Business Law 1st

year

Unit-1

Indian Contract Act 1872

CONTRACT

A contract is an agreement made between two or more parties which the law will enforce. A
contract is an agreement to do or not to do an act. It is a legally binding agreement, which is
enforceable at law.

Definition Sec. 2 (h) of the Indian Contract Act, 1872 defines contract as an agreement
enforceable by law. According to Salmond, “contract is an agreement creating and defining
obligations between the parties”.

In the words of Sir William Anson, “a legally binding agreement made between two or more
persons by which rights are acquired by one or more to acts or forbearances (abstaining from
doing something) on the part of other or others”.

Halsbury defines contract as, an agreement between two or more persons which is intended to
be enforceable at law and is constituted by the acceptance by one party of an offer made to
him by the other party to do or to abstain from doing some act.

Sir Fredrick Pollock says, “Every agreement and promise enforceable at law is a contract”. So,
the subject matter of contract consists of two essential elements:

a) Agreement and

b) Its enforceability at law.

a) Agreement: An agreement is defined in Section 2 (e) as every promise or every set of

promises forming the consideration for each other. A promise is defined in Section 2 (b) as a
proposal when accepted becomes a promise.

An agreement involves a proposal or offer by one party and acceptance of the same by the
other party. It requires existence of two or more persons i.e., plurality of persons because a
person cannot enter into an agreement with himself. It also implies that the parties have a
common intention about the subject matter of their agreement. Two parties should be thinking
of the same thing in the same sense at the same time. Thus, an agreement is the outcome of
two consenting minds i.e., consensus ad idem.

Thus, Agreement = Offer + Acceptance

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b) Enforceable at Law: An agreement to become a contract must give rise to a legal obligation.
The common acceptance formed and communicated between the two parties must create legal
relations and not merely the relations which are purely social or domestic in nature. If the
parties specify or the circumstances indicate that the parties intend to create legal relationship
through it-even an agreement between husband and wife will be legally enforceable. On the
other hand, if the two parties rule out legal obligation expressly the agreement will not be
enforceable though it may be a trade agreement.

Thus, Contract = Agreement + Enforceability at Law

Therefore, all contracts are agreements but all agreements are not contracts.

Meaning and Definition of an Agreement:

An Agreement consists of an offer by one party and its acceptance by other. In other words, an
agreement comes into existence only when one party makes a proposal to the other party and
that other party gives acceptance.

Agreement = Proposal + Acceptance of proposal

Essential Elements of a Valid Contract:-

According to Sec. 10, all agreements are contracts if they are made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful object and are not
expressly declared to be void. All agreements are not contracts. Only that agreement which is
enforceable at law is a contract.

In order to become a contract, an agreement must have the following essential elements:

1. Offer and Acceptance: In order to create a valid contract, there must be two or more parties
because an individual cannot enter into an agreement with himself. It implies that one party
makes a lawful proposal (offer) and the other party makes a lawful acceptance of the offer. The
term lawful means offer and its acceptance must confirm to the rules laid down in the Indian
Contact Act regarding valid offer and acceptance and its communication.

For example, if Kumar makes a proposal to sell his house to Mahesh for Rs. 50,00,000 and
Mahesh accepts the proposal, there will be a valid agreement between the two.

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2. Intention to Create Legal Relationship: When two parties enter into an agreement, their
intention must be to create legal relationship between them. If there is no such intention on
the part of the parties, there is no contract between them. Agreements of a social or domestic
nature do not contemplate legal relationship, as such they are not contracts.

3. Lawful Consideration: An agreement to be enforceable by law must be supported by

consideration. ′Consideration′ means an advantage or benefit moving from one party to the
other. For a valid contract, the consideration need not necessarily be in terms of a price — the
consideration can even be in the past, present or future – but the consideration needs to real
and lawful. [Secs.2 (d), 23 and 25].

As per Section 2 (d), “ 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 promises to do or to abstains
from doing an act, such act or abstinence or promise is called a consideration for the promise”.

4. Competency or Contractual Capacity of Parties: The parties to the agreement must be

legally competent to enter into a valid contract.

