BUSINESS REGULATIONS

MODULE -2

CONTRACT LAW

Contract Meaning

A contract is a voluntary arrangement between two or more parties that is enforceable by law as
a binding legal agreement.

Contract law concerns the rights and duties that arise from agreements.

A contract is a legally enforceable agreement between two or more parties. It may be oral or
written. A contract is essentially a set of promises. Typically, each party promises to do
something for the other in exchange for a benefit.

Definition of contract

According to Sir John Salmond defines a contract as, “An agreement creating and defining
obligations between two parties.

According to Sir Fredirck Pollock defines, “Every agreement and promise enforceable at law is
a contract”.

The definition of Contract is given under S.2(h) of the Indian Contract Act, of 1872 which
provides

‘A contract is an agreement enforceable by law’. Thus, a contract is an agreement made between

two or more parties which the law will enforce.

According to above definitions it is clear that a contract should consist of two elements

a. Agreement

b. Legal obligation (enforceable by law)

a. Agreement

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Agreement is considered to be prime element to form any contract. An agreement is defined u/s
2 (e) as ‘every promise and every set of promises, forming consideration for each other. When a
proposal is accepted it becomes a promise. Thus, an agreement is an accepted proposal.
Therefore, in order to form an agreement there must be a proposal or an offer by one party and
its acceptance by other party.
In short Agreement = Proposal + Acceptance.

b. Legal obligation (enforceable by law)

An agreement to become a contract must give rise to legal obligation. The second part of the
definition deals with enforceability by law. An agreement is enforceable u/s 10 if it is made by
competent parties, out of their free consent and for lawful object and consideration. Therefore, a
Contract = Agreement + Enforceability. Thus, all contracts are agreements but all agreements are
not necessarily contracts.

Essentials elements of a valid Contract

1. Offer and Acceptance:

Basically, a contract unfolds when an offer by one party is accepted by the other party. The
accepted offer should be without any qualification and be definite. An offer needs to be clear,
definite, complete and final. It should be communicated to the offeree. A proposal when accepted
becomes a promise or agreement. The offer and acceptance must be ‘consensus ad idem’ which
means that both the parties must agree on the same thing in the same sense i.e. identity of wills or
uniformity of minds.

2. Intention to Create Legal Relationship:

The intention of the parties to a contract must be to create a legal relationship between them.
Agreements of social nature, as they do not contemplate legal relationship, are not contracts. For
instance, if a father fails to give his daughter the promised pocket money, the daughter cannot
sue the father, because it was purely a domestic arrangement. Thus, it is clear that all agreements,
which do not result in legal relations, are not contracts.

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3. Capacity to Contract:

If an agreement is entered between parties who are competent enough to contract, then the
agreement becomes a contract.

4. Genuine and Free Consent:

Free consent is another essential element of a valid contract. An agreement must have been made
by free consent of the parties. The contract would be void in case of mutual mistakes. When
consent is obtained by unfair means, the contract would be voidable.

[Link] Object:

Objectives of an agreement should be lawful. It must not be illegal or immoral or opposed to

public policy. It is lawful unless it is forbidden by law. When the object of a contract is not
lawful, the contract is void.

6. Lawful Consideration:

Something in return is Consideration. In every contract, agreement must be supported by

consideration. It must be lawful and real.

7. Legal Formalities: Legal formalities if any required for particular agreement such as
registration, writing, they must be followed. Writing is essential in order to affect a sale, lease,
mortgage, gift of immovable property etc. Registration is required in such cases and legal
formalities in the relevant legislation should be strictly followed.

CLASIFICATION OF CONCTRACT

1. On the basis of creation

a. Express contract: Express contract is one which is made by words spoken or written.

b. Implied contract: An implied contract is one which is made otherwise than by works
spoken or written. It is inferred from the conduct of a person or the circumstance of the
particular case.

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c. Quasi or constructive contract:

It is a contract in which there is no intention either side to make a contract, but the law imposes
contract. In such a contract eights and obligations arise not by any agreement between the
practice but by operation of law.

2. Contracts on the basis of execution:

a. Executed contract: It is a contract where both the parties to the contract have fulfilled
their respective obligations under the contract.

b. Executory contract: It is a contract where both the parties to the contract have still to
perform their respective obligations.

c. Partly executed and partly executory contract: It is a contract where one of the parties
to the contract has fulfilled his obligation and the other party has still to perform his
obligation.

