Law of contract

In short

The law of contract governs promises that the law will enforce — it is the base layer of every sale, lease, loan, employment, service, construction and software agreement in India. The governing statute is the Indian Contract Act, 1872 (ss. 1-75 general principles; ss. 124-238 the special contracts of indemnity, guarantee, bailment, pledge and agency), supplemented by the Sale of Goods Act, 1930, the Specific Relief Act, 1963 (heavily amended in 2018), the Limitation Act, 1963 and s. 10A of the Information Technology Act, 2000 for electronic contracts. It is a compulsory first-year paper in every LLB and BA/BBA LLB course, a staple of CLAT-PG, judicial services, AIBE and company-secretary exams, and the single most tested subject in interviews for law firms, in-house legal teams, contract-management and compliance roles. Drafting, vetting and disputing contracts is what most junior Indian lawyers actually do for a living.

Explained

Formation: the essentials of a valid contract

• Agreement + enforceability. s. 2(h): a contract is "an agreement enforceable by law". s. 2(e): every promise and set of promises forming consideration for each other is an agreement. So contract = agreement + enforceability; all contracts are agreements, not all agreements are contracts.
• Proposal (offer) — s. 2(a): signifying willingness to do or abstain, with a view to obtaining the assent of another. Must be communicated, certain, and intend to create legal relations. An invitation to offer (price lists, tenders invited, auction advertisements, goods on a shelf) is not an offer.
• Acceptance — s. 2(b), ss. 7-9: must be absolute and unqualified, in the prescribed manner, and communicated. A counter-offer or conditional acceptance destroys the original offer. Silence is not acceptance; acceptance may be by conduct (implied contract).
• Communication and revocation — ss. 4-5: the offeror is bound when the acceptance is put in course of transmission (posted); the acceptor is bound when the acceptance reaches the offeror. Revocation of a proposal must reach before the acceptance is posted; revocation of acceptance must reach at or before the acceptance reaches the offeror. For instantaneous communication (telephone, telex, and by analogy e-mail/portals) the contract is made where acceptance is received — *Bhagwandas Goverdhandas Kedia v Girdharilal Parshottamdas* (1966).
• Consideration — s. 2(d): some act, abstinence or promise done at the desire of the promisor, by the promisee or any other person. Hence India does not insist on privity of consideration (a stranger to the consideration may sue — *Chinnaya v Ramayya*), though privity of contract is the rule (*Jamna Das v Ram Autar*) with exceptions: trust, charge on property, family settlement, marriage provision, agency, acknowledgement.
• Consideration need not be adequate (Explanation 2 to s. 25) but must be real and lawful; past consideration is good in India, unlike English law.
• s. 25 — agreement without consideration is void, except: (i) natural love and affection between near relatives, in writing and registered; (ii) promise to compensate for something voluntarily done; (iii) promise to pay a time-barred debt, in writing and signed. Also no consideration needed for a completed gift, agency (s. 185) or a contract of guarantee (s. 127 — consideration moving to the principal debtor suffices).
• Capacity — ss. 10-12: parties must be of the age of majority (18 under the Indian Majority Act, 1875), of sound mind, and not disqualified (insolvent, alien enemy, convict serving sentence, foreign sovereign).
• Minor's agreement is void *ab initio* — *Mohori Bibee v Dharmodas Ghose* (1903). No ratification on majority; no estoppel even if the minor lied about age; but a minor may be a promisee/beneficiary, can be an agent (not personally liable), and the necessaries supplied to a minor are recoverable from the minor's estate under s. 68 (quasi-contract), not from the minor personally.
• Lawful object and consideration — s. 23: unlawful if forbidden by law, defeats the provisions of any law, is fraudulent, injures person or property, or is immoral or opposed to public policy (trading with an enemy, stifling prosecution, trafficking in public office, marriage brocage, interference with justice).
• Writing/registration/stamping are not general requirements, but are mandatory where a statute says so (sale of immovable property, lease over one year, arbitration agreement in writing under s. 7 Arbitration and Conciliation Act, 1996) and stamp duty under the Indian Stamp Act, 1899 and State schedules affects admissibility.

