INDIAN CONTRACT ACT, 1872

The Indian Contract Act, 1872 codifies the legal principles that govern ‘contracts’. The Act
basically identifies the ingredients of a legally enforceable valid contract in addition to dealing
with certain special type of contractual relationships like indemnity, guarantee, bailment, pledge,
quasi contracts, contingent contracts etc.

All agreements are not studied under the Indian Contract Act, 1872, as some of those are not
contracts. Only those agreements, which are enforceable by law, are contracts.

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as
“An agreement enforceable by law”. In other words, we can say that a contract is anything that is an
agreement and enforceable by the law of the land.

This definition has two major elements in it viz – “agreement” and “enforceable by law”. 

The Contracts or agreements between various parties are framed and validated by the Indian Contract
Act. Contract Act is one of the most central laws that regulates and oversees all
the business wherever a deal or an agreement is to be reached at. 

So a contract is a legal document that bestows upon the parties special rights (defined by the contract
itself) and also obligations which are introduced, defined and agreed upon by all the parties of the
contract.

A Contract is an agreement enforceable by law [Section 2(h)]. An agreement is enforceable by

law, if it is made by the free consent of the parties who are competent to contract and the
agreement is made with a lawful object and is for a lawful consideration, and is not hereby
expressly declared to be void [Section10]. All contracts are agreements but all agreements are
not contracts. Agreements lacking any of the above said characteristics are not contracts. A
contract that ceases to be enforceable by law is called ‘void contract’, [Section 2(i)], but an
agreement which is enforceable by law at the option of one party thereto, but not at the option of
the other is called ‘voidable contract’ [(Section 2(i)].

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Thus, according to section 2 (h) of the India Contract Act,’’ An agreement enforceable by law is
a contract ‘.
Thus for the formation of a contract, there must be –
 An agreement, and
 The agreement should be enforceable by law.
All agreements are not enforceable by law and therefore, all agreements are not contracts. Some
agreement not enforceable by law.
For example-  An agreements to sell a radio set any be a contract, but an agreement to go to see
a movie may be a mere agreement not enforceable by law.
Illustration –  if the agreement between the farmer and the tractor owner is given force under the
law, then it becomes a contract.

Agreement

The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act
defines the term agreement as “every promise and every set of promises, forming
the consideration for each other”.
According to section 2 (e) defines agreement as, “Every promise and every set of promise,
forming the consideration for each other, is an agreement.”

In agreement, there is a promise from both sides. For example, A promises to deliver his watch
to B and in return B promises to pay a sum of Rs. 2000 to A, there is said to be an agreement
between A and B.

A promise is a result of an offer (proposal) by one person and its acceptance by the other. For
example – when A makes a proposal to sell his watch to B for Rs. 2,000 and B accept his
proposal, it results from a promise between the two persons.

Illustration – Such a promise between the tractor owner and the farmer which involves a
consideration of Rs. 1000 is called an agreement.

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 Promise

This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise”
here as: “when the person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted. Proposal when accepted, becomes a promise”.
According to section 2 (b) defines promise 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.’’
 Thus, when there is a proposal from one side and the acceptance of that proposal by the other
side, it results in a promise. This promise from the two parties to one another is known as an
agreement. The person who makes the proposal is called the promisor. The person who accepts
such a promise is called the promise.
Illustration – if in the given example, the farmer accepts the proposal of the tractor owner to
transport his produce from the farms to the market, the proposal then becomes a promise.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the
agreement or affected by it. This definition thus introduces a flow chart or a sequence of steps that
need to be triggered in order to establish or draft a contract. The steps may be described as under:

i. The definition requires a person to whom a certain proposal is made.

ii. The person (parties) in step one have to be in a position to fully understand all the aspects
of a proposal.
iii. “signifies his assent thereto” – means that the person in point one accepts or agrees with
the proposal after having fully understood it.
iv. Once the “person” accepts the proposal, the status of the proposal changes to “accepted
proposal”.
v. “accepted proposal” becomes a promise. Note that the proposal is not a promise. For the
proposal to become a promise, it has to be accepted first.

Thus, in other words, an agreement is obtained from a proposal once the proposal, made by one or
more of the participants affected by the proposal, is accepted by all the parties addressed by the
agreement. To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

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Offer and Acceptance: Offeror undertakes to do or to abstain from doing a certain act if the offer
is properly accepted by the offeree. Offer may be expressly made or may even be implied in
conduct of the offeror, but it must be capable of creating legal relations and must intend to create
legal relations. The terms of offer must be certain or at least be capable of being made certain.

Acceptance of offer must be absolute and unqualified and must be according to the prescribed or
usual mode. If the offer has been made to a specific person, it must be accepted by that person
only, but a general offer may be accepted by any person.

Communication of offer and acceptance, and revocation thereof-

(a) Communication of an offer is complete when it comes to the knowledge of the offeree.
(b) Communication of an acceptance is complete: As against the offeror when it is put in the
course of transmission to him as against the acceptor, when it comes to the knowledge of the
offeror.
(c) Communication of revocation of an offer or acceptance is complete: It is complete as against
the person making it, when it is put into a course of transmission so as to be out of power of the
person making it and as against the person to whom it is made, when it comes to his knowledge.
Proposal or Offer

The whole process of entering into a contract starts with a proposal or an offer made by one party to
another. To enter into an agreement such a proposal must be accepted. According to the Indian
Contract Act 1872, proposal is defined in Section 2 (a) as “when one person will signify to another
person his willingness to do or not do something (abstain) with a view to obtain the assent of such
person to such an act or abstinence, he is said to make a proposal or an offer.”

Features or essentials of such an offer:

 The person making the offer/proposal is known as the “promisor” or the “offeror”. And
the person who may accept such an offer will be the “promisee” or the “acceptor”.
 The offeror will have to express his willingness to do or abstain from doing an act. Only
willingness is not enough. Or simply a desire to do/not do something will not constitute an
offer.

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  An offer can be positive or negative. It can be a promise to do some act, and can also be a
promise to abstain (not do) some act/service. Both are valid offers.

Classification of Offer

There can be many types of offers based on their nature, timing, intention, etc.
General Offer

A general offer is one that is made to the public at large. It is not made any specified parties. So any
member of the public can accept the offer and be entitled to the rewards/consideration. Say for
example you put out a reward for solving a puzzle. So if any member of the public can accept the
offer and be entitled to the reward if he finishes the act (solves the puzzle.)
Specific Offer

A specific offer, on the other hand, is only made to specific parties, and so only they can accept the
said offer or proposal. They are also sometimes known as special offers. Like for example, A offers
to sell his horse to B for Rs 5000/-. Then only B can accept such an offer because it is specific to
him.
Cross Offer

In certain circumstances, two parties can make a cross offer. This means both make an identical
offer to each other at the exact same time. However, such a cross offer will not amount
to acceptance of the offer in either case.

For example, both A and B send letters to each other offering to sell and buy A’s horse for Rs
5000/. This is a cross offer, but it will be considered as acceptable for either of them.
Counter Offer

There may be times when a promise will only accept parts of an offer, and change certain terms of
the offer. This will be a qualified acceptance. He will want changes or modifications in the terms of
the original offer. This is known as a counteroffer. A counteroffer amounts to a rejection of the
original offer.

