THE INDIAN CONTRACT ACT, 1872

UNIT -1 NATURE OF CONTRACT

 Nature of Contracts 1.
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 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.

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 1. Nature of Contracts
„ 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
WHATIS
ISAACONTRACT?
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:
1) an agreement, and
2) its enforceability by law.
A. Agreement- The term ‘agreement’ given in Section2(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

B. Enforceability by law– An agreement to become a contract must give rise to a

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 Nature of Contracts 1.
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.

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.

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.

AGREEMENT V/S CONTRACT

Basis of Agreement Contract

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

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 1. Nature of Contracts
ESSENTIALS OF A VALID CONTRACT

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

Contract Ac 1872 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 6
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 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
y his own goods.
cannot buy g
„ State of
n State
In of Gujarat
Gujarat vs.
vs. Ramanlal
RamanlalS S& &CoCo. w
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.

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 Nature of Contracts 1.
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

g
as it was a domestic agreement and the parties did not intend to create any legal
s. (Balfour
relations. (Balfour v.
v. Balfour)
Balfour)

„ Example 6: 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.

„ 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.
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 1. Nature of Contracts
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.
Example10: A agrees with B to discover treasure by magic. The agreement
cannot be enforced as it is not possible to be performed.

Essential
ESSENTIAL elements
ELEMENTS OFofAaVALID
valid contract
CONTRACT

„ According to Section 10 of the Indian Contract Act, 1872, the following are the
essential elements of a Valid Contract:
1.) Offer and Acceptance or an agreement: An agreement is the first essential
element of a valid contract.

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 Nature of Contracts 1.
„ 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.

2.) 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 a consent must be free. 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 Rs. 30000? “ and 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 Rs 2000 and B
agreed to it. Here the agreement is entered into under coercion and hence not a
valid contract.

3.) 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 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

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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.

4.) 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.

„ Example 13:- A agrees to sell his books to B for Rs 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 Rs 100.

5.) 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.

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 Nature of Contracts 1.
6.) 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.
„ Example16: 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.

TYPES OF CONTRACTS

Types of Contract on the basis of

Validity or enforceability Formation Performance

Valid Contracts Express contract Performance

Void Contracts Implied Contract Executory Contract

Voidable Contracts Quasi- Contract Unilateral Contract Bilateral Contract

Illegal Agreements Ecom.Contracts

Unenforceable
Contracts Tacit Contract

„ On the basis of the validity

1.) Valid Contract: An agreement which is binding and enforceable is a valid contract. It
contains all the essential elements of a valid contract.
„ Example17: A ask B if he wants to buy his bike for Rs.10,000. B agrees to buy bike.
It is agreement which is enforceable by law. Hence, it is a valid contract.
2.) Void Contract: Section 2 (j) states as follows: “A contract which ceases to be

enforceable by law becomes void when it ceases to be enforceable”. Thus a void

contract is one which cannot be enforced by a court of law.
„ Example18: Mr. X agrees to write a book with a publisher. Such contract is valid.
But after few days, X dies in an accident. Here the contract becomes void

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due to the impossibility of performance of the contract. Thus, a valid contract when
cannot be performed because of some uncalled happening becomes void.
„ Example 19: A contracts with B (owner of the factory) for the supply of 10 tons of
sugar, but before the supply is effected, the fire caught in the factory and everything
was destroyed. Here the contract becomes void.

„ It may be added by way of clarification here that when a contract is void, it is not a
contract at all but for the purpose of identifying it, it has to be called a [void]
contract.

3.) Voidable Contract: Section 2(i) defines that “an agreement which is enforceable by
law at the option of one or more parties thereto, but not at the option of the other
or others is a voidable contract”.
„ This in fact means where one of the parties to the agreement is in a position or is
legally entitled or authorized to avoid performing his part, then the agreement is
treated and becomes voidable.

„ Such a right might arise from the fact that the contract may have been brought
about by one of the parties by coercion, undue influence, fraud or misrepresentation
and hence the other party has a right to treat it as a voidable contract.
„ Example 20: X promise to sell his scooter to Y for Rs 1 Lac. However, the consent of
X has been procured by Y at a gun point. X is an aggrieved party and the contract is
voidable at his option but not on the option of Y. It means if X accepts the contract,
the contract becomes a valid contract then Y has no option of rescinding the contract.

4.) Illegal Contract: It is a contract which the law forbids to be made. The court
will not enforce such a contract but also the connected contracts.

„ All illegal agreements are void but all void agreements are not necessarily illegal.

„ Despite this, there is similarity between them is that in both cases they are void
ab initio and cannot be enforced by law.

„ Example 21: Contract that is immoral or opposed to public policy are illegal in nature.

Similarly, if R agrees with S, to purchase brown sugar, it is an illegal agreement.

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