Module-1: Indian Contract Act, 1872

Introduction
The Indian Contract Act, 1872, is a fundamental piece of legislation that governs contract
law in India. It lays down the legal framework for the creation, execution, and enforcement of
contracts in the country. The Act came into effect on September 1, 1872, and it has since been
the cornerstone of commercial and civil agreements in India.

Objectives of the Indian Contract Act, 1872

The primary objectives of the Indian Contract Act are to ensure that contracts are made in
a systematic and standardized manner, to define and enforce the rights and duties of parties
involved in a contract, and to provide legal remedies in case of breach of contract. It aims to
promote economic activities by ensuring trust and reliability in transactions.

Scope and Applicability

The Indian Contract Act applies to the whole of India except the state of Jammu and
Kashmir (note: this may need updating based on current legal developments). It is applicable to
all contracts, whether oral or written, related to goods, services, or immovable property, as long
as they fulfill the criteria specified within the Act.

Key Provisions of the Act

The Act is divided into two parts: the first part (Sections 1 to 75) deals with the general
principles of the law of contract, and the second part (Sections 124 to 238) deals with specific
kinds of contracts, such as indemnity and guarantee, bailment, pledge, and agency.
 Offer and Acceptance:
The Act defines how contracts are formed, starting with a lawful offer by one party and
its acceptance by another.
 Competency of Parties:
It specifies who is competent to contract, excluding certain categories of individuals like
minors, persons of unsound mind, and those disqualified by law.
 Free Consent:
The Act emphasizes that for a contract to be valid, consent must be freely given without
coercion, undue influence, fraud, misrepresentation, or mistake.
 Consideration:
It outlines that a contract must be supported by consideration (something of value)
exchanged between the parties, except in certain cases provided by the Act or any other law.
 Legality of Object and Consideration:
The object and consideration of a contract must be lawful and not prohibited by law.
 Performance of Contracts:
The Act specifies how contracts should be performed and the obligations of parties
involved in the contract.
 Breach of Contract and Remedies:
It details the consequences of breaching a contract and the remedies available to the
aggrieved party, such as damages, specific performance, and injunction.

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Importance of the Act
The Indian Contract Act, 1872, plays a crucial role in the Indian legal system by
providing a standardized and legal framework for contracts, which is essential for economic
transactions and relationships. It facilitates commerce and trade, not only within the country but
also in international dealings involving Indian parties. The Act ensures predictability and fairness
in contractual relationships, thereby contributing to the overall trust and efficiency in the
economic system.

Definition of Contract:
Contract is defined in Section 2(h) of the Indian Contract Act, 1872, as “an agreement
enforceable by law.” This definition underscores two fundamental aspects that constitute a
contract under the Act: an agreement and its enforceability by law.
 Agreement (Section 2(e)):
An agreement itself is defined as “every promise and every set of promises, forming the
consideration for each other.” Essentially, an agreement is formed when one party makes a
proposal or offer to another party, and that other party signifies their assent to that proposal.
Thus, at its core, an agreement is composed of at least two elements – an offer (or proposal) and
an acceptance of that offer.
 Enforceability by Law:
For an agreement to transform into a contract, it must be enforceable by law. This
enforceability vests an agreement with legal obligations, implying that if one party fails to honor
their part of the agreement, the other party has the right to seek redress or enforcement through
the court system. Not all agreements are contracts because not all of them are recognized by law
as having legal enforceability. For instance, social or domestic agreements (like a promise to
give a gift) usually do not constitute enforceable contracts because the law does not generally
intend to govern such private agreements.

Essentials of Valid Contract:

The Indian Contract Act, 1872, outlines several essential elements that must be present for an
agreement to be considered a valid contract enforceable by law. These essentials ensure that the
contract is formed on a lawful basis and the interests of both parties are protected under legal
provisions.
1. There must be at least two parties.
2. Offer and Acceptance
A contract initiates with a clear and definite offer by one party (offeror) and an
unambiguous acceptance of that offer by the other party (offeree). The acceptance must match
the terms of the offer exactly, leading to the mutual consent of both parties to enter into the
contract.
3. Lawful Consideration
Consideration refers to something of value that is exchanged between the parties involved in
the contract. It can be an act, abstinence, or promise and must be lawful. A contract without
consideration is void unless specified exceptions apply.
4. Capacity to Contract
The parties entering into a contract must have the legal capacity to do so. According to the
Act, the parties must be of legal age (majority), of sound mind, and not disqualified from
contracting by any law to which they are subject.

