INDIAN CONTRACT ACT 1872

BUSINESS LAW
Branch of legal system that regulates the smooth conduct of business activities and
provides for settlement of disputes in a systematic manner.

CONTRACT LAW
Branch of law which deals with making of legally valid agreements and also for
interpreting these agreements. The law of contracts is the basis of business law
because majority of the transactions in business, trade, occupation, commerce and even
in profession and our day to day life are based in contracts.

Features of Law of Contract

- Parties to the contract make the law for themselves
- It only lays down general principles. (does not consider all the relevant laws)
- Does not over ride customs (unwritten law, established by long usage and consent of the
ancestors) or usages (habitual use, established practice or an established or recognized
method or procedure)
- The object of law of contract is to introduce clarity and certainty in commercial and other
transactions
- Contract can be made by speaking or words of mouth, in writing, partly in writing and partly
by speaking or even by the conduct of parties
- Act was brought into force from 1st September, 1872 and is applicable to all states in India
except the state of Jammu & Kashmir
- At present contract act contains –
a. General Principles (Section 1 to 75) b. Special Contract (Section 124 to 238)
- The act lays down general principles relating to
a. Formation of Contract, Performance of contract & Discharge of Contract
b. Remedies for breach of contract & Quasi Contracts
c. Rules relating to special contracts like Idemnity, Guarantee, Bailment, Pledge, Agency
- Right in Rem – Right available against the whole world or world at large. E.g. A is the owner of
a flat in Mumbai. He has a right to possession and enjoyment of the same against the whole
world
- Right in Personam – means right against a particular person. E.g. A owes a sum of Rs.25 lacs
to B. Here B has a right to recover Rs.25 lacs from A only. The right B is “Right in Personam”
 DEFINITIONS

CONTRACT – u/s 2 (h) – “A Contract is an agreement enforceable by law.”

A contract consist of two elements namely
a. An agreement
b. Enforceability of Law (to make sure something is done or obeyed.
An agreement is enforceable by law when it fulfils certain conditions laid down in
section 10 of Indian Contract Act, 1872. According to this section, all agreements are
contracts if they are made –
a. By Free Consent of
b. Parties competent to Contract
c. For a lawful consideration and lawful object
d. And are not expressly declared to be void
e. Fulfils legal formalities required by any law like writing, registration etc.

AGREEMENT – u/s 2 (e) – “Every promise & every set of promises forming the
consideration for each other”

PROMISE – u/s 2 (b) – “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.” In other words, a promise is an accepted proposal.

PROPOSAL – u/s 2 (a) – “When one person signifies to another his willingness to do or
to abstain from doing anything, with a view to obtaining the assent of that other to such
act or abstinence, he is said to make a proposal.”

Therefore, in order to form an agreement, there must be a proposal or offer by one

party and its acceptance by the other.

