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    LAW OF CONTRACTLAW OF CONTRACTINDIAN CONTRACT ACTINDIAN CONTRACT ACT

    18721872

    PROF. RAJARSHI CHAKRABORTYPROF. RAJARSHI CHAKRABORTY

    SESSION 2SESSION 2

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    HIGHLIGHTSHIGHLIGHTS

    INTRODUCTION TO THE LAW OFINTRODUCTION TO THE LAW OFCONTRACTCONTRACT

    OFFER OR PROPOSALSOFFER OR PROPOSALSACCEPTANCEACCEPTANCE

    CONTRACTUAL CAPACITYCONTRACTUAL CAPACITY

    FREE CONSENTFREE CONSENTCONSIDERATIONCONSIDERATION

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    INTRODUCTIONINTRODUCTION

    The main objective of the law is to introduce definitenessThe main objective of the law is to introduce definitenessin Business Transactions.in Business Transactions.

    It does not lay down so many rights and duties which theIt does not lay down so many rights and duties which thelaw will protect and enforce.law will protect and enforce.

    It determines the circumstances in which promises madeIt determines the circumstances in which promises madeby the parties to a contract shall be legally binding onby the parties to a contract shall be legally binding on

    themthem

    Its rules define the remedies that are available in the courtIts rules define the remedies that are available in the courtof Law against a person who fails to perform his contract.of Law against a person who fails to perform his contract.

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    CONTRACTCONTRACT

    An agreement enforceable by Law ( Section 2(h) of IndianAn agreement enforceable by Law ( Section 2(h) of IndianContract Act.Contract Act.

    Agreement is defines as every promise and every set ofAgreement is defines as every promise and every set of

    promises forming the consideration of each other (Sectionpromises forming the consideration of each other (Section2(e))2(e))

    The two elements of an agreement are Offer or a proposalThe two elements of an agreement are Offer or a proposaland An acceptance of that offer or proposal.and An acceptance of that offer or proposal.

    When the person, to which the proposal is made signifiesWhen the person, to which the proposal is made signifieshis assent thereto, the proposal is said to be accepted. Ahis assent thereto, the proposal is said to be accepted. Aproposal, when accepted, becomes a promise.proposal, when accepted, becomes a promise.

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    CLASSIFICATIONCLASSIFICATION

    The Indian Contract Act may be classifiedThe Indian Contract Act may be classifiedinto two main Groupsinto two main Groups

    General principles of ContractGeneral principles of Contract

    Specific kinds of Contract only.Specific kinds of Contract only.

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    GENERAL PRINCIPLES OFGENERAL PRINCIPLES OFCONTRACTCONTRACT

    Includes rules and laws relating to communicationIncludes rules and laws relating to communication

    Acceptance and revocation of proposalsAcceptance and revocation of proposals

    Voidable contractsVoidable contracts

    Void agreementsVoid agreements

    Contingent ContractsContingent Contracts

    Performance of contractsPerformance of contracts

    Consequences of breach of ContractConsequences of breach of Contract

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    SPECIFIC KINDS OF CONTRACTSPECIFIC KINDS OF CONTRACT

    Contracts of Indemnity and GuaranteeContracts of Indemnity and Guarantee

    BailmentBailment

    Pledge andPledge and

    AgencyAgency

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    KIND OF AGREEMENTSKIND OF AGREEMENTS

    Valid Agreement : It is an agreement , which isValid Agreement : It is an agreement , which isenforceable by Lawenforceable by Law

    Void Agreement: It is an Agreement, which is notVoid Agreement: It is an Agreement, which is notenforceable by Law.enforceable by Law.

    Voidable Agreement: it is an agreement which isVoidable Agreement: it is an agreement which isenforceable by Law at the option of one or moreenforceable by Law at the option of one or moreof the parties but not at the option of the otherof the parties but not at the option of the other

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    KIND OF AGREEMENTSKIND OF AGREEMENTS

    Unenforceable Agreement: Such an agreement is valid inUnenforceable Agreement: Such an agreement is valid inthe eyes of Law , but cannot be enforced by the court ofthe eyes of Law , but cannot be enforced by the court ofLaw because of some technical defects in proceduralLaw because of some technical defects in proceduralmatters of formation and enforcement.matters of formation and enforcement.