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5. Free Consent
For a contract to be valid, the consent of the parties involved must be free and not obtained
through coercion, undue influence, fraud, misrepresentation, or mistake. If consent is obtained
through any of these means, the contract may become voidable at the option of the party whose
consent was not free.
6. Lawful Object and Agreement
The object of the agreement and the agreement itself must be lawful. This means that it
should not be forbidden by law, should not defeat the provisions of any law, should not be
fraudulent, should not involve or imply injury to the person or property of another, and should
not be considered immoral or opposed to public policy.
7. Certainty and Possibility of Performance
The terms of the agreement must be clear and certain, or capable of being made certain.
Additionally, the agreement must not be for an act impossible in itself. Agreements to do an
impossible act are void from the beginning.
8. Not declared to be void or illegal
The agreement though satisfying all the conditions for a valid contract must not have been
expressly declared void by any law in force in the country. Agreements mentioned in Section 24
to 30 of the Act have been expressly declared to be void.
9. Legal Formalities
Although a contract can be oral or written, certain types of contracts must comply with
specific legal formalities such as being in writing, registered, or made under a seal to be
enforceable. For example, contracts related to the sale of immovable property must adhere to the
formalities required by law.
10. Intention to Create Legal Relationships
The parties must intend for their agreement to result in a legal relationship. Generally, social
or domestic agreements are not considered contracts because there is usually no intention to
create legal relations.

Offer (or Proposal):

An offer or proposal is defined in Section 2(a) of the Indian Contract Act, 1872, as 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.
The person making the offer is known as the “offeror,” and the person to whom the offer is
made is known as the “offeree.”
 Communicated:
The offer must be communicated to the offeree, enabling the offeree to decide whether to
accept or reject it.
 Definite:
It must be clear and certain, leaving no room for ambiguity in terms.
 Intention:
It should indicate a clear intention to enter into a contract on the offeror’s part, subject to
acceptance by the offeree.
 Offers can be express (stated verbally or in writing) or implied (inferred from conduct or
circumstances).

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Kinds of Offer:

Express Offer: When a proposal or acceptance of a promise is made using words, it is

considered an express offer. In other words, it’s a clear and direct offer communicated in spoken
or written language.
Implied Offer: On the other hand, when a proposal or acceptance is conveyed in a manner other
than using words, it is categorized as an implied offer. This means that the offer is not explicitly
stated but is inferred from the actions or circumstances of the parties involved.
General Offer: A General Offer is an offer that is open to anyone, effectively made to the public
in general.
Specific Offer: A Specific Offer is a type of offer that is directed toward a particular, identified
individual. This type of offer can only be accepted by the person for whom it was intended.

Acceptance:
Acceptance is defined in Section 2(b) of the Act as the act of assent to an offer. It signifies
the offeree’s agreement to the terms of the offer and results in a contract provided other
conditions of contract formation are met.
 Absolute and Unconditional: Acceptance must be absolute and unqualified, exactly
matching the terms of the offer (the “mirror image rule”).
 Communicated: It must be communicated to the offeror in a prescribed manner, or if no
manner is prescribed, in some usual and reasonable manner.
 Within Time: If the offer specifies a time for acceptance, it must be accepted within that
time frame; otherwise, the acceptance must be within a reasonable time.

Revocation of Offer:
According to Section 5 of the Act, an offer can be revoked by following modes:
 Revocation by communication
 Revocation by lapse of time
 Revocation by the failure of a condition precedent
 Revocation by death or insanity of the offeror

Revocation of Acceptance:
Similar to the offer, acceptance can also be revoked, but the revocation must reach the
offeror before or at the time when the acceptance becomes effective.

