Contents

What is A Contract.................................................................................................................................2
Defination of a contract.........................................................................................................................2
Is every a Contract? Agreement............................................................................................................3
Essentials of a valid contract.................................................................................................................5
Agreement.............................................................................................................................................6
Intention to create legal relationship :..................................................................................................7
Competency of parties :........................................................................................................................8
Free Consent :.......................................................................................................................................9
Lawful consideration :.........................................................................................................................10
Agreements not expressly declared void :...........................................................................................11
Certainty and possibility of performance :..........................................................................................12
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What is A Contract

We enter into contracts day after day. Taking a seat in a bus amounts to
entering
into a contract. When you put a coin in the slot of a weighing machine, you
have entered
into a contract. You go to a restaurant and take meals, you have entered into a
contract. In
such cases, we do not even realize that we are making a contract. In the case
of people engaged in trade, commerce and industry, they carry on business by
entering into contracts. The law relating to contracts is to be found in the
Indian Contract Act, 1872. The law of contracts differs from other branches of
law in a very important respect. It does not lay down so many precise rights
and duties which the law will protect and enforce; it contains rather a number
of limiting principles, subject to which the parties may create rights and duties
for themselves, and the law will uphold those rights and duties. Thus, we can
say that the parties to a contract, in a sense make the law for themselves. So
long as they do not transgress some legal prohibition, they can frame any rule
they like in regard to the subject matter of their contract and the law will give
effect to their contract. Before we look at essentials of a valid contract, its
important to see what is the definition of a contract and what exactly
constitutes a legal contract.

Defination of a contract

A contract is a legally binding agreement, that is, an agreement which will be

enforced by the courts. Salmond defines contract as, “an agreement creating
and defining obligation between the parties.” Halsbury defines a contract to
be, “an agreement between two or more persons which is intended to be
enforceable at law and is constituted by the acceptance by one party of an
offer made to him by the other party to do or abstain from doing some act.”
The definition of the term ‘contract’ given in the Act is based on the definition
given by Halsbury. Section 2(h) of the Indian Contract Act defines a contract as,
“An agreement which is enforceable by law.” This definition has two important
components which constitute the basis for a contract. They are :
● Agreement :
An agreement gives birth to a contract. An agreement is defined as,
“every promise and every set of promises forming consideration for each
other.” (Section 2(e)). A proposal when accepted becomes a promise.
Thus an agreement is an accepted proposal. An agreement comes into
existence only when one party makes a proposal or offer to the other
party and the other party signifies his assent thereto

● Legal Obligation:
Although every contract is an agreement, there are many kinds of
agreements which are not contracts. An agreement to become a
contract must give rise to a legal obligation. Obligation is an undertaking
to do or to abstain from doing some definite act. The obligation must be
such as is enforceable by law. In other words, it must be a legal
obligation and not merely moral, social or religious.

Is every a Contract? Agreement

To take an example, “Please, come to my house”, says P to D, “and we

shall go out for a walk together”. D came to the house of P but P could
not leave the house because of some important engagement. D cannot
sue P in damages for his not fulfilling the promise, the reason being that
there had been no intention between D and P to create any legal
obligation by the engagement as made between them. In the
circumstances, there was, in the eye of law no contract between P and D
Another kind of obligation which does not constitute a contract is the
arrangement made between husband and wife. Such agreements are
purely domestic and are not intended to create legal relationship. The
Leading case on this point is Balfour V. Balfour.
The points decided were :
 Agreements which do not create legal relations are not contracts.
Agreement between husband and wife in domestic affairs is not a
contract.
Essentials of a valid contract
We know that there are two elements of a contract :
(1) an agreement;
(2) legal obligation.
Section 10 of the Act provides for some more elements which are
essential in order to constitute a valid contract. It reads as follows : “All
agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful consideration and with a lawful
object and are not hereby expressly declared to be void.” Thus the
essential elements of a valid contract can be explained as follows :

