1. Law of Contract
 The law of contract is that branch of law which
determines the circumstances in which promises
made by the parties to a contract shall be legally
binding on them.
 Its rules define the remedies that are available in a
court of law against a person who fails to perform his
contract, and the conditions under which the remedies
are available.
 It is of particular importance to people engaged in
trade, commerce and industry as bulk of their
business transactions are based on contracts.
 The law of contract introduces definiteness in
business transactions.
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2. Contd..
 The parties to a contract, in a sense, make the law for
themselves. So long as they do not infringe some
legal prohibition, they can make what rules they like in
respect of the subject-matter of their agreement, and
the law will give effect to their decisions.
 Salmond has rightly observed that the law of contract
is “not the whole law of agreements, nor is it the whole
law of obligations. It is the law of those agreements
which create obligations, and those obligations which
have their source in agreements.” It excludes from its
purview all obligations which are not contractual in
nature and agreements which are social in nature.
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3. Contd..
 Law of contract creates jus in personam as distinguished from
jus in rem:
Jus in rem means a right available against the whole world. Jus
in personam means a right available only against a particular
individual. The Contract Act deals with rights in personam and
not with rights in rem.
Example: Á’ is the owner of a house. As owner of the house
he has the right of its quiet possession and enjoyment against
the whole world. This is, therefore, his right in rem.
A is indebted of B to the extent of Rs. 10,000. B’s right to
recover money from A will be termed as right in personam as it
is available only against A and none else.
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4. The Indian Contract Act, 1872
 The law relating to contracts is contained in the Indian
Contract Act, it came into force from 1st September,
1872 and has been amended in 1886, 1891, 1899,
1930, 1932 and 1997.
 The Act has been mainly enacted to ensure that the
obligations prescribed by agreements and the
reasonable expectations created by them are fulfilled
by the concerned parties to the agreements.
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5. Contd…
 The Act largely deals with:
(i) The general principles applicable to contracts
(ii) The conditions necessary for making a valid contract
(iii)The principles applicable to quasi contract; and
(iv)The principles applicable to some special contracts
like those of Indemnity, Guarantee, Bailment and
Agency.
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6. Meaning of Contract
 A contract is an agreement made between two or more parties
which the law will enforce. Sec 2 (h) defines a contract as an
agreement enforceable by law. In other words, “Every
agreement and promise enforceable at law is a contract”.
 A contract essentially consists of two elements (1) Agreement
and (2) its enforceability by law.
 An agreement is defined as “every promise and every set of
promises, forming consideration for each other.”(Sec.2 (e). A
promise is defined “when the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be
accepted. A proposal, when accepted, becomes a promise. Sec
2 (b). To form an agreement, there must be a proposal or offer
by one party and its acceptance by the other. To sum up:
 Agreement= Offer+Acceptance.
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7. Contd..
 Before there can be an agreement between two parties, there
must be consensus ad idem (meeting of minds). This means
that the parties to the agreement must have agreed about the
subject –matter of the agreement in the same sense and at the
same time . Unless there is consensus ad idem, there can be
no contract.
 Ex: A who owned two cars namely Maruti Swift and Honda
City, is selling Maruti Swift to B. B thinks he is purchasing
Honda City. There is no consensus ad idem and consequently
no contract.
 If A says to B will you purchase my Maruti Swift for Rs.
3,00,000/- and B says “yes” to it, there is consensus ad idem
and an agreement comes into existence.
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8. Contd..
Obligation:
An agreement, to become a contract, must give rise to a legal
obligation or duty. The term ‘obligation’ is defined as a legal tie
which imposes upon a definite person or persons the
necessity of doing or abstaining from doing a definite act or
acts. It may relate to social or legal matters. An agreement
which gives rise to a social obligation is not a contract. It must
give rise to a legal obligation in order to become a contract.
Ex: A agrees to sell his car to B for Rs. 10,000. The
agreement gives rise to an obligation on the part of A to
deliver the car to B and on the part of B to pay Rs. 10,000 to
A. This agreement is a contract.
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9. Contd..
 An agreement may be a social agreement or a legal
agreement. If A invites B to a dinner and B accepts the
invitation, it is a social agreement. A social agreement does
not give rise to contractual obligations and is not enforceable
in a court of law. It is only those agreements which are
enforceable in a Court of law which are contracts.