Essentials of a Valid Offer

Here are some of the few essentials that make the offer valid.

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1] Offer must create Legal Relations: The offer must lead to a contract that creates legal relations
and legal consequences in case of non-performance. So a social contract which does not create legal
relations will not be a valid offer. Say for example a dinner invitation extended by A to B is not a
valid offer.
2] Offer must be clear, not vague: The terms of the offer or proposal should be very clear and
definite. If the terms are vague or unclear, it will not amount to a valid offer. Take for example the
following offer – A offers to sell B fruits worth Rs 5000/-. This is not a valid offer since what kinds
of  fruits or their specific quantities are not mentioned.
3] Offer must be communicated to the offeree: For a proposal to be completed it must be
clearly communicated to the offeree. No offeree can accept the proposal without knowledge of the
offer. The famous case study regarding this is Lalman Shukla v. Gauri Dutt. It makes clear that
acceptance in ignorance of the proposal does not amount to acceptance. This was an application
for revision against the Judgement & Order of B. Shoe Prasad, Judge of the Court of Small
Causes at Cawnpore. The Plaintiff-Applicant, Lalman Shukla, had filed a suit for recovery of
reward offered by public advertisement. The Plaintiff was acting as munib in the firm of the
Defendant-Respondent, Gauri Datt. While the Plaintiff was in service, the nephew of the
Defendant ran away from his house. The Defendant sent his servants, including the Plaintiff, to
different places to trace the boy. The plaintiff was sent to Haridwar and was paid money for his
traveling and other expenses. Subsequently, as the nephew was not traceable for some time, the
Defendant advertised that a reward of Rs. 501 would be paid to a person who would find the
boy. Finally the Plaintiff found the boy at Rishikesh and wired the Defendant, who went there
and brought the boy back to Cawnpore. The Plaintiff was rewarded with two sovereigns and
later on upon his return to Cawnpore, the Defendant gave him rupees twenty more. The Plaintiff
did not ask for any further payment and continued in his service for six months when he was
dismissed by the Defendant. He then brought the suit for recovery of the reward offered by
public advertisement, alleging that the Defendant had promised to pay him the amount of the
reward in addition to other gifts and traveling expenses when he was sent to Haridwar, out of
which this application arose. It was contended on behalf of the Plaintiff that a privity of
contract was not necessary and that neither motive nor knowledge was essential, and that mere
performance of the act was sufficient to entitle a person performing it to claim the reward
advertised for.

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 In defense, the Defendant contended that the Plaintiff’s claim could only be maintained on the
basis of a contract. The very basis of a contract is that there should be a vinculum juris between
the parties. It was further contended that there must be an acceptance of the offer and an assent
to it and that there was no valid contract between the parties. There must be an offer which is
communicated to the other party. Also that, in this case, the Plaintiff was under an obligation to
do what he did and was, therefore, not entitled to recover the reward. The right to reward can be
founded only upon a contract. The Defendant strongly relied on: Fitch -Vs- Snedker [1868] 38
N. Y. 248 and Ashley, Law of Contract (12, 23-4) & Pollock, Principles of Contract (ed. 8, 193).
Decision of the High Court of Allahabad:
The High Court dismissed the revision application upholding the Judgement & Order of the
Judge of the Court of Small Causes at Cawnpore in favour of the Defendant-Respondent.
1. An offer must be made with an intention to create legal relation.
2. An offer may be expressed or implied.
3. The terms of the offer must be certain and not vague.
4. An offer cannot prescribe silence as mode of acceptance.
5. An offer must be an expression of willingness to do or abstain from doing something.
6. An offer must be made to obtain the assent of the other.
7. An offer must be communicated.
8. Two identical cross offers do not result in a contract.
9. An offer is different from invitation to offer.
10. An offer may be general or specific.
The Court observed, that a suit like the present one could “only be founded on a contract. In
order to constitute a contract, there must be an acceptance of the offer and there can be no
acceptance unless there is a knowledge of the offer. Motive is not essential but knowledge and
intention are.” It was observed that in the case of a public advertisement offering a reward, the
performance of the act raises an inference of acceptance in terms of section 8 of the Indian
Contract Act, 1872, which provides that, “performance of the conditions of a proposal… is an
acceptance of the proposal.”
Therefore, in the present case it was observed that the right to a reward could only be founded
upon a contract.

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Lastly, no relief could be granted to the Plaintiff since he was in the service of the Defendant
and as such he was sent to trace the missing boy.
The application was, therefore, dismissed.
The very basis of a contract is that there should be a vinculum juris between the parties.

4] Offer may be Conditional: While acceptance cannot be conditional, an offer might be

conditional. The offeror can make the offer subject to any terms or conditions he deems necessary.
So A can offer to sell goods to B if he makes half the payment in advance. Now B can accept these
conditions or make a counteroffer.
5] Offer cannot contain a Negative Condition: The non-compliance of any terms of the offer
cannot lead to automatic acceptance of the offer. Hence it cannot say that if acceptance is not
communicated by a certain time it will be considered as accepted. Example: A offers to sell his cow
to B for 5000/-. If the offer is not rejected by Monday it will be considered as accepted. This is not a
valid offer.
6] Offer can be specific or general: As we saw earlier the offer can be to one or more specific
parties. Or the offer could be to the public in general.
7] Offer may be Expressed or Implied: The offeror can make an offer through words or even by
his conduct. An offer which is made via words, whether such words are written or spoken (oral
contract) we call it an express contract. And when an offer is made through the conduct and the
actions of the offeror it is an implied contract.

Acceptance

It is often said that acceptance is to an offer what a lighted match is to a barrel of gunpowder. For a
successful contract, there must be a valid offer followed by the offer being accepted. Let us learn
more about the essentials of a valid acceptance. The Indian Contract Act 1872 defines acceptance
in Section 2 (b) as “When the person to whom the proposal has been made signifies his assent
thereto, the offer is said to be accepted. Thus the proposal when accepted becomes a promise.”

So as the definition states, when the offeree to whom the proposal is made, unconditionally accepts
the offer it will amount to acceptance. After such an offer is accepted the offer becomes a promise.

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Say for example A offers to buy B’s car for rupees two lacs and B accepts such an offer. Now, this
has become a promise.

When the proposal is accepted and it becomes a proposal it also becomes irrevocable. An offer does
not create any legal obligations, but after the offer is accepted it becomes a promise. And a promise
is irrevocable because it creates legal obligations between parties. An offer can be revoked before it
is accepted. But once acceptance is communicated it cannot be revoked or withdrawn.
Rules regarding Valid Acceptance

1] Acceptance can only be given to whom the offer was made: In the case of a specific
proposal or offer, it can only be accepted by the person it was made to. No third person without the
knowledge of the offeree can accept the offer.

Let us take the example of the case study of Boulton v. Jones. Boulton bought
Brocklehurst’s business but Brocklehurst did not inform all his creditors about the same. Jones, a
creditor of Brocklehurst placed an order with him. Boulton accepted and supplied the goods. Jones
refused to pay since he had debts to settle with Brocklehurst. It was held that since the offer was
never made to Boulton, he cannot accept the offer and there is no contract.

