THE INDIAN CONTRACT ACT, 1872

Meaning of Contract

According to Section 2(h) of the Indian Contract Act, 1872, “An agreement enforceable by law is a
contract.” In other words, an agreement which can be enforced in a court of law is known as a
contract. A contract must have the following two elements.

Agreement + Enforceability by law = Contract

Meaning of Agreement

According to Section 2(e) of the Indian Contract Act, 1872, “Every promise and every set of promises
forming the consideration for each other is an agreement.” A proposal when accepted becomes a
promise.

Offer + Acceptance = Agreement

Example: A lost his Cell Phone and announced that anybody who brought his cell phone back home
would receive Rs.500 as reward. B heard the announcement and brought the Cell Phone back home.
He is said to have accepted the proposal by doing the act required by A and hence he can recover the
reward

Enforceability of Agreement

An agreement is said to be enforceable by law if it creates some legal obligation. The parties to an
agreement must be bound to perform their promises and in case of default by either of them, must
intend to sue.

Eg., in case of social or domestic agreements, the usual presumption that the parties do not intend to
create legal relations.

Obligation

An agreement, to become a contract, must give rise to a legal obligation or duty. The term ‘obligation’
is defined as a legal tie which imposes upon a definite person or persons the necessity of doing or
abstaining from doing a definite act or acts. It may relate to social or legal matters. An agreement
which gives rise to a social obligation is not a contract. For eg. If A invites B to a dinner and B
accepts the invitation, it is a social agreement. It must give rise to a legal obligation in order to
become a contract. To Conclude, all contracts are agreements but all agreements are not necessarily
contracts.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

In order to become a contract, an agreement must have the following essential elements:

1. Minimum two persons

 There must be at least two persons for a contract to come into existence. One person to make
the offer and the other person to accept it.

2. Offer and acceptance

There must be two parties to an agreement, i.e., one party making the offer and other party
accepting it. The terms of the offer must be definite and the acceptance of the offer must be
complete and unconditional. The acceptance must also be according to the mode prescribed
and must be communicated to the offeror.

3. Intention to create legal relationship

When the two parties enter into an agreement, their intention must be to create legal
relationship between them. If there is no such intention on the part of the parties, there is no
contract between them. Agreements of a social or domestic nature do not contemplate legal
relationship, as such they are not contracts.

Example: A husband promised to pay his wife a household allowance of Rs. 3000 every
month. Later the parties separated and the husband failed to pay the amount. The wife sued
for the allowance but this cannot be considered to be a valid contract.

4. Lawful consideration
An agreement to be enforceable by law must be enforceable by consideration.
‘Consideration’ means an advantage or benefit moving from one party to the other. It is the
essence of a bargain. In simple words, it means ‘something in return’. The agreement is
legally enforceable only when both the parties give something and get something in return. A
promise to do something, getting nothing in return is usually not enforceable by law.
Consideration need not necessarily be in cash or kind. It may be an act or abstinence
(abstaining from doing something) or promise to do or not to do something. It may be past,
present or future. But it must be real and lawful.

5. Capacity of parties – competency

The parties to the agreement must be capable of entering into a valid contract. Every person is
competent to contract if he (a) is of the age of majority, (b) is of sound mind, and (c) is not
disqualified from contracting by any law to which he is subject (Secs. 11 and 12). Flaw in
capacity to contract may arise from minority, lunacy, idiocy, drunkenness, etc., and status. If a
party suffers from any flaw in capacity, the agreement is not enforceable except in special
cases.

6. Free and genuine consent

It is essential to the creation of every contract that there must be free and genuine consent of
the parties to the agreement. The consent of the parties is said to be free when they are of the
same mind on all the terms of the contract. There is absence of free consent if the agreement
is induced by coercion, undue influence, fraud, misrepresentation, etc. (Sec. 14).

7. Lawful object
The object of the agreement must be lawful. In other words, it means that the object must not
be (a) ilIegal, (b) immoral, or (c) opposed to public policy (Sec. 23). If an agreement suffers
from any legal flaw, it would not be enforceable by law.
 8. Agreement not declared void
The agreement must not have been declared void by law in force in the country (Secs. 24 to
30 and 56).

9. Certainty and possibility of performance

The agreement must be certain and not vague or indefinite (Sec. 29). If it is vague and it is not
possible to ascertain its meaning, it cannot be enforced.

