Unit 1

Introduction to contract

Elements of a Contract :

Types of Contracts

Element of offers

Contract and its essential elements

Modes of Discharge of Contract

Quasi Contract:

Contract of Agency
Definition of Contract

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement
enforceable by law”.
In section 2 (e), the Act defines the term agreement as “every promise and every set of promises, forming
the consideration for each other”.
In section 2 (e), the Act defines the term agreement as “every promise and every set of promises, forming
the consideration for each other”.
In other words, an agreement is an accepted promise, accepted by all the parties involved in the
agreement or affected by it.
Agreement = Offer + Acceptance.

Thus, we can say that for an agreement to change into a Contract as per the Act, it must give rise to or
lead to legal obligations. In other words, must be within the scope of the law. Thus, we can summarize it
as

Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law).

Elements of a Contract :

1.Substantive elements

Offer (Proposal) : When one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal. Every contract starts from an offer. Without an offer there can be no acceptance and then no
agreement and then no contract. Thus, offer becomes an essential element for a contract.

Essentials of a valid offer:

• Intention to obtain the acceptance.

• Intention to create legal relationship.
• The offer must be certain.
• A valid offer should not contain any term, the non-compliance of which leads to acceptance.
• The offer must be communicated
Acceptance: When the person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted. Once the offer is extended, it is in the hands of the offeree (the person to whom offer
is made) to either accept or reject the proposal/offer.
Consideration : Something of value must be exchanged in order to have a valid legal agreement as any
agreement without consideration is void. Thus, if there will be no consideration then the agreement will
be void and it will not be enforceable by law and there will be no contract. Therefore, consideration is
must for a contract.
Capacity : Capacity simply means competence or ability of the parties to come into a contract. A
capable person is the one who is allowed /qualified to enter into a contract. Section 11[9] of Indian
Contract Act defines who are competent to contract:
1. Major person
2. Person with sound mind (section 12 defines unsound mind)
3. Person not disqualified by law
4. Convicts
5. Alien enemy
6. Insolvent
7. Married women (with respect to her husband's property)
8. Corporations

Legality: As section 2(h) defines contract as - ‘An agreement enforceable by law', the legality becomes
the most important element of a contract. One cannot enforce a contract which is unlawful. Also, every
agreement of which the object or consideration is unlawful is void. Section 23[10] defines what
considerations and objects are lawful, and what not -Should not be forbidden by law; or should not
defeat provisions of any law; or should not imply injury to the person or property of another; or the court
should not regard it as immoral or opposed to public policy.

Procedural elements :

Communication of offer : As it is essential for an offer to be communicated to be valid, section 4[6] of

Indian Contract Act states that the communication of the offer/proposal is complete when it comes to
the knowledge of the person to whom it is made. Therefore, until and unless the information of the
proposal reaches the person to whom it is made, the offer is not considered valid. And if the knowledge of
the offer does not reach the other party, then how will the other party accept the offer and until there is no
acceptance of the offer, there will be no agreement between the parties. And without agreement and its
enforceability by law, a contract cannot be completed.

Thus, completion of communication of offer becomes essential for establishment of a contract between
any two or more parties

Meeting of minds : he meeting of minds in contract law refers to the moment when both parties have
recognized the contract and agreed to enter into its obligation. This is also called Mutual assent or
consensus ad idem.
Communication of acceptance : Section 4 states that the communication of acceptance is complete:
As against the proposer, when it is put in a course of transmission to him, so as to be out of the power of
the acceptor; As against the acceptor, when it comes to the knowledge of the proposer.

For example,

A proposes, by letter, to sell a house to B at a certain price. B accepts A's proposal by a letter sent by post.
The communication of the acceptance is complete, as against A, when the letter is posted; as against B,
when the letter is received by A.

Types of Contracts

Contracts are divided into different categories based on their purpose and needs.

1.Formation Based Contracts

2.Validity Based Contracts

3.Performance Based Contracts

Formation Based Contracts - These types of contracts are classified based on the mode of formation.

