UNIT - I

LAW OF CONTRACT
Definition, essentials and Types of Contract
A contract is an agreement made between two or more parties
which the law will enforce. Sec 2(h) defines contract “as an
agreement enforceable by law”.

Contract=Agreement + Enforceability at law. Agreement

Agreement is defined as “every promise and every set of promises,

forming consideration for each other”.

Promise= a proposal when accepted becomes a promise. Agreement =

Offer+ Acceptance
The parties to the agreement must have agreed about the subject matter of the
agreement in the same sense and at the same time.

Unless there is consensus ad idem, there can be no contract.

Enforceable by law

An agreement, to become a contract, must give rise to a legal obligation or duty.

An agreement may be social agreement or legal agreement.

But only those agreements which are enforceable in a court of law are contracts.

“All contracts are agreements, but all agreements are not necessarily
contract”
Essential elements of a Valid Contract
1.Offers and Acceptance
2.Legal Relationship
3.Lawful Consideration
4.Capacity of Parties
5.Free Consent
6.Lawful Objects
7.Writing and Registration
8.Certainty
9.Possibility of Performance
10.Not Expressly Declared Void
 1.Offers and Acceptance
It is one of the essentials of valid contract. There must an offer and
acceptance of the same.

2. Legal Relationship
The parties to an agreement must create legal relationship. Agreements of
a social or domestic nature do not create legal relations and as such cannot
give rise to a contract

Example, X invited Y to a dinner Y accepted the invitation. It is a social

agreement. If X fails to serve dinner to Y, Y cannot go to the courts of law
for enforcing the agreement.
3. Lawful Consideration

Consideration is “something in return.” Consideration has been defined as the price

paid by one party for the promise of the other. Example,: X agrees to sell his motor
bike to Y for Rs. 1,00,000. Here Y’s promise to pay Rs. 1, 00,000 is the consideration
for X’s promise to sell the motor bike and X’s promise to sell the motor bike is the
consideration for Y’s promise to pay 1, 00,000.

4. Capacity of Parties

It means that the parities to an agreement must be competent to contract. A contract

by a person of unsound mind is void ab-initio. Thus, a contract entered into by a minor
or by a lunatic is void.

Example: X a minor borrowed Rs 8,000 from Y and executed mortgage of his property in
favour of the lender. This was not a valid contract because X is not competent to contract
 5. Free Consent
For a valid contract it is necessary that the consent of parties to the contact must be
free.
Example: X threatens to kill Y if he does not sell his car to X. Y agrees to sell his
car to X. In this case, Y’s consent has been obtained by coercion and therefore, it
cannot be regarded as free.

6. Lawful Objects
It is also necessary that agreement should be made for a lawful object. Every
agreement of which the object or consideration is unlawful is illegal and the therefore
void.

7. Writing and Registration

According to Contract Act, a contract may be oral or in writing. Although in practice,
it is always in the interest of the parties that the contract should be made in writing so
that it may be convenient to prove in the court.
 8. Certainty
For a valid contract, the terms and conditions of an agreement must be clear and
certain.

9. Possibility of Performance
If the act is legally or physically impossible to perform, the agreement cannot be
enforced at law.

Example: A agrees with B to discover treasure by magic and B agrees to pay Rs

1,000 to A. This agreement is void because it is an agreement to do an impossible
act.

10. Not Expressly Declared Void

An agreement must not be one of those, which have been expressly declared to be
void by the Act.
Kinds of Contract
Contracts may be classified as follows:

1. On the basis of enforceability

(A)Valid Contracts.
(B) Void Contracts.
(C)Voidable Contracts
(D) Illegal Contracts.
(E) Unenforceable Contracts.

2. On the basis of mode of creation

(A) Express Contracts
(B) Implied Contracts.

3. On the basis of the extent of execution

(A) Executed Contracts
(B) Executory Contracts.
 Valid contract: The Contracts which are enforceable in a court of law are
called Valid Contracts.

Voidable Contract: If one party to the contract has the option of enforcing
a contract by law, but not at the option of the other or others, it is a voidable
contract.
(A)Voidable from starting
(B) voidable after some time

Void contract: An agreement may be enforceable at the time when it

was entered into but later on, due to certain reasons, for example impossibility
or illegality of the contract, it may become void and unenforceable
Illegal contract: If the contract has unlawful object it is called Illegal
Contract.