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Consideration:
Consideration is a core concept in contract law, serving as one of the essential elements
for forming a valid contract. Under the Indian Contract Act, 1872, consideration is detailed in
Section 2(d), which defines it 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 to abstain from doing,
something, such act or abstinence or promise is called a consideration for the promise.”
1. Something in Return:
Consideration involves something of value that is exchanged between the parties to a
contract. It is what one party receives, or expects to receive, in return for fulfilling the contract.
This “something” can be an act, abstinence from an act, or a promise to do or not do something.
2. At the Desire of the Promisor:
The act or abstinence forming the consideration must be done at the request or with the
consent of the promisor. If it is done at the instance of a third party or without the promisor’s
request, it does not constitute valid consideration.
3. Can Move from the Promisee or Any Other Person:
According to Indian law, consideration does not necessarily have to move from the
promisee to the promisor. It can be provided by some other person, which differentiates Indian
contract law from other jurisdictions where consideration must move from the promisee.
4. Must Be Real and Not illusory:
Consideration must have some value in the eyes of the law, though it need not be adequate.
The sufficiency of the consideration is for the parties to decide at the time of agreement and not
for the court to determine. However, consideration must be real and not vague or illusory.
5. Legal Object:
The consideration or the object for which the consideration is given must be lawful. It should
not be something that is illegal, immoral, or opposed to public policy.

Exceptions to the Rule of Consideration

The Indian Contract Act specifies certain situations where an agreement is enforceable even
without consideration. These exceptions are covered under sections 25 and 185 of the Act:
 Natural Love and Affection:
Agreements made out of natural love and affection between parties standing in a near
relation to each other, which are expressed in writing and registered under the law.
 Compensation for Past Voluntary Services:
A promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor.
 Promise to Pay a Time-Barred Debt:
A promise in writing to pay a debt barred by the limitation law.

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Contractual capacity:
Contractual capacity refers to the legal ability of a party to enter into a contract. Under
the Indian Contract Act, 1872, not all individuals or entities have the capacity to contract. The
Act specifies certain criteria that determine whether individuals possess the necessary legal
capacity to be bound by contractual obligations. The sections of the Act dealing with the capacity
to contract highlight that for a contract to be valid, the parties involved must be competent to
enter into a contract.
Criteria for Competency
According to Section 11 of the Indian Contract Act, 1872, a person is competent to contract
if they meet the following criteria:
 Age of Majority:
The person must have attained the age of majority, which is 18 years in India, according
to the Majority Act, 1875. However, if a guardian is appointed for a minor, or if the minor is
under the care of a court of wards, the age of majority is extended to 21 years.
 Sound Mind:
The person must be of sound mind at the time of making the contract. A person is
considered to be of sound mind if they are capable of understanding the contract and forming
a rational judgment as to its effect upon their interests. A person who is usually of unsound
mind but occasionally of sound mind can make a contract when they are of sound mind.
Conversely, a person who is usually of sound mind but occasionally of unsound mind cannot
make a contract when they are of unsound mind.
 Not Disqualified by Law:
The person must not be disqualified from contracting by any law to which they are
subject. Certain individuals and entities, such as insolvents, foreign sovereigns, and
diplomats, may have restrictions or immunities that affect their capacity to enter into
contracts.

Implications of Incapacity
 Contracts with Minors:
Contracts entered into with minors (persons under the age of 18, or 21 in certain cases) are
void, which means they are considered void from the outset. However, a minor can be a
beneficiary of a contract, and certain provisions protect minors’ rights in contracts for
necessities.
 Contracts with Persons of Unsound Mind:
Similar to contracts with minors, contracts made by persons of unsound mind are void.
However, if it can be shown that they were of sound mind at the time of contracting and
understood the implications of their actions, the contract may be valid.
 Necessaries:
The law protects contracts for the supply of necessaries to individuals incapable of
contracting. According to Section 68 of the Act, if a person incapable of entering into a contract,
or anyone whom they are legally bound to support, is supplied with necessaries suited to their
condition in life, the person who has furnished such supplies is entitled to be reimbursed from
the property of the incapable person.