Free consent and flawed contracts

• s. 13-14: consent = agreeing on the same thing in the same sense; free consent is consent not caused by coercion, undue influence, fraud, misrepresentation or mistake.
• Coercion (s. 15): committing or threatening to commit an act forbidden by the Bharatiya Nyaya Sanhita, 2023 (which replaced the IPC from 1 July 2024 — the section text still reads "Indian Penal Code"), or unlawful detaining of property. Contract is voidable at the option of the coerced party (s. 19); money or thing received must be repaid (s. 72).
• Undue influence (s. 16): one party is in a position to dominate the will of the other (real or apparent authority, fiduciary relation, mental or bodily distress) and uses it to obtain an unfair advantage. Where such dominance is shown, the burden of proving the absence of undue influence lies on the dominant party (s. 16(3)) — a key difference from coercion.
• Fraud (s. 17): active concealment, false suggestion of fact known to be untrue, promise made without intention of performing, or any act fitted to deceive. Mere silence is not fraud (Explanation) unless there is a duty to speak or silence itself is equivalent to speech.
• Misrepresentation (s. 18): innocent false statement believed to be true. Remedy: rescission and restitution — but no damages (unlike fraud, where damages lie in tort for deceit).
• Mistake (ss. 20-22): a bilateral mistake of fact essential to the agreement makes it void (s. 20); a unilateral mistake of fact does not (s. 22); a mistake of Indian law is no excuse (s. 21), but mistake of foreign law is treated as mistake of fact.
• Voidable contract (s. 2(i)) — valid until avoided by the aggrieved party, who must restore benefits received (s. 64). Void agreement (s. 2(g)) — not enforceable from the start; s. 65 requires restoration of advantage where an agreement is discovered to be void.
• Expressly void agreements: s. 26 restraint of marriage; s. 27 restraint of trade (any agreement restraining a lawful profession, trade or business is void, with the only statutory exception being sale of goodwill; service-related exceptions come from the Partnership Act 1932 ss. 11, 36, 54) — so post-employment non-compete clauses are generally void in India, while restraints operating *during* employment are valid (*Niranjan Shankar Golikari v Century Spinning*, 1967); confidentiality and non-solicitation are enforced more readily; s. 28 restraint of legal proceedings (an exception permits arbitration); s. 29 uncertainty; s. 30 wagering agreements are void (collateral transactions are not illegal except in Gujarat and Maharashtra, where they are); s. 56 impossible acts.
• Contingent contract (ss. 31-36): performance depends on a collateral uncertain event — insurance, indemnity, performance guarantees. Enforceable only when the event happens (s. 32); void if the event becomes impossible; an agreement contingent on an impossible event is void (s. 36).
• Standard-form and e-contracts: click-wrap, shrink-wrap and browse-wrap terms are recognised; s. 10A of the IT Act, 2000 validates contracts formed electronically and ss. 3/3A and Sch. II deal with digital and electronic signatures. Protection against oppressive terms comes from s. 23, undue influence, and the unfair contract provisions of the Consumer Protection Act, 2019 (s. 2(46)), whose terms the State and National Commissions can declare null and void (ss. 49(2), 59(2)).

Performance, discharge and frustration

• Who performs (ss. 37-45): the promisor, a representative, or a competent third person; death discharges a contract of personal skill. Joint promisors are liable jointly and severally in India (s. 43), and a release of one does not discharge the others (s. 44).
• Tender (attempted performance) that is refused discharges the promisor's liability (s. 38) if unconditional, at a proper time and place, and gives a reasonable opportunity to inspect.
• Time and place (ss. 46-50, 55): where time is of the essence, failure makes the contract voidable; where it is not (ordinarily in sale of immovable property), the remedy is compensation. Reciprocal promises: ss. 51-54 (simultaneous, conditional, dependent orders of performance).
• Modes of discharge: (1) performance; (2) agreement — s. 62 novation, rescission, alteration; s. 63 remission/waiver; (3) accord and satisfaction; (4) operation of law (death, insolvency, merger, unauthorised material alteration); (5) impossibility; (6) breach.
• Frustration — s. 56: an agreement to do an act impossible in itself is void; a contract to do an act which, after the contract is made, becomes impossible or unlawful becomes void. India follows a statutory, not a common-law "implied term", doctrine — *Satyabrata Ghose v Mugneeram Bangur* (1954): "impossible" means impracticable and useless from the point of view of the object, not literal impossibility. Frustration does not apply to mere commercial hardship, price rise or an *force majeure* clause already covering the event (*Energy Watchdog v CERC*, 2017), and self-induced impossibility is no defence. Compensation for a promisor who knew of the impossibility: s. 56, para 3.
• Anticipatory breach: repudiation before the due date; the aggrieved party may sue at once or wait; damages are measured at the date of breach if it accepts the repudiation.