    Social Agreements : they are of social nature and do notSocial Agreements : they are of social nature and do notenjoy the benefits of Lawenjoy the benefits of Law

    Illegal Agreement: It is against the provision of Law.Illegal Agreement: It is against the provision of Law.

    Agreements For Future: An agreement to agree in theAgreements For Future: An agreement to agree in thefuture is a contradiction and is not a contract.future is a contradiction and is not a contract.

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    ESSENTIALS OF A VALID CONTRACTESSENTIALS OF A VALID CONTRACT

    Agreement : To constitute a contract there mustAgreement : To constitute a contract there mustbe an agreement. An agreement is composed ofbe an agreement. An agreement is composed oftwo elements, offer and acceptance. The partytwo elements, offer and acceptance. The partywho is making the offer is known as the offerorwho is making the offer is known as the offeror

    and the party to whom the offer is made is knowand the party to whom the offer is made is knowas the offeree.as the offeree.

    Intention to create legal relationship: When twoIntention to create legal relationship: When two

    parties enter into an agreement their intentionparties enter into an agreement their intentionmust be to create legal relationship betweenmust be to create legal relationship betweenthem. If there is no such intension then there canthem. If there is no such intension then there canbe no contract between them.be no contract between them.

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    ESSENTIALS OF A VALID CONTRACTESSENTIALS OF A VALID CONTRACT

    Lawful Consideration: The agreement to beLawful Consideration: The agreement to beenforced by Law must be supported byenforced by Law must be supported byconsideration on both sides. The termconsideration on both sides. The termconsideration means something in return. Theconsideration means something in return. The

    agreement is enforceable only when both partiesagreement is enforceable only when both partiesgive something and get something in return.give something and get something in return.

    Capacities of Parties: The parties to the agreementCapacities of Parties: The parties to the agreement

    must be capable of entering into a valid contract.must be capable of entering into a valid contract.There are lots of parameters based on which it isThere are lots of parameters based on which it isdecided whether the parties can enter into a validdecided whether the parties can enter into a validcontract.contract.

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    ESSENTIALS OF A VALID CONTRACTESSENTIALS OF A VALID CONTRACT

    Agreement not declared Void: The agreementAgreement not declared Void: The agreementmay not have been expressly declared Void by anymay not have been expressly declared Void by anyLaw enforced in the country.Law enforced in the country.

    Certainty and Possibility of Performance: TheCertainty and Possibility of Performance: TheAgreement must be certain and not vague orAgreement must be certain and not vague orindefinite. If it is vague and it is not possible toindefinite. If it is vague and it is not possible toascertain its meaning , it cannot be enforced.ascertain its meaning , it cannot be enforced.

    Legal Formalities: An agreement may be oral or inLegal Formalities: An agreement may be oral or inwriting.writing.

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    OFFER AND ACCEPTANCEOFFER AND ACCEPTANCE

    An offer is a proposal by one party toAn offer is a proposal by one party toanother to enter into a legally bindinganother to enter into a legally bindingagreement with him. It is defined as whenagreement with him. It is defined as whenone person signifies to another hisone person signifies to another hiswillingness to do or to abstain from doingwillingness to do or to abstain from doinganything with a view to obtain the assentanything with a view to obtain the assent

    of that other to such act , he is said to makeof that other to such act , he is said to makea proposal.a proposal.

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    CHARACTERISTICSCHARACTERISTICS

    It must be an expression of willingness to do or toIt must be an expression of willingness to do or toabstain from doing something.abstain from doing something.

    It must be made to another person.It must be made to another person.

    It must be made with a view to obtain the assentIt must be made with a view to obtain the assentof another person to such act.of another person to such act.

    The expression of willingness must be made withThe expression of willingness must be made witha view to create legal obligations.a view to create legal obligations.

