The slideshow contains study material for Indian Contact Act - Meaning of Contract, essentials of a valid contract, performance and discharge of a contract, contract of - indemnity and guarantee, bailment and pledge, agency.

1. LAW of CONTRACT 1872
UNIT – 1

2. Law of Contract - Introduction
• Is also called Indian Contract Act, 1872
• It came into force on 1st September 1872
• The first part (Section 1-75) deals with
the general principles of the law of contract and
therefore applies to all contracts irrespective of
their nature.
• The second part (Sections 124-238) deals with
certain special kinds of contracts, namely
contracts of Indemnity and Guarantee, Bailment,
Pledge, and Agency.

3. What is a Contract?
• The word ‘Contract’ has been derived from the
word ‘Contractum’ meaning ‘drawing
together’
• Contract is an ‘agreement enforceable by law”
[section 2h]
• A contract has two characteristics:
There must be an agreement
The agreement must be enforceable by law
[obligation]

4. What is an Agreement?
• Every promise and every set of promises forming
the consideration for each other is called an
agreement
• Promise – a proposal when accepted becomes a
promise
• Agreement = offer + acceptance
• There must be at least two or more persons to
make an agreement
• Consensus – ad – idem – both the parties to an
agreement must agree to the subject matter of the
agreement in the same sense and at the same time.

5. What is ‘enforceability’ an Agreement?
• An agreement is enforceable by law if it
creates some legal obligations. The parties to
an agreement must be bound to perform their
promises.
• Parties intend to create legal relations.
• All contracts are agreements but all
agreements are not contracts.

6. What is ‘enforceability’ an Agreement?
• Law of contract is the law of those agreements
which create legal obligations
• E.g. a dinner invitation offered by Mr. A to Mr.
B and accepted by Mr. B is not a contract.
Because it cannot be enforced legally.

7. Essential elements of a valid Contract
• To be enforceable by law, an agreement must
possess the essential elements of a valid contract.
• Sections 10, 29 and 56 provide that ‘all
agreements are contracts if they are made by free
consent of parties, competent to law, for a lawful
consideration, with a lawful object are not
expressly declared to be void, and wherever
necessary, satisfy the requirements of any law as
to writing or registration’

8. Following are the essential elements of
a valid contract:
1. Offer and Acceptance
2. Intention to create legal relations
3. Lawful considerations
4. Capacity of parties
5. Free consent
6. Lawful object
7. Writing & registration
8. Certainty
9. Possibility of performance
10. Agreement not expressly declared void

9. Offer and Acceptance
1. Offer: it is also called proposal. An offer can be
made in an express or implied manner.
2. Offer made in an express manner: using words
[written or oral]
3. Offer made in implied manner: using conduct
[train]
4. The terms of the offer should be clear and not
vague
5. An offer can be ‘specific’ or ‘general’
6. The offer should be communicated to the other
party

10. Offer and Acceptance
1. Acceptance: when the party, to whom the offer is
made, gives its assent [says yes], the offer is
called as ‘accepted’
2. Acceptance is the act of giving assent to the offer
3. Acceptance can be made in express of implies
manner
4. Acceptance must be absolute [without
conditions]
5. Silence or un-communicated acceptance is not
acceptance, it must be communicated

11. Intention to create legal relations
1. Agreement should be attached by legal
consequences
2. If there is no legal obligation, there is no
agreement and hence no contract
3. Agreement of social or domestic nature do
not result into contract

12. Lawful Considerations
1. Consideration means ‘benefit’ or ‘advantage’. In
simple words it means ‘something in return’
2. Agreement is enforceable by law if both parties
do something for each other. If a person
promises to do something, he must get
something in return, else the contract is generally
not valid
3. The act of giving something and getting
something in return should be ‘lawful’ i.e.
correct in the eyes of the law. It should not be
illegal.