Implied Contracts - A legally-binding obligation that results from the actions, behavior, or
circumstances of one or more parties to a contractual agreement is known as an implied contract.
Express Contracts – An express contract is one in which all of the terms have been agreed upon by
the parties at the moment the agreement was made in writing or in verbal mode.
Quasi-Contracts – The Quasi-Contract is a contract between two parties that is retrospective in
nature. There are no prior ties between the parties in this kind of contract. A judge creates it to
remedy situations when one party gains something at the expense of the other party.
E-Contracts – Contracts that are created using electronic, cyber, or electronic data exchange methods
are referred to as e-contracts. Email, telephone, and more recently digital signatures are tools that help
create an electronic contract

2. Validity Based Contracts - These types of contracts are founded on legal ramifications. The types of
legal contracts under this category are:
Valid Contracts – According to the definition of a valid contract, it is a deal that is legally enforceable. The
Indian Contracts Act of 1872’s Section 10 states that all agreements are considered to be contracts if
they are freely entered into by parties who are legally able to do so, are formed for legal consideration,
have a legal purpose, and are not expressly disregarded by this declaration.
Void Contracts – Section 2(j) of the Indian Contracts Act of 1872 defines a void contract. A void contract
was originally a valid contract, but as a result of modifications made to some of the original terms, it is
now void. A void contract has no obligations or rights concepts and cannot be enforced by any party. Even
if both parties agree, these agreements are illegal and cannot be upheld.
Voidable Contracts – An agreement that is enforceable by law at the discretion of one or more of the
parties involved but not at the option of the others is said to render a contract voidable. Simply put, the
terms of the contract must be binding on at least one of the parties. The other party, who might be a
minor or temporarily unable to enter into a contract for other reasons, is not bound by it and is free to
reject or accept its conditions. The agreement is void if the latter decides to renounce it.
Unforceable Contracts – If a contract does not satisfy the necessary legal requirements, it is not
enforceable. After fulfilling these requirements, which typically take the form of technical errors, a
contract of this kind can be enforced.
Illegal Contracts – According to section 23 of the act, a contract may be void or illegal. A contract is
termed illegal if it violates some law or is in conflict with public policy. An illegal contract is different from
a void one. These types of agreements are the ones that the law only states that the court will not enforce
if it is made, as opposed to an illegal contract, whose consideration is prohibited by the law.

3. Performance Based Contracts

Executory Contracts – A contractual agreement where both parties have ongoing performance
requirements or when there are unfulfilled duties on both sides. For instance, the majority of leases and
contracts for the sale of commodities in which the buyer has not made the required payment and the
vendor has not delivered the products are executory contracts.
Executed Contracts – A signed agreement that creates a business relationship between two or more
parties is known as an executed agreement. Each party promises to uphold the legal duties agreed upon
within the written agreement once the contract is fully executed.
Unilateral Contracts – In these types of contracts, an agreement is made where one party agrees to pay
a certain amount only after the occurrence of an action. Such contracts can only be carried out if the
contract’s promise is kept by the other party.

Bilateral Contracts – These are contractual agreements where both parties make an agreement that’s
mutual. As a result, the parties involved are established, and the contract is created through the
exchange of proposals and agreements. These agreements, often known as two-sided contracts, are the
most typical type of contracts used today.

Q2) Contract and its essential elements: Contract = Accepted Proposal (Agreement) + Enforceable by
law (defined within the law)
• Substantive elements
o Offer
o Acceptance
o Consideration
o Capacity
o Legality
• Procedural elements
o Communication of offer
o Meeting of minds
o Communication of acceptance
Essential elements of a contract:

Offer (Proposal): view to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal. Every contract starts from an offer. Without an offer there can be no acceptance and then no
agreement and then no contract. Thus, offer becomes an essential element for a contract.

Essentials of a valid offer:

• Intention to obtain the acceptance.

