Section 10
Essentials
of
a
Valid
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Contract
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Section 10: What agreements are
contracts
All agreements are contracts if they are made by the
free consent of parties
competent to contract,
for a lawful consideration and
with a lawful object,
and are not here by expressly declared to be void.
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Salient points:

Parties to the contract should be competent

Free consent

Object (purpose) and consideration (quid pro quo) must be lawful otherwise
agreement becomes void.

Should not be barred by law (Section 25-30) ICA, 1872
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Sec 11- Capacity to Contract
Every person is competent to contract provided.
(i) Is of the age of majority according to the Law which he is subject, and
(ii) Who is of sound mind and
(iii) Is not disqualified from contracting by any law to which he is subject.
(i) Age of majority
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
Sec 3 Indian Majority Act, 1875

Agreement entered by minor are void ab intio
Mohiri Bibi v. Dharamdas Ghose
1. No Estoppel against minor
2. Section 68 Necessity-reimbursed from the property
3. Rule of beneficiary
4. Ratification not allowed (for minor these can be voidable after he has attained the
age of majority)
5. Doctrine of Restitution (to restore back unjust richness)- not applicable
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(ii) Soundness of mind
 Sec 12- 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 sound mind, but occasionally of unsound
mind, may not make a contract when he is of unsound mind.
 The idiot, lunatic and drunkards are the person of unsound mind
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Meaning of idiot, lunatic and
drunkards
 Idiot: A person who is devoid of any faculties of thinking or rational
judgment is called an idiot . .all agreements other than those for
necessaries of life, with idiots are absolutely void.
 Lunatics: A person whose mental powers are deranged is called a
lunatic. agreement made with lunatic except those made during lucid
intervals (period in which he is in his senses )
 Drunkards : A person under the influence of drink or drugs are incapable
to understand the business contract.
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 Alien enemy
 Disqualified by law in case of auction
 An insolvent
 A convict undergoing imprisonment
 Foreign Diplomats
Disqualified by law
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Free Consent (Consenus ad idem)
A contract without free consent is a voidable
A, gets in a contract with B claiming he is a partner of Mukesh Ambani. It was
later discovered this was factually incorrect. Such agreement is void by way of
Error in causa between A and Mukesh Ambani.
A, is in business of real and imitation jewellery. B buys imitation jewellery
assuming it to be real jewellery. This is a voidable contract because of
erroneous belief.
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What is not free consent ?
Section 14, consent is said to be free when it is not caused by
(a)
Coercion, or
(b)
Undue influence, or
(c)
Fraud, or
(d)
Misrepresentation, or
(e)
Mistake.
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Coercion-Sec 15
 Compelling a person to enter into a contract, by use of physical
force/activities forbidden by Indian penal code, OR
threatens to do activities forbidden by I.P.C, OR threatens to
damages the property.
 X threatens to kill Y if he does not sell his house for Rs.
1,00,000 to X.
 Y sells his house to X and receives the payments. Here, Y's
consent has been obtained by coercion.
Undue Influence Sec 16
a.
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Where the relations subsisting between the parties are such that one of them
is in a position to dominate the will of the other, and
b. Where the dominant party dominates that position
c. Where the dominant party uses that position to obtain an unfair advantage over
the other
i. Where there is a fiduciary duty (duty of good faith and trust) - Teacher and
student or Doctor and Patient
ii. Real Authority
Income Tax Officer and assess
Police Officer and accused
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Fraud (Sec 17)
1. ‘Fraud' means a false representation with an intention to deceive
2. Not disclosing latent (something that cannot be discovered by reasonable
examination)
3. Making a promise without any intention to perform.
4. Any other deceptive activity
a.
X sells to Y locally manufactured goods as imported goods charging a higher price,
it amounts to fraud.
b.
Active concealment (Hide) of defect in goods: "A car-painter, uses paint to hide the
scratches over the old furniture and sold it claiming that is new". This is fraud.
c. "A farmer agrees to supply 100kg potato that will be produced by him out of his field,
after three month". Two months has been lapsed, but the farmer neither implant
seeds, nor does cultivation. This is case of fraud.
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
Fraud: where there is a duty to speak
Silence can be fraud where there is a duty to speak
a.
Insurance Policies
b.
Mediclaim Policies
c.
Any encumbrances (Ranbaxy- Daiichi Case)
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
Misrepresentation (Sec 18)
Misrepresentation" means a false representation of fact made innocently or nondisclosure of a material fact without any intention to deceive the other party.
Rules relating to misrepresentation
a.
It should relate to material or important facts
b.
It should induce or inspire other party to enter into a contract
c.
There should be no intention to deceive
d.
Any change of circumstances should be communicated before completion of
contract
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Consequences of misrepresentation

