Law of contracts

An introduction
 Indian contract Act,1872
• Oldest branch of law
• Relates to business or commercial transactions
• Security and stability of business world depends on law
of contracts
• Concerned with enforceability of promises
• Furnishes the foundation for other branches of
commercial law ,for example, sale of goods.
• Is part of private law
• Is part of law of obligations
• Is part of that law which deals with obligations which
are self imposed
 EXPLANATION
• Law of contracts (LOC) has existed since the beginning of civilized
society.
• LOC does not relate to social transactions
• Just as security and stability of person and property depend on
criminal law , security and stability of business world depends on law
of contracts
• Most exchanges cannot be performed simultaneously .One or both
parties will have to perform in the future . Most arrangements for
transfer of goods ,land or services cannot be performed instantly and
simultaneously . What if one party performs and the other doesn’t?
Of course there are many sanctions against promise breakers. The
simplest sanction is not to deal with the person again . But sometimes
sanctions of this kind are not satisfactory . Although these are better
than nothing he Indian Contract Act, 1872 spells out consequences of
default in keeping promises.
 EXPLANATION
• Sale of goods act, negotiable instruments act ,partnerships
act - are all based on LOC
• Obligations of a public character, such as constitutional or
political obligations are not treated by law as law of
obligations. Public law refers to criminal law, administrative
regulations.
• The law of contracts is not the whole law of obligations. It is
the law of only those obligations which arise out of
agreements. The law of contracts is not concerned with
those obligations which do not arise out of agreements e.g.
obligation to maintain wife and children, obligations arising
from judgments of courts , obligations arising from torts or
civil wrong.
 EXPLANATION
TYPE OF OBLIGATION WHETHER THE LAW OF CONTRACT
COVERS SUCH OBLIGATION

1. Obligations which arise out of yes

agreements

2. Obligations which do not arise out no

of contract

THUS, THE LAW OF CONTRACTS IS NOT THE WHOLE LAW OF

OBLIGATIONS
 EXPLANATION
• As opposed to obligations which are imposed
on citizen by society( e.g.
negligence,tresspassing, infringing on another
patent, trademark or copyright) LOC are the
obligations that are imposed on individual by
society.
IMPORTANCE OF CONTRACTS
 IMPORTANCE OF CONTRACTS
• Contract is essential to a complex economic system
• Contract is the cement that holds our economic system
together.[Explanation- there is need for contract law because
society functions on basis of division of labour and contract is
the legal machinery through which transfer of property and
person takes place.]
• Any commercial establishment consists of a mass of separate
activities linked together into an effective whole by a
multitude of contracts
• For any modern industry to operate several contracts must be
fulfilled. If most of these contracts were not performed
according to their terms most of the time, transactions and
manufacturing processes in business and industry would be
impossible.
WHAT IS A CONTRACT ?
 DEFINITION
Section 2 (h) defines contract as : A contract is an agreement
enforceable by law. EXPLANATION-
In order to make a contract , there must be two things :
(i) agreement and (ii) agreement should be enforceable by
law.
This implies (i) all contracts are agreements but all
agreements are not contracts and (ii) The law of contracts is
not the whole law of agreements.
The law of contracts is the law of only those agreements
which create legal obligations. The law of contract does not
relate to social, domestic, moral or religious agreements
where the usual presumption is no intention to create legal
relations.
WHAT IS AN AGREEMENT ?
AGREEMENT
• An agreement comes into existence by the process of
offer by one party and its unqualified acceptance by
the other party.
• Agreement=[ offer + acceptance]
• Agreement is defined as : every promise and every set
of promises forming the consideration for each other
• And promise is an accepted proposal i.e., a proposal
when accepted becomes a promise
• So, contract is an agreement .Now, what is an
agreement ? Agreement is a promise. What is a
promise? It is an accepted proposal.
 Enforceable by law ??
• The conditions of enforceability are laid down
in section 10of ICA,1872.
• According to this section , an agreement is a
contract when :
(i) There is some consideration for it
(ii) The parties are competent to contract
(iii) Their consent is free
(iv) Their object is lawful
 Explanation
• Consideration- quid pro quo or something in return.
• Competent to contract –no one is a minor, person of
unsound mind, drunken, lunatic or a person
disqualified by law from contracting.
• Free consent – consent is not caused by coercion
,undue influence, fraud, misrepresentation or mistake.
• Lawful object- object is not forbidden by law, object is
not opposed to public policy ,e.g., trading with an alien
enemy, agreement interfering with course of justice.
KINDS OF CONTRACTS
 Contracts-kinds
• Express and implied.
• Valid, voidable, void and unenforceable.
• Executed ,executory.
• Bilateral, unilateral.
 Classification according to formation
• Express contract – a contract in which the terms are stated
in words ( written or spoken) by the parties
• Implied contract- a contract which is inferred from the
circumstances of the case or from the conduct of the
parties. For example, when one boards a bus, takes a cup of
tea in a restaurant, coolie picks up luggage at railway
station.
• Quasi-contract – an obligation created by law regardless of
agreement. These contracts are based on the doctrine of
unjust enrichment i.e. one party shall not be allowed to
enrich itself at the expense of the other. For example,
liability of person to whom money is paid or thing delivered
under mistake or coercion , obligation of person enjoying
benefit of non-gratuitous act.
 Classification according to validity
• Voidable contract - a contract which is
enforceable by law at the option of one party
thereto but not at the option of the other
• Void contract- a contract which ceases to be
enforceable by law
• Unenforceable contract- a contract which cannot
be enforced in a court of law because of some
technical defect such as absence of writing or
where the remedy has been barred by lapse of
time. Sale of immovable property, arbitration
agreement ought to be in writing.
 Classification according to validity
• Valid contract- it is an agreement which is binding
and enforceable. It has the following essentials :
• Agreement-two parties
• Intention to create legal relations
• Competent to contract
• Lawful consideration
• Free consent
• Lawful object
• Certainty of terms and possibility of performance
• Not expressly declared void.
 Intention to create legal relations ?!
• Intention to create legal relations – It is
presumed that in social agreements (invitation
to a friend for dinner) there is no intention to
create legal relations whereas in business
agreements there is intention to create legal
relations.
• Case law- Balfour versus Balfour.
 Lawful consideration ?!
• It should not be forbidden by law.
• It should not involve injury to the person or
property of another.
 Certainty of terms and lawful performance?!