• Intention to create legal relationship.
• The offer must be certain.
• A valid offer should not contain any term, the non-compliance of which leads to acceptance.
• The offer must be communicated.
Acceptance: Section 2(b)[7] defines acceptance as:
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted. Once the offer is extended, it is in the hands of the offeree (the person to whom offer is made)
to either accept or reject the proposal/offer.
Consideration: Something of value must be exchanged in order to have a valid legal agreement as any
agreement without consideration is void. Thus, if there will be no consideration then the agreement will
be void and it will not be enforceable by law and there will be no contract. Therefore, consideration is
must for a contract.
Capacity: Capacity simply means competence or ability of the parties to come into a contract. A capable
person is the one who is allowed /qualified to enter into a contract.
Section 11[9] of Indian Contract Act defines who are competent to contract:
• Major person
• Person with sound mind (section 12 defines unsound mind)
• Person not disqualified by law
• Convicts
• Alien enemy
• Insolvent
• Married women (with respect to her husband's property)
• Corporations
• Legality
Legality: As section 2(h) defines contract as - - ‘An agreement enforceable by law', the legality becomes
the most important element of a contract. One cannot enforce a contract which is unlawful. Also, every
agreement of which the object or consideration is unlawful is void. Section 23[10] defines what
considerations and objects are lawful, and what not -Should not be forbidden by law; or should not
defeat provisions of any law; or should not imply injury to the person or property of another; or the court
should not regard it as immoral or opposed to public policy.
Communication of offer: As it is essential for an offer to be communicated to be valid, section 4[6] of
Indian Contract Act states that the communication of the offer/proposal is complete when it comes to
the knowledge of the person to whom it is made.
Therefore, until and unless the information of the proposal reaches the person to whom it is made, the
offer is not considered valid. And if the knowledge of the offer does not reach the other party, then how
will the other party accept the offer and until there is no acceptance of the offer, there will be no
agreement between the parties. And without agreement and its enforceability by law, a contract cannot
be completed.
Thus, completion of communication of offer becomes essential for establishment of a contract between
any two or more parties
Meeting of minds: The meeting of minds in contract law refers to the moment when both parties have
recognized the contract and agreed to enter into its obligation. This is also called Mutual assent or
consensus ad idem..
Communication of acceptance: Section 4 states that the communication of acceptance is complete:
As against the proposer, when it is put in a course of transmission to him, so as to be out of the power of
the acceptor; As against the acceptor, when it comes to the knowledge of the proposer
For example,
A proposes, by letter, to sell a house to B at a certain price. B accepts A's proposal by a letter sent by post.
The communication of the acceptance is complete, as against A, when the letter is posted; as against B,
when the letter is received by A.

Q3) Modes of Discharge of Contract

Performance of a Contract

Discharge Vs Breach of Contract

Breach of Contract
When a contracting party refuses or fails to perform or disables himself from performing or makes the
performance of the promise stated in the contract impossible by his conduct, then the contract is said to
be discharged by breach. A party to a contract may discharge it by actual breach or anticipatory breach

• Actual Breach: When a default is committed by a party on the due date of performance
• Anticipatory Breach: When the party commits a default before the due date of performance it
amounts to an anticipatory breach.

Remedies for breach of contract

1. Suit for Injunction: A restraint order from the court is an injunction. The court has the power to
restrain a person from doing a certain act. If the defendant does something that he should not
perform, then the aggrieved party can file a suit for injunction. This shall be temporary or permanent.

2. Suit for Specific Performance: When compensation for the damage is not enough to cover the
loss due to a breach of contract, we can approach the court and ask the court to force them to
perform as promised. So, if any of the parties fails to perform the contract, the court may order them
to do so. This is a decree of specific performance and is granted instead of damages

3. Suit for Damages: The party can ask for compensation for loss or damage caused by the breach of
contract. Remedy by way of damages is the most common remedy available to the injured party.
Damages can be ordinary damages, special damages, exemplary damages, nominal damages,
damage caused by delay, and pre-fixed damages
 4. Suit for Quantum Meruit: Quantum Meruit for contracts means the reasonable value of services.
If a person hires someone and the contract is incomplete or un-performable, then the employer can
sue the defendant for the services and the value of improvements made. The law states that the
employer has to pay the employee an amount that he deserves for his services.

