FORMATION OF CONTRACT

ANUPAM KISHORE SINHA

LEGAL ASPECTS OF BUSINESS

 FORMATION OF A CONTRACT

Proposal:
Where A signifies to B: 
•What:- his willingness to do or not do something;
•Why:- with a view to obtaining the assent of that other to such act or omission /
abstinence, A is said to make a proposal to B
 
Promise:
When B assents to the proposal, it becomes a promise.
A- who made the proposal – Promisor; B:- to whom the proposal was made, or
who accepted the proposal – Promisee
FORMATION OF A CONTRACT (contd.)

• Consideration
where at the desire of A, B has done something or omitted / abstained to do something or promises to do or
abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

• Reciprocal promises Promises which form the consideration for each other are called reciprocal promises
 
• Agreement Every promise and every set of promises, forming the consideration for each other, is an
agreement.

• Contract An agreement enforceable by law is a contract.

 
ESSENTIAL ELEMENTS OF A CONTRACT

• Section 10 of the Contract Act

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.
•  Minimum two parties
• Parties must be competent i.e. they must not be minor, should be mentally sound, etc.
• Offer + Acceptance
• Intention to create legally binding relationship
• Consideration:- there must be legal consideration
• Free consent:- Vitiating factors like coercion, undue influence, misrepresentation, fraud and mistake
must be absent.
• Lawful Object
ESSENTIAL ELEMENTS OF A CONTRACT
(contd.)
• Intention to create legally binding relationships
• Balfour v. Balfour
• This case involved a husband and wife.
• The husband was due to return to Ceylon where he had employment, but the wife, on medical advice was to
remain in England.
• The husband promised to pay the wife £30-00 per month until she was able to join him in Ceylon. Later the
parties separated and were divorced.
• The wife brought this action for the money her husband had promised to pay to her but had failed to do so.
Judgment
• Commonly parties to a marriage will make arrangements for personal or household expenses. But they do not
amount to contracts, even though there may be present what would amount to consideration if it had occurred
between different parties. They are not contracts because the parties do not intend that legal consequences
should follow.
ESSENTIAL ELEMENTS OF A CONTRACT
(contd.)
•Acceptance must be absolute and unconditional
•Felthouse v. Bindley
•Facts
•Paul Felthouse had a conversation with his nephew, John Felthouse, about buying his horse.
•After their discussion, the uncle replied by letter stating that if he didn’t hear anymore from his nephew
concerning the horse, he would consider acceptance of the order done and he would own the horse.
•His nephew did not reply to this letter and was busy at auctions.
•The defendant, Mr Bindley, conducted the auctions and the nephew advised him not to sell the horse.
However, by accident he ended up selling the horse to someone else.
•Paul Felthouse, the uncle, sued Mr. Bindley for a civil wrong known as conversion. “Conversion” is a
civil wrong in which one person, here Mr. Bindley “takes” someone else's property, here the horse by
using or altering the property in a way that is inconsistent with the rights of the owner, sold it.
 Felthouse v. Bindley (contd.)

Issue
• Whether the uncle owned the horse, which means, whether there was a valid contract between John
and Paul for the sale of horse?
• Mr Bindley argued there was no valid contract for the horse, since the nephew had not
communicated his acceptance of the complainant’s offer. The issue in this case was whether silence
or a failure to reject an offer amount to acceptance.
Held
• No. there was no valid contract as any acceptance of an offer must be communicated clearly.
Although the nephew had intended to sell the horse to the complainant and showed this interest,
there was no contract of sale. Thus, the nephew’s failure to respond to the complainant did not
amount to an acceptance of his offer.
ESSENTIAL ELEMENTS OF A CONTRACT
(contd.)

Mohori Bibee v. Dharmdas Ghose

• Till 1903, English Law provided that minor’s contract was voidable contract.
• DG, a minor, who mortgaged property in favour of BD (money lender) for a loan
of Rs. 20,000/- all the dealings of BD was done by KNM as BD was away.
KNM knew DG was a minor – got a declaration from DG to the effect that he
was not a minor.
•  DG filed a case through his mother saying that he was minor at the time
mortgage was executed. BD contended that DG had fraudulently misrepresented
his age and that he had a declaration that he was not a minor. No relief should be
given. If mortgage is cancelled, DG should repay the sum advanced.
 Mohori Bibee v. Dharmdas Ghose (contd.)

• Held – minor’s contract is void ab initio. Every man is best judge of his
interest is suspended in case of minor. There are exception beneficial
contract made by and for the minor can be executed so long as he is
benefitted.

