General Introduction to the Law of Contracts in India:A Guide for CLAT Aspirants

Importance and Scope of the Indian Contract Act, 1872

The Indian Contract Act, 1872, stands as the principal legislation governing contracts in India, extending its applicability across all states.¹ Enacted with the primary objective of ensuring that contractual agreements are formed with free and fair consent, and with a comprehensive understanding by all parties of their respective rights and obligations, the Act plays a pivotal role in the commercial and social fabric of the nation.² It meticulously outlines the circumstances under which promises made by parties to a contract attain legal enforceability, thereby becoming legally binding.¹ Furthermore, the Act aims to safeguard the interests of all contracting parties by clearly delineating the consequences that ensue from a breach of contract.²

For aspirants of the Common Law Admission Test (CLAT), a thorough understanding of the Indian Contract Act, 1872, is indispensable. Contract law is a cornerstone of legal studies and frequently features in the legal reasoning section of the CLAT, testing not only conceptual knowledge but also the ability to apply these principles to factual scenarios. The Act’s relevance extends beyond mere business transactions; it underpins the enforceability of promises that form the basis of countless everyday interactions and societal engagements.³

The legislative intent behind the Act reveals a commitment to fostering an environment where contracts are entered into with genuine willingness and fairness.² This foundational principle is not merely an abstract ideal but translates into specific legal doctrines embedded within the Act, such as those pertaining to free consent and the capacity of parties to contract. For instance, if the consent to an agreement is vitiated by factors like coercion, undue influence, or fraud, the resulting contract is typically rendered voidable at the instance of the aggrieved party. This direct linkage between the Act’s overarching goal of fairness and its specific provisions underscores a critical theme for CLAT aspirants to internalize.

Moreover, the Indian Contract Act, 1872, serves a dual purpose: it facilitates the smooth conduct of commerce by ensuring that promises are honored, and simultaneously, it protects individuals from potential exploitation or unfair dealings.¹ This often necessitates a careful balancing of competing interests – a recurring motif in legal reasoning problems. For example, while the law seeks to uphold the sanctity of a contract to maintain business efficacy, it may also intervene to nullify an agreement if it is found to be procured through undue influence, thereby protecting a vulnerable party. CLAT aspirants should, therefore, be adept at identifying how legal principles are applied to achieve this equilibrium in diverse factual contexts.

Basic Definitions: Contract, Agreement, Promise

To navigate the complexities of contract law, a clear understanding of its fundamental terminology is essential. The Indian Contract Act, 1872, defines these terms in a hierarchical manner:

• A Proposal (or Offer), as defined in Section 2(a) of the Act, is when one person signifies to another their willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence.⁴
• When the person to whom the proposal is made signifies their assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a Promise (Section 2(b)).⁴
• An Agreement, according to Section 2(e), is “every promise and every set of promises, forming the consideration for each other”.³ This means an agreement arises from an offer and its acceptance, coupled with consideration.
• Finally, a Contract is defined under Section 2(h) as “an agreement enforceable by law”.⁷

This progression – from proposal to promise, promise to agreement, and agreement to contract – is fundamental. It highlights that while a proposal and its acceptance lead to a promise, and promises supported by consideration form an agreement, not all agreements automatically qualify as contracts.⁴ An agreement is often described as a rudimentary form of a contract; it requires the element of “enforceability by law” to transform into a legally binding contract.³

This critical element of “enforceability by law” depends on the fulfillment of several other conditions, often referred to as the essentials of a valid contract. These essentials ensure that the agreement is not only mutually assented to but also meets certain legal and ethical standards.

                                            Table 1: Essentials of a Valid Contract

Understanding these essentials is crucial because an agreement that lacks one or more of these elements may not be enforceable as a contract. For instance, an agreement might involve a clear offer, acceptance, and consideration, but if its object is illegal (e.g., an agreement to commit a crime), it will not be a contract. Similarly, an agreement with a minor (who lacks capacity) is generally void. This distinction is a frequent subject of questions in CLAT, requiring aspirants to analyze scenarios and determine if a valid contract has been formed.

Formation of a Contract: Offer and Acceptance

Introduction

The journey of a contract begins with an offer made by one party and its subsequent acceptance by another. These two elements – offer and acceptance – are the foundational pillars upon which a legally binding agreement is built. They represent the mutual assent, or consensus ad idem (meeting of the minds), which is the bedrock of any contractual relationship. As Section 2(a) of the Indian Contract Act, 1872, indicates, a contract effectively “kicks off with an offer,” and it becomes binding upon the communication of acceptance as per Section 2(b).⁸ The formation process, therefore, commences when one individual or entity initiates a potential exchange by making an ‘offer’.⁴ Without a clear and valid offer, and an equally clear and unqualified acceptance of that offer, no agreement can materialize, and consequently, no contract can come into existence. This initial stage is paramount as it determines whether parties have crossed the threshold from mere negotiation to a binding legal commitment.

Offer (Proposal)

Definition: The term ‘proposal’ (synonymous with ‘offer’ in common parlance) is defined in Section 2(a) of the Indian Contract Act, 1872, as: “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”.4 This definition encapsulates the essence of an offer – an expression of willingness to be bound on certain terms, contingent upon the acceptance of the party to whom it is addressed.

Essentials of a Valid Offer:

For a proposal to be valid and capable of forming the basis of a contract upon acceptance, it must satisfy several key requirements:

1. Intention to Create Legal Relations: A fundamental prerequisite is that the offer must be made with the genuine intention of establishing a legally binding relationship. Casual statements, jests, or promises made in a purely social or domestic context typically lack this requisite intent and are therefore not considered valid offers.⁵ The landmark case of Balfour v. Balfour ( 2 KB 571) illustrates this principle, where an agreement between a husband and wife regarding maintenance was held not to be a contract due to the absence of an intention to create legal relations.⁸ This ensures that the law of contracts is applied to serious commitments rather than informal understandings. ⁵
2. Definite, Certain, and Complete Terms: The terms of the offer must be clear, unambiguous, and complete. An offer that is vague or uncertain cannot be enforced because it is impossible for a court to ascertain the precise obligations of the parties.³ If the terms are not sufficiently defined, the agreement may be void for uncertainty. The case of Scammell and Nephew Ltd. v. Ouston ( AC 251) highlighted that an agreement to purchase a vehicle on “hire-purchase terms” was too vague to be enforceable as the specific terms were not defined.⁵
3. Communication to the Offeree: An offer must be effectively communicated to the person to whom it is intended (the offeree). An individual cannot accept an offer of which they are unaware.³ This principle was firmly established in the Indian case of Lalman Shukla v. Gauri Datt ((1913) 11 All LJ 489).⁵ In this case, the plaintiff, an employee, was sent to find his employer’s missing nephew. Subsequently, the employer issued handbills offering a reward for finding the boy. The plaintiff found the nephew without knowledge of the reward. The Allahabad High Court held that he was not entitled to the reward because he was unaware of the offer at the time he performed the act of finding the boy. This judgment underscores that knowledge of the offer and an intention to accept it are crucial for a valid acceptance.⁹
4. Distinction between Offer and Invitation to Treat (Invitation to Offer): It is crucial to distinguish an offer from an invitation to treat (also known as an invitation to offer). An invitation to treat is merely an expression of willingness to negotiate or an invitation to others to make offers. It is not intended to result in a binding contract upon a simple “yes” from the other party.⁵ Common examples include:
   • Display of Goods in a Shop: The display of goods with price tags in a shop is generally considered an invitation to treat. The customer makes an offer to buy when they present the goods at the counter, which the shopkeeper can then accept or reject.⁶
   • Advertisements and Catalogues: Advertisements, price lists, and catalogues are usually invitations to treat, not offers.⁵ In Partridge v. Crittenden ( 1 WLR 1204), an advertisement for the sale of birds was held to be an invitation to treat.⁵ However, an advertisement can constitute an offer if it is clear, definite, explicit, and leaves nothing open for negotiation, as seen in general offers like Carlill v. Carbolic Smoke Ball Co.
   • Auction Sales: An auctioneer’s call for bids is an invitation to treat. Each bid is an offer, and acceptance occurs with the fall of the hammer.

The law assesses such communications objectively: what would a reasonable person in the position of the person to whom the statement is made believe was intended? This objective test is critical for determining whether a statement is a firm offer capable of acceptance or merely a preliminary step in negotiations.

Types of Offers:

Offers can be classified based on their nature and the mode of their making:

• Express Offer: An offer made using words, either spoken or written.⁶ For example, A writes to B offering to sell his car for Rs. 2,00,000.
• Implied Offer: An offer that is not made in words but is inferred from the conduct of the parties or the circumstances of the case.⁶ For instance, a transport company running a bus on a particular route makes an implied offer to carry passengers at the scheduled fare when it stops at a bus stop.⁶
• Specific Offer: An offer made to a definite person or a specific group of persons. Only that person or a member of that group can accept such an offer.⁶
• General Offer: An offer made to the public at large. It can be accepted by any person who has notice of the offer and performs the conditions stipulated in the offer.⁴ The landmark case of Carlill v. Carbolic Smoke Ball Co. ( 1 QB 256) is the quintessential example of a general offer.⁴ The Carbolic Smoke Ball Company advertised their product, claiming it would prevent influenza, and offered a reward of £100 to anyone who contracted influenza after using the smoke ball according to the directions. They even stated they had deposited £1000 in a bank to show their sincerity.¹² Carlill used the smoke ball as directed but still caught the flu. She claimed the reward. The Court of Appeal held that the advertisement was a unilateral offer to the world at large, which Mrs. Carlill had accepted by performing the conditions (using the smoke ball). The deposit of money indicated an intention to create legal relations, not mere sales puffery.¹²

Cross Offers:

When two parties make identical offers to each other, in ignorance of each other’s offer at the time of making it, these are known as cross offers. Cross offers do not result in a contract because there is no acceptance of either offer.3 For example, if A writes to B offering to sell his watch for Rs. 2000, and B simultaneously writes to A offering to buy A’s watch for Rs. 2000, there is no contract. 3

Revocation of Offer:

An offeror has the right to withdraw their offer. According to Section 5 of the Indian Contract Act, 1872, “A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards”.5 The revocation must be communicated to the offeree to be effective. An offer may also lapse due to various reasons, such as:

• By notice of revocation by the offeror.
• By lapse of the time prescribed in the offer for its acceptance, or, if no time is prescribed, by the lapse of a reasonable time. The case of Ramsgate Victoria Hotel v. Montefiore ((1866) LR 1 Ex 109) illustrates that an offer may lapse if not accepted within a reasonable time; a delay of nearly five months in accepting an offer to buy shares was deemed unreasonable, causing the offer to lapse.¹⁴
• By the failure of the acceptor to fulfill a condition precedent to acceptance.
• By the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.

