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General Principles of Contract Act

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Dr. Prashant S. Desai,
Chair Professor,
HAL DPSU Chair in Business Laws,
NLSIU, Bengaluru.
Indian Contract Act, 1872

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The Indian Contract Act consists of the following two parts:
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GENERAL
SPECIAL
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PRINCIPLES
OF THE LAW KINDS OF Sections 124 to 238 of
OF CONTRACTS the Indian Contract
Sections 1 to 75 of the
CONTRACT Indian Contract Act. Act. These special
came into force on contracts are
September 1, 1872. Indemnity, Guarantee,
Bailment, Pledge and
Agency.
Objective of the Act

• To ensure that the rights and obligations arising out of a

contract are honoured and that legal remedies are made
available to an aggrieved party against the party failing to

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honour his part of agreement.
• The Indian Contract Act makes it obligatory that this is done
and compels the defaulters to honour their commitments.

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• What is a Contract?
An agreement which is legally enforceable alone is a contract.
Agreements which are not legally enforceable are not contracts

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but remain as void agreements which are not enforceable at all or
as voidable agreements which are enforceable by only one of the

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parties to the agreement.
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• “All contracts are agreements, But all agreements are not
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contracts.”
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OFFER/PROPOSAL ACCEPTANCE PROMISE
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• Offer/Proposal sec 2(a)- When one person signifies to another
his willingness to do or to abstain from doing anything, with a

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view to obtaining the assent of that other person either to such
act or abstinence, he is said to make a proposal.

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• Acceptance sec 2(b)- When the person to whom the proposal
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is made, signifies his assent there to , the proposal is said to be
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accepted.
• Promise sec 2(b)- A Proposal when accepted becomes a
promise. In simple words, when an offer is accepted it

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becomes promise.
• Promisor and promise sec 2(c)- When the proposal is

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accepted, the person making the proposal is called as promisor
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and the person accepting the proposal is called as promisee.
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• Consideration sec 2(d)- When at the desire of the promisor,
the promisee or any other person has done or abstained from
doing something or does or abstains from doing something or

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promises to do or abstain from doing something, such act or
abstinence or promise is called a consideration for the promise.
• Price paid by the one party for the promise of the other

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Technical word meaning QUID-PRO-QUO i.e. something in
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return.
• Agreement sec 2(e)- Every promise and set of promises
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forming the consideration for each other.
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Contract sec 2(h) - An agreement enforceable by law is a
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contract.
 PROPOSAL

PROMISE

CONSIDERATION

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AGREEMENT

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LEGALLY NOT
LEGALLY ENFORCEABLE
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ENFORCEABLE

CONTRACT VOIDABLE AGREEMENT VOID AGREEMENT

Essentials of a Valid Contract

• As per Section 10, “All agreements are contracts, if they are

made – by free consent of the parties, competent to contract,
for a lawful consideration and with a lawful object, and not

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hereby expressly declared to be void”.

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Essential requirements of a valid contract

• Offer and its acceptance

• Free consent of both parties
• Mutual and lawful consideration for agreement

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• It should be enforceable by law. Hence, intention should be to
create legal relationship. Agreements of social or domestic

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nature are not contracts
• Parties should be competent to contract
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• Object should be lawful
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• Certainty and possibility of performance
• Contract should not have been declared as void under Contract
Act or any other law
• Offer and Acceptance: In order to create a valid contract,
there must be an agreement between two parties. An
agreement involves a valid offer by one party and valid

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acceptance of the same by the other party.
• Legal relationship: The parties must intend their agreement to
result in legal relations. This means that the parties must intend

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that if one of them falls to perform his promise, he shall be
answerable for that failure in law. Duties and rights should be
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legal and not merely moral. [an agreement of a purely
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domestic or social nature is not a contract]
• Consensus-ad-idem: The minds of both the parties must be
ad-idem. In other words, the tow parties must have agreed
about the subject matter of the contract at the same time and in

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the same sense.
• Free consent (Permission or Willingness): An agreement
must have been made by free consent of the parties. consent is

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said to be free when it is not caused by coercion, undue
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influence, fraud, misrepresentation or mistake.
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 Review