13. Lawful Considerations
1. Consideration must be lawful or legal i.e.
correct in the eyes of the law
2. Consideration must be about ‘doing
something’ or ‘abstaining from doing
something’
3. Consideration must be something of value

14. Capacity of Parties
1. The parties to contract must be competent to
make contract, else it will not be enforceable by
law
2. Both the parties must have attained the age of
majority [18 years in India]
3. Both the parties should not be of ‘unsound’ mind
4. The party should not be disqualified from
contracting by any law to which he is the subject

15. Capacity of Parties
1. The persons disqualified by law are:
 Alien enemies [citizens of enemy country,
with whom India is at war]
 Convict: a person who is found guilty by the
court and is undergoing prison sentence
 Insolvents: an insolvent is a person whose
debt exceeds his assents, such a person cannot
enter into contract

16. Free Consent
1. There must be free and genuine ‘consent’ of
the parties to the agreement
2. Consent is said to be free when it is not
caused by:
 Coercion [force]
 Undue influence
 Fraud
 Misinterpretation

17. Free Consent
1. There must be free and genuine ‘consent’ of
the parties to the agreement
2. Consent is said to be free when it is not
caused by:
 Coercion [force]
 Undue influence
 Fraud
 Misinterpretation

18. Lawful Object
1. The objective of the ‘purpose’ of the contract
being made must be correct in eyes of the law
2. The contract should not:
 Involve any fraudulent activity
 Harm any person or living being
 Harm anyone’s property
 Involve an immoral activity

19. Writing and Registration
1. Contract can be in writing or oral
2. However, it is in the interest of the parties that
the contract is in writing [because it is easier
to prove in the court of the law]
3. In some cases the contact have to be stamped
4. In some cases, besides being stamped, the
contract has to be registered [in case of all
immovable properties]

20. Certainty
1. The terms of the agreement must be certain.
Certainty means clarity.
2. There should be no confusion or uncertainty
3. E.g. Mr. Sharma had three cars. He promises
to Mr. Verma that he will sell a car to him.
This is an uncertain statement because it is
not mentioned as to which car out of the three
will be sold to Mr. Verma

21. Possibility of Performance
1. The contract can only be made for actions
which are possible to achieve
2. There should be possibility to achieve actions
mentioned or expressed in the contract
3. E.g. a contract made by A and B in which it is
mentioned that A will pay Rs. One billion to
B if B give him Taj Mahal is a void contract

22. Agreement not expressly declared Void
1. Agreements not enforceable by law are called
void contracts
2. There are some agreements which are
declared to be void in the Contract Act 1872.
Like:
 Agreement in restraint of marriage
 Agreement in restraint of trade
 Agreement restricting enforcement of rights

23. Performance of a contract
• Performance of a contract means fulfilling the
terms of the contract by respective parties.
• An insolvent is however excused from
performing his part of the contract by law

24. Discharge of a contract
• Discharge of a contract means discontinuation of
contractual relations between the parties
• A contract may be discharged in the following
ways:
 Discharge by performance
 Discharge by mutual consent or agreement
 Discharge by subsequent or supervening
impossibility or illegality
 Discharge by lapse of time
 Discharge by breach of contract

25. Discharge of a contract [Contd.]
• Discharge by mutual consent or agreement:
 Novation: substitution of a new contact in
place of the original one
 Rescission: cancellation of the contract
altogether
 Alteration: changes in the terms of the
contract

26. Discharge of a contract [Contd.]
• Discharge by subsequent or supervening
impossibility or legality:
 Destruction of subject matter
 Outbreak of war
 Death or personal incapacity of the promisor
 Change of law

27. Discharge of a contract [Contd.]
• Discharge by lapse of time: a contract stands
discharged if it is not enforced within a
definite time period. This time period is
called period of limitation.
• E.g. period of limitation for the right to
recover a debt is 3 years

28. Breach of Contract
• Breach of a contract occurs if any party to the
contract refuses or fails to perform his part to the
contract
• Breach of contract may occur in the following
two ways:
 Anticipatory breach of contract: it occurs when
the party declares his intention of not performing
his part
 Actual breach of contract: it can occur either on
the due date of performance or during the course
of performance

29. Breach of Contract [Contd.]
• In case of a breach, the aggrieved party [the
party not at fault] is relieved from performing
his obligation and gets a right to proceed
against the party at fault.