Quasi-contracts and remedies for breach

• Quasi-contracts (ss. 68-72) — obligations resembling those created by contract, resting on unjust enrichment: s. 68 necessaries supplied to a person incapable of contracting; s. 69 payment by an interested person of money another is bound by law to pay; s. 70 non-gratuitous act lawfully done and enjoyed; s. 71 finder of goods (a bailee's duties); s. 72 money paid or thing delivered by mistake or under coercion must be repaid.
• Damages — s. 73: compensation for loss or damage naturally arising in the usual course of things from the breach, or which the parties knew would be likely to result (the two limbs of *Hadley v Baxendale*). Remote and indirect loss is not recoverable, and the explanation imposes a duty to mitigate. Types: ordinary/general, special (needs notice), nominal, and — exceptionally — damages for mental agony or loss of reputation (wrongful dishonour of a cheque, breach of promise to marry). Exemplary damages are not the norm.
• Liquidated damages and penalty — s. 74: where a sum is named or a penalty stipulated, the court awards reasonable compensation not exceeding that sum; India does not draw the English penalty/liquidated-damages distinction for enforceability, but *Fateh Chand v Balkishan Das* (1963) and Kailash Nath Associates v DDA (2015) hold that loss must be proved unless it is impossible to assess, and the named sum is only a ceiling. *ONGC v Saw Pipes* (2003) allows a genuine pre-estimate in construction contracts where loss is hard to prove. Forfeiture of earnest money beyond actual loss is relieved against.
• Quantum meruit — payment for work actually done where the contract is discharged by the other party's breach or is void; s. 65 and s. 70 support it.
• Specific performance — Specific Relief Act, 1963, as amended by Act 18 of 2018: specific performance is now a general remedy that the court shall grant (s. 10), no longer discretionary; substituted performance by the aggrieved party at the defaulter's cost is available (s. 20) after 30 days' written notice; no injunction may be granted against infrastructure projects listed in the Schedule (s. 20A); courts must dispose of such suits within 12 months (s. 20C); and ss. 14/16 still bar specific performance of contracts of personal service, determinable contracts and where compensation is adequate relief. Injunctions (temporary and perpetual) and rescission are the other remedies.
• Limitation Act, 1963: a suit for compensation for breach of contract must be filed within three years from the date of breach (Art. 55); for specific performance, three years from the fixed date or from refusal (Art. 54). Acknowledgement in writing (s. 18) or part-payment (s. 19) restarts limitation.

Special contracts (ss. 124-238)

