Unit 3

MBA/BBA/B.com /M.Com /UGC Net

By
Dr. Anand Vyas
Law of Contract: Definition,
The law of contract is that branch of law which determines the
circumstances in which a promise shall be legally binding on the
person making it. According to Section 2(h) of the Indian Contract Act,
1872, An agreement enforceable by law is a contract.

A contract is a legally enforceable agreement that creates, defines, and

governs mutual rights and obligations among its parties. A contract
typically involves the transfer of goods, services, money, or a promise
to transfer any of those at a future date.
Essentials and types of contracts
• A valid contract should have all essential elements including offer, its
communication, meeting of minds, acceptance, communication of
acceptance, consideration, capacity, legality. The two main essential
elements of a contract are: An Agreement and. Enforceability of this
agreement by law.
• Express Contracts
• A contract made by word spoken or written.
Implied Contract
• A contract inferred by
• The conduct of person
• The circumstances of the case.
• By implies contract means implied by law (i.e.) the law implied a
contract through parties never intended.
• According to sec 9 in so for as such proposed or acceptance is made
otherwise than in words, the promise is said to be implied.
• QUASI-CONTRACT

• In such a types of contract, the rights and obligations arise not by an

agreement but by operation of law.
• Example: If Mr A leaves his goods at Mr B’s shop by mistake, then it is
for Mr. B to return the goods or to compensate for the price.

• E-CONTRACT
• An e-contract is a contract made through the digital mode.
• Example: Via Internet
Executed contract
In an executed contract both the parties have performed their promises
under a contract.
Example: A contracts to buy a car from B by paying cash, B instantly delivers
his car.

Executory contract
In a Executory contract both the parties are yet to perform their promises.
Example: A sells his car to B for Rs. 2 lakh. If A is still to deliver the car and B
is yet to pay the price, it is an executory contract.
• Partly Executed and partly executory contract
• In a partly executed and partly executory contract, one party has
already performed his promised and the other party has yet to
execute his promise.
• Example: Anuj sells his bike to Bibek. Though Anuj has delivered the
bike, Bibek has yet to pay the price. For Anuj, it is an executed
contract, whereas it is an executory contract on the part of Bibek
since the price has yet to be paid.
•
• Unilateral Contract
• A unilateral contract is also known as a one-sided contract. It is a type
of contract where only one party has to perform his promise.
• Example: Anuj promises to pay Rs. 1000 to anyone who finds his lost
cellphone. B finds and returns it to Anuj. From the time B found the
cellphone, the contract came into existence. Now Anuj has to perform
his promise, i.e. the payment of Rs. 1,000.
• Bilateral contract
• A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties. It is also known as a two-
sided contract.
• Example: Aj promises to sell his car to Bj for Rs. 1 lakh and agrees to
deliver the car on the receipt of the payment by the end of the week.
The contract is bilateral as both the parties have exchanged a promise
to be performed within a stipulated time.
•
• Valid contract
• If the contract entered into by the parties and satisfies all the elements of a
valid contract as per the act, it is said to be a valid contract.

