Unit III: Law of Contract

Law of Contract

According to Section 2(h) of the Indian Contract Act, 1872

"A contract is an agreement enforceable by law."

In simple terms, a contract is a legally binding agreement between two or more parties that creates rights and obligations.

✅ Essentials of a Valid Contract (Section 10 of Indian Contract Act)

Types of Contracts (Based on Validity)

Definition of Offer (Section 2(a))

"When one person signifies to another his willingness to do or abstain from doing something, with a view to obtaining the assent of the other, he is said to make a proposal or offer."

🔷 Essentials of a Valid Offer

Acceptance – Definition and Essentials

🔷 Definition of Acceptance (Section 2(b))

"When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted."

In short, acceptance is the agreement to the terms of the offer, turning it into a binding contract.

✅ Essentials of a Valid Acceptance

Consideration – Definition and Essentials

🔷 Definition of Consideration (Section 2(d))

"When, at the desire of the promisor, the promisee or any other person has done or abstained from doing something... such act or abstinence or promise is called a consideration."

In simple terms, consideration is "something in return" — money, goods, service, or promise — given by one party in exchange for the promise of the other.

✅ Essentials of Valid Consideration

Exceptions to the Rule: No Contract Without Consideration

⚠️ General Rule: “No consideration, no contract” – but there are exceptions.

Example Combining Both Concepts:

A offers to sell his car to B for ₹3 lakhs.
B accepts the offer in writing.
The offer is communicated, acceptance is unconditional, and consideration (₹3 lakhs) is present.
This forms a valid contract.

No Consideration, No Contract

“An agreement without consideration is void”

(Section 25 of Indian Contract Act, 1872)

Consideration is the foundation of a valid contract.
It means something in return (money, service, promise, etc.).

🟢 Exceptions to this Rule

Doctrine of Privity of Contract

Only parties to a contract can sue or be sued under it.
A third party (who is not a part of the contract) cannot enforce the contract.

❌ Example: A makes a contract with B to give ₹10,000 to C. C cannot sue B, even though he is the beneficiary — because he is not a party to the contract.

✅ Exceptions

Capacity of Parties (Section 11)

🔷 Who is competent to contract?

A person is competent if he/she:
Is 18 years or older
Is of sound mind
Is not disqualified by law

❌ Not Competent

Free Consent (Section 13 & 14)

🔷 Definition of Consent

“When two or more persons agree upon the same thing in the same sense.”

🔷 Consent is free when it is not caused by

❌ If consent is not free → contract is voidable or void.

Quasi Contract

"A Quasi Contract is not a real contract but is imposed by law to prevent unjust benefit or loss."

There is no agreement, but still one party is legally bound to compensate the other.

✅ Examples of Quasi Contract (Sections 68–72)

Legality of Object (Section 23 of Indian Contract Act)

The object (purpose) of a contract must be legal and not against public policy.

❌ A contract is void if its object is:

Example: A contracts B to smuggle gold from another country. This is void as the object is illegal.

Performance of Contract (Section 37–67)

Performance means fulfilling the obligations or promises made in a contract.

🔹 Types of Performance

Who Should Perform?

The promisor himself
Agent or representative (unless personal skills required)
Legal representative (if promisor dies)

Termination of Contract (Discharge of Contract)

A contract is said to be terminated or discharged when the parties are no longer bound by its obligations.

🔹 Modes of Discharge

Remedies for Breach of Contract

If a party fails to perform the contract, the injured party can claim remedies through court.

🔹 Types of Remedies

Example of Damages: A agrees to deliver goods to B by 1st Jan. Fails to do so. B suffers loss. B can claim compensation.

Essentials of a Contract of Sale (Section 4 of Sale of Goods Act, 1930)

A contract of sale of goods is an agreement where the seller transfers or agrees to transfer the ownership of goods to the buyer for a price.

🔹 Essentials of a Valid Sale Contract

Sale vs Agreement to Sell

Section 4 also makes a distinction between “Sale” and “Agreement to Sell”.

Example

Sale: A sells a car to B today, and B pays the full price — ownership transfers immediately.
Agreement to Sell: A agrees to sell a car to B next month after receiving payment — ownership will transfer in future.

Condition vs Warranty

Both conditions and warranties are terms in a contract of sale. But they differ in importance and legal consequences.

🔹 Difference Between Condition and Warranty

Implied Conditions (examples)

Goods must match description.
Goods must be of merchantable quality.
Goods must be fit for buyer’s purpose.

🔹 Implied Warranties (examples)

Buyer shall enjoy quiet possession.
Goods are free from any charge or encumbrance.

Rights of an Unpaid Seller (Sections 45–54)

🔷 Who is an Unpaid Seller?

A seller is considered unpaid if:
Full price is not paid, or
Payment is made by cheque/bill and it gets dishonoured