Example: There is a contract between X and Z according to which Z has to

murder Y for a consideration of Rs. 10000/- from X. It is illegal contract.

Unenforceable contract: A contract which has not properly fulfilled legal

formalities is called unenforceable contract. That means unenforceable
contract suffers from some technical defect like insufficient stamp etc. After
rectification of that technical defect, it becomes enforceable or valid
contract.

Example: A and B have drafted their agreement on Rs. 10/- stamp where it is
to be written actually on Rs. 100/- stamp. It is unenforceable contract.
“All illegal Contracts are void,
but all void contracts are not
illegal”
 Express contract – Where the offer or acceptance of any promise is made in words, the promise is
said to be express. For example: A has offered to sell his house and B has given acceptance. It is
Express Contract.

Implied contract – An implied contract is one which is inferred from the acts of the parties or course of
dealings between them. Sitting in a Bus can be taken as example to implied contract between passenger
and owner of the bus.

Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so, actually there will
be no Contractual relations between the partners. Such a Contract which is created by Virtue of law is
called Quasi Contract.

Executed contract – In a contract where both the parties have performed their obligation.

Unilateral contract – In a contract one party has performed his obligation and other person is yet to
perform his obligation.

Bilateral contract – It is a contract where both the parties are yet to perform their obligation. Bilateral &
Executory are same and inter – changeable
Contingent Contracts :
A contingent contract is an agreement where parties agree to perform
certain actions if a specific event happens in the future. The event must be
unpredictable, future, separate from the contract, and not reliant on the
promisor.
Example:-
(1) A contract to pay if a house burns down: A agrees to pay B Rs. 10,000 if
B's house burns down.
(2) A contract to buy a horse if someone survives: A makes a contract with B
to buy B's horse if A survives C.
(3) A contract to marry: A contracts to pay B a sum of money when B marries
C.
(4) A fire insurance contract: Peter agrees to pay John Rs 5 lakh if his house is
burnt against an annual premium of Rs 5,000.
 Contingent contracts are often used to manage risk and
uncertainty. They can be found in many situations, including employment
contracts, insurance policies, and real estate deals.
The term ‘Performance of contract‘ means that both, the promisor, and the
promisee have fulfilled their respective obligations, which the contract
placed upon them. For instance, A visits a stationery shop to buy a calculator.
The shopkeeper delivers the calculator and A pays the price. The contract is
said to have been discharged by mutual performance.

Conclusion :- The parties to a contract must either perform, or offer to

perform, their respective promises, unless such performance is
dispensed with or excused under the provisions of this Act, or any other
law.
Methods :-
(1) Actual Performance
(2) Performance by tender
(3) Attempted Performance

(1) Actual Performance:- Actual performance occurs when both parties have fulfilled
their obligations.
(2) Performance by tender:- Performance by tender refers to a formal offer to fulfill a
contract obligation or legally required action. It is also known as an attempted
performance.
(3) Attempted Performance:- Attempted performance, also known as a tender of
performance, is when a promisor offers to perform their obligations under a contract but
the promisee refuses to accept the performance.
Discharge of Contract:
Discharge refers to the termination of the contractual relationship
between the parties, which can happen in several ways:
•By Performance: The most common way to discharge a contract is when all
parties fulfill their obligations.
•By Agreement or Consent: The parties may mutually agree to end the contract
through novation, rescission, alteration, or remission of obligations.
• Novation: Substituting a new contract for an existing one, either by
changing the parties or the terms.
• Rescission: Canceling the contract by mutual consent.
• Alteration: Changing the terms of the contract with the consent of both
parties.
• Remission: Accepting a lesser fulfillment of the obligations than originally
agreed upon.
•By Impossibility of Performance (Doctrine of Frustration): A contract
may be discharged if it becomes impossible to perform due to unforeseen
events. This includes physical impossibility (like destruction of subject matter)
or legal impossibility (change in law).

•By Lapse of Time: If a contract specifies a time for performance and that
time lapses without performance, the contract may be discharged.

•By Operation of Law: Contracts can be discharged by the operation of law,

including bankruptcy, merger, or unauthorized alteration of the contract.

•By Breach of Contract: If one party fails to perform their obligations, the
other party may treat the contract as discharged and seek remedies like
damages or specific performance.
Remedies for Breach of Contract:
When a contract is breached, the aggrieved party can seek legal
remedies:

•Damages: Financial compensation for losses caused by the breach.