According to Section11 if the Act, every person is competent to contract if he:

(a) is of the age of majority,

(b) is of sound mind and

(c) is not disqualified from contracting by any law to which he is subject.

If a party suffers from any flaw in capacity, the agreement is not enforceable except in some
special cases.

5. Free and Genuine Consent: It is essential to the creation of every contract that there must be
free and genuine consent of the parties to the agreement. According to Section 13, the consent
of the parties is said to be free when they are of the same mind on the material terms of the
contract. The parties are said to be of the same mind when they agree about the subject matter
of the contract in the same sense and at the same time. The identity of views is the
prerequisite. If such identity is not there, no agreement is possible. As per section 14, consent is
said to be free when it is not caused by coercion or undue influence or fraud or mis-
representation or mistake.

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6. Lawful Object: The object of an agreement must be lawful. Object has nothing to do with
consideration. It means the purpose or design of the contract. Thus, when one hires a house for
use as a gambling house, the object of the contract is to run a gambling house.

The object is said to be unlawful if —

a) it is forbidden by law;

b) it is of such nature that if permitted it would defeat the provisions of any law;

c) it is fraudulent;

d) it involves an injury to the person or property of any other and

e) the court regards it as immoral or opposed to public policy.

7. Certainty of Meaning: According to Section 29, agreements the meaning of which is not
certain or capable of being made certain are void. The terms of the contract must be precise
and certain and not vague or indefinite. A contract may be void on the ground of uncertainty.

For example, a purported acceptance of an offer to buy lorry on hire-purchase terms does not
constitute a contract if the hire-purchase terms are never agreed.

8. Possibility of Performance: If the act is impossible in itself, physically or legally, it cannot be

enforced at law.

9. Agreement not Declared Void or Illegal: The agreement though satisfying all the conditions
for a valid contract must not have expressly declared void by any law in force in the country.
Agreements mentioned in Sections 24 to 30 of the Contract Act have been expressly declared
void for example agreements in restraint of trade, marriage, legal proceedings, etc.

10. Legal Formalities: An oral contract is a perfectly valid contract, except in those cases except
where writing, registration, etc. is required by some statute. In India, writing is required in cases
of sale, mortgage, lease and gift of immovable property, negotiable instruments, memorandum
and articles of association of a company, etc. Registration is required in case of documents
coming within the scope of section 17 of the Registration Act.

If an agreement does not meet the above criteria, then it cannot be a contract. It will remain
an agreement.

Kinds or classification of Contracts

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A. On the basis of Enforceability

1. Valid Contract: A valid contract is an agreement enforceable by law. An agreement becomes
enforceable by law when all the essential elements of a valid contract (as per section 10 of the act) are
present.

2. Voidable Contract: “An agreement which is enforceable by law at the option of one or more of the
parties, but not at the option of one or more of the other, is a voidable contract.”

3. Void Contract: Void means not binding in law. It is valid at the time of making it but becomes void
subsequently due to change in circumstances. Void Agreement:” An agreement not enforceable by law
is said to be void” Thus a void agreement does not give rise to any legal consequences and is void ab
initio.

4. Unenforceable contract: It is one which is valid in it, but is not capable of being enforced in a court of
law because of some technical defect such as absence of writing, registration requisite stamp.

5. Illegal or unlawful contract: An agreement which is expressly or impliedly prohibited or forbidden by

law. It is void ab initio.

B. On the basis of Creation:

1. Express Contract: It is one in which parties make oral written declaration of the terms and conditions
of the contract.

2. Implied Contract: It is one in which evidence of contract is gathered from acts and conduct of the
parties and not from written or spoken words of parties.

3. Constructive or Quasi Contract: It is not a contract made intentionally by the parties by exchange of
promises. It is a contract imposed by the law. The basis of this contract is that no one can be allowed to
enrich himself at the cost of the other.

On the basis of Execution

1. Executed Contract: When both the parties to a contract have completely performed their share of
obligations and nothing remains to be done by either party under the contract.

2. Executory Contract: When either parties have still to perform their share of obligation in to or there
remains something to be done under the contract on both sides.

