CONTRACT ACT, 1832 NOTES

Agreement:
An agreement is defined in section 2(e) “Every promise and every set of promises,
forming the con-sideration for each other is an agreement”.
Now, what is promise?
Promise is defined as an accepted proposal, for section 2(b) says. “A proposal, when,
accepted becomes promise ”. Thus an agreement is an accepted proposal OR
Agreement = Offer + Acceptance
The process of definition comes down to this:
An agreement comes into existence when one party makes a proposal or offer to the
other party and that other party gives his acceptance thereto. Thus there should be
exchange of promises. There must be two or more persons to make an agreement
because one person cannot enter into an agreement with himself. There should also be
consensus-ad-idem i.e. both the parties must agree on the same thing in the same
sense.

(b) Legal Obligation:

For an agreement to become a contract, it must give rise to a legal obligation i.e. a
legal duty which is enforceable by law. The parties must have the intention to impose
a duty on the promisor to fulfil the promise and bestow a right on the promisee to
claim its fulfilment. This obligation must not be merely moral alone; it must be legal.

For example, A invites B to join his marriage party and B promises to do so. But B
eventually fails to keep up his promise. In this case, there is a full-fledged agreement
between A and B. But behind this agreement there is no intention on the part of the
parties to impose a duty on the promisor (i.e., A) and bestow a right on the promisee
(i.e. B) to claim the fulfilment of the contract. Therefore, the agreement is not
enforceable by law.

All Contracts Are Agreements But All Agreements Are Not Contracts:
Agreement is the genus of which contract is the species. An agreement is a wider term
than a contract. It may be a legal agreement (i.e. enforceable by law) or a social
agreement (i.e. not enforceable by law). Agreements relating to social matters like an
agreement to go to movie together or a visit to a hotel do not create legal obligations
between the‘parties and hence are not contracts. Only those agreements grow into
contracts, which create legal obligations.
Distinction between Agreement and Contract:

AGREEMENT CONTRACT

1. Agreement is a promise. Offer and acceptance Contract is an agreement

together constitute an agreement. enforceable by law.

2. Agreement is a wider term. It is a genus. It Contract is a specie of an

includes legal as well as social agreement. agreement. It is a narrower term.

A contract necessarily creates a

3. Agreement may not create any legal obligation.
legal obligation.

4. All agreements are not contracts. All contracts are agreements.

What type of legal obligations are dealt with by the law of contracts?
Obligations may arise from different sources. The law of contract deals only with such
legal obligations which arise from agreements. Obligations which are not contractual
in nature are outside the purview of the law contract. For example, obligation to
observe traffic rules does not fall within the scope of the Contract Act.

The other sources of obligations are: obligations under the trust law or the law of tort
or the fundamental duties under the Constitution etc. They are outside the purview of
the Contract law since they are not voluntarily created through an agreement. Salmond
has rightly observed:

“The law of contracts is not the whole law of agreements, nor is the whole law of
obligation.
It is the law of those agreements which create obligations and those obligations, which
have X their source in agreements.”

Contract creates Right in Personam:

“The law of contract creates ‘right in personam’as against ‘right in rem. ”Right in
personam means a right available against a particular person. For example, A buys TV
from B for ₹ 20,000. B has a right to recover this amount. This right can be exercised
only by B and only against A. This right of B is right in personam.
Right in rem:
Right in rem means a right available against the whole world. If A is the owner of a
house property he has the right of peaceful possession and enjoyment of the property
against the whole world.

What are the essential elements of a valid contract?

Section 10 provides “all agreements are contracts if they are made by the 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”.

