Reading Material

UNIT 2: Topic Indian Contract Act 1872/ Law of Contract

Meaning of contract:
A contract is a legally binding agreement between two or more parties, where
they agree to perform certain obligations and enjoy certain rights. The Act lays
down rules and principles for the formation, validity, and enforceability of
contracts.
As per section 2(h) of the Indian Contract Act, 1872, contract means “an
agreement enforceable by law”.
For example:
1. When one enters into a restaurant, and takes some snacks, lunch or dinner, an
agreement gets entered into to the effect that the person (being the first party)
will make the payment to the hotel management (being the other party), for the
items consumed, at the price specified in the menu-card or the price list
displayed, plus taxes, if any.
2. If you hire a plumber to fix a leaky pipe in your house, you both enter into a
contract. The plumber agrees to provide the service, and you agree to pay for it.
Definition of Contract:
According to Salmond “A contract is an agreement creating and defining
obligation between two or more persons by which rights are acquired by one or
more to acts or forbearance on the part of others”
According to Sir William Anson “A legally binding agreement between two or
more persons by which rights are acquired by one or more to acts or forbearance
on the parts of others”

Characteristics of contract/ Essential of valid

contract:

Contracts have several key characteristics that define their nature and
enforceability. The main characteristics of a contract are as follows:
1. Offer & Acceptance: For an agreement there must be a lawful offer by
one party and lawful acceptance of that offer from the other party. The
term lawful means that the offer and acceptance must satisfy the
requirements of the contract Act. The offer must be made with the
intention of creating legal relations; otherwise there will be no agreement.
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2. Intention to Create Legal Relations: The parties must have a clear
intention to enter into a legally binding agreement. This means that they
understand and accept that the contract will be enforceable by law.
3. Lawful Consideration: Consideration refers to something of value
exchanged between the parties as part of the contract. It can be monetary
payment, goods, services, or a promise to do or not to do something.
Consideration is essential for a contract to be valid. Only those
considerations are valid which are lawful
4. Legal Capacity: The parties entering into a contract must have the legal
capacity to do so. This means they must be of legal age and have the
mental capacity to understand the terms and consequences of the contract.
5. Legal Object: The purpose of the contract must be legal and not contrary
to public policy. Contracts with illegal objectives, such as engaging in
illegal activities, are not enforceable.
6. Certainty of Terms: Contracts must have clear and specific terms that
define the rights, obligations, and expectations of the parties involved.
Uncertainty or ambiguity in the terms can invalidate the contract.
7. Free Consent: It conveys a meaning to the parties that both the parties to
the contact have agreed upon the same thing in the same sense. For a
valid contract, it is necessary that the consent of parties to the contract
must be free. a consent is said to e free when it is not obtained by
coercion, under influence, fraud, misrepresentation or mistake.
8. Enforceability: A valid contract is enforceable by law, meaning that if
one party fails to fulfill their obligations, the other party can seek legal
remedies such as damages or specific performance.

Elements of the Contract

There are the following elements of the contract.
Agreement
An Agreement can be defined as an acceptance of an offer given by one party
to another. Every promise and set of promises that form any type of
consideration for all the parties involved is called an agreement. Here, promise
refers to the acceptance of an offer or proposal. The agreement comes into
existence when an individual or an entity makes an offer or proposal to a second
individual or entity, and the latter accepts that offer with all the required
conditions.
Agreement = Offer + Acceptance
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Section 2(e) of the Indian Contract Act, 1872 defines an agreement as, “Every
promise and every set of promises, forming the consideration for each other, is
an agreement.”
The two main features of an agreement are:
 Two or more parties: A minimum of two persons or entities should be
there to get into an agreement. A single person or entity cannot get into
an agreement.
 Consensus ad-idem: It is a Latin word that means ‘Meeting of Minds’. It
further implies that all the parties involved in an agreement should agree
upon the same thing in the same way as it meant.
Example: Bijay offers to sell his Car to Kashish for ₹ 2, 00,000. So,
when Kashish accepts the offer, it becomes an agreement.

A Contract can be defined as an agreement that is enforced by law involving at

least two parties; as such one party is entitled with some right and the other with
some obligation. An agreement is said to be a contract when it is abided by the
law. It means that legal obligations must be led by a contract.
Contract = Agreement (Offer + Acceptance) + Enforceable by Law
The two main features of a contract are:
 An agreement: An acceptance of an offer given by one party to another
is called an Agreement.
 Abided by law: A contract should create some legal obligation or duty.
Example: A multiplex sells a ticket on 1st January 2023 to Gaurav for a
movie show. The Multiplex is under an obligation to organize a movie show
on the given date. In case, the Multiplex fails to fulfill its promise, Gaurav
can take legal action against the multiplex owners. Thus, Gaurav has a right
against the Multiplex, and a corresponding duty is imposed on the Multiplex.

Difference between Agreement and Contract

Basis Agreement Contract

The meaning of agreement can

A contract can be
be understood as an acceptance
Meaning defined as an agreement
of an offer given by one party to
that is enforced by law.
another.