When the proposal is a general offer, then anyone with knowledge of the offer can accept it.

2] It has to be absolute and unqualified: Acceptance must be unconditional and absolute. There
cannot be conditional acceptance that would amount to a counteroffer which nullifies the original
offer. Let us see an example. A offers to sell his cycle to B for 2000/-. B says he accepts if A will sell
it for 1500/-. This does not amount to the offer being accepted, it will count as a counteroffer.

Also, it must be expressed in a prescribed manner. If no such prescribed manner is described then it
must be expressed in the normal and reasonable manner, i.e. as it would be in the normal course of
business. Implied acceptance can also be given through some conduct, act, etc.

However, the law does not allow silence to be a form of acceptance. So the offeror cannot say if no
answer is received the offer will be deemed as accepted.

3] Acceptance must be communicated: For a proposal to become a contract, the acceptance of

such a proposal must be communicated to the promisor. The communication must occur in the

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prescribed form, or any such form in the normal course of business if no specific form has been
prescribed.

Further, when the offeree accepts the proposal, he must have known that an offer was made. He
cannot communicate acceptance without knowledge of the offer.

So when A offers to supply B with goods, and B is agreeable to all the terms. He writes a letter to
accept the offer but forgets to post the letter. So since the acceptance is not communicated, it is not
valid.

4] It must be in the prescribed mode: Acceptance of the offer must be in the prescribed manner
that is demanded by the offeror. If no such manner is prescribed, it must be in a reasonable manner
that would be employed in the normal course of business.

But if the offeror does not insist on the manner after the offer has been accepted in another manner,
it will be presumed he has consented to such acceptance.

So A offers to sell his farm to B for ten lakhs. He asks B to communicate his answer via post. B  e-
mails  A accepting his offer. Now A can ask B to send the answer through the prescribed manner.
But if A fails to do so, it means he has accepted the acceptance of B and a promise is made.

5] Implied Acceptance: Section 8 of the Indian Contract Act 1872, provides that acceptance by

conduct or actions of the promisee is acceptable. So if a person performs certain actions that
communicate that he has accepted the offer, such implied acceptance is permissible. So if A agrees
to buy from B 100 bales of hay for 1000/- and B sends over the goods, his actions will imply he has
accepted the offer.
Communication of Offer and Acceptance and Revocation of Offer

We know that two very important aspects of a contract are the offer and the acceptance of the offer.
However, in the practical world of business and economics, the communication of the offer and the
acceptance and the timings of these are also very important factors.
Communication of Offer and Acceptance

Now we have seen previously that an offer cannot be revoked after the offeror has communicated it
to the offeree. Then the offer becomes binding, it creates legal relations between the two parties.

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So when is the communication complete? Effective communication of the offer and a clear
understanding of it is important to avoid misunderstanding between all the parties.

If the parties are talking face-to-face this is not a problem. The communication happens in
real time and the offer and acceptance will be communicated on the spot, creating no confusion.

But often times in business the communication occurs via letters and emails etc. So, in this case, the
timeline of communication is important.
Communication of Offer

Section 4 of the Indian Contract Act 1872 says that the communication of the offer is complete
when it comes to the knowledge of the person it has been made to. So when the offeree (in case of a
specific offer) or any member of the public (in case of a general offer) becomes aware of the offer,
the communication of the offer is said to be complete.

So when two people are talking, face-to-face or via telephone, etc. the communication will be
complete as soon as the offer is made. Example if A tells B he will fix his roof for five thousand
rupees, the communication is complete as soon as the words are spoken.

Let us take the same example. A writes to B offering to fix his roof for five thousand rupees. He
posts the letter on 2nd July. The letter reaches B on 4th July. So the communication is said to
complete on 4th July.
Communication of Acceptance

Mode of Acceptance

In this case of communication of acceptance, there are two factors to consider, the mode of
acceptance and then the timing of it. Let us first talk about the mode of acceptance. Acceptance can
be done in two ways, namely:

A. Communication of Acceptance by an Act: This would include communication via

words, whether oral or written. So this will include communication via telephone calls,
letters, e-mails, telegraphs, etc.

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 B. Communication of Acceptance by Conduct: The offeree can also convey his acceptance
of the offer through some action of his, or by his conduct. So say when you board a bus, you
are accepting to pay the bus fare via your conduct.

Timing of Acceptance

The communication of acceptance has two parts.

A. As against the Offeror: For the proposer, the communication of the acceptance is
complete when he puts such acceptance in the course of transmission. After this it is out of
his hand to revoke such acceptance, so his communication will be completed then. So, for
example, A accepts the offer of B via a letter. He posts the letter on 10 th July and the letter
reaches B on 14th For B (the proposer) the communication of the acceptance is completed on
10th July itself.
B. As against the Acceptor: The communication in case of the acceptor is complete when
the proposer acquires knowledge of such acceptance. So in the above example, A’s
communication will be complete on 14th July, when B learns of the acceptance.
Revocation of Offer

The Indian Contract Act lays out the rules of revocation of an offer in Section 5. It says the offer
may be revoked any time before the communication of the acceptance is complete against the
proposer/offeror. Once the acceptance is communicated to the proposer, revocation of the offer is
now not possible.

Let us take the same example of before. A accepts the offer and posts the letter on 10th July. B gets
the letter on 14th July. But for B (the proposer) the acceptance has been communicated on 10 th July
itself. So the revocation of offer can only happen before the 10th of July.
Revocation of Acceptance

Section 5 also states that acceptance can be revoked until the communication of the acceptance is
completed against the acceptor. No revocation of acceptance can happen after such date.

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Again from the above example, the communication of the acceptance is complete against A
(acceptor) on 14th July. So till that date, A can revoke his/her acceptance, but not after such date.
So technically between 10th  and 14th July, A can decide to revoke the acceptance.
Legal Rules Regarding Consideration

Enforcing any legal contract requires it to have an element of consideration included in it. In simple
words, it is nothing but a price that the promisee agrees to pay to the promisor. Now, this price can
be paid as a benefit to the promisor and/or a loss or detriment to the promisee.
Basic Understanding of Consideration
(a) Consideration is a price for the promise of the other party and it may either be in the form
of ‘benefit’ or some ‘detriment’ to the parties.
(b) Consideration must move at the desire of the promisor.
(c) It may be executed or executory.
(d) Past consideration is valid provided it moved at the previous request of the promisor.
(e) It must not be something which the promisor is already legally bound to do.
(f) It may move from the promisee or any third party.
(g) Inadequacy of consideration is not relevant.
(h) Consideration must be legal.
(i) The general rule of law is “No Consideration, No Contract” but there are a few
exceptional cases where a contract, even though without consideration is valid.
(j) “Stranger to a contract can’t sue but in some exceptional cases the contract may be
enforced by a person who is not a party to the contract.

According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined 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 is called a consideration for the promisee.”