Capacities of Parties

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Meaning of Capacity to Contract

Capacity or competence to contract means legal capacity of parties to enter into a contract. In other
words, it is the capacity of parties to enter into a legally binding contract.

Who are Competent to Contract?

Every person is legally competent to contract if he fulfills the following three condition :

i. He has attained the age of majority;

ii. ii. He is of sound mind; and.
iii. iii. He is not disqualified from contracting by any other law to which he is subject.

1) MINORS
Any person, who has not attained the age of majority prescribed by law, is known as minor.
Section 3 of the Indian Majority Act prescribes the age limit for majority and says a minor is
a person who has not completed eighteen years of age.
But the same Act also mentions that in the following two cases a person attains majority
only after he completes his age of twenty one years :
(i) Where a Court has appointed guardian of a minor’s person or property or both
(under the Guardians and Wards Act, 1890); or

(ii) Where the minor’s property has been placed under the superintendence of a Court of
wards.

2) PERSONS OF UNSOUND MIND

A person is said to be of sound mind for the purpose of making a contract (a) if he is capable
of understanding the contract at the time of making it, and (b) if he is capable of making a
rational judgment as to the effect upon his interests.
Types of Persons of Unsound Mind and their Contracts:
1. Idiot
2. Lunatic
3. Delirious persons
4. Drunken or intoxicated persons
5. Hypnotized persons
6. Mental decay

3) PERSONS DISQUALIFIED BY OTHER LAWS

There are certain persons who are disqualified from contracting by the other laws of our
country. They are as under:
1. Alien enemy

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2. Foreign sovereigns, diplomatic staff etc.
3. Corporations and companies
4. Insolvents
5. Convicts

Rules /effects as to or Nature of Minor’s Agreements:

1. Void ab-initio: - Minor’s agreement is absolutely void from very beginning, i.e. void ab-
initio. It is nullity in the eye of law. An agreement with minor, therefore, can never be
enforced by law.

2. Minor can be a promise or beneficiary: - A minor can enforce such agreements in which
he is a beneficiary or promise and does not create any obligation on his part.

3. No ratification:- A minor cannot be ratify even after attaining the age majority because
void agreement cannot be ratified.
4. Restitution/ Compensation possible: - If a minor has received benefits under an
agreement from the other party, the Court may require the minor to restore the benefit (so
far as may be), to the other party at the time of rescission of the agreement. The minor may
be asked to restore the benefit to the extent he or his estate has been benefited.

5. Contract by parent/ guardian/ manager: - A minor’s parent/ guardian/ manager can

enter into contract on behalf of the minor provided: i. The parent/ guardian/ manager acts
within the scope of his authority; and ii. The contract is for the benefit of the minor

6. No liability of parents: - The parents (guardian) of a minor are not liable for agreements
made by their minor ward. However, they can be held liable if the minor makes agreement
as their authorized.

7. Minor as an agent: - A minor is not entitled to employ an agent; he can be an agent

himself for someone else. As an agent he ca represent the principal, and bind him for his
acts done in the course of agency. But the minor is not responsible to the principal for his
acts.

8. Minor and insolvency: - A minor cannot be declared insolvent because he is not

competent to contract.

9. Minor as joint Promisor: - A minor can be a joint promisor with a major, but the minor
cannot be held liable under the promise to the promises as well as to his co-promisor. But

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the major promise cannot escape liability. The major joint promisor can be forced to
perform the promise.

10. Minor shareholder: - A minor can become a shareholder or member of a company if (a)
the shares are fully paid up and (b) the articles of association do not prohibit so.

11. Liability for necessaries of life: - A minor is incompetent to contract. A minor, therefore,
is not personally liable for the payment of price of necessaries of life supplied to him or to
his legal dependents. However, the person who has furnished such supplies is entitled to be
reimbursed from the property of the minor.

12. Minor Partner: - According to the Partnership Act, 1932, a minor cannot make a
contract of partnership though he may be admitted to its benefits with the consent of all
the partners. A minor partner cannot be made personally liable for any obligation of the
firm, but his share in the firm’s property can be made liable.

