should be capable or being enforced by law.
2 Certain agreements have been expressly declared illegal or void by the law.

9. Necessary legal formalities

1 A contract may be oral or in writing.
2 Where a particular type of contract is required by law to be in writing and registered, it
must comply with necessary formalities as to writing, registration and attestation.
3 If legal formalities are not carried out then the contract is not enforceable by law.
Example : A promise to pay a time. Barred debt must be in writing.

Distinction between contract and agreement

Basis Contract Agreement

Definition A contract is an agreement Every promise or every set of promises
enforceable by law forming consideration for each other is
an agreement.
Enforceability Every contract is enforceable Every promise is not enforceable
Interrelationship A contract includes an agreement An agreement does not include a
contract
Scope The scope of a contract is limited, Its scope is relatively wider, as it
as it includes only commercial includes both social agreement and
agreements commercial agreements.
Validity Only legal agreements are called An agreement may be both legal and
contracts illegal
Legal obligation Every contract contains a legal It is not necessary for every agreement
obligation to have legal obligation
Types of contract

1. On the basis of creation

 Express contract:- A contract made by word spoken or written. According to sec
9 in so for as the proposal or acceptance of any promise is made in words, the
promise is said to be express.
Example: A says to B ‘will you purchase my bike for $20,000?” B says to A
“Yes”.

 Implied contract:- A contract inferred by

 The conduct of person or
 The circumstances of the case.
By implies contract means implied by law (i.e.) the law implied a contract
through parties never intended. According to sec 9 in so for as such proposed or
acceptance is made otherwise than in words, the promise is said to be implied.

Example:
A stops a taxi by waving his hand and takes his seat. There is an implied contract
that A will pay the prescribed fare.

 Tacit contract: -
A contract is said to be tacit when it has to be inferred from the conduct of the
parties.
Example obtaining cash through automatic teller machine, sale by fall hammer
of an auction sale.

 Quasi Contracts are contracts which are created -

 Neither by word spoken
 Nor written
 Nor by the conduct of the parties.
 But these are created by the law.

Example:
If Mr. A leaves his goods at Mr. B’s shop by mistake, then it is for Mr. B to return
the goods or to compensate the price. In fact, these contracts depend on the
principle that nobody will be allowed to become rich at the expenses of the other.

 e – Contract:
An e – contract is one, which is entered into between two parties via the internet.

2. On the basis of validity

 Valid contract:-
An agreement which satisfies all the requirements prescribed by law On the basis
of creation
  Void contract:- a contract which ceases to be enforceable by law because void
when of ceased to be enforceable
 When both parties to an agreement are:-
 Under a mistake of facts
 Consideration or object of an agreement is unlawful
 Agreement made without consideration
 Agreement in restrain of marriage
 Restraint of trade
 Restrain legal proceeding
 Agreement by wage of wager

 Unenforceable contract: - where a contract is good in substance but because of

some technical defect i.e. absence in writing barred by imitation etc one or both
the parties cannot sue upon but is described as unenforceable contract.
 Example: Writing registration or stamping.
 Example: An agreement which is required to be stamped will be
unenforceable if the same is not stamped at all or is under stamped.

 Illegal contract: - It is a contract which the law forbids to be made. All illegal
agreements are void but all void agreements or contracts are not necessary illegal.
Contract that is immoral or opposed to public policy are illegal in nature.

Unlike illegal agreements there is no punishment to the parties to a void

agreement. Illegal agreements are void from the very beginning agreements are
void from the very beginning but sometimes valid contracts may subsequently
becomes void.

3. On the basis of execution

 Executed contract: - A contract in which both the parties have fulfilled their
obligations under the contract.
Example: A contracts to buy a car from B by paying cash, B instantly delivers his
car.

 Executory contract:- A contract in which both the parties have still to fulfilled
their obligations.
Example: D agrees to buy V’s cycle by promising to pay cash on 15th July. V
agrees to deliver the cycle on 20th July.

 Partly executed and partly executory:- A contract in which one of the parties
has fulfilled his obligation but the other party is yet to fulfill his obligation.
Example: A sells his car to B and A has delivered the car but B is yet to pay the
price. For A, it is executed contract whereas it is executory contract on the part of
B since the price is yet to be paid.
 4. On the basis of liability for performance:-
 Bilateral contract:- A contract in which both the parties commit to perform their
respective promises is called a bilateral contract.
Example : A offers to sell his fiat car to B for $1,00,000 on acceptance of A’s
offer by B, there is a promise by A to Sell the car and there is a promise by B to
purchase the car there are two promise.

