Professional Knowledge: Law of Contracts
Scope
Law of Contracts is governed mainly by the Indian Contract Act, 1872. The exam tests formation, consideration, capacity, free consent, void and voidable agreements, performance, breach, damages, indemnity, guarantee, bailment, pledge and agency.
Core rules
- A contract is an agreement enforceable by law. Essentials: offer, acceptance, lawful consideration, capacity, free consent and lawful object.
- Acceptance must be absolute and unqualified; a conditional acceptance is a counter-offer.
- Consideration may be past, present or future, but must be real and lawful. An agreement without consideration is void, subject to statutory exceptions such as natural love and near relation.
- Free consent is absent where there is coercion, undue influence, fraud, misrepresentation or mistake.
- Damages for breach are governed by Section 73: compensation for loss naturally arising or known to the parties.
Worked example
A offers to sell a machine for Rs 5,00,000 and asks for acceptance by Friday. B replies, "I accept if you deliver by Wednesday." This is not acceptance but a counter-offer. No contract arises unless A accepts B's new term. The reasoning is that acceptance must mirror the offer exactly.
Traps
Treating an invitation to offer as an offer; calling a counter-offer an acceptance; ignoring the exception to consideration; and confusing void agreements with voidable contracts.