• No restitution of money can be done. The contract of minor is void ab

initio. KNM was aware about the majority of DG.
 DISCHARGE OF CONTRACT

• ALL GOOD THINGS COME TO AN END

• CONTRACT IS NO EXCEPTION

• WHEN RIGHTS & DUTIES CREATED BY A

CONTRACT COME TO AN END– CONTRACT IS
DISCHARGED
 MODES OF DISCHARGE OF CONTRACT

• PERFORMANCE
• AGREEMENT / CONSENT
• IMPOSSIBILITY
• OPERATION OF LAW
• BREACH
DISCHARGE OF CONTRACT BY
PERFORMANCE

WHEN PARTIES TO A CONTRACT

FULFILL THEIR RESPECTIVE DUTIES &
OBLIGATIONS, THE CONTRACT IS SAID
TO BE DISCHARGED BY
PERFORMANCE
 DISCHARGE OF CONTRACT BY
AGREEMENT

PARTIES CAN GET OUT OF A CONTRACT JUST AS

THEY ENTERED – THROUGH MUTUAL CONSENT
• NOVATION
• ALTERATION
• RECISSION
• REMISSION
• WAIVER
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

• NOVATION – When a new contract replaces the old one

• ALTERATION – When one or more terms of contract are
changed
• RECISSION – When all of some of the terms are
rescinded (cancelled)
• WAIVER – When one of the parties intentionally forgoes /
relinquishes what belongs to it
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

Section 62. Effect of novation, rescission,

and alteration of contract.—
If the parties to a contract agree to substitute
a new contract for it, or to rescind or alter it,
the original contract, need not be
performed.
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

• After novation of contract, parties cannot revert to the

original contract.
• Original contract can be revived only in two cases:- (i)
where the new contract is void / unenforceable & (ii)
the new contract provides for revival of the old contract
• Otherwise, the original contract gets extinguished &
wiped out and only the new contract survives.
RESOLUTION OF DISPUTES BY
ARBITRATION

•Parties may mutually agree in a contract that instead of going to

court they will resolve their disputes through an arbitrator.
•There has to be arbitration clause in writing for parties to do
so.
•If there is an arbitration clause, parties must go to arbitration.
•Arbitrator carries on proceedings just as a court and ultimately
gives an award which is binding on the both parties.
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

• Young Achievers vs IMS Learning Resources Pvt Ltd (Del HC)

• IMS, a coaching company, entered into a Franchisee Contract with its
business partner YA by making available its proprietary & copyrighted
course material for a period of 3 years. However, before its expiry, the
contract was mutually terminated through a document known as Exit Paper.
• Due to breach of terms contained in the Exit Paper, IMS sued YA in a civil
suit.
• Interestingly, though Franchisee Contract contained an arbitration clause,
whereas Exit Paper did not have an arbitration clause.
• YA insisted that disputes can be resolved only through arbitration.
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

• Since the original agreement had been

superseded/novated by the Exit Paper, and in
view of Exit Paper being a fresh agreement
with no arbitration clause for adjudication of
disputes, the application of YA to refer the
matter to arbitration was rightly rejected.
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

Section 63 – Promise may dispense with or remit

performance of promisee.—Every promisee may
dispense with or remit, wholly or in part, the
performance of the promisee made to him, or may
extend the time for such performance , or may accept
instead of it any satisfaction which he thinks fit
.
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

• Section 63 of the Contract Act applies when a creditor or a

promisee by his unilateral act discharges or partly discharges the
promisor. Unlike Section 62 of the Act which requires mutual
agreement between both the parties, Section 63 of the Act
applies in case of unilateral act of the promisee. A promisee is
at liberty to accept part performance or condone non
performance, if he is satisfied. It requires and implies intention
on the part of the promissee to discharge the promisor in spite of
his failure to meet his obligations or part obligations.
 DISCHARGE OF CONTRACT BY
AGREEMENT (contd)

• 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
DISCHARGE OF CONTRACT BY
IMPOSSIBILITY (contd)
56. Agreement to do impossible act.—An agreement to do an act
impossible in itself is void.
Contract to do an act afterwards becoming impossible or
unlawful.—A contract to do an act which, after the contract is
made, becomes impossible, or, by reason of some event which
the promisor could not prevent, unlawful, becomes void when
the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known
to be impossible or unlawful.—W here one person has promised
to do something which he knew, or, with reasonable diligence,
might have known, and which the promisee did not know, to be
impossible or unlawful, such promisor must make
compensation to such promisee for any loss which such
promisee sustains through the nonperformance of the promise.
 DISCHARGE OF CONTRACT BY
IMPOSSIBILITY (contd)

(a) A agrees with B to discover treasure by magic. The agreement is void:

(b) A contracts to take in cargo for B at 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.
(c) A contracts to act at a theatre for six months in consideration of a sum
paid in advance by B. On several occasions A is too ill to act. The contract to
act on those occasions becomes void
 DISCHARGE OF CONTRACT BY
IMPOSSIBILITY (contd)
• Satyabrat Ghose v. Mugneeram Bangur & Co. (Supreme Court)
• MB, a developer entered into an agreement with several persons including SG for sale of
certain plots of land after making the land suitable for building and residential purpose
• MB accepted some money as advance / earnest money from SG.
• Thereafter, some of the lands were requisitioned by the govt. Requisition implies taking
temporary possession of lands for war purposes.
• MB wrote a letter to SG stating that there are two options – (i) treat the agreement as
cancelled and take back the advance; (ii) take the land in the current condition on “as is
where is” basis.
• SG filed a suit for specific performance of the agreement. MB contended that the agreement
stood discharged by frustration as it became impossible by reason of supervening event.
 DISCHARGE OF CONTRACT BY
IMPOSSIBILITY (contd)

Having regard to the nature of contract, the actual existence of war

conditions at the time when it was entered into and order of requisition
was common and temporary in nature, the requisition did not affect the
fundamental basis of the contract nor did the performance of contract
became illegal. Importantly, in the contract, there was no time limit
which was prescribed. Therefore, the Court held that the agreement did
not stand frustrated under Section 56 of the Contract Act.
 DISCHARGE OF CONTRACT BY
IMPOSSIBILITY (contd)

• Supervening impossibility means an impossibility arising after the

formation of a contract but before the time when the promisor’s
performance is due, and arising because of facts that the promisor had
no reason to anticipate and did not contribute to the occurrence of.
• Force majeure event – an event or effect that can neither by
anticipated nor controlled. Includes acts of nature (flood, earthquake)
& acts of men (war, riots etc.)
• Force majeure clause – contractual term allocating the risk of loss if
performance becomes impracticable / impossible.
 DISCHARGE OF CONTRACT BY BREACH

• If one of the two parties to a contract breaks an obligation which the

contract imposes, a new obligation will arise in every case – an
obligation to pay damages to the other party in respect of any loss /
damage sustained by the breach.
DISCHARGE OF CONTRACT BY BREACH

Compensation for loss or damage caused by breach of contract.—W hen

a contract has been broken, the 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.
…………………. …………………….. ……………………………. …………………. …
Explanation.—In estimating the loss or damage arising from a breach of
contract, the means which existed of remedying the inconvenience
caused by the non-performance of the contract must be taken into
account. Illustrations
DISCHARGE OF CONTRACT BY BREACH

74. Compensation for breach of contract where penalty stipulated for.—

W hen a contract has been broken, if a sum is named in the contract as
the amount to be paid in case of such breach, or if the contract contains
any other stipulation by way of penalty, the party complaining of the
breach is entitled, whether or not actual damage or loss is proved to have
been caused thereby, to receive from the party who has broken the
contract reasonable compensation not exceeding the amount so named
or, as the case may be, the penalty stipulated for. Explanation.—A
stipulation for increased interest from the date of default may be a
stipulation by way of penalty
 DISCHARGE OF CONTRACT BY BREACH

• TWIN PRINCIPLES
• He who has proved a breach of contract, must be placed, as far as
money can do it, in as good a situation as if the contract had been
performed.
• The person who has suffered on account of breach of contract must
take all reasonable steps to mitigate the loss consequent to such a
breach.
 QUASI CONTRACTS

• Even though there may be no contract, strictly speaking, but there are
certain relations / transaction which resemble a contract. For example:
• Section 68 – Claim for necessaries supplied to a person incapable. A
supplies B, a lunatic, with necessaries suitable to his condition in life. A
is entitled to be reimbursed from B’s property.
• Section 69 – Reimbursement of person paying money due by another, in
the payment of which he is interested. B (tenant) has a lease from A
(owner). On account of land revenue dues, the said land is advertised for
sale by the govt. being interested, B makes the payment. A is bound to
make payment to B
 QUASI CONTRACTS

• Section 70 – Obligation of person enjoying benefit of non gratuitous

act –
• Goods / services are to be delivered has to be done for another person
lawfully.
• Goods / services which are being delivered not intending to do so
gratuitously.
• The person to whom the goods are delivered enjoys the benefit thereof.
 QUASI CONTRACTS

• Section 71 – Responsibility for finder of goods – the goods will vest in

the finder and he can retain the goods as his own against the whole
world, except the owner.
• Section 72 – Mistake or coercion. A supplier refuses to supply unless a
definite excess amount is paid which is illegal. You pay for it because
you are in dire need. The supplier is bound to repay you the illegally
excessive charges.
• Quantum Meruit – [Latin] as much as he has deserved. The reasonable
value of services, an amount considered reasonable to compensate a
person who has rendered services in a quasi contractual relationship.
 QUESTIONS / DISCUSSION

QUESTIONS / DISCUSSION

QUESTIONS / DISCUSSION