 Unilateral contract:- A unilateral contract is a one sided contract in which only

one party has to perform his promise or obligation party has to perform his
promise or obligation to do or forbear.
Example: - A wants to get his room painted. He offers $500 to B for this purpose
B says to A “ if I have spare time on next Sunday I will paint your room”. There
is a promise by A to pay Rs 500 to B. If B is able to spare time to paint A’s room.
However there is no promise by B to Paint the house. There is only one promise.

Difference between void and voidable contract

Void contract Voidable contract

Definition It means contract which cease to be It means an agreement
enforceable enforceable by law by one or
more parties
Nature Valid when made subsequently becomes It remains voidable until
unenforceable cancelled by party
Rights or No legal remedy Aggrieved party has remedy to
remedy cancel the contract
Performance Party can’t demand performance of contract If aggrieved party does not
of contract cancel it within reasonable
time, performance can be
demanded.
Reason Due to change in law or circumstances If consent is not obtained
freely
Damages Not available Can demand in certain cases

Difference between void and illegal agreement

Void agreement Illegal agreement

What Void agreement is not prohibited by law It is prohibited by law
Effect on Enforced Not enforced
collateral
transaction
Punishment No Yes

Offer
Offer (i.e. Proposal):-When one person signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that other person either to such act or
abstinence, he is said to make a proposal.

To form an agreement, there must be at least two elements – one offer and the other acceptance.
Thus offer is the foundation of any agreement.

“When one person signifies to another his willingness –

1 to do or to abstain from doing anything, with a view to obtaining the assent of that other
to such act or abstinence, he is said to make a proposal.”

The person who makes an offer is called “Offeror” or “Promisor” and the person to whom the
offer is made is called the Offeree” or “Promisee”.

Example
Mr. A says to Mr. B, “Will you purchase my car for $25000?” In this case, Mr. A is making an
offer to Mr. B. Here A is the offeror and B is the offeree.

Essentials elements of an offer:-

(1) There must be two parties.

(2) The offer must be communicated to the offeree.
(3) The offer must show the willingness of offeror. Mere telling the plan is not offer.
(4) The offer must be made with a view to obtaining the assent of the offeree.
(5) A statement made jokingly does not amount to an offer.
(6) An offer may involve a positive act or abstinence by the offeree.
(7) Mere expression of willingness does not constitute an offer.

A tells B’ that be desires to marry by the end of 2016, if does not constitute an offer of
marriage by A’ to B’ A further adds will you marry me. Then it becomes offer.

Legal Rules as to valid offer:-

1. Offer must be communicated to the offeree: The offer is completed only when it has
been communicated to the offeree. Until the offer is communicated, it cannot be
accepted. Thus, an offer accepted without its knowledge, does not confer any legal rights
on the acceptor.
Example:
A’s nephew has absconded from his home. He sent his servant to trace his missing
nephew. When he servant had left, A then announced that anybody who discovered the
missing boy, would be given the reward of $1000. The servant discovered the missing
boy without knowing the reward. When the servant came to know about the reward, he
brought an action against A to recover the same. But his action failed. It was held that the
servant was not entitled to the reward because he did not know about the offer when the
discovered the missing boy.
 2. The offer must be certain definite and not vague unambiguous and certain.
Example:
A offered to sell to B. ‘a hundred tons of oil’. The offer is uncertain as there is nothing to
show what kind of oil is intended to be sold.

3. The offer must be capable of creating legal relation. A social invitation is not create
legal relation.
Example:
A invited B to a dinner and B accepted the invitation. It is a mere social invitation. And A
will not be liable if he fails to provide dinner to B.

4. Offer may be express and implied

The offer may be express or implied; An offer may be express as well as implied. An
offer which is expressed by words, written or spoken, is called an express offer. The offer
which is expressed by conduct is called an implied offer

5. Communication of complete offer

Example:
A offered to sell his pen to B for $1,000. B replied, “I am ready to pay $950”. On A’s
refusal to sell at this price, B agreed to pay $1,000. held, there was not contract at the
acceptance to buy it for $950 was a counter offer, i.e. rejection of the offer of A.
Subsequent acceptance to pay $1,000 is a fresh offer from B to which A was not bound
go give his acceptance.

