CLASSIFICATION OF CONTRACTS

VALID CONTRACTS

VOID CONTRACT VOID AGREEMENTSVOIDABLE CONTRACTSUNFORCEABLE CONTRACTSILLEGAL CONTRACTS

EXECUTORY CONTRACTSEXECUTED CONTRACTS

EXPRESS CONTRACTSIMPLIED CONTRACTSQUASI CONTRACTS

UNILATERAL CONTRACTSBILATERAL CONTRACTS

Kinds of Contracts(Point of view of Enforceability)

Valid ContractVoid ContractVoid AgreementVoidable ContractUnenforceable ContractIllegal or Unlawful Contract

Kinds of Contract(Point of view of Mode of Creation)

• Express Contract• Implied Contract• Constructive or Quasi-Contract

Kinds of Contract(Point of view of Performance)

• Executed Contract• Executory Contract Bilateral Unilateral

Bilateral Contract• A bilateral contract is entered into by way of

exchange of promises of the parties-a promise for a promise. No act of performance is necessary to create a bilateral contract.

Bilateral contracts are formed when parties exchange a set of promises. For example, a contract to buy a house involves a promise to pay an agreed price in exchange for a promise to convey title to the property. Making the promises is what creates a bilateral contract; the actual performance of paying the money and transferring title is not required. A party who breaks his promise to perform may be sued for breach of contract.

Unilateral Contract• A unilateral contract is a contract in which the offeror's

offer can be accepted only by the performance of an act by the offeree-a promise for an act.

A unilateral contract is based on a promise in exchange for a specific act. For example, a person's pet dog is missing and the dog owner posts a sign in a local paper with contact details and a photo of the dog. The sign reads “Rs. 100 Reward for the Return of the dog." A unilateral contract will be formed if someone returns the dog. The offeror is asking for acceptance by performance, not by promise. If the dog is returned and the reward is not paid, the offeror may be sued for breach of contract.

PROPOSAL OR OFFER

“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 to such act or abstinence, he is said to make a proposal or offer”…… Section 2(a)

Essentials of an OFFER• There must be an expression of willingness

to do or to abstain from doing something• The expression of willingness to do or to

abstain from doing must be made to another person

• This expression must be made with a view to obtain the assent of the other person to such act or abstinence

• The expression must be made with a view to create legal relations

Legal rules with regard to a Valid Offer• An offer may be ‘express’ or ‘implied’• An offer must be capable of creating legal relations• The terms of offer must be certain and not vague or

loose• An invitation to offer is not an offer

(advertisements, expression of intentions, tenders etc.)

• Offer may be specific or general

Contd.• An offer must be communicated to the offeree• An offer can be made subject to any terms &

conditions• An offer should not contain a term the non-

compliance of which would amount to acceptance

• Two identical cross-offers do not make a contract

• An offer may be one-time or standing

Types of Offer

• Cross offer• Counter offer• Standing offer• Express or Implied offer• Specific or General offer• Positive or Negative offer

Lapse & Revocation of offer• An offer lapses by rejection• An offer lapses after stipulated or

reasonable time• An offer lapses by not being accepted in the

mode prescribed & if no mode is prescribed, in some usual or reasonable manner• An offer lapses by counter offer

Contd.• An offer lapses by the death or insanity of

the offeror or the offeree before acceptance

• An offer lapses by revocation • Revocation by non-fulfillment of a

condition precedent to acceptance• An offer lapses by subsequent illegality or

destruction of subject matter

ACCEPTANCE• When the person to whom proposal

has been made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise……Section 2(b)

Legal Rules as to Acceptance Acceptance must be absolute and unqualified. Acceptance must be communicated to the

offeror. Acceptance must be according to the mode

prescribed or usual and reasonable mode. Acceptance must be given within a reasonable

time or before the offer lapse or is withdrawn.

Contd…. Acceptance must succeed an offer. Acceptance must be given only by the party to

whom the offer is made. Acceptance cannot be implied from silence. Rejected offer can be accepted only if renewed It may be express or implied

ConsiderationWhen 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 promises to

do or to abstain from doing something,

such act or abstinence or promise is

called a consideration [Section 2(d)]

Legal Rules as to Consideration

• Consideration must move at the desire of the promisor.

• Consideration may move from promisee or any other person.

• Consideration may be an act, abstinence or forbearance.

• Consideration may be past, present or future.

Contd….• Consideration need not be adequate.• Consideration must be real and not

illusory.• Consideration must be something

which the promisee is not already bound to do. • Consideration must not be immoral or

opposed to public policy.