Examples: (a) A agrees to sell to B "a hundred tons of oil". There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.

10. Legal formalities

A contract may be made by words spoken or written. As regards the legal effects, there is no
difference between a contract in writing and a contract made by word of mouth. It is,
however, in the interest of the parties that the contract should be in writing. There are some
other formalities also which have to be complied with in order to make an agreement legally
enforceable. In some cases, the document in which the contract is incorporated is to be
stamped. In some other cases, a contract, besides being a written one, has to be registered.
Thus where there is a statutory requirement that a contract should be made in writing or in the
presence of witnesses or registered, the required statutory formalities must be complied with
(Sec. 10).

PERFORMANCE OF CONTRACT

Performance of a contract is the fulfilment of the contractual obligations by the parties. It is one of the
methods to discharge a contract. The parties to a contract must either perform, or offer to perform,
their respective promises unless such performance is excused under the provisions of this Act, or of
any other law.

Who can perform a Contract?

 Promisor himself: If the terms and conditions of the contract clearly specify that the
conditions are as such that the promisor only can perform them, then it can be done
by the promisor only. This means contracts which involve the use of personal skill
and expertise, must be performed by the promisor himself.
 Agent: When it is not separately mentioned that the promisor needs to complete the
performance, then the agent can perform the contract on behalf of his principal i.e. the
promisor.
 Representatives: A contract which involves the use of personal skills of the promisor
or is founded on personal consideration comes to an end on the death of the promisor.
In such a condition, the legal representatives of the promisor are bound by the
conditions of the contract entered into by him until contrary intention appears from
the contract.

 Third Persons: For performance by a third person, the promisee has to accept it

when the contract is being made. Once the condition of performance by the third
party is accepted, promisee cannot deny later.
 Contracts which need not be performed :

 If the parties to a contract agree to substitute a new contract for it (Novation).

 If a voidable contract is rescinded, the other party need not perform his part.
 If the promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to
any non- performance caused thereby.
 Further, where the consideration and object of a contract are unlawful and where the
performance is unlawful or illegal, the contract need not be performed.

TERMINATION OF CONTRACT
Breaches of conditions are so serious, that it justifies the innocent party ending the contract
altogether. When the innocent party ends or cancels the contract, it is known as "termination"
of the contract.

To terminate a contract means to end the contract prior to it being fully performed by the
parties. In general, the effect of the termination of a contract is to discharge the parties from
their unperformed obligations under the contract. However, termination does not affect
liabilities of the parties for breaches of the contract that occurred prior to the contract being
terminated. And, despite the fact that future obligations to perform under the contract terms
have been extinguished, if appropriate, the parties remain entitled to pursue claims for
damages under the common law and as provided by any termination provisions that may be
contained within the contract.

There are two basic types of termination:

1) Termination for cause, otherwise known as termination for default: It may originate from
the general principles of contract law or it may arise out of the terms of the contract itself.

2) Termination for convenience: It may originate only from the terms of a contract which
provide for such termination, for there is no general contract principle allowing termination
for convenience.

In the event a party terminates the contract without having justification either under general
principles of contract law or under the terms of the contract, such a termination is called a
wrongful termination.

A contract may be brought to an end:

 where one party is in breach of contract, entitling the other party to terminate
the contract (termination for breach of contract)

 where one party is entitled to rescind the contract by reason of the other party’s
misrepresentation, undue influence or duress (rescission)
  where a contract is void by reason of mistake, non est factum or statute (void
contract)

 where the parties agree to bring the contract to an end (discharge by agreement)

 where the contract provides for termination in the event of force majeure (force
majeure)

 where some unforeseen event prevents the parties from performing the contract
(frustration)

Termination for breach of contract

A contract may be terminated by reason of one party’s breach of contract. Termination for
breach arises as follows:

 one party to the contract is in breach of contract

 the breach in question is an anticipatory breach or a repudiatory breach, and

 the innocent party accepts the breach

There are several legal remedies available when there has been a breach of contract.

 Monetary Damages: Compensatory damages are awarded in an attempt to put the

innocent party in the position they would have been in if the contract had been
performed. Usually that means awarding the innocent party an amount of money that
gives them the “benefit of the bargain” or allows them to enter into an agreement with
someone else for the same service. Punitive damages might be awarded to punish the
breaching party, but are much less common.