                                                Table 2: Offer vs. Invitation to Offer

Core Concepts:

Acceptance

Definition:

Acceptance is the final and unqualified expression of assent to the terms of an offer. Section 2(b) of the Indian Contract Act, 1872, defines acceptance as: “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise”.5 Acceptance transforms a proposal into a binding promise, which is a crucial step towards the formation of a contract.

Essentials of a Valid Acceptance:

For an acceptance to be valid and legally effective, it must satisfy the following conditions:

1. Absolute and Unqualified: Acceptance must be unconditional and must exactly mirror the terms of the original offer. This is often referred to as the “mirror image rule”.¹ If the offeree introduces any new terms, conditions, or modifications, it is not a valid acceptance but constitutes a counter-offer. A counter-offer has the effect of rejecting the original offer, which then cannot be subsequently accepted unless revived by the original offeror. The classic case illustrating this is Hyde v. Wrench ((1840) 3 Beav 334), where an offer to sell an estate for £1000 was met with a counter-offer of £950, which was rejected. The offeree then tried to accept the original £1000 offer, but the court held that the original offer was terminated by the counter-offer.⁵ For example, if “A” offers to sell his car to “B” for Rs. 50,000, and “B” replies, “I will purchase it for Rs. 45,000,” B’s reply is a counter-offer, not an acceptance of A’s offer.¹
2. Communicated to the Offeror: Acceptance must be communicated to the offeror in some perceptible form.¹ Mere mental determination or internal assent to an offer is insufficient to constitute acceptance. The offeror must be made aware that their offer has been accepted. ¹
   • The landmark case of Felthouse v. Bindley ((1862) EWHC CP J35) established that silence generally does not amount to acceptance.¹ In this case, an uncle offered to buy his nephew’s horse, stating, “If I hear no more about him, I consider the horse mine at £30 15s.” The nephew did not reply but intended to sell the horse to his uncle and told an auctioneer not to sell the horse. The auctioneer mistakenly sold the horse. The court held there was no contract between the uncle and nephew because the nephew’s acceptance (his silence) had not been communicated to the uncle.⁵ An offeror cannot impose upon the offeree the burden of a refusal by stipulating that silence will be treated as acceptance.
   • However, acceptance can be made by conduct if the offer invites acceptance in that manner.¹ For instance, in M/S Bhagwati Prasad Pawan Kumar vs Union Of India (2006), the Supreme Court of India acknowledged that an offer might be accepted by conduct.¹⁵
3. Mode Prescribed: If the offeror prescribes a specific mode of acceptance, the acceptance must be made in that manner (Section 7(2), ICA).¹ If no mode is prescribed, acceptance must be communicated in some usual and reasonable manner. If the offeree communicates acceptance in a mode different from the prescribed one, the offeror has the option to insist that acceptance be made in the prescribed mode. However, if the offeror does not object to the deviation within a reasonable time, they are deemed to have consented to the different mode of acceptance and are bound by it.¹ For example, if “A” makes an offer to “B” and says, “If you accept the offer, reply by voice,” and “B” sends a reply by post, it will be a valid acceptance unless “A” informs “B” that the acceptance is not according to the prescribed mode.¹
4. Within Reasonable Time/Before Offer Lapses: Acceptance must be given within the time specified in the offer. If no time limit is specified, it must be given within a reasonable time before the offer lapses.¹ What constitutes a “reasonable time” depends on the facts and circumstances of each case.
5. Cannot Precede an Offer: Acceptance must be made after an offer has been communicated. An act done in ignorance of an offer cannot be considered an acceptance of that offer. For example, if a company allots shares to a person who had not applied for them, and that person subsequently applies for shares, unaware of the previous allotment, the initial allotment is not a valid acceptance.¹
6. By the Person to Whom Offer is Made: If an offer is specific (made to a particular person or group), only that person or a member of that group can accept it.⁶ A general offer, however, can be accepted by anyone who fulfills its conditions.

Communication of Offer, Acceptance, and Revocation (Sections 4 & 5, ICA):

The Indian Contract Act lays down specific rules regarding when the communication of offer, acceptance, and revocation is complete:

• Communication of Offer: The communication of an offer is complete when it comes to the knowledge of the person to whom it is made (Section 4).⁵
• Communication of Acceptance (Section 4): The communication of an acceptance is complete:
  • As against the proposer (offeror): When it is put in a course of transmission to him, so as to be out of the power of the acceptor. This is often referred to as the “postal rule” or “mailbox rule” where acceptance is complete against the offeror when the letter of acceptance is posted, even if it is delayed or lost in transit. ⁵
  • As against the acceptor: When it comes to the knowledge of the proposer.⁵ This dual rule means that once the acceptor posts the acceptance, the offeror is bound, but the acceptor is not bound until the acceptance reaches the offeror. This allows the acceptor to revoke their acceptance by a speedier means before it reaches the offeror.
• Communication of Revocation (Section 4): The communication of a revocation is complete:
  • As against the person who makes it (revoker): When it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it.
  • As against the person to whom it is made: When it comes to his knowledge.¹⁴
• Revocation of Proposals and Acceptances (Section 5):
  • A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. ⁵
  • An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

The “postal rule” has significant implications. It means a contract can be formed and become binding on the offeror even before they are aware of the acceptance. This rule was developed in an era of slower communication and aims to provide certainty to the acceptor. However, it places the risk of delay or loss of acceptance on the offeror. Understanding this nuance is critical for analyzing when a contract is formed and when an offer or acceptance can no longer be revoked.

The dynamic interplay between offer, counter-offer, rejection, and potential revival of offers is also a key area. As established in Hyde v. Wrench, a counter-offer effectively terminates the original offer.⁵ The original offer cannot then be accepted unless the original offeror explicitly renews it or agrees to the counter-offer (which then becomes the new offer accepted). This sequence of communications must be carefully traced in problem scenarios to determine if and when a mutual agreement (a contract) has been reached, as illustrated in the example of Rajat and Rohit where Rohit’s lower price was a new offer, causing Rajat’s original offer to lapse.⁶

1. CLAT-Style Exemplar Passage (Offer & Acceptance):

“TechNova Inc. advertised on its website: ‘Flash Sale! The first 100 customers to email sales@technova.com with the subject ‘BUY X1000′ starting 9:00 AM on 1st June will get our latest X1000 drone for Rs. 50,000. Payment details will be sent upon successful order placement.’ Priya saw the ad. At 8:55 AM on 1st June, she sent an email with the correct subject to sales@technova.com. At 9:05 AM, she sent another email, this time to a different address, info@technova.com, stating, ‘I want to buy the X1000 drone for Rs. 48,000. Please confirm.’ TechNova received Priya’s first email at 9:02 AM and her second email at 9:06 AM. By 9:03 AM, 100 orders via sales@technova.com had been confirmed from other customers who had emailed at or after 9:00 AM. TechNova did not respond to Priya’s emails.”

Detailed Explanation of Legal Principles Illustrated:Nature of TechNova’s Advertisement:

The advertisement by TechNova Inc. is likely to be construed as a general offer rather than a mere invitation to treat. This is because it specifies clear terms for acceptance: a particular product (X1000 drone), a fixed price (Rs. 50,000), a precise method of acceptance (email to sales@technova.com with subject ‘BUY X1000’), a specific start time for acceptance (9:00 AM on 1st June), and a limit (first 100 customers). The promise to send payment details upon successful order placement further indicates an intention to be bound by those who comply with the terms. This is analogous to the principles in Carlill v. Carbolic Smoke Ball Co., where an advertisement with clear conditions for acceptance was held to be a unilateral offer to the public at large.¹²

1. Priya’s First Email (sent at 8:55 AM, received at 9:02 AM):
   • Timing of Offer Acceptance: The offer explicitly stated that acceptance (ordering) could commence “starting 9:00 AM on 1st June.” Priya sent her email at 8:55 AM, which is before the offer opened. An offer cannot be accepted before it is effectively made or open for acceptance.
   • Communication of Acceptance: Even if her email was considered an attempt to accept, its receipt at 9:02 AM by TechNova is relevant. However, the offer was limited to the “first 100 customers” who emailed starting 9:00 AM.
   • Validity of Acceptance: Priya’s first email is unlikely to be a valid acceptance because it was sent prematurely, before the offer was officially open for acceptance as per its own terms. The offer stipulated a specific window for making an acceptance.
2. Priya’s Second Email (sent at 9:05 AM to info@technova.com):
   • Nature of Communication: This email, offering to buy the drone for Rs. 48,000, is a counter-offer.¹ It varies a material term of TechNova’s original offer (the price). A counter-offer implies a rejection of the original offer and proposes new terms.
   • Effect of Counter-Offer: If TechNova’s advertisement was an offer available to Priya, her counter-offer would have terminated TechNova’s original offer to her (if any was still open to her individually). She cannot subsequently insist on the original terms.
   • Mode of Acceptance: Furthermore, this email was sent to info@technova.com, whereas the offer specified sales@technova.com. If an offer prescribes a specific mode of acceptance, it should generally be followed.¹
3. TechNova’s Silence: TechNova’s failure to respond to Priya’s emails does not constitute acceptance of either her premature attempt or her counter-offer. The general rule, as established in Felthouse v. Bindley, is that silence does not amount to acceptance.¹ There is no indication that TechNova had agreed that Priya’s silence or their own silence would constitute acceptance.
4. Lapse of Offer: The offer made by TechNova was for a limited quantity – “the first 100 customers.” The facts state that by 9:03 AM, 100 orders via the correct channel had been confirmed. Once these 100 acceptances were received from customers who complied with the terms (emailing at or after 9:00 AM to the correct address), the general offer made by TechNova would have lapsed or been exhausted. Therefore, even if Priya’s first email had been timely, if it was received after the 100-customer limit was reached, it would not result in a contract.

Conclusion for Priya’s Scenario: Priya is unlikely to have a valid contract with TechNova. Her first attempt at acceptance was premature. Her second communication was a counter-offer to a different email address, which was not accepted by TechNova. The original offer likely lapsed once the quota of 100 customers was met through valid acceptances.

