Contract Law: Definition, Essentials, Types, and Breach of Contracts

What is the Contract Act

The Indian Contract Act 1872 is a cornerstone of legislation in India, establishing the rights, duties, and obligations of parties entering into agreements to conduct business in today’s global landscape. This Act plays a pivotal role in facilitating successful business transactions, particularly when Indian entities engage with multinational corporations. Having been in force for over 150 years, the Indian Contract Act, 1872, has evolved to reflect the unique conditions and economic landscape of India. Despite its age, the Act remains relevant and effective. With the advent of technology and the rise of e-commerce, Indian contract law has undergone significant changes, adapting to the digital era while maintaining its foundational principles

Significance of Law of Contract

Due to this importance of contracts, the Indian Contract Act, 1872, holds immense importance in legal field.. It outlines the rules for making and enforcing agreements, playing a crucial role in legal education, professional exams, and business practices. This Act is essential for students preparing for tests like CLAT PG and judiciary exams, as well as for lawyers handling various contractual matters, from simple agreements to complex corporate deals. Despite its age, the Act has remained relevant, adapting to modern business needs including digital transactions. Its principles guide the creation, interpretation, and enforcement of contracts, making it an indispensable tool for both legal professionals and students navigating the intricacies of law and commerce in India. The Act's enduring importance lies in its practical application across courtrooms, boardrooms, and classrooms, shaping how agreements function in society and business.

Quick tips to understand Contract Act Easily

To build a strong command over Contract Act, some of the below mentioned suggestions can be adopted:

1. Start by understanding the basics of Contract Act like offer, acceptance, consideration, etc. Try to unlearn the general definition that you have always known of these concepts and focus on learning the legal language.

2. Use real life situations and relate the concepts of contract law with everyday situations. This will help in better retention and recall.

3. Do not underestimate the importance of case laws. They help in understanding the real life application of concepts of the act.

4. Create flowcharts and diagrams to map out the steps involved in the forming of contract and remedies available in case of breach of contract.

5. Practice with a hypothetical situation.

6. Prepare a summary of the contract act for quick revision.

7. Revision is the key to success.

Contract Law in India Syllabus

Here is the essential syllabus for contract law needed to be completely studied in-depth for the competitive exam by an aspirants are:

1. Quasi Contracts
2. Remedies for Breach of Contract
3. Contingent Contracts
4. Discharge of Contracts
5. Contract of Indemnity
6. What is Contract
7. Types of Contract-Based on Validity, Formation, Performance
8. Contract of Guarantee
9. Capacity to Contract
10. Free Consent
11. Anticipatory Breach and Actual Breach of Contract
12. Doctrine of Privity of Contract
13. Undue Influence
14. Criminal Misappropriation of Property
15. Difference between offer and invitation to offer
16. Fraud
17. Suit for Damages in Contract Law
18. Contract of bailment and Pledge
19. Legal rules regarding consideration
20. Time and place of performance of contract
21. Communication of Offer and Acceptance
22. Coercion in Contract Law
23. Agreement with Minor
24. Agreements without consideration
25. Expressly void agreement
26. Rights available to parties
27. Mistake of Facts and Mistakes of law under Contract law, 1872
28. Rights and Discharge of Surety
29. Introduction of Indian Contract Act, 1872