• Indemnity (s. 124): promise to save another from loss caused by the promisor's conduct or that of any other person; two parties; liability is contingent on loss; the indemnity-holder's rights are in s. 125. Insurance (other than life) is in substance indemnity.
• Guarantee (s. 126): a promise to perform the promise or discharge the liability of a third person on default — three parties (surety, principal debtor, creditor); the surety's liability is secondary and co-extensive with the principal debtor's (s. 128). Types: specific and continuing (s. 129, revocable as to future transactions under s. 130 and by the surety's death under s. 131). Discharge: variance without consent (s. 133), release or discharge of the principal debtor (s. 134), a creditor's act or omission impairing the surety's eventual remedy (s. 139), loss of security (s. 141). A guarantee obtained by misrepresentation or concealment by the creditor is invalid (ss. 142-143). The surety has rights of subrogation (s. 140), indemnity against the principal debtor (s. 145) and contribution between co-sureties (ss. 146-147).
• Bailment (s. 148): delivery of goods by the bailor to the bailee for a purpose, on a contract to return or dispose of them. Bailee's duties: reasonable care (s. 151 — the standard of an ordinary prudent man with his own goods), not to make unauthorised use (s. 154), not to mix (ss. 155-157), to return on time (s. 160-161) and to deliver accretions (s. 163). Lien: particular (s. 170) and general (s. 171 — bankers, factors, wharfingers, attorneys, policy brokers).
• Pledge (s. 172): bailment of goods as security for a debt or performance; the pawnee may retain (s. 173), sue for the debt and sell after reasonable notice (s. 176); a pledge by a person in possession under a voidable contract (s. 178A) or by a pledgor with limited interest (s. 179) is good to that extent. Compare hypothecation and mortgage — no delivery of possession, governed by the Transfer of Property Act and SARFAESI for enforcement.
• Agency (ss. 182-238): an agent's acts bind the principal. Creation by express/implied appointment, ratification (ss. 196-200), necessity or estoppel/holding out; no consideration is necessary (s. 185). An agent's authority extends to every lawful thing necessary (s. 188) and widens in emergency (s. 189). Sub-agent vs substituted agent (ss. 190-195). Termination: ss. 201-210 — but an agency becomes irrevocable where the agent has an interest in the subject matter (s. 202) or has incurred personal liability. The principal is bound by the agent's acts within apparent authority (s. 237); undisclosed principal: ss. 231-232.

Key points

• Contract (s. 2(h)) - an agreement enforceable by law: offer, acceptance, consideration, capacity, free consent, lawful object, not expressly void.
• Invitation to offer - a price list, tender notice or displayed goods; the customer makes the offer, the seller accepts.
• Postal rule (ss. 4-5) - offeror bound on posting of acceptance; acceptor bound on its receipt; revocation must beat the acceptance.
• Consideration (s. 2(d)) - must move at the promisor's desire; may be past; need not be adequate; privity of consideration is not required in India.
• s. 25 - no consideration, no contract, save registered love-and-affection promises, voluntary-service compensation and time-barred debts in writing.
• Minor's contract - void *ab initio*, no ratification, no estoppel; necessaries recoverable from the estate under s. 68.
• Coercion vs undue influence - physical/criminal pressure vs abuse of dominant position; in undue influence the dominant party must disprove it.
• Fraud vs misrepresentation - knowledge of falsity gives rescission plus damages; innocent misstatement gives rescission only.
• Mistake - bilateral mistake of fact voids (s. 20); unilateral mistake and mistake of Indian law do not (ss. 21-22).
• s. 27 - every restraint of trade is void (only sale of goodwill excepted); post-employment non-compete is unenforceable, restraint during employment is valid.
• s. 30 - wagering agreements are void; collateral agreements remain valid except in Gujarat and Maharashtra.
• s. 56 frustration - supervening impossibility or impracticability makes the contract void; commercial hardship and a covering force-majeure clause are not frustration.
• s. 73 - damages must flow naturally or be within the parties' knowledge; remote loss is not recoverable; loss must be mitigated.
• s. 74 - a named sum is a ceiling; the court awards reasonable compensation and loss must ordinarily be proved (*Kailash Nath*, 2015).
• Specific Relief (Amendment) Act, 2018 - specific performance is a right, not a discretion; substituted performance under s. 20; no injunction against notified infrastructure projects.
• Guarantee vs indemnity - three parties and secondary, co-extensive liability vs two parties and primary liability on loss.
• Pledge vs bailment - pledge is bailment for security, with a power of sale after reasonable notice (s. 176).
• Limitation - three years from the date of breach for a contract suit (Art. 55, Limitation Act, 1963).

Formulas and examples

Example 1 — Market-price damages on a failed supply. A Pune fabricator contracts to buy 500 tonnes of HR steel at ₹52,000/tonne, delivery 1 June. The seller fails to deliver; the market price on 1 June is ₹58,000/tonne.