 Restitution: Restitutionis intended to put the innocent party in the position they were
in before they entered into the contract. The court looks at what the party who
breached the contract gained prior to the breach and orders it returned to the other
party. 
o For example, a customer enters into a contract with a carpenter to build a bed.
After the carpenter builds the bed, the customer refuses to pay and breaches
the contract. Restitution would require the customer to return the bed.

 Specific Performance: If monetary damages are insufficient to compensate the

innocent party, then the court might order specific performance. The breaching party
would be required to perform their obligations under the contract or face contempt of
court charges.
 CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their (1) validity, (2) formation, or (3) performance.

I. Classification according to validity

An agreement becomes a contract when all the essential elements referred to above are
present. In such a case, the contract is a valid contract. If one or more of these elements is/are
missing, the contract is either voidable, void, illegal or un-enforceable.

i) Voidable Contract
This happens when the element of free consent in a contract is missing. When the
consent of a party to a contract is not free, i.e., it is caused by coercion, undue
influence, misrepresentation or fraud, the contract is voidable at his option.

Example: A promises to sell his car to B for Rs 2,00,000. His consent is obtained by
use of force. The contract is voidable at the option of A. He may avoid the contract or
elect to be bound by it.

ii) Void Contract

A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable [Sec. 2 (j)]. A contract, when originally entered into, may be valid and
binding on the parties, e.g., a contract to import goods from a foreign country. It may
subsequently become void, e.g., when a war breaks out between the importing
country and the exporting country.

iii) Unenforceable contract

An unenforceable contract is one which cannot be enforced in a Court of law because
of some technical defect such as absence of writing or where the remedy has been
barred by lapse of time. The contract may be carried out by the parties concerned; but
in the event of breach or repudiation of such a contract, the aggrieved party will not
be entitled to the legal remedies.

II. Classification according to formation

A contract may be (a) made in writing or by word of mouth, or (b) inferred from the conduct of the
parties or the circumstances of the case. Contracts may be classified according to the mode of their
formation as follows:

1. Express contract
If the terms of a contract are expressly agreed upon (whether by words spoken or written) at
the time of formation of the contract, the contract is said to be an express contract. Where the
offer or acceptance of any promise is made in words, the promise is said to be express (Sec.
9). An express promise results in an express contract.

2. Implied contract
 An implied contract is one which is inferred from the acts or conduct of the parties or course
of dealings between them. It is not the result of any express promises by the parties but of
their particular acts. It may also result from a continuing course of conduct of the parties.
Where the proposal or acceptance of any promise is made otherwise than in words, the
promise is said to be implied (Sec. 9). An implied promise results in an implied contract.

Examples: There is an implied contract when A takes a cup of tea in a restaurant or gets in to
a public bus.

3. Quasi-contract
Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered
into by the parties. A quasi-contract, on the other hand, is created by law. It resembles a
contract in that a legal obligation is imposed on a party who is required to perform it. It rests
on the ground of equity that “a person shall not be allowed to enrich himself unjustly at the
expense of another.”

Example: X, a tradesman, leaves goods at Cs house by mistake. C treats the goods as his own.
C is bound to pay for the goods.

4. E-Commerce contract
An E-commerce contract is one which is entered into between two parties via Internet. In
Internet, different individuals or companies create networks which are linked to numerous
other networks. This expands the area of operation in commercial transactions for any person.

III. Classification according to performance

To the extent to which the contracts have been performed, these may be classified as –

1. Executed contract
‘Executed’ means that which is done. An executed contract is one in which both the
parties have performed their respective obligations.

Example: A agrees to paint a picture for B for Rs. 1,000. When A paints the picture and B
pays the price, i.e., when both the parties perform their obligations, the contract is said to be
executed.

2. Executory contract
‘Executory’ means that which remains to be carried into effect. An executor contract is
one in which both the parties have yet to perform their obligations. Thus, in the example,
the contract is executory if A has not yet painted the picture and B has not paid the price.
Similarly, if A agrees to engage B as his servant from the next month, the contract is
executory.

Another classification of contracts according to the performance is as follows:

1. Unilateral or one-sided contract:

A unilateral or one-sided contract is one in which only one party has to fulfil his
obligation at the time of the formation of the contract, the other party having fulfilled
 his obligation at the time of the contract or before the contract comes into existence.
Such contracts are also known as contracts with executed consideration.