• An agreement to sell 130 tons of oil is not

certain as which oil is not specified.
• An agreement to put back life in A’s dead son
is impossible to perform.
Not expressly declared void?!

• An agreement by a minor is expressly declared

void.
Lawful object? lawful consideration?

• The words object and consideration in section

23 are not used synonymously. They are
distinct in meaning. Object means purpose or
design. In some cases consideration for an
agreement maybe lawful but the purpose for
which agreement is entered into maybe
unlawful. e.g. letting out your house to a
tenant who gives it to a prostitute to carry on
prostitution. Here, consideration is lawful
,object is unlawful.
 Illegal agreement? Void?
• Illegal agreement- contrary to law
• Void- unenforceable at law
Example - An agreement with minor is void but
not illegal.
Voidable contract ? Void contract?

• Voidable contract is one from which the element

of free consent is missing. If consent is obtained
by coercion ,undue influence, misrepresentation
or fraud the contract is voidable at the option of
the party whose consent is so obtained.
• Void contract – it was valid when originally made
but ceases to be enforceable later on due to
subsequent illegality(trade of goods subsequently
banned) or destruction of subject matter.
Classification according to performance
• Executed contract – a contract which is wholly performed by
both the parties .Example- when a book seller sells a book for
cash payment.
• Executory contract- a contract in which promises of both the
parties have yet to be performed, either wholly or in part ,at the
time of formation of contract. They are also called bilateral
contracts. Example- Manu promises to sell his car to N for Rs.
100,000 cash down but N pays only Rs. 10,000 and promises to
pay the rest later. M gives possession of car to N and promises to
execute sale deed on receipt of fulfillment. The contract
between M and N is executory.
• Partly executory,partly executed- a contract in which one party
has performed his obligation, but the other party has yet to
perform his obligation. This type of contract is called unilateral
contract.
CLASSIFICATION ACCORDING TO
PERFORMANCE
Kinds of contract based on performance.

• Unilateral contract-a contract in which one party has yet to perform

his obligation ( the other party having fulfilled his obligation at the
time of the contract or before the contract comes into existence.)
Such contracts are also known as contracts with executed
consideration.Example,M advertises a reward of rs. 50,000 to
anyone who finds his missing son . B, knowing the offer finds his
missing son . As soon as B traces M’s son ,there comes into
existence an executed contract of obligation because B has
performed his share and it remains for M to pay. Another example,
general offers.
• Bilateral contract- a contract in which both the parties have yet to
perform their obligations (at the time of formation of contract).
Also called contracts with executory consideration.