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Free Consent:
Free consent is a fundamental concept in contract law, ensuring that parties enter into
agreements voluntarily and with a clear understanding of their terms. Under the Indian Contract
Act, 1872, free consent is crucial for the validity of a contract. Section 14 of the Act defines free
consent as consent that is not caused by coercion, undue influence, fraud, misrepresentation, or
mistake. If the agreement is entered into under any of these conditions, it may not be considered
a contract entered into with free consent.
1. Coercion (Section 15)
Coercion involves 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. It is equivalent
to duress in common law. A contract entered into under coercion is voidable at the option of the
party subjected to it.
2. Undue Influence (Section 16)
Undue influence occurs when the relations between the two parties are such that one of the
parties is in a position to dominate the will of the other and uses that position to obtain an unfair
advantage over the other. In cases of undue influence, the contract is voidable at the option of the
influenced party. The law presumes undue influence in certain relationships, such as between
parent and child, trustee and beneficiary, etc.
3. Fraud (Section 17)
Fraud involves making a representation that is known to be false, or without belief in its
truth, or recklessly, careless about whether it is true or false, with the intent to deceive another
party. The deceived party, upon discovering the fraud, may choose to treat the contract as
voidable.
4. Misrepresentation (Section 18)
Misrepresentation is a false statement of fact made innocently, which induces the other party
to enter into the contract. Unlike fraud, misrepresentation does not involve intentional deceit. A
contract made under misrepresentation is voidable at the option of the party misled by the
misrepresentation.
5. Mistake (Sections 20, 21, and 22)
Mistakes can be of two types: mistake of fact and mistake of law. A mistake of fact occurs
when both parties to an agreement are under an illusion about a fact essential to the agreement. A
contract is not voidable because it was caused by a mistake as to any law in force in India; but a
mistake as to a law not in force in India has the same effect as a mistake of fact. A mutual
mistake of fact renders the agreement void.

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Classification of Contract:
Contracts are fundamental to the functioning of the modern economy, facilitating
exchanges between individuals, businesses, and organizations. In India, as in many jurisdictions,
contracts are governed by principles laid out in the Indian Contract Act, 1872. This
comprehensive piece of legislation not only defines what constitutes a legally enforceable
agreement but also categorizes contracts based on various criteria. Understanding these
classifications is crucial for grasping the legal implications of agreements and navigating the
complexities of business law.

Valid, Void, Voidable, and Unenforceable Contracts

 Valid Contracts:
These are agreements that meet all the essential requirements outlined in the Contract Act,
such as free consent, a lawful object, consideration, and competent parties. Valid contracts are
enforceable by law.
 Void Contracts:
A contract becomes void when it ceases to be enforceable by law, essentially losing its legal
binding power. This can occur if the agreement involves an illegal act or if the terms are not
capable of being performed.
 Voidable Contracts:
These contracts contain all the elements of a valid contract but allow one or more parties the
option to rescind their obligation. This option arises from circumstances such as undue influence,
misrepresentation, or fraud at the time of contract formation.
 Unenforceable Contracts:
These are contracts that may have been valid at one point but have become impossible to
enforce due to certain technical defects, such as the absence of a written form when required by
law.

Express and Implied Contracts

1) Express Contracts:
These agreements are articulated clearly in words, either orally or in writing, detailing the
obligations and rights of the parties involved.
2) Implied Contracts:
Implied contracts are not stated in words but are inferred from the actions, conduct, or
circumstances of the parties. These can be further divided into contracts implied in fact (based on
the circumstances or conduct of the parties) and contracts implied in law (recognized by courts to
prevent unjust enrichment).

Executed and Executory Contracts

1) Executed Contracts:
An executed contract is one in which both parties have fulfilled their respective obligations.
These contracts represent completed transactions.
2) Executory Contracts:
In an executory contract, one or both parties have obligations that are yet to be performed.
These are ongoing agreements where performance is due in the future.

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Bilateral and Unilateral Contracts
1) Bilateral Contracts:
These involve two parties where each party has made a promise to the other. In these
contracts, the promise of one party is the consideration for the promise of the other.
2) Unilateral Contracts:
In a unilateral contract, only one party makes a promise or undertakes an obligation to
perform in exchange for an act by the other party. The contract becomes binding only when the
party acting on the promise completes the requested act or performance.