The essential elements or essentials of a valid contract (or enforceable agreement) are:

 An offer or proposal by one party and an acceptance of that offer by another

party resulting in an agreement.
 An intention to create legal relations or an intent to have legal consequence.
 Free consent between the parties.
 The parties to contract are legally capable of contracting.
 The object of the contract is legal and is not opposed to public policy.
 The agreement is supported by consideration
 The agreement must not have been expressly declared to be void under the Act.
 The terms of the contract are certain.
 The agreement is capable of being performed, i.e. it is not impossible to
perform the contract.
 Where agreement is required to be in writing under any law it must be in
writing; and where both writing and registration are required by some Act or
Law, the agreement must be in writing and registered.
Offer and acceptance:
There must be a “lawful offer” and a “lawful acceptance” of the offer, thus resulting in
an agree-ment. The adjective lawful implies that the offer and acceptance must satisfy
the requirements of the Contract Act in relation thereto.

Intention to create legal relations:

There must be an intention among the parties that the agreements should be attended
by legal consequences and create legal obligations. Agreements of a social or
domestic nature do not con-template 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.

Balfour Vs Balfour, 1919, 2 KB 571:

Mr. & Mrs. Balfour who were living in Ceylon went to England. Mrs. Balfour fell ill.
Mr. Balfour had to come back to Ceylon to join his duties. However he promised to
pay 30 pounds per month to his wife. On his failure to pay, Mrs. Balfour sued him for
the recovery of the amount. It was held that it was a domestic agreement and the
husband never intended to create any legal relations out of it.
In commercial agreements an intention to create legal relations is presumed. Thus, an
agreement to buy and sell goods intends to create legal relationship, and hence is a
contract, provided other requisites of a valid contract are present.

Lawful consideration:
Consideration means ‘something in return.’ An agreement is enforceable when each of
the parties to it gives something and gets something in return. If A agrees to sell his
house to B for ₹ 5 lac, the consideration for A’s promise is ₹ 5 Lac and B’s promise is
a house. Thus consideration is the price paid by one party for the promise of the other.
The payment of money is a common form of consideration. But it may also consist of
an act, forbearance, and a promise to do or not to do something. Consideration must
be real, valuable and lawful.

Capacity of parties:
The parties to an agreement must be competent to contract; otherwise it cannot be
enforced by a court of law. Every person is competent to contract who is (a) of the age
of majority, (b) of sound mind and (c) is not disqualified from contracting by any law.
(Sec. 11)

Free consent:
The consent of the parties must be free i.e. the parties should enter into contract
voluntarily and free will. Section 14 lays down that consent is not free if it is caused
by –

 coercion
 undue influence
 fraud
 misrepresentation
 mistake
Lawful object K:
The object of the agreement should be lawful. It should be authorised or sanctioned by
law. The object of an agreement is unlawful if it is forbidden by law or is fraudulent or
is immoral or opposed to public policy. For example a “suparF contract for unlawful
recovery of money or a smuggling agreement is unlawful hence unenforceable.

Agreement not expressly declared void:

The Indian Contract Act, 1872, has expressly declared certain agreements to be not
enforceable at law, e.g. agreements in restraint of marriage, agreements in restraint of
trade, wagering agreements etc. The parties to the agreement should ensure that their
agreement do not fall in the category of these void agreements, otherwise the
agreement will not be enforceable even if all the other essentials of valid contract are
present.
Certainty:
The terms of the contract should be certain and definite and not vague. Section 29 says
“Agreements, the meaning of which is not certain or capable of being made certain are
void.” For example, A agrees to sell B “a hundred tons of oil”. There is nothing
whatever to show what kind of oil was intended. The agreement is not enforceable
because it is vague and uncertain.

Possibility of performance:
Yet another essential feature of a valid contract is that it must be capable of
performance. Section 56 lays down that “An agreement to do an act impossible in
itself is void.” If the act is impossible in itself, physically or legally, the agreement
cannot be enforced at law. For example, A agrees with B to discover treasure by
magic. The agreement is void due to impossibility.

Writing and registration:

According to the Indian Contract Act, a contract may be oral or in writing. An oral
contract is as much enforceable as a written contract. However, if there is a provision
in any law prescribing that contracts should be in writing/registered then, this
formality of writing and registration should be followed.