“No consideration, No contract”- Exceptions• Agreement made on account of natural love

and affection• Agreement to compensate for past voluntary

service• Agreement to pay a time barred debt• Completed gift• Contract of agency• Remission of performance of promise by the

promisee• Contribution to charity

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CAPACITY TO CONTRACT

Every person is competent to contract who-

• is of the age of majority according to the law

to which he is subject, and

• is of sound mind, and

• is not disqualified from contracting by any

law to which he is subject (Section 11)

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Position of Minor’s Agreements • An agreement with or by minor is void ab

initio : Mohiri Bibi vs Dharmodas Ghose (1903)• Doctrine of Estoppel does not apply, never

stopped to plead minority• Limited application of Restitution/restoration

(to the extent of the property or money still traceable with minor)

• Contracts for the benefit of Minor: A minor may be a beneficiary under the contract

• No ratification of agreement on attaining majority

Contd….• No specific performance• Cannot be adjudged insolvent• Can be an agent• Minor’s liability in Tort• Minor as a Partner• Minor as a Shareholder• Liability of minor for necessaries supplied

to him- only his estate, not his person

Persons of unsound mind• A person is said to be of sound mind for the

purpose of making a contract, if at the time when he makes it, he is capable of understanding it and of forming rational judgment as to its effects upon his interests….Section 12

• A person who is usually of unsound mind, but occasionally of sound mind may make a contract, when he is of sound mind, and, a person who is usually of sound mind but occasionally of unsound mind may not make contract, when he is of unsound mind…Section 12

Tests of soundness of mind

• Idiots • Lunatics or insane persons• Drunkards • Hypnotized• Persons with mental decay e.g. old aged

persons

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Other Persons Disqualified by Law• Alien Enemy• Foreign Sovereigns and Ambassadors• A Company and a Corporation- for contracts not

made under its seal, for ultra vires contracts, and for contracts of personal nature

• Convicts • Insolvents• Married women- in respect of properties not

their stridhan• Pardanashin women

FREE CONSENTConsent is defined:Two or more persons are said to consent when they agree upon the same thing in the same sense……. Section 13

• Consent involves consensus ad-idem i.e. identity of minds about the subject matter of the contract.

• A mere consent is not enough, it should be free and voluntary.

FREE CONSENT

CONSENT is said to be free when it is not caused by:• a) Coercion.• b) Undue influence.• c) Fraud.• d) Misrepresentation.• e) Mistake

…… Section 14

CoercionCoercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code, 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……Section 15

Legal rules as to coercion• Committing or threatening to commit any act

forbidden by the Indian Penal Code• Unlawful detaining or threatening to detain any

property• The act of coercion must be done with the object of

compelling any person to enter into an agreement• The act of coercion may be directed at any person and

not necessarily at the other party to the agreement• The act of coercion may proceed from any person and

not necessarily from the party to the agreement• Whether Threat to Commit Suicide Amounts To

Coercion……?

Undue Influence

• 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…….Section 16(1)

• “A person is deemed to be in a position to dominate the will of another:

• When he holds a real or apparent authority over the other,

• when he stands in a fiduciary relation to the other (relationship of mutual trust and confidence), and

• Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness etc. .. Section 16(2)

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Presumption of Domination• Master and Servant,

• Parent and Child,

• Guardian and Ward,

• ITO and the Assessee,

• Police officer and Accused

• Trustee and Beneficiary,

• Spiritual Guru and Disciple,

• Teacher and Student

• Solicitor and Client,

• Doctor and Patient.

Coercion• Forbidden by IPC• Mainly physical in nature

• No prior presumption• Restoration of the

benefit received

• Criminal liability involved

Undue Influence• Domination of will• Moral or psychological

in nature• Prior presumption • Restoration of the

benefit received at the direction of the court

• No criminal liability involved

Coercion & Undue Influence- Distinguished

Fraud• 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 the intent to deceive or to induce another party thereto, or his agent, to enter into the contract:

• i. The representation that a fact is true when it is not true by one who does not believe it to be true;

• ii. The active concealment of a fact by one having knowledge or belief of the fact;

• iii. A promise made without any intention of performing it;

• iv. Any other act fitted to deceive;• v. Any such act or omission as the law

specifically declares to be fraudulent ……Section 17

Does silence tantamount to fraud?• Caveat Emptor- Let the buyer beware

• Silence is fraud in the following cases:• In contracts where silence is in itself equal to speech• In contracts of uberrimae fidei (utmost good faith):– Fiduciary relationship– Contracts of insurance– Contracts of family settlements– Contracts of marriage engagement– Contracts of share allotment

Effects of fraud

• Rescission of the contract• Restitution and not rescission

(Performance with restitution)• Sue for damages/compensation

Misrepresentation

• “Where a person asserts• something which is not true,• though he believes it to be true,• his assertion amounts to• misrepresentation.”

Mistake

• “When both the parties to an• agreement are under a• mistake to a matter of act• essential to the agreement the• agreement is altogether void”