6. Counter offer – A counter offer amounts to rejection of the original offer

7. Cross offer do not conclude a contract

8. An offer must not thrust the burden of acceptance on the offeree.

Example:
A made a contract with B and promised that if he was satisfied as a customer he would
favorably consider his case for the renewal of the contract. The promise is too vague to
create a legal relationship.
1 The acceptance cannot be presumed from silence.
2 Acceptance is valid only if it is communicated to the offeror.

9. Offer must be distinguished from invitation to offer.

Example:
Menu card of restaurant is an invitation to put an offer.

Example:
Price – tags attached with the goods displayed in any showroom or supermarket is also an
invitation to proposal. If the salesman or the cashier does not accept the price, the or the
cashier does not accept the price, the interested buyer cannot compel him to sell, if he
wants to buy it, he must make a proposal.
 Example:
Job or tender advertisement inviting applications for a job or inviting tenders is an
invitation to an offer.

Example:
An advertisement for auction sale is merely an invitation to make an offer and not an
offer for sale. Therefore, an advertisement of an auction can be withdrawn without any
notice. The persons going to the auction cannot claim for loss of time and expenses if the
advertisement for auction is withdrawn.

10. Offeror should have an intention to obtain the consent of the offeree.

11. An answer to a question is not a offer.

Difference between offer and invitation to offer

Offer Invitation to offer

 Show his readiness to enter into  Person invites offer to make an
a contract it is called as an offer offer to him
 Purpose of entering contract  Purpose of enter offer
 Results in a contract  Results in offer
 Example: application filled in  Example: issue of prospectus by
by a prospective applicable to a company, an education
the institution, a student seeking institution
admission in educational
institution.

Kinds of offer

1. Express offer - When the offeror expressly communication the offer the offer is said to
be an express offer the express communication of the offer may be made by
Spoken word
Written word

2. Implied offer – when the offer is not communicate expressly. An offer may be implied
from:-
The conduct of the parties or
The circumstances of the case

3. Specific:- It means an offer made in

(a) A particular person or
(b) A group of person: It can be accepted only by that person to whom it is made
communication of acceptance is necessary in case of specific offer.

4. General offer: - It means on offer which is made to the public in general.

  General offer can be accepted by anyone.
 If offeree fulfill the term and condition which is given in offer then offer is accepted.
 Communication of acceptance is not necessary is case of general offer

Example
Company advertised that a reward of $1000 would be given to any person who would
suffer from influenza after using the medicine (Smoke balls) made by the company
according to the printed directions.

One lady, M$ Carlill, purchased and used the medicine according to the printed
directions of the company but suffered from influenza, She filed a suit to recover the
reward of $1000. The court held that there was a contract as she had accepted a
general offer by using the medicine in the prescribed manner and as such as entitled
to recover the reward from the company.

5. Cross offer: - When two parties exchange identical offers in ignorance at the time of
each other’s offer, that offers are called cross offer.
Two cross offer does not conclude a contract. Two offer are said to be cross offer if
 They are made by the same parties to one another
 Each offer made in ignorance of the offer made by the
 The terms and conditions contained in both the offers’ are same.

Example: ‘A’ offers by a letter to sell 100 tons of steel at $1,000 per ton. On the same
day, B also writes to A offering to buy 100 tons of steel at $1,000 per ton.

When does a contract come into existence: - A contract comes into existence when any
of the parties, accept the cross offer made by the other party.

6. Counter offer: - when the offeree give qualified acceptance of the offer subject to
modified and variations in the terms of original offer. Counter offer amounts to rejection
of the original offer.

Legal effect of counter offer:-

(1) Rejection of original offer
(2) The original offer is lapsed
(3) A counter offer result is a new offer.

In other words an offer made by the offeree in return of the original offer is called as a
counter offer.

Example:
A offered to sell his pen to B for $1,000. B replied, “I am ready to pay $950.” On A’s
refusal to sell at this price, B agreed to pay $1,000. Held, there was not contract as the
acceptance to buy it for $950 was a counter offer, i.e. rejection of the offer of A.
Subsequent acceptance to pay $1,000 is a fresh offer from B to which A was not bound to
give his acceptance.
 7. Standing, open and continuous offer: - An offer is allowed to remain open for
acceptance over a period of time is known as standing, open or continually offer. Tender
for supply of goods is a kind of standing offer.