• Loss per tonne = 58,000 − 52,000 = ₹6,000.
• Damages = 500 × 6,000 = ₹30,00,000.
• If the buyer actually bought cover at ₹56,500 the next day, recovery = 500 × 4,500 = ₹22,50,000 — the duty to mitigate under the Explanation to s. 73 fixes the lower figure.
• A claim for ₹9,00,000 of profit lost on a downstream export order is recoverable only if the seller was told of that order at the time of contracting (second limb of *Hadley v Baxendale*).

Example 2 — Liquidated damages under s. 74. A ₹4,00,00,000 EPC contract provides LD at 0.5% of contract value per week of delay, capped at 10%. The contractor is 9 weeks late; the owner proves additional supervision and rent costs of ₹11,00,000.

• Contractual LD = 4,00,00,000 × 0.5% × 9 = ₹18,00,000; cap = ₹40,00,000, so ₹18,00,000 is within the ceiling.
• Under s. 74 as read in *Kailash Nath Associates v DDA*, the ₹18,00,000 is only the upper limit; if the court finds the proved loss to be ₹11,00,000, the award is ₹11,00,000. Where loss is genuinely impossible to assess, the pre-estimate itself may be awarded (*Saw Pipes*).

Example 3 — Forfeiture of earnest money. Flat agreed at ₹80,00,000, earnest ₹8,00,000 (10%). The buyer defaults; the seller resells at ₹76,00,000 and pays ₹50,000 brokerage.

• Actual loss = (80,00,000 − 76,00,000) + 50,000 = ₹4,50,000.
• Applying *Fateh Chand v Balkishan Das*, the seller forfeits ₹4,50,000 and refunds ₹3,50,000; a clause permitting forfeiture of the whole deposit is relieved against as a penalty.

Example 4 — Quantum meruit plus loss of profit. A contract for 10 machines at ₹2,00,000 each (cost to the maker ₹1,70,000 each). Six are delivered and accepted; the buyer then wrongfully repudiates.

• Price for work done = 6 × 2,00,000 = ₹12,00,000 (s. 70 / quantum meruit).
• Lost profit on the undelivered four = 4 × (2,00,000 − 1,70,000) = ₹1,20,000.
• Total claim = ₹13,20,000, subject to credit for materials resold.

Example 5 — MSMED delayed payment. A registered micro enterprise invoices ₹10,00,000; payment is 6 months late beyond the 45-day limit. If the RBI bank rate is 6% p.a., the statutory rate is 3 × 6% = 18% p.a., compounded monthly → 1.5% per month.

• Factor = 1.015⁶ = 1.093443.
• Interest = 10,00,000 × 0.093443 = ₹93,443, recoverable before the MSE Facilitation Council, and not deductible as a business expense.

Where it is used

• Law firms and litigation: drafting and disputing supply, distribution, franchise, shareholders', lease, loan and construction contracts; recovery suits, s. 9/s. 17 arbitration applications and specific-performance suits.
• In-house legal and contract-management (CLM) teams at Infosys, TCS, Reliance, L&T, Tata Motors, Flipkart and GCCs: vetting MSAs, SOWs, NDAs, SLAs, indemnity caps, limitation-of-liability and force-majeure clauses.
• Banking, NBFC and insurance: loan agreements, guarantees and pledges (ss. 126-181), hypothecation, insurance as contingent contracts and indemnity, SARFAESI and IBC enforcement of secured contracts.
• HR and employment: appointment letters, training bonds, confidentiality and non-solicitation clauses tested against s. 27, now read with the four Labour Codes in force from 21 November 2025.
• Infrastructure and public procurement: GFR-based tender conditions, GCC/SCC clauses on LD, price variation, EOT and termination; s. 20A of the Specific Relief Act bars injunctions against notified infrastructure projects.
• E-commerce, fintech and SaaS: click-wrap terms of use, platform seller agreements and payment-gateway contracts under s. 10A of the IT Act, 2000 and the unfair-contract provisions of the Consumer Protection Act, 2019.