This is a complex sentence. Let’s break it down for further understanding and rewrite it as follows:

At the desire of the promisor if the promisee either

 Does something (in the past, present or future) OR

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  Abstains from doing something (in the past, present or future)

Then, this act of doing or abstinence is called Consideration. Now, it has two aspects, either doing
some act or abstaining from doing something.
Example 1 – Doing something

Peter and John enter into a contract where Peter promises to deliver 15 curtains to John in one
month’s time. Also, John promises to pay Peter an amount of Rs 3,000 on delivery. In this contract,
John’s promise to pay Rs 3,000, on delivery, is the consideration for Peter’s promise. Also, Peter’s
promise of delivering 15 curtains is the consideration of John’s promise to pay.
Example 2 – Not doing something

Peter has taken a loan from his friend John. However, he has not repaid the loan yet. John
promises not to file a suit against Peter if he promises to repay the loan within a week. In this case,
abstinence on the part of John is due to the consideration of Peter’s promise of repayment of
the loan.

Rules Regarding Consideration

According to Section 2(d) of the Indian Contract Act, 1872, the follows features are essential for a
valid consideration:
(i) Consideration must move at the desire of the promisor

Consideration can be offered by the promisee or a third-party only at the request or desire of the
promisor. If an action is initiated at the desire of the third-party, it is not a consideration.

Peter is going back home from work. On his way, he sees that his neighbor John’s house is on fire.
He immediately arranges for a  water hose and manages to douse the fire. Peter cannot claim any
reward for his effort because it was a voluntary act and was not done at the desire of John
(promisor).
(ii) Consideration may move from the promisee to any other person

If you look at the definition of consideration according to section 2 (d) of the Indian Contract Act.
1872, it explicitly states the phrase ‘promisee or any other person…’ This essentially means that in
India, consideration may move from the promise to any other person. However, it is important to
note that there can be a stranger to consideration but not a stranger to the contract.
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Peter gifted his son, Oliver an apartment in the city with a condition that he pays a fixed amount of
money to his uncle, John, every year. On the same day, Oliver executed a deed to pay a fixed
amount of money to John every year. However, Oliver failed to pay and John filed a suit for
recovery. Oliver pleaded that he was not liable since no consideration had moved from John.
However, the court held the words ‘promisee or any other person…’ and allowed John to maintain
his suit for recovery.
(iii) It can be in the past, present or future

a.      Past

Since consideration is the price of a promise, it is normally given to induce the promise. However, it
can be given before the promise is made by the promisor. This is past consideration. It is important
to note that past consideration is not considered for a new promise since it is not been given in lieu
of the promise. According to Indian law, ‘past considerations’ is ‘good consideration’ if it was
given at the desire of the promisor.

Peter employs John to work on his field during the months of agricultural harvesting. He promises
to pay John an amount of Rs 5,000 for his services when he sows the new crop in the fields. The
services of John in the past constitute a valid consideration.

a.1. Past Voluntary services

At times, a person might render voluntary services without any request or promise from another. If
the person receiving the services makes a subsequent promise to pay for the services, then such a
promise is enforceable in India under Section 25(2) of the Indian Contract Act, 1872 which states:

‘An agreement made without consideration is void, unless it’s 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; or unless.’

Peter finds John’s wallet on the road. He returns it to him and John promises to pay Peter Rs 500
for his services. This is a valid contract.

b.      Present

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If the promise and consideration take place simultaneously then it is present or executed
consideration. An example is Peter goes to a shop, buys a bag of chips and pays for the same on-
spot.

c.       Future

When the consideration for a promise moves after the contract is formed, it is a future or executor. It
is also valid if it depends on the condition.

Peter promises to create architectural plans for John’s new house. John promises to pay Peter an
amount of Rs 50,000 provided the plans are approved by his wife.
(iv) It must have value in the eyes of the law

While the law allows the parties to decide an ‘adequate’ consideration for them, it must be real and
have value in the eyes of law. While the Court will not consider inadequacy, it will look at it to
determine if the consent was given by the party with free-will or not.

Peter’s wife agrees to withdraw the suit she has filed against him in return for his promise to pay
her a monthly maintenance amount. This is a good consideration and holds value in the eyes of law.
(v) It should be over and above the Promisors’ existing obligations

If the promisor is already obligated either by his promise or law to perform or abstain from a certain
act, then it is not a good consideration for a promise.

Peter receives a summons from the Court to appear before it as a witness for John. John promises
to pay him Rs 10,000 to appear in the Court. This contract is not valid because Peter is obligated
by law to appear in the Court on receiving a summons.
(vi) It cannot be Unlawful

A consideration that is against the law or public policies is not valid.

Peter offers Rs 10,000 to John to beat up his business rival. John beats him up but Peter refuses to
pay him. John cannot file a suit for recovery since the consideration is against the law.

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Agreements without Consideration

Consideration is an integral part of a contract. The rules of consideration state that it is essential to

have consideration for a contract. But there are some specific exceptions to the “No consideration
no contract” rule.
Consideration

Can you make a legal agreement without consideration? No. As per Section 10 and Section 25
of the Indian Contract Act, 1872, consideration is essential in a valid contract. In simple words, no
consideration no contract. Hence, you can enforce a contract only if there is a consideration.

While considerations are integral to a contract, the Indian Contract Act, 1872 has listed
some exceptions whereby an agreement made without consideration will not be void.
Exceptions to the ‘No Consideration No Contract’ Rule

Section 25 also lists the exceptions under which the rule of no consideration no contract does not
hold, as follows:

Natural Love and Affection

If an agreement is in writing and registered between two parties in close relation (like blood

relatives or spouse), based on natural love and affection, then such an agreement is enforceable even
without consideration.

Example, Peter and John are brothers. In his will, their father nominates Peter as the sole owner of
his entire property after his death. John files a case against Peter to claim his right to the property
but loses the case. Peter and John come to a mutual decision where Peter agrees to give half of the
property to his brother and register a document regarding the same.

Eventually, Peter didn’t fulfil his promise and John filed a suit for recovery of his share in the
property. The Court held that since the agreement was made based on natural love and affection,
the no consideration no contract rule didn’t apply and John had the right to recover his share.

Past Voluntary Services

If a person has done a voluntary service in the past and the beneficiary promises to pay at a later
date, then the contract is binding provided:

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  The service was rendered voluntarily in the past
 It was rendered to the promisor
 The promisor was in existence when the voluntary service was done (especially important
when the promisor is an organization)
 The promisor showed his willingness to compensate the voluntary service

Example, Peter finds Johns wallet on the road and returns it to him. John is happy to find his lost
wallet and promises to pay Peter Rs 2,000. In this case, too, the no consideration no contract rule
does not apply. This contract is a valid contract.

Promise to pay a Time-Barred Debt

If a person makes a promise in writing signed by him or his authorized agent about paying a time-
barred debt, then it is valid despite there being no consideration. The promise can be made to pay
the debt wholly or in part.

Example, Peter owes Rs 100,000 to John. He had borrowed the money 5 years ago. However, he
never paid a single rupee back. He signs a written promise to pay Rs 50,000 to John as a final
settlement of the loan. In this case, ‘the no consideration no contract’ rule does not apply either.
This is a valid contract.

