THE INDIAN CONTRACT ACT, 1872 2.

During British period; before the advent of the Indian Contract Act, the English Law was
applied in the Presidency Towns of Madras, Bombay and Calcutta under the Charter of 1726
issued by king George to the East India Company. If one of the parties of contract is from
either of the religion and other is from other religion then the law of the defendant is to be
used. This was followed in the presidency towns, but in cities outside the presidency towns,
the matters were solved on the basis of justice, equity and good conscience. This procedure
was followed till the Indian Contract Act was implemented in India.
The Law of contract: Introduction
The Law of Contract constitutes the most important branch of mercantile or commercial law.
It affects everybody, more so, trade, commerce and industry. It may be said that the contract
is the foundation of the civilized world. The law relating to contract is governed by the Indian
Contract Act, 1872. It was formed on April 25, 1872 and came into force on September 01,
1872. The preamble to the Act says that it is an Act "to define and amend certain parts of the
law relating to contract". It extends to the whole of India including the state of Jammu and
Kashmir after removal of Article – 370 of Indian Constitution.
The Act mostly deals with the general principles and rules governing contracts. The Act is
divisible into two parts. The first part (Section 1-75) deals with the general principles of the
law of contract, and therefore applies to all contracts irrespective of their nature. The second
part (Sections 124-238) deals with certain special kinds of contracts, e.g., Indemnity and
guarantee, bailment, pledge, and agency.
As a result of increasing complexities of business environment,
innumerable contracts are entered into by the parties in the usual
course of carrying on their business. ‘Contract’ is the most usual
method of defining the rights and duties in a business
transaction. This branch of law is different from other branches
of law in a very important aspect. It does not prescribe so many rights and duties, which the
law will protect or enforce; instead it contains a number of limiting principles subject to which
the parties may create rights and duties for themselves. The Indian Contract Act, 1872 codifies
the legal principles that govern ‘contracts’. The Act basically identifies the ingredients of a
legally enforceable valid contract in addition to dealing with certain special type of contractual
relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent
contracts etc. It basically defines the circumstances in which promises made by the parties to
a contract shall be legally binding on them.
This unit refers to the essentials of a legally enforceable agreement or contract. It sets out
rules for the offer and acceptance and revocation thereof. It states the circumstances when an
agreement is voidable or enforceable by one party only, and when the agreements are void,
i.e. not enforceable at all.

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 2.4 BUSINESS LAWS

1.1 WHAT IS A CONTRACT?

The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as-
“an agreement enforceable by law”.
The contract consists of two essential elements:
(i) an agreement, and
(ii) its enforceability by law.
(i) Agreement - The term ‘agreement’ given in Section 2(e) of the Act is defined
as- “every promise and every set of promises, forming the consideration for
each other”.
To have an insight into the definition of agreement, we need to understand
promise.
Section 2 (b) defines promise as- “when the person to whom the proposal is
made signifies his assent there to, the proposal is said to be accepted. Proposal
when accepted, becomes a promise”.
The following points emerge from the above definition:
1. when the person to whom the proposal is made
2. signifies his assent on that proposal which is made to him
3. the proposal becomes accepted
4. accepted proposal becomes promise
Thus, we say that an agreement is the result of the proposal made by one party
to the other party and that other party gives his acceptance thereto of course
for mutual consideration.

Agreement = Offer/Proposal + Acceptance + Consideration

(ii) Enforceability by law – An agreement to become a contract must give rise to
a legal obligation which means a duly enforceable by law.

Thus, from above definitions it can be concluded that –

Contract = Agreement + Enforceability by law
On elaborating the above two concepts, it is obvious that contract comprises of an agreement
which is a promise or a set of reciprocal promises, that a promise is the acceptance of a
proposal giving rise to a binding contract. Further, section 2(h) requires an agreement capable
of being enforceable by law before it is called ‘contract’. Where parties have made a binding
contract, they created rights and obligations between themselves.

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 THE INDIAN CONTRACT ACT, 1872 2.5

Example 1: A agrees with B to sell car for ` 2 lacs to B. Here A is under an obligation to give
car to B and B has the right to receive the car on payment of ` 2 lacs and also B is under an
obligation to pay ` 2 lacs to A and A has a right to receive ` 2 lacs.

Example 2: Father promises his son to pay him pocket allowance of Rs. 500 every month. But
he refuses to pay later. The son cannot recover the same in court of law as this is a social
agreement. This is not created with an intention to create legal relationship and hence it is
not a contract.