13. No estoppels against minor: - The term ‘estoppels’ means prevention of a claim. When
a minor enter into contract, representing that he is a major, but in reality he is not, then
later on he can plead his minority as a defence and cannot be estopped (prevent) from
doing so.

Definition of Consideration

Consideration is one of the essential elements of a valid contract. The term “Consideration”
means something in return i.e. quid –pro-quo. Consideration must result in a benefit to the
promiser, & a detriment or loss to the promisee or a detriment to both. Without
consideration a contract is void or nude i.e. nudum pactum
Section 2(d) of the Indian Contract act, 1872 defines Consideration as follows:

“ When, at the desire of the promiser ,the promisee or any other person has done or
abstained from doing, or does or abstains from doing ,or promises to do or abstain from
doing something, such act or abstinence or promise is called a consideration for the
promise.”

ESSENTIAL ELEMENTS OF A VALID CONSIDERATION

 It must move at the desire of the promisor: Consideration must have been done at the desire
or request of the promisor & not at the desire of a third party or without the desire of the
promisor.

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 It may move from the promise or any other person: An act constituting consideration may be
done by the promise himself or any other person. Thus, it is immaterial who furnishes the
consideration & therefore may move from the promisee or any other person. This means that
even a stranger to the consideration can sue on a contract, provided he is a party to the contract
(Case Chinayya V/s Ramayya)
 It may be Past , Present or Future:
 Past Consideration: The consideration which has already move before the formation of
agreement.
 Present consideration: The consideration which moves simultaneously with the promise.
 Future Consideration: The consideration which is to be moved after the formation of
agreement.
 It must be of some value: The consideration need not be adequate to the promise but it must
be of some value in the eye of the law.
 It must be real & not illusory: Ex. A promise to put life into the B’s dead wife & B promises to
pay Rs 10,000. This agreement is void because consideration is physically impossible to perform.
 Must be Something other than the promisor’s Existing obligation: Consideration must be
something which the promisor is not already bound to do because a promise to do what a
promisor is already bound to do adds nothing to the existing obligation.
 It must not be illegal, immoral or opposed to public policy.

A CONTRACT WITHOUT CONSIDERATION IS VOID

The general rule is “An Agreement made without consideration is void”. Sec 25 & 185 deals with
the Exceptions to this rule. These cases are:
1) Love & Affection: A written & registered agreement based on natural love & affection
between near relatives is enforceable even if it is without consideration. Ex: X, for natural love &
affection, promises to give his son, Y, Rs 1000. X puts his promise to Y in writing & registers it.
This is a contract.
2) Compensation for voluntary services: A promise to compensate wholly or partly, a person
who has already voluntarily done something for the promisor, is enforceable even without
consideration. Ex: A finds B’s purse & gives it to him. B promises to give Rs 50 to A. This is a
contract.
3) Promise to pay a Time barred debt: A promise by a Debtor to pay a time-barred debt if it is
made in writing & is signed by the debtor or by his agent is enforceable.
4) Completed gifts: There need not be consideration in case of completed gifts.
5) Agency: No consideration is necessary to create an Agency.
6) Contribution to Charity

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STRANGER TO A CONTRACT
Though a stranger to consideration can use because the consideration can be furnished or supplied by
any person whether he is the promises or not, but a stranger to a contract cannot sue because of the
absence of privity of contract (i.e. relationship subsisting between the parties to a contract.

Free Consent
MEANING OF CONSENT

Two or more persons are said to consent when they agree upon the something in the same sense at the
same time.

MEANING OF FREE CONSENT

Sec. 14 describes the cases when the consent is not free. It lays down that consent is not free if it is
caused by coercion, undue influence, fraud, misrepresentation, etc. if the consent is not free, the
agreement is avoidable at the option of the party whose consent was not free.

1) COERCION
Coercion simply means forcing a person to enter in to a contract. Sec. 15 defines coercion as,
“Committing or threatening to commit, any act forbidden by the Indian Penal Code, or 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”.