2. Consideration and its Essentials

Introduction

Consideration is a cornerstone of the Indian Law of Contracts, often described by the Latin maxim quid pro quo, meaning “something for something”.⁴ It represents the price or value that one party gives in exchange for the promise of the other. This element of bargain or exchange is fundamental because it distinguishes legally enforceable promises (contracts) from gratuitous or voluntary promises (which are generally not enforceable).¹⁷ The Indian Contract Act, 1872, mandates that for an agreement to be a valid contract, it must be supported by lawful consideration.⁷ The general rule, encapsulated in Section 25 of the Act, is “no consideration, no contract,” meaning an agreement made without consideration is void, subject to certain specific exceptions.⁴ Understanding consideration is vital for CLAT aspirants as it determines the enforceability of promises.

//Core Concepts

Definition (Section 2(d), ICA):

Section 2(d) of the Indian Contract Act, 1872, defines consideration as follows: “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 abstain from doing something, such act or abstinence or promise is called consideration for the promise”.1

This definition is comprehensive and highlights several key aspects of what constitutes valid consideration.

Essentials of Valid Consideration:

For an act, abstinence, or promise to be recognized as valid consideration, it must fulfill certain conditions:

1. Must move at the desire of the promisor: The act performed or the abstinence undertaken by the promisee (or any other person) must be at the request or “desire” of the promisor.¹ An act done voluntarily, without any request from the promisor, or at the instance of a third party, will not constitute good consideration. For example, if ‘A’ voluntarily saves ‘B’s goods from a fire without B asking him to do so, ‘A’ cannot later demand payment for this service as it was not done at B’s desire.¹ This requirement links consideration directly to the concept of a bargain; the promisor must have requested the “price” for their promise.
2. May move from the promisee or any other person (Privity of Consideration): A significant feature of Indian contract law, distinguishing it from English law, is that consideration need not necessarily move from the promisee alone. It can be furnished by “any other person,” i.e., a stranger to the consideration.¹ This means that as long as there is consideration for the promise, it is immaterial who has provided it. For instance, if A promises to pay B Rs. 5000, and the consideration for this promise is provided by C (a third party) at A’s desire, the contract between A and B is valid. This flexibility decouples, to an extent, the benefit of the promise from the burden of providing consideration and has implications for the related but distinct doctrine of Privity of Contract.
3. Must be an act, abstinence, forbearance, or a returned promise: Consideration can take various forms. It can be a positive act (doing something, e.g., delivering goods), an abstinence (refraining from doing something one is legally entitled to do, e.g., not filing a lawsuit for a certain period), a forbearance (tolerating something), or a promise to do or abstain from doing something in the future.¹
4. May be Past, Present, or Future:
   • Past Consideration: This refers to an act done or an abstinence undertaken before the promise is made. Under Indian law, past consideration is good consideration if the past act was done at the desire of the promisor.¹ For example, if ‘A’ renders some service to ‘B’ at B’s request, and after a month ‘B’ promises to compensate ‘A’ for those services, the promise is supported by valid past consideration.¹ This contrasts with English law, which generally does not recognize past consideration as valid, subject to certain exceptions.¹⁸
   • Present (Executed) Consideration: This is when consideration is given simultaneously with the promise.¹ A common example is an over-the-counter cash sale, where goods are exchanged for payment at the same time.
   • Future (Executory) Consideration: This involves promises to perform acts or make payments at a future date.¹ For example, ‘A’ promises to deliver goods to ‘B’ after one week, and ‘B’ promises to pay the price after a fortnight. Both promises constitute future consideration for each other.
5. Must be Real and Not Illusory: Consideration must be something that has some value in the eyes of the law. It should not be physically or legally impossible, uncertain, or illusory.¹ For instance, a promise by ‘A’ to put life into ‘B’s deceased wife in exchange for Rs. 1000 is not real consideration because the act is physically impossible.¹ Similarly, a promise to pay an amount that is wholly undefined or to perform an act that is too vague would be illusory.
6. Must be something which the promisor is not already bound to do: The performance of an act that one is already legally bound to perform, either by general law or under an existing contract with the promisor, is generally not considered good consideration for a new promise from that promisor.¹ This is because the promisor is not receiving anything new of value beyond what they were already entitled to.
7. Need not be Adequate: While consideration must be real and have some value, the law does not generally inquire into its adequacy.¹ Parties are free to make their own bargains, and if they agree to an exchange, the courts will not typically interfere merely because the value of what one party gives is disproportionate to what the other party gives, provided the consent of the parties was freely given. For example, selling a valuable property for a nominal sum can still be a valid contract if there was free consent and the consideration was real.
8. Must be Lawful: The consideration (and the object) of an agreement must be lawful as per Section 23 of the Indian Contract Act, 1872. If the consideration is forbidden by law, fraudulent, involves injury to a person or property of another, is regarded by the court as immoral, or is opposed to public policy, the agreement will be void.¹

“No Consideration, No Contract” (Section 25, ICA) – General Rule and Exceptions:

Section 25 of the Indian Contract Act, 1872, lays down the general rule that “an agreement made without consideration is void”.4 This emphasizes the centrality of consideration in forming a binding contract. However, this section itself carves out certain exceptions where an agreement can be valid and enforceable even without consideration. These exceptions are crucial for ensuring fairness and justice in specific situations: 19

1. Agreement Based on Natural Love and Affection (Section 25(1)): An agreement made without consideration is valid if it is:
   • Expressed in writing,
   • Registered under the law for the time being in force for the registration of documents,
   • Made on account of natural love and affection, and
   • Between parties standing in a near relation to each other (e.g., husband and wife, parent and child, siblings).¹⁹ In Bhiwa v. Shivaram, the Bombay High Court enforced a registered promise made out of natural love and affection between two brothers, even if they were not on good terms, highlighting the importance of the formal requirements being met.¹⁹
2. Compensation for Past Voluntary Services (Section 25(2)): A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable even without fresh consideration.¹⁹ For this exception to apply:
   • The service must have been done voluntarily for the promisor.
   • The promisor must have existed at the time the service was rendered.
   • The promisor must have intended to compensate for it. ¹⁹ For instance, if A voluntarily supports B’s infant child, and B later promises to pay A’s expenses in so doing, this promise is a contract.¹⁹ The “desire of the promisor” is not a prerequisite for the initial voluntary act here, but the subsequent promise to pay for that act creates a binding obligation.
3. Promise to Pay a Time-Barred Debt (Section 25(3)): A promise made in writing and signed by the debtor (or by their agent generally or specially authorized in that behalf) to pay wholly or in part a debt which is barred by the law of limitation is valid without fresh consideration.¹⁹ For example, if A owes B Rs. 1,000, but the debt is barred by the Limitation Act, and A signs a written promise to pay B Rs. 500 on account of the debt, this is a contract. ¹⁹
4. Completed Gifts (Explanation 1 to Section 25): The rule of “no consideration, no contract” does not affect the validity, as between the donor and donee, of any gift actually made.¹⁹ Once a gift is completed (i.e., delivered and accepted), it cannot be questioned on the ground of lack of consideration. The case of Vasant Rajaram Narvekar v. Ankusha Rajaram Narvekar underscores that once a gift is accepted, it becomes irrevocable even without any exchange of value.¹⁹
5. Agency (Section 185, ICA): No consideration is necessary to create a contract of agency.¹⁹ An agent can be appointed without any consideration flowing from the principal to the agent for the creation of the agency relationship itself, although the agent may later be entitled to remuneration. ¹⁹

Other minor exceptions include gratuitous bailment and contracts of charity to some extent. These exceptions balance the strict requirement of consideration with the practical realities of human relationships and social duties. ¹⁹

CLAT-Style Exemplar Passage (Consideration):

“Mr. Sharma’s vintage car, a prized possession, broke down on a highway. His neighbor, Karan, a skilled mechanic who happened to be passing by, noticed Mr. Sharma’s distress. Without any request from Mr. Sharma at that moment, or any discussion of payment, Karan spent the next two full days meticulously repairing the complex engine of the car. Mr. Sharma was immensely relieved and grateful for Karan’s unsolicited help. A week after the car was fully functional, Mr. Sharma, feeling a strong sense of obligation, handed Karan a written and signed note stating: ‘My dear Karan, in consideration of your invaluable effort in voluntarily repairing my vintage car last week, I promise to pay you Rs. 10,000 as a token of my appreciation.’ Later, Mr. Sharma had a disagreement with Karan over a separate community issue and, in a fit of anger, refused to pay the Rs. 10,000. Mr. Sharma argued that Karan had repaired the car voluntarily without any prior agreement for payment, and therefore, his subsequent promise was not backed by valid consideration and was merely a gratuitous promise.”

1. Detailed Explanation of Legal Principles Illustrated:
2. Identification of Promise and Act: The promise in question is Mr. Sharma’s written commitment to pay Karan Rs. 10,000. The act performed by Karan was the repair of Mr. Sharma’s vintage car.
3. Initial Act by Karan – Voluntary Nature: Karan’s act of repairing the car was initially voluntary. The passage states he did it “without any request from Mr. Sharma at that moment, or any discussion of payment.” This means the repair was not done at the “desire of the promisor” (Mr. Sharma) in the context of forming an initial contract for repair services.¹ If Karan had simply repaired the car and Mr. Sharma had made no subsequent promise, Karan would likely have no legal claim for payment for his services.
4. Nature of Consideration – Past Consideration: Karan’s repair work was completed before Sharma made the promise to pay. Therefore, the consideration for Mr. Sharma’s promise (the repair work) is past consideration.²²
5. Validity of Past Consideration in India: Under Indian Contract Law, past consideration is generally valid if the past act was done at the desire of the promisor.²² However, this scenario involves an initially voluntary
6. Applicability of Section 25(2) – Promise to Compensate for Past Voluntary Services: This situation directly engages Section 25(2) of the Indian Contract Act, 1872, which provides an exception to the rule “no consideration, no contract.” Section 25(2) states that a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor is a valid contract.¹⁹
   • Conditions for Section 25(2):
     • The act must have been done voluntarily for the promisor (Karan voluntarily repaired Mr. Sharma’s car).
     • The promisor must be the person for whom the act was done (Mr. Sharma).
     • The promisor must have existed at the time the act was done (Mr. Sharma existed).
     • The promisor must subsequently promise to compensate the person who did the act (Mr. Sharma made a written promise to pay Karan Rs. 10,000). ¹⁹

6. Sharma’s Argument: Mr. Sharma’s argument that Karan repaired the car voluntarily and there was no prior agreement for payment is factually correct regarding the initial act. However, it fails to consider the legal effect of his subsequent written promise to compensate for that voluntary act. This subsequent promise, under Section 25(2), can form a binding contract even though the initial service was rendered without a request or prior agreement for payment. The note explicitly states it is “in consideration of your invaluable effort in voluntarily repairing my vintage car,” directly linking the promise to the past voluntary act.
7. Conclusion: Sharma is likely legally bound by his written promise to pay Karan Rs. 10,000. The agreement falls under the exception provided in Section 25(2) of the Indian Contract Act, 1872, making the promise enforceable despite the consideration (repair work) being past and initially voluntary. The written and signed note serves as evidence of this promise.