Chapter for Contract Law

1. Quasi Contract: Quasi Contract means ‘contract implied in law’ or ‘constructive contract’. It is decided by a judge for one party to compensate the other party and is therefore a legal obligation imposed by law to prevent unjust enrichment. Essentially quasi contract is not a contract at all because the essential factors for the formation of a contract are absent. It is a statutory requirement.
2. Remedies for Breach of Contract: A breach of contract arises when one or more parties involved in a contract deliberately violate or neglect to satisfy the stipulations of a legally binding agreement. Certain remedies are made available in case of such breach of contract. These are- suite for Damages, suit for specific performance, elimination of the contract, recission of contract, suit for quantum meruit, and liquidated damages and penalty.
3. Contingent Contracts: Contingent contracts are the type of contracts where the obligation to perform the obligation by the promisor arises only when certain conditions are met. It is a statutory concept and is explained under Section 31 of the Indian Contract Act, 1872. The contracts of insurance, indemnity, and guarantee are some examples of contingent contracts. Essential of the Contingent contract is that the condition for which the contract has been entered into must be a future event, and it should be uncertain. If the performance of the contract is dependent on an event, which is although a future event, but certain and sure to happen, then it’ll not be considered as a contingent contract.
4. Discharge of Contracts: The term discharge of contract means ending of the contractual relationship between the parties. A contract is said to have been discharged when it ceases to operate i.e. when the rights and obligations created by the parties came to an end. A contract can be discharged in different ways for eg, discharge by performance, discharge by agreement or consent, discharge by impossibility of performance, discharge by lapse of time, discharge by operation of law, and discharge by breach of contract.
5. Contract of Indemnity: A contract of indemnity basically involves one party promising the other party to make good its losses. These losses may arise either due to the conduct of the other party or that of somebody else. To indemnify something basically means to make good a loss. In other words, it means that one party will compensate the other in case it suffers some losses.
6. What is Contract: Contracts form the backbone of commercial transactions and personal dealings in everyday life. They are essential for establishing legally binding agreements between parties. The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by law”. In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land. For a contract to be legally binding, it must contain these six elements- offer, acceptance, awareness, consideration, capacity and enforceability by law.
7. Types of Contract-Based on Validity, Formation, Performance: Contracts can be classified into various types based on validity, formation, and performance and each type is unique and cater to the specific needs of the parties drafting them. Based on validity, they can be divided into valid contracts, void contracts, voidable contracts, unenforceable and illegal contracts. Types of contracts based on formation include express contracts, implied contracts, and quasi-contracts. Based on performance, they can be divided into executed and executory contracts.
8. Contract of Guarantee: The contract of guarantee finds mention under section 126 of the Indian Contract Act, 1872. It means a contract to perform the promises made or discharge the liabilities of the third person in case of his failure to discharge such liabilities. In such cases the person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor‘.
9. Capacity to Contract: One of the most essential elements of a valid contract is the competence of the parties to make a contract. Section 11 of the Indian Contract Act, 1872, defines the capacity to contract of a person to be dependent on three aspects; attaining the age of majority, being of sound mind, and not disqualified from entering into a contract by any law that he is subject to.
10. Free Consent: In the Indian Contract Act, the definition of Consent is given in Section 13. As per this there have to be two parties to a contract, who willingly and knowingly enter into an agreement. In furtherance of the same, free consent has been defined under section 14 of the act which says that consent is considered free consent when it is not caused or affected by coercion, undue influence, fraud, misrepresentation, or mistake.
11. Anticipatory Breach and Actual Breach of Contract: A breach is a failure by a party to fulfil the obligations under a contract. It is of two types, namely, anticipatory breach and actual breach. an anticipatory breach is a breach of contract before the time of performance. So, if a promisor denies to perform his promise and signifies his unwillingness before the time for performance, then it is an anticipatory breach of contract. Whereas an actual breach of contract is on the scheduled time of performance of the contract.
12. Doctrine of Privity of Contract: The doctrine of privity of a contract is a common law principle which implies that only parties to a contract are allowed to sue each other to enforce their rights and liabilities and no stranger is allowed to confer obligations upon any person who is not a party to contract even though contract the contract have been entered into for his benefit. The rule of privity is basically based on the ‘interest theory’ which implies that the only person having an interest in the contract is entitled as per law to protect his rights.
13. Undue Influence: Undue Influence is defined under Section 16 of the Indian Contract Act which states that ‘a contract is said to be induced by undue influence where the will of the party consenting is able to be dominated by the other one due to the existence of the relation subsisting between them’. One party influence the other while the contract is formed to get an unfair advantage over the other. In such case the burden of proof to prove that the contract was not affected from undue influence lies with the defendant i.e. the person who was in a position to dominate the will of the other.
14. Criminal Misappropriation of Property: Criminal misappropriation of property is a serious offense under the Bhartiya Nyaya Sanhita (BNS). It involves dishonestly taking someone else's property without their consent. It is punishable by imprisonment and/or fines. The essence of offence under this section is that some property belonging to another which comes into the possession of the accused innocently, is misappropriated or converted by the accused to his own.
15. Difference between offer and invitation to offer: The difference between an offer and an invitation to offer is quite simple and primarily depends on the parties’ “intention.” An offer allows the other party to enter a legally binding agreement once accepted. On the other hand, an invitation to treat mainly invites the other party to negotiate and make an offer themselves. No specific party intends to enter into a contract in an invitation to offer. The seller is open to entering into a contract with any member of the public who presents the best offer.
16. Fraud: The Indian Contract Act defines fraud as an act of deliberate deception with the intention of giving the offender an unlawful advantage or gain, or, on the other hand, forfeiting the rights of the victim, which are included in the initial clauses of Section 17 of the Act. Fraud is when a person has an unethical and unlawful gain over the expense of another person, which accounts for an act of deception. The false assertion needs to be a fact, not just a person’s opinion. Fraud cannot exist if there is no loss. The party has to bear some actual loss to claim that fraud has been committed against them.