3. Contracts on the basis of enforceability:

a. Valid contract: A contract which satisfies all the conditions prescribed by law is a valid
contract.

b. Void Contract: the term void contract is described as under section 2(j) of [Link], 1872, A
contract which cases to be enforceable by law becomes void when it ceases to be
enforceable. In other words, a void contract is a contract which is valid when entered into
but which subsequently became void due to impossibility of performance, change of law
or some other reason.

c. Void Agreement: According to Section 2(g), an agreement not enforceable by law is

said to be void. Such agreements are void- ab- initio which means that they are
unenforceable right from the time they are made.

d. Voidable contract: According to section 2(i) of the Indian contract act, 1872,
arrangement which is enforceable by law at the option of one or more of the parties
thereon but not at the option of the other or other, is a voidable contract. In other words,
A voidable contract is one which can be set aside or avoided at the option of the
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aggrieved party. Until the contract is set aside by the aggrieved party, it remains a valid
contract. For e.g. a contract is treated as voidable at the option of the party whose consent
has been obtained under influence or fraud or misinterpretation.

e. Illegal Agreement: An illegal agreement is one the object of which is unlawful. Such an
agreement cannot be enforced bylaw. Thus, illegal agreements are always void – ab-
initio (i.e. void from the very beginning)

f. Unenforceable contract: It is contract which is actually valid but cannot be enforced

because of some technical defect (such as not in writing, under stamped). Such contracts
can be enforced if the technical defect involved is removed.

4. Contracts on the basis of performance

According to the extent of performance of contracts, contracts may be classified as

a. Unilateral Contract

It is also called as one-sided contract. In a unilateral contract, only one party has to satisfy his
obligation at the time of the formation of it, the other party having fulfilled his obligation at the
time of the contract or before the contract comes into existence.

b. Bilateral Contract

A contract is said to be a bilateral contract where the obligations of both the parties to the
contract are pending at the time of formation of the contract. In this type of contract, a promise
on one side is exchanged for a promise on the other.

Breach of contract

When any party to a contract, whether oral or written, fails to perform any of the contract’s
terms, they may be found in breach of contract. While there are many ways to breach a contract,
common failures include failure to deliver goods or services, failure to fully complete the job,
failure to pay on time, or providing inferior goods or services. In other words, a breach of

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contract is a broken promise to do or provide something. To explore this concept, consider the
following breach of contract

MEANING OF BREACH OF CONTRACT

Breach of contract means the failure of a party to perform or fulfill its obligations under the
contract

Different ways to breach a contract

Types of Breaches
There are four different types of breaches of contract:

1. Actual Breach

Most breaches of contracts are one of two types: actual or anticipatory. Actual breaches occur
when a party fails to fulfill her obligations on the date performance is due, or when a party
performs her obligations and the other party refuses to perform.

2. Anticipatory Breach

Anticipatory breach occurs when a party refuses to perform her obligations under the contract
before the due date of performance. For example, if a party agrees to sell her car to a buyer in
five days, but then reneges on day three, she is anticipatorily breaching the contract.

3. Minor Breach

A contract breach can either be minor or material. A minor breach, also known as a partial
breach, is a failure to complete a minor, non-essential part of a contract. Although it is
technically a breach, the contract can still be completed.

4. Material Breach

A material breach, on the other hand, is a substantial breach in contract terms usually excusing
the non-breaching party from performing and giving her the right to sue for damages. For

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example, in a home purchase contract, a seller refusing to give the buyer the keys to the home
after the buyer has completed all contract terms is a material breach.

Remedies for breach of contract

A remedy is the means given by law for the enforcement of a right. A right accruing to a party
under a contract is meaningless if there is no remedy to enforce that right in the event of its
volition.
1. Compensatory damages: This is the most common breach of contract remedy. When
compensatory damages are awarded, a court orders the person that breached the contract to
pay the other person enough money to get what they were promised in the contract elsewhere

2. Restitution: When a court orders restitution, they tell the person that breached the contract to
pay the other person back.

3. Punitive damages: This is a sum of money intended to punish the breaching party, and is
usually reserved for cases in which something morally reprehensible happened, such as a
manufacturer deliberately selling a retailer unsafe or substandard goods.

4. Nominal damages: A court awards nominal damages when there has been a breach of contract
but no party to the contract suffered any harm.

5. Liquidated damages: These are damages that the parties agree to pay in the event a contract
is breached.

6. Quantum Meruit: A court can award one party payment for what they deserve for any work
that she performed before the other party breached the contract.

Remedies in Equity

A remedy in equity is when the court orders someone do something. This can also be called
"injunctive relief." In breach of contract cases, this can look like any of the following:

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a. Cancellation: The court cancels the contract and decides that the parties are no longer
bound by it.

b. Specific Performance: This is when the court forces the breaching party to perform the
service or deliver the goods that they promised in the contract. This is typically reserved for
cases when the goods or services are unique and no other remedy will suffice.

