CHAPTER 1 THE INDIAN CONTRACT ACT, 1872

UNIT – 1
NATURE OF CONTRACT

CONTRACT

Elements of Contract Essential of a valid Contract Types of Contracts

Agreement Enforceability at Law

Offer Acceptance

Legal Rules of Kinds of Essentials of a Communication Legal Rules of Communication

a valid offer offer proposal of offer a valid acceptance of acceptance

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 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.
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
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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.

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
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 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
(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 = Accepted proposal/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.

Example 1: A agrees with B to sell car for Rs. 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 Rs. 2 lacs and also B is under an
obligation to pay Rs. 2 lacs to A and A has a right to receive Rs. 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.

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 Difference between Agreement and Contract
Basis of differences Agreement Contract
Meaning Every promise and every set of Agreement enforceable by law.
promises, forming the consideration (Agreement + Legal enforceability)
for each other.
(Offer + Acceptance)
Scope It’s a wider term including both It is used in a narrow sense with
legal and social agreement. the specification that contract is
only legally enforceable agreement.
Legal obligation It may not create legal obligation. Necessarily creates a legal
An agreement does not always obligation. A contract always grants
grant rights to the parties certain rights to every party.
Nature All agreement are not contracts. All contracts are agreements.

ESSENTIALS OF A VALID CONTRACT

As given by Section 10 of Not given by Section 10
Indian Contract Act, 1872 but are also considered essential
1. Agreement 1. Two parties
2. Free consent 2. Intention to create legal relationship
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 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 others sections which also
contains requirements for an agreement to be enforceable. Thus, in order to create a valid

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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: Lekhpal promises to pay Rs. 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.
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
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 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.

Essential elements of a valid contract