Creation of an Agency

According to section 185 of the Indian Contract Act, 1872, no consideration is necessary to create
an agency.

Gifts

The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of the
Indian Contract Act, 1872 states that the rule of an agreement without consideration being void does
not apply to gifts made by a donor and accepted by a donee.

Bailment

Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one
person to another for some purpose. This delivery is made upon a contract that post accomplishment

18
of the purpose, the goods will either be returned or disposed of, according to the directions of the
person delivering them. No consideration is required to effect a contract of bailment.

Charity

If a person undertakes a liability on the promise of another to contribute to charity, then the contract
is valid. In this case, the no consideration no contract rule does not apply.

Example, Peter is the trustee of his town’s charity organization. He wants to build a small pond in
the town to enhance greenery and offer the residents a good place to walk around in the evenings.
He raises a charity fund where he appeals to people to come ahead and contribute to the cause.
Many people come forward as subscribers the fund and agree to pay Peter their share of the
amount once he enters into a contract for constructing the pond.

After raising half the amount, Peter hires contractors for building the pond. However, 10 people
back out at the last moment. Peter files a suit against them for recovery. The Court ordered the 10
people to pay the amount to Peter since he had undertaken a liability based on their promise to pay.
Even though there was no consideration, the contract was valid and enforceable by law.

“All contracts are agreements but all agreements are not contracts” 
This is so because agreements of moral, religious or social nature e.g., a promise to lunch
together at a friend’s house or to take a walk together are not contracts because they are not
likely to create a duty enforceable by law for the simple reason that the parties never intended
that they should be attended by legal consequences.

In business agreements the presumption is usually that the parties intend to create legal relation
for e.g. An agreement to buy certain specific goods at an agreed price e.g.., 10 bags of wheat at
Rs. 500 per bag is a contract because it gives rise to a duty  enforceable by law , and in case of
default on the part of either party an action for breach of contract could be enforced through a
court provided other essential elements of a valid contract as laid down in Section 10 are present,
namely, if the contract was made by free consent of the parties competent to contract, for a
lawful consideration and with a lawful object.

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The various agreements may be classified into two categories:
 Agreement not enforceable by law (Any essential of a valid contract is not available )
 An agreement enforceable by law(All essentials of a valid contract are available )

Types of Contracts On The Basis Of Validity

Chapter 2 of the Indian Contract Act, 1872 discusses the voidable contracts and void agreements.
On the basis of validity or enforceability, we have five different types of contracts as given below.

Valid Contracts

The Valid Contract as discussed in the topic on “Essentials of a Contract” is an agreement that is
legally binding and enforceable. It must qualify all the essentials of a contract.

Void Contract or Agreement

The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable”. This makes all those contracts that are not
enforceable by a court of law as void.

We have already stated examples of these kinds of contracts in the “Essentials of a Contract”.

Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A dies of
natural causes in 4 years. The contract is no longer valid and becomes void due to the non-
enforceability of the agreed terms.

Voidable Contract

These types of Contracts are defined in section 2(i) of the Act: “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,
is a voidable contract.” This may seem difficult to wrap your head around but consider the
following example:

Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This
contract would be valid, the only problem is that person B is a minor and can’t legally enter
a  contract.

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So this contract is a valid contract from the point of view of A and a “voidable” contract from the
point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus
this is a voidable contract.

A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be
bound to the terms of the contract. For example, person A in the above example.

The other party is not bound and may choose to repudiate or accept the terms of the contract. If they
so choose to repudiate the contract, the contract becomes void. Otherwise, a voidable contract is a
valid contract.

Illegal Contract

An agreement that leads to one or all the parties breaking a law or not conforming to the norms of
the society is deemed to be illegal by the court. A contract opposed to public policy is also illegal.

Several examples may be cited to illustrate an illegal contract. For example, A agrees to sell
narcotics to B. Although this contract has all the essential elements of a valid contract, it is still
illegal.

The illegal contracts are deemed as void and not enforceable by law. As section 2(g) of the
Act states: “An agreement not enforceable by law is said to be void.”

Thus we can say that all illegal contracts are void but the reverse is not true. Both the void contracts
and illegal contracts can’t be enforceable by law. Illegal contracts are actually void ab initio (from
the start or the beginning).

Also because of the criminal aspects of the illegal contracts, they are punishable under law. All the
parties that are found to have agreed on an illegal promise are prosecuted in a court of law.

Unenforceable Contracts

Unenforceable contracts are rendered unenforceable by law due to some technical. The contract
can’t be enforced against any of the two parties.

For example, A agrees to sell to B 100kgs of rice for 10,000/-. But there was a huge flood in the
states and all the rice crops were destroyed. Now, this contract is unenforceable and can not be
enforced against either party.
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Types of Contract – Based on Performance

There are various types of contract, one such type are contacts based on their performance. The
basis for this type is whether the contract is performed or still to be performed. Accordingly, the two
types are known as executed contracts and executory contracts.
Executed Contracts

A contract between two or more parties is said to be executed when the act or forbearance promised
in the contract has been performed by one, both or all parties. Basically, it means that whatever the
contract stipulated, has been carried out. Thus the contract has been executed.

Let us see an example of an executed contract. Alex goes to the local coffee shop and buys a cup of
coffee. The barista sells her the coffee in exchange for the cash payment. So it can be said that this
is an executed contract. Both parties have done their part of what the contract stipulates.

In most executed contracts the promises are made and then immediately completed. The buying of
goods and/or services usually falls under this category. There is no confusion about the date of
execution of the contract since in most cases it is instantaneous.
Executory Contracts

In an executory contract, the consideration is either the promise of performance or an obligation. In

such contracts, the consideration can only be performed sometime in the future, hence the name
executory contract. Here the promises of consideration simply cannot be performed immediately.

The best example of an executory contract is that of a lease. All the conditions of a lease cannot be
fulfilled immediately. They are performed over time. Similarly, say Alex decides to tutor some
students in Physics. They pay her Rs 2500/- at the start of the month. But here the contract isn’t
executed since Alex has to still carry out her promise. So such a contract is an executory contract.

Now even in executory contracts, there are two types, namely unilateral and bilateral contracts. Let
us take a look at both times.

Unilateral Contracts

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As the name suggests these are one-sided contracts. It usually comes into existence when only one
party makes a promise, which is open and available to anyone who wishes to or can fulfil the said
promise. The contract will only be fulfilled once someone fulfils the promise.

Let us see an example. Alex lost his bag pack on the metro. So he decided to announce a reward of
Rs 1000/- to anyone who finds and returns his bag with all its contents. Here the is only one party
to the contract, namely Alex. If someone finds and returns his bag he is obligated to pay the reward.
This is a unilateral contract.