The essential elements of coercion are

(1) Committing or threatening to commit any act forbidden by Indian Penal Code.
(2) Unlawful detaining or threatening to detain any property.
(3) The act of coercion may be directed at any person and not necessarily at the other party to
the agreement.
(4) The act of coercion must be done with the object of inducing or compelling any person to
enter into an agreement

2) UNDUE INFLUENCE :
It is kind of moral coercion.
Sec. 16(1) defines undue influence as, “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

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position to dominate the will of other and uses that position to obtain an unfair advantage over
the other”.
(a) Where he holds a real or apparent authority over the other e.g., in the relationship between
master and servant.
(b) Where he stands in fiduciary relation to the other. It implies a relationship of mutual trust
and confidence.
(c) Where a contract is made with a person whose mental capacity is affected by reason of age,
illness, or mental or bodily distress. Any innocent or unintentional false statement or assertion
of fact made by one party to the other during the course of negotiation of a contract is called a
misrepresentation.

3) MISREPRESENTATION
As per Sec. 18, misrepresentation is a wrong statement of fact made innocently, i.e., without
any intention to deceive the other party. It may be caused.
(1) By positive statement.
(2) By breach of duty.
(3) By mistake regarding the subject matter of the agreement.

Essential of misrepresentation
(1) There must be a representation or omission of a material fact.
(2) The representation or omission of duty must be made with a view to inducing the other
party to enter into contract.
(3) The representation or omission of duty must have induced the party to enter into contract.
(4) The representation must be wrong but the party making the representation should not know
that it is wrong.

4) FRAUD
Fraud is the international misrepresentation or concealment of material facts of an agreement
by a party to or by his agent with an intention to deceive and induce the other party to enter
into an agreement.
Sec. 17 defines fraud as, any of the following acts committed by a party to a contract (or with
his convenience or by his agent) with intention to deceive another party thereto (or his agent)
or to induce him to enter into the contract.
(1) The suggestion that a fact is true when it is not true by a person who does not believe it be
true.
(2) The active concealment of the fact by a person having knowledge or belief of the fact.
(3) A promise made with out any intention to perform it.
(4) Any other act fitted to deceive.
(5) Any such act or omission as the law specifically declares to be fraudulent.

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5) MISTAKE
Acc. To Sec. 20 mistake means erroneous belief concerning some fact. The parties are said to
consent when they agree upon the same thing in the same sense. If they do not agree upon the
agreement in the same sense, there will be no contract.
When the consent of one or both the parties to a contract is caused by misconception or
erroneous belief, the contract is said to be induced by mistake.

Mistake may be of following types:

(1) Mistake of law,

(a) Mistake of law of the country.

(b) Mistake of foreign law.

(c) Mistake of private rights of the parties

(2) Mistake of fact,

(A) Bilateral Mistake :

(1) Mistake as to subject mater :

(a) Mistake regarding existence

(b) Mistake regarding identity

(c) Mistake regarding title.

(d) Mistake regarding price

(e) Mistake regarding quality

(f) Mistake regarding quantity

(2) Mistake as to the possibility of performance

(a) Physical impossibility

(b) Legal impossibility

(B) Unilateral Mistake :

(1) Mistake as to identify of the person contracted with.

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(2) Mistake as to the nature of contract.

Distinction between an Agreement and a Contract

Basis of distinction Agreement Contract

1. Definition Every promise and every set of An agreement enforceable by
promises forming consideration law is a contract
for each other is an agreement
2. Creation An agreement is created by Agreement and its enforceability
acceptance of an offer. together create a contract.
3. legal rights and obligations An agreement may not create A contract creates legal rights
legal rights and obligations of the and obligation between the
parties parities.
4. Necessity No contract is required to make Valid agreement is necessary for
an agreement. making a contract.
5. Legally binding An agreement is not a A contract is a concluding or
concluding or legally binding legally binding on the parties.
contact.
6. Concept Agreement is a wider concept Contract is a narrow concept and
and includes contacts it is only a specific of agreement.