For example, in certain special cases the Contract Act prescribes that the contract
should be in writing or/and registered. Section 25 of the Contract Act requires that an
agreement to pay a time barred debt must be in writing and an agreement to make a
gift for natural love and affection must be in writing and registered.

Similarly, certain other Acts also require writing or/and registration to make the
agreement enforce-able by law which must be complied with. Thus (i) an arbitration
agreement must be in writing as per the Arbitration Act, 1996, (ii) an agreement for a
sale of immovable property must be in writing and registered under the Transfer of
Property Act, 1882 before they can be legally enforced, (iii) for example, contract
with the Government should be in writing. Article 299, Constitution of India.

Kinds of Contracts:
On the basis of enforceability or validity a contract can be classified under following
heads:

 Valid Contracts
 Void Agreement
 Voidable Contract
 Void Contract
 Unenforceable Contract
 Illegal or Unlawful Agreement
On the basis of Formation, a contract can be classified as:

 Express Contract
 Implied Contract
 Quasi-Contract
 E.com. Contract
On the basis of performance it can be classified as:

 Executed Contract
 Executory Contract
Executory contract can further be classified as:

 Unilateral Contract
 Bilateral Contracts

(a) Valid Contract:

A valid contract is one which contains all the essential elements of a valid contract. It
is an agreement which is binding and enforceable by law.

(b) Void agreement:

“An agreement not enforceable by law is said to be void. [Sec. 2(g)]

Features:
(1) A void agreement does not give rise to any legal consequences. It is void ab-initio,
i.e. from the very beginning. If any of the essentials of a valid contract, other than free
consent, is missing, the agreement is void, i.e. it cannot be enforced at courts of law.
For example, an agreement with a minor or an agreement without consideration.

(2) Certain agreements have been expressly declared as void by the Indian Contracts
Act, in sections 11, 20, 23-30 and section 56.

(3) There cannot be restitution of benefit under a void agreement and if something has
been paid it cannot be recovered. However, when an agreement is discovered to be
void or when a contract becomes void, any person who has received any advantage
under such agreement or contract is bound to restore it, or to make compensation for
it, to the person from whom he received it. (Sec. 65).

For example, A pays B ? 50,000 in consideration of B’s promising to sell his car to
him. The car is destroyed in an accident at the time of the promise though neither
party was aware of the fact. In this case the agreement is discovered to be void and B
must repay A ₹ 50,000. It should be noted that when the agreement is known to be
void, no restitution is allowed. Thus if A pays ? 10,000 to ^B to assault. C, the money
cannot be recovered.
(c) Voidable contract
An agreement which is enforceable by law at the option of one or more of the parties
thereto, but not at the option of the other or others, is a voidable contract.” [Sec. 2(i)].

Features:
→ A voidable contract is enforceable at the option of one party. For ex. if X is forced
to sign a contract the contract is voidable at the option of X. X may either rescind
(avoid or repudiate) the contract or elect to be bound by it.

→ A voidable contract continues to be good until it is avoided by the party entitled to

do so.

→ The aggrieved party must exercise his option of rejecting the contract (i) within a
reasonable time and (ii) before the rights of third parties intervene, otherwise the
contract cannot be repudiated.

→ The party rescinding a voidable contract shall if he has received any benefit
thereunder from another party to such contract, restore such benefit, so far as may be,
to the person from whom it was received (Sec. 64)

(d) Void contract:

“A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable”. [Section 2(j)].