SALE OF GOODS ACT 1930

Till 1930, transactions relating to sale and purchase of goods were regulated by the Indian
Contract Act, 1872.

In 1930, Sections 76 to 123 of the Indian Contract Act, 1872 were repealed and a separate Act
called ‘The Indian Sale of Goods Act, 1930 was passed.

It came into force on 1st July, [Link] effect from 22ndSeptember,1963, the word ‘Indian
‘was also removed. Now, the present Act is called ‘The sales of goods act,1930’. This Act
extends to the whole of India except the State of Jammu and Kashmir.

Scope of the Act

The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of goods is a contract
whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.”
‘Contract of sale’ is a generic term which includes both a sale as well as an agreement to sell.

Meaning of contract of sale

Contract of sale of goods is a contract, whereby, the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There can be a contract of sale between one part-
owner and another.

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In other words, under a contract of sale, a seller (or vendor) in the capacity of the owner, or part-
owner of the goods, transfers or agrees to transfer the ownership in goods to the buyer (or
purchaser) for an agreed upon value in money (or money equivalent), called the price, paid or the
promise to pay same.

A contract of sale may be absolute or conditional depending upon the desire of contracting
parties.

Definition

According to Section 4 of the Sale of Goods Act a contract of the sale of goods is a contract
whereby the seller transfers, or agrees to transfer, the property in (i.e., ownership of) goods to the
buyer for a price.

Essentials elements of a Contract of Sale

The following six features are essential elements of any contract of sale of goods.

▪ Goods

▪ Price

▪ Two parties

▪ Transfer of ownership

▪ All Essentials of a Valid Contract of Sale

▪ Includes both a ‘sale ‘and ‘an agreement to sell ‘

1. Two Parties:

A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from
one party to another. One cannot buy one’s own goods.

2. Goods:

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The subject matter of a contract of sale must be goods. Every kind of movable property except
actionable claims and money is regarded as ‘goods’. Contracts relating to services are not
considered as contract of sale. Immovable property is governed by a separate statute, ‘Transfer of
Property Act’.

3. Transfer of ownership:

Transfer of property in goods is also integral to a contract of sale. The term ‘property in goods’
means the ownership of the goods. In every contract of sale, there should be an agreement
between the buyer and the seller for transfer of ownership. Here property means the general
property in goods, and not merely a special property.

Thus, it is the general property, which is transferred under a contract of sale as distinguished
from special property, which is transferred in case of pledge of goods, i.e., possession of goods is
transferred to the pledgee or Pawnee while the ownership rights remain with the pledge. Thus, in
a contract of sale there must be an absolute transfer of the ownership. It must be noted that the
physical delivery of goods is not essential for transferring the ownership.

4. Price:

The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale
of goods’. Accordingly, consideration in a contract of sale has necessarily to be in money. Where
goods are offered as consideration for goods, it will not amount to sale, but it will be called
barter or exchange, which was prevalent in ancient times.

Similarly, if a person offers the goods to somebody else without consideration, it amounts to a
gift or charity and not sale. In explicit terms, goods must be sold for a definite amount of money,
called the price. However, the consideration can be partly in money and partly in valued up
goods. Furthermore, payment is not necessary at the time of making the contract of sale.

5. All essentials of a Valid contract:

A contract of sale is a special type of contract, therefore, to be valid, it must have all the essential
elements of a valid contract, viz., free consent, consideration, competency of contracting parties,
lawful object, legal formalities to be completed, etc. A contract of sale will be invalid if

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important elements are missing. For instance, if A agreed to sell his car to B because B forced
him to do so by means of undue influence, this contract of sale is not valid since there is no free
consent on the part of the transferor.

6. Includes both a ‘Sale’ and ‘An Agreement to Sell’:

The ‘contract of sale’ is a generic term and includes both sale and an agreement to sell. The sale
is an executed or absolute contract whereas ‘an agreement to sell’ is an executory contract and
implies a conditional sale.

A contract of sale can be made merely by an offer, to buy or sell goods for a price, followed by
acceptance of such an offer. Interestingly, neither the payment of price nor the delivery of goods
is essential at the time of making the contract of sale unless otherwise agreed.

Subject to the provisions of the law for time being in force, a contract of sale may be made either
orally or in writing, or partly orally and partly in writing, or may even be implied from the
conduct of the parties.