Elements of a valid contract

AGREEMENT
Two parties REALITY OF LEGALITY

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CONSENT

not valid
OFFER ACCEPTANCE • FRAUD OBJECTIVE SUBJECT
• MISREPRESENTATION

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Legal relationship MATTER
• DURESS
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• MUTUAL MISTAKE
CONSIDERATION
CAPACITY
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not valid
LEGAL BARGAINED •INFANTS WRITING
DETRIMENT/ FOR •MENTAL
LAWFUL •DRUNKARDS
•CORPORATIONS
 Types of contract
• Express contract
On the basis of • Implied contract
creation/formation • Tacit contract
• Quasi contract

On the basis of validity
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• Valid contract
• Void contract
• Voidable contract
• Unenforceable contract

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• Illegal contract
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On the basis of • Executed contract
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execution/performance • Executory contract

• Bilateral contract
On the basis of liability • Unilateral contract
On the basis of creation

• Express Contracts: Where the terms of the contract are

expressly agreed upon in words (written or spoken) at the time
of formation, the contract is said to be express contract.

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• Implied Contracts: Implied contracts in contrast come into
existence by implication.
• Most often the implication is by law and or by action.

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• Tacit Contracts: Tacit contracts are those that are inferred
through the conduct of parties.
• Quasi Contracts: A quasi contract is created by law. Thus,

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quasi contracts are strictly not contracts as there is no intention
of parties to enter into a contract. It is legal obligation which is
imposed on a party who is required to perform it.

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On the basis of validity

• Valid contract: An agreement which has all the essential

elements of a contract is called a valid contract. A valid
contract can be enforced by law.

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• Void contract (2(j)): “A contract which ceases to be
enforceable by law becomes void when it ceases to be
enforceable”. Thus, a void contract is one which cannot be

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enforced by a court of law.
• Under a mistake of facts [20]
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• Consideration or object of an agreement is unlawful [23]
• Agreement made without consideration [25]
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• Agreement in restrain of marriage [26]
• Restraint of trade [27]
• Restrain legal proceeding [28].
• Agreement by wage of wager [30]
• Voidable contract Section 2[i]: Defines that an agreement
which is enforceable by law at the option of one or more
parties but not at the option of the other or others is a voidable
contract.

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• Result of coercion, undue influence, fraud and
misrepresentation.
• Unenforceable contract: Where a contract is good in

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substance but because of some technical defect cannot be
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enforced by law is called unenforceable contract. These
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contracts are neither void nor voidable.
• Example: Writing registration or stamping.
• Illegal contract: Contracts those which are forbidden by law.
All illegal contracts are hence void also, because of the
illegality of their nature they cannot be enforced by any court

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of law. In fact even associated contracts cannot be enforced.
Contracts which are opposed to public policy or immoral are
also illegal.

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• “All illegal agreements are void agreements but all void
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agreements are not illegal.”
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On the basis of execution

• Executed contract: An executed contract is one in which both

the parties have performed their respective obligation.
• Executory contract: An executory contract is one where one

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or both the parties to the contract have still to perform their
obligations in future. Thus, a contract which is partially
performed or wholly unperformed is termed as executory

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On the basis of liability

• Unilateral contract: A unilateral contract is one in which only

one party has to perform his obligation at the time of the
formation of the contract, the other party having fulfilled his

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obligation at the time of the contract or before the contract
comes into existence.
• Bilateral contract: A bilateral contract is one in which the

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obligation on both the parties to the contract is outstanding at
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the time of the formation of the contract. Bilateral contracts are
also known as contracts with executory consideration.
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Performance made by whom?

