2) THE LAW OF CONTRACT

Contract law lies at the heart of our system of laws and serves as the foundation of our entire
society. This is not an exaggeration. It is a simple observation - one that too often goes
unobserved.
Our society depends upon free exchange in the marketplace at every level. Contract law makes
this possible. Exchanges in the marketplace always depend upon voluntary agreements between
individuals or other "legal persons". Such voluntary agreements could never work without
contract law.
Contract law serves to make these agreements "enforceable", which usually means that it allows
one party to a contract to obtain money damages from the other party upon showing that the
latter stands in breach.
Without contract law, these voluntary agreements would instantly become impractical and
unworkable. Since such agreements lie at the very heart of our society and economy, and since
they depend upon contract law, it is no exaggeration to say, as I have just done, that "contract law
lies at the heart of our system of laws and serves as the foundation of our entire society." Those
were the very words that I used to begin this essay.
Stated more precisely, it is our system of contract law that underpins and makes possible the
many private, voluntary agreements by which exchanges of goods and services are accomplished
in our society at every level. No exchange is exempt from the contract law, which indeed can be
rightly called the cornerstone of marketplace civilization.
Types of Contracts
The law recognizes contracts that arise in a number of different ways:
A bilateral contract is the type of agreement most people think of as a traditional contract -a mutual exchange of promises among the parties. In a bilateral contract, each party may be
considered as both making a promise, and being the beneficiary of a promise.
A unilateral contract is one in which the offer requests performance rather than a promise
from the person accepting the offer. A unilateral contract is formed when the requested act is
complete. A classic example of a unilateral contract is a "reward" advertisement, offering
Written contract:
A deal done on a handshake - "You do X for me, and I'll pay you Y" - is a contract, because it is a
legally enforceable agreement involving an exchange of promises. Most contracts are
enforceable whether they are oral or written. Nonetheless, you should always have written
contracts for all your business relationships.
There are several reasons why written contracts are better than oral contracts:
The process of writing down the contract's terms and signing the contract forces both
parties to think about - and be precise about - the obligations they are undertaking. With

an oral contract, it is too easy for both parties to say "yes" and then have second
thoughts.
When the terms of a contract are written down, the parties are likely to create a more
complete and thorough agreement than they would by oral agreement. A hastily made
oral agreement is likely to have gaps that will have to be resolved later - when the
relationship may have deteriorated.
A valid contract typically requires the following four elements:
Voluntary Agreement : Both Parties must accept the terms and condition of the
agreement voluntarily, free of coercion, fraud and the like.
Consideration: Consideration is the bargained-for exchange. It is the legal benefit
received by one person and the legal detriment imposed on the other person. Usually
consideration takes the form of money, property or services. An agreement without
consideration is not a contract.
Contractual Capacity: Each party must have the legal ability to enter into a building
agreement. Generally minors, persons with mental handicaps, and intoxicated
persons do not have contractual capacity.
Legality: For a contract to be enforceable, it must involve a legal activity. The law
does not enforce contracts based on illegal activity. For example, a winner of a poker
game usually cannot go into court and enforce an IOU in a state in which that type of
gambling is illegal.
"Breach of Contract" and Lawsuits
In a perfect business world, agreements would be entered into, both sides would benefit and be
pleased with the outcome, and no disputes would arise. But in the real business world, delays
happen, financial problems can crop up, and other unexpected events can occur to hinder or even
prevent a successful contract from being carried out. Following is a discussion of the legal
concept of "breach of contract," and your options should such a breach occur.
Damages
The remedy that is most often used for a breach of contract is the remedy of damages -- payment
in one form or another, made by the breaching party to the non-breaching party. There are many
kinds of damages, and generally speaking damages may be very specific to the kind of breach
that has occurred. Following are some guidelines on damages.
Compensatory damages aim to put the non-breaching party in the position that they had been if
the breach had not occurred.
Punitive damages are payments that the breaching party must make, above and beyond the point
that would fully compensate the non-breaching party. Punitive damages are meant to punish a
wrongful party for particularly wrongful acts, and are rarely awarded in the business contracts
setting.

Nominal damages are token damages awarded when a breach occurred, but no actual money
loss to the non-breaching party was proven.
1.

The Contract Act, 1872 was enacted with the view to define and amend certain parts of
the law relating to contracts1. The Act does not profess to be a complete code dealing with the
law relating to contracts. The intention of the Legislature was not to deal exhaustively with any
particular chapter or subdivision of the law relating to contracts. 2 The Act was an outcome of
different systems adopted in the form of legislation. The Act deals with the manner of making
valid agreements, contracts, its kind, manner and possibilities and impossibilities of
performance, parties to such performance, quasi-contracts, breach of contract and its
consequences. It also deals with indemnity, guarantee, bailment agency and the effect of
contracts through agency. In this respect, the Act is a comprehensive piece of legislation. There is
one basic difference between the law of contracts and other laws. It does not specify a number of
rights and duties, which the law protects or enforces. It rather consists of a number of limiting
principles, subject to which the parties may create right and duties for themselves, which the law
will uphold. In a sense, the parties to a contract make the law for themselves. So long as they do
not infringe some legal provision, they remain at liberty to make what rules they like regarding
the subject matter of their agreement, and the law protects the parties in respect of their mutual
determinations. Therefore, in its application, it is neutral of effect in terms of commercial
transactions, and a detailed discussion of its provisions is not required for this Report.