 Ex: A father promises to pay his son Rs.100 every month as
pocket allowance. Later he refuses to pay. The son cannot
recover as it is a domestic agreement and there is no intention
on the part of the parties to create legal relations.
 To conclude: Contract= Agreement + Enforceability at law
Thus all contracts are agreements but all agreements are not
necessarily contracts.
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10. Essential Elements of a Valid Contract
 According to Sec. 10 “All agreements are contracts if they
are made by free consent of parties competent to contract,
for a lawful consideration and with a lawful object and are not
hereby expressly declared to be void.
In order to become a contract, an agreement must have the
following essential elements:
1. Agreement:
To constitute a contract there must be an agreement. An
agreement is composed of two elements-offer and
acceptance. The party making the offer is known as the
offeror, the party to whom the offer is made is known as
the offeree. Thus, there are essentially to be two parties
to an agreement. They both must be thinking of the
same thing in the same sense. In other words, there
must be consensus-ad-idem.
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11. Contd…
2. Intention to create legal relationship:
There should be an intention on the part of the parties to the
agreement to create a legal relationship. An agreement of
purely social or domestic nature is not a contract.
Balfour Vs. Balfour
A husband agreed to pay 30 pounds to his wife every month
while he was abroad. As he failed to pay the promised amount,
his wife sued him for the recovery of the amount. Held, she
could not recover as it was a social agreement and the parties
did not intend to create any legal relations.
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12. Contd…
3. Lawful Consideration:
The agreement must be supported by consideration on both
sides. Each party to the agreement must give or promise
something and receive something or a promise in return.
Consideration is the price for which the promise of the other is
sought. However, this price need not be in terms of money. In
case the promise is not supported by consideration, the
promise will be a bare promise and is not enforceable at law. It
must be real and lawful.
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13. Contd…
4. Capacity of parties-competency:
The parties to the agreement must be capable of entering into a
valid contract. Every person is competent to contract if he
(a) is of the age of majority,
(b) is of sound mind, and
(c) is not disqualified from contracting by any law to which he is
subject.
Flaw in capacity to contract may arise from minority, lunacy,
idiocy, drunkenness, etc., If a party suffers from any flaw in
capacity, the agreement is not enforceable except in some
special cases.
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14. Contd…
5. Free and genuine consent:
The consent of the parties to the agreement must be free and
genuine. The consent of the parties should not be obtained by
misrepresentation, fraud, undue influence, coercion or mistake.
If the consent is obtained by any of these flaws, then the
contract is not valid.
6. Lawful object:
The object of the agreement must be lawful. In other words, it
means that the object must not be illegal, immoral, or opposed
to public policy. If an agreement suffers from any legal flaw, it
would not be enforceable by law.
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15. Contd..
7. Agreement not declared illegal or void:
There are certain agreements which have been expressly
declared illegal or void by the law. In such cases, even if the
agreement possesses all the elements of a valid agreement,
the agreement will not be enforceable at law.
8. Certainty and possibility of performance:
The agreement must be certain and not vague or indefinite. If it
is vague and it is not possible to ascertain its meaning , it
cannot be enforced.
Ex: A agrees to sell to B “a hundred tons of oil”. There is
nothing whatever to show what kind of oil was intended. The
agreement is void for uncertainty.
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16. Contd..
The terms of the agreement must also be such as are capable
of performance. Agreement to do an act impossible in itself
cannot be enforced .
For example, where A agrees with B to put life into B’s death
wife, the agreement is void as it is impossible of performance.
9. Legal Formalities:
A contract may be oral or in writing. If, however, a particular
type of contract is required by law to be in writing, it must
comply with the necessary formalities as to writing, registration
and attestation, if necessary. If these legal formalities are not
carried out , then the contract is not enforceable at law.
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17. Test Your Knowledge
 X invites Z to a dinner in his house on Sunday. Z hired a taxi
and reaches X’s house at the appointed time, but X fails to
perform his promise. Can Z recover any damages from X?
 Amitab forced Akshay to enter into a contract at the point of
pistol. What remedy is available to Akshay, if he does not want
to be bound by the contract?
 State whether there is any contract in the following cases:
1. Ramgopal Verma engaged the services of Urmila as an
actress in a film and promised to pay such remuneration as
shall be fixed by Mahesh Butt. Urmila acted in the film.
2. Bipasha boarded RTC bus at ICBM Campus to go to Palasa.
3. Rakhi Shawant invited Shahid Kapoor for a party. Shahid
accepted the invitation.
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