Indian Contract

Act, 1872

1
Chapter – 2
Nature and Essentials of a
Contract(2.1)
Definition of Contract
 The term “Contract” in ordinary sense means an
agreement between two persons.
 The law of contract seeks to regulate the behavior of
persons who make contracts, so that any conflict
arises between these persons later, may be resolved.
Meaning of Contract:
Sec. 2 (h) defines a contract: “ An agreement
enforceable by law is a contract”.
e.g. C makes an agreement with D to sell him some
goods for Rs. 25000.
Example:

B invites a friend S to dinner. He makes elaborate

preparations. S fails to turn up for dinner and all the
preparations made by B go waste.
Since this was an agreement between the parties, B cannot
take S to court for legal action against him for breaking the
commitment to come for the dinner.

 How could it be said that the above was not a contract

although it was clearly an agreement between the two
friends?
 Agreement & its enforceability
 If we analyse the definition of Contract, we find that it consists
of two elements – (1) agreement and (2) its enforceability by
law.
 Agreement = Offer + Acceptance

 Consensus ad idem – means that the parties to the

agreement must have agreed about the subject matter of the
agreement in the same sense and at the same time.
 Eg: A, who owns two horses – Rajhans & Hansraj, is selling
Rajhans to B. B thinks he is purchasing horse Hansraj. There is
no consensus ad idem and consequently no contract.
Essential elements of a valid
Contract
1. Offer and acceptance – there must be two parties to an agreement; one
making the offer and the other accepting it.
2. Intention to create legal relationship - Court would like to measure the
degree of seriousness. Not every loose conversation, not any exchange of
pleasantries, not a casual social commitment, considered as a contract.
Ex: A husband promised to pay his wife a household allowance of $30 every
month. Later, the parties separated and the husband failed to pay the
amount. Held, agreements such as these were outside the realm of
contract altogether (Balfour v. Balfour).
3. Lawful consideration - “Something in Return”. The agreement is legally
enforceable only when both the parties give something and get something
in return.
Ex:. B promise to S that he will buy his bike for Rs.35,000.
4. Capacity of parties – competency - Everybody is able to make contract
except Minor, Person of Unsound mind, Person who are disqualified by any
other law.
 Essential elements of a valid Contract
5. Free and genuine consent - If the parties make the agreement, without
any kind of pressure or misguidance, then the agreement would be the
result of Free Consent.
The consent of the parties is said to be free when they are of the same mind
on all the material terms of the contract .
6. Lawful object – the object of the agreement should be lawful. The object
should not be illegal, immoral or opposed to public policy.
7. Agreement not declared void - (Cancelled). The agreement must not
have been expressly declared void by law in force in the country.
8. Certainty and possibility of performance - Necessary fulfillment of
certain formalities for making certain specific types of contract. Made in
written or in presence of witness.
Ex: 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 void for uncertainty.
9. Legal formalities – a contract may be made in words spoken or written.
Wherever there is a statutory requirement that a contract should be made
in writing or in the presence of witnesses or registered, the required
formalities should be complied with.
Classification of Contracts

 Contracts may be classified according to their:

(1)Validity
(2)Formation
(3)Performance
1. Classification according to validity
 A contract is based on an agreement. An agreement becomes a contract
when all the essential elements are present. In such a case, the contract
is a valid contract.
 If one or more of those elements are missing, the contract is either
voidable, void, illegal or unenforceable.
 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
other or others, is a voidable contract. Here “free consent” is missing.
Ex: A promises to sell his car to B for Rs. 20,000. His consent is obtained
by use of force. The contract is voidable at the option of A.
 Void agreement – an agreement not enforceable by law is said to
be void. It does not create any legal rights or obligations.
Ex: An agreement with a minor, it is void ab initio, i.e from the beginning.
1. Classification according to validity(contd.)

 Void contract – A contract which ceases to be enforceable by

law becomes void when it ceases to be enforceable.
Ex: A contract to import goods from a foreign country. It may
subsequently become void, when a war breaks out between importing
& exporting country.
 Illegal agreement – is one which transgresses some rule of basic
public policy or which is criminal in nature or which is immoral.
All illegal agreements are void, but all void agreements or
contracts are not necessarily illegal.
 Unenforceable contract – An unenforceable contract is one which
cannot be enforced in a Court of law because of some technical
defect such as absence of writing, etc.
 2. Classification according to
 formation
Express Contract – if terms of a