5. Recession of Contract: When one of the parties to a contract does not fulfill his obligations, then
the other party can rescind the contract and refuse the performance of his obligations. As per section
65 of the Indian Contract Act, the party that rescinds the contract must restore any benefits he got
under the said agreement. And section 75 states that the party that rescinds the contract is entitled to
receive damages and/or compensation for such a recession.

Liquidated Damage and Penalty: Liquidated Damage: A reasonable estimate of likely loss in case of
a breach which is mentioned in the contract before the breach.

Penalty: An arbitrarily fixed amount of money without estimating the likely loss in case of a breach

Q4) Quasi Contract: Quasi-contracts are a concept under the Indian Contract Act, of 1872, that governs
situations where there is no express or implied contract between parties but still imposes an obligation
on one party to pay the other party. It is also known as a “constructive contract” or “implied-in-law
contract.”

The principle of Quasi contract is “NO ONE SHOULD GET BENEFIT AT THE EXPENSE OF ANOTHER”.

Example and Explanation

A person orders some perishable items online by providing his address and paying for the same. At

the time of the delivery of the goods, the delivery man delivers them to the wrong address. Instead of

denying the delivery, the receiving party accepts the order and consumes the same.

The case went to the court, and the court then ordered to issue a quasi-contract according to which

the recipient has to pay back the cost of the item to the party who paid for the item initially. So, in

this case, the benefits of the goods have been enjoyed by the receiving party, so such a receiving party

is bound to compensate the former party.

A quasi contract is an agreement between two parties without previous obligations to

one another that has been created and legally recognized by the court system. Under a

quasi-contract, neither involved party is expected to create such an agreement; this

contract is arranged and imposed by a judge to correct a circumstance in which one

party acquires something at the expense of the other party.

A quasi-contract refers to the obligation of the contract created out of order by the

court not to let one party get unfair benefit out of the situation at the expense of other

parties where there is the absence of initial agreement among the parties and there is a

dispute between them. Quasi-contracts are based on principles of justice, equity, and

sound conscience. They aim to ensure fairness and prevent one party from taking

advantage of another party’s efforts or resources without appropriate compensation or

restitution.
Characteristics of quasi contract:

• Absence of Agreement
• Implied by Law
• Obligation to pay
• No mutual consent

Elements of quasi contract:

• No mutual consentThe defendant must have been enriched;
• The enrichment must have been at the plaintiff’s expense;
• The enrichment must have been unjust;
• There must be no other legal remedy available to the plaintiff; and
• The enrichment must not have been due to any fault of the plaintiff.
Features of Quasi contract:
• It is not a real contract
• It is not based on express or implied intention of the parties
• It is not based on the offer - acceptance rule
• It doesn’t arise from formal agreement but it is imposed by law
• Usually, the quasi-contracts provide the right to the money.
• There is an absence of the contract or mutual consent among the parties; thus, it is imposed by
the law and is not the outcome of any agreement.
• They are based on equity, a good conscience, justice, and principles of natural justice.

Contract VS QUASI CONTRACT

Types of Quasi contract

Supply of necessities (sec.68)
If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is
supplied by another with necessaries suited to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.
Example
- John is a lunatic. Peter supplies John with certain necessaries suited to his condition in life. However,
John does not have the money or sanity and fails to pay Peter. This is termed as a Quasi contract and
Peter is entitled to reimbursement from John’s property.
However, to establish his claim, Peter needs to prove two things:
• John is a lunatic.
• The goods supplied were necessary for John at the time they were
sold/ delivered.