Definition Section 2(e) of the Indian Section 2(h) of the

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Basis Agreement Contract

Contract Act, 1872 defines an Indian Contract Act,

agreement as, “Every promise 1872 defines a contract
and every set of promises, as, “an agreement
forming the consideration for enforceable through the
each other, is an agreement.” law.”

Agreement = Offer + Contract = Agreement +

Elements
Acceptance Enforceable by Law

The agreement cannot A contract is normally

Written Form
necessarily be in written form. written and registered.

A contract has a
An agreement has a wider scope narrower scope as
Scope
than a contract. compared to an
agreement.

It involves a higher risk factor A contract is abided by

Risk because it is not enforceable by the law, so it ensures a
law. low-risk factor.

One in All agreements cannot be All contracts can be

Another considered a contract. considered an agreement.

Legal An agreement does not create a Contracts are meant to

Obligation legal obligation. create a legal obligation.

There should be some

Agreements can be formed
Consideration consideration to form a
without consideration.
contract.

Enforceability:
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Enforceability is the second requirement of contract. An agreement is
enforceable if it is recognized by court. In order to be enforceable by law, the
agreement must create legal obligation between the parties. If an agreement
does not create legal obligation, it is not a contract.

Types/ Classification of Contract

A) Based on Validity or enforceability

1. Valid contract-
A valid contract is a legally binding agreement that meets all the essential
elements required for its enforceability. These elements typically include an
offer and acceptance, consideration, legal capacity of the parties, genuine
consent, lawful object, and proper form, if necessary. A valid contract is
enforceable by law, and the parties involved are obligated to fulfill their
respective obligations.

For example:

Imagine Riya want to buy a used bicycle from her friend Vedika means both
agree on the terms: Riya will pay Rs 10,000 to vedika and she will give her the
bicycle.
1. Offer: Your friend (Vedika) offers to sell you the bicycle for Rs 10,000.
This offer can be made verbally or in writing.
2. Acceptance: You (Riya) agree to the offer and accept it. You (Riya)
express your acceptance by saying, "I agree to buy the bicycle for Rs
10,000."
3. Consideration: Consideration refers to something of value that each party
gives or promises to give as part of the agreement. In this case, the
consideration is Rs 10,000 from riya and the bicycle from her friend
vedika.
4. Legal Capacity: Both riya and her friend vedika have the legal capacity to
enter into a contract. This means riya are of legal age and mentally
competent to make the agreement.
5. Consent: Both parties enter the agreement willingly and without any form
of coercion (pressure) or fraud. Riya and her friend vedika have a clear
understanding of what they're agreeing to.
6. Lawful Object: The purpose of the contract, which is the exchange of the
bicycle for Rs 10,000 is legal and not against the law.
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7. Proper Form: In most cases, contracts don't need to be in any specific
written format. However, certain types of contracts, such as real estate
agreements, may require written documentation to be valid.
In this example, if all these elements are present, the contract is considered
valid. If either party fails to fulfill their obligations—for example, if riya
don't pay the Rs 10,000 or her friend vedika refuses to give you the bicycle
—the other party can seek legal remedies to enforce the contract.

2. Void Contracts:
The Indian Contract Act, 1872 defines void contracts under Section 2(g) as
contracts or agreements that cannot be enforced by law. When one or both of
the parties cannot enforce a contract, it is considered null and void. Contracts
can be declared void for many reasons, such as the use of unlawful means,
incompetency, supervening impossibility, etc. For example, a contract to
commit a crime or a contract involving an illegal act is void.

3. Illegal Contract:
An agreement that leads to one or all the parties breaking a law or not
conforming to the norms of the society is deemed to be illegal by the court.
A contract opposed to public policy is also illegal.
For example, A agrees to sell narcotics to B. Although this contract has all
the essential elements of a valid contract, it is still illegal.
The illegal contracts are deemed as void and not enforceable by law. As
section 2(g) of the Act states: “An agreement not enforceable by law is said
to be void.”
Thus we can say that all illegal contracts are void but the reverse is not true.
Both the void contracts and illegal contracts can’t be enforceable by law. Illegal
contracts are actually void ab initio (from the start or the beginning).

4. Voidable contract:
A voidable contract is a legally binding agreement that can be declared void
or canceled by one or both parties under certain circumstances. It means that
the contract is initially valid and enforceable, but due to specific legal
grounds, one or both parties have the option to void the contract.
For example: Imagine you're at a store and a salesperson convinces you to
buy an expensive electronic device by misleading you about its features.
They make false claims about its capabilities, promising it can perform
advanced functions that it actually cannot. Relying on these
misrepresentations, you decide to purchase the device.
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4. Unenforceable contract:
An unenforceable contract is an agreement that cannot be legally enforced
by a court. This means that even if the parties agreed to the terms, there are
external factors or legal issues that prevent the contract from being enforced
For example: Imagine you make an agreement to buy a car from someone,
but the contract is not properly documented or written. In this case, the lack
of proper written documentation makes the contract unenforceable. Even
though you both intended to create a valid contract, without the necessary
written evidence, you would not be able to legally enforce the terms of the
agreement.
In short, an unenforceable contract is an agreement that lacks the necessary
legal elements or compliance with certain requirements, making it
impossible to enforce through legal means.