Features:
a. The term void contract appears to be contradictory, but it is a nice way of describing
a situation where a contract is valid in the beginning but becomes void subsequently.
Note that a Contract becomes void. it is never void ab initio.

b. A void contract is one, which was valid when it was made but becomes void later
on. For example, A agrees to supply liquor to B but before he gives delivery, the
Government declares total prohibition. The contract becomes void. A void contract is
not void from its inception and its valid and binding on the parties when originally
entered but subsequent to its formation it becomes invalid.

c. Restitution of benefit allowed when contract becomes void: According to Section

65 when a contract becomes void, the party who received any advantage under such
agreement, should restore or make compensation for it to the party from whom he
received it. For example, A takes an advance of ? 1000 for singing at a concert for B.
A is too ill to sing. A must refund to B the 1000 rupees paid in advance.

The reasons which transform a valid contract into a void contract as given in the
Contract Act are as follows:
→ Supervening impossibility (Section 56): A Contract becomes void if it becomes
impossible to perform, after it is made. A and B contracted to marry each other.
Before the time fixed for the marriage A goes mad. In this case the contract becomes
void due to subsequent impossibility.

→ Subsequent illegality (Section 56): A contract becomes void if it becomes illegal

after it is made. A agrees to sell B 100 bags of wheat at ₹ 550 per bag. Before
delivery, the government bans private trading in wheat. The contract becomes void
due to subsequent illegality.

→ Repudiation of a voidable contract: When a voidable contract is rescinded, the

contract becomes void.

→ Subsequent impossibility of contingent event (Sec. 32): A contingent contract to do

or not to do something on the happening of an uncertain future event, becomes void,
when the event becomes impossible.

→ The following are the points of differences between various types of contracts
discussed above:

Void agreement Void contract

It is not void ab-initio. Initially a valid contract comes into existence

1. It is void ab-
but it becomes void and unenforceable later on due to reasons like
initio
impossibility of performance, illegality etc.

2. No restitution of When a contract becomes void, restitution of benefit is allowed

benefit is allowed under section 65.

The legal effect of void agreements and void contract is the same. Both cannot be
enforced in a Court of Law. Note that a contract cannot be void ab-initio and only an
agreement can be void ab-initio.
Void agreement Voidable contract

It is not void ab-initio. It becomes void and

1. It is void ab-initio unenforceable only when the aggrieved party chooses to
void it.

2. No contract comes into Contract comes into existence and remains valid unless
existence it is avoided.

The party rescinding the contract shall restore the

3. No restitution of benefit is
benefit, if he has received any, to the other party under
allowed
section 64.

4. No question of If a party rightfully avoids the contract it can claim

compensation since a void compensation from other party for loss suffered by him
agreement has no legal effect. on account of nonperformance of contract.

5. A third party cannot acquire A third party acquires a valid title to the goods obtained
any title to the goods under a under a voidable contract if it has been obtained in good
void agreement. faith for a value and before the contract is avoided.

Void contract Voidable contract

1. A void contract is one which is

A voidable contract is one, which is enforceable by
valid when it is made but becomes
law at the option of one of the parties.
void later on.

2. A void contract cannot be A voidable contract can be enforced if the

enforced aggrieved party elects to carry out the contract.

A contract becomes voidable, if consent is caused

3. A contract becomes void due to
by coercion, undue influence, fraud and
certain reasons like impossibility of
misrepresentation or failure to perform at the time
performance, subsequent illegality.
fixed if time is essence of the contract.

4. Compensation is not payable In a voidable contract the aggrieved party can claim
except only when party knows
 beforehand about the impossibility
damages.
of the performance.

(e) Unenforceable contract:

An unenforceable contract is one, which suffers from some technical defect. It is valid
in itself, but Is not capable of being enforced in a court of law because of non-
observance of some technical formalities such as insufficiency of stamp, want of
registration, attestation etc.

In some cases such contracts can be enforced if their technical defects are removed,
for example, the defect of under stamping can be removed by affixing the right value
of stamps.