So, Law of Contract deals with only such legal obligations which has resulted from
agreements. Such obligation must be contractual in nature. However, some obligations are
outside the purview of the law of contract.

Example 3: An obligation to maintain wife and children, an order of the court of law etc. These
are status obligations and so out of the scope of the Contract Act.
Difference between Agreement and Contract
Basis of differences Agreement Contract
Meaning Every promise and every set Agreement enforceable by law.
of promises, forming the (Agreement + Legal enforceability)
consideration for each other.
(Promise + Consideration)
Scope It’s a wider term including It is used in a narrow sense with the
both legal and social specification that contract is only
agreement. legally enforceable agreement.
Legal obligation It may not create legal Necessarily creates a legal
obligation. An agreement obligation. A contract always
does not always grant rights grants certain rights to every party.
to the parties
Nature All agreement are not All contracts are agreements.
contracts.

1.2 ESSENTIALS OF A VALID CONTRACT

Essentials of a valid contract

As given by Section 10 of Indian Not given by Section 10 but are also

Contract Act, 1872 considered essential
1 Agreement 1 Two parties
2 Free consent 2 Intention to create legal relationship

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 2.6 BUSINESS LAWS

3 Competency of the parties 3 Fulfilments of legal formalities

4 Lawful consideration 4 Certainty of meaning
5 Legal object 5 Possibility of performance
6 Not expressly declared to be void [as per 6 -
Section 24 to 30 and 56]

In terms of Section 10 of the Act, “all agreements are contracts if they are made by the
free consent of the parties competent to contract, for a lawful consideration and with a
lawful object and are not expressly declared to be void”.
Since section 10 is not complete and exhaustive, so there are certain other sections which also
contains requirements for an agreement to be enforceable. Thus, in order to create a valid
contract, the following elements should be present:
1. Two Parties: One cannot contract with himself. A contract involves at least two parties-
one party making the offer and the other party accepting it. A contract may be made
by natural persons and by other persons having legal existence e.g. companies,
universities etc. It is necessary to remember that identity of the parties be
ascertainable.
Example 4: To constitute a contract of sale, there must be two parties- seller and
buyer. The seller and buyer must be two different persons, because a person cannot
buy his own goods.
In State of Gujarat vs. Ramanlal S & Co. when on dissolution of a partnership, the
assets of the firm were divided among the partners, the sales tax officer wanted to tax
this transaction. It was held that it was not a sale. The partners being joint owner of
those assets cannot be both buyer and seller.
2. Parties must intend to create legal obligations: There must be an intention on the
part of the parties to create legal relationship between them. Social or domestic type
of agreements are not enforceable in court of law and hence they do not result into
contracts.
Example 5: A husband agreed to pay to his wife certain amount as maintenance every
month while he was abroad. Husband failed to pay the promised amount. Wife sued
him for the recovery of the amount. Here, in this case, wife could not recover as it was
a social agreement and the parties did not intend to create any legal relations. (Balfour
v. Balfour)
Example 6: Mr. Lekhpal promises to pay ` 5 lakhs to his son if the son passes the CA
exams. On passing the exams, the son claims the money. Here, the son could not
recover as it was a social agreement.

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 THE INDIAN CONTRACT ACT, 1872 2.7

Example 7: A sold goods to B on a condition that he must pay for the amount of goods
within 30 days. Here A intended to create legal relationship with B. Hence the same is
contract. On failure by B for making a payment on due date, A can sue him in the court
of law.
3. Other Formalities to be complied with in certain cases: A contract may be written
or spoken. As to legal effects, there is no difference between a written contract and
contract made by word of mouth. But in the interest of the parties the contract must
be written. In case of certain contracts some other formalities have to be complied with
to make an agreement legally enforceable.
For e.g. Contract of Insurance is not valid except as a written contract. Further, in case
of certain contracts, registration of contract under the laws which is in force at the
time, is essential for it to be valid, e.g. in the case of immovable property.
Thus, where there is any statutory requirement that any contract is to be made in
writing or in the presence of witness, or any law relating to the registration of
documents must be complied with.
4. Certainty of meaning: The agreement must be certain and not vague or indefinite.
Example 8: A agrees to sell to B a hundred tons of oil. There is nothing certain in order
to show what kind of oil was intended for.
Example 9: XYZ Ltd. agreed to lease the land to Mr. A for indefinite years. The contract
is not valid as the period of lease is not mentioned.
5. Possibility of performance of an agreement: The terms of agreement should be
capable of performance. An agreement to do an act impossible in itself cannot be
enforced.
Example 10: A agrees with B to discover treasure by magic. The agreement cannot be
enforced as it is not possible to be performed
Now, according to Section 10 of the Indian Contract Act, 1872, the following are the essential
elements of a Valid Contract:
I. Offer and Acceptance or an agreement: An agreement is the first essential element
of a valid contract. According to Section 2(e) of the Indian Contract Act, 1872, “Every
promise and every set of promises, forming consideration for each other, is an
agreement” and according to Section 2(b) “A proposal when accepted, becomes a
promise”. An agreement is an outcome of offer and acceptance for consideration.
II. Free Consent: Two or more persons are said to consent when they agree upon the
same thing in the same sense. This can also be understood as identity of minds in
understanding the terms viz consensus ad idem. Further such consent must be free.