B) Based on Formation-

1. Express Contract: An express contract is a type of contract where the

parties explicitly (Clearly) state the terms and conditions of the
agreement, either orally or in writing. The terms are clearly defined and
agreed upon by the parties involved. For example, signing a lease
agreement for renting an apartment, where the terms of rent, duration, and
responsibilities are clearly stated in a written document, is an example of
an express contract.
2. Implied contract: This contract is an agreement between two or more
parties that is not explicitly (clearly)stated in words or writing but is
understood based on their actions, behavior, or the circumstances of the
situation. It is a contract that is formed through unspoken or implied
consent rather than through explicit verbal or written agreement.
For example: When you make an online purchase from a reputable website,
there is an implied contract between you and the seller. You select and order
items, provide payment information, and expect the seller to deliver the
purchased goods in exchange for the agreed-upon price.

3. Quasi Contract:
A quasi-contract, also known as an implied-in-law contract, is not an actual
contract, but a legal remedy imposed by the court to prevent unjust
enrichment or provide restitution. It is a fictional contract created by law to
prevent one party from unjustly benefiting at the expense of another party.
For example, if you mistakenly pay someone for a service they did not
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provide, the court may impose a quasi-contract to require the recipient to
return the payment.
For example: Let's say you accidentally make a payment to someone who is
not entitled to receive it. For example, you mistakenly transfer money to the
wrong person's bank account. In this case, the court may impose a quasi
contract on the recipient, requiring them to return the funds to you. The
recipient would be unjustly enriched if they were allowed to keep the money
without any legal obligation.

4. Tacit Contract

A tacit contract is an agreement that is inferred from the conduct, actions, or

circumstances of the parties involved, rather than being explicitly stated in written or
spoken words. In such contracts, the terms and conditions are understood by the actions
of the parties, even if no formal agreement has been expressed.

For example, if a person visits a restaurant, orders food, and eats it, a tacit contract is formed
where the person is expected to pay for the food, even though there may not be a written or
spoken contract specifying this obligation. The actions of both parties imply an agreement.
Tacit contracts are often considered valid in legal systems as long as the conduct clearly
indicates mutual consent to the agreement.

They differ from express contracts, where the terms are explicitly stated and agreed upon.

C) Based on Performance:
1. Executed Contract

An executed contract is one in which both parties have fully performed their obligations
under the contract. In other words, all terms of the contract have been fulfilled, and there is
nothing left to be done by either party.

Example: A person buys a car from a dealership and pays the full amount, and the dealership
delivers the car. Once the car is delivered and payment is made, the contract is considered
executed.

2. Executory Contract

An executory contract is one in which either or both parties still have obligations to fulfill.
The contract is still in progress, and some part of the performance remains pending.

Example: A contract where a person agrees to buy a house and the deal is set to close in 30
days. Until the house is transferred and payment is made, the contract is executory.
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3. Unilateral Contract

A unilateral contract involves a promise made by one party in exchange for the
performance of an act by another party. In this type of contract, the contract is completed
when one party performs the required act. The other party's obligation is fulfilled once the
performance occurs.

Example: A reward contract, where one party promises to pay a reward if someone finds
their lost pet. The contract is only executed if and when someone finds the pet and claims the
reward.

4. Bilateral Contract

A bilateral contract involves mutual promises made by both parties. Each party is both a
promisor and a promisee, meaning both are obligated to perform certain actions. The
performance of one party is exchanged for the performance of the other.

Example: An employment contract where an employer agrees to pay a salary, and the
employee agrees to provide services. Both parties have ongoing obligations toward each
other.

Offer & Acceptance:

Offer/proposal (Section 2(a))
 The entire process of entering into a contract begins with the proposal or
an offer made by one party to another. The proposal must be accepted to
enter into an agreement.
 According to the Indian Contract Act 1872, proposal is defined in Section
2(a) as “when one person will signify to another person his willingness
to do or not do something (abstain) with a view to obtain the assent of
such person to such an act or abstinence, he is said to make a proposal or
an offer.”

Features of a valid offer:

The person making the offer/proposal is referred to as the “promiser” or the

“offeror”. And the person who accepts an offer is referred to as “promisee” or
the “acceptor”.
 The offeror must express his willingness to do or abstain from doing an
act. Only willingness is not adequate. Or just an urge to do something or
not to do anything will not be an offer.
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 An offer can either be positive or negative. It can be a promise to do some
act, and can also be a promise to abstain from doing any act/service. Both
are valid offers.