Obligation to pay for non-gratuitous acts (sec. 70)

When a person lawfully does anything for another person or delivers anything to him, not
intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of, or to restore, the things so done or
delivered.
Example:
A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound
to pay for them to A.
A saves B's property from fire. A is not entitled to compensation from B, if the circumstances show
that he intended to act gratuitously.

Responsibilities of finder of goods (sec. 71)

It states that if a person finds goods that belong to another party and takes such goods into his
custody, then the former has responsibility the same as that of a bailee.
Example:
Peter owns a flower shop. Olivia visits him to buy a bouquet but forgets her purse in the shop.
Unfortunately, there are no documents in the purse to help ascertain her identity. Peter leaves the
purse on the checkout counter assuming that she would return to take it. John, an assistant at
Peter’s shop finds the purse lying on the counter and puts it in a drawer without informing Peter.
He finished his shift and goes home. When Olivia returns looking for her purse, Peter can’t find it.
He is liable for compensation since he did not take care of the purse which any prudent man
would have done.
F picks up a diamond on the floor on k's shop. He hands it over to K to keep it till true owner is
found out. No one appears to claim it for quite some weeks in spite of the wide advertisement in
the newspapers. F claims the diamond from K Who refuses to return. K is bound to return the
diamond to F who is entitled to retain the diamond against the whole world except the true owner.

Mistake or coersion (sec. 72)

A person to whom money has been paid, or anything delivered, by mistake or under coercion,
must repay or return it to the person who paid it by mistake or under coercion.
Example:
Peter misunderstands the terms of the lease and pays municipal tax erroneously. After he realizes
his mistake, he approached the municipal authorities for reimbursement. He is entitled to be
reimbursed since he had paid the money by mistake.
A pays some money to B by mistake. It is really due to C. B must refund the money to A. C,
however, cannot recover the amount from B is no privity of contract between B and C.
Q5)Contract of Agency: The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a
person employedto do any act for another or to represent another in dealing with third persons.

According to Section 182, The person for whom such act is done, or who is so
represented, is called the “principal”. Therefore, the person who has delegated his
authority will be the principal.

The relationship between the principal and his agent is called as ‘agency’.

Contract of Agency- Creation of Agency

Direct (express) appointment– The standard form of creating an agency is by direct
appointment. When a person, in writing or speech appoints another person as his agent, an
agency is created between the two. Example of a written contract of agency is the Power of
Attorney that gives a right to an agency to act on behalf of his principal in accordance with the
terms and conditions therein. A power of attorney can be general or giving many powers to the
agent or some special powers, giving authority to the agent for transacting a single act.
Implication– When an agent is not directly appointed but his appointment can be inferred from
the circumstances, an agency by implication is created.
Necessity– In a situation of necessity, one person can act on behalf of another to save the person
from any loss or damage, without expressly being appointed as an agent. This creates an agency
out of necessity. For example, A sent a horse by railway. On its arrival at the destination, there was
no one to receive it. The railway company, is bound to take reasonable steps to keep the horse
alive, was an agent of the necessity of A.
Estoppel– An agency can also be created by estoppel. In a situation where one person behaves in
such a manner in front of a third person, as to make someone believe he is an authorized agent on
behalf of someone, an agency by estoppel is created.
Ratification– When an act of a person, who acted as another person’s agent (on his behalf)
without his knowledge is later ratified by that person, this creates an agency by ratification
between the two.

Termination of Agency:
When the relationship between principal and his agent is ended, it is called
termination of Agency.
Section 201 - An agency is terminated by the Principal revoking his authority or a by
the agent renouncing the business, or by the business of the agency being completed
or by either the principal or agent dying or becoming of unsound mind; or by the
principal force for the relief of insolvent debtors.