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Consent would be considered as free consent if it is not caused by coercion, undue

influence, fraud, misrepresentation or mistake.
Example 11: A, who owns two cars is selling red car to B. B thinks he is purchasing the
black car. There is no consensus ad idem and hence no contract.
To determine consensus ad idem the language of the contract should be clearly drafted.
Thus, if A says B “Will you buy my red car for ` 3,00,000?“. B says “yes” to it. There is
said to be consensus ad idem i.e. the meaning is taken in same sense by both the
parties.
Example 12: A threatened to shoot B if he (B) does not lend him ` 2,00,000 and B
agreed to it. Here the agreement is entered into under coercion and hence not a valid
contract.
(Students may note that the terms coercion, undue influence, fraud, misrepresentation,
mistake are explained in the Unit-3)
III. Capacity of the parties: Capacity to contract means the legal ability of a person to
enter into a valid contract. Section 11 of the Indian Contract Act specifies that every
person is competent to contract who
(a) is of the age of majority according to the law to which he is subject and
(b) is of sound mind and
(c) is not otherwise disqualified from contracting by any law to which he is subject.
A person for being competent to contract must fulfil all the above three qualifications.
Qualification (a) refers to the age of the contracting person i.e. the person entering
into contract must be of 18 years of age. Persons below 18 years of age are considered
minor, therefore, incompetent to contract.
Qualification (b) requires a person to be of sound mind i.e. he should be in his senses
so that he understands the implications of the contract at the time of entering into a
contract. A lunatic, an idiot, a drunken person or under the influence of some
intoxicant is not supposed to be a person of sound mind.
Qualification (c) requires that a person entering into a contract should not be
disqualified by his status, in entering into such contracts. Such persons are an alien
enemy, foreign sovereigns, convicts etc. They are disqualified unless they fulfil certain
formalities required by law.
Contracts entered by persons not competent to contract are not valid.
IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in return’. A valuable
consideration in the sense of law may consist either in some right, interest, profit or
benefit accruing to one party, or some forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other.

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 THE INDIAN CONTRACT ACT, 1872 2.9

Example 13: A agrees to sell his books to B for ` 100.

B’s promise to pay ` 100 is the consideration for A’s promise to sell his books.
A’s promise to sell the books is the consideration for B’s promise to pay ` 100.
V. Lawful Consideration and Object: The consideration and object of the agreement
must be lawful.
Section 23 states that consideration or object is not lawful if it is prohibited by law, or
it is such as would defeat the provisions of law, if it is fraudulent or involves injury to
the person or property of another or court regards it as immoral or opposed to public
policy.
Example 14: ‘A’ promises to drop prosecution 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.
Example 15: A agrees to sell his house to B against 100 kgs of cocaine (drugs). Such
agreement is illegal as the consideration is unlawful.
VI. Not expressly declared to be void: The agreement entered into must not be which the
law declares to be either illegal or void. An illegal agreement is an agreement expressly
or impliedly prohibited by law. A void agreement is one without any legal effects.
Example 16: Threat to commit murder or making/publishing defamatory statements
or entering into agreements which are opposed to public policy are illegal in nature.
Similarly, any agreement in restraint of trade, marriage, legal proceedings, etc. are
classic examples of void agreements.

1.3 TYPES OF CONTRACTS

Now let us discuss various types of contracts.

Type of Contract on the basis of

Validity or Formation Performance

enforceability
Express contract
Valid contracts Executed contract
Implied contract
Void contracts Executory contract
Quasi-contract
Voidable contracts Unilateral Bilateral
E-contracts contract contract
Illegal agreements

Unenforceable contracts

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