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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 Act is not exhaustive since it does not take into its purview all the relevant
legislations.
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.
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.
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.
Breach of Contract
The remedies available to the aggrieved party, in case of breach of contract by the
other party are:-
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 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:-
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;
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.
When the party, whose consent is not free, repudiates the contract,etc.
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.
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.
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.
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.
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
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.