Unit 1: Forms of Business, Business Laws in India, The Indian

Contract Act, 1872, Definitions of a Contract and its essentials.

Formation of a Valid Contract – Offer & Acceptance, Consideration,
Free Consent, Legality of Object, Discharge of Contract by
Performance, Breach, Damages for breach of a contract, Quasi
Contracts, Special Contracts, Contract of Indemnity & Guarantee,
Contract of Bailment & Pledge, Contract of Agency

INDIAN CONTRACT ACT, 1872

The Indian Contract Act was passed by British India in 1872.
This law is applicable throughout the country, except the states
of Jammu and Kashmir. This act deals mostly with the
guidelines and principles related to contracts.
This law can be subdivided into two parts −
 Sections 1 to 75 are related to general principles of
contracts.
 Sections 124 to 238 are related to special kinds of
contracts such as indemnity and guarantee, bailment,
pledge and agency.
o According to the Contract Act, a contract can be
defined as an agreement which can be enforced by
law. When two parties mean the same thing in the
similar sense at the same time and work for the
same purpose, they are termed to be at a point of
agreement.
o Section 2(e) of the Contract Act defines an
agreement to be a set of promises, which form the
considerations of both the parties. Obligation can be
defined as an action or a duty to which a person is
committed morally as well as legally.
 o Both agreement and obligation constitute to form a
contract. Any agreement related to social matters
cannot be considered as a contract. A legal
relationship must be created between the two parties
to constitute a contract.

ESSENTIAL ELEMENTS OF VALID CONTRACT

1. Offer and Acceptance
Basically, a contract unfolds when an offer by one party is accepted by
the other party. The accepted offer should be without any qualification
and be definite. An offer needs to be clear, definite, complete and final. It
should be communicated to the offeree. A proposal when accepted
becomes a promise or agreement. The offer and acceptance must be
‘consensus ad idem’ which means that both the parties must agree on the
same thing in the same sense i.e. identity of wills or uniformity of minds.
Example:
A has 2 houses, one in Mumbai and the other in Chennai. He has offered to sell one
house to B.B accepts the offer with the idea of purchasing the house in Mumbai, while A was
intending to sell the house in Chennai. There is no identity of minds. So the agreement is void.

2. Intention to Create Legal Relationship

The intention of the parties to a contract must be to create a legal
relationship between them. Agreements of social nature, as they do not
contemplate legal relationship, are not contracts. For instance, if a father
fails to give his daughter the promised pocket money, the daughter
cannot sue the father, because it was purely a domestic arrangement.
Thus, it is clear that all agreements, which do not result in legal relations,
are not contracts.
Example
A husband agreed to pay 30 pounds to his wife every month while he was abroad. As he failed to pay the
promised amount, his wife sued him for the recovery of the amount. Held, she could not recover it as it was a
social agreement and the parties did not intend to create legal relations.

3. Capacity to Contract
If an agreement is entered between parties who are competent enough to
contract, then the agreement becomes a contract.

4. Genuine and Free Consent

Free consent is another essential element of a valid contract. An
agreement must have been made by free consent of the parties. The
contract would be void in case of mutual mistakes. When consent is
obtained by unfair means, the contract would be voidable.
Example
A threatened to shoot B if he (B) does not lend him Rs. 2,000 and B agreed to it, Here the agreement is entered
into under coercion and hence voidable at the option of B.
5. Lawful Object
Objectives of an agreement should be lawful. It must not be illegal or
immoral or opposed to public policy. It is lawful unless it is forbidden by
law. When the object of a contract is not lawful, the contract is void.
Example
If A rents out a house for use as a' gambling den, the agreement is an agreement
expressly or impliedly prohibited by law.

6. Lawful Consideration
Something in return is Consideration. In every contract, agreement must
be supported by consideration. It must be lawful and real.
Example
A agrees to, sell his books to B for Rs. 100, B .promises to pay Rs. 100 in consideration for A’s promise to sell
his books and A's, promise to sell the books is the consideration for B's promise to pay Rs. 100.