Conditions & Warranty

Meaning of Conditions [Section 12(2)]

A condition is a stipulation

1. Which is essential to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to terminate the contract.

Meaning of Warranty [Section 12(3)]

A warranty is a stipulation

1. Which is collateral to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to claim damages but not a right to
reject goods and to terminate the contract.

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Distinguish Between Conditions and Warranties

Sl no Basis Condition Warranty

1 Meaning A requirement or event that should A warranty is an assurance given

be performed before the by the seller to the buyer about the
completion of another action, is state of the product, that the
known as Condition. prescribed facts are genuine.

2 In the case of The party can bring the contract to The party can only claim damages.
an end.
Breach

Condition/Warr
anty

3 What is it? The party can only claim damages. It is a subsidiary provision related
to the object of the contract.

4 Superiority of A condition has a direct link with A breach of warranty may not be
Condition: the essential party of the contract. treated as a breach of condition.

5 Violation Violation of condition can be Violation of warranty does not

regarded as a violation of the affect the condition.
warranty.

6 Basic difference A breach of condition can also be A breach of warranty cannot be

considered as a breach of warranty. considered as a breach of condition.

Types of Conditions and Warranties

1. Express Conditions & Warranties: -

Conditions and warranties are those which are included in clear words and all parties are agree at
the time of contract.

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2. Implied conditions: -

Those conditions are not included in the contract but the law presumes their existence in the
contract are called implied conditions.

A. Condition as to title {sec. 14(a)} or Right to sell. This right is considered as an implied
condition in every sale contract. It is presumed that he can sell the goods and he can enter in sale
agreement.

B. Sale by Description {sec 15} In this case implied condition is that goods shall the
correspond with the description. A buyer can reject if the goods if these are not according the
description.

C. Sale by Sample {sec 17} In this case goods must be supplied according the sample
agreed upon condition.

1. The buyer may be able to compare the sample with the bulk.
2. The goods should be free from any defect.
3. The bulk should match with the quality of the sample.
3. Sale by Sample & Description {sec 15} In this case goods supplied must correspond with
sample and description both. So there is implied condition in it that if bulk does not match with
one even then buyer may reject the goods.

4. Condition of Merchantable Quality {sec 16 (2)} Merchantable quality means that the goods
must be sale able in the market as goods of that description are sold. In case of any defect a
seller must inform the buyer. It is implied condition.

5. Conditions as Quality to Fitness {16 (1)} Sometimes buyer informs the seller that he wants to
purchase the goods for particular purpose. It is implied condition that goods shall serve the
purpose of buyer. As the buyer relays on the seller’s skill then seller should provide the goods
according the description.

6. Wholesomeness Condition

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It means conductive to health. When someone makes a sale of contract about the eatable goods
this condition is applied. If someone supply the goods and it damages to health then supplier will
be liable for damages.

7. Conditions implied by custom [Section 16(3)]

Condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.

2 (A) Implied warranties

1. Possession of Goods {sec 14(b)} It is an implied warranty on the part of the seller that
buyer shall enjoy the quiet possession of goods sold to him without any disturbance. In case of
any disturbance a buyer can claim the damages from the seller.

2. Dangerous Nature Must Be Disclosed It is necessary that seller should disclose the
dangerous nature of the good sold to the buyer. If he does not disclose then any type of loss
suffered by the buyer will be compensated by the seller.

3. Burden on Property or Warranty of freedom from encumbrances [Section 14(c)]

Before selling the goods, it is necessary that these should be free from any charge or
encumbrance from any third party. If a seller does not tell about such burden on the goods to the
buyer and later on the buyer suffers a loss. The buyer can claim such damages from seller.

Rights of an unpaid seller

What are the Rights of Unpaid Seller?

The seller who has not received price of goods sold or the seller who has got his negotiable
instrument dishonored will become Unpaid Seller. Sale of goods act, 1930 Section 45 to 55 read
about the rights of Unpaid Seller. Those rights can be classified into two groups. They are as
follows.

1. Rights of unpaid seller against Goods

2. Rights of unpaid seller against Buyer

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1. What are the Rights of Unpaid Seller against Goods

When goods are in existence and title has not gone to buyer, Unpaid Seller can exercise the
rights against goods. These rights are categorized into three types. They are as follows.

a. Right of lien

b. Right of stoppage in transit

c. Right to Re-Sell

a. Right of lien

Right to retain goods by unpaid seller till amount is recovered is called right of lien. If unpaid
seller wants to exercise right of lien, he has to fulfill the following conditions.

• He must be unpaid seller

• There should be no credit terms in the Contract of Sale.

• After completion of credit period, right of lien can be exercised.

• The unpaid seller should have obtained those goods lawfully.