Bilateral Contracts

By contrast, a bilateral contract is one that has two parties. It is a traditional type of contract most
commonly known and occurring. Here both parties agree to the terms of the agreement and thus
enter into a contract. Hence it is also known as a reciprocal contract

In bilateral contracts, both parties have usually agreed to a time frame to carry out the said contract.
Say for example the contract of sale of a house. The buyer pays a down payment and agrees to pay
the balance at a future date. The seller gives possession of the house to the buyer and agrees to
deliver the title against the specified sale price. This is a bilateral contract.
Types of Contract – Based on Formation

While getting into a contract various aspects are to be taken into consideration. Like if the contract
has to be in written form, it must be an Express Contract. Similar to the express contract, we have
four other types of contracts based on the formation of the contract.

In the essentials of a contract, we saw some important aspects of an agreement as well as a contract.
We also saw that some contracts are void contracts if certain aspects are missing from them. For
example, a contract for a lease is void if it is not registered.

Such conditions allow us to classify contracts on the basis of the terms or conditions under which
the agreements or contracts come into existence. On the basis of the formation of a contract, there
are four types of contracts. They are listed below.

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Express Contract

The Section 9 of the Act defines what is meant by the term express: “Promises, express and implied
—In so far as the proposal or acceptance of any promise is made in words, the promise is said to be
express.”

This means that if a proposal or a promise is expressed by listing the terms in words – in writing or
orally is said to be an Express Contract as long as it gets acceptance from the other party.

The terms of the Express Contract are clearly stated either orally or in writing. So the main aspect of
the Express Contract is that the terms of the contract are expressed clearly. For example, consider
the following:

A person A sends a text from his phone to person B, proposing to sell their bike for a cost of Rs.
10,000/-. The person B calls the first person and agrees to the terms of the promise.

This is an Express Contract as the terms have been stated clearly in oral as well as written form.
Note that the communications could be entirely oral or written.
Implied Contracts

The second part of section 9 of the Act defines what is meant by an implied contract: “In so far as
such proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

Going by the definition we can say that a contract in which the terms of the agreement are not
expressed in written or oral form is an implied contract. Let us see an example to understand this.

For example, you board a rickshaw and the driver starts to drive. You tell the driver the address
where he has to drop you. The driver stops and you pay him.

As you can see this is a contract but did you and the driver express any of the terms in written and
oral form? No, the intent was implied by your conduct and thus there was an implied contract.
Quasi-Contract

They are not contracts in the sense that no agreements are made between any of the parties. In fact,
there is no contract prior to some court order. For example, a bank mistakenly transfers a large
amount of money into your account. Now there is no written or oral or any sort of agreement
between you and the bank but the money doesn’t belong to you. You will have to return the money

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even if you don’t want to. The bank will approach the court and the court will issue an order to
return the money, which is becoming a quasi-contract.

So here we see that a quasi-contract is not agreed upon by the two parties but it comes into existence
by a court order. It is thus enforced by the law which also creates it. Most of the times the quasi-
contract is created to stop any of the parties from taking unfair advantage of the other.

Consider this example. You have a yard and you commission a person to build a small door for
your car. You come home one day to find out that the mansion has made a big door which is very
expensive. At the same time very good for the value of your property. Now, what would happen if
you both approach the court?

The courts usually enforce what is known as the “Quantum Merit” which means “as much as is
deserved.” Since the work was done also increased the value of your property, it would be immoral
if the worker doesn’t get paid for the extra work and materials. The payment might be lesser than
the normal cost but the quantum merit will apply. This is a quasi-contract.
E-Contract

When a contract is formed by the use of electronic devices and means, it is called an electronic
contract or an e-contract. The electronic means and devices may include emails, tests, telephones,
digital signatures etc. They are also known as the Cyber contracts, the EDI contracts or the
Electronic Data Interchange contracts. The terms of the contract are listed by electronic means or
implied by the actions of the users.

ESSENTIAL ELEMENTS OF A CONTRACT

The following persons are incompetent to contract: (a) minor, (b) persons of unsound mind, (c)
other disqualified persons.
(a) Minor: Agreement with a minor is altogether void but his property is liable for necessaries
supplied to him. He cannot be a partner but can be admitted to benefits of partnership with the
consent of all partners. He can always plead minority and cannot be asked to compensate for any
benefit received under a void agreement. Under certain circumstances, a guardian can enter into
valid contract on behalf of minor. Minor cannot ratify a contract on attaining majority.

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(b) Persons of unsound mind: Persons of unsound mind such as idiots, lunatics and drunkers
cannot enter into a contract, but a lunatic can enter into a valid contract when he is in a sound
state of mind. The liability for necessities of life supplied to persons of unsound mind is the same
as in case of minors. (Section 68).
(c) Certain other persons are disqualified due to their status.
Free Consent
Two or more persons are said to consent when they agree upon the same thing in the same sense
(Section 13). Consent is free when it is not caused by mistake, misrepresentation, undue
influence, fraud or coercion. When consent is caused by any of above said elements, the contract
is voidable at the option of the party whose consent was so caused (Sections 19 and 19A)
(a) Coercion: Coercion is the committing or threatening to commit any act, forbidden by the
Indian Penal Code or the unlawful detaining or threatening to detain, any property, to the
prejudice of any person with the intention of causing any person to enter into an agreement
(Section 15). A contract induced by coercion is voidable at the option of the aggrieved party.
(b) Undue influence: When one party to a contract is able to dominate the will of the other and
uses the position to obtain an unfair advantage, the contract is said to be induced by undue
influence. (Section 16). Such contract is voidable, not void.
(c) Fraud: Fraud exists when a false representation has been made knowingly with an intention
to deceive the other party, or to induce him to enter a contract (Section 17). Contract in the case
is voidable.
(d) Misrepresentation: Means a misstatement of a material fact made believing it to be true,
without an intent to deceive the other party (Section 18). Contract will be voidable in this case.
(e) Mistake: When both the parties are at a mistake to a matter of fact to the agreement, the
agreement is altogether void.
Thus, according to of section 10, as all agreement 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 hereby expressly declared to be void. Nothing herein contained shall affect any law in
force in India, and not hereby expressly repealed, by which any contract is required to be made
in writing or in the presence of witnesses, or any law relating to the registration of documents.

 ESSENTIALS OF VALID CONTRACT           

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Offer + Acceptance = Promise + Consideration = Agreement +Enforceability by
law Contract
The essential elements of a valid contract are as follows :
 Lawful offer and Acceptance
These must be a ‘ lawful offer ‘ and a ‘ lawful acceptance ‘ of the offer, thus resulting in an
agreement. The adjective ‘ lawful ‘ implies that the offer and acceptance must satisfy the
requirements of the Indian Contract Act in relation thereto.
 Intention to create legal relation
There must be intention among the parties that the agreement should be attached by legal
consequences and create legal obligations. Agreements of social or domestic nature do not
contemplate legal relations, and as such, they do not give rise to a
contract.                                             
For example: 
1. An agreement to dine at a friend’s house is not an agreement intended to create legal
relations and therefore is not a contract.
2. An agreement between husband and wife also lack the intention to create a legal
relationship and thus do not result in a contract.
3. Suraj promises his wife Megha to get her jewelry if she will make a special dish. Megha
made a dish but Suraj did not bring the jewelry for her. Megha cannot bring an action in
a court to enforce the agreement as it lacked the intention to create legal
relation.                                      
CASE LAW: BALFOUR V/S BALFOUR
Where the defendant was a civil servant stationed in Ceylon. He and his wife were enjoying
leave in England. When the defendant was due to return to Ceylon, his wife could not
accompany him because if her health. The defendant agreed to send her Rs. 300 a month as
maintenance expenses during the time they were thus forced to live apart. She sued for breach of
this agreement. Her action was dismissed on the ground that no legal relation had been
contemplated and therefore, there was no contract.
 Lawful consideration
The third essential element of a valid contract is the presence of consideration. Consideration has
been defined as “the price paid by one party for the promise of the other.” An agreement is