•Specific Performance: A court order requiring the breaching party to perform
their contractual obligations.
•Injunction: A court order preventing the breaching party from doing
something.
•Rescission: The contract is canceled, and both parties are restored to their
original positions.
Each of these mechanisms plays a role in how contracts are enforced,
completed, and legally brought to an end.
 Breach of Contract: Meaning and Remedies
Breach of Contract occurs when one party to a contract fails to perform
their obligations under the contract without a lawful excuse. It can happen in
various forms:

1.Actual Breach: When a party refuses to fulfill their part of the contract on
the due date or during the performance period.
2.Anticipatory Breach: When one party makes it clear in advance, either by
words or actions, that they will not perform their contractual obligations
when the time comes.
Remedies for Breach of Contract
When a contract is breached, the aggrieved party can seek several remedies to protect
their legal rights:
(A) Damages:
1. Compensatory Damages: Awarded to compensate for the actual loss suffered due to
the breach. The goal is to put the injured party in the position they would have been in
if the contract had been performed.
2. Consequential Damages: Compensation for additional losses incurred due to the
breach that are beyond the direct damages, such as lost profits. These must have been
foreseeable by both parties at the time the contract was formed.
3. Nominal Damages: Awarded when there is a breach but no actual financial loss
occurred. This is more symbolic in nature.
4. Liquidated Damages: Pre-determined damages specified in the contract itself,
applicable in case of breach. Courts enforce these unless they are seen as a penalty.
5. Punitive Damages: Rare in contract law, these are awarded to punish the breaching
party in cases of egregious misconduct.
(B) Specific Performance:
A court may order the breaching party to perform their obligations under the contract
rather than simply pay damages. This remedy is typically used when the subject matter of the
contract is unique, such as in real estate or rare goods.

(c) Injunction:
A court may issue an injunction preventing a party from doing something that would
breach the contract or cause further damage, such as violating a non-compete clause.

(D) Rescission:
The contract is canceled, and both parties are restored to their pre-contractual positions.
This remedy is available when there has been a fundamental breach or misrepresentation.

(E) Restitution:
Restitution aims to restore the injured party to the position they were in before the
contract. If one party has already conferred a benefit to the other, restitution might require
returning the benefit.
 Quasi-Contract
A Quasi-Contract is not a true contract, but rather an obligation imposed by
law to prevent unjust enrichment. Quasi-contracts are based on the principle that no one
should benefit at another's expense without offering compensation. These obligations arise
even though there is no formal agreement between the parties.

Key Features of Quasi-Contracts:

Implied by Law: Quasi-contracts are imposed by courts to ensure fairness, not by the
agreement of parties.
No Prior Agreement: There is no actual contract or mutual consent between the parties.
However, the law creates the obligation to prevent unjust enrichment.
Obligation to Pay: If one party receives something of value or a benefit from another
without proper compensation, the court may require the party to pay for it.
 Examples of Quasi-Contracts:

1.Supply of Necessities: If someone supplies necessities (food, clothing, shelter) to a person

who is incapable of contracting (e.g., minors or those of unsound mind), the supplier may
recover the cost from the person's estate.
2.Payment by Mistake: If a person mistakenly pays money to someone who is not entitled to
it, the recipient must return the money.
3.Unjust Enrichment: If one person benefits at the expense of another without any legal
justification, a court may impose a quasi-contract to compel repayment.

Remedies under Quasi-Contracts:

The remedy for quasi-contractual obligations is usually restitution, which seeks to
prevent unjust enrichment. The party who has received a benefit must restore or compensate
for the value of that benefit to the party who provided it.
Contracts of Indemnity and Guarantee

Both Indemnity and Guarantee are types of contracts under the law that
deal with ensuring one party's financial protection, but they have distinct roles
and legal implications. They are particularly important in situations involving
financial risk, loans, or third-party obligations.
Contract of Indemnity
A contract of indemnity is an agreement between two parties where one party (the
indemnifier) promises to compensate the other (the indemnified or indemnity holder) for any
loss or damage suffered due to the actions of a third party or an event specified in the
contract.