Example: A permits a railway coolie to carry his luggage and place it in a carriage. A
contract comes into existence as soon as the luggage is placed in the carriage. But by
that time the coolie has already performed his obligation. Now only A has to fulfil his
obligation, i.e., pay the reasonable charges to the coolie

2. Bilateral contract: A bilateral contract is one in which the obligations on the part of
both the parties to the contract are outstanding at the time of the formation of the
contract. In this sense, bilateral contracts are similar to executory contracts and are
also known as contracts with executory consideration.

CONTINGENT CONTRACTS
A contract may be an absolute contract or a contingent contract. An ‘absolute contract’ is one in
which the promisor binds himself to performance in any event without any conditions. ‘Contingent’
means that which is dependent on something else.

A contingent contract' is a contract to do or not to do something, if some event, collateral or incidental

to such contract, does or does not happen (Sec. 31). It is a contract, the performance of which is
dependent upon the happening or non-happening of an uncertain event. Contingent Contracts are
also known as “Conditional Contract” in some cases.

Examples:
i) A contracts to pay Rs. 10,000 if B’s house is burnt. This is a contingent contract.

ii) A contracts to sell B a certain piece of land to B, in case he succeeds in his litigation concerning
that land.

INDEMNITY CONTRACT

Indemnity means Insurance or Security or Protection. Indemnity is an obligation by a person

(indemnitor/indemnifier) to provide compensation for a particular loss suffered by another person
(indemnitee/indemnity holder).According to Section 124, A contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by the conduct of
any other person is a "contract of Indemnity".

Example: a car owner may purchase different kinds of insurance as an indemnity for various kinds of
loss arising from operation of the car, such as damage to the car itself, or medical expenses following
an accident.

There are two parties involved in the Contract of Indemnity. The two parties are:

1. Indemnifier: Someone who protects against or compensates for the loss of the damage
received. 
 2. Indemnified/Indemnity-holder: The other party who is compensated against the loss
suffered.
Example- A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a certain sum of 2 Lakhs rupees. This is a contract of
indemnity.

Essential elements of Indemnity Contract–

1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person (in Indian context
loss is to be caused by only by a human agency.)
3. Indemnifier is liable only for the loss.

GUARANTEE CONTRACT

A Contract to perform the promise, or discharge the liability, of a third person in case of his default is
called Contract of Guarantee. A guarantee may be either oral or written.The person who gives the
guarantee is called the Surety (guarantor).The person on whose default the guarantee is given is called
the Principal Debtor. The person to whom the guarantee is given is called the Creditor.

Example: If A gives an undertaking stating that if ` 200 are lent to C by B and C does not pay, A will
pay back the money, it will be a contract of guarantee. Here, A is the surety, B is the principal debtor
and C is the creditor.

A guarantee can be many a things. It can be assurance of a particular outcome or that

something will be performed in a specified manner. A guarantee is a way of assuming
responsibility for paying another’s debts or fulfilling another’s responsibilities. It can be a
promise for the execution, completion, or existence of something. A guarantee can also be a
promise or an assurance attesting to the quality or durability of a product or service. In a
contract of guarantee, there are two contracts; the Principal Contract between the principal
debtor and the creditor as well as the Secondary Contract between the creditor and the surety.
In India, a contract of guarantee may be oral or written.

Example: When A promises to a shopkeeper C that A will pay for the items being bought by
B if B does not pay, this is a contract of guarantee. In this case, if B fails to pay, C can sue A
to recover the balance.

BAILMENT
A bailment is a special contract defined under section 148 of the Indian Contract Act, 1872. It
is derived from a French word i.e. “bailer” which means “to deliver”. The meaning of
bailment is “handing over”or “change of possession of goods”. By bailment, we mean
delivery of goods from one person to another for a special purpose on the contract that they
shall reimburse the goods on the fulfilment of the purpose or dispose of them as per the
direction of the bailor. The person who delivers the goods is known as bailor. And the person
to whom the goods are given is known as Bailee. And the property bailed is known as Bailed
Property.