The element of a valid offer:

1. There must be two parties

There have to be at least two parties: a person making the proposal and the other
person agreeing to it. All the persons are included i.e, Legal persons as well as
artificial persons.
2. Every proposal must be communicated
Communication of the proposal is mandatory. An offer is valid if it is conveyed
to the offeree. The communication can either be expressed or implied. It can be
communicated by terms such as word of mouth, messenger, telegram,
etc. Section 4 of the Indian Contract Act says that the communication of a
proposal is complete when it comes to the awareness of the person to whom it is
made.
Example
‘A’ proposes to sell a car to ‘B’ at a certain price. Once ‘B’ receives the letter,
the proposal communication is complete.
3. It must create legal relations
An offer must be such that when accepted it will result in a valid contract. A
mere social invitation cannot be regarded as an offer, because if such an
invitation is accepted it will not give rise to any legal relationship.
Example
‘A’ invited ‘B’ to dinner and ‘B’ accepted the invitation. It is a mere social
invitation. And ‘A’ will not be liable if he fails to provide dinner to B.
4. It must be certain and definite
The terms of the offer must be certain and clear in order to create a valid
contract, it must not be ambiguous.
5. It may be specific or general
The specific offer is an offer that is accepted by any specific or particular
person or by any group to whom it is made. Whereas, The general offers are
accepted by any person.
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Classification of offer:

An offer can be of many types, ranging across the spectrum. There are
basically 7 kinds of offers:

 Express offer
 Implied offer
 General offer
 Specific Offer
 Cross Offer
 Counter Offer
 Standing Offer

1. Express Offer

An express offer is an offer that is explicitly made by words, either spoken or written. In this
type of offer, the intention of the offeror (the person making the offer) is clearly
communicated to the offeree (the person to whom the offer is made).

Example: A person verbally offers to sell a car for $10,000, or a written contract offering to
supply goods at a specific price.

2. Implied Offer

An implied offer is not made in express words but is inferred from the conduct, actions, or
circumstances of the parties. It arises when one party's actions suggest an intention to enter
into a contract.

Example: A bus service company operates buses on a certain route. By doing so, it is implied
that they are offering transportation services to the public.

3. General Offer

A general offer is made to the public at large or to a group of people, rather than to a specific
individual. Anyone who fulfills the conditions of the offer can accept it and form a contract.

Example: A reward offer for the return of lost property is a general offer, as anyone who
finds the lost item can claim the reward.

4. Specific Offer

A specific offer is made to a particular person or a specific group of individuals. Only the
person or group to whom the offer is addressed can accept it.
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Example: A person offers to sell their car to a particular friend. Only that friend can accept
the offer and form a contract.

5. Cross Offer

A cross offer occurs when two parties make identical offers to each other at the same time,
without knowledge of the other's offer. Since neither party has accepted the other's offer, no
contract is formed.

Example: Two companies send each other letters offering to buy each other's products at the
same price on the same day. Because neither party accepted the other's offer, it is a cross
offer and does not result in a contract.

6. Counter Offer

A counter offer occurs when the offeree responds to the original offer by making changes to
its terms. A counter offer effectively rejects the original offer and proposes a new offer. The
original offer cannot be accepted once a counter offer is made.

Example: A seller offers to sell a car for $10,000, but the buyer responds by offering $9,000.
The buyer's response is a counter offer, and the original offer is no longer valid.

7. Standing Offer

A standing offer is an offer that remains open for acceptance over a period of time. The
offeror is willing to supply goods or services as required by the offeree during the duration of
the offer. It is typically used in supply contracts.

Example: A supplier offers to provide a company with a certain product at a fixed price for
the next six months. The company can accept this standing offer whenever it needs to
purchase the product within that time frame.

Lapses and revocation of an offer

A. Lapse of an offer
A lapse occurs when an offer is no longer valid or enforceable because a
specific event or time frame specified in the offer has passed. In other words, if
the offeree (the person receiving the offer) does not accept the offer within the
designated time or before the stated event occurs, the offer becomes void.
Following are the situations where an offer may lapse:
Time-based lapse: The offer may specify a certain period within which it is
valid. If the offeree does not accept within that time, the offer lapses.
b. Event-based lapse: The offer might be contingent on a specific event taking
place. If that event does not occur, the offer becomes void.
c. Failure to meet conditions: If the offeree does not meet the conditions set
forth in the offer, the offer may lapse.
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B. Revocation (the official cancellation of a promise/ decision) of an
Offer: Revocation refers to the act of the offeror (the person
making the offer) withdrawing or canceling the offer before the
offeree accepts it. The offeror has the right to revoke the offer at
any time before it is accepted, as long as the revocation is
effectively communicated to the offeree.
There are some important points to understand about revocation:
a. Communication of revocation: For the revocation to be valid, the offeror
must communicate the withdrawal of the offer to the offeree. The offeree must
receive the revocation before accepting the offer.
b. Effective upon receipt: Revocation becomes effective when the offeree
receives the communication of withdrawal, not when the offeror sends it.
c. Exceptions to revocation: In some jurisdictions, an offer may be irrevocable
under certain circumstances, such as when the offeror has made a promise to
keep the offer open for a specified period (option contract) or if the offeror has
accepted consideration in exchange for keeping the offer open (firm offer).
It's essential to remember that once an offer has lapsed or has been properly
revoked, it can no longer be accepted, and the parties cannot form a contract
based on that particular offer. If the offeree still wishes to proceed with the deal,
they would need to negotiate a new offer or counteroffer with the offeror.
When communication is complete
 Communication of offer (section 4)