3.Capacity to Contract

Introduction

For an agreement to be transformed into a legally enforceable contract, it is imperative that the parties entering into the agreement possess the legal capacity to do so. Section 10 of the Indian Contract Act, 1872, explicitly states that all agreements are contracts if they are made by parties “competent to contract.” Section 11 of the Act then clarifies who is considered competent: “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”.⁷ This means that certain categories of persons are deemed incapable of entering into valid contracts, primarily to protect them from exploitation due to their vulnerability or lack of mature judgment. The most significant categories are minors and persons of unsound mind. Understanding the rules of capacity is crucial, as an agreement with an incompetent party can be entirely void.

Minors:

• • Definition of a Minor: According to Section 3 of the Indian Majority Act, 1875, a person attains the age of majority upon completing 18 years. However, if a guardian for the minor’s person or property has been appointed by a court, or if the minor is under the superintendence of a Court of Wards, the age of majority is extended to 21 years.³⁰
  • Nature of a Minor’s Agreement: The Indian Contract Act, 1872, under Section 11, declares that a minor is incompetent to contract.²⁸ The legal position regarding a minor’s agreement was definitively settled by the Privy Council in the landmark case of Mohori Bibee v. Dharmodas Ghose ((1903) 30 Cal. 539).⁸ The key principles established are:
    • Void ab initio: An agreement entered into by a minor is not merely voidable but is absolutely void from the very beginning (void ab initio).²⁸ This means it has no legal effect and cannot be enforced by either party.
    • No Ratification: A minor cannot ratify an agreement entered into during their minority upon attaining the age of majority.³⁰ Ratification relates back to the date of the making of the contract, and since the original contract was void, it cannot be validated by a subsequent ratification. A new contract with fresh consideration would be required.
    • No Estoppel against a Minor: The rule of estoppel does not apply against a minor. Even if a minor fraudulently misrepresents their age and induces another party to enter into a contract, the minor cannot be prevented from pleading their minority as a defense to avoid the contract.²⁹ The law prioritizes the protection of the minor over the general principles of estoppel in such cases.
    • Restitution: Generally, if a minor has obtained property or goods under a void agreement, they cannot be compelled to restore them or make compensation. The doctrine of restitution, which might apply in other void agreements, is often not applied against a minor, especially if they have misrepresented their age to procure the benefit.³⁰ However, courts may, in certain equitable circumstances, order a minor to restore property if it is still traceable and in their possession, but not to repay money. ³⁰
  • Exceptions and Beneficial Contracts: While the general rule is that a minor’s agreement is void, the law does allow for certain situations where contracts can be, to some extent, enforceable for the minor’s benefit:
    • Contracts for Necessaries (Section 68, ICA): If a person incapable of entering into a contract (including a minor) is supplied by another person with “necessaries” suited to their condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.³⁰ Necessaries are not just bare essentials like food and clothing but can include things like education and medical expenses, depending on the minor’s social standing. The minor is not personally liable; only their estate or property can be held accountable.³⁰
    • Beneficial Contracts: Contracts that are purely for the benefit of the minor, and under which they are not required to bear any obligation, may be enforceable by the minor (though not against them). Examples include contracts of apprenticeship or service, or a contract where a minor is a beneficiary (e.g., under an insurance policy or a trust).²⁸
    • Minor as an Agent: A minor can be appointed as an agent. However, they will not be personally liable for their acts as an agent (Section 184, ICA).²⁷
    • Minor as a Partner: A minor cannot become a partner in a partnership firm, but with the consent of all other partners, they can be admitted to the benefits of an existing partnership (Section 30, Indian Partnership Act, 1932).²⁸ They will not be personally liable for the firm’s debts.

The strong stance of the law in declaring a minor’s agreement absolutely void, as established in Mohori Bibee, reflects a clear policy choice: to shield minors from the consequences of their own inexperience and improvidence, even if it means that the other contracting party (often an adult) might suffer a loss. This protective umbrella is extensive, often preventing recovery even in cases of fraudulent misrepresentation of age by the minor. This demonstrates a prioritization of the minor’s welfare over the general principle of contractual sanctity when these two come into conflict.

2. Persons of Unsound Mind:
   • Definition of Sound Mind for Contracting (Section 12, ICA): “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 a rational judgment as to its effect upon his interests.”
   • A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
   • A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
   • Effect of Agreement with a Person of Unsound Mind: Similar to a minor’s agreement, an agreement entered into by a person who is not of sound mind (at the time of contracting) is void. This includes persons like idiots (congenitally without understanding), lunatics (whose mental faculties are deranged due to some mental strain or disease), and persons intoxicated to the extent that they cannot understand the terms of the contract or form a rational judgment.
   • The burden of proving unsoundness of mind lies on the person who alleges it. Like minors, persons of unsound mind can also be liable for necessaries supplied to them or their dependents from their property under Section 68.
3. Persons Disqualified by Law:
   • Certain other persons may be disqualified from contracting by specific statutes. Examples include:
     • Alien enemies (citizens of a country at war with India, cannot contract without the license of the Central Government).
     • Foreign sovereigns and ambassadors (can contract but can claim immunity from being sued, unless they submit to the jurisdiction of Indian courts).
     • Convicts (while undergoing imprisonment, their capacity to contract may be suspended).
     • Insolvents (an undischarged insolvent has limited capacity to contract regarding their property).

CLAT-Style Exemplar Passage (Capacity to Contract):

“Rahul, aged 17 years and 10 months, appeared to be well over 18. He approached ‘Vintage Wheels,’ a dealer in antique motorcycles, and expressed a keen interest in purchasing a rare 1950s model priced at Rs. 2,50,000. To convince the dealer of his age and financial standing, Rahul presented a cleverly forged college ID card showing his age as 19 and a bank statement (belonging to his elder brother) suggesting substantial funds. Impressed, ‘Vintage Wheels’ entered into a written agreement with Rahul for the sale of the motorcycle. Rahul paid an advance of Rs. 50,000 and promised to pay the balance within a month, upon which the motorcycle would be delivered. A month later, Rahul failed to pay the balance. When ‘Vintage Wheels’ contacted him, Rahul confessed his true age and refused to complete the purchase or take delivery, demanding a refund of his advance. ‘Vintage Wheels’ argued that Rahul had fraudulently misrepresented his age and should be compelled to honor the contract or at least forfeit the advance.”

1. Detailed Explanation of Legal Principles Illustrated:

1. Rahul’s Capacity to Contract: Rahul is 17 years and 10 months old, making him a minor according to the Indian Majority Act, 1875 (assuming no court-appointed guardian extending majority to 21).³⁰ Section 11 of the Indian Contract Act, 1872, states that a minor is incompetent to contract.²⁸
2. Nature of the Agreement with Rahul: Based on the ruling in Mohori Bibee v. Dharmodas Ghose, any agreement entered into by a minor is void ab initio (void from the beginning).⁸ Therefore, the written agreement between Rahul and ‘Vintage Wheels’ for the sale of the motorcycle is void.
3. Rahul’s Misrepresentation of Age: Rahul fraudulently misrepresented his age by presenting a forged ID card. However, the principle of estoppel does not apply against a minor.²⁹ This means Rahul is not prevented (estopped) from pleading his minority as a defense, even though he made a fraudulent misrepresentation. The contract remains void despite his deceit.
4. Enforceability of the Contract: Since the contract is void ab initio, ‘Vintage Wheels’ cannot compel Rahul to honor the contract, i.e., pay the balance amount and take delivery of the motorcycle.
5. Forfeiture of Advance / Restitution:
   • The question of whether ‘Vintage Wheels’ can retain the Rs. 50,000 advance or if Rahul is entitled to a refund is complex. The general principle is that under a void agreement, any benefit received must be restored (Section 65, ICA). However, the application of Section 65 to minors’ void agreements is not straightforward due to the ruling in Mohori Bibee.
   • While Mohori Bibee held that a minor cannot be compelled to repay a loan taken under a void mortgage, and the doctrine of restitution might not apply if the minor misrepresented their age ³⁰, courts have sometimes exercised equitable jurisdiction.
   • If the minor is seeking relief from the court (e.g., cancellation of an instrument), the court may, as a condition of granting relief, require the minor to restore any benefit obtained, provided it is traceable and still with the minor.
   • In this case, Rahul is demanding a refund. Some courts might allow the minor to recover the advance paid, as the contract is void. Others might consider the minor’s fraud and, if the dealer suffered loss, might be reluctant to order a full refund, though compelling the minor to complete the contract is not an option. The law is strongly protective of minors, and it is unlikely Rahul would be forced to forfeit the advance simply due to the void nature of the contract, though his fraud complicates equitable considerations. However, the primary legal position is that the contract is void, and typically, parties should be restored to their original position.
6. ‘Vintage Wheels’ Argument: Their argument that Rahul should be compelled to honor the contract due to fraudulent misrepresentation is legally untenable because of the void nature of minor’s agreements and the non-applicability of estoppel against a minor.

Conclusion for Rahul’s Scenario: The contract is void. ‘Vintage Wheels’ cannot enforce the contract against Rahul. Rahul is likely entitled to a refund of his advance, although his fraudulent conduct might be a factor a court considers in equity if ‘Vintage Wheels’ can show specific loss directly attributable to relying on the minor’s misrepresentation for which they seek some other relief (though not enforcement of the contract itself). The primary shield of minority protects Rahul from contractual liability.

4. Free Consent (Sections 13, 14)

Introduction

For an agreement to be a valid contract, it is not enough that the parties have given their consent; the consent must also be “free.” Section 10 of the Indian Contract Act, 1872, lists “free consent” as an essential element of a valid contract. Section 13 defines “consent” as when “two or more persons are said to consent when they agree upon the same thing in the same sense” (this is the principle of consensus ad idem). Section 14 then defines “free consent” by stating what it is not: “Consent is said to be free when it is not caused by— (1) coercion, as defined in section 15, or (2) undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in section 18, or (5) mistake, subject to the provisions of sections 20, 21 and 22.” ⁷

If the consent of one or more parties to an agreement is vitiated by any of these factors (coercion, undue influence, fraud, or misrepresentation), the agreement becomes a contract voidable at the option of the party whose consent was so caused (Section 19 and 19A).²⁶ Mistake has a different effect, often rendering the agreement void. The concept of free consent is vital as it upholds the principle of contractual autonomy and protects parties from being bound by agreements they did not willingly or knowingly enter into.