Example:
When we ask the newspaper vendor to supply the newspaper daily, we do not repeat our
offer daily and the newspaper vendor supplies the newspaper to us daily. The offers of
such types are called Standing Offer.

Lapse of an offer

An offer should be accepted before it lapses (i.e. comes to an end). An offer may come to an end
in any of the following ways:

1. By communication of notice of revocation:

An offer may come to an end by communication of notice of revocation by the offeror. It
may be noted that an offer can be revoked only before its acceptance is complete for the
offeror. In other words, an offeror can revoke his offer at any time before he becomes
before bound by it. Thus, the communication of revocation of offer should reach the
offeree before the acceptance is communicated.

2. By lapse of time;
Where time is fixed for the acceptance of the offer, and it is not acceptance within the
fixed time, the offer comes to an end automatically on the expiry of fixed time. Where no
time for acceptance is prescribed, the offer has to be accepted within reasonable time.
The offer lapses if it is not accepted within that time. The term ‘reasonable time’ will
depend upon the facts and circumstances of each case.

3. By failure to accept condition precedent:

Where, the offer requires that some condition must, be fulfilled before the acceptance of
the offer, the offer lapses, if it is accepted without fulfilling the condition.

4. By the death or insanity of the offeror:

Where, the offeror dies or becomes, insane, the offer comes to an end if the fact of his
death or insanity comes to the knowledge of the acceptor before he makes his acceptance.
But if the offer is accepted in ignorance of the fact of death or insanity of the offeror, the
acceptance is valied. This will result in a valid contract, and legal representatives of the
deceased offeror shall be bound by the contract. On the death of offeree before
acceptance, the offer also comes to an end by operation of law.

5. By counter – offer by the offeree:

Where, a counter – offer is made by the offeree, and then the original offer automatically
comes to an end, as the counter – offer amounts to rejections of the original offer.

6. By not accepting the offer, according to the prescribed or usual mode:

 Where some manner of acceptance is prescribed in the offer, the offeror can revoke the
offer if it is not accepted according to the prescribed manner.

7. By rejection of offer by the offeree:

Where, the offeree rejects the offer, the offer comes to an end. Once the offeree rejects
the offer, he cannot revive the offer by subsequently attempting to accept it. The rejection
of offer may be express or implied.

8. By change in law:
Sometimes, there is a change in law which makes the offer illegal or incapable of
performance. In such cases also, the offer comes to an end.

Acceptance

Acceptance: - When the person to whom the proposal is made, signifies his assent there to , the
proposal is said to be accepted.

Legal rules for the acceptance

1. Acceptance must be absolute and unqualified
Example: A offers to sell his house to B for $100000. B accepts the offer and promises
to pay the price in four installments. This is not the acceptance as the acceptance is with
variation in the terms of the offer.

2. Acceptance must be communicated: Mere mental acceptance is no acceptance, But

there is no requirement of communication of acceptance of general offer.
Example The manager of Railway Company received a draft agreement relating to the
supply of coal. The manager marked the draft with the words “Approved” and put the
same in the drawer of his table and forgot all about it. Held, there was no contract
between the parties as the acceptance was not communicated. It may however, be pointed
out that the Court construed a conduct to parties as railway company was accepting the
supplies of coal from time to time.

3. Manner of acceptance
General rule say that it must be as per the manner prescribed by offeror. If no mode is
prescribed in which it can be accepted, then it must be in some usual and reasonable
manner.

4. If there is deviation in communication of an acceptance of offer, offeror may reject

such acceptance by sending notice within reasonable time. If the offeror doesn’t send
notice or rejection, he accepted acceptance of offer.
Example: A offers B and indicates that the acceptance be given by telegram. B sends his
acceptance by ordinary post. It is a valid acceptance unless A insists for acceptance in the
prescribed manner.

5. Acceptance of offer must be made by offeror.

 Example: A applied for the headmastership of a school. He was selected by the
appointing authority but the decision was not communicated to him. However, one of
members in his individual capacity informed him about the selection. Subsequently, the
appointing authority cancelled its decision. A sued the school for breach of contract. The
Court rejected the A’s action and held that there was no notice of acceptance.
“Information by unauthorized person is as insufficient as overhearing from behind the
door”.