Key Features of a Contract of Indemnity:

1.Two Parties: There are two parties involved – the indemnifier (who promises to
compensate) and the indemnified (the one receiving protection).
2.Protection from Loss: The main purpose is to protect the indemnified against any loss,
damage, or liability that may arise from an event described in the contract, whether caused by
the indemnifier or a third party.
3.Loss Must Be Proven: The indemnified can only claim indemnity after proving that the
loss has occurred due to the specific event or actions outlined in the contract.
4.Scope of Indemnity: The indemnifier is only liable for losses covered by the terms of the
contract. Losses outside the contract will not be compensated.
Examples of Contract of Indemnity:

•Insurance Contracts: The insurer agrees to compensate the insured for losses
(e.g., damage to property, theft, accidents).
•Business Contracts: If a third party sues a business partner, the indemnifying
party compensates for the losses incurred due to such litigation.

Rights of Indemnifier:

Once the indemnifier has compensated the indemnified, they can:

1.Recover from the third party (if the loss was caused by a third party).
2.Subrogation: Step into the shoes of the indemnified to claim recovery from
the responsible party.
Contract of Guarantee
A contract of guarantee involves three parties, where one party (the guarantor) agrees to
fulfill the obligations or pay the debts of a second party (the principal debtor) if the second
party fails to do so. It is often used in financial and loan agreements.

Key Features of a Contract of Guarantee:

1.Three Parties:
1. Creditor: The party to whom the guarantee is given (e.g., a lender or service provider).
2. Principal Debtor: The party whose obligation is guaranteed (e.g., the borrower).
3. Guarantor: The party who promises to fulfill the obligation if the principal debtor
defaults.
2.Secondary Obligation: The guarantor's liability arises only when the principal debtor fails
to perform their obligations.
3.No Need for Loss to Occur: In a contract of guarantee, the creditor does not need to suffer a
loss before enforcing the guarantee. The moment the principal debtor defaults, the creditor can
approach the guarantor.
4. Types of Guarantee:

1.Specific Guarantee: The guarantor's responsibility is limited to a

single transaction or debt.
2.Continuing Guarantee: The guarantor’s responsibility extends to
multiple transactions or a series of debts over time.

Examples of Contract of Guarantee:

•Loan Agreements: If a person (the principal debtor) takes out a loan and
defaults, the bank can demand repayment from the guarantor.
•Rent Agreements: If a tenant defaults on paying rent, the guarantor (if
any) would be liable to cover the unpaid amount.
Rights of the Guarantor:

1.Right to Subrogation: Once the guarantor pays the debt, they step into
the shoes of the creditor and can recover the amount from the principal
debtor.
2.Right to Indemnity: The guarantor can claim compensation from the
principal debtor for any payment made to the creditor.
3.Right to be Relieved: The guarantor has the right to be discharged from
their obligations once the principal debtor fulfills their obligations or if the
creditor acts in a way that increases the guarantor's risk without consent.
Basis Indemnity Guarantee
Parties Two parties: Indemnifier and Three parties: Creditor, Principal
Involved Indemnified Debtor, Guarantor
Nature of Primary liability (arises from loss Secondary liability (arises only
Liability or damage) when the debtor defaults)
To assure payment or
Purpose To protect against loss or damage performance of obligations by a
third party
When Liability After the occurrence of the loss or Upon default by the principal
Arises damage debtor
Loss must be proven before the No need to prove loss before
Loss Proof
indemnity is paid enforcing guarantee

Both contracts serve to provide security, but they

are used in different situations: indemnity deals with
protecting against loss, while a guarantee ensures fulfillment
of a third party's obligations.
 Agency: Creation, Relationship,
Rights, and Types

Agency refers to a legal relationship in which one party (the agent) acts on
behalf of another party (the principal) in dealings with third parties. The principal delegates
authority to the agent to enter into contracts or make decisions on their behalf.
Creation of Agency

Agency can be created in various ways, either explicitly or implicitly. The most common
methods of creating an agency relationship include:

1. By Agreement (Express Agreement):

1. Express Agency: This is the most direct form of agency, where the principal and agent
enter into a formal agreement, either orally or in writing. The agent is granted authority
to act on behalf of the principal.
2. Example: A real estate broker explicitly hired by a homeowner to sell their house.

2. By Implied Authority:
1. Implied Agency: In some situations, even if there is no express agreement, the
behavior of the parties may imply an agency relationship. This can arise from the
circumstances or conduct of the parties.
2. Example: A manager in a business who regularly deals with third parties may be
considered an agent of the company, even if not explicitly appointed.
3. By Ratification:

•Agency by Ratification: This occurs when an individual acts on behalf of another without
authority, but the principal later ratifies (approves) the actions, creating an agency
relationship retroactively.
Example: If someone buys property on behalf of another without permission, and the
principal later approves the purchase, the agency is created by ratification.