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    TYPES OF OFFERTYPES OF OFFER

    Express and implied offer: Express offer isExpress and implied offer: Express offer isan offer made by express words, spoken oran offer made by express words, spoken orwritten.written.

    When an offer is made otherwise thanWhen an offer is made otherwise thanwords, the offer is called an implied offerwords, the offer is called an implied offer

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    EXAMPLE OF IMPLIED OFFEREXAMPLE OF IMPLIED OFFER

    In a self service restaurant, there is anIn a self service restaurant, there is animplied promise to pay for eatingimplied promise to pay for eatingconsumables.consumables.

    A transport company runs a bus on aA transport company runs a bus on aparticular route , there is an implied offer byparticular route , there is an implied offer bythe transport company to carry passengersthe transport company to carry passengersfor a specified fare.for a specified fare.

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    TYPES OF OFFERTYPES OF OFFER

    Specific and General Offer: When an offerSpecific and General Offer: When an offeris made to a specific person, it is called ais made to a specific person, it is called aspecific offer.specific offer.

    When the offer is made to the world atWhen the offer is made to the world atlarge , which could be accepted by anyone,large , which could be accepted by anyone,

    for e.g. reward to a person supplyingfor e.g. reward to a person supplyinginformation pertaining to someone, is calledinformation pertaining to someone, is calleda general offer or offer at large.a general offer or offer at large.

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    TYPES OF OFFERTYPES OF OFFER

    Positive and Negative Offer: An offer mayPositive and Negative Offer: An offer maybe positive or negative. Thus, an offer maybe positive or negative. Thus, an offer maybe to do something or not to do something.be to do something or not to do something.

    An offer must be distinguished fromAn offer must be distinguished frominvitation to offer. Invitation to offer areinvitation to offer. Invitation to offer are

    offers to negotiate . On the other hand,offers to negotiate . On the other hand,offer is a final expression of willingness byoffer is a final expression of willingness bythe offeror to be bound by his promise.the offeror to be bound by his promise.

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    EXAMPLES TO DISTINGUISH OFFEREXAMPLES TO DISTINGUISH OFFERAND INVITATION TO OFFERAND INVITATION TO OFFER

    A prospectus issued by a college for admission toA prospectus issued by a college for admission tovarious courses is not an offer. It is only anvarious courses is not an offer. It is only aninvitation to offer. A prospective student by fillinginvitation to offer. A prospective student by filling

    up an application form attached to the prospectusup an application form attached to the prospectusis making the offer.is making the offer.

    A display of goods with a price on them in a shopA display of goods with a price on them in a shopwindow is an invitation to offer and not an offer towindow is an invitation to offer and not an offer tosell.sell.

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    LEGAL RULES AND ESSENTIALSLEGAL RULES AND ESSENTIALSREGARDING OFFERREGARDING OFFER

    An offer must intend to create legal relationshipAn offer must intend to create legal relationship

    Terms of offer must be definiteTerms of offer must be definite

    Offer must be communicated.Offer must be communicated.

    The must express the final willingness of theThe must express the final willingness of theofferor.offeror.

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    LEGAL RULES AND ESSENTIALSLEGAL RULES AND ESSENTIALSREGARDING OFFERREGARDING OFFER

    An offer may be made to a specific person,An offer may be made to a specific person,or class of persons or to the world at large.or class of persons or to the world at large.

    The offer may be expressed or implied.The offer may be expressed or implied.

    The offer may be positive or negative.The offer may be positive or negative.

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    ACCEPTANCEACCEPTANCE

    When the person to whom the proposal iaWhen the person to whom the proposal iamade signifies his assent thereto, themade signifies his assent thereto, theproposal is said to be accepted. A proposal ,proposal is said to be accepted. A proposal ,when accepted, becomes a promise.when accepted, becomes a promise.

    The person making the proposal is calledThe person making the proposal is calledthe promiser, and the person to whom it isthe promiser, and the person to whom it ismade is called the promisee.made is called the promisee.