7. Certainty and Possibility of Performance

The agreements, in which the meaning is uncertain or if the agreement is
not capable of being made certain, it is deemed void. T&C of the contract
should always be certain and cannot be vague. Any contract that are
uncertain are considered void. The terms of the agreement must also be
capable of performance and should not enforce impossible act.
Example
P agreed to sell 10 tons of oil to Q. It is not clear what kind of oil is intended to be
sold. Therefore, this agreement is not valid on the ground of uncertainty. If, however, the meaning of the
agreement could be made certain from the circumstances of the case, it will be treated as a valid contract.
8. Legal Formalities
Legal formalities if any required for particular agreement such as
registration, writing, they must be followed. Writing is essential in order
to effect a sale, lease, mortgage, gift of immovable property etc.
Registration is required in such cases and legal formalities in the
relevant legislation should be strictly followed.

Example
Time barred debt, a promissory note with inadequate stamps
 CLASSIFICATION OF
CONTRACTS
A. Contracts on the basis of Creation

1. Express Contracts: Section 9 of the Act defines promises which are

expressly made. If the proposal or acceptance of any contract/promise is made by the
parties in words, it is said to be express. The express contract need not be a written
one.

Example: If A asks B whether he will purchase his pet dog and B accepts it, it can also
be termed express contract. Oral promise and acceptance, if made clearly, constitute
a legal contract expressly made.

2. Implied Contracts: Again, Section 9 of the Act states that any promise
or acceptance which is made otherwise than in words, they are said to be implied
contracts. If a contract can be inferred from the conduct of the parties or
circumstances, they are called implied contracts. When the intention of parties is
known by the specific circumstances or their behavior, a contract can be implied.

Example: If a person boards a bus, the law implies a promise on his part to pay the
fare and also on the part of the bus operator to carry him safely to the required
destination. This is inferred from the conduct of the parties and is accepted by law in
the form of implied contract.

3. Quasi-Contracts: Quasi means “that appears to be something but is not

really so” and “partly; almost”. Quasi-contracts are created by law. These are based
on the principle that no one shall be allowed to be rich at the expense of another. 
In India, Section 68 to 72 of the Act deals with Quasi Contracts.

Example: A trader, by mistake left certain goods in X’s house. X treated the goods as his own
and consumed them. X is bound to pay for the goods even though he had not asked for them.

B. Contracts on the basis of Validity

1. Valid Contract: A contract which meets all the requirements

prescribed by law is called a valid contract. For a valid contract, the
requirements mentioned in Section 10 of the Act must be satisfied.
Agreements made by the free consent of parties who are competent to contract
 are called valid contracts. Apart from that, it must be made for a lawful
consideration with a lawful object. Further, it should not be expressly declared
void by the Act.

2. Void Contract: Void contracts are one which is expressly declared to be

void under the Act. Agreements shown below are void as per the Act:
 An agreement made by an unsound person.
 An agreement made by mistake of fact.
 An agreement made with unlawful consideration.
 An agreement made with an unlawful object.
 An agreement made without consideration.
 An agreement in restraint of marriage.
 An agreement restrains trade or profession.
 An agreement which restrains legal proceedings.
 An uncertain agreement.
 Any wagering agreement.
 Any contingent agreement to do or not to do something in case of happening
of an impossible event.
 An agreement to do an impossible act.

3. Voidable Contract: An agreement which is enforceable by

law at the option of one or more of the parties to the contract, but not at
the option of other or others is a voidable contract. Thus it means that
such contracts can become void due to its illegality. But if the suffering
party chooses to continue the contract, it is enforceable by law.

Example: A being the father of B asks him to enter into a contract with
C which B believes to be not worthy. Yet B could continue the contract
despite the undue influence of his father A. Thus the contract is
voidable at the option of B as he could repudiate the contract and prove
the undue influence of his father.
If A forced B to enter into a contract, B can choose to repudiate it or
continue the contract despite the compulsion from A.

Unenforceable Contracts: Unenforceable contracts are such

4. 
contracts which are not enforceable in law due to some technical defects. If the law
requires a contract to be in writing, an oral contract in its place cannot be enforced.
For instance, Section 54 of the Transfer of Property Act, 1882 mandates that sale of
tangible immovable property of the value of One Hundred Rupees and upwards can
be made only by a registered instrument. Here it is necessary that the sale agreement
must be in writing. If it is not a written agreement, such contract will be
unenforceable.

