Contract
1.1. Define contract.
A contract is an exchange of promises between two or more parties to do or refrain
from doing an act which is enforceable in a court of law. A contract may be made
either orally or in written form.
According to legal scholar Sir Jhon William Salmond, “A contract is an agreement
creating and defining the obligations between two or more parties.”
According Sir William Anson, “A contract is an agreement enforceable at law made
between two or more persons, by which rights are acquired by one or more to acts or
forbearances on the part of the other or others.”
A contract has been defined in Section 2(h) as “An agreement enforceable by law is a
contract.” Therefore in a contract there must be (1) An agreement and (2) the
agreement must be enforceable by law.
1.2. The essential elements of a valid contract:
An agreement becomes enforceable by law when it fulfils certain conditions. The
essential elements of a valid contract may be summed up as follows:
1. Offer and acceptance: There must be a 'lawful offer' by one party and 'lawful
acceptance' of the same by the other party. The adjective ‘lawful’ implies that the
offer and acceptance must satisfy the requirements of the Contract Act, 1872
regarding Offer and acceptance.
2. Intention to create legal relations: There must be an intention among the parties
that the agreement should be attached by legal consequences and create legal
obligations. Agreements of a social or domestic nature do not contemplate legal
relations, and as such they do not give rise to a contract.
An agreement to dine at a friend’s house is not an agreement intended to create legal
relations and therefore is not a contract. Agreements between husband and wife also
lack the intention to create legal relationship and thus do not result in contracts.
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Illustrations: (a) M promises his wife N to get her a Saree if she will sing a song. N
sang the song but M did not bring the Saree for her. N cannot bring an action in a
Court to enforce the agreement as it lacked the intention to create legal relations.
3. Lawful consideration: The third essential element of a valid contract is the
presence of ‘consideration’. Consideration has been defined as the price paid by one
party for the promise of the other. An agreement is legally enforceable only when
each of the parties to it gives something and gets something.
The something given or obtained is the price for the promise and is called
‘consideration’. Subject to certain exceptions, gratuitous promises are not enforceable
at law. The ‘consideration’ may be an act (doing something) or forbearance (not
doing something) or a promise to do or not to do something. It may be past, present
or future. But only those considerations are valid which are ‘lawful’.
4. Capacity of parties: The parties to an agreement must be competent to contract;
otherwise it cannot be enforced by a court of law. In order to be competent to contract
the parties must be of the age of majority and of sound mind and must not be
disqualified from contracting by any law to which they are subject. If any of the
parties to the agreement suffers from any such minority, lunacy, idiocy, drunkenness,
etc., the agreement is not enforceable at law, except in some special cases.
5. Free consent: Free consent of all the parties to an agreement is another essential
element of a valid contract. ‘Consent’ means that the parties must have agreed upon
the same thing in the same sense. There is absence of free consent’ if the agreement is
induced by (ii) coercion, (ii) undue influence, (iii) fraud, (iv) misrepresentation, or (v)
mistake (Sec. 14). If the agreement is vitiated by any of the first four factors, the
contract would be voidable and cannot be enforced by the party guilty of coercion,
undue influence etc. The other party can either reject the contract or accept it, subject
to the rules laid down in the Act.
6. Lawful object: For the formation of a valid contract it is also necessary that the
parties to an agreement must agree for a lawful object. The object for which the
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agreement has been entered into must not be illegal or immoral or opposed to public
policy.
7. Certainty: The agreement must not be vague or uncertain. It must be possible to
ascertain the meaning of the agreement otherwise, it cannot be enforced.
8. Possibility of performance: Yet another essential feature of a valid contract is
that it must be capable of performance. The agreement must be capable of being
performed. If the act is impossible in itself, physically or legally, the agreement
cannot be enforced at law.
Illustration: A, agrees with B to discover treasure by magic. The agreement is not
enforceable.
9. Void Agreements: An agreement which is not enforceable by law is void. Under
the contract Act.1872 there are five categories of agreements which are expressly
declared to be void. They are:
1. Agreement in restraint to marriage,(Sec. 26)
2. Agreement in restraint of trade, (Sec. 27)
3. Agreement in restraint of proceedings, (Sec. 28)
4. Agreement having uncertain meaning, (Sec. 29)
5. Wagering agreement (Sec. 30)
10. Writing and registration: An oral contract is a perfectly good contract. A
contract regarding the transfer of immovable property must be registered. According
to the Indian Contract Act, a contract may be oral or in writing. But in certain special
cases it lays down that the agreement, to be valid, must be in writing or/and
registered. The terms of an oral contract are sometimes difficult to prove. Therefore
important agreements are usually entered into in writing even in cases where writing
is not compulsory.