1. Core Concepts: Factors Vitiating Free Consent
2. Coercion (Section 15):
   • Definition: “Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) 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.” ²⁶
   • Explanation: Coercion involves compulsion or threat. It can be a threat to commit a crime (e.g., physical violence) or unlawfully detain property to force someone into a contract. The act constituting coercion need not be directed at the contracting party; it can be against any person. It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed.
   • Effect: An agreement where consent is obtained by coercion is voidable at the option of the party whose consent was so caused (Section 19). That party can choose to rescind the contract. ²⁶
3. Undue Influence (Section 16):
   • Definition: (1) “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.” (2) “In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another— (a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.” ²⁶
   • Explanation: Undue influence involves the improper use of power or trust by one party over another to procure a contract. It typically occurs in relationships where one party has a natural dominance or influence over the other (e.g., doctor-patient, lawyer-client, parent-child, spiritual guru-disciple). The dominant party must have used that position to gain an unfair advantage. ²⁹
   • Burden of Proof: If a person is in a position to dominate the will of another and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.
   • Effect: An agreement where consent is obtained by undue influence is voidable at the option of the party whose consent was so caused (Section 19A).²⁶ The court may set aside the contract either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just.
4. Fraud (Section 17):
   • Definition: “‘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 intent to deceive another party thereto or his agent, or to induce him to enter into the contract:— (1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true (false assertion); (2) the active concealment of a fact by one having knowledge or belief of the fact (active concealment); (3) a promise made without any intention of performing it; (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent.” ³
   • Explanation: Fraud involves intentional deception or dishonesty to mislead another party into entering a contract.¹⁰ The core element distinguishing fraud from misrepresentation is the intent to deceive.¹⁰
     • False Assertion: Making a statement known to be false or without belief in its truth. ³
     • Active Concealment: Deliberately hiding a material fact that should be disclosed. ³ Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.³ This “duty to speak” arises in contracts uberrimae fidei (of utmost good faith, e.g., insurance contracts) or where a fiduciary relationship exists, or where partial disclosure creates a misleading impression.¹⁰ This imposition of a positive duty of disclosure in certain situations is an important exception to the general principle of caveat emptor (let the buyer beware).
     • Promise without intent to perform: Making a promise with no intention of fulfilling it. ³
   • Effect: When consent to an agreement is caused by fraud, the contract is voidable at the option of the party defrauded (Section 19).²⁶ The defrauded party may:
     • Rescind (cancel) the contract.
     • Insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true. ³²
     • Claim damages for deceit (under tort law, and sometimes in conjunction with contractual remedies).

4. Misrepresentation (Section 18):
   • Definition: “‘Misrepresentation’ means and includes— (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.” ²⁶
   • Explanation: Misrepresentation involves a false statement of a material fact made innocently, without any intention to deceive.¹¹ The maker of the statement believes it to be true. The key difference from fraud lies in the absence of an intention to deceive.¹⁰
   • Effect: When consent to an agreement is caused by misrepresentation, the contract is voidable at the option of the party whose consent was so caused (Section 19).²⁶ The aggrieved party can rescind the contract. However, if the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary diligence, the contract is not voidable (Exception to Section 19). ³²
5. Mistake (Sections 20, 21, 22):
   • Mistake occurs when the parties intending to do one thing by error do something else. Mistakes can be of fact or of law.
   • Mistake of Fact:
     • Bilateral Mistake (Section 20): “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.” For an agreement to be void under Section 20, the mistake must be: (a) mutual (both parties mistaken), (b) about a matter of fact, and (c) essential to the agreement (e.g., mistake as to the existence or identity of the subject matter). ³³
     • Unilateral Mistake (Section 22): “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.” Generally, a unilateral mistake does not affect the validity of the contract unless it is induced by fraud or misrepresentation of the other party, or if the mistake is as to the nature of the contract or the identity of the person contracted with.
   • Mistake of Law (Section 21): “A contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India has the same effect as a mistake of fact.” Ignorance of Indian law is no excuse (ignorantia juris non excusat). However, a mistake regarding a foreign law is treated as a mistake of fact. ²⁶
   • Effect: A bilateral mistake as to an essential fact makes the agreement void. A unilateral mistake generally does not make the contract voidable, unless specific conditions are met. A mistake of Indian law does not make the contract voidable.

The distinction between factors like fraud (intentional deceit) and misrepresentation (innocent false statement) is critical because it influences the available remedies and the perceived culpability of the party making the statement. While both can lead to the contract being voidable, fraud may also give rise to a claim for damages in tort for deceit.

1. CLAT-Style Exemplar Passage (Free Consent):

“Mrs. Gable, an elderly widow with limited business understanding, owned a valuable antique painting inherited from her ancestors. Mr. Croft, a charismatic art dealer, learned of the painting. Over several visits, Croft cultivated a close, seemingly friendly relationship with Mrs. Gable, often assisting her with small errands and financial advice, gaining her complete trust. He repeatedly told her the painting was of ‘modest value’ and ‘difficult to sell.’ He also subtly hinted that her estranged nephew, her only heir, was in dire financial straits and might try to force her to sell her assets unwisely. One day, Croft offered Mrs. Gable Rs. 5 lakhs for the painting, stating it was a ‘very generous offer given its condition and limited appeal.’ He also mentioned that if she didn’t sell it to him, the government might soon impose a new ‘heritage tax’ that could be financially crippling for her. Mrs. Gable, trusting Croft completely, worried by the (false) tax information, and concerned about her nephew, agreed to sell. Later, it was discovered the painting was worth at least Rs. 50 lakhs, and there was no such heritage tax being planned. Mrs. Gable seeks to set aside the sale.”

1. Detailed Explanation of Legal Principles Illustrated:

1. Undue Influence (Section 16):
   • Position to Dominate Will: Croft appears to have placed himself in a position to dominate Mrs. Gable’s will. He cultivated a relationship of trust (“gaining her complete trust”) and acted as an advisor (“assisting her with small errands and financial advice”).²⁹ This suggests a fiduciary-like relationship or at least one where Mrs. Gable became dependent on his judgment. Mrs. Gable’s age and limited business understanding also make her potentially vulnerable.
   • Use of Position for Unfair Advantage: Croft used this position to obtain an unfair advantage. He significantly undervalued the painting (Rs. 5 lakhs vs. Rs. 50 lakhs) and persuaded her to sell it to him.
   • Unconscionable Transaction: The transaction appears unconscionable on its face due to the gross undervaluation. The burden would likely shift to Croft to prove that the contract was not induced by undue influence.
   • The subtle hints about her nephew could also be part of creating an atmosphere of pressure and reliance on Croft.
2. Fraud (Section 17):
   • False Assertion/Suggestion of Fact:
     • Croft stated the painting was of “modest value” and “difficult to sell,” knowing (as an art dealer) or recklessly disregarding its true, much higher value. This is a suggestion of a fact which is not true, by one who does not believe it to be true (or has no reasonable basis to believe it).³
     • Croft’s statement about a new “heritage tax” being planned by the government was false. This was a suggestion of a fact, which was not true, made with the intent to induce Mrs. Gable to enter the contract.
   • Intent to Deceive: Croft’s actions – cultivating trust, undervaluing the painting, and inventing the tax – strongly suggest an intent to deceive Mrs. Gable and induce her to sell the painting to him at a very low price. ¹⁰
   • Active Concealment (Potentially): As an art dealer, Croft likely knew the true value. His deliberate understatement of its value while feigning to give her fair advice could be seen as a form of active concealment of the true worth, especially given the trust relationship he built. ³
3. Misrepresentation (Section 18) (Less likely, as fraud seems more dominant):
   • If Croft genuinely (though negligently) believed his statements about the painting’s value or the tax were true (which is unlikely for an art dealer regarding value), it might be misrepresentation. However, the facts point more strongly towards intentional deceit (fraud).
4. Effect on Consent and Contract:
   • Gable’s consent to sell the painting was caused by Croft’s undue influence (exploiting her trust and vulnerability) and fraud (false statements about value and the non-existent tax).
   • Therefore, her consent was not free.
   • Under Section 19 (for fraud) and Section 19A (for undue influence), the contract is voidable at the option of Mrs. Gable.²⁶
5. Remedies Available to Mrs. Gable:
   • She can choose to rescind (cancel) the contract of sale. If she rescinds, she would need to return the Rs. 5 lakhs (if received and if the court so directs upon setting aside the contract), and Croft would have to return the painting.
   • She could also potentially claim damages for fraud if she suffered additional losses, though rescission and recovery of the painting would be the primary remedy.

Conclusion for Mrs. Gable’s Scenario: Mrs. Gable has strong grounds to argue that her consent was vitiated by both undue influence and fraud. The contract is voidable at her option, and she is likely to succeed in having the sale set aside.

5. Lawful Object and Consideration (Section 23)

Introduction

A fundamental principle of contract law is that for an agreement to be valid and enforceable, both its object (purpose) and the consideration exchanged must be lawful. Section 10 of the Indian Contract Act, 1872, explicitly requires lawful consideration and a lawful object as essentials of a valid contract.⁷ Section 23 of the Act elaborates on what constitutes an unlawful object or consideration, stating that if either is unlawful, the agreement is void.¹ This provision ensures that the legal machinery of contract enforcement is not used to support or facilitate activities that are prohibited by law, are fraudulent, harmful, immoral, or contrary to public interest.