The communication of the offer is complete when it comes to the knowledge of

the person to whom it is made.
Time of revocation of an offer
 Revocation of the offer (Section 4)

A proposal can be revoked at any time before the communication of its

acceptance is complete as against the proposer but not afterward.
Revocation of the offer by the offeror
The offeror can withdraw his offer before it is accepted “the bidder can
withdraw (revoke) his offer at an auction sale before being accepted by any
auctioneer using any of the customary methods.
Example
‘A’ agreed to sell the property to ‘B’ by a written document which stated “this
offer to be left over until Friday 9 AM”. on Thursday ‘A’ made a contract to sell
the property to ‘C’. ‘B’ heard of this from ‘X’ and on Friday 7 AM he delivered
to ‘A’ acceptance of his offer. Held ‘B’ could not accept A’s offer after he knew
it had been revoked by the sale of the property to C.
Capacity to Contract:
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According to the definition of capacity to contract: “A person who is
major, sound mind and not disqualified by law has the capacity to
contract.” In simple words, the person who is a sound mind, major
and not disqualified by law can enter into a contract.
According to sec 11 of the Indian contract act
A person who is major, sound mind and not disqualified by law has
the capacity to contract.”
As per the capacity to contract definition, we have two parties which
are:
 Parties Competent to contract (Competent- Capable)

 Parties Incompetent to contract (Incompetent- incapable)

[A] Parties competent to contract:
When we refer to "Parties Competent to Contract," we are talking
about individuals or entities that have the legal capacity and
qualifications to enter into a valid and enforceable contract. These
parties possess the necessary legal attributes and mental capacity
to understand and be bound by the terms and conditions of the
contract they are entering into. In other words, they have the ability
to make legally binding agreements.
[The party that meets these three conditions for capacity to
contract has the capacity to enter into a contract. The conditions
are:
 The person has attains the age of majority (18 or above)

 The person is a sound mind

 He is not disqualified by law from entering into the contract]
To be considered competent to contract, the parties involved must
generally meet the following criteria:
1. Age of Majority: In most jurisdictions, parties must have
reached the age of majority, which is typically 18 years old.
Minors, individuals below the age of majority, are generally not
considered competent to contract, except for certain types of
contracts (e.g., contracts for necessaries).
2. Sound Mind: Parties must have the mental capacity to
understand the nature and implications of the contract. They
should be of "sound mind" and not suffering from any mental
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incapacity that would impair their ability to comprehend the
terms of the agreement.
3. Voluntary Consent: Competent parties must enter into the
contract voluntarily and without any form of coercion, fraud,
misrepresentation, or undue influence. Voluntary consent
ensures that the contract is entered into freely, without
external pressures or deception.
4. Legal Capacity: Entities, such as corporations, partnerships,
and other legal entities, must have the legal capacity to
contract as per the laws governing their establishment and
operation. For example, a corporation must have the power to
contract as stated in its articles of incorporation or the
applicable corporate laws.
5. Not Prohibited by Law: Parties must not be prohibited by law
from entering into the specific type of contract they are about
to make. For instance, some professions or occupations may
have restrictions on certain contractual arrangements.
When all parties involved meet these criteria, the contract they
create is considered legally valid and enforceable. In case any of
the parties lack competence, the contract may be void or voidable,
meaning it may be canceled or disaffirmed by the incompetent party
or by a court of law. It is crucial to ensure that all parties have the
necessary capacity to contract to avoid potential legal challenges
and ensure the contract's enforceability.
[B] Parties Incompetent to contract:
Parties Incompetent to Contract refers to individuals or entities that
lack the legal capacity or qualifications to enter into a valid and
enforceable contract. These parties do not possess the necessary
attributes or mental capacity to fully understand the terms and
obligations of a contract, and as a result, they are not legally bound
by the agreements they make.
The following are some common categories of parties considered
incompetent to contract:
1. Minors: Minors, individuals who have not reached the age of
majority (usually 18 years old), are generally considered
incompetent to contract. Since minors are presumed to lack
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the maturity and understanding to fully comprehend the
consequences of their contractual commitments, the law
protects them by treating their contracts as voidable. This
means that a minor has the option to disaffirm or cancel the
contract upon reaching the age of majority or shortly
thereafter.
2. Mentally Incapacitated Individuals: Persons who lack the
mental capacity to understand the nature and consequences
of a contract due to mental illness, intellectual disability, or
cognitive impairment are considered incompetent to contract.
Such individuals may not have the legal ability to make
informed decisions and, therefore, their contracts may be void
or voidable.
3. Intoxicated Individuals: Contracts entered into while a
person is heavily intoxicated may be considered voidable if the
intoxication prevents them from understanding the terms of
the contract. Intoxication can impair judgment and inhibit a
person's ability to enter into a contract knowingly.
4. Under the Influence of Drugs: Similar to intoxication,
contracts made while under the influence of drugs that impair
judgment and understanding may be voidable if the individual
lacked the capacity to comprehend the agreement.
5. Unconscious or Incapacitated Individuals: Obviously, a
contract cannot be entered into by someone who is
unconscious or otherwise unable to express their intent and
understand the contract's terms.
6. Persons under Guardianship or Power of Attorney:
Individuals placed under guardianship or represented by
someone through a power of attorney may have limited or
restricted capacity to contract, depending on the terms of the
guardianship or power of attorney arrangement.
Contracts entered into by parties who are incompetent to contract
are generally not legally enforceable against them. In such cases,
the party lacking capacity may have the option to void the contract
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or seek the court's intervention to have it declared void. It is
essential to ensure that all parties involved in a contract have the
necessary competence to avoid potential legal issues and to ensure
the enforceability of the agreement.
[For the formation of a valid contract, the given people are not
eligible because they do not have the capacity to contract:
 Minor who has not attained the age of 18 or above