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    ESSENTIALS AND LEGAL RULES OFESSENTIALS AND LEGAL RULES OFA VALID ACCEPTANCEA VALID ACCEPTANCE

    Acceptance must be absolute and unconditional.Acceptance must be absolute and unconditional.

    Acceptance must be according to the modeAcceptance must be according to the mode

    prescribed or usual and reasonable mode.prescribed or usual and reasonable mode.

    Acceptance must be given within a reasonableAcceptance must be given within a reasonabletime.time.

    Acceptance must be in response to offer.Acceptance must be in response to offer.Acceptance cannot precede an offer.Acceptance cannot precede an offer.

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    ESSENTIALS AND LEGAL RULES OFESSENTIALS AND LEGAL RULES OFA VALID ACCEPTANCEA VALID ACCEPTANCE

    Acceptance must be made before the lapse of an offer.Acceptance must be made before the lapse of an offer.

    Acceptance must be given by the authorised person.Acceptance must be given by the authorised person.

    Acceptance must intend to show fulfillment of a promise.Acceptance must intend to show fulfillment of a promise.

    Acceptance may be expressed or implied. It must beAcceptance may be expressed or implied. It must becommunicated to the offeror by spoken or written words orcommunicated to the offeror by spoken or written words or

    conduct.conduct.

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    ESSENTIALS AND LEGAL RULES OFESSENTIALS AND LEGAL RULES OFA VALID ACCEPTANCEA VALID ACCEPTANCE

    Acceptance of offer means acceptance of allAcceptance of offer means acceptance of allthe terms attached with that particularthe terms attached with that particularoffer.offer.

    Acceptance cannot be implied from silenceAcceptance cannot be implied from silenceof the offeree.of the offeree.

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    CONTRACTUAL CAPACITYCONTRACTUAL CAPACITY

    It means the competence of the parties to enter a validIt means the competence of the parties to enter a validcontract.contract.

    Every person is competent to contract who is of the ageEvery person is competent to contract who is of the age

    of majority according to the law to which he is subject,of majority according to the law to which he is subject,and who is of sound mind, and is not disqualified fromand who is of sound mind, and is not disqualified fromcontracting by any law.contracting by any law.

    The following persons are incompetent to contractThe following persons are incompetent to contract

    a)a) MinorsMinorsb)b) Persons of unsound mind , andPersons of unsound mind , andc)c) Persons disqualified by any law to which they are subject.Persons disqualified by any law to which they are subject.

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    MINORSMINORS

    A minor is a person who has not completed 18A minor is a person who has not completed 18years of age. However , a minor for whom ayears of age. However , a minor for whom aguardian has been appointed by the court, heguardian has been appointed by the court, hebecomes a major only on his completing the agebecomes a major only on his completing the age

    of 21 years.of 21 years.

    A contract with or by a minor is void and a minor,A contract with or by a minor is void and a minor,therefore, cannot bind himself by a contract. He istherefore, cannot bind himself by a contract. He is

    not competent to contract.not competent to contract.

    A minor can be a beneficiary .A minor can be a beneficiary .

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    MINORSMINORS

    An agreement made by a minor (during the period of minority) cannotAn agreement made by a minor (during the period of minority) cannotbe ratified by him on attaining majority because a minors contract isbe ratified by him on attaining majority because a minors contract isvoid from the very beginning.void from the very beginning.

    A minor can always put forth the plea for minority and will not beA minor can always put forth the plea for minority and will not be

    prevented from doing so even when he has entered into a contractprevented from doing so even when he has entered into a contractfalsely representing himself to be a major.falsely representing himself to be a major.

    A minor cannot be a partner in a partnership firm.A minor cannot be a partner in a partnership firm.

    Minors parents will not be liable for the debts incurred by him ,Minors parents will not be liable for the debts incurred by him ,

    however, parents are liable when the minor is acting as an agent forhowever, parents are liable when the minor is acting as an agent forthem.them.

    A minor has no liability in contract.A minor has no liability in contract.