17. Suit for Damages in Contract Law: Contract is a type of legal promise and when a party breaks a promise, then the other parties to the contract might suffer losses due to non-performance of the obligation. The Indian Contract Act, 1872, has laid down some specific rules for filing a suit for damages in such cases. There are different types of suits for damages that can be filed in such situations as suit for ordinary damages, special damages, vindictive and exemplary damages, nominal damages, pre-fic damages, and damages for deterioration caused by delay.
18. Contract of bailment and Pledge: Bailment and pledge are two legal terms often used interchangeably. However, in legal language the terms are distinctive to each other. Bailment refers to the transfer of possession of a good from the bailor to the bailee. It has involvement of two parties: the bailor and the bailee. Whereas on the other hand, Pledge is the transfer of possession of a good as security for a debt or obligation. It has involvement of three parties: the pledgor, pledgee and debtor.
19. Legal rules regarding consideration: Enforcing any legal contract requires it to have an element of consideration included in it. Therefore, we need to understand “what is consideration in contract law?”. It is the price that the promisee agrees to pay to the promisor. The term consideration in contract law is defined in Section 2(d) of the Indian Constitution Act. according to section 2(d), three things are required for consideration to uphold validly, that is, the abstinence or act should be done at the desire of the promisor, the act should be done by the promise or any other person, the act should be either already executed or be in the process of being done or should be executory, that is, it should be promised to be done.
20. Time and place of performance of contract: As a promisor and promise are essential to a contract, so are the time and place of the performance of contract. If a time and place for the performance of contract are agreed upon, then the promisor should perform the promise accordingly. If not, then it should be performed at a reasonable place and time. The Indian Contract Act, 1872, specifies some rules regarding the time and place for the performance of contract under sections 46 – 50.
21. Communication of Offer and Acceptance: The offer is a proposal made by one party (the offeror) to another party (the offeree) expressing a willingness to enter into a contract under certain terms. For the offer to be effective, it must be communicated to the offeree. Communication can be made orally, in writing, or through conduct, but it must be clear and definite enough to indicate the offeror's intention to be bound by the proposed terms. Once the offer is communicated, it remains open until it is either accepted, rejected, or revoked. Acceptance in contract law is the offeree's expression of assent to the terms of the offer. Like the offer, acceptance must be communicated to the offeror. Any attempt to modify the offer constitutes a counteroffer, which terminates the original offer.
22. Coercion in Contract Law: Coercion is committing, or threatening to commit, any act forbidden by the Bhartiya Nyaya Sanhita, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. The burden of proof in cases of coercion lies on the party taking the defense of the coercion. The burden of proof on him is heavier, as mere probability or suspicion doesn’t amount to coercion under the eyes of the law.
23. Agreement with Minor: A common legal complexity often arises when an agreement with minor parties takes place because the Indian Contract Act does not permit such agreements outrightly. Section 11 of the act explains the requirements of competency for entering into contracts. Individuals or entities can create contracts only if they meet these requirements. The very first such requirement is that of majority age. In most cases, a contract with a minor is invalid as the minor can disaffirm it at will. This does not apply to contracts concerning necessities, penalties, military service, instances of minors' age being misinterpreted, or employment contracts. In such instances, the contracts are valid.
24. Agreements without consideration: Consideration is an integral part of a contract. The rules of consideration in contract law state that it is essential to have consideration for a contract. But there are some specific exceptions to the “No consideration no contract” rule. In certain exception such as, natural love and affection, past voluntary services, promises to pay a time-barred debt, creation of an agency, gifts, bailment and charity, it is not essential to have consideration to form a valid contract.
25. Expressly void agreement: There are certain essential elements of a valid contract. And if those elements are not present, the contract would then be void or voidable. However, there are certain agreements that are expressly void agreements. This means these agreements that are declared void by the law itself. This includes section 26, 27, 28, 29, 30, 36 and 56 of the Indian Contract Act. For example, agreement in restraint of marriage and agreement in restraint of trade.
26. Rights available to parties: Indian Contract Act leads to birth of some rights and duties for the parties to the transaction. These rights are- Rights in rem or jus in rem and Rights in Personam or Jus in Personam. As per the law of the land, every person entering into a contract has rights in rem. This is right available to him or her against the entire world. It protects a person’s property from the entire world. Whereas, right in personam gives the person rights against one person or party to the contract.
27. Mistake of Facts and Mistakes of law under Contract law, 1872: A mistake in contract law refers to an incorrect belief that is innocent in nature which leads one party to misunderstand the other. Mistakes can be of two types, mistake of law and mistake of fact. The Latin maxim ignorantia juris non excusat means that ignorance of the law is no excuse. Therefore under section 21 of the Indian Contract Act, 1872, a contract cannot be said to be voidable due to the mistake of the parties in understanding any laws that are in force in India. However, The maxim Ignorantia Facti Excusat which means that the Ignorance of fact excuses. Therefore under Section 20 of the Indian Contract Act, 1872, a contract is said to be void when both the parties to the agreement are under a mistake as to a matter of fact.
28. Rights and Discharge of Surety: The surety is bought in the contract just as a person who gives a guarantee that the principal debtor will pay the amount but if in any circumstances the principal debtor fails to pay the amount the creditor may ask the surety to pay the debt amount. Sureties has rights against the co-sureties like right to get release from the contract, right to contribute equally and right to pay the amount as promised. There are also certain conditions in which the surety can be discharged from its liability like Revocation of contract of guarantee; Conduct of the creditor; and Invalidating contract of guarantee.
29. Introduction of Indian Contract Act, 1872: The Indian Contract Act, 1872 is important legislation in the field of commercial law in India. It became effective in the month of September in 1872. It is basically responsible for regulating contractual relationships and It is private law. Its basis is English common law, but it was passed in the Indian Parliament, which is Calcutta Parliament.