 The person in unsound mind

 The person is disqualified by the law]

Breach of Contract

Meaning:

A breach of contract occurs when one party fails to fulfill its obligations under the terms of
a legally binding contract. This can include failing to perform a task, not completing it as
promised, or doing something that contradicts the agreement. When a breach occurs, the
aggrieved party may seek legal remedies such as damages, specific performance, or
cancellation of the contract.

Types of Breach of Contract:

1. Minor (Partial) Breach

A minor breach, also known as a partial breach, occurs when a party fails to
perform a small part of the contract, while still completing most of the agreed terms.
This type of breach may not allow the non-breaching party to terminate the contract
but could entitle them to compensation for the incomplete part.

Example: A contractor completes a construction job but fails to install one minor
feature specified in the contract. The client can seek compensation for that feature but
cannot cancel the entire contract.

2. Material (Major) Breach

A material breach is a significant failure that goes to the essence of the contract and
undermines the entire purpose of the agreement. In this case, the non-breaching party
may be entitled to terminate the contract and seek damages.

Example: A seller agrees to deliver 100 units of a product but delivers 50 units
instead, failing to meet a critical requirement of the contract. This would likely be
considered a material breach, allowing the buyer to cancel the contract and seek
compensation.

3. Anticipatory Breach (Repudiation)

An anticipatory breach occurs when one party indicates, either through words or
actions, that they will not be performing their obligations before the performance is
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due. The non-breaching party can treat this as a breach and take legal action
immediately, without waiting for the breach to actually occur.

Example: A supplier informs a company that they will not be able to deliver goods
on the agreed date, well before the deadline. The company can treat this as an
anticipatory breach and seek remedies without waiting for the actual date.

4. Actual Breach
An actual breach occurs when one party fails to perform their contractual duties at
the time performance is due. It can happen either by not performing at all or by
performing improperly.

Example: A service provider fails to deliver services as agreed on the deadline

specified in the contract, constituting an actual breach.

Remedies for Breach of Contract:

1. Damages
Damages are the most common remedy for breach of contract. The non-breaching
party can claim compensation for any losses suffered due to the breach. The different
types of damages include:
o Compensatory Damages: To cover direct losses and costs.
o Consequential Damages: To cover indirect losses that resulted from the
breach.
o Punitive Damages: In rare cases, awarded to punish the breaching party for
wrongful conduct.
o Nominal Damages: A small sum awarded when a breach occurred, but no
significant loss was suffered.

2. Specific Performance
In cases where damages are not sufficient to remedy the breach, the court may order
specific performance. This remedy requires the breaching party to fulfill their
obligations under the contract as agreed. It is often used when the subject matter of
the contract is unique, such as real estate or rare goods.
3. Rescission
Rescission allows the non-breaching party to cancel the contract and be relieved of
their obligations. Both parties are restored to their positions before the contract was
made. This remedy is appropriate when the breach is so severe that continuing with
the contract would be unfair.
4. Restitution
Restitution aims to restore the injured party to the position they were in before the
contract was formed. It is used to prevent unjust enrichment, where one party has
gained benefits at the expense of the other without fulfilling their contractual
obligations.
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Free constant, legality of object & consideration

1. Free Consent

Free consent refers to the genuine and voluntary agreement of the parties involved in a
contract, without any force, coercion, fraud, undue influence, or mistake. For a contract to be
valid, the consent of the parties must be given freely and voluntarily. If consent is obtained
through improper means, the contract may be voidable at the option of the aggrieved party.