Contract becomes voidable

The aggrieved party may insist of performance

A refund may be claimed
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Mistake (Sec 20-22)
A mistake is said to have occurred where the parties intending to do
one thing by error do something else.
1. Mistake of law
(a) Mistake of Indian Law (In sense of penalty): The contract is not
voidable because everyone is supposed to know the law of his
country.
(b) Mistake of Foreign Law (void-ab-initio): A mistake of foreign law is
treated as mistake of fact, i.e. the contract is void if both the parties
are under a mistake as to a foreign law because one cannot be
expected to know the law of other country.
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Mistake of fact
 Philips V Brooks Ltd.
Phillips was a jeweller. The fraudster purchased a ring from the jeweller with a cheque and signed his name
“Sir George Bullough” and provided this person’s address. Phillips knew of Bullough and knew he lived at
the address, so allowed him to take the ring before the cheque cleared. The cheque dishonored. The
fraudster then pledged the ring to Brooks Ltd who paid for it with a bona fide intent. Phillips brought action
against Brooks Ltd to recover the ring or its value.
The contract was declared as voidable and the claim by Phillips was allowed.
There was found to be no contract between Phillips and the fraudster, as Phillips believed he was making a
contract with Sir George Bullough. If he had known he was not, he would have had no intention to pass the
ring onto him. This was considered to be a material part of the contract. The property of the ring did not
pass to the fraudster so he never had a possessory title he could pass to Brooks Ltd on consideration.
Brooks Ltd were liable to Phillips and were required to return the ring.
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
Lawful object and consideration –Sec
23
Consideration or object of an agreement is unlawful if it
(a)
(b)
is forbidden by law; or
is of such nature that, if permitted, would defeat the provisions of any law; or
(c) is fraudulent; or
(d) Involves or implies, injury to person or property of another; or
(e) Court regards it as immoral, or opposed to public policy.
Consideration [Ss.2(d), 23-25,185]
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The term consideration
is used in the sense of quid pro quo, i.e., “something in return”.
This something or consideration need not be in terms of money.
Abstinence or promise is called a consideration for the promise”.
“No Consideration, No Contract” [Ss.10 and 25]. A promise without consideration
cannot create a legal obligation. The benefit so received or the loss, damage or
inconvenience so caused is regarded in law as the consideration for the promise.
Rules Regarding Consideration
1. Consideration must move at the desire of the promisor
2. Consideration may move either from the promisee or any other person
3.
4.
5.
6.
Consideration need not be adequate
Consideration must be real and competent
Consideration must be legal
A consideration may be present, past or future
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Valid Consideration and lawful object
 Sec 25 An agreement without consideration is void.
 A offers to buys B house, for which later quotes a price of Rs 50 lakhs. A
agrees to buy the house for Rs 50 lakhs however, mentions it would be
paid in kind by giving cocaine of equal amount.
Is this a valid agreement ?
 A agrees to buy arms and ammunition from B though he does not
possess arms licence and agrees to pay through cheque.
Is this a valid agreement ?
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Consideration 2(d)
 When at the desire of the promisor, the promisee or any other person has
done or abstained from doing something or does or abstains from doing
something or promises to do or abstain from doing something, such act or
abstinence or promise is called a consideration for the promise
 The doctrine of consideration requires that:
(1) there must be an exchange between the parties, involving either a
promise for promise, or promise for performance; and
(2) the promise or performance given in exchange must have value
 Price of the Promise
 Sec 10. of the Indian Contract Act 1872 says that Consideration is necessary for any
valid contract.
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 According to Sec. 25, an agreement made without consideration is void.
 Hence……..No Consideration No Contract
 EXCEPTION: CONTRACTS WITHOUT CONSIDERATION

Agreements made on account of natural love and affection [Sec. 25(1)]

It is registered under the law

If is between parties standing in near relation to each other
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Consideration 2(d)

Practical Definition

Doesn't take into theory of consideration beneficial to one party or detrimental to
another

Must be at desire of promisor
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Rules of Consideration

Consideration does not have to be adequate
Chappell & Co. v. Nestle : ‘Rockin’ copyright case

Consideration can be present, past and future.