Agreement
Intention to create legal obligation
Competancy of Parties
Free consideration
Lawful Consideration
Agreement not expressly not declared void
Agreement :
As already mentioned, to constitute a contract there must be an
agreement. An agreement is composed of two elements – offer and
acceptance. The party making the offer is known as the offeror, the
party to whom the offer is made is known as the offeree. Thus, there are
essentially to be two parties to an agreement. They both must be
thinking of the same thing in the same sense. In other words, there must
be consensusad-idem. An offer to be valid must fulfill certain conditions,
such as it must intend to create legal relations, its terms must be certain
and unambiguous, it must be communicated to the person to whom it
made, etc. An acceptance to be valid must fulfill certain conditions, such
as it must be absolute and unqualified, it must be made in the
prescribed manner, it must be communicated by an authorised person
before the offer lapses. Thus, where ‘A’ who owns 2 cars ‘X’ and ‘Y’
wishes to sell car ‘X’ for Rs.30,000. ‘B’, an acquaintance of ‘A’ does not
know that ‘A’ owns car ‘X’ also. He thinks that ‘A’ owns only car ‘Y’ and is
offering to sell the same for the stated price. He gives his acceptance to
buy the same. There is no contract because the contracting parties have
not agreed on the same thing at the same time, ‘A’ offering to sell his car
‘X’ and ‘B’ agreeing to buy car ‘Y’. There is no consensus-ad-idem.
Intention to create legal relationship :
As already mentioned there should be an intention on the part of the
parties to the agreement to create a legal relationship. An agreement of
a purely social or domestic nature is not a contract. However, even in
the case of agreements of purely social or domestic nature, there may
be intention of the parties to create legal obligations. In that case, the
social agreement is intended to have legal consequences and, therefore,
becomes a contract. Whether or not such an agreement is intended to
have legal consequences will be determined with reference to the facts
of the case. In commercial and business agreements the law will
presume that the parties entering into agreement intend those
agreements to have legal consequences. However, this presumption
may be negatived by express terms to the contrary. Similarly, in the case
of agreements of purely domestic and social nature, the presumption is
that they do not give rise to legal consequences. However, this
presumption is rebuttable by giving evidence to the contrary, i.e., by
showing that the intention of the parties was to create legal obligations.
Example: There was an agreement between Rose Company and
Crompton Company, whereof the former were appointed selling agents
in North America for the latter. One of the clauses included in the
agreement was : ‘This arrangement is not…. a formal or legal agreement
and shall not be subject to legal jurisdiction in the law courts.” Held
that : This agreement was not a legally binding contract as the parties
intended not to have legal consequences (Rose and Frank Co. v. J.R.
Crompton and Bros. Ltd. (1925) A.C. 445).
Competency of parties :
The parties to the agreement must be competent to contract. If either
of the parties to the contract is not competent to contract, the contract
is not valid. According to Section 11 following are the persons who are
competent to contract – who are of the age of majority according to the
law to which they are subject; who are of sound mind; :14: who are not
disqualified from contracting by any law to which they are subject.
Examples A patient in a lunatic asylum who is at intervals of sound mind
may make a contract during those intervals. A sane man, who is delirious
from fever or who is so drunk that he cannot understand the terms of a
contract, or form a rational judgment as to its effect on his interests,
cannot contract whilst such delirium or drunkenness lasts.
Free Consent :
An agreement must have been made by free consent of the parties. A
consent may not be free either on account of mistake in the minds of
the parties or on account of the consent being obtained by some unfair
means like coercion, fraud, misrepresentation or undue influence. In
case of mutual mistakes, the contract would be void, while in case the
consent is obtained by unfair means, the contract would be voidable.
Examples X has two scooters, one is blue and the other green. He wants
to sell his blue scooter. Y who knows of only X’s green scooter offers to
purchase X’s scooter for Rs. 5,000. X accepts the offer thinking it to be an
offer for his blue scooter. Held, consent is not free since both the parties
are not understaning the same thing in the same sense. An old man