27
legally enforceable only when each of the parties to it gives something and gets something. The
something given or obtained is the price for the promise and is called ‘consideration’. But only
those considerations are valid which ‘lawful’.
According to Section 23, the consideration is unlawful if:
1. Law forbids it;
2. It is fraudulent;
 Involves or implies injury to the person or property of another;
1. It is of such a nature that, if permitted it would defeat the provision of any law;
2. Is immoral or is opposed to public policy.
 Capacity of parties
The parties to an agreement must be competent to contract; otherwise, it cannot be enforced by a
court of law. In order to be competent to contract according to section 11 the parties must be :
1. Of the age of majority;
2. Of sound mind:
 Must not be disqualified from contracting by any law to which they are subject.
Thus, if any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness,
etc.
 Free consent
Consent’ means that the parties must have agreed upon the same thing in the same sense
( section 13). Free consent of all the parties to an agreement is another essential element of a
valid contract.
There is an absence of ‘free consent’. If the agreement is induced by any of the following factors:
1. Coercion
2. Undue influence,
3. Fraud
4. Misrepresentation, or
5. Mistake
If the agreement is vitiation by any of the first four factors, the contract would be voidable and
cannot be enforced by the party guilty of coercion, under influence, etc. The other party ( i.e., the
aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the

28
act. But, if the agreement were induced by mutual mistake that is material to the agreement, it
would be void.
 Lawful object
For the formation of a valid contract, it is also necessary that the parties to an agreement must
agree for a lawful object.
The object for which the agreement has been entered into must be fraudulent or illegal or
immoral or opposed to public policy or must not imply injury to the person or property of
another (section 23 ).
If the object is unlawful for one or the other of the reason mentioned above the agreement is
void.
For example – When a landlord knowingly lets a house to a prostitute to carry on prostitution, he
cannot recover the rent through a court of law.
 Oral, Writing and Registration
According to the Indian contract act, a contract may be oral or in writing. But in certain special
cases, it lays down that the agreement, to be valid, must be in writing or/ and registered.
For example – under section 25 of the act – It requires that an agreement to pay a time-barred
debt must be in writing and an agreement to make a gift for natural love and affection must be in
writing and registered.
Similarly, certain other cases also require writing or/and registration to make the agreement
enforceable by law, which must be observed.
Illustration – The agreement for a sale of immovable property must be in writing and registered
under the Transfer of Property Act, 1882 before they can be legally enforced.
 Certainty
Section 29 of the contract act provided that, ‘Agreement’, the meaning of which is not certain, or
capable of being made certain, are void.’’
In order to give rise to a valid contract, the terms of the agreement must not be vague or
uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot
be enforced.
Illustration- A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty.
 Possibility of performance

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Another essentials feature of a valid contract is that must be capable of performing.
Section 56 lays down that, “An agreement to do an act impossible in itself is void.”  If the act is
impossible in itself, physically or legally, the agreement cannot be enforced at law.
Illustration- Ajay agrees with Vijay to discover treasure by magic. The agreement is not
enforceable because it is physically impossible to perform.
  Not expressly declared a void agreement
The agreement must not have been expressly declared to be void under the Indian Contract Act.
Section 24 – 30 specify certain types of agreements, that have been expressly declared to be
void.
For example-
 An agreement in restraint of marriage, ( section 26)
 An agreement in restraint of trade, and ( section 27)
 An agreement by way of the wager (section 30)

Lawful Object and Consideration

An agreement where the object or the consideration is unlawful, is void. Object or consideration
is unlawful if it is forbidden by law, it defeats the provisions of law; or is fraudulent, or involves
injury to the person or property of another; or is immoral; or is opposed to public policy.
Besides the above said agreements, certain agreements have been expressly declared to be void
by the Contract Act such as – wagering agreements, agreement with uncertain meaning,
agreements where consideration is unlawful in part etc.
PERFORMANCE OF CONTRACT
1. The promisor or his representative must perform unless the nature of contract
shows that it may be performed by a third person, but the promisee may accept
performance by a third party. (Sections 37, 40 and 41)
2. In case of joint promisors, all must perform, and after the death of any of them,
the survivors and the representatives of the deceased must perform. But their
liability is joint and several. If the promisee requires any one of them perform the
whole promise, he can claim contribution from others. (Sections 42, 43 and 44)
3. Joint promisees have only a joint right to claim performance. (Section 45)

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 4. The promisor must offer to perform and such offer must be unconditional, and be
made at the proper time and place, allowing the promisee a reasonable
opportunity of inspection of the things to be delivered. (Sections 38, 46, 47, 48,
49 and 50)
5. If the performance consists of payment of money and there are several debts to be
paid, the payment shall be appropriated as per provisions of Sections 59, 60 and
61.
6. If an offer of performance is not accepted, the promisor is not responsible for non-
performance and does not lose his rights under the contract; so also if the
promisee fails to accord reasonable facilities. He may sue for specific
performance or he may avoid the contract and claim compensation (Sections 38,
39, 53 and 67).
7. Rescission is communicated and revoked in the same way as a promise. The
effect is to dispense with further performance and to render the party rescinding
liable to restore any benefit he may have received. (Sections 64 and 66)
8. Parties may agree to cancel the contract or to alter it or to substitute a new
contract for it. (Section 62)

BREACH OF CONTRACT AND ITS REMEDIES

According to Indian Contract Act, 1872 Section 2(h), a contract is an agreement enforceable by

law.

An agreement becomes a “contract” only when it is intended to meet its legal obligation.
Prepared on the basis of equality and mutual benefit be in line with the applicable law.

BREACH OF CONTRACT

A contract is breached or broken when any of the parties fails or refuses to perform its promise
under the contract. Breach of contract is a legal cause of action in which a binding agreement is
not honored by one or more parties by non-performance of its promise by him renders
impossible.

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Section 37 of the Indian Contract Act,1872 provides that the parties to the contract are under
obligation to perform or offer to perform, their respective promises under the contract, unless
such performance is dispensed with or excused under the provisions of the Indian Contract Act
or of any other law.

According to Section 39, where the party has refused to perform or disabled himself from
performing, his promise in its entirely, the other party may put an end to the contract, , unless
that other party has expressly or impliedly signified its consent for the continuance of contract. If
the other party chooses to put an end to the contract, the contract is said to be broken and
amounts to breach of contract by the party not performing or refusing to perform its promise
under the contract. This is called repudiation. Thus repudiation can occur when either party
refuses to perform his part or makes it impossible for him to perform his part of contract in each
of the cases in such a manner as to show an intention not to fulfil his part of the contract.

