MODULE 1

Introduction to Contracts
The main source of law that applies to contracts is common law (judge-made law). Contracts are
in every aspect of our everyday lives. When you rent a home, you have to abide by the terms of a
lease. If you have a mortgage on your home, you essentially have a contract with your bank to
pay back the money they lent you. When you go to work, the terms and conditions of your
employment are likely outlined in a written employment contract. You are under a contract
whenever you use your mobile phone or queue up your favorite show on your television
subscription service. By the end of today, you will probably enter into some more contracts. Did
you buy a coffee in the morning or grab some groceries? Work out at a gym? How about open up
your web browser to read the news? Have you done some online shopping? All of these activities
are governed by contracts.
What is a contract?
A contract is a type of agreement where there is an exchange of legally enforceable promises
between parties. To create a legally-binding contract, there must be 6 essential elements:

1. There must be an offer where one party is willing to enter into an agreement with another
party.
2. There must be an acceptance where one party signifies their willingness to enter into a
contract with the party making the offer. An offer can be accepted by words or actions.
3. There must be consideration given by each party. Consideration is a right, interest, profit
or benefit experienced by one party with some detriment, forbearance, loss or
responsibility experienced by another party. An example of consideration between parties
is one party paying money and the other party providing a service.
4. Parties to a contract must intend for the agreement to become binding when it is
accepted by the other party.
5. Generally, only parties who are privy to (named in) a contract can sue or be sued on the
contract. Third party rights are usually not recognized except in specific circumstances.
6. There must be certainty of terms between the parties to the contract. Each party must
know what the terms of the contract are.
For each of these elements, there are additional rules that have been developed in case law.
While we won’t be going into further details about the elements of a contract in this article, what
you should know is that the elements of a contract often overlap. For example, the rules of
certainty of terms and the rules of offer and acceptance overlap.

What does a contract look like?

A contract is often in the form of a written agreement between parties. Contracts can also be in
the form of an oral agreement but oral agreements can be much harder to prove when a dispute
arises.

A typical form of a written contract contains information such as:

 the names of the parties to the contract;

 when and where the contract was made;
 terms and conditions that must be met by the parties;
 what service, product or good is provided;
 what is being exchanged (e.g., money) for the service, product or good that is provided;
 an acknowledgment that the parties agree to the terms in the contract; and
 the signature of the parties agreeing to the contract.

For example, when your employer offered you your job, they may have sent you an offer letter.
This letter would have set out the name of your employer, your name, your salary, the number of
holidays you get, your job description and duties, and any other terms of the job. This is a
contract.

What laws apply to contracts?

The main source of law that applies to contracts is common law (judge-made law). The general
rules on agreements and contract theory comes from the decisions of judges in past contract
dispute cases, many of which come from England. While our body of knowledge in contract law
in Canada has its roots in English case law, it has evolved over the years in the Canadian courts
to suit our circumstances. In Canada, the Supreme Court of Canada has the ultimate authority in
making binding decisions that Canadian courts must follow in contract dispute cases.
A contract is a type of agreement where there is an exchange of legally enforceable promises
between parties. There is some legislation (parliament or legislative assembly-made law) that
applies to particular types of contracts. However, the legislation is usually limited to setting out
what the default rules are for the particular type of contract. There are varying degrees on how
far legislation goes in setting out the “default rules” for a particular type of contract.
For example, the Residential Tenancies Act (RTA) applies to residential leases. If there’s an
inconsistency between the RTA and a residential lease, then the terms in the Residential
Tenancies Act will override the inconsistent terms of the lease. The RTA doesn’t go as far as
setting out what information must be in a lease. On the other hand, the Consumer Protection Act,
which applies to direct sales contracts, outlines specific information that must be in a direct sales
contract –for example, a detail description of goods, a statement of cancellation rights, etc.

The Indian Contract Act was enacted in 1872 and came into force on 1st September 1872. The
word ‘contract’ has been derived from the Latin word ‘contructus’ which means ‘to work on
contract’. The law of contract is based on the principle of ‘pacta sunt servanda’ which means
‘agreements must be kept’.

Section 2(h) of the Indian Contract Act 1872 defines the term ‘contract’ as an ‘agreement
enforceable by law’. As per section 2(e) every promise and every set of promises forming
consideration for each other is called an agreement. A promise is an accepted proposal.

An agreement becomes a valid contract when the following essential conditions are satisfied:

1. Offer and acceptance

2. Intention to create legal obligations

3. Lawful consideration

4. Contractual capacity

5. Free consent

6. Lawful object
7. Must not be expressly declared as void

8. Certain terms of the contract

9. Legal formalities

TYPES OF CONTRACT

Contracts may be classified on the basis of enforce-ability, mode of creation, extent of execution
or the form of the contract as follows:

 Contracts on the basis of enforce-ability: a contract on the basis of enforce-ability can be of

the following kind:

1. Valid contract

2. Voidable contracts

3. Void agreement

4. Unenforceable contract

5. Illegal agreement

 Contract on the basis of mode of creation: a contract on the basis of mode of creation can
be of the following kind:

1. Express contract

2. Implied contracts

3. Quasi contract

 Contract on the basis of extent of execution: a contract on the basis of extent of execution
can be of the following kind:

1. Executed contracts

2. Executory contract
3. Unilateral contract

4. Bilateral contract

 Contract on the basis of form: a contract on the basis of form can be of the following kind:

1. Ordinary contract

2. Standard contract

OFFER

Section 2(a) of the Indian Contract Act 1872 defines proposal as ‘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 to such act or abstinence, he is said to make a proposal’.