Core Concepts

According to Section 23 of the Indian Contract Act, 1872, the consideration or object of an agreement is unlawful in the following cases: ²⁵

1. If it is forbidden by law:
   • An act or undertaking is forbidden by law when it is punishable by criminal law or expressly or impliedly prohibited by any statute (e.g., an Act of Parliament or State Legislature). ¹
   • An agreement to perform an act that is explicitly illegal (e.g., an agreement to commit murder, theft, or to sell narcotics) has an unlawful object and is void.¹ For instance, a contract for the sale of liquor that violates statutory provisions would be void.²⁶
2. If it is of such a nature that, if permitted, it would defeat the provisions of any law:
   • This applies to agreements which, though not directly forbidden, would undermine the intention or purpose of a legislative enactment if allowed.¹ For example, an agreement intended to circumvent insolvency laws or taxation statutes would be void.
   • The term “law” in this context is interpreted broadly and includes any rule of law, whether statutory or based on judicial precedent.³³
3. If it is fraudulent:
   • An agreement whose object or consideration is to defraud others is void.¹ For example, an agreement between A and B to deceive C by making false representations would be void.
4. If it involves or implies injury to the person or property of another:
   • An agreement that necessitates harming another individual or their property is unlawful and void.¹ For example, an agreement to publish a defamatory statement about someone, or an agreement to commit assault or trespass. An example provided is a bond where ‘A’ borrowed Rs. 100 from ‘B’ and agreed to work for ‘B’ without pay for two years, with a harsh penalty for default; this was held void as it involved injury to the person.¹
5. If the Court regards it as immoral:
   • An agreement whose object or consideration is considered immoral by the prevailing standards of morality is void.¹ What is “immoral” is determined by the court based on societal norms. Examples often include agreements for illicit cohabitation or agreements that promote sexual immorality. An agreement between a husband and wife for future separation has been held to be void on this ground.¹
6. If the Court regards it as opposed to public policy:
   • “Public policy” is a broad and somewhat elastic concept that allows courts to invalidate agreements which are injurious to the public interest or welfare, even if they are not explicitly illegal.¹ It is a principle of judicial legislation founded on the current needs of the community. Agreements considered opposed to public policy include:
     • Trading with an enemy: Agreements with citizens of a country at war with India. ¹
     • Stifling prosecution: Agreements to prevent criminal proceedings. ¹
     • Maintenance and Champerty: Agreements where a person with no legitimate interest assists in litigation in return for a share of the proceeds (champerty) or otherwise improperly supports litigation (maintenance). ¹
     • Agreements interfering with the administration of justice:g., agreements to give false evidence. ¹
     • Agreements creating an interest opposed to duty:g., an agent agreeing to receive secret commission.
     • Agreements in restraint of parental rights.
     • Agreements restricting personal liberty.
     • Agreements to commit a crime or a tort.
     • Agreements that tend to create monopolies or unfairly restrain trade (beyond what is covered by Sec 27).
     • Agreements to bribe public officials.²⁵

The scope of “public policy” is not fixed and can evolve with changing societal values and circumstances. Courts exercise caution when invoking public policy to invalidate contracts, as it can lead to uncertainty. However, it remains a crucial tool to prevent the enforcement of agreements that are detrimental to the collective good.

Effect of Unlawful Object or Consideration:

If the object of an agreement, or the consideration for it, is unlawful as per Section 23, the agreement is void.25 Such an agreement creates no legal rights or obligations and cannot be enforced in a court of law. If the unlawful part cannot be severed from the lawful part, the entire agreement is void.

1. CLAT-Style Exemplar Passage (Lawful Object and Consideration):

“Rajesh, a senior executive at ‘PharmaGlobal Inc.’, was responsible for overseeing the procurement of raw materials. ‘ChemSupply Ltd.’ was a potential supplier. To secure a lucrative contract with PharmaGlobal, Mr. Verma, the CEO of ChemSupply, privately met Rajesh and offered him a ‘consultancy fee’ of Rs. 5 lakhs, to be paid in cash, if ChemSupply’s bid was favored. Rajesh agreed to this arrangement and subsequently used his influence within PharmaGlobal to ensure that ChemSupply was awarded the contract, even though another supplier had offered slightly better terms. The contract between PharmaGlobal Inc. and ChemSupply Ltd. was formally signed. Later, a whistleblower exposed the secret deal between Rajesh and Mr. Verma. PharmaGlobal Inc. now seeks to avoid the contract with ChemSupply Ltd.”

1. Detailed Explanation of Legal Principles Illustrated:

1. The Main Contract: The primary contract in question is the procurement contract between PharmaGlobal Inc. and ChemSupply Ltd.
2. The Secret Agreement (Rajesh and Verma): There is a separate, secret agreement between Rajesh (PharmaGlobal’s executive) and Mr. Verma (ChemSupply’s CEO) for the payment of Rs. 5 lakhs to Rajesh in return for favoring ChemSupply’s bid.
3. Lawfulness of the Object/Consideration of the Secret Agreement:
   • The object of the secret agreement between Rajesh and Mr. Verma was to improperly influence the procurement process of PharmaGlobal Inc. The consideration for Rajesh was Rs. 5 lakhs, and the consideration for Mr. Verma (ChemSupply) was Rajesh’s promise to favor their bid.
   • This agreement is clearly opposed to public policy as it involves bribery or an agreement to induce a public/corporate official (Rajesh, in his capacity as an executive making decisions for PharmaGlobal) to act corruptly or in breach of his duty to his employer.¹
   • It could also be considered fraudulent as against PharmaGlobal Inc., as it was designed to deceive the company into awarding a contract that might not have been in its best interest. ¹
   • Therefore, the secret agreement between Rajesh and Mr. Verma is void under Section 23 of the Indian Contract Act due to its unlawful object and consideration. 
4. Impact on the Main Contract (PharmaGlobal and ChemSupply):
   • The issue is whether the illegality of the secret agreement between Rajesh and Verma taints the main contract between PharmaGlobal and ChemSupply.
   • The main contract itself (for the supply of raw materials) might appear lawful on its face. However, if it can be shown that the main contract was procured as a result of the unlawful secret agreement (the bribe), then the main contract’s formation is tainted by an unlawful act.
   • An agreement whose object or consideration is fraudulent, or is regarded by the court as opposed to public policy, is void (Section 23). If the “object” of ChemSupply entering into the main contract was, in part, to give effect to the bribery scheme, or if the consideration PharmaGlobal received (the promise of supply) was obtained through this unlawful inducement, then the main contract itself could be affected. 
   • Courts often hold that if a contract is entered into with the object of committing an illegal act, or if its consideration is illegal, the contract is void. Here, ChemSupply’s method of obtaining the contract involved an illegal act (bribery).
5. PharmaGlobal’s Position:
   • PharmaGlobal Inc. can argue that its consent to the contract with ChemSupply Ltd. was, in effect, procured by fraud (the fraud being perpetrated by its own employee Rajesh in collusion with ChemSupply’s CEO).
   • Alternatively, they can argue that the contract with ChemSupply is void or voidable because it is inextricably linked to an illegal act (the bribe) that was fundamental to its formation. The consideration flowing from ChemSupply (their promise to supply) is tainted by the method used to secure the contract.
   • If the contract is deemed void due to an unlawful object (i.e., being secured through bribery which is against public policy), PharmaGlobal would not be bound by it. If it’s deemed voidable due to fraud on PharmaGlobal (by its agent and the other party), PharmaGlobal would have the option to rescind it.

Conclusion for PharmaGlobal’s Scenario: PharmaGlobal Inc. has strong grounds to avoid the contract with ChemSupply Ltd. The secret agreement involving the ‘consultancy fee’ (bribe) renders the means of securing the main contract unlawful and opposed to public policy. This illegality or fraud would likely make the main contract either void or voidable at the option of PharmaGlobal Inc.

Void, Voidable, and Illegal Agreements: A Comprehensive Distinction

A. Introduction

In the realm of contract law, not all agreements result in legally binding obligations. The Indian Contract Act, 1872, categorizes agreements and contracts based on their enforceability and validity. Understanding the distinctions between void agreements, voidable contracts, and illegal agreements is crucial for CLAT aspirants, as these concepts determine the legal status and consequences of various arrangements. This section provides a complete analysis of these categories, clarifying their definitions, legal effects, and, most importantly, their differing impacts on related transactions—a nuanced area frequently tested in legal reasoning problems.   

Definition: Section 2(g) of the Indian Contract Act, 1872, defines a void agreement as : “an agreement not enforceable by law

• A void agreement is one that is not legally enforceable from the beginning.

• This means it has no legal effect, and cannot be enforced in a court of law.

Examples of Expressly Void Agreements: The Indian Contract Act specifically declares certain types of agreements to be void:

• Agreements where both parties are under a mistake as to a matter of fact essential to the agreement (Section 20).  

Section 20: Mistake of Fact – Void Agreements

Text of the Law :

“Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.”

What does this mean?

If both parties enter into a contract believing something to be true, but that “something” is actually false, and it’s crucial to the contract, the agreement becomes void.

 Key Conditions:

1. Mutual mistake: Both parties are mistaken — not just one.

2. Mistake of fact: Not law, not opinion — it must be about a factual matter.

3. Essential to the agreement: The fact must be fundamental to the contract.

 If these are met → The agreement is void (not enforceable).

Example:

• A agrees to sell a cargo of rice to B, believing it is on its way from Myanmar.

• But unknown to both, the ship carrying the rice had already sunk.

• ➤ Result: The agreement is void, as both parties were mistaken about an essential fact.

Agreements with an unlawful object or consideration (Section 23).   

• • It is forbidden by law
    ▸ Example: A contract to sell narcotics.

  • It defeats the provisions of any law
    ▸ Example: An agreement to avoid paying tax.

  • It is fraudulent
    ▸ Example: Contract to fake documents to obtain a loan.

  • It causes injury to person or property
    ▸ Example: Agreement to harm someone or damage property.

  • It is immoral
    ▸ Example: Agreements involving prostitution or extramarital relationships (courts decide based on social standards).

  • It is opposed to public policy
    ▸ Example: Agreements to suppress evidence or bribe public officials.

    When is an agreement unlawful under Section 23?

    An object or consideration is unlawful if:

    Agreements made without consideration (Section 25), subject to its exceptions.   

    Agreements in restraint of marriage of any person other than a minor (Section 26)   

    Agreements in restraint of trade, profession, or business (Section 27).  

    Agreements in restraint of legal proceedings (Section 28).   

    Agreements whose meaning is uncertain (Section 29).   

    Agreements by way of wager (betting) (Section 30).   

    Agreements to do an impossible act (Section 56).   

    An agreement with a minor is also void ab initio, as established in Mohori Bibee v. Dharmodas Ghose.   

     

C. Voidable Contracts (Section 2(i))

Definition: Section 2(i) of the Act defines a voidable contract as “an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others”.   

Characteristics: A voidable contract is a valid and legally enforceable contract unless and until it is cancelled or rescinded by the aggrieved party. The power to avoid the contract rests solely with the party whose consent was not free. If this party chooses to affirm the contract, or fails to rescind it within a reasonable time, the contract remains valid and binding on both parties.   