Contingent Contracts
Contingent contracts are agreements where the performance of the contract depends on
the occurrence or non-occurrence of a future, uncertain event. These contracts are conditional,
and the obligations are triggered by the specified event’s happening.

Quasi-Contracts
While not contracts in the traditional sense because they lack the parties’ agreement,
quasi-contracts are treated as contractual obligations by the law to prevent unjust enrichment.
These are obligations that the law creates in the absence of an agreement when one party
acquires something at the expense of another under circumstances that demand restitution.
Standard Form Contracts
Standard form contracts are pre-prepared contracts where one party sets the terms of the
agreement, and the other party has little or no ability to negotiate more favorable terms. These
are common in industries where uniformity and efficiency in transactions are necessary.

Discharge of a Contract
The discharge of a contract refers to the termination of contractual obligations between the
parties involved. In India, the Indian Contract Act, 1872, governs the mechanisms through which
a contract can be discharged, releasing the parties from their commitments. Understanding these
mechanisms is crucial for parties engaged in contractual relationships, as it informs them of their
rights, obligations, and the potential for relieving themselves from the contract under various
circumstances.
1) Discharge by Performance
The most straightforward method of discharging a contract is by performing the obligations it
stipulates. When both parties fulfill their respective duties as agreed upon in the contract, the
contract is considered discharged by performance. This discharge signifies the successful
completion of the contract, with no further obligations remaining on either side.
2) Discharge by Mutual Agreement
Contracts can also be discharged through mutual agreement or consent. This can occur in
several ways:
 Novation:
Replacing an old contract with a new one, either by changing the parties involved or the
terms of the contract.
 Rescission:
The parties agree to cancel the contract, relieving all parties of their obligations.

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  Alteration:
The terms of the contract are altered by mutual consent, which can discharge the original
contract and give rise to a new one.
 Remission:
One party agrees to accept a lesser fulfillment of the other party’s obligation than what was
stipulated in the contract.

3) Discharge by Impossibility of Performance

A contract can be discharged if its performance becomes objectively impossible or unlawful
after it has been entered into. This concept, known as the doctrine of frustration under Section 56
of the Indian Contract Act, encompasses situations where:
 The performance is made impossible by an act of God (natural calamities, unforeseen
disasters).
 The subject matter of the contract is destroyed.
 The performance becomes illegal due to a change in law.
 The purpose of the contract becomes futile due to circumstances beyond the control of
the parties.
4) Discharge by Lapse of Time
Under the Limitation Act, contracts must be performed within a specified period from the
time the contract is constituted. If the contract is not performed within this period, and no legal
action is taken by the aggrieved party, the contract is discharged due to the lapse of time, and the
rights and obligations under the contract become unenforceable.
5) Discharge by Operation of Law
A contract can be discharged by operation of law through:
 Death:
In contracts that require personal performance, the contract may be discharged if one of the
parties dies.
 Insolvency:
If a party is declared insolvent, they are discharged from performing the contract as their
assets are vested in the official assignee or receiver.
 Merger:
When an inferior right accruing to a party in a contract merges into a superior right, ensuring
the same performance.
6) Discharge by Breach of Contract
A breach of contract occurs when a party fails to perform their obligations under the contract.
This can lead to discharge in two ways:
 Actual Breach:
When a party fails to perform their obligations at the time when performance is due.
 Anticipatory Breach:
When a party declares their intention not to perform their obligations before the performance
is due.
The non-breaching party is discharged from their obligations and may seek remedies for
the breach, such as damages, specific performance, or rescission.