• Personal Performance: In cases involving personal skill, taste,

or credit, the promisor must himself perform the contract.
• Performance by Representative: In all other cases the Promisor

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or his representatives may employ a competent person to
perform it.
• Performance by a third person: When a promise accepts

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performance of the promisee from a third person, he cannot
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afterwards enforce it against the promisor
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• Death of Promisor: Contracts involving personal skill or
volition, come to an end when the Promisor dies.
– His heirs or legal representatives are not bound to perform such

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contract.
– In cases not involving personal skill or volition, the legal
representatives of a deceased promisor are bound to perform the

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contract.
– Liability of the legal representatives is limited to the assets obtained
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from the deceased.
• Persons entitled to demand performance: Promisee, Legal
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Representative, Third Party (Eg.Trust: A & B enter into a
contract in favour of C; C can demand performance), Joint
promises
Time for Performance

When no time is specified:

1) Reasonable time
2) When time is specified (it has to be followed)

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3) On application for performance by promisee Place for
Performance. This applies to Delivery of Goods, Payment of
Money.

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Performance of Reciprocal Promises

• Mutual and Dependent

• Mutual and Independent
• Mutual and Concurrent

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• Order of Performance (who has to do when): Fixed by contract

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Contracts that need not be performed

• When a new contract is substituted

• A person rescinds it (who has the option of ‘voidable’)
• Promisee neglects or refuses to afford the promisor

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circumstance for performance
• Impossibility or Illegality

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• If one person has right to rescind a contract
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Discharge of Contract by a New Agreement

Substitution:
1) Of old contract by new contract
2) Of a party to the contract by a new one.

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3) Alteration (change in terms of contract
4) Rescission (by mutual consent/non- performance/voidable)

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5) Waiver (abandonment of a right which a person is entitled to)
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Remission (promisee may give up a part of his claim at his own
will)
1) Whole / in part

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2) Extend the time of performance
3) Accept any other satisfaction than performance

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4) Merger (superior right and inferior right coincide and meet in
one and the same person) eg. Person buys the land which he
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has taken for lease before.
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Discharge by Operation of law

• Insolvency
• Merger
• Death

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• Lapse of Time
• Material alteration / Unauthorized alteration

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Discharge of contract by impossibility

• Destruction of object necessary for performance

• Change of law
• Personal incapacity

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• Non-existence or non-occurrence of an event necessary for
performance

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• Outbreak of war
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Breach
• If a party breaks his obligations which the contract imposes;
contract is no longer binding on the other person
• Actual Breach of Contract – At the time when the performance
is due

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• One party fails or refuses to perform his obligation – During
the performance of the contract
• Express Repudiation (by word or act refuses to continue to

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perform his obligation)
• Implied Repudiation (makes by his own act the complete
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performance of the contract impossible)
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• Anticipatory Breach of Contract (done before the time for
performance arrives) – By Renunciation (Express
Repudiation) – By creating some Impossibility (Implied
Repudiation)
Remedies in case of Breach

• Suit for damages (dealt by Indian Contract Act)

• Dealt by Specific Relief Act, 1963- Bring an action for specific
performance

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• Suit for Injunction- Claim for quantum meruit
• Restitution- Suit for cancellation or rescission

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Remedies for Breach of Contract

• Suit for Damages (loss or damage suffered by breach of

contract)
• Kinds

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– Ordinary or General Damages (damages which arise on a breach;
parties know it at the time of entering into contract; eg. Difference in
contract price and market price)

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– Special Damages (breach of contract under some special
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Kinds
• Exemplary Damages (shows the Court’s strong disapproval of
the conduct of the defendant in committing the wrong; eg.

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Refusal to honor a cheque in spite of having funds)
• Nominal Damages (breach involved is of technical nature, so
some nominal damages (1 rupee) may be awarded)

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• Remote Damages (not to be given for any remote and indirect
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loss or damage sustained by reason of the breach)
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Rules regarding determination of amount of damages
- Restoration of parties to a position where they would have been if the
contract had been performed and not where they would have been if they

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never made the contract
Damages are recoverable in 2 cases
- When they arise naturally in the usual course of things from such breach.

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- Loss or damage which the parties knew, when they made the contract is
likely to result from the breach of it.
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Suit for Injunction
- Preventive relief
- This is an order of the court restraining the wrong doer from doing or

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continuing the wrongful act complained of.
- Usually granted to enforce negative stipulations in cases where damages
are not adequate relief.

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Suit for Quantum Meruit
- Quantum Meruit means as much as is earned.
- Right to Quantum Meruit: Right to claim the compensation for

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the work already done.

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Thanks very much

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