6. Acceptance must be communicated to offeror

7. Time limit for acceptance

1 If the offer prescribes the time limit, it must be accepted within specified time.
2 If the offer does not prescribe the time limit, it must be accepted within reasonable time.
Example: A applied (offered) for shares in a company in early June. The allotment
(Acceptance) was made in late November. A refused to take the shares. Held, A was
entitled to do so as the reasonable time for acceptance had lapsed.

8. Acceptance of offer may be expressly (by words spoken or written); or impliedly (by
acceptance of consideration); or by performance of conditions (e.g.in case of a general
offer)

9. Mere silence is not acceptance of the offer

Example A offers to B to buy his house for $5 lakhs and writes “If I hear no more about
it within a week, I shall presume the house is mine for $5 lakhs. “B does not respond.
Here, no contract is concluded between A and B.

10. Acceptance subject to the contract is no acceptance

If the acceptance has been given ‘subject to the contract” or subject to approval by certain
persons, it has not effect at all. Such an acceptance will not create binding contract until a
formal contract is prepared and signed by all the parties.

Difference between offer and acceptance

Particulars Offer Acceptance
When  Communication of a  As against the offerer/proposer.
communication proposal is complete when When it is put in a course of
is complete it comes to the knowledge transmission to him so as to be out
of the person to whom it is of the power of the acceptor.
made  As against the offeree/acceptor:
 Example: A proposes by when it comes to the knowledge of
letter, to sell his Tonga to B the proposer.
at $ 10,000.
Communication of the
proposal is complete when
B receives the letter
When  Offer/proposal may be  Acceptance may be revoked at any
revocation can revoked at any time before time before the communication of
be made the communication of its acceptor, but not afterwards.
acceptance is complete, as  Example: T sends to S by post, an
against the proposer but offer to sell his cycle. S sends his
not afterwards acceptance via post, S could revoke
 Example: U sends a letter his acceptance, upto any time before
to Y proposing to sell his or at the moment when he posts his
land. Y sends his letter of acceptance, but no
acceptance by post. U can afterwards.
revoke the offer at any time
before or at the moment
when Y posts his letter of
acceptance, but not
afterwards
When  As against the offeror:  As against the offeree: when it
communication when it is put into a course comes to his knowledge.
of revocation is of transmission to the  Example: communication of
complete person to whom it is made, revocation is complete only when H
so as to be out of the power receives the telegram.
of the person who makes it.  When H revokes his acceptance, it is
 Example: S proposes to H complete when he dispatches the
by letter. H sends his telegram.
acceptance by letter.
Suddenly, S sends a
telegram revoking his offer.
Revocation is complete as
against S when the
telegram is dispatched; H’s
revocation of acceptance is
complete when S receives
such telegram.
Capacity to contract

Parties unable to enter into a contract

1. Minor
2. A person of unsound mind
 Lunatic
 Idiot
 Drunken and intoxicated
3. Person disqualified by law
 Alien enemy
 Foreign sovereign
 Convict
 Corporation and company
 Insolvent

1. Minor

 Validity: - An agreement with a minor is void

Example:
Mr. D, a minor, mortgaged his house for $20000 to a money – lender, but the mortgagee,
i.e. the money – lender, paid him a sum of $8000. Subsequently, the minor sued for
setting aside the mortgage. Held that the contract was void, as Mr. D was minor and
therefore he is not liable to pay anything to the lender.

 A minor has received any benefit under a void contract, he cannot be asked to return
the same.
 If a minor has received any benefit under a void contract, he cannot be asked to return
the same.
 Fraudulent representation by a minor- no difference in the status of agreement. The
contract remains void.
 A minor with the consent of all the partners, be admitted to the benefits of an existing
partnership
 Contracts entered into by minors are void-ab-initio. Hence no specific performance
can be enforced for such contracts.
 Minor’s parent/guardians are not liable to a minor’s creditor for the breach of
contract by the minor
 A minor can act as an agent but not personally liable. But he cannot be principal.
 A minor cannot become shareholder of a the company except when the shares are fully
paid up and transfer by share.
 A minor cannot be adjudicated as insolvent.
 Can enter into contracts of Apprenticeship, Services, Education, etc:
(a) A minor can enter into contract of apprenticeship, or for training or instruction in a
special art, education, etc.
(b) These are allowed because it generates benefits to the Minor.
  Guarantee for and by minor
A contract of guarantee in favor of a minor is valid. However, a minor cannot be a
surety in a contract of guarantee. This is because, the surety is ultimately liable under a
contract of guarantee whereas a minor can never be held personally liable.
 Minor as a trade union member
Any person who has attained the age of fifteen years may be a member for registered
trade union, provided the rules of the trade union allow so. Such a member will enjoy all
the rights of a member.