The Contract Act,1872

The Contract Act, 1872 was enacted with the view to define and amend certain parts of the
law relating to contracts3
The Act does not profess to be a complete code dealing with the law relating to contracts. The
intention of the Legislature was never to deal exhaustively with any particular chapter or
subdivision of the law relating to contracts.4
The Act was an outcome of different systems adopted in the form of legislation. This Act
originally contained II Chapters. The Indian Partnership Act, 1932 (9 of 1932) repealed the last
Chapter XI. Formerly Partnership Act was a part of contract Act. Chapter VII of the Act
headed as Sale of Goods was also repealed by the Indian Sale of Goods Act, 1930 (3 of 1930).

1 The Preamble of the Contract Act, 1872.

2 Irawaddy Flotilla Co. v. Bugawandas, (1891) 18 I.A. 121; Jwaladuti R. Pillani v. Bansilal Motilal, (1929) 56 I.A. 174; Meghu
Mian v. Kishun Ram, 1954 A.P. 477.

3 The Preamble of the Contract Act, 1872.

4 Irrawaddy Flotilla Co. v. Bugawandas, (1891) 18 I.A. 121; Jwaladuti R. Pillani v. Bansilal
Motilal, (1929) 56 I.A. 174; Meghu Mian v. Kishun Ram, 1954 A.P. 477.

The Act deals with the manner of making valid agreements, contracts, its kind, manner and
possibilities and impossibilities of performance, parties to such performance, quasi-contracts,
breach of contract and its consequences. It also deals with indemnity, guarantee, bailment
agency and the effect of contracts through agency. In this respect, Act is comprehensive piece of
legislation.
There is one basis difference between the law of contracts and other laws. It does not specify a
number of rights and duties, which the law protects or enforces. It rather consists of a number of
limiting principles, subject to which the parties may create right and duties for themselves, which
the law will uphold. In a sense, the parties to a contract make the law for themselves. So long as
they do not infringe some legal provision, they remain at liberty to make what rules they like
regarding the subject matter of their agreement, and the law protects the parties in respect of their
mutual determinations.
Formation of Contract
1. The first stage of a contract is a proposal or an offer, which is made by one person to
another for doing or refrain from doing an act.
2. The second stage is the acceptance of the proposal by the person to whom it is made. A
proposal when accepted becomes a promise.
3. Next comes the consideration involved in the promise.
4. Every promise and every set of promises forming the consideration for each other is an
agreement.
5. An agreement enforceable by law is a contract.
Communication, Acceptance and Revocation
A proposal has to be communicated and the communication is complete only when the person to
whom it is made has received the communication. A proposal can be revoked before the
communication has been received and accepted, but not afterwards.
An acceptance of a proposal has to be without conditions attached. A conditional acceptance is
not an acceptance.
Valid contracts
There are five essential prerequisites for a valid contract:
1. There should be a proposal and an acceptance.
2. The consideration must be lawful.
3. There must be a free consent of both parties, i.e. it should not have any of the following
elements:

 Coercion (Section 15)

Undue Influence (Section 16)
Fraud (Section 17)
Misrepresentation (Section 18)
Mistake (Section 21 to Section 23)
4. Both the parties must be competent to enter into the agreement, i.e., they should not be:
Minor according to the law to which he is subject
Person of unsound mind
Any person who is disqualified from contracting by any law to which he is subject
5. The agreement should not expressly be declared to be void. Under the Contract Act, the
following agreements are expressly declared to be void:
Agreement in restraint of the marriage of any person other than a minor;
Agreement in restraint of trade;
Agreement in absolute restraint of judicial proceedings, (an agreement to refer to
arbitration is not a restraint and it is not therefore, void);
Agreement, the meaning of which is not certain or capable of being made certain;
Agreement by way of wager.
Agreement becomes void even if only one or any part of one of its several
considerations for a single object is unlawful.
Agreement could be void if its meaning is not free from doubt.
Performance
Parties to a contract are obliged to perform their respective promises. Where an offer of
performance has not been accepted by the promisee, the promises are not responsible for nonperformance. When a party to a contract refuses to perform, the promisee may put an end to the
contract.
Time for performance of a promise is important. If no time has been specified, it should be
performed in a reasonable time.
Discharge of a Contract
A contract terminates in the following situations:
1. Performance: When all the terms of the contract in terms of performance have been
carried out.
2. Release: When one party to the contract agrees to excuse performance by the other party
after breach of the contract by the latter.
3. Discharge by implied consent or impossibility of performance: The law does not compel
a party to do something, which cannot be done. Contract is discharged when performance
becomes impossible:
Due to destruction of the subject-matter;

4.
5.
6.
7.

Due to death or incapacity of the promisor in a contract for personal services;

Due to subsequent change of legislation;
Due to non-existence or cessation of a state of affairs, the existence or
continuance of which formed the basis of the contract; and
Due to such an alternation of circumstances as to bring about complete frustration
of the commercial object.
Discharge by tender: Where a party is ready and willing to perform his promise and has
offered to do so at the right time and place, but the other party does not accept the
performance, the contract is discharged by tender or attempted performance.
Novation: If the parties to a contract agree to substitute a new contract for it or rescind or
later it, the original contract need not be performed.
Void Contracts: When an agreement is discovered to be void.
Breach of contract: When a contract has been broken.

Consequences of Breach of Contract

1. Compensation for loss or damage caused by breach
2. Compensation stipulated for breach in the contract itself
3. Party rightfully rescinding a contract is also entitled to compensation