30. Remedies for breach of a contract
• Remedies are the course of actions available to
the aggrieved party [when a breach of contract
has occurred]
• The various remedies available are:
 Rescission of contract
 Suit for damages
 Suit for specific performance
 Suit for injunction
 Suit of quantum meruit

31. Remedies for breach of a contract
 Rescission of contract: it means a right of not
performing the obligations.
 Suit for damages: monetary compensations
allowed for loss suffered by the aggrieved
party
 Suit for specific performance
 Suit for injunction
 Suit of quantum meruit

32. Remedies for breach of a contract
 Suit for specific performance: Aggrieved
party demanding the court’s direction to the
defaulting party to carry out the promise
according to the contract
 Suit for injunction: Aggrieved party
demanding a ‘stay order’ from the court.
 Suit of quantum meruit: Aggrieved party can
claim to compensate for the work already
done

33. Quasi Contract
 A quasi contract is not a contract at all
because the essential elements for the
formation of a contract are absent
 It is an obligation imposed by law upon a
person for the benefit of another person even
in the absence of a contract.
 Quasi contracts are also called implied
contracts

34. Quasi Contract [Contd.]
 Kinds of quasi contracts:
 Claim for necessaries supplied to a person
incapable of contracting
 Reimbursement of person paying money due by
another, in payment of which he is interested
 Obligation of person enjoying benefit of non
gratuitous act
 Responsibility of finder of goods
 Liability of person to whom money is paid, or
things delivered by mistake or under coercion.

35. LAWS
of
i. Indemnity and Guarantee
ii. Bailment and Pledge
iii. Contract of Agency

36. Indemnity and Guarantee

37. Indemnity & Guarantee
 The term ‘indemnity’ means to compensate
the party who has suffered some loss.
 A contract by which one party promises to
save the other from loss caused to him by the
conduct of the promisor himself, or by the
conduct of any other person, is called a
contract of indemnity

38. Contract of Indemnity
 E.g. A and B go into a shop, B says to the
shopkeeper C “Let A have the goods, I will
pay the money”
 The person who promises to compensate the
loss is called the indemnifier or promisor
 The person who loss is to be compensated
[shopkeeper in the above example] is called
the indemnified, indemnity holder or
promisee

39. Contract of Guarantee
 The Contract of guarantee is a contract to
perform the promise or discharge the liability
of a third person in case of his default.
 E.g. A and B go into a shop. A says to the
shopkeeper C, “Let B have the goods, I will
pay the money in case A does not Pay”
 The above contract is contract of guarantee

40. Parties to the Contract of Guarantee
 Principal Debtor: The person in respect of
whose default the guarantee is given is called
the principal debtor
 Creditor: The person to whom the guarantee
is given is called the creditor
 Surety: The person who gives the guarantee is
called the surety

41. Types of Guarantee
 Specific Guarantee: A guarantee which extends
to a single transaction is called a specific
guarantee. The liability of surety comes to an
end when the guarantee debt is duly discharged
or the promise is duly discharged
 Continuing Guarantee: A guarantee which
extends to a series of transactions is called
continuing guarantee. Surety’s liability continues
till the revocation of guarantee.

42. Discharge of Surety from Liability
 The liability of surety comes to an end in the
following circumstances:
 Notice of revocation [revocation means end of
guarantee]
 Death of surety
 Variance in terms of contract: any variation made in
the contract without the consent of surety
 Contract of guarantee becomes invalid due to
misrepresentation or fraud
 If the creditor loses security given to him by the surety

43. Indemnity Vs Guarantee
 In case of indemnity, there are two parties
while in case of guarantee, there are three
parties
 There is only one contract in indemnity while
there are three contracts in case of guarantee
 Liability of indemnifier is primary in nature
while the guarantee of surety is secondary in
nature

44. Indemnity Vs Guarantee [Contd.]
 The indemnifier acts independently without
any request from indemnity holder or third
party while the surety should give the
guarantee on the request from the debtor
 Purpose of indemnity is to compensate the
loss, while guarantee is given for the for
security of a debt.

45. Bailment & Pledge

46. Meaning of Bailment
 The word Bailment is derived from French
word ‘Baillier’ which means to deliver
 Bailment is delivery of goods from one
person to another for some specific purpose,
upon a contract that the goods will be
returned [after the purpose is over] or
disposed off, according to the directions of
the person delivering them

47. Meaning of Bailment [Contd.]
 The person delivering the goods is called
‘Bailor’
 The person to whom the goods are delivered
is called ‘Bailee’

48. Essential Features of Bailment
• It involves the delivery of movable goods
• The goods are delivered for some purpose
• The goods must be returned to the bailor or
otherwise must be disposed as per the
directions of the bailor, after the expiry of the
bailment period

49. Type of Bailment
• Bailment can be classified into three types:
• Gratuitous: Neither the bailor nor the bailee is
entitled to any remuneration
• Non Gratuitous: Goods are given for reward,
remuneration or some consideration
• Pledge or Pawn: Goods given to another as a
security for money borrowed is called pledge

50. Duties of Bailor
• To disclose faults / defects in goods bailed.
• To repay necessary expenses in case of
gratuitous bailment.
• To repay any extra ordinary expenses in case
of non-gratuitous bailment.
• To receive back the goods.