2. Person of Unsound Mind

A person who is usually of unsound mind, but occasionally of sound mind can make a
contract when he is of sound mind. Similarly, a person who is usually of sound mind, but
occasionally of unsound mind, may not make a contract when he is of unsound mind.

At time of entering into a contract, a person must be sound mind. Law presumes that
every person is of sound mind unless otherwise it is proved before court. An agreement by a
person of unsound mind is void. The following are categories of a person considered as person of
a unsound mind.

 An idiot
An idiot is a person who is congenital (by birth) unsound mind. His incapacity is
permanent and therefore he can never understand contract and make a rational judgment
as to its effects upon his interest. Consequently, the agreement of an idiot is absolutely
void ab initio. He is not personally liable even for the payment of necessaries of life
supplied to him.

 Delirious persons
A person delirious from fever is also not capable of understanding the nature and
implications of an agreement. Therefore, he cannot enter into a contract so long as
delirium lasts.

 Hypnotized persons
Hypnotism produces temporary incapacity till a person is under the effect of artificial
induced sleep.

 Mental decay
There may be mental decay or senile mind the to old age or poor health. When such
person is not capable of understanding the contract and its effect upon his interest, he
cannot enter into contract.

 Lunatic is not permanently of unsound mined. He can enter into contract during
lucid intervals i.e., during period when he is of sound mind.

 Drunken person
An agreement made by intoxicated person is void.
Person disqualified by law

 Body corporate or company or corporation

Contractual capacity of company is determined by object clause of its memorandum of
association. Any act done in excess of power given is ultra – virus and hence void.

 Alien enemy
1 An ‘alien’ is a person who is a foreigner to the land. He may be either an ‘alien friend’ or
an ‘alien enemy. If the sovereign or state of the alien is at peace with the country of his stay, he
is an alien friend. An if a war is declared between the two countries he is termed as an alien
enemy.
2 During the war, contract can be entered into with alien enemy with the permission of
central government.

 Convict can’t enter into a contract while he is undergoing imprisonment. But he can
enter into a contract with permission of central government while undergoing
imprisonment. After the imprisonment is over, be becomes capable of entering into
contract. Thus the incapacity is only during the period of sentence.
 Insolvent
When any person is declared as an insolvent, his property vests in receiver and therefore,
he can’t enter into contract relating to his property. Again he becomes capable to enter
into contract when he is discharged by court.

 Foreign sovereigns, diplomatic staff and representative of foreign staff can enter into
valid contract. However, a suit cannot be filed against them, in the Indian counts without
the prior sanction of the central Government.

Consideration

Consideration is a quid pro quo i.e. something in return it may be –

(i) Some benefit right, interest, loss or profit that may accrue to one party or,
(ii) Some forbearance, detriment, loss or responsibility suffered on undertaken by the
other party

Definition: - when at the desire of the Promisor, the promise or any other person.
(a) has done or abstained from doing , or [Past consideration]
(b) does or abstains from doing, or [Present consideration]
(c) promises to do or abstain from doing something [Future consideration ] such act or
abstinence or promise is called a consideration for the promise.

Example
(i) ‘P’ aggress to sell his car to ‘Q’ for $50,000 Here ‘Q’s Promise to pay $50,000 is the
consideration for P’s promise and ‘P’s promise to sell the car is the consideration for ‘Q’s
promise to pay $50000.
 (ii) ‘A’ promises his debtor ‘B’ not to file a suit against him for one year on ‘A’s agreeing
to pay him $10,000 more. Here the abstinence of ‘A’ is the consideration for ‘B’s
Promise to pay.

Legal rules for consideration

1. Consideration must move at the desire of the promisor.

D constructed a market at the instance of District collector. Occupants of shops promised
to pay D a commission on articles sold through their shops. Held, there was no consideration
because money was not spent by Plaintiff at the request of the Defendants, but at instance of
a third person viz. the Collector and, thus the contract was void.

2. Consideration may move from the promisee or any other person who is not a party to the
contract.
A owed $20,000 to B. A persuaded C to sign a Pro Note in favor of B. C promised B that
he would pay the amount. On faith of promise by C, B credited the amount to A’s account.
Held, the discharge of A’s account was consideration for C’s promise.