CONSEQUENCES OF BREACH OF CONTRACT

Chapter VI (Section 73 to 75) of the Indian Contract Act, 1872 deals with the consequences of
breach of the contract.

SECTION 73 1ST PARAGRAPH DEALS WITH COMPENSATION FOR LOSS OR DAMAGE

CAUSED BY BREACH OF CONTRACT

When a contract has been broken, the party who suffers by such breach is entitled to receive,
from the party who has broken the contract, compensation for any loss or damage caused to him,
which naturally arose in the natural course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of it.

No compensation shall be given to any remote and indirect loss or damage sustained by reason of
breach.

COMPENSATION IN REGARD TO FAILURE TO DISCHARGE OBLIGATION  WHICH

RESEMBLES THOSE CREATED BY THE CONTRACT

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An obligation resembling those created by contract has been incurred and has not been
discharged, any person affected by the failure to discharge it is entitled to receive the same
compensation from the party in default as if such person had contracted to discharge it and had
broken his contract.

COMPENSATION FOR LOSS OR DAMAGE WHICH NATURALLY AROSE IN THE

USUAL COURSE OF THINGS FROM SUCH BREACH

Compensations to be recovered for loss or damage which the parties knew or which would have
naturally arisen in the usual course, to be likely to result from the breach of it.

SECTION 73: REMOTE AND INDIRECT LOSS OR DAMAGE

It states that no compensation is payable for remote and indirect loss or damage arising out on
account of breach of contract. The indirect loss cannot be said to arise on usual course of things.
The aggrieved party can claim compensation for indirect loss or loss of profit, only where it is
expressly made known to the other party or contemplated by contract that breach of non-
performance of the contract would result in some indirect loss or loss of profit to the party. The
term remoteness of damage refers to the legal test used for deciding which type of loss caused by
the breach of contract may be compensated by the award of damage.

SECTION 73: BREACH OF RESEMBLING CONTRACT

It confers a statutory right upon a party to get compensation from a party who has incurred a
statutory obligation to pay compensation in case default even though there may be no contract to
pay compensation .The party in default is under obligation to pay compensation to injured party
as if there was contract and has broken such contract.

SECTION 73: MITIGATION OF LOSSES

It explains that the means which existed of remedying the inconvenience caused by the non-
performance of the contract must be considered while calculating the damage or loss for breach
of the contract.

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SECTION 74: PENALTIES IN REGARD TO BREACH OF CONTRACT

The party to the contract may agree at the time of contracting that, in the occurrence of breach,
the party in default have to pay a stipulated sum of money to the other, or may agree that in the
event of breach by one party any amount paid by him shall be forfeited. If this sum is genuine
pre-estimate of damage likely to flow from the breach is called ‘liquidated damages’ .If it is not
genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it
may be called as ‘penalty’.

 Section 74 provides for the measure of damages in two classes: (a) where the contract names a
sum to be paid in case of breach; and (b) where the contract contains any other stipulation by
way of penalty.

ESSENCE OF PENALTY AND LIQUIDATED DAMAGE:

Penalty is a payment of money to non –defaulting party, which put the other party in fear and
enforces the other party to perform its promise under the contract .The penalty is deterrent in
nature.

A liquidated damage is a genuine and reasonable pre-estimate of damage. Liquidated damages

means it shall be taken as the sum which the parties have by the contract assessed as damages to
be paid whatever may be the actual damage.

SECTION 75: COMPENSATION TO THE PARTY RIGHTFULLY RESCIDING THE

CONTRACT

A person who rightfully resides the contract is entitled to compensation for any damage which he
has sustained through non fulfillment of the contract .A party to a contract is entitled to rescind
the contract in circumstances given in Section 39, 53, 55, 64 and 65 of the Contract Act .The
claim for compensation under Section 75 is maintainable when the right of repudiation of the
contract has been exercised either of the Section 39, 53, 54 and 55 of the Contract Act

DAMAGE CAN BE CLAIMED BY:

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Only those parties can claim damages for breach of contract who have performed or is willing to
perform his part of the obligations arising under the contract. Section 73 and 74 are for the
benefit of a party willing to perform the contract and not for defaulting party .Loss which is
caused by the party’s failure to fulfill his duty is not recoverable from the other party. A party to
a Contract cannot be in better position by reason of his own default, than if he had fulfilled his
obligations. A person, who is not a party to the contract, cannot claim damages.

CAN DAMAGE OR LOSS SUFFERED BY THIRD PARTY BE CLAIMED?

A party claiming the damage need not necessarily suffer any loss from breach of contract. When
it is contemplated by the contract. When it is contemplated by the contract that breach by any of
the parties to the contract is likely to cause loss to an identified or identifiable stranger to the
contract, rather than to the contracting party, a party not in default can claim damages for the loss
caused to an identified or identifiable stranger to the contract. Thus the party may recover
substantial damages even though it does not personally bear the cost of correcting the defects or
personally suffers the diminution in the value; provided this was intended or was within the
contemplation of the parties; and if such intention or contemplation is shown it is immaterial that
the true prayer or suffered is stranger to the contract.

CAN INTEREST BE CLAIMED AS DAMAGE?

Interest would be refused if the party fails to show that interest is being claimed under a contract
or on account of usage or customs. The Supreme Court in Mahavir Prasad Rungta v. Durga
Dutta,1961 AIR 990 has ruled that interest can be claimed only if it is payable by custom or there
is express or implied provision in the agreement for payment of interest or under provisions of
substantive law plaintiff is entitled to recover the interest.

NATURE OF REMEDY OF DAMAGE

The principle behind awarding damage for breach of contract to the party, who has suffered the
loss, is to place that party in the same position in which it would have been, had that contract not
broken. The damages must commensurate with the loss suffered .Where the contract is broken by

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one party, contract is discharged, and the obligations under the contract, comes to end; a new
obligation arises for the payment of damages.

CONCLUSION

A contract is the fountainhead of a correlative set of rights and obligation of the parties and
would be of no value if there is no statutory provision for compensation for damage or loss
caused to the aggrieved party. Chapter VI of the Indian Contract Act, 1872 provides for the
remedy to the non-defaulting party to contract by way of compensation for damage or loss
caused due to breach of contract by the other party. Section 73 provides for compensation for
actual damage or loss from the party in breach of the contract Reasonable liquidated damages are
payable without proof of loss. Section 74 provides that contracting parties in the event of breach,
may agree that the defaulted party shall pay a stipulated amount to the other, or may agree that in
the event of breach by one party any amount paid to him shall be forfeited. If it is not genuine
pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be
called ‘penalty’. However mere stipulation does not give right for compensation by way of
penalty. Prove has to be established for loss or damages caused by breach of contract.

1. In case of breach of contract by one party, the other party need not perform his part of
the contract and is entitled to compensation for the loss occurred to him.
2. Damages for breach of contract must be such loss or damage as naturally arise, in the
usual course of things or which had been reasonably supposed to have been in
contemplation of the parties when they made the contract, as the probable result of the
breach.
3. Any other damages are said to be remote or indirect damages, hence, cannot be claimed.

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