Must be real not unsubstantial
Consideration
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Privity Rule

Privity of Contract- Contract is a contract between parties only and no third
person can sue

Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge & Co. ltd
Exceptions to rule
Compensation for past voluntary services
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Promise
Gifts made under Transfer of Property Act
Contracts of Agency
Contract of Gurantee as per section 127 of ICA, 1872
Gifts
 Promise to pay time barred debt [Sec. 25(3)
(i) If it is expressed in writing
(ii)
If it is signed by the debtor or his agent
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Contract on the basis of enforceability
(effectiveness of agreements)

Valid Contracts- Sec 10 conditions satisfied and as defined under Section 2(h)

Void Contract 2(j)- a contract which ceases to be enforceable by law

Voidable contract 2(i)- an agreement which is enforceable by law at the option of one or
more the parties but not at the option of the other or others is a voidable contract.

Illegal Contract
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Void Agreements
 When both parties to an agreement are:-
1. Under a mistake of facts [ Sec 20]
2. Consideration or object of an agreement is unlawful [Sec
23]
3. Agreement made without consideration [Sec 25]
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Voidable Contracts

If consent is expressed because of coercion, undue influence, fraud and misrepresentation such
contracts are voidable.

In these contracts one of the parties has the option to rescind or affirm.

If the choice is to affirm the contract, or if the right to rescind is not exercised within a reasonable
time so that the position of the parties has, in the meantime, become altered, the option to rescind
may be lost and the party who had it will be bound by the contract; otherwise that party is entitled to
repudiate its liability.

These contracts are not a nullity from the beginning. Until it is rescinded, it is valid and binding.

Illustration: A third party, therefore, who in good faith purchases goods which have been the subject
of a voidable contract without notice of the prior defect acquires a good title to the goods and cannot
be compelled to surrender them to their former owner.
Void and Voidable Contract
Void
Voidable
Definition
Contract Not enforceable.
Contract enforceable at the
option of one party
Nature
Not enforceable
Valid unless cancelled by
party
Legal remedy
No
Can be declared void
Performance
Party cannot demand
performance
If aggrieved party doesn’t
cancel the performance can
be demanded
Damages
Not available
In certain cases
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Illegal agreements (Section 23-24)

Forbidden by law

Should not defeat provision of any law

Should not be fraudulent

Should not imply injury to person or property

Objects which are immoral in nature(against the ethos of
society) or public policy (trade agreement with a participating
party from an enemy country, a country will whom India is at
war)
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Standard Form of Contract
Protective Devices

There should be contractual document

There should be no misrepresentation

Reasonable notice of the contractual terms

Notice should be contemporaneous with contract

Terms of contract to be reasonable
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Agreements Declared Void
The Act declares certain agreements to be void.
(i)
agreements entered into through a mutual mistake of fact between the
parties (s.20);
(ii) agreements, the object or consideration of which is unlawful (s.23);
(iii) agreements, part of consideration of which is unlawful (s.24);
(iv) agreements made without consideration (s.25).
Agreements Declared Void [Ss.26-30]
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 Agreements Against Public Policy (Ss.26-28).
Agreement with an alien enemy, stifling legal proceedings,
mala fide legal and/or financial help to recover property of another
 Agreement in Restraint of Trade (Section 27)
Exceptions : 1. Sale of goodwill provided its within a limited period
2. Provisions under The Partnership Act, 1932
3. Negative covenant by way of exclusive dealing agreements

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Agreements Declared Void [Ss.26-30]
 Restraint of Legal Proceedings (s.28)

Uncertain or Ambiguous Agreements (s.29)
I can sell my car for Rs 5,00,000 or whatever you may decide

Wagering Agreements (s.30)
Exceptions : 1. Horse Race
2. Crossword, competition based on skill and lottery
 An agreement contingent upon happening of an impossible act (Sec 36)
 An agreement to do an impossible act (Sec 56)