51. Duties of Bailee
• To take reasonable care of goods delivered to
him.
• Not to make unauthorized use of goods
entrusted to him.
• Not to mix goods bailed with his own goods.
• To return the goods.
• Not to set up any adverse title.

52. Rights of Bailor
• Enforce Bailee’s duties
• To terminate bailment if the bailee uses the
goods wrongfully
• To demand the returns of goods in case of
gratuitous bailment

53. Rights of Bailee
• Enforce Bailor’s duties
• To return the goods to the bailor

54. Pledge or Pawn
• “The bailment of goods as security for
payment of a debt or performance of a promise
is called ‘pledge’.
• The bailor in this case is called the ‘pawner’.
The bailee is called the ‘pawnee’.
• Pledge is therefore a kind of bailment.

55. Bailment Vs Pledge
• Pledge is for providing a security or loan.
Bailment is for many purpose like repairs, safe
custody etc.
• In pledge, there is a right to sale. In bailment
there is not right to sale by the bailee
• The pawnee has not right to use the product
while the bailee has the right to use the
product.

56. Contract of Agency

57. Contract of agency
• It is not always possible for a person to do
everything himself, hence it becomes
necessary for him to delegate some of the acts
to be performed by another person.
• Such a person, to whom the act is delegated to
is called agent.

58. Agent & Principal
• Principal: The person who is represented by an
agent is called principal
• Agent: An agent is a person who is employed
to represent another person in acts or dealings
or to act on the behalf of another person called
principal

59. Agent & Principal
• Principal: The person who is represented by an
agent is called principal
• Agent: An agent is a person who is employed
to represent another person in acts or dealings
or to act on the behalf of another person called
principal
• The contract which creates the relationship of
‘principal’ and ‘agent’ is called ‘agency’

60. General Rules of an agency
• There are two important rules regarding an
agency:
• What a person can himself lawfully do, can as
well get it done by another person.
• What a person does by another person, he does
by himself. Thus, acts of the agent are
considered as the acts of the principal.

61. General Rules of an agency [Contd.]
• Who can employ an agent? – any person who
is capable on contracting can employ an agent
• Who can become an agent? – any person can
become an agent

62. How can agency be created?
• Agency can be created in the following ways:
 Agency by express agreement [written or oral]
– e.g. power of attorney
Agency by implied agreement – when agency
is inferred from the conduct of the parties.
Implied agency includes – Agency by estoppel,
agency by necessity and agency by operation
of the law

63. Duties of an Agent
• To follow principal’s directions or customs.
• To carry out the work with reasonable skill and
diligence.
• To communicate, in case of difficulty.
• Not to deal on his own account in the business.
• Not to make any profit out of his agency except
his remuneration.
• On termination of agency by principal’s death or
insanity to protect and preserve the interests
entrusted to him.

64. Rights of an Agent
• To receive remuneration.
• To be indemnified against consequences of
lawful acts.
• To be indemnified against consequences of
acts done in good faith.
• To compensation for injuries sustained by him
due to principal’s neglect or want of skill.

65. Duties and Rights of the Principal
• Duties of the principal – Indirectly, rights of
the agent are duties of the principal
• Right of the principal – Indirectly, duties of the
agent are the rights of the principal

66. Sub Agent & Substituted Agent
• Sub Agent: Sub agent is a person who is
employed by the original agent and is acting
on behalf of him.
• Substituted Agent: An agent names or appoints
a substituted agent at the request of the
principal and thereafter drops out altogether
from the scene. Such person is an agent of the
principal

67. Termination of the Agency
• Through agreement
• Revocation by the principal
• Renunciation by the agent
• Expiry of time
• Death of principal or agent
• Insolvency of the principal
• Dissolution [closure] of the company