Agreement = Offer + Acceptance

Contract = Agreement + Enforceability
 ESSENTIAL ELEMENTS OF A VALID CONTRACT

1. Offer/Proposal & Acceptance – Agreement should be based on lawful offer made

by one party and its lawful acceptance by another party. There must be minimum two
parties for creating a contract i.e. one party making the offer & other party accepting it.
2. Intention to create legal Relationship – There must be a common intention of the
parties to enter into a legal obligation. An agreement to have a cup of tea at friends
house is a social agreement. A friendly agreement cannot be called a contract. On the
other hand commercial agreements are presumed to be intended as binding contracts.
E. g An agreement to buy a computer is a contract
3. Lawful Consideration – An agreement to be enforceable at law must be supported
by consideration. (something in return). An agreement is legally enforceable when one
gets something in return for something. Consideration may be in cash or kind, a
promise to do or not to do something, past, present or future. Consideration must be
real & lawful.
4. Capacity of Parties/Competency of Parties – The parties to a contract must have
the ability to know and understand the terms and conditions of the contract. Every
person is competent to contract if he is
- Of the age of majority
- Of sound mind
- Not disqualified from contracting by any law to which he is subject
5. Free Consent – Two or more parties are said to consent when they agree upon the
same thing in the same sense. Consent must be free from
- Coercion
- Undue Influence
- Fraud
- Misrepresentation
- Mistake
6. Lawful Object – The object and purpose must be legal, for a contract to be valid.
Every agreement of which the object is unlawful is void. (Section 23). The word
unlawful means
- Contrary to law
- Not enforceable in law
- Punishable by law
- Forbidden by law (not allowed)
- Court regards it as immoral or opposed to public policy
- Fraudulent
- Defeats the provisions of any law
- Involves injury to the person or property
7. Agreement not declared void – The agreement must not have been expressly
declared to be void. Following agreements are declared to be void by law.
- Agreements in restraint (condition that keeps something under control) of marriage
- Agreements in restraint of trade
- Agreements in restraint of legal proceedings
- Agreements having uncertain meaning
8. Certainty of Terms – Agreement must be certain & not vague (unclear) or indefinite.
E.g. A agrees to sell to B “100 liters of oil”. There is nothing to show what kind of oil is
intended. Agreement is void for uncertainty.
9. Possibility of Performance – Agreement must be capable to being performed. An
agreement to do impossible act is void
10. Form of a contract – The law does not prescribe any form of a contract.
Therefore contracts may be in any form including oral or writing
11. Legal Formalities – An agreement may be oral or in writing.
- Registration: Certain agreements like Lease, Gift, Mortgage of immovable property,
negotiable instruments such as promissory note, bill of exchange, cheque are must be in
writing. Certain agreements must be registered like documents of which registration is
compulsory under Indian Registration Act 1908, Contracts made out of natural love &
affection, Transfer of immovable property e.g. land, flat, house etc. MOA & AOA of the
company.
- Breach of Contract: When a party does not fulfill or perform all the stated obligations
in a contract, the party is said to have breached (broken) the contract. The injured
party may rescind the contract or release the other party from the obligations or the
parties may agree on Novation (act of replacing the obligation with new obligation)
- Litigation: The injured party may sue the other party for money as damages /
compensation or for specific performace.
- Injuction: It is a court order compelling someone to stop doing something or not to do
something.
 KINDS OF CONTRACT
1. Voidable Contract: (legally valid but can be made void) If a contract which can be
rejected by one of the parties on legal grounds, it is called voidable contract. Section
2(i) says, an agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of other or others is called voidable contract. E.g.
contracts brought about by coercion, undue influence, fraud and misrepresentation are
voidable contracts. Because the consent obtained in such cases is not real or genuine
consent.
2. Void Contract: (not legally valid or having no legal force) Section 2(g) – an agreement
not enforceable by law is said to be void i.e. an agreement which ceases to be
enforceable by law becomes void. E.g contracts to import goods from foreign country
becomes void when a war breaks out between the two countries
3. Unenforceable Contract: It is a valid contract in law, but it is not enforced in a court of
law because of some technical defect. E.g. absence of writing , contract affecting law of
limitation
4. Express Contract: When the terms of the contract are in writing or agreed upon by
spoken words at the time of its formation
5. Implied Contract: a contract in which the terms of the contract are inferred from the
act, conduct or dealings between the parties or from the surrounding circumstances is
called an implied contract. This is a contract where the law resumes a man to have
promised to perform. These are the contracts not fully expressed in words, it is to be
inferred from the act or conduct.E.g. going by a public bus, taking a cup of tea in a
restaurant etc.
6. Quasi Contract: (which seems like): Certain obligations which are not contracts but
are considered to be so by law, are called quasi contracts. When one person obtains a
benefit at the expense of another, then such another person can ask the benefiting
person to pay for such expenses. Such cases of obligations are known as quasi
contracts. E.g. supply of necessaries to a person incapable of entering into a contract,
Finder of goods (responsibility of finder of goods to return them to the owner) etc.
7. Executed Contract: A contract where the parties have performed their obligations
under the contract is called an executed contract.
8. Executory Contract: A contract where the parties are yet to perform their respective
promises is called an executor contract
9. Contingent Contract: A contract to do or not to do something if some event, collateral
to such contract, does or does not happen
 10. Contract under the seal: A contract under seal is made by a deed. It derives its binding
force from its form alone. It is in writing and is signed, sealed and delivered by the
parties. No consideration is necessary for contracts under seal.

DIFFERENCE BETWEEN AGREEMENT & CONTRACT

All contracts are agreements but all agreements are not contracts.

An arrangement (usually A formal arrangement between

informal) between two or two or more party that, by its
Definition
more parties that is not terms and elements, is
enforceable by law. enforceable by law.
Validity based Mutual acceptance by both Mutual acceptance by both (or
on (or all) parties involved. all) parties involved.
No. No, except for some specific kinds
Does it need to of contracts, such as those
be in writing? involving land or which cannot be
completed within one year.
Consideration No Yes
required
An agreement that lacks any A contract is legally binding and
Legal effect of the required elements of its terms may be enforceable in a
a contract has no legal effect court of law.

Agreement Contract
Offer + Acceptance = Agreement Agreement + Enforceability = Contract
Agreement is every promise & every set of Contract is an agreement enforceable by law
promises forming consideration for each
other
Because, every agreement is not a contract, it A contract always creates legally binding
may not create legally binding relationship. relationship. All contracts are agreements
All agreements are not contracts
Agreement is a wider term than a contract Contract is a kind of agreement
Agreement is not a concluded or legally Contract is always concluded and legally
binding contract binding.