DISTINCTION BETWEEN VOID AGREEMENT AND VOID CONTRACT

Basis of distinction Void Agreement Void Contract

1. Definition An agreement not enforceable A contract which cases to be
by law is said to be void. [Sec.enforceable by law becomes
2(g)] void when it ceases to be
enforceable [Sec. 2(j)]
2. Time when becomes void It is void It becomes void subsequently
from very beginning. due to change in law or change
in circumstances.
3. Restitution Generally no restitution is Restitution may be granted
granted, however, the Court may when the contract is discovered
on equitable grounds grant to be void or becomes void
restitution in case of fraud or
misrepresentation by minors
4. Description in the Act Such agreement have been They are created by
mentioned as void in the Act. circumstances and law Courts
Agreements without decide whether they have
consideration, agreements with become void or not. and some
lawful object or consideration other agreements have expressly
There is no mention of cases of been declared to be void.

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void contracts in the Act.

DISTINCTION BETWEEN VOID AGREEMENT AND VOIDABLE CONTRACT

Basis of distinction Void Agreement Voidable Contract

1. Definition An agreement not enforceable A contract enforceable by law at
by law is said to be void. the option of the aggrieved
party, is a voidable contract.
2. Period of validity It is void from the beginning i.e. It is valid till it is avoided by the
void ab initio aggrieved party to the contract.
3. Legal existence It is nullity, hence, does not exist It has its existence in the eye of
in the eye of law. law till it is repudiated.
4. Change in status Status of void agreement does Status of such contract change
not change with the change in when the aggrieved party elects
circumstances. to avoid it within a reasonable
time. It becomes void when the
aggrieved party elects to rescind
it.
5. Causes Any agreement is void when it is A contract is voidable when the
made with incompetent parties consent of the party is caused by
or for unlawful objects and coercion or undue influence or
consideration, or without fraud or misrepresentation
consideration, or without
consideration or it is expressly
declared to be void under the
law.
6. Transfer of title The party obtaining goods under The party obtaining goods under
void agreement cannot transfer voidable agreement can transfer
a good title to the third party. a good title to the third party if
the third party obtains it in good
faith and for consideration and
the aggrieved party has not
avoided the contract before such
transfer.
7. Restitution Parties do not have right to Generally, right restitution is
restore the benefits passed on to available if the party elects to
the other unless the parties were avoid the contract.
unaware of the impossibility of
performance at the time of
agreement or the party to the
agreement was minior

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8. Damages No party as a right to get If a party rightfully recinds (i.e.
compensation for damages puts and end) the contract, he
because such agreement has no can claim compensation, he can
legal effect. claim compensation of damages
sustained by him due to non-
fulfilment of the promise.

DISTINCTION BETWEEN VOID AND VOIDABLE CONTRACT

Basis of distinction Void Contract Voidable Contract

1. Definition A contract which ceases to be A contract which is enforceable
enforceable by law become void, by law at the option of the
when it ceases to be aggrieved party is a voidable
enforceable. contract.
2. Period of validity It remains valid till it does not It remains valid if the aggrieved
cease to be enforceable. party does not elect to avoid it
within a reasonable time.
3. Will of the party Its validity is not affected by the It is Its validity is affected by the
will of any party will of the aggrieved party.
Aggrieved party has option to
treat it either decided by the Law
Court binding or repudiate it.
4. Causes Contracts become void due to Contract is voidable when the
change in circumstances or in consent of the party is caused by
the law of land. coercion, undue influence, fraud
or misrepresentation.
Sometimes, it may be voidable
under the provisions of the Secs.
39, 53 and 55.

DISTINCTION BETWEEN VOID AND ILLEGAL AGREEMENT

Basis of distinction Void Agreement Illegal Agreement

1. Definition An agreement not enforceable An agreement which is expressly
by law is void. or impliedly prohibited by law, is
illegal.

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2. Effect on collateral agreement The agreement collateral to the The agreement collateral to an
void agreement is not illegal agreement is always void.
necessarily void.
3. Scope All void agreements need not All ill agreements are void.
necessarily be illegal
agreements. Hence, the scope is
wider than that of the illegal
agreements
4. Restitution The Court may grant restitution Restitution of money is not
of money advanced if is minor or granted in case of an illegal
if the parties were unaware of agreement
the impossibility of performance
of the agreement.

DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE

Basis of distinction Coercion Undue influence

1. Definition Coercions the committing or Undue influence is an influence
threatening to commit, any act which arises where the relations
forbidden by the I.P.C. or unlawful subsisting between the parties
detaining or threatening to detain are such that one of the parties
any property with the intention of is in a position to dominate the
causing any person to enter into will of the other and uses that
an agreement position to obtain an unfair
advantage over the other.
2. Relations In case of coercion, relation In case of undue influence, in
between the parities is the relation between the parties
immaterial. the parties must be such that
one of them is in a position to
dominate the will of other.
3. Intention Coercion is applied with the It is exerted with the intention
intention of causing any person to to obtain an unfair advantage
enter into an agreement. over the other party. 4. Nature
of force It involves physical
force. It involves moral force.
5. Kind of act It involves criminal act. It does not involve criminal act
. 6. Direction The coercion may be directed Under influence is used against
against any person including a the weaker party only.
stranger.
7. Who exercise It can be exercised by any person. It is employed by the person
Even a stranger to contract can who is in a position to dominate
exercise it. the will of the other.

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8. Remedies A contract caused by coercion, In case of undue influence, the
may be avoided by the aggrieved aggrieved party may avoided
party’s contract. [Sec. 19] the contract or the Court, may
set aside the contract absolutely

DISCHARGE OF CONTRACT
When the rights and obligations arising out of a contract are extinguished, the contract is said to be
discharged or terminated.

A contract may be discharged by any of the following ways:

1. By performance – Actual or Attempted.

2. By mutual consent or agreement.

3. By subsequent or supervening impossibility or illegality.

4. By lapse of time.

5. By operation of law.

6. By breach of contract.

1.Discharge by Performance

Performance of a contract is the most popular manner of discharge of a contract.

The performance may be either Actual performance or Attempted performance.

A. Actual performance:-When each party fulfils his obligations arising out of the contract within the
time and in a manner prescribed , it is called the actual performance and the contract comes to an end.
B. Attempted performance or Tender:-When the promisor offers to perform his obligation, but is
unable to do so because the promise does not accept the performance, it is called ” Attempted
Performance” or “tender”. Thus tender is not actual performance but is only an offer to perform the
obligation under the contract. A valid tender of performance is equivalent to performance.

Essentials of a valid tender:-if it fulfils the following conditions:-

1. It must be unconditional. If A who is a debtor of company B, offers to pay if shares are allotted to him
at par. IT is not a tender.

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2. It must be made at proper time and place:- A is tenant of B. H offers him rent at a marriage party. B is
not bound to accept as tender is not made at a proper place.

3. It must be of the whole obligation contracted for and not only of the part:- e.g. deciding of his own to
pay in the installments and offering the first installment was held invalid tender as it was not of the
whole amount due .

4. If the tender related to the delivery of goods, it must give a reasonable opportunity to the promise for
inspection of goods so that he may be sure that the goods tendered are of contract description.

5. It must be made by a person who is in a position and is willing to perform the promise.

6. It must be made to the proper person i.e. the promisee or his authorized person.

7. If there are several joint promisees, an offer to any one of them is a valid tender (but the actual
payment must be made to all joint promisees, and not to any one of them.)

8. In case of tender of money, exact amount should be tendered in the legal tender money.

Effect of refusal to accept a valid tender: The effect of refusal to accept a properly made “offer of
performance” is that the contract is deemed to have been performed by the promisor. And the promise
can be sued for breach of contract. Thus we can say that “a valid tender discharges the contract.”

2. Discharge by Mutual Consent or Agreement:

A contract is created by means of an agreement, it may also be discharged by another agreement

between the same parties.-

A. Novation: “Novation occurs when a new contract is substituted for an existing contract, either
between the same parties or between different parties, the consideration mutually being the discharge
of the old contract.” If the parties are same, then small changes in the in the terms of contract is called
“alteration” and not “Novation”. For being “Novation”, the changes must be of significant nature.
Novation cannot be compulsory, it can only be with the mutual consent of all the parties.

B. Alteration:-It means that change of one or more of the material terms of a contract. A material
alteration is one which alters the legal effect of the contract. e.g. change in the amount of money,
change in the rate of interest etc.