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    PERSON OF UNSOUND MINDPERSON OF UNSOUND MIND

    A person is said to be of unsound mind for the purpose ofA person is said to be of unsound mind for the purpose ofmaking a contract, if at the time when he makes it, he ismaking a contract, if at the time when he makes it, he iscapable of understanding it and of forming rationalcapable of understanding it and of forming rationaljudgments as to its effects upon his interests.judgments as to its effects upon his interests.

    A person who is usually of unsound mind but occasionallyA person who is usually of unsound mind but occasionallyof sound mind, may make a contract when he is of soundof sound mind, may make a contract when he is of soundmind.mind.

    A person who is usually of sound mind and occasionally ofA person who is usually of sound mind and occasionally ofunsound mind, may not make a contract when he is ofunsound mind, may not make a contract when he is ofunsound mind.unsound mind.

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    PERSON OF UNSOUND MINDPERSON OF UNSOUND MIND

    A patient in a lunatic asylum, who is at intervals of soundA patient in a lunatic asylum, who is at intervals of soundmind, may contract during those sound mind intervals.mind, may contract during those sound mind intervals.

    A sane man who is suffering from high fever or who isA sane man who is suffering from high fever or who isdrunk to that extent that he does not understand thedrunk to that extent that he does not understand thecontract.contract.

    The tests of soundness of mind areThe tests of soundness of mind are

    a)a) The capacity to understand the contents of the businessThe capacity to understand the contents of the businessconcerned.concerned.

    b)b) The ability to form a rational judgement.The ability to form a rational judgement.

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    PERSON OF UNSOUND MINDPERSON OF UNSOUND MIND

    Mental incompetentsMental incompetents

    a)a) Lunatics or insane persons.Lunatics or insane persons.

    b)b) Idiots : Permanently of unsound mindIdiots : Permanently of unsound mind

    c)c) DrunkardsDrunkards

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    PERSONS DISQUALIFIED BY ANYPERSONS DISQUALIFIED BY ANYLAWLAW

    Alien Enemy:Alien Enemy: is a person (Including an Indian citizen)is a person (Including an Indian citizen)who is domiciled in a country which is at war with India.who is domiciled in a country which is at war with India.

    Foreign Sovereigns and AmbassadorsForeign Sovereigns and Ambassadors

    Corporations (Corporate status):Corporations (Corporate status): it is an artificialit is an artificialperson created by law, having a legal existence apart fromperson created by law, having a legal existence apart fromits members.its members.

    Married Women (Marital Status)Married Women (Marital Status)

    Bankrupt.Bankrupt.

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    FREE CONSENTFREE CONSENT

    Two or more persons are said to consent whenTwo or more persons are said to consent whenthey agree upon the same thing in the samethey agree upon the same thing in the samesense.sense.

    Consent is said to be free, when it is not causedConsent is said to be free, when it is not causedbyby

    a)a) coercion.coercion.b)b) Undue influenceUndue influencec)c) FraudFraudd)d) MisrepresentationMisrepresentatione)e) MistakeMistake

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    COERCIONCOERCION

    COERCION is committing or threatening to commitCOERCION is committing or threatening to commitany act forbidden by the Indian Penal Codeany act forbidden by the Indian Penal Code

    It is the unlawful detention or threatening toIt is the unlawful detention or threatening todetain any property that belong to any person.detain any property that belong to any person.

    With the intention of causing any person harm toWith the intention of causing any person harm toenter into an agreement.enter into an agreement.

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    UNDUE INFLUENCEUNDUE INFLUENCE

    A contract is said to be induced by undueA contract is said to be induced by undueinfluence where the relations subsistinginfluence where the relations subsistingbetween the parties are such that one ofbetween the parties are such that one ofthe parties is in position to dominate the willthe parties is in position to dominate the willof the other and uses that position to obtainof the other and uses that position to obtainan unfair advantage over the other.an unfair advantage over the other.