Interview questions

• Q: What is the difference between an agreement and a contract? A: An agreement is every promise supported by consideration (s. 2(e)); a contract is an agreement that the law will enforce (s. 2(h)) because it also satisfies capacity, free consent, lawful object and is not expressly declared void.
• Q: Is a minor's agreement void or voidable? A: Void *ab initio* (*Mohori Bibee v Dharmodas Ghose*); it cannot be ratified on attaining majority, and no estoppel operates even if the minor misrepresented age — though necessaries supplied are recoverable from the minor's estate under s. 68.
• Q: Can a stranger to a contract sue on it in India? A: Generally no (privity of contract), but a stranger to the consideration may sue, and exceptions exist for trusts, charges on property, family settlements, marriage provisions, agency and acknowledgement.
• Q: Why is a post-employment non-compete clause usually unenforceable in India? A: s. 27 declares every agreement in restraint of a lawful profession, trade or business void, with only the sale-of-goodwill exception; restraints that operate during the employment term are valid (*Golikari*), but those biting after termination are not.
• Q: How does s. 74 differ from the English penalty rule? A: Indian law does not ask whether the stipulation is a penalty or liquidated damages for enforceability — it caps recovery at the named sum and awards only reasonable compensation, with loss ordinarily required to be proved (*Kailash Nath*, 2015).
• Q: When does s. 56 frustration apply, and when does it not? A: When performance becomes impossible or impracticable after formation and the contract's object is defeated (*Satyabrata Ghose*); not for mere price rise, commercial hardship, self-induced impossibility, or where an express force-majeure clause already covers the event (*Energy Watchdog*).
• Q: Who bears the burden of proof in undue influence? A: Once the plaintiff shows the defendant was in a position to dominate his will and the transaction appears unconscionable, s. 16(3) shifts the burden to the dominant party to prove free consent.
• Q: What changed with the Specific Relief (Amendment) Act, 2018? A: Specific performance became a general, enforceable remedy rather than a discretionary one, substituted performance at the defaulter's cost was introduced (s. 20), injunctions against notified infrastructure projects were barred (s. 20A), and courts must decide such suits in 12 months.
• Q: Distinguish a pledge from hypothecation. A: A pledge requires actual or constructive delivery of possession of goods as security with a statutory power of sale after reasonable notice (ss. 172, 176); hypothecation leaves possession with the borrower and is enforced through the agreement, SARFAESI or a court.
• Q: If goods are destroyed by fire in a godown, is the bailee automatically liable? A: No — s. 151 requires only the care of an ordinarily prudent person with his own goods; the bailee is liable if negligence, unauthorised use or mixing is shown, or if the loss occurred after a wrongful refusal to return (s. 161).
• Q: An e-commerce site shows a laptop at ₹8,000 by error and the customer pays. Is there a contract? A: Display is an invitation to offer, so the customer's order is the offer and the contract arises only on the seller's acceptance/confirmation; a genuine, mutually apparent pricing mistake can also be attacked as a bilateral mistake of fact under s. 20.
• Q: What is the limitation period to sue for breach of contract, and can it be extended? A: Three years from the date of breach (Art. 55, Limitation Act, 1963); it restarts on a written acknowledgement of liability (s. 18) or part-payment (s. 19), and s. 28 of the Contract Act forbids a clause that shortens it.

Common mistakes

• Treating "void" and "voidable" as interchangeable, and so giving the wrong remedy and the wrong restitution section (s. 65 versus s. 64).
• Saying consideration must be adequate, or that past consideration is no consideration — Explanation 2 to s. 25 and Indian law on past consideration say otherwise.
• Confusing privity of contract with privity of consideration, and therefore mis-stating *Chinnaya v Ramayya*.
• Applying the English penalty/liquidated-damages distinction to s. 74 instead of the ceiling-plus-proof-of-loss approach of *Fateh Chand* and *Kailash Nath*.
• Claiming remote or speculative losses under s. 73 and ignoring the duty to mitigate, or forgetting to prove notice for special damages.
• Pleading frustration for a mere price rise, lockdown inconvenience or a delay already covered by a force-majeure clause.
• In drafting, relying on a bare post-employment non-compete or an unstamped/unwitnessed document, and quoting the pre-2018 "discretionary" position on specific performance.

Related topics

Law of torts · Property law and the Transfer of Property Act · Sale of Goods Act, 1930 and e-commerce law · Company and partnership law · Arbitration, conciliation and the Mediation Act, 2023 · Consumer Protection Act, 2019