Factors Affecting Free Consent:

 Coercion: Using physical force or threats to compel someone to enter into a contract.
 Undue Influence: One party taking advantage of their dominant position to pressure
the other party into agreeing to the contract.
 Fraud: Deliberate deception to secure unfair or unlawful gain.
 Misrepresentation: Providing false information or making misleading statements,
albeit unintentionally.
 Mistake: Both parties must have a correct understanding of the facts; if both parties
are mistaken about an essential fact, the contract may be void.

Example: If a person signs a contract because of a threat or fraud, the consent is not free, and
the contract could be voidable at the request of the coerced party.

2. Legality of Object

The legality of object means that the purpose of the contract must be lawful. If the object or
purpose of the contract is illegal or goes against public policy, the contract is void and cannot
be enforced by law. The law requires that the agreement must have a legal and valid
objective, meaning that it should not involve illegal acts, immoral activities, or actions
contrary to public interest.

What Makes the Object Illegal:

 Illegal activities: Contracts involving illegal acts (e.g., drug trafficking or theft) are
void.
 Immoral purposes: If the purpose is immoral, the contract is void.
 Against public policy: Contracts that harm the public good or go against established
societal norms (e.g., agreements to commit fraud or harm others).

Example: An agreement to smuggle goods or to harm someone would be considered void

because the object of the contract is illegal.

3. Legality of Consideration

Consideration is the value that each party to a contract agrees to exchange. For a contract to
be legally enforceable, the consideration must be lawful, meaning it must not involve illegal
or immoral acts. Legality of consideration means that the consideration offered by each
party must not violate any law or go against public policy.
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Consideration may be:

 Money, goods, services: Anything of value can be considered.

 Future actions: Promises for future actions can also serve as consideration.
 Lawful: The consideration must be legal and not involve illegal or forbidden
activities.

If the consideration is unlawful (involving illegal acts or goes against moral or public
standards), the contract will be considered void.

Examples of Illegal Consideration:

 A contract to pay someone to commit a crime.

 An agreement to pay someone in return for a favor that goes against public policy.

Example: A contract to bribe a public official in exchange for a license is void, as the
consideration (bribe) is unlawful.

Key Differences:

 Free Consent focuses on whether the parties voluntarily agreed to the contract
without any external pressure or deception.
 Legality of Object refers to the lawful purpose or aim of the contract.
 Legality of Consideration ensures that the value exchanged between the parties does
not involve illegal activities.

Indemnity & guarantee, pledge

1. Indemnity

Indemnity refers to a contractual obligation where one party (the indemnifier) promises to
compensate the other party (the indemnified) for any loss or damage that the indemnified
party may suffer due to the actions of the indemnifier or a third party. The main purpose of
indemnity is to protect the indemnified party from any potential losses or liabilities.

Key Features of Indemnity:

 Two parties: Indemnifier (promising compensation) and indemnified (receiving

compensation).
 Loss compensation: The indemnifier agrees to cover any loss, damage, or liability
incurred by the indemnified.
 Claim upon loss: The indemnified party can claim compensation from the
indemnifier as soon as the loss occurs, without waiting for actual financial damage.

Example:
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 An insurance contract is a classic example of indemnity. The insurance company
(indemnifier) promises to compensate the policyholder (indemnified) for any loss or
damage caused by a specified event (e.g., fire, accident).

2. Guarantee

A guarantee is a contract in which one party (the guarantor) agrees to fulfill the obligations
or repay the debt of a third party (the principal debtor) if the third party fails to fulfill their
obligations or defaults. A guarantee involves three parties: the guarantor, the principal debtor,
and the creditor.

Key Features of Guarantee:

 Three parties: Guarantor (promising to repay), principal debtor (who owes the
obligation), and creditor (to whom the obligation is owed).
 Contingent liability: The guarantor’s liability arises only if the principal debtor fails
to perform their obligations.
 Secondary liability: The guarantor is only liable when the principal debtor defaults.

Example:

 In a loan agreement, if a guarantor signs a contract agreeing to repay the loan if the
borrower (principal debtor) defaults, the guarantor is providing a guarantee. If the
borrower fails to pay, the bank (creditor) can demand payment from the guarantor.

Key Differences Between Indemnity and Guarantee:

Basis Indemnity Guarantee

Parties Two (indemnifier and Three (guarantor, principal debtor, and
Involved indemnified) creditor)
Nature of Primary liability for Secondary liability; only arises if the
Liability compensating the loss principal debtor defaults
Time of Arises immediately after the Arises only upon default by the principal
Liability loss debtor
Purpose To compensate for a loss To ensure the performance of an obligation

3. Pledge

A pledge is a form of bailment in which personal property is given as security for the
repayment of a debt or the performance of an obligation. The pledgor (borrower) delivers
movable property to the pledgee (lender) as collateral, with the agreement that the property
will be returned once the debt is repaid or the obligation is fulfilled. If the pledgor fails to
meet their obligation, the pledgee has the right to sell the pledged property and recover the
debt.
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Key Features of a Pledge:

 Two parties: Pledgor (the person who delivers the property) and pledgee (the person
to whom the property is delivered).
 Movable property as security: The pledge involves only movable property (e.g.,
jewelry, stocks, or other personal items).
 Right to sell: If the pledgor fails to repay the debt, the pledgee has the right to sell the
pledged property to recover the amount owed.
 Temporary transfer of possession: The ownership of the pledged property remains
with the pledgor, but the possession is temporarily transferred to the pledgee as
security.