Types of Bailment

There are three types of bailments on the basis of “Reward”:

i) Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods
that he is aware of to the Bailee that can interfere with the use of goods or can expose him
to extraordinary risks. And failure to do the same will make bailor liable for damages.
ii) Non Gratuitous Bailment (Bailment for Reward):This duty particularly deals with the
goods given on hire. As per this provision, when the goods are bailed for hire, then in
such a situation even if the bailor is aware of the defect in the goods or not will be held
liable for the injury that has been caused due to the existence of such defect.

There are three types of bailments on the basis of “benefit”:

(1) For the sole benefit of the bailor: if a restaurant, a bailee, provides an
attended coatroom free of charge to its customers, the bailors. By virtue of the
terms of the bailment, the bailee agrees to act without any expectation of
compensation.
(2) For the sole benefit of the bailee: The loan of a book from a library is a
bailment for the sole benefit of the bailee.
(3) For the benefit of the bailor and bailee: A bailment for the repair of a bike is
a bailment for mutual benefit when the bailee receives a fee in exchange for his
repair work.
 Essentials of Bailment

 There shall be a contract between the parties for the delivery of goods,
 The goods shall be delivered for a special purpose only,
 Bailment can only be done for movable goods and not for immovable goods or
money,
 There shall be a transfer of possession of goods,
 Ownership is not transferred to Bailee, therefore Bailor remains the owner,
 Bailee is duty bound to deliver the same goods back and not any other goods.

PLEDGE
Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section 172 of
the Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the
repayment of debt or loan advanced or performance of an obligation or promise. The person
who pledges the goods as security is known as Pledger or Pawnor and the person in whose
favour the goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the
essentials of the pledge. Apart from that, the other essentials of the pledge are:

 There shall be a bailment for security against payment or performance of the

promise,
 The subject matter of pledge is goods,
 Goods pledged for shall be in existence,
 There shall be the delivery of goods from pledger to pledgee,
 There is no transfer of ownership in case of the pledge.

LIEN
Lien is one of the rights available to a person to retain possession of goods owned by another
person until the assertion of the person having the control is satisfied.

For example, if an individual purchases a vehicle, the seller would be paid using the
borrowed funds from the bank. In turn, the bank would be granted a lien on the vehicle.
In other words A lien is defined as the right to hold the property of another as security for the
performance of an obligation or the payment of a debt. Under the Indian Contract Act, 1872
the Bailee is free to employ or operate the Right of Lien in a Contract of Bailment. 

The two types of Lien which are recognized by the common law courts are:

 Particular lien (Sec. 170): In Particular lien, the person reserves the right to
retain the possession of the goods until the charges due in respect of the
property are paid.
Example: Purchasing the house from a seller who will be paid using the
borrowed funds from the bank.

 General lien (Sec. 171): A general lien is a right to retain the possession for
the payment of the sum which is owed and even if the payment is not
connected with the property in possession.

Example: John wants to purchase a new house. In order to afford the purchase, he borrows
Rs. 300,000 from ABC Bank. The bank wants to guarantee the repayment of the loan, and it
requires John to provide the house as the collateral for the loan. The bank will be granted a
lien on the John’s house till he repays the loan amount

AGENCY CONTRACT

Contract of the agency is a legal relationship, where one person appoints another to represent
him or to do any act on his behalf in dealings with third person. The person who appoints the
other to take care of his dealings is the principal. Whereas, the person who represents or looks
after the transaction of the principal is the agent. The Contract of the agency is a special
contract under the Indian Contract Act, 1872.

Essential Requirements of Agency

 Principal Must be Competent to Contract
 Any person of sound mind and with the age of majority by law can employ an agent.
 Competence of Agent is not Mandatory
 Any person can become an agent between the principal and the third person.
Generally, an agent does not have any personal liabilities towards the principal while
contracting. Therefore the agent doesn’t need to be competent to contract.
 No Consideration is Necessary
 No remuneration is necessary while appointing an agent. The agent receives payment
by the way commission for the rendered services.
Duties of an Agent
The agent has to fulfil certain duties in the contract of agency. The following are the duties of
an agent:

 Communicating with the principal and Conduct the Principal’s Business according to
the directions of the principal.
 The agent has to act diligently and skilfully if not he has to compensate to the
principal for his negligence.
 Render proper Accounts When the principal demands
 Not to Make Secret Profit
 Not to Delegate his duties to other lawfully employed person without the consent of
the principal