• Void contract
• Section 2 (j) states as follows: “A contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable”. Thus a void
contract is one which cannot be enforced by a court of law.
• Example: Mr Aj agrees to write a book with a publisher. After few days, Aj
dies in an accident. Here the contract becomes void due to the
impossibility of performance of the contract.
• Voidable contract
• Section 2(i) defines that an agreement which is enforceable by law at
the option of one or more parties but not at the option of the other
or others is a voidable contract.
• This in fact means where one of the parties to the agreement is in a
position or is legally entitled or authorized to avoid performing his
part, then the agreement is treated and becomes voidable.
• Such a right might arise from the fact that the contract may have
been brought about by one of the parties by coercion, undue
influence, fraud or misrepresentation and hence the other party has
a right to treat it as a voidable contract.
• Illegal contract
• Illegal contract are those that are forbidden by law. All illegal
contracts are hence void also. Because of the illegality of their nature
they cannot be enforced by any court of law.
• In fact, even associated contracts cannot be enforced. Contracts
which are opposed to public policy or immoral are illegal. Similarly
contracts to commit a crime like supari contracts are illegal contracts.
• Unenforceable contract
• A type of contract which satisfies all the requirements of the contract
but has technical defects is called an unenforceable contract.
• A contract is said to have a technical defect when it does not fulfil the
legal formalities required by some other act. When such legal
formalities are compiled are complied with, later on, the act becomes
enforceable.
• Void agreement – Agreement not enforceable by law and is
without any legal effect.
Void contract – Valid at the time of making but becomes void
subsequently due to change in circumstances.
Voidable Contract – Agreement enforceable at the option of
the aggrieved party. Until the party won’t nullify, it remains
valid.
Illegal agreement – An agreement prohibited or forbidden
by law.
• Express contract – Where parties orally or written defines the terms
and conditions of the contract.
Implied contract – Contract inferred from an act, conduct or from the
circumstances of the case.
Executed contract – Which has been completely performed by all the
parties.
Executory contract – One in which something remains to be done by
all the parties.
Bilateral contracts – Where the obligations on the part of both the
parties are outstanding at the time of formation of the contract.
Unilateral contract – Where only one party has to perform his duty or
obligation.
 Offer definition and essentials,
• An offer is a conditional proposal made by a buyer or seller to buy or sell an asset, which becomes legally binding if
accepted. An offer is also defined as the act of offering something for sale, or the submission of a bid to buy something.
• Essentials of a valid offer
• There are mainly three essential elements of a valid offer:
• (1) The offer must be Communicated
• Communication or expression of the willingness by the offerer to enter into a contract or abstain from doing so is essential
for a valid offer. Mere desire or willingness to do or not to do something is not enough and will not constitute for an offer.
• In Lalman Shukla vs Gauri Dutt(1913) it was held that mere knowledge of an offer does not imply acceptance by the offeree.
• (2)Terms of the offer must be clear and definite
• Knowledge of the Intention of the parties is very essential as without this the courts will not be able to decide what the
parties want to do. Therefore the terms of the offer must be clear and definite and not vague and loose.
• Example-Ram offers Shyam to sell fruits worth Rs 600/-. This is not a valid offer since what kinds of fruits or their specific
quantities are not mentioned.
• (3)Must create a legal relationship
• It is essential for a valid proposal that it must be made with the intention of creating a legal relationship otherwise it will only
be an invitation. A social invitation may not create a social relationship. An offer must lead to a contract which creates legal
obligations and legal consequences in the case of non-performance of the contract.
• (1)In Balfour vs. Balfour (1919)
• Mr. Balflour was a civil engineer and worked for the government as
the Director of Irrigation in Ceylon(now Sri Lanka).In 1915 both of
them came back to England when Mr. Balflour was on leave but due
to an illness(arthritis) of Mrs. Balfour, she was unable to come back to
Ceylon with her husband. The husband promised to pay 30 euros per
month to his wife until she rejoined him in Ceylon. The husband failed
to pay her the said amount hence the wife sued him for the
amount. The court held that the husband was not liable as there
was no intention to create a legal relationship.
acceptance – definition and essentials,
• The Indian Contract Act 1872 defines acceptance in Section 2 (b) as
“When the person to whom the proposal has been made signifies his
assent thereto, the offer is said to be accepted. Thus the proposal
when accepted becomes a promise.”
• Therefore once an offer is accepted it cannot be revoked because it
has become a promise which creates a legal obligation between the
parties.
• Example -Anita offers to buy Priya’s car for Rs.10 lakhs and Priya
accepts such an offer. Now, this has become a promise.
Essentials of a valid acceptance
• Section 7 of The Indian Contract Act,1872 lays down two essentials of a
valid acceptance.
• (1) Must be unconditional and absolute
• Conditional Acceptance will not be a valid acceptance as it would amount
to a counter offer which would nullify the original offer. Example. Anita
offers to sell her bag to Priya for 3000/-. Priya says she accepts if Anita will
sell it for 1500/-. This does not amount to the offer being accepted and it
will count as a counteroffer.
• (2) Must be expressed in some usual and reasonable manner
• If the offeror does not describe any prescribed manner then it must be
expressed in the normal and reasonable manner, i.e. as it would be in the
normal course of business.
consideration – definition and essentials,
• Consideration is the price for which the promise of the other is bought.
Consideration means quid pro quo which means something in return.
Consideration plays a very significant role in the contract. Section 10 of the
Indian Contract Act enumerates (mentions) it as one of the essentials to a
valid contract.
• Given at the desire of the promisor.
• Given by the promisee or any other person.
• It may be in the past, present or future.
• It must be real, certain and lawful.
• It may be positive or negative.
• It need not be adequate.
exceptions to the rule, no consideration, no
contract,
• Exception when gift actually made

Between donor and donee any gift actually made will be valid and
binding even though without consideration. In order to attract this
exception there need to be natural love and affection or nearness of
relationship between the donor and donee but the gift must
complete.
doctrine of Privity of contract, capacity of
parties, free consent,
• Privity is a doctrine of contract law that says contracts are only
binding on the parties to a contract and that no third party can
enforce the contract or be sued under it.
• According to Section 10 of the Indian Contract Act, 1872, to
constitute a valid contract, parties should enter into the contract
with their free Consent. Consent is said to be free when it is not
obtained by coercion, or undue influence or fraud or
misrepresentation or mistake.
legality of object,

• The legality of the object in contract law stipulates that the

consideration and the object of a contract are considered legal
except when: They are specifically forbidden by law. They are
fraudulent in nature. The nature of the object and the consideration
is such that it defeats the purpose of the law.
performance of contract,
termination of contract
• The most common way to terminate a contract, it's just to negotiate
the termination. If you want to get out of a contract, you just contact
the other party involved and you negotiate an end date to that
contract. There may be a fee to pay for cancellation. You might want
to offer some type of consideration to cance
Sale of Goods Act: Essentials
• The essentials of sales contracts under the Sales of Good Act
are the two parties (buyer and seller), the goods for sale,
the price for which the goods will be sold, and the transfer
of general property.
Condition v/s warranties,
Rights of unpaid seller
• There are mainly 2 kinds of rights of unpaid seller i.e., right against
goods and right against buyers.
• The unpaid seller can sue the buyer to recover the price, damage and
interest on the non-payment of money. It can also exercise the right
to lien, stoppage or resale against the goods.