The above are the essential requirement of a contract.
Every contract gives rise to certain legal obligations or duties on the part of the
contracting parties. The legal obligations are enforced by the courts.
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1.3. Explain the various Types of contracts :
1. Express contract: When a contract is expressed in words spoken or written, it is
called express contract.
2. Implied contract: When a contract is to be understood from the acts, the conduct of
the parties and /or course of dealing between them is called implied contract.
3. Quasi contract: Quasi contracts are those dealings which are not contract strictly but
the parties act as if there is a contract (Section 68-72 of the contract Act.1872).
4. Executed contract: When the parties perform their obligation as per the contract it is
called executed contract. An executed contract means the parties have completed their
duties.
5. Executory contract: When the obligations to the parties are to be performed at a
later time, it is called Executory contract.
6. Oral and written contract: A contract may be made either orally or in written form.
A contract must be written in some cases under the Transfer of property Act.1882 or the
Registration Act. 1906.
7. Bilateral contract: There must be at least two parties to the contract. Therefore all
contracts are bilateral or multilateral. (Sec.15)
8. Unilateral contract: In certain contracts one party has to fulfill his obligations
whereas the other party has already performed his obligations. Such a contract is called
unilateral contract.
9. Legality or Validity of the contract: Contract can be classified into the following:
(a) Valid, (b) Void, (c) Voidable, (d) Illegal and (e) Unenforceable. (46 p)
1.4. Distinguish between Contract & Agreement:
A contract is an exchange of promises between two or more parties to do or refrain
from doing an act which is enforceable in a court of law. A contract may be made
either orally or in written form.
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Agreement is a negotiated and usually legally enforceable understanding between
two or more legally competent parties.
Distinction between Contract & Agreement:
Contract Agreement
1. Section: Sec. 2 (h) Sec. 2(e)
2. Definition: A contract is an agreement
enforceable by law.
Every promise or every set of
promises forming consideration
for each other is an agreement.
3. Enforceability: Every contract is enforceable. Every promise is not
enforceable.
4. Interrelationship A contract includes an
agreement.
An agreement does not include
a contract.
5. Scope : The scope of a contract is
limited, as it includes only
Commercial agreements.
Its scope is relatively wider, as
it includes both social
agreement and commercial
agreements.
6. Validity : Only legal agreements are
called contracts.
An agreement may be both
legal and illegal.
7. Legal Obligation Every contract contains a
legal obligation.
It is not necessary for every
agreement to have legal
obligation.
1.5. 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 person
either to such act or abstinence, he is said to make a proposal.
To form an agreement, there must be at least two elements – one offer and the other
acceptance. Thus offer is the foundation of any agreement.
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Offer: A proposal is also called an offer. The person who makes an offer is called
“Offeror” or “ Promisor”and the person to whom the offer is made is called the
Offeree” or “Promisee”
Example: Mr. A says to Mr. B, “Will you purchase my car for Rs.1,00,000?” In this
case, Mr. A is making an offer to Mr. B. Here A is the offeror and B is the offeree.
Offer: A proposal is also called an offer.
Offeror: The person who makes the offer.
Offeree: The person to whom the offer is made.
1. Specific Offer: A specific offer is one which is made to a definite person or
particular group of persons. A specific offer can be accepted only by that definite
person or that particular group of persons to whom it has been made.
Example X offers to buy car from Y for Rs 1.0 lakh. This offer is a specific offer
which has been made to a definite person Y No person other than Y can accept this
offer
2. General Offer: A general offer is one which is not made to a definite person, but
to the world at large or public in general. A general offer can be accepted by any
person by fulfilling the terms of the offer. In case of general offer, the contract is
made with person who having the knowledge of the offer comes forward and acts
according to the conditions of the offer.
3. Cross Offers: Meaning Two offers which are similar in all respects made by two
parties to each other, in ignorance of each other’s offer are known as `cross offers’.
Effect Cross offers do not amount to acceptance of one’s offer by the other. Hence,
no contract is entered into on cross offers.
1.6. Essentials elements of an offer:-
(1)There must be two parties.
(2)The offer must be communicated to the offeree.
(3)The offer must show the willingness of offeror. Mere telling the plan is not offer.
(4) The offer must be made with a view to obtaining the assent of the offeree.
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(5)A statement made jokingly does not amount to an offer.
(6)An offer may involve a positive act or abstinence by the offeree.
(7)Mere expression of willingness does not constitute an offer.
1.7. Legal Rules Regarding Offer:
An offer to be valid must comply with the following rules:
1. Offer may be express or implied: An offer may be express or may be implied
from the conduct of the parties or circumstances of the case.
Express Offer: An express offer is made by words spoken or written.