Grounds: A contract becomes voidable primarily when the consent of a party is not free. The factors that vitiate free consent and make a contract voidable are:

• Coercion (Section 15).   

• Undue Influence (Section 16).   

• Fraud (Section 17).   

• Misrepresentation (Section 18).   

• Additionally, when a party to a contract prevents the other from performing their promise (Section 53) or when a party fails to perform at a fixed time in a contract where time is of the essence (Section 55), the contract becomes voidable at the option of the aggrieved party.   

Consequences of Rescission (Section 64): When the aggrieved party exercises their option to rescind a voidable contract, the other party is discharged from any further performance. Crucially, the party rescinding the contract must restore any benefit they have received under it to the party from whom it was received. This principle of restitution ensures that a party cannot both cancel a contract and retain the benefits received under it.   

Definition: An illegal agreement is one whose object or consideration is forbidden by law, is of a criminal nature, or is against public policy. Such agreements are unlawful and are therefore void ab initio under Section 23 of the Act.   

Punishment: Since illegal agreements involve acts that are forbidden by law, the parties to such agreements may be liable for punishment under the Indian Penal Code or other relevant statutes.   

The most nuanced and important distinction between void and illegal agreements lies in their effect on collateral transactions. A collateral transaction is a separate, subsidiary agreement that is connected to the main agreement.

• Collateral to Void Agreements: A transaction that is collateral to a merely void (but not illegal) agreement is valid and enforceable. The law does not see a reason to invalidate an independent, lawful contract simply because it is connected to an agreement that is unenforceable for technical reasons.   

   

  • Example: A wagering agreement (e.g., a bet) is void under Section 30. If ‘A’ borrows Rs. 5,000 from ‘B’ to pay a gambling debt to ‘C’, the main agreement between ‘A’ and ‘C’ is void. However, the separate loan agreement between ‘A’ and ‘B’ is a valid collateral transaction. ‘B’ can recover the loan amount from ‘A’.   

     

• Collateral to Illegal Agreements: A transaction that is collateral to an illegal agreement is also tainted with illegality and is therefore void and unenforceable. The law will not assist a party in recovering money or property that was part of a scheme to perform an illegal act. The illegality of the main agreement infects any related transactions.   

   

  • Example: An agreement to smuggle goods is illegal under Section 23. If ‘A’ borrows Rs. 50,000 from ‘B’ to finance this smuggling operation, and ‘B’ is aware of the purpose, the loan agreement is collateral to an illegal act. This collateral agreement is also void, and ‘B’ cannot recover the money from ‘A   

     

This distinction reveals a core policy objective of the legal system: to contain and discourage illegality. The law refuses to lend its enforcement machinery to any part of a scheme that is fundamentally unlawful. However, it is willing to enforce independent, lawful agreements that are merely connected to agreements that are void for technical reasons but are not forbidden by law.

            Table 3: Void vs. Voidable vs. Illegal Agreements

“Mr. Gupta entered into an agreement with Mr. Sharma, a government official in the licensing department, to pay him Rs. 2,00,000 in exchange for expediting the approval of a business license. To fund this payment, Mr. Gupta borrowed Rs. 2,00,000 from his friend, Mr. Kumar, telling him that the money was for ‘urgent business compliance expenses.’ Separately, Mr. Gupta also entered into a wagering agreement (a bet) with his neighbor, Mr. Jain, on the outcome of a cricket match, for which he lost Rs. 50,000. To pay Mr. Jain, Mr. Gupta borrowed Rs. 50,000 from another friend, Ms. Reddy, fully disclosing to her that the loan was to settle a betting loss. Subsequently, Mr. Gupta refused to repay both Mr. Kumar and Ms. Reddy.”

Detailed Explanation of Legal Principles Illustrated:

• Agreement with Mr. Sharma (The Bribe):

  • Nature: The agreement to pay Rs. 2,00,000 to a government official to expedite a license is an agreement to bribe a public official.

  • Legal Status: This agreement has an object that is forbidden by law and is opposed to public policy under Section 23. Therefore, it is an illegal agreement and is void ab initio. 

     

• Loan from Mr. Kumar (Collateral to the Bribe):

  • Nature: This is a loan agreement collateral to the main illegal agreement (the bribe).

  • Legal Status: The legal status depends on Mr. Kumar’s knowledge. The facts state Mr. Gupta told him it was for ‘urgent business compliance expenses,’ which is vague and does not explicitly reveal the illegal purpose. If Mr. Kumar was unaware of the illegal purpose, the loan agreement would be a valid, independent contract. However, if it could be proven that Mr. Kumar knew or had reason to know the true illegal purpose, the loan agreement would be tainted by the illegality of the main transaction and would become void and unenforceable. Given the ambiguity, a court would investigate Mr. Kumar’s knowledge. If he is found innocent, he can recover the loan.

• Agreement with Mr. Jain (The Wager):

  • Nature: This is a wagering agreement.

  • Legal Status: Under Section 30 of the Act, wagering agreements are expressly declared to be void. They are not illegal.  

     

• Loan from Ms. Reddy (Collateral to the Wager):

  • Nature: This is a loan agreement collateral to the main void agreement (the wager). Ms. Reddy was fully aware of the purpose.

  • Legal Status: Since the main agreement (the wager) is only void and not illegal, the collateral transaction is valid and enforceable. Ms. Reddy’s knowledge of the purpose is irrelevant because the purpose itself is not illegal. Therefore, Ms. Reddy can legally recover the Rs. 50,000 loan from Mr. Gupta.   

     

     

• Conclusion: Mr. Gupta is legally obligated to repay Ms. Reddy. His obligation to repay Mr. Kumar depends on whether Mr. Kumar can be proven to have had knowledge of the illegal bribery scheme.

The Lifecycle of a Contract: From Discharge to Remedies

The Discharge of a Contract

A. Introduction

Once a valid contract is formed, it creates legal obligations for the parties involved. “Discharge of contract” refers to the termination of these contractual rights and obligations. When a contract is discharged, it ceases to operate, and the parties are freed from their respective duties under it. The Indian Contract Act, 1872, recognizes several modes by which a contract can be discharged, ranging from the natural conclusion of performance to termination by agreement, supervening events, or breach.   

B. Modes of Discharge

1. Discharge by Performance (Sections 37, 38): This is the most common and natural mode of discharge, occurring when the parties fulfill their contractual promises.   

• Actual Performance: When both parties perform their obligations completely and precisely as per the terms of the contract, the contract is discharged. For example, if A agrees to sell his car to B for Rs. 5,00,000, and A delivers the car and B pays the price, the contract is discharged by actual performance   

   

• Attempted Performance (Tender): When the promisor offers to perform their obligation, but the promisee refuses to accept the performance, it is called an attempted performance or tender. A valid tender of performance discharges the promisor from further liability and entitles them to sue the promisee for breach of contract.   

   

2. Discharge by Mutual Agreement (Sections 62, 63): A contract is created by agreement, and it can also be discharged by a subsequent agreement between the parties. This is based on the maxim    

eodem modo quo oritur, eodem modo dissolvitur (a thing is dissolved in the same way it is created).

Meaning 

This principle is commonly used in contract law and civil law systems. It means that a legal relationship, agreement, or obligation must be terminated using the same process by which it was originally formed.

Example:

• If a contract was formed by mutual agreement between two parties, then:

  • It must be terminated by mutual agreement (not unilaterally).

• If a partnership was created through a formal agreement, it must be dissolved through a formal process, not by informal actions.

The following are modes of discharge by mutual agreement:

• Novation (Section 62): This occurs when parties agree to substitute the existing contract with a new one. The new contract may be between the same parties or between different parties. For novation to be valid, the original contract must be subsisting; it cannot be novated after a breach.   

   

• Rescission (Section 62): This involves the cancellation of the original contract by mutual consent of the parties. No new contract is formed in its place   

   

• Alteration (Section 62): This happens when the parties mutually agree to change one or more of the material terms of the original contract. The original contract is discharged, and the new, altered contract becomes binding   

   

• Remission (Section 63): This is the acceptance of a lesser performance or a lesser sum than what was contracted for. For example, if A owes B Rs. 10,000, and B accepts Rs. 7,000 in full satisfaction of the debt, the entire debt is discharged.   

   

• Waiver: This is the intentional and voluntary relinquishment of a right under the contract by a party. For example, if a contract requires delivery by a certain date, and the promisee knowingly accepts a late delivery without protest, they may be deemed to have waived their right to claim damages for the delay.   

   

3. Discharge by Impossibility of Performance (Section 56 – The Doctrine of Frustration):

• Initial Impossibility: An agreement to do an act that is impossible from the outset is void ab initio. For example, an agreement to discover treasure by magic.   

   

• Subsequent Impossibility (Frustration): A contract that was possible to perform when made may subsequently become impossible or unlawful due to a supervening event that was not the fault of either party. In such cases, the contract becomes void and is discharged. This is known as the Doctrine of Frustration.   

   

• Grounds for Frustration:

  • Destruction of Subject Matter: If the specific subject matter of the contract is destroyed without the fault of either party (e.g., a concert hall burning down before a scheduled performance).   

  • Change in Law: If a subsequent change in law makes the performance of the contract illegal.   

  • Death or Personal Incapacity: In contracts dependent on the personal skill or qualification of a party, the death or incapacitating illness of that party discharges the contract.   

  • Non-occurrence of a Contemplated Event: If the very basis of the contract is the occurrence of a specific event, and that event does not occur, the contract is frustrated.   

  • Outbreak of War: War may render performance impossible or illegal, thus discharging the contract.   

     

• The Supreme Court of India in Satyabrata Ghose v. Mugneeram Bangur & Co. clarified that the word “impossible” in Section 56 is not used in the sense of physical or literal impossibility. A contract is frustrated if a supervening event fundamentally changes the conditions under which the contract was to be performed, making it a radically different obligation from what was undertaken.   

   

4. Discharge by Lapse of Time: The Limitation Act, 1963, prescribes a period within which a party can enforce their contractual rights. If the promisee fails to take legal action against the promisor for breach within this limitation period, the contract is discharged by lapse of time, and the remedy is barred by law.   

5. Discharge by Operation of Law: A contract may be discharged by the operation of law in certain cases:

• Death: In contracts involving personal skill or ability, the death of the promisor discharges the contract.   

• Insolvency: When a person is declared insolvent, their rights and obligations under contracts pass to an official receiver, and the insolvent is discharged from liabilities on those contracts.   

• Merger: When an inferior right under a contract merges into a superior right, the contract for the inferior right is discharged. For example, if a tenant buys the house they were renting, the tenancy agreement is discharged by merger.   