(f) Illegal or unlawful agreement:

An illegal agreement is one, which is contrary to law. According to section 23 an
agreement is illegal and void if its object or consideration.

 is forbidden by law, or
 is of such a nature that, if permitted, it would defeat the provisions at any law,
or
 is fraudulent, or
 involves or implies injury to the person or property of another, or
 the court regards it as immoral or opposed to public policy (Sec. 23)
An illegal agreement may attract punishment and prosecution under criminal law. An
agreement which is collateral to an illegal agreement also becomes illegal. It is like an
contagious disease and is fatal not only to the main contract but to collateral
transactions as well.

Difference between Void & Illegal agreements:

→ Scope – An illegal agreement is narrower in scope than a void agreement. All
illegal agreements are void but all void agreements are not necessarily illegal. E.g. an
agreement with a minor is void, but not illegal.

→ Collateral Transactions – When an agreement is illegal, other agreements which

are incidental or collateral to it are also tainted with illegality, hence void.

Example:
India and Pakistan are playing test match in Nagpur. X of Nagpur, agrees to pay ₹ 1
lac to Y, if India wins. The match is won by India and in order to pay Y, X borrows ₹
1 lac from Z, who is aware of the purpose.
The agreement between X and Y is void being wagering (betting) agreement and it is
also illegal in Maharashtra. The agreement between X and Z being collateral
agreement is also void because the main agreement is between X and Y is illegal.

→ Restitution – In the case of illegal agreement, no right/remedy is available to either

party. Hence money paid under an illegal agreement cannot be recovered. Under sec.
65 if an agreement is discovered to be void any person who has received
advantage/benefit must restore it or make compensation for it.

→ Punishment – In case of an illegal agreement the parties may be punished under the
criminal law, in case of a void agreement (which is not illegal) there is no such
punishment.

(g) Express contract:

An express contract is created by the words of the parties, whether oral or written.
Section 9 of the Act provides that if a proposal or acceptance of any promise is made
in words the promise is said to be express. For example: A tells B that he offers to sell
his house for ₹ 20 lakhs and B replies that he accepts the offer.

(h) Implied contract:

An implied contract is created by implication of law or by the conduct of the parties.
For example; A coolie in uniform picks up the luggage of Mr. S to be carried out of
the railway station without being asked by S and S allows him to do so. Here, S is
compelled to pay to the coolie for his services.

Tacit Contracts: Tacit means Silent. These are the contracts that are inferred through
action of the conduct of the parties without any words spoken or written. For example;
Mr. V steps into a bus to go to a certain location. V is bound to pay the fare, although
he has not in words promised to do so. Other examples of Tacit contracts are obtaining
cash from an ATM, sale by fall of hammer at an auction sale etc. Tacit contracts are
not separate forms of contracts but they fall within the scope of implied contracts.

(i) Quasi-Contract:
Quasi contract is a contract in which there is no intention on the part of either party to
make a contract but law imposes a contract upon parties. These are not actual
contracts but they resemble a contract which is created by law under certain
circumstances. Here, law creates legal rights and obligations when there is no real
contract. For example; obligation of finder of lost goods to return them or liability of
person whom money is paid by,mistake to repay it back.

(j) E-Com Contract:

These are also known as e-commerce contracts, EDI contracts, Cyber contracts,
mouse click contracts or e-contracts. These contracts are created by parties using
electronic means such as email. Different parties create networks which are linked to
other networks through Electronic Data Interchange (EDI). When you buy a mobile
phone from an online shopping website or through a mobile application, you enter into
an e-contract.

(k) Executed contracts:

An executed contract is one that has been performed by all parties. A buys a TV set
from B for ₹ 20,000. A pays the price and B delivers the TV. It is an executed
contract. Both the parties have performed their respective obligations.

(l) Executory contracts:

An executory contract is one where both the parties have still to perform their
respective contractual obligations. A contract may be partly executed and partly
executory. For example: A contracts to sell and deliver a TV to B for ₹ 20,000 to be
paid in 3 weeks. A delivers the TV. The contract is executed as to A, executory as to
B, as B has not yet paid the agreed price.