Termination of Agency may be

• By the Act of Parties
• By the operation of law

Different Types of Agents:

1. General Agent: The principal appoints a general agent to do anything within his authority in all
transactions or appointed to do all acts relating to a specific job. The principal grants the authority
to the agent to act on his behalf. It may be assumed by the third party that such an agent has the
authority to do all that is usual for a general agent to do. Any private restrictions on the agent’s
authority do not affect the third party.
2. Special Agent: He is the one who is appointed or employed to do or perform only a specific
act, task or function. Outside of this special act, task or function, he has no authority or power. In
this case, the third party cannot assume that the agent has unlimited authority. Thus, any act of
the agent outside his authority cannot bind the principal.
3. Mercantile Agent: section 2(9) of the Sale of goods act, 1930, a mercantile agent is a person
who in the customary course of business has an agent’s authority either to sell or consign the
goods for the purpose of sale or to buy goods or to raise money on the security of goods. Thus,
this definition covers the following:
a) Factors
A factor is a person who is appointed to sell goods which are put in his possession or to buy goods
for his principal. An agent who is remunerated by a commission (one who looks like the apparent
owner of the things concerned). He is the evident owner of the goods in his custody and can thus
sell them in his own name and receive payment for them. He also has an insurable interest in the
goods in his custody and a general lien regarding any claim that he may have to arise out of the
agency.
b) Brokers
A broker is a person whose job is to create a contractual relationship between two parties or
whose business is to make contracts with the other parties for the sale and purchase of goods or
securities for brokerage. He does not have the possession of the goods and acts in the name of
the principal. Also, he has no lien over goods because he has no possession of goods.
c) Del credere Agent
A delcredere agent is a person who ensures or guarantees his principal that the creditors of goods
will pay for the goods they buy for extra remuneration. In the case of failure to pay by the third
party, he needs to pay the due amount to his principal.
d) Auctioneers
An auctioneer is a person who sells the goods by auction or an agent who acts a seller for the
principal in an auction. An auction is a process by which goods are sold to the highest bidder in a
public competition. He cannot warrant his principal’s title to the goods.
He is the agent of the seller until the goods are auctioned or knocked down. However, after the
knockdown, he becomes the agent of the buyer. Also, he is evidence that the sale took place.
e) Commission agents
Commission agents--also known as commercial agents--work as middlemen between vendors
and buyers. These individuals find employment in myriad industries for large and small
businesses, depending on their area of specialization. Commission agents work in countries
throughout the world and may seek work from a number of employers simultaneously if their field
of specialization provides the opportunity to do so. These expert purchasers and vendors provide
a valuable service to their clients.
Rights of an agent:
• Right to claim reimbursement of expenses
• Right to receive/claim remuneration
• Right to get indemnity
o Right to indemnification against consequences of all lawful acts
o Rights of indemnification against consequences of acts done in good faith
o Right of indemnification for injuries caused by Principal’s neglect
• Right to get compensation
• Right of particular lien
• Right to do lawful things
• Rights in emergency
• Right to appoint substitute agent
• Right to renounce agency
• Right to claim compensation for premature revocation
Duties of an agent:
• Duty to conduct principal’s business according to directions or custom of trade
• Duty to act, with skills and diligence
• Duty to render proper accounts
• Duty to pay sums received for principal
• Duty to communicate with principal and to follow principal’s instructions
• Duty not to deal on his own account
• Repudiation of the transaction by principal
• Duty to pay sum received for principal
Liabilities of an agent
• Liability for acts of sub-agents
• Liability for misinterpretation or fraud
• Liability to pay damages for breach of contract
• Liability for misconduct
Rights of a principal:
• To repudiate contract
• To claim benefit
• To ratify or disown agent’s acts
• To revoke the agent’s authority
• To claim loss or profit
• To demand accounts
• To refuse remuneration when an agent is guilty of misconduct
Duties and liabilities of a principal:
• Reimbursement & indemnification
• To pay remuneration and dues
• Compensate the agent for injury caused
• Liability of Principal for Agent’s Fraud or Misrepresentation.
• Liability of Principal to Third Parties For The Acts Of Agent
• Bound by notice given or information obtained by agent