executed a sale deed thinking it to be a power of attorney and the deed
before execution was not ready over to him. Held, there was no free
consent of the man and the contract is not binding on him.
Lawful consideration :
All contracts must by supported by consideration. Gratuitous promises
are not enforceable at law. An agreement made for an unlawful
consideration is void. Lawful consideration requires both the presence of
consideration and the lawfulness of consideration. :15: Example : A
promises to obtain for B an employment in public service and B
promises to pay Rs. 1,000 to A. The agreement is void as the
consideration for it is unlawful. Lawful object : The object of an
agreement must be lawful. Object has nothing to do with consideration.
It means the purpose or design of the contract. Thus, when one hires a
house for use as a gambling house, the object of the contract is to run a
gambling house. According to Section 23, the object is said to be
unlawful if – it is forbidden by law; it is of such nature that if permitted it
would defeat the provisions of any law; it is fraudulent; it involves an
injury to the person or property of any other; the court regards it is
immoral or opposed to public policy. Examples A, B and C enter into an
agreement for a division among them of gains acquired, or to be
acquired, by them by fraud. The agreement is void, as its object is
unlawful (Illustration (e) to Sec. 23). A promises to obtain for B an
employment in the public service, and B promises to pay Rs. 1,000 to A.
The agreement is void as the consideration for it is unlawful (Illustration
(f) to Sec. 23). A promises B to drop a prosecution which he has
instituted against B for robbery, and B promises to restore the value of
the things taken. The agreement is void, as its object is unlawful
(Illustration (h) to Sec. 23).
Agreements not expressly declared void :
The agreement must not have been declared to be expressly void.
Agreements mentioned in sections 24 to 30 have been expressly
declared to be void. Under these provisions, agreement in restraint of
marriage, agreement in restraint of legal proceedings, agreement in
restraint of trade and agreement by way of wager have been expressly
declared void. Examples A makes a contract with B that he will marry
nobody except B, and if he marries somebody else, he will pay a certain
sum of money to B, the contract is void; because there is no promise of
marriage on either side and the agreement is purely restrictive (Lowe v.
Peers). An agreement made by a married man that after the death of his
wife, he will marry the plaintiff is void ; because it interferes with the
security of marriage. Where X and Y enter into an agreement which
provides that if England’s cricket team wins the test match, X will pay Y
Rs.200, and if it loses, Y will pay Rs.200 to X. Nothing can be recovered
by the winning party under the agreement as it is by the winning party
under the agreement as it is a wagering contract. Where A and B enter
into a wagering agreement and each deposits Rs.200 with C instructing
him to pay or give the total sum to the winner, no suit can be brought by
the winner for recovering the bet amount from C, the stake-holder.
Further, if C had paid the sum to the winner, the loser can not bring a
suit, for recovering his Rs.200, either against the winner or against C, the
stake-holder, even if C had paid after the loser’s definite instructions not
to pay.
Certainty and possibility of performance :
The terms of the contract must be precise and certain. It cannot be left
vague. A contract may be void on the ground of uncertainty. Thus a
purported acceptance of an offer to buy a lorry ‘on-hire-purchase terms’
does not constitute a contract if the hire-purchase terms are never
agreed. (Scammell (G) and Nephew Ltd. v. Ouston (1941) A.C. 251).
Similarly an agreement ‘subject to war clause’ is too vague to be
enforceable. (Bishop and Barber Ltd. v. AngloEastern Trading and
Industrial Co. Ltd. (1944) K.B. 12). The terms of the agreement must also
be capable of performance. An agreement to do an impossible act
cannot be enforced. Legal formalities : An oral contract is a perfectly
valid contract, except in those case where writing, registration etc. is
required by some statute. In India writing is required in cases of sale,
mortgage, lease and gift of immovable property, negotiable instrument;
memorandum and articles of association of a company, etc. Registration
is required in cases of documents coming within the scope of Section 17
of the Registration Act. All the elements mentioned above must be
present in order to make a valid contract. If any one of them is absent
the agreement does not become a contract.