Business Law - Law of Contract Act

The Indian Contract Act was passed by British India in 1872. This law is applicable throughout the country, except the states of Jammu and Kashmir. This act deals mostly with the guidelines and principles related to contracts.

This law can be subdivided into two parts −

  • Sections 1 to 75 are related to general principles of contracts.

  • Sections 124 to 238 are related to special kinds of contracts such as indemnity and guarantee, bailment, pledge and agency.

    • According to the Contract Act, a contract can be defined as an agreement which can be enforced by law. When two parties mean the same thing in the similar sense at the same time and work for the same purpose, they are termed to be at a point of agreement.

    • Section 2(e) of the Contract Act defines an agreement to be a set of promises, which form the considerations of both the parties. Obligation can be defined as an action or a duty to which a person is committed morally as well as legally.

    • Both agreement and obligation constitute to form a contract. Any agreement related to social matters cannot be considered as a contract. A legal relationship must be created between the two parties to constitute a contract.

Essential Elements of a Valid Contract

The following are the essential elements for a valid contract −

  • An offer proposed by one party should be accepted by the other party which results in a point of agreement.
  • Both the parties should be in consent of creating a legal relation and stay prepared for legal consequences.
  • The agreement should be in the consent of the law.
  • The contracting parties must be legally eligible for the contract.
  • The consent of both the parties must be genuine.
  • The aims and objective of the contract should be legally acclaimed and should not oppose any policy of the public.
  • There should be precise and clear terms and conditions in the contract.
  • The agreement should be practically possible to be enacted.

Proposal or Offer

Making an offer is one of the initial steps in creating a contract. An offer or a proposal must be made by the first party, which initiates the contract to the second party. The first party is often termed as the offeror and the second party is often termed as the offeree. If the offeree accepts the entire offer without any negotiations or changes, the contract comes into existence.

Rules Administrating Offers

The following rules must be followed for the validation of an offer −

  • It is mandatory for an offer to be clear, complete, definite and final.

  • For an offer to be effective, it must be conveyed to the offeree so that the offeree gets the choice to accept or reject the offer.

  • The offer can be conveyed orally or in a written document or may be implied by the conduct.

  • An offer may be made to the general public or to a specific person or to a specific group of people.


It is only upon the acceptance of an offer that a contract comes into existence. Acceptance of an offeree can be defined as the point when the offeree agrees with the terms & conditions and interest of the offer and gives his consent in compliance of the offer. A proposal becomes a promise when it is accepted.

Rules Administrating Acceptances

  • It is mandatory for the acceptance to be unqualified and absolute.

  • The acceptance must comply with all the terms and conditions of the offer.

  • Acceptance can be expressed orally or in a written document or may be implied by the conduct.

  • A conditional acceptance or a return offer may is considered as a rejection to the offer and may contribute to lapse of the offer.

  • The offerer should be conveyed of the acceptance by the offeree. If, in any case, the offeree intends to accept the offer but does not convey the acceptance, the offer is not considered accepted.

  • No communication to the offerer is required for acceptance of an offer that requires some actions to be invoked as a response or sign of acceptance.

  • The offeree must accept the offer within the specified time limit of the offer.

Contract of Indemnity and Guarantee

Contract of Indemnity

A contract of indemnity is defined as a special contract by virtue of which two parties’ enter into a contract, if and only if, one party promises the other party to save it from any losses incurred due to the contract or any other specific reasons. The party which makes the promise is termed as indemnifier. The party which is protected by the promise is termed as indemnified. The best possible example of a contract of indemnity would be the contract of insurance.

Contract of Guarantee

A contract of guarantee may be defined as a contract to carry out the promise of a third person in case of any defaults. The person who gives the guarantee is termed as surety.

  • ‘Debtor’ is the term used for the person for whom the guarantee is given.

  • The person to whom the guarantee would be given is called creditor.

  • A guarantee can either be oral or written.

  • A contract must qualify all the norms of a valid contract just like an indemnity.

  • There is however a special consideration according to section 127 of the Contract Act, i.e., it may be a sufficient condition for the surety to give the guarantee that something is done or some promises are made for the benefit of the principal debtor.