Example:

 A person borrows money from a bank and pledges their gold jewelry as collateral.
The bank keeps the jewelry until the loan is repaid. If the borrower defaults, the bank
has the right to sell the jewelry to recover the loan amount.

Principal-Agent Relationship

A Principal-Agent relationship arises when one party (the principal) authorizes another
party (the agent) to act on their behalf in business dealings or legal matters. The agent is
empowered to create legal relationships between the principal and third parties, making
decisions and performing tasks as per the authority granted by the principal. This relationship
is common in employment, business contracts, real estate transactions, and partnerships.

Key Elements of a Principal-Agent Relationship:

1. Consent: Both parties must agree to the relationship.

2. Authority: The principal grants authority to the agent to act on their behalf.
3. Fiduciary Duty: The agent must act in the best interest of the principal.
4. Third-Party Dealings: The agent has the authority to engage with third parties,
binding the principal by the agent's actions.

Example:

A company (principal) hires a lawyer (agent) to represent it in legal matters. The lawyer can
negotiate or make legal decisions within the authority granted by the company.

Rights and Obligations of Principal and Agent

1. Rights and Obligations of the Principal

Rights of the Principal:

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1. Right to Performance: The principal has the right to expect the agent to carry out
duties according to the terms of the agreement or instructions.
2. Right to Accountability: The principal can demand that the agent provides an
accurate account of the transactions or tasks performed on their behalf.
3. Right to Termination: The principal has the right to terminate the agency
relationship under certain conditions, especially if the agent fails to fulfill their
obligations or breaches trust.
4. Right to Indemnity: The principal has the right to be indemnified by the agent for
any losses caused by the agent’s unauthorized or wrongful acts.
5. Right to Compensation for Damages: If the agent’s actions cause harm or losses to
the principal, the principal can seek compensation.

Obligations of the Principal:

1. Duty to Pay Remuneration: The principal must pay the agent for services rendered
as per the terms of the agreement.
2. Duty to Reimburse Expenses: The principal must reimburse the agent for any
legitimate expenses incurred during the performance of duties.
3. Duty to Indemnify: The principal must indemnify the agent for any lawful acts
performed during the course of agency, where the agent suffers loss while acting
within the scope of authority.
4. Duty of Cooperation: The principal must cooperate with the agent and provide the
necessary tools, information, or access to enable the agent to perform their duties.

2. Rights and Obligations of the Agent

Rights of the Agent:

1. Right to Remuneration: The agent is entitled to receive agreed-upon compensation

or commission for services rendered.
2. Right to Lien: The agent has the right to retain the principal's goods, property, or
documents as a security for non-payment of dues.
3. Right to Indemnity: The agent can claim indemnity from the principal for any losses
incurred while performing lawful duties within the scope of the authority given.
4. Right to Reimbursement: The agent has the right to reimbursement for any
reasonable expenses incurred while acting on behalf of the principal.
5. Right to Retain Benefits: The agent is entitled to retain any benefits or commissions
as per the contract or customary practice, provided it is within the authority granted
by the principal.

Obligations of the Agent:

1. Duty to Act in Good Faith: The agent must always act in the best interest of the
principal and perform duties with honesty and integrity.
2. Duty to Follow Instructions: The agent must adhere to the principal's instructions
and guidelines. If no instructions are provided, the agent must act in a manner that is
reasonable and beneficial to the principal.
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3. Duty of Care and Skill: The agent must perform their duties with the appropriate
level of care, competence, and skill. The agent should avoid negligence or
misconduct.
4. Duty of Loyalty and Avoid Conflict of Interest: The agent must avoid any conflict
of interest that could harm the principal’s interests and should not act for their own
benefit or a third party’s benefit without the principal’s consent.
5. Duty to Render Accounts: The agent must keep accurate records of transactions and
provide an account of dealings and transactions to the principal.
6. Duty Not to Delegate: Unless permitted, the agent should not delegate the authority
to another person without the principal’s consent.

Termination of the Principal-Agent Relationship:

The relationship between the principal and agent can be terminated under the following
circumstances:

1. By Agreement: Both parties mutually agree to terminate the relationship.

2. By Revocation: The principal can revoke the agent’s authority at any time, subject to
certain conditions.
3. By Renunciation: The agent can renounce the agency by giving notice to the
principal.
4. Completion of the Purpose: Once the specific task or objective for which the agency
was created is completed, the relationship ends.
5. Death or Insanity: The death or insanity of either the principal or agent automatically
terminates the agency.
6. Expiry of Time: If the agency was created for a specific period, it terminates once the
time period lapses.
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