4. Illegal Contract:A enters upon a contract with B to kill C. This

is an illegal Contract. This is void ab-initio and not at all enforceable in
law. Money spent on such an illegal contract cannot be claimed with
the help of law. In short, a contract which is immoral or opposed to
public policy is illegal.
 Example: A enters into an agreement with B to produce a specially
brewed liquor which is banned in the State. Consequently, A cannot
claim to enforce such contract or ask to repay the money paid to B.

C. Contracts on the basis of execution

1. Executed Contract: As the name suggests, an executed contract is a fully

completed contract which has met all the requirements of a contract as per
law.

Example: A enters into a contract with B who is a videographer to cover a

marriage function. The payment will be made if B delivers the video footage to
A after editing. This is a fully completed contract which is executed.

2. Executory Contract: A wants to buy an immovable property of B. A

gives token advance and enters into an ‘agreement of sale’ with B to purchase
the property on or before a specific date. Here full obligations are not
complete as A has not paid the full amount and B has not delivered the title to
A

3. Partly Executed & Partly Executory: A enters into a home

equipment showroom for purchasing a refrigerator. He doesn’t have the full
amount of money to buy the refrigerator. The shop owner asks him to enter
into an agreement by which he could pay a token amount as advance and take
home the refrigerator. It was specifically agreed that the balance amount has
to be paid by A in equated monthly installments. This is called a partly
executed and partly executory agreement or contract. Here, one party has
fulfilled his promise while the party has to fulfill his part of the contract at a
future date. Thus the contract is not fully complete on the date of purchase.
In short, in a partly executed and partly executory contract, full obligations are
not complete.

D. On the basis of liability

Contracts can be further classified on the basis of liability.

1. Unilateral Contract: As the name suggests, a unilateral contract is one-

sided. Only one person/group or side has promised to perform. The other part has
not really promised to do the act.

Example: A lost his gold chain and he publishes a newspaper advertisement that he
will pay a certain sum to the finder of his gold chain. Here A has promised to do the
act. But the other part is uncertain. This is a unilateral contract.
 2. Bilateral Contract:
A bilateral contract is a normal contract where both parties are involved by
their respective promises/offer and acceptance
Example
P agrees to sell his next sugarcane harvest to a local sugar mill Y Ltd, who promises
to pay the price after delivered. This is a bilateral Contract.

Discharge by Performance
When the parties to a contract fulfil the obligations arising under the contract
within the time and manner prescribed, then the contract is discharged by
performance.

llustration: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to
be paid by John on the delivery of the cycle. As soon as it is delivered, John
pays the promised amount.

Since both the parties to the contract fulfil their obligation arising under the
contract, then it is discharged by performance. Now, discharge by the
performance of a contract can be by:

1. Actual performance
2. Attempted performance

As shown in the example above, actual performance is when all the parties to
a contract do what they had agreed for under the contract. On the other hand,
it is possible that when the promisor attempts to perform his promise, the
promisee refuses to accept it. In such cases, it is called attempted
performance or tender.

BREACH OF CONTRACT
A breach of contract is a violation of any of the agreed-upon terms and
conditions of a binding contract. The breach could be anything from a late
payment to a more serious violation such as the failure to deliver a
promised asset.

A contract is binding and will hold weight if taken to court. To successfully

claim a breach of contract, it is imperative to be able to prove that the breach
occurred.
A breach of contract is when one party breaks the terms of an agreement
between two or more parties. This includes when an obligation that is stated in
the contract is not completed on time—you are late with a rent payment, or
when it is not fulfilled at all—a tenant vacates their apartment owing six-
months' back rent.

Sometimes the process for dealing with a breach of contract is written in the
original contract. For example, a contract may state that in the event of late
payment, the offender must pay a $25 fee along with the missed payment. If
the consequences for a specific violation are not included in the contract, then
the parties involved may settle the situation among themselves, which could
lead to a new contract, adjudication, or another type of resolution.

Types of Contract Breaches

One may think of a contract breach as either minor or material. A "minor
breach" happens when you don't receive an item or service by the due date.
For example, you bring a suit to your tailor to be custom fit. The tailor
promises (an oral contract) that he'll deliver the adjusted garment in time for
your important presentation, but in fact, he delivers it a day later.