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    FRAUDFRAUD

    Fraud means and includes any of the followingFraud means and includes any of the followingacts committed by a party to a contract, or byacts committed by a party to a contract, or byhis agent, with the intent to deceive the otherhis agent, with the intent to deceive the otherparty.party.

    a)a) The active concealment of a fact by one havingThe active concealment of a fact by one havingknowledge or belief of the fact.knowledge or belief of the fact.

    b)b) A promise made without any intent ofA promise made without any intent ofperforming it.performing it.

    c)c) Any other act fitted to deceiveAny other act fitted to deceived)d) The suggestion as to a fact, of that which is notThe suggestion as to a fact, of that which is not

    true, by one who does not believe it to be true.true, by one who does not believe it to be true.

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    MISREPRESENTATIONMISREPRESENTATION

    When a person positively asserts that a factWhen a person positively asserts that a factis true, when his information does notis true, when his information does notwarrant it to be so.warrant it to be so.

    Breach of dutyBreach of duty

    Misrepresentation of the subject matter.Misrepresentation of the subject matter.

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    MISTAKEMISTAKE

    It is defined as an enormous belief in something.It is defined as an enormous belief in something.Mistake is of following kindsMistake is of following kinds

    a)a) Mistake of factMistake of fact

    b)b) Mistake of lawMistake of lawc)c) Mistake as to the subject matter.Mistake as to the subject matter.

    d)d) Mistake as to the possibility of performing theMistake as to the possibility of performing thecontractcontract

    e)e) Mistake as to the identity of the personMistake as to the identity of the personcontracted withcontracted with

    f)f) Mistakes as to the nature of the contractMistakes as to the nature of the contract

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    CONSIDERATIONCONSIDERATION

    Consideration is a recompense given by theConsideration is a recompense given by theparties contracting with each other.parties contracting with each other.

    It means something which is of some value in theIt means something which is of some value in theeye of Law.eye of Law.

    A valuable consideration in the sense of the lawA valuable consideration in the sense of the lawmay consist either in some rights, profit ormay consist either in some rights, profit or

    benefits accruing to one party, or some detriment,benefits accruing to one party, or some detriment,loss or responsibility given, suffered or undertakenloss or responsibility given, suffered or undertakenby the other.by the other.

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    THE ELEMENTS OF ATHE ELEMENTS OF ACONSIDERATIONCONSIDERATION

    The consideration is an ACTThe consideration is an ACT

    Such ACT may be done by the promiseeSuch ACT may be done by the promisee

    Such act is either already executed, or is inSuch act is either already executed, or is in

    the process of execution or may be stillthe process of execution or may be stillexecutory.executory.

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    LEGAL RULES REGARDINGLEGAL RULES REGARDINGCONSIDERATIONCONSIDERATION

    Consideration is required for both formation and dischargeConsideration is required for both formation and dischargeof an agreement or a contract.of an agreement or a contract.

    Consideration may be Past:Consideration may be Past:

    A saves Bs life . B promises to pay A a sum of Rs 1000 outA saves Bs life . B promises to pay A a sum of Rs 1000 outof gratitude. The consideration of Bs promise is a pastof gratitude. The consideration of Bs promise is a pastconsideration something done before making of a promise.consideration something done before making of a promise.

    Consideration may be present : Consideration whichConsideration may be present : Consideration whichmoves simultaneously with the promise. E.G. CASH SALES.moves simultaneously with the promise. E.G. CASH SALES.

    Consideration may be future: A promises B to deliver someConsideration may be future: A promises B to deliver somegoods after 10 days. B promises to pay the price ongoods after 10 days. B promises to pay the price ondelivery.delivery.

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    LEGAL RULES REGARDINGLEGAL RULES REGARDINGCONSIDERATIONCONSIDERATION

    Consideration may be positive or negative: TO DO OR NOTConsideration may be positive or negative: TO DO OR NOTTO DO.TO DO.

    Consideration must be done or promised to be done at theConsideration must be done or promised to be done at the

    desire of the promiser.desire of the promiser.

    Consideration must be Lawful.Consideration must be Lawful.

    Consideration (Something in return) need not necessarilyConsideration (Something in return) need not necessarily

    be equal to the value of something given (offer)be equal to the value of something given (offer)

    Consideration must be real and not illusory.Consideration must be real and not illusory.