As per section 2(a) an offer or proposal has the following essential ingredients:

1. One person signifies to another

2. His willingness to do or to abstain from anything

3. With a view to obtain an assent thereto

The person who makes the proposal or offer is called the promisor or offeror and the person on
whom the proposal is made is called the promisee or offeree.

Following are the essential conditions for a valid offer:

1. Intention to create legal obligation

2. Express or implied

3. Certainty of terms

4. Silence as acceptance

5. Expression of willingness to do or to abstain from anything

6. General or specific: there are two kinds of offers viz. general and specific. A specific offer is
made to a specific person or specific group of persons and it can be accepted only by the
person(s) to whom it is made. A general offer is made to public or world at large and it can be
accepted by a definite person who comes forward and performs the requisite conditions.
However, the communication of acceptance is not necessary in such cases.

7. Offer must be communicated: communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made. This may be express or implied.

8. Cross offers: when two parties make identical offers to each other, in ignorance of each
other’s offer, the offers are termed as ‘cross offers’. Such offers do not constitute acceptance
of one’s offer by the other thus they do not lead to a completed agreement.

9. Invitation to offer: in a valid offer there is an expression of willingness to do or abstain from

doing an act with a view of obtaining assent from the other while in case of invitation of offer
a party without expressing his final willingness proposes certain terms on which he is willing
to negotiate. There in an invitation to offer the party does not make an offer but invites the
other party to make an offer on those terms.

10. Special terms and conditions: the special terms and conditions of the contract must be
specifically communicated to the party in order to make him bound by the same.

ACCEPTANCE

Section 2(b) of the Indian Contract Act 1872 defines acceptance as ‘When the person to whom
the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal,
when accepted, becomes a promise’.

Following are the essential requirements of a valid acceptance:

1. Oferee must signify his assent or communicate the acceptance. Acceptance may be in the
form of express words written or spoken or may be signified through conduct i.e. implied.

2. Acceptance must be specifically communicated to the offeror himself or his authorized agent

3. The communication of acceptance should be from a person who has the authority to accept.
4. Acceptance must be made in the manner prescribed by the offeror. Where no mode of
acceptance is prescribed it must be made within a reasonable time and manner

5. To convert a proposal into a promise the acceptance must be absolute and unqualified i.e.
without any qualification and condition.

The communication of a proposal is complete when it comes to the knowledge of the person to
whom it is made. The communication of acceptance is complete against the proposer when it is
put in course of transmission to him, so as to be out of the power of the acceptor. The
communication of acceptance against the acceptor gets complete when the proposer comes to
know about the acceptance. A proposal may be revoked at any time before the communication of
acceptance is complete as against the proposer but not afterwards. Communication of revocation
is complete against the person who makes it when it is put into a course of transmission to the
person to whom it is made so as to be out of the power of the person who makes it. The
communication of revocation is complete against the person to whom it is made when it comes
to his knowledge.

Place of acceptance- When the contract is made through post the place of contract shall be the
place of acceptance i.e. from where the letter of acceptance is posted. The place of contract in
case of a contract on phone shall be where the acceptance is heard. The communication through
e-mail shall follow the same rules as that of communication through post.

CONSIDERATION

Section 2(d) of the Indian Contract Act 1872 defines consideration as ‘When, at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from doing, something, such act or
abstinence or promise is called a consideration for the promise’

Consideration is a cardinal necessity of the formation of a contract, but no consideration is

required for the discharge or modification of contract. It is the price of a promise. Consideration
may be present, past or future. Forbearance to sue constitutes a valid consideration provided the
plaintiff has a bona-fide belief that he has a reasonably good claim against the defendant.

Under the following situations an agreement made without consideration shall not be void:

 Natural love and affection

 Past voluntary service

 Time barred debt

 Absence of consideration shall not affect the validity of a gift

 No consideration is necessary to create agency.

Privity of contract

The doctrine of ‘privity of contract’ means that a contract is a contract only between the parties
and no third person can sue upon it i.e. a stranger to a contract cannot sue. Following are the
exceptions to the rule of privity of contract:

 Beneficiaries under trust or charge

 Marriage and family arrangement

 Acknowledgement or estoppel

 Undisclosed principal has the right to sue a third party subject to the rights and obligations
subsisting between the third party and agent.

 The assignee of insurance policy is entitled to sue on the contract made between the insurer
and insured.

References:

1. Harshita Gulati, Introduction to Contracts

2. Judy Feng, Introduction to Contracts