6. Discharge by Breach of Contract: A breach occurs when a party fails or refuses to perform their contractual obligation without a lawful excuse. A breach discharges the aggrieved party from their obligations and gives them the right to sue for remedies.

• Actual Breach: Failure to perform on the due date of performance.   

• Anticipatory Breach: A party indicates their intention not to perform the contract before the due date of performance has arrived.

   
   

               Table 4: Modes of Discharge of Contract

CLAT-Style Exemplar Passage and Detailed Explanation

“Aria, a famous opera singer, entered into a contract with ‘The Grand Theatre’ to perform every Saturday night for two months for a fee of Rs. 1,00,000 per performance. The contract was for a total of eight performances. After the first four performances, the government, in response to a sudden public health emergency, issued an order banning all public gatherings, including theatre performances, for an indefinite period. ‘The Grand Theatre’ informed Aria that they could not host any more shows and considered the contract terminated. Aria, however, argued that the theatre was still liable to pay her for the remaining four performances as they had a binding contract.”

Detailed Explanation of Legal Principles Illustrated:

• The Contract: There is a valid contract between Aria and ‘The Grand Theatre’ for eight performances.

• The Supervening Event: The government order banning public gatherings is a supervening event that occurred after the contract was made and after partial performance. This event was unforeseen and beyond the control of either party.

• Application of Doctrine of Frustration (Section 56): The core issue is whether the contract is discharged by impossibility of performance.

  • The performance of the contract (hosting an opera show for a public audience) has become unlawful due to the government’s prohibitory order.   

  • This change in law makes the future performance of the contract impossible.

  • Therefore, the contract is frustrated and becomes void from the moment the government order was issued.

• Consequences of Frustration:

  • When a contract becomes void under Section 56, the parties are discharged from any further obligations.   

  • ‘The Grand Theatre’ is discharged from its obligation to host the remaining four shows and to pay Aria for them.

  • Aria is discharged from her obligation to perform in the remaining four shows.

• Aria’s Argument: Aria’s argument that the theatre is liable for the remaining performances is incorrect. The doctrine of frustration provides a complete defense to a claim for breach of contract in such circumstances. The contract has ceased to exist for future performance.

• Restitution (Section 65): While not directly at issue in Aria’s claim for future payment, Section 65 would apply to any advance payments. If the theatre had paid Aria an advance for the cancelled shows, she would be bound to restore that benefit. Similarly, the theatre is liable to pay Aria for the four performances she has already completed.

• Conclusion: The contract between Aria and ‘The Grand Theatre’ is discharged by supervening impossibility (frustration) under Section 56. ‘The Grand Theatre’ is not liable to pay Aria for the four cancelled performances.

Remedies for Breach of Contract

A. Introduction

When a party to a contract fails to perform its obligations, it is termed a breach of contract. A breach does not automatically terminate the contract; rather, it entitles the non-breaching (or aggrieved) party to seek legal remedies. The Indian Contract Act, 1872, along with the Specific Relief Act, 1963, provides a spectrum of remedies designed to compensate the aggrieved party for the loss suffered or to compel the performance of the contract, thereby upholding the sanctity of the agreement.   

B. The Spectrum of Remedies

1. Rescission of the Contract: When one party breaches the contract, the other party is entitled to rescind or cancel the contract. This absolves the aggrieved party from performing their part of the obligation. For example, if A promises to supply goods to B, and B fails to pay the price, A can rescind the contract and is not obligated to supply the goods.   

• Types of Damages:

  • General/Compensatory Damages: These are damages that arise naturally and directly from the breach in the usual course of things. For example, if a seller fails to deliver goods, the general damage would be the difference between the contract price and the market price of the goods on the date of the breach.   

     

  • Special Damages: These are damages that arise from special circumstances that were known to both parties at the time of making the contract. To claim special damages, the aggrieved party must prove that the breaching party was aware of the special circumstances that would lead to such a loss.   

     

  • Nominal Damages: When a party’s legal right has been violated but they have suffered no actual financial loss, the court may award a trivial amount as nominal damages to acknowledge the breach.   

     

  • Liquidated Damages and Penalty (Section 74): If the contract itself specifies a sum to be paid in case of a breach, it is known as liquidated damages. Indian courts will enforce such a clause if the sum is a genuine, reasonable pre-estimate of the likely loss. If the sum is exorbitant and intended to terrorize the party into performance, it is considered a penalty and is not enforceable.   

     

  • Exemplary/Punitive Damages: These are awarded not to compensate the plaintiff but to punish the defendant for their conduct. They are rarely awarded in contract law, except in specific cases like breach of a promise to marry or wrongful dishonor of a cheque.   

     

     

     

3. Suit upon Quantum Meruit (“as much as is earned”): Quantum meruit is a Latin phrase meaning “as much as is merited” or “as much as is earned”. It is a claim for reasonable remuneration for the work already done or services rendered by a party before the contract was discharged. This remedy is not based on the original contract but on a quasi-contractual obligation implied by law to prevent unjust enrichment. A claim for quantum meruit arises in situations such as:

• When an agreement is discovered to be void (Section 65).   

   

• When one party abandons the contract or prevents the other from completing it.   

   

• When a contract is divisible, and the party not in default has enjoyed the benefit of partial performance.   

   

4. Suit for Specific Performance (The Specific Relief Act, 1963): Specific performance is an equitable remedy where the court, instead of awarding damages, directs the breaching party to perform the promise they made in the contract. This remedy is discretionary and is granted only when:   

• Monetary compensation is not an adequate relief. This is presumed in contracts for the transfer of immovable property (land) or for the sale of unique or rare goods (like a specific painting or antique) for which there is no market substitute.   

   

• There is no standard for ascertaining the actual damage caused by the non-performance.   

   

  Section 14 of the Specific Relief Act specifies contracts that cannot be specifically enforced, such as contracts for personal service or contracts requiring constant supervision by the court.   

   

5. Suit for Injunction (The Specific Relief Act, 1963): An injunction is a court order restraining a person from doing a particular act. It is a preventive remedy. In the context of contract law, an injunction may be granted to prevent a party from committing a breach of a negative stipulation in the contract.   

• Temporary Injunction: Granted to maintain the status quo pending the final outcome of a lawsuit.   

   

• Permanent Injunction: Granted by a decree after a full hearing on the merits of the case, perpetually restraining the defendant from committing an act.   

  For example, if a singer contracts to sing exclusively at a particular theatre and nowhere else, the court cannot compel her to sing (specific performance of a personal service), but it can issue an injunction restraining her from singing at any other theatre.

   

             C. Table 5: Remedies for Breach of Contract

D. CLAT-Style Exemplar Passage and Detailed Explanation

“Artisan Furnishers, a company specializing in custom-made antique replica furniture, entered into a contract with Mr. Kapoor, a collector. The contract was for the creation of a unique, hand-carved rosewood desk, an exact replica of a 17th-century piece, for a price of Rs. 15 lakhs. Mr. Kapoor paid an advance of Rs. 5 lakhs. The contract specified that this particular desk was intended as the centerpiece for a museum exhibition he was curating. After three months of work, Artisan Furnishers received a more lucrative offer from an overseas buyer and informed Mr. Kapoor that they would not be able to deliver the desk. They offered to refund his advance and pay an additional Rs. 1 lakh as compensation for his trouble.”

Detailed Explanation of Legal Principles Illustrated:

• Breach of Contract: Artisan Furnishers has committed an anticipatory breach of contract by unequivocally stating their intention not to perform their obligation before the performance was due.

• Mr. Kapoor’s Options and Remedies: Mr. Kapoor, as the aggrieved party, is entitled to legal remedies. The offer from Artisan Furnishers (refund plus Rs. 1 lakh) is merely a settlement offer, which Mr. Kapoor is not obligated to accept.

• Analysis of Remedies:

  • Damages: Could Mr. Kapoor sue for damages? Yes. However, the subject matter is a “unique, hand-carved” desk, an “exact replica of a 17th-century piece.” Calculating the monetary loss would be difficult. There is no ready market for such a unique item, so ascertaining the difference between the contract price and market price is not straightforward. Furthermore, the desk has a special value for Mr. Kapoor as the “centerpiece for a museum exhibition.” These factors suggest that monetary compensation would be an inadequate remedy.  

     

  • Specific Performance: This is the most appropriate remedy in this scenario. The contract is for a unique good that is not an ordinary article of commerce and has special value to the plaintiff. The court can compel Artisan Furnishers to complete and deliver the specific desk they promised to create. The fact that the performance is difficult or less profitable for the seller is not a sufficient ground to deny specific performance.   

     

  • Injunction: An injunction is not the primary remedy here, as it is preventive. Mr. Kapoor wants the desk, not just to stop Artisan Furnishers from selling it to someone else (though an injunction could be used as an interim measure to prevent that).

• Conclusion: Mr. Kapoor should reject the settlement offer and file a suit for specific performance of the contract. The court is highly likely to grant this remedy because the subject matter of the contract is unique and damages would not be an adequate relief.

Conclusion: Synthesizing Principles for Legal Reasoning

This guide has traversed the entire lifecycle of a contract under Indian law, from its formation through the essential elements of offer, acceptance, consideration, capacity, consent, and lawful object, to its conclusion through various modes of discharge, and finally, to the remedies available in the event of a breach. The detailed examination of these concepts, supported by landmark case law and illustrative examples, provides a comprehensive foundation for any CLAT aspirant.

The ultimate goal of this guide is to equip aspirants with the conceptual clarity required to master the CL-LST Legal Reasoning section. It must be reiterated that the CLAT does not test rote memorization of legal provisions but rather a candidate’s ability to reason like a lawyer. This involves a specific methodology:   

1. Identify the Principle: First, carefully read the provided passage to extract the legal rule or principle being laid down.

2. Analyze the Facts: Meticulously examine the factual scenario presented in the question.

3. Apply the Principle to the Facts: Logically apply the extracted principle to the given facts to arrive at a conclusion.

It is imperative to treat the principles given in the passage as the governing law for that question, without imposing external knowledge or personal moral beliefs. A foundational understanding of contract law, as detailed herein, streamlines this process. It allows an aspirant to quickly recognize the legal concepts at play—be it a counter-offer, the doctrine of frustration, or the distinction between void and illegal agreements—and to focus their mental energy on the critical task of application. Mastery of these fundamentals is not an end in itself, but a powerful means to achieve speed, accuracy, and confidence under the demanding conditions of the CLAT examination