The Law of Contracts is the basis of business law because the bulk of transactions of the

people engaged in trade, commerce and industry is based on contracts. In India, the Law
of Contracts is contained in the Indian Contract Act,1872. The Act lays down the general
principles relating to formation, performance and enforceability of contracts and the rules
relating to certain special types of contracts like, Indemnity and Guarantee; Bailment and
Pledge, and Agency. The Partnership Act; the Sale of Goods Act; the Negotiable
Instruments Act; the Companies Act, though technically belonging to the Law of
Contracts, have been covered by separate enactments. However, the general principles of
the Contract Law are the basis for all such contracts as well.

The principal features of the Law of Contract are:-

 The parties to the contract make the law for themselves.

 The Act is not exhaustive since it does not take into its purview all the relevant
legislations.

 It does not override customs or usages.

 The Law of Contracts is not the whole law of agreements.

As per the Indian Contract Act,1872, a "contract" is an agreement enforceable by law.

The agreements not enforceable by law are not contracts. An "agreement" means 'a
promise or a set of promises' forming consideration for each other. And a promise arises
when a proposal is accepted. By implication, an agreement is an accepted proposal. In
other words, an agreement consists of an 'offer' and its 'acceptance'.

An "offer" is the starting point in the process of making an agreement. Every agreement
begins with one party making an offer to sell something or to provide a service, etc.
When one person who desires to create a legal obligation, communicates to another his
willingness to do or not to do a thing, with a view to obtaining the consent of that other
person towards such an act or abstinence, the person is said to be making a proposal or
offer.

An agreement emerges from the acceptance of the offer. "Acceptance" is thus, the second
stage of completing a contract. An acceptance is the act of manifestation by the offeree of
his assent to the terms of the offer. It signifies the offeree's willingness to be bound by the
terms of the proposal communicated to him. To be valid an acceptance must correspond
exactly with the terms of the offer, it must be unconditional and absolute and it must be
communicated to the offeror.
An "agreement" is a contract if 'it is made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and is not expressly declared
to be void'. The contract must be definite and its purpose should be to create a legal
relationship. The parties to a contract must have the legal capacity to make it. According
to the Contract Act, " Every person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of a sound mind, and is not
disqualified from contracting by any law to which he is subject". Thus, minors; persons
of unsound mind and Persons disqualified from contracting by any law are incompetent
to contract.

Essential Elements of a Contract

Minimum two parties :- Atleast two parties are needed to enter into a contact. One party
has to make an offer and other must accept it. The person who makes the 'proposal' or
'offer' is called the 'promisor' or 'offeror'. While, the person to whom the offer is made is
called the 'offeree' and the person who accepts the offer is called the 'acceptor'.

Offer and acceptance :- There must be an 'offer' and an 'acceptance' to the offer,
resulting into an agreement. Both offer and acceptance should be lawful.

Legal obligations :- The parties must intend to create a legal obligation.The agreement
sought to be enforced should contemplate legal relations between the parties to it.

Lawful consideration:- A contract is basically a bargain between two parties, each

receiving 'something' of value or benefit to them. This 'something' is described in law as
'consideration'. Consideration is an essential element of a valid contract. It is the price for
which the promise of the other is bought. A contract without consideration is void. The
consideration may be in the form of money, services rendered, goods exchanged or a
sacrifice which is of value to the other party. This consideration may be past, present or
future, but it must be lawful.

Competent parties:- The parties making the contract must be legally competent in the
sense that each must be of the age of majority, of a sound mind, and not expressly
disqualified from contracting. An agreement by incompetent parties shall be a legal
nullity.

Free consent:- The contracting parties must give their consent freely. 'Consent' means
that the parties must agree about the subject matter of the agreement in the same sense
and at the same time. Consent is said to be free if it is not induced by coercion, undue
influence, fraud,misrepresentation or mistake. The absence of free consent would affect
the legal enforceability of a contract.

Lawful object:- The object of the agreement must be lawful. An agreement is unlawful,
if it is:- (i) illegal (ii) immoral (iii) fraudulent (iv) of a nature that, if permitted, it would
defeat the provisions of any law (v) causes injury to the person or property of another (vi)
opposed to public policy.

Not expressly declared void:- An agreement expressly declared to be void under the
Contract Act or under any other law, is not enforceable and is, thus, not a contract. The
Contract Act declares void certain types of agreements such as those in restraint of
marriage, or trade, or legal proceedings as well as wagering agreements.