• Amount must be due on those goods only against which right of lien is decided.

b. Right of stoppage in transit

Unpaid Seller has right to stop the goods in the transit itself. To exercise this right the following
conditions are to be fulfilled.

• He must be unpaid seller.

• Buyer must be insolvent.

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• There should be no credit terms in the Contract of Sale. After expiry of Credit period, this right
can be exercised.

• Amount must be due on those goods only against which this right is desired.

At times the transport company may refuse to deliver the goods to buyer due to any reason. Then
the goods are said to be in transit. At times, the buyer may retain the goods at the transport
company. Then the goods are said to be not in transit.

c. Right to re-sale

The unpaid seller can re-sell the goods for non-payment of price by buyer. He can exercise this
right when the goods are of perishable nature while doing so it is beneficiary to the seller to give
a notice to buyer with regard to resale. If such notice is given seller can claim loss. If any on
resale from the buyer. On the other hand if there is profit on resale the former buyer cannot claim
that profit. If notice is not given the seller has to face adverse consequence. If there is any loss on
re-sale, that loss cannot be recovered from buyer. But in case of profit, seller has responsibility to
pay that amount of profit to buyer.

2. What are the Rights of Unpaid Seller against Buyer

At times it becomes inevitable choice to exercise rights on buyer for non-payment of price. The
unpaid seller can file suits against the buyer as explained below.

a. Right to sue for price

It is fundamental right of buyer to file a suit for recovery of unpaid price. In the case of sale. Suit
will be made for price balance, but not for compensation.

b. Right to sue to interest

If the buyer makes unreasonable delay for making payment, the seller has right to claim interest
also.

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c. Right to sue for compensation

When an agreement to sell is breached, the seller can see only for compensation for the breach of
Contract. Under such circumstances he cannot sue for price.

d. Right to Sue for anticipatory contract

When an agreement to sell is breached by buyer before date of performance. It is called

anticipatory breach. Then also seller can sue for compensation.

Rights of the Buyer:

1). Right to have delivery of goods:

It is the basic right of the buyer to take the delivery of goods from the seller after payment of
consideration.

2). Right to Reject:

It is the right of the buyer to reject the goods if it is found that the seller has delivered him the
goods of other quantity or quality or if the buyer notices any defects in the goods he may also
refuse to take those defective goods.

3). Right to Cancel:

It is another right of the buyer to cancel the contract if the seller does not perform his part in the
stipulated time or otherwise, if the seller commits any negligence as to the performance of a
contract in that situation it is the right of the buyer to cancel the contract.

4). Right to claim damages:

If there is any defect in the Goods which may cause loss to the buyer or if due to the negligence
of a seller. The buyer sustains a loss, in such circumstance or eventuality, it is the right of the
buyer to be compensated or the buyer may claim damages.

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5). Right to Examine:

It is the right of the buyer to examine the goods before their purchase and to duly satisfy himself
as to be quality of goods.

6). Right to sue for performance:

If the seller refuses to obey the terms and conditions of the contract which gives irreparable loss
to the buyer, the buyer has the right to knock or approach the competent court of law to compel
the seller for specific performance.

7). Right to take insurance:

It is the duty of the seller to give notice to the buyer to be ensured the goods if the seller delivers
in a good way whether by sea or by any other method/means due to which apprehension that the
goods may be destroyed then it is the right of the buyer to ensure the goods before its delivery.

8). Right to sue for recovery of price:

It is the right of the buyer to file a suit for recovery of the price which he has already paid to the
seller but even then, the seller refuses to perform his part.

9). Right to claim interest:

It is the right of the buyer to claim an interest in the situation if the delay is caused by the seller
in the delivery of goods.

Duties of Buyer:

1). Duty to accept goods:

After the execution of the agreement if the seller delivers the goods to the buyer to accept the
goods without any delay. If the buyer refuses to take the goods from the seller and the goods
sustain any damage, the seller cannot be held responsible for the same.

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2). Duty to pay the consideration:

It is the basic duty of the buyer to pay the agreed consideration to the seller on time.

3). Duty to pay damages:

It is the duty of the buyer to pay damages to the seller if due to the refusal of buyer receives
goods from the seller and the seller sustains any injury or for maintenance if the seller incurs any
cost over the goods.

4). Duty to pay damages

It is the duty of the buyer to perform his part/obligation in true spirit as agreed between buyer
and seller and in case of his non-performance, the buyer can be held liable for any loss to the
seller.

5). Duty to apply for goods:

It is another duty of the buyer to apply for delivery of goods to the seller. If it was agreed that the
seller would only deliver the goods if the buyer applies for its delivery.

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