2. Consideration may be past, present, Future:

Under English law, past consideration is no consideration
Present consideration: - cash sale

4. Consideration should be real and not illusory. Illusory consideration renders the transaction
void consideration is not valid if it is.
(i) Physically impossible (ii) Legally not permissible
(iii) Uncertain (iv) illusory (fulfillment of a pre existing obligation)

5. Must be legal:-
Consideration must not be unlawful, immoral or opposed to public policy.

6. Consideration need not be adequate. A contract is not void merely became of the fact that
the consideration is inadequate. The law simply requires that contract should be
supported by consideration. So long as consideration exists and it is of some value, courts
are not required to consider its adequacy.
Example:
A agreed to sell a watch worth $500 for $20, A’s consent to the agreement was freely
given. The consideration though inadequate, will not affect the validity of the contract.
However, the inadequacy of the consideration can be considered in order to know
whether the consent of the promisor was free or not

8. The performance of an act what one is legally bound to perform is not consideration for
the contract mean’s something other than the promisor’s existing obligation –
A contract not supported by consideration is void .
Fraud

The term fraud means a take representation of facts made willfully with a view to deceive the
other party. –

Fraud means any act committed by a party to a contract or with his connivance or by his agent
with intent to deceive another party there to or his agent or to induce to enter into contract.

Essentials of fraud:-
(a) By a party to the contract

(b) There must be representation – [an opinion a statement of expression – does not fraud].

(c) The representation must be false.

(d) Before conclusion of contract.

(e) The misrepresentation must be made willfully.

(f) The misrepresentation must be made with a view to deceive the other party.

(g) The other party must have actually been deceived.

(h) The other party has suffered a loss.

Exception

Where the circumstances of the case are such that regarding being had to them. It is duty of the
person keeping silence to speak. Such duty arises in the following two cases.

(1) Duty to speak exists where the parties stand in a fiduciary relationship, e.g. father and son,
guardian and ward, trustee and beneficiary etc. or where contract is a contract of
ubberima fidei (requiring utmost good faith), e.g. contracts of insurance.
Ex.:- A sells by auction to B a horse which A knows to be unsound. B’ is A’s daughter and has
just come of age. Here the relation between the parties would make it A’s duty to tell B is
the horse is unsound.

(2) When silence itself equivalent to speech. B says to A “if you do not deny it I shall assume
that the horse is sound”. A say nothing – A’s silence equivalent to speech. A can held liable to
fraud.

Effect of fraud:

A contract induced by fraud is voidable at the option of the party defrauded. Till the exercise of
such option, the Contract is valid.
1. Rescinds of contract
2. Right to insist upon performance
3. Right to claim damages – if he suffered loss.

Exception: The contract is not voidable in the following cases.

.1 When the party who consent was caused by silence amount to fraud and be has the means
of discovering the truth with ordinary diligence.
.2 When the party give the consent in ignorance of fraud.
.3 When the party after become aware of fraud takes a benefit.
.4 When the parties can’t be restored to their original position.
.5 Where interests of third parties intervene before the contract is avoided.

Misrepresentation

Misrepresentation is when a party (person) asserts something which is not true though he
believes is to be true. In other words misrepresentation is a falls representation made innocently.
An agreement is said to be influenced by misrepresentation if all the following conditions are
satisfied.

(a) The party makes a representation of a fact [The representation by a stranger (By anyone
with his connivance or by agent) to the contract does not affect the validity of the contract.
(b) The misrepresentation was made innocently i.e. if was not made with a view to deceive the
other party.
(c) The other party has actually acted believing the misrepresent to be true.

Misrepresentation include:-
 Unjustified statement of facts – positive assertion – Believe true really not true no basis
misrepresentation
 Breach of duty.
 Inducing other to make mistake as to qualify or nature of subject matter.

Fraud Misrepresentation
Wrongful representation is made willfully to Innocently without any intention to deceive the
deceive the party other party
The person making the wrong statement does The person making the wrong statement
not believe it to be true. believes it to be true
Right to claim damage Cant claim damage
Incase of fraud the contract is voidable even In case of misrepresentation the contract is not
though the aggrieved party had the means of voidable if the aggrieved party had the means
discovering the truth with ordinary diligence of discovering the truth with ordinary
diligence.