Certainity and possibility of performance:- The terms of a contract must not be vague
or uncertain. If an agreement is vague and its meaning cannot be ascertained, it cannot be
enforced. Also,the terms of a contract must be such as are capable of performance. An
agreement to do an impossible act is void and is not enforceable by law.

Legal formalities:- Generally, a contract may be oral or in writing. However, certain

contracts are required to be in writing and may even require registration. Therefore,
where law requires an agreement to be put in writing or be registered, the same must be
complied with. For instance, the Indian Trusts Act requires the creation of a trust to be
reduced to writing.

Breach of Contract

The remedies available to the aggrieved party, in case of breach of contract by the
other party are:-

 Suit for rescission of the contract :- Rescission is the revocation of a contract.

When a contract is broken by one party, the other party may sue for rescission and
refuse further performance. In such a case, the aggrieved party is absolved of all
its obligations under the contract.

 Suit for damages:- the party who is injured by the breach of a contract may bring
an action for damages. Damage is the monetary compensation allowed by the
court to the aggrieved party for the loss or injury suffered by him as the result of
breach by the other party.

 Suit for injunction:- An injunction is an order of the court requiring a person to

refrain from doing some act which has been the subject matter of contract. The
power to grant injunction is discretionary and it may be granted temporarily or for
an indefinite period.
  Suit upon 'Quantum Meruit' :- The term "quantum meruit" means, 'as much as
is merited' or 'as much as earned'. A suit of quantum meruit is a claim for the
value of the material used or supplied under a contract that has become void on
account of breach by the other party. When a contract becomes void, any person
who has received any advantages under such contract is bound to restore it, to the
person from whom he received it.

 Suit for specific performance:- When the loss suffered by breach of contract
cannot be compensated by damages or where there are no standards to ascertain
the quantum of damages, the aggrieved party may approach the Court for the
grant of a decree for specific performance of the contract. Specific performance is
granted when:-

 Money is an adequate remedy

 It will be inequitable to either party

 The contract is of a personal nature

 the court cannot supervise its execution

Classification of Contracts

Express Contract:-A contract wherein both the offer and acceptance are made in words,
spoken or written.

Implied Contract:- A contract which is inferred from the conduct of parties or course of
dealings between them.

Quasi Contract:- It is a contract which does not arise by virtue of an agreement, express
or implied, but the law recognises the contract under certain special circumstances. These
contracts are based on the principle of equity, justice and good conscience. The Act
describes the obligations arising under these contracts as 'certain relations resembling
those created by contracts'. Some of the transactions that will be considered as 'quasi-
contract' under the law are:-
  When a person who is interested in the payment of money which another person
is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by
the other person

 When a person finds goods belonging to another person, it is his duty to restore
them to the rightful owner;

 A person to whom money is paid or anything delivered, by mistake or under

coercion, is liable to repay or return it

 Where necessaries are supplied to a person, who is incompetent to contract such

as minors or to someone whom he is legally bound to support, the supplier is
entitled to recover the price of the property of the incompetent person,etc.

Valid Contract:- A valid contract is a 'contract which satisfies all the requirements of the
Act'. Such a contract creates rights in personam and is legally enforceable.

Void Agreement:- It is an agreement not enforceable by law. It is void ab initio because

it lacks one or more of the essentials of a valid contract. Such an agreement does not
create any legal relations. However, it is different from unlawful agreements which are
forbidden by the law. An illegal agreement must necessarily be void but a void agreement
need not be illegal.The following agreements that have been declared void by the
Contract Act:-

 Agreements by incompetent persons

 Agreements wherein consideration and objects are unlawful

 Agreements in restraint of marriage

 Agreements in restraint of trade

  Agreements in restraint of legal proceedings

 Agreements the meaning of which are uncertain,etc.

Void Contract:- A contract which ceases to be enforceable by law becomes void. In

other words, an agreement may be enforceable initially and due to certain circumstances
may become void subsequently. Thus a contract is not void from its inception.Some of
such circumstances which makes a contract void are:-

 An agreement without lawful consideration becomes void

 A contingent contract to do or not to do something on the happening of an event

becomes void when the event becomes impossible

 When the party, whose consent is not free, repudiates the contract,etc.