4. By Estoppel (Apparent Authority):

•Agency by Estoppel: If a principal, through their words or conduct, leads a third party to
believe that someone is their agent, the principal is "estopped" (prevented) from denying the
agency relationship, even if no formal authority was granted.
Example: If a person acts as an agent and the principal does nothing to disprove it, the
principal may be held liable for the agent's actions.
5. By Necessity:

Agency by Necessity: This arises in situations where it is necessary

to act on behalf of another to prevent loss or harm, even without
express authority.

Example: A ship’s captain making emergency decisions to sell cargo

in a foreign port to save a ship during a storm.
Agent and Principal Relationship
The relationship between the principal and agent is fiduciary, meaning the
agent must act in the best interests of the principal with loyalty, honesty, and good faith.

Duties of an Agent to the Principal:

Duty to Obey Instructions: The agent must follow the principal’s lawful instructions
precisely.
Duty of Care and Skill: The agent must act with reasonable care and competence while
performing their duties.
Duty to Account: The agent must account for any money or property handled on behalf of the
principal.
Duty of Loyalty and Good Faith: The agent must act in the best interests of the principal and
avoid conflicts of interest.
Duty to Communicate: The agent must keep the principal informed about important matters
related to the agency.
No Secret Profit: The agent cannot profit personally from their position unless agreed by the
principal.
Duties of a Principal to the Agent:

1.Duty to Pay Agreed Compensation: The principal must compensate the

agent as per their agreement (fees, salary, commission, etc.).
2.Duty to Reimburse and Indemnify: The principal must reimburse the agent
for expenses incurred during their duties and indemnify against any liabilities
arising from authorized actions.
3.Duty to Cooperate: The principal must cooperate with the agent to help
them fulfill their duties.
 Rights of Agents and Principals
Rights of an Agent:

1.Right to Remuneration: The agent is entitled to receive payment for

services rendered if the contract stipulates remuneration.
2.Right to Lien: The agent has a right to retain the principal's property or
money until they are compensated or reimbursed for expenses incurred.
3.Right to Indemnity: The agent has the right to be indemnified for any
losses or liabilities suffered while performing authorized tasks on behalf of
the principal.
4.Right to Reimbursement: The agent is entitled to reimbursement for
expenses incurred while acting on behalf of the principal.
Rights of a Principal:

1.Right to Demand Proper Performance: The principal can demand that

the agent performs their duties competently and according to the terms of
the agreement.
2.Right to Recover Losses: If the agent acts negligently or dishonestly,
the principal can recover any resulting losses.
3.Right to Profits: Any profits or benefits derived from the agency
relationship belong to the principal unless otherwise agreed.
4.Right to Information: The principal is entitled to receive all relevant
information and updates about the matters handled by the agent.
Types of Agency
There are several types of agency relationships, based on the scope of
authority granted to the agent:

1.General Agent:
1. A general agent has broad authority to act on behalf of the principal in a specific area
or business. This type of agent handles all the principal’s affairs in a particular domain.
2. Example: A manager running the day-to-day operations of a business.
2.Special Agent:
1. A special agent is appointed for a specific task or transaction. Once the task is
completed, the agency relationship ends.
2. Example: A real estate agent hired to sell a particular property.
3.Mercantile Agent:
1. A mercantile agent (or factor) is authorized to buy or sell goods on behalf of the
principal and has possession of the goods or documents of title.
2. Example: A broker who buys or sells goods for a principal in a trade setting.
4. Sub-Agent:
A sub-agent is appointed by the original agent to assist in performing tasks
on behalf of the principal, with the principal's consent.
Example: An agent appointing a sub-agent to manage specific aspects of a project.

5. Co-Agent:
Co-agents are multiple agents appointed to act jointly on behalf of the
principal. Each agent may have independent or collaborative duties.

6. Del Credere Agent:

A del credere agent is one who guarantees the performance of third parties
in contracts they negotiate for the principal. In return, they receive extra
compensation or commission.
Example: An agent who promises the principal that the buyers will pay for goods
sold.
7. Agency by Estoppel:
As mentioned earlier, this agency arises when the principal’s
conduct leads a third party to believe that the agent has authority, even if
no actual authority was given.

8. Agency of Necessity:
An agent of necessity arises in emergency situations, where the
agent acts on behalf of the principal without prior authorization to prevent
loss.
THANK YOU