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Breach of Contract:
It is a critical aspect of business law, particularly within the Indian legal framework,
which is governed by the Indian Contract Act, 1872. This piece of legislation outlines the rules
and protocols surrounding agreements made between two or more parties and the remedies
available in the event of a breach. Understanding the nuances of breach of contract in the Indian
context is essential for businesses operating within the country to navigate legal challenges
effectively and safeguard their interests.
Definition of Breach of Contract
A breach of contract occurs when a party involved in a contractual agreement fails to
fulfill their part of the bargain as stipulated in the contract. This failure can be either actual or
anticipatory. An actual breach happens when a party refuses to perform their obligation on the
due date or performs incompletely or unsatisfactorily. Anticipatory breach occurs when a party
declares their intention not to fulfill their contractual obligations in the future.
Types of Breaches
In Indian law, breaches are typically categorized based on their nature and severity:
1. Actual Breach
An actual breach occurs when a party fails to perform their part of the contract on the due
date or during the performance period. This breach can be of two types:
 Non-performance:
When a party outright fails to perform their obligations under the contract.
 Defective Performance:
When a party’s performance is incomplete or fails to meet the contract’s stipulated standards.
2. Anticipatory Breach
Anticipatory breach, or anticipatory repudiation, happens when one party informs the other,
before the due date for performance, that they will not fulfill their contractual obligations. This
breach allows the non-breaching party to take immediate action, such as claiming damages or
seeking other remedies, without waiting for the actual time of performance.
3. Material Breach
Material breach is a significant failure to perform, to such an extent that it undermines the
contract’s very essence, denying the non-breaching party the contract’s full benefit. The severity
of a material breach allows the aggrieved party to terminate the contract and sue for damages.
Determining whether a breach is material involves assessing the breach’s impact on the
contractual relationship and the benefits that the non-breaching party would have received if the
contract had been fully performed.
4. Minor (or Partial) Breach
A minor breach, also known as a partial breach, occurs when the breach does not
significantly affect the contract’s core. The breach might involve minor deviations from the
agreed terms, where the main obligations are still fulfilled. While the contract remains in effect,
and termination is not justified, the non-breaching party can still seek compensation for the
losses incurred due to the partial non-compliance.
5. Fundamental Breach
A fundamental breach is a grave violation of the contract, going to the heart of the agreement
and resulting in such significant harm that the contract cannot be fulfilled as intended. This type
of breach allows the aggrieved party not only to terminate the contract but also to claim
damages. The concept of a fundamental breach highlights scenarios where the breach’s nature is
so severe that it renders the contractual relationship irreparably damaged.

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Remedies for Breach of Contract
When a breach of contract occurs, the law provides several remedies to the aggrieved party.
These remedies are designed to address the harm caused by the breach and, as much as possible,
restore the injured party to the position they would have been in had the breach not occurred.
Here’s an overview of the primary remedies for breach of contract:
1. Damages
Damages are the most common remedy for a breach of contract. They involve the payment of
money from the breaching party to the non-breaching party as compensation for the breach.
There are several types of damages:
 Compensatory Damages:
These are intended to compensate the non-breaching party for the loss directly resulting from
the breach, putting them in the position they would have been in if the contract had been
performed.
 Consequential (Special) Damages:
These compensate for additional losses that are a result of the breach but were foreseeable at
the time the contract was made.
 Nominal Damages:
A small sum awarded when a breach occurred, but the non-breaching party did not suffer any
actual loss.
 Liquidated Damages:
These are pre-determined damages agreed upon by the parties at the time of the contract, to
be paid in case of a breach.
 Punitive Damages:
Intended to punish the breaching party for egregious behavior and deter future breaches.
However, they are rarely awarded in contract law.
2. Specific Performance
This remedy involves a court order compelling the breaching party to perform their
obligations under the contract. Specific performance is generally reserved for cases where
monetary damages are inadequate to compensate for the breach, such as in the sale of unique
goods or real estate.
3. Rescission
Rescission cancels the contract, releasing both parties from their obligations. After rescission,
the parties should make restitution, returning any property or funds exchanged under the
contract. This remedy is often sought when a contract was formed under misrepresentation,
fraud, undue influence, or mistake.
4. Reformation
Reformation involves modifying the contract to reflect the true intentions of the parties. This
remedy is typically used when there has been a mutual mistake in the terms of the contract or
when one party was under a misunderstanding.
5. Injunction
An injunction is a court order preventing a party from doing something, such as breaching
the contract. Injunctions are particularly useful in preventing irreparable harm that cannot be
adequately compensated by damages.

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