Voidable Contract:- A voidable contract is 'an agreement which is enforceable by law at

the option of one or more of the parties thereto, but not at the option of other or others'. In
such a contract, the consent of one of the parties is not free and the law regards it as an
aggrieved party. The aggrieved party has the option to either affirm or rescind the
contract within a reasonable time.The other party does not have any such right.
However,the aggrieved party is entitled to recover from the other party the damages
which it may have suffered but it must restore the benefits received by it.

Contracts of Indemnity and Guarantee

A contract of indemnity is one whereby a person promises to save the other from loss
caused to him by the conduct of the promisor himself or of any third person.For
example,a shareholder executes an indemnity bond favouring the company thereby
agreeing to indemnify the company for any loss caused as a consequence of his own
act.The person who gives the indemnity is called the 'indemnifier' and the person for
whose protection it is given is called the 'indemnity-holder' or 'indemnified'. A contract of
indemnity is restricted to cover the loss caused by the promisor himself or by a third
person.The loss must be caused by some human agency.Loss arising from accidents like
fire or perils of the sea are not covered by a contract of indemnity.

A contract of 'guarantee' is a contract,whether oral or written,to perform the promise,or

discharge the liability,of a third person in case of his default. A contract of guarantee
involves three persons,viz. a person who gives the guarantee is called the 'surety'; the
person in respect of whose default the guarantee is given called the 'principal debtor'; and
the person to whom the guarantee is given is called the 'creditor'. A contract of guarantee
is a conditional promise by the surety that if the principal debtor defaults he shall be
liable to the creditor.

Difference between Indemnity and Guarantee:-

 In a contract of indemnity there are two parties i.e. indemnifier and indemnified.
A contract of guarantee involves three parties i.e. creditor, principal debtor and
surety.

 An indemnity is for reimbursement of a loss, while a guarantee is for security of

the creditor.

 In a contract of indemnity the liability of the indemnifier is primary and arises

when the contingent event occurs. In case of contract of guarantee the liability of
surety is secondary and arises when the principal debtor defaults.

 The indemnifier after performing his part of the promise has no rights against the
third party and he can sue the third party only if there is an assignment in his
favour. Whereas in a contract of guarantee, the surety steps into the shoes of the
creditor on discharge of his liability, and may sue the principal debtor.

Contracts of Bailment and Pledge

A 'bailment' is the delivery of goods by one person to another for some purpose upon a
contract that they shall, when the purpose is accomplished,be returned or disposed of
according to the directions of the person delivering them. The person delivering the
goods is called the 'bailor' and the person to whom the goods are delivered is called the
'bailee'. The examples of a contract of bailment are:- delivering a watch or radio for
repair; leaving a car or scooter at a parking stand; leaving luggage in a cloak room;
delivering gold to a goldsmith for making ornaments; leaving garments with a dry
cleaner,etc. The essence of bailment is the transfer of possession. The ownership remains
with the owner. There cannot be a bailment of immovable property.

A 'pledge' is a bailment of goods wherein the goods are delivered as a security for
payment of a debt or performance of a promise.The bailor is called the 'pledgor' or
'pawnor' and the bailee is called the 'pledgee' or 'pawnee'. Thus, pledge is a special kind
of bailment. Pledge can be made only of movable properties. In order to make the pledge
legally valid it is essential that the pledgor has the legal right or title to retain the goods.

Difference between Bailment and Pledge:-

 Purpose:- A pledge is made for a specific purpose, while bailment can be made
for any purpose.

 Property:- In bailment, the bailee gets only the possession of goods bailed. The
ownership remains with the bailor. In the case of pledge, the pledgee acquires a
special property in the goods pledged whereby he gets possession coupled with
the power of sale, on default.

 Right of sale :- Bailee can exercise a lien on the goods bailed. He has no right of
sale. But in case of a pledge, the pledge can sell the goods after due notice to
pawner.

Contracts of Agency

An 'Agent' is a person employed to do any act or to represent another in dealings with

third persons. The person who employs the agent and for whom such act is done,or who
is so represented,is called the 'principal'. The relation between the agent and the principal
is called 'Agency'. It is only when a person acts as a representative of the other in the
creation,modification or termination of contractual obligations,between that order and
third persons,that he is an agent. The essence of a contract of agency is the agent's
representative capacity coupled with a power to affect the legal relations of the principal
with third persons.

Contracts of agency are based on two important principles:-

 Whatever a person can do personally shall also be allowed to be done through an

agent except in case of contracts involving personal services such as painting,
marriage, singing, etc.

 He who does an act through a duly authorised agent does it by himself i.e. the acts
of the agent are considered the acts of the principal.