A "material breach" is when you receive something that is different from what
was stated in the agreement. Say, for example, that your firm contracts with a
vendor to deliver 200 copies of a bound manual for an auto industry
conference. But when the boxes arrive at the conference site, they contain
gardening brochures instead.

Further, a breach of contract generally falls under one of two categories: an

"actual breach"—when one party refuses to fully perform the terms of the
contract—or an "anticipatory breach"—when a party states in advance that
they will not be delivering on the terms of the contract.

DAMAGES FOR BREACH OF CONTRACT

The term “damages” is not defined under the Indian Contract Act, 1872.
However, in common parlance, it means an award of money to be paid by a
defaulting party to a non-defaulting party as compensation for loss or
injury caused on account of the defaulting Party’s breach of the terms and
conditions of the contract.

the Supreme Court extracted the definition of the word “damages”, as

propounded by Mc Gregor at para 127 as follows:
 “Damages are the pecuniary compensation, obtainable by success in an
action, for a wrong which is either a tort or a breach of contract, the
compensation being in the form of a lump sum which is awarded
unconditionally.”

TYPES OF DAMAGES

 General and Special Damages;

 Consequential Damages;
 Pecuniary and Non-pecuniary Damages;
 Liquidated Damages;
 Aggravated Damages;
 Exemplary Damages;
 Compensatory and Non-compensatory Damages;
 Nominal Damages;
 Damages for Loss of Profit/Loss of Opportunity.

GENERAL/ DIRECT DAMAGES

 Section 73 of the Indian Contract Act deals with Direct Damages;

 It means damages which naturally arose in the usual 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.

SPECIAL/ INDIRECT DAMAGES

 Special damages arise on account of the unusual/ special circumstances

affecting the plaintiff and resulting into the consequential damage;
 They are not recoverable unless the special circumstances were brought to
the knowledge of the defendant, so that the possibility of the special loss was in
contemplation of the parties.
 Special damages do not mean serious damage in the sense of irreparable loss
but damage affecting the plaintiff individually (or damage peculiar to the plaintiff)
or beyond what is suffered by him in common with orders.
 DIFFERENCE BETWEEN GENERAL AND SPECIAL DAMAGES

Liability Aspect: In the context of liability for loss (usually in contract),

general damages are those which arise naturally and in the normal course
of events, whereas special damages are those which do not arise naturally
out of the defendant’s breach.

Recovery Aspect: Claim Special Damages are recoverable only where

they were not beyond the reasonable contemplation of the parties (for
example, where the plaintiff communicated to the defendant prior to the
breach the likely consequences of the breach).

Quantification Aspect: General damages are losses, usually but not

exclusively, non-pecuniary, which are not capable of precise quantification
in monetary terms. For example, damages for harm to reputation in actions
for defamation and damages for pain and suffering in actions relating to
personal injury. Special damages, in this context, are those losses which can
be calculated in financial terms. These are generally pecuniary losses
calculable at the time of trial, for example, claims for loss of earnings,
whether past or future, or the cost of care in personal injury actions.

Pleading Aspect: Special damage refers to those losses which must be

specifically pleaded and proved by evidence, and particulars of the special
damage claimed must be specified in the plaint, whereas general damage is
that which will be presumed to be the natural or probable consequences of
the wrong complained of, with the result that the plaintiff is required only
to assert that such damage has been suffered and quantification is left to
the court.

CONSEQUENTIAL DAMAGES

 In contract law, consequential damages are commonly referred as special

damages or expectation damages.Consequential losses are anything above the
normal losses such as profits lost or expenses incurred through the breach and are
recoverable if they are not remote.
 Consequential damages do not flow directly and immediately from the act of
the party but as a consequence of a wrongful act which are so proximate as to be
recoverable.
 Only such damages that are sufficiently proximate to the course of action as
to be the natural consequence of the wrongful act, though even of an interim
nature, are recoverable.
 Unlike, direct damages which focus on the costs associated directly with the
contract itself, consequential damage focus on the costs outside of the contract.
 Examples of consequential damages: lost profits, lost products, lost
revenues, lost time, damage to reputation, reduction in value, etc.