Examples: (1) A says to B, "Will you purchase my car for Rs. 15,000? It is an oral
offer.
(2) A, through a letter asks B to buy his car for Rs. 15,000. It is a written offer.
Implied Offer: An implied offer is not made by words spoken or written. It is
implied from the conduct of the parties or from the circumstances.
2. Offer may be specific or general: A specific offer is one which is made to a
particular person. It can be accepted by the person to whom it has been made, no one
else can accept such an offer. General offer: A general offer is made to the world at
large. Therefore, it can be accepted by any person.
Example: A offer to sell his watch to B for Rs. 200. This is a specific offer made to
B. It is B alone who can accept this offer and no one else can accept this offer, i.e., C
or D cannot accept this offer.
3. Offer must give rise to legal obligation: An offer to be valid must create legal
relationship between the parties. The every purpose of entering into an agreement is
to make it enforceable at a Court of law. If the offer has not been made with this
intention it will not become a contract even if it is accepted by the party to whom it
was made.
4. Terms of an offer must be definite and certain: The terms of an offer should not
be vague or indefinite.
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Example: A has two cars - Ambassador and Toyota. He agrees to sell one of his cars
to B for Rs. 20,000. It is not clear as to which of the cars A has agreed to sell. A
might be thinking to sell the Ambassador car while B might be thinking to purchase
the Toyota car. The offer is not definite.
5. Offer must be distinguished from an invitation to offer: An offer must be
distinguished from an invitation to offer. The shopkeepers generally display their
goods in showcases with price tags. The shopkeeper in such cases is not making an
offer so that you can accept it. He is, on the other hand, inviting you to make an offer
which he may or may not accept. For example, during National Emergency essential
commodities like sugar etc. have to be sold at marked price.
6. Offer must be distinguished from a mere declaration of intention: A
declaration of intention to make an offer is not an offer. It is regarded as an invitation
to offer. An advertisement for sale in a Newspaper or Magazine etc. is not an offer for
sale.
7. Offer must be communicated: An offer must be communicated to the person to
whom it is made. A person can accept the offer only when he knows about it. If he
does not know it, he cannot accept it.
8. Communication of Special Terms: Special terms of a contract must be
communicated. Generally, such cases arise in respect of general offers, like tickets or
receipts for depositing luggage at the Railway Station or receipts for clothes given for
dry cleaning etc. The rule in these cases is that parties are not bound unless conditions
printed are properly communicated.
Example: A, and his wife took a room on hire in a hotel. After booking the room,
they entered the room and saw a notice on the wall of the room. The proprietors not
responsible for articles lost or stolen unless handed over to the manager for safe
custody."
Due to the negligence of the hotel staff, their property was stolen. Held, the proprietor
of the hotel was liable as the notice was not binding, because it came to the
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knowledge of the client only after the contract to take the hotel on hire had already
been made.
9. Offer must be made with a view to obtaining the consent of the other party to
do or to abstain from doing the act: The offer must be made with an intention to
get the consent of the other party to do or to abstain from doing the act and not simply
with a view to making known the intention of making an offer.
10. Offer should not impose an unnecessary obligation to communicate non-
acceptance: Thus an offeror cannot say that if acceptance is not communicated by
Sunday next, the offer would be considered as accepted.
11. An offer may be conditional: An offer can be made subject to a condition. In
that case offer can be accepted only subject to that condition. A conditional
offer lapses when the condition is not accepted.
12. Offer must be certain, define and not vague: No contract can come into
existence if the terms of the offer are vague or loose and indefinite. Both the parties
should clear about the contract.
13. Offer must be communicated to the offeree: There can be no offer by a person
to himself. It must always be communicated to the offeree. If there is no
communication of an offer, there is no acceptance resulting in the contract.
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knowledge of the client only after the contract to take the hotel on hire had already
been made.
9. Offer must be made with a view to obtaining the consent of the other party to
do or to abstain from doing the act: The offer must be made with an intention to
get the consent of the other party to do or to abstain from doing the act and not simply
with a view to making known the intention of making an offer.
10. Offer should not impose an unnecessary obligation to communicate non-
acceptance: Thus an offeror cannot say that if acceptance is not communicated by
Sunday next, the offer would be considered as accepted.
11. An offer may be conditional: An offer can be made subject to a condition. In
that case offer can be accepted only subject to that condition. A conditional
offer lapses when the condition is not accepted.
12. Offer must be certain, define and not vague: No contract can come into
existence if the terms of the offer are vague or loose and indefinite. Both the parties
should clear about the contract.
13. Offer must be communicated to the offeree: There can be no offer by a person
to himself. It must always be communicated to the offeree. If there is no
communication of an offer, there is no acceptance resulting in the contract.
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