Note that a material alteration made in a contract by one party without the consent of the other will
make the whole contract void and no person can maintain an action upon it.

C. Rescission. 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. Such an agreement amounts to “Rescission” or

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cancellation of the contract, the consideration being the abandonment by the respective parties of their
rights under the contract.

Example A promises to deliver some goods to B on say 14th Nov. 2006. But before the date of
performance i.e. 14th Nov. 2006, A and B mutually agree that the contract will not be performed. The
contract stand discharged by rescission. If there is non performance of a contract by both the parties for
a long time without complaint, it amounts to an implied rescission.

Note: In rescission, the existing contract is cancelled by mutual consent without substituting a new
contract in its place.

D. Remission. It is defined as “Acceptance of lesser amount than what was contracted for or a lesser
fulfillment of the promise made”

E. Waiver. It means deliberate giving up of a right which a party is entitled to under a contract
whereupon the other party to the contract is released form his obligation.

Example A promises to stitch a Shirt for B if B sings a song in A’s party and accepting it B sings a song in
A’s party. Then later on B says there is no need to stitch shirt for me, to which A gives his consent. Thus
the contract is terminated.

3. Discharge by Subsequent or Supervening Impossibility or Illegality.

Impossibility at the time of contract. If you contract for something impossible, the agreement is void ab
initio the promisor knows about the impossibility after using reasonable efforts, the promisor is bound
to compensate the promisee for any loss he may suffer because of non performance of the promise,
even if the agreement being void ab initio

Subsequent impossibility. Impossibility is found out after the contract is made, “ A contract to do an act
which, after making the contract, becomes impossible or unlawful, becomes void when the act becomes
impossible or unlawful.”

Conditions for It…

(i) the act should have become impossible.

(ii) The impossibility should be by reason of some event which the promisor could not prevent.

(iii) the impossibility should not be self induced by the promisor or due to negligence.

To be impossible, it is sufficient that it becomes impracticable or extremely hazardous or useless from

the point of view of the object and purpose which the parties had in view, If the performance of a
contract becomes impossible by reason of supervening impossibility or illegality of the act, it s logical to

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absolve the parties from further performance of it as they never did promise to perform an
impossibility.

4. DISCHARGE BY LAPSE OF TIME.

In some circumstances, the laps of time may also discharge a contacts, e.g. the period of limitation for
simple contracts is three years the under limitation Act and therefore on default by a debtor, if the
creditor does not file a suit of recovery against him within three years of default, the debt becomes time
barred and the creditor will not get the help of the law.

This in effect discharges the contract. ‘Where times is of essence`, if the contract is not performed on
time, the contract comes to an end, and the party not at fault need not perform his obligation and may
sue the other party for damages.

5. DISCHARGE BY OPERATION OF LAW: -

A contract is discharged by operation of law in the following cases:-

(A) Death: Sometimes a contract is of a person nature and involves personal skills, of promiser, of
promisor, In such cases the contract is discharged on the death of the promisor. In such cases the
contract is discharged on the death of the promisor.

(B) Insolvency: When a person is adjudged in solvent the he is released from his all liabilities in current
order of adjudication. His rights (Assets) and liabilities are transferred to the official assignee or official
receiver, on the case may be.

(C) Merger of rights: Sometimes, inferior right of a person under the some or other contract, in such a
case the inferior, right is vanished and is not required to be enforced, Foe example an ordinary debt can
be merged. In to rights, of ownership in such case the inferior right need not to be enforced because this
right have merge in to a superior right of mortgage or ownership.

(D) Loss of evidence of contract:- There the evidence of the existence of the contract is lost or vanished.
The contract is discharged for example document of contract is lost or destroyed and not other evidence
is available the contract is discharged.

6.DISCHARGE BY BREACH OF CONTRACT:-

A contract is sometimes discharged, by its breach generally, Breach of contract means refused. Or future
of any one party to perform his contractual obligation under the contract specifically a breach of
contract occurs when a party to a contract does any of the other following things.

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(1) Fails or refuses to perform his obligation under the contract.

(2) Disable himself from performing his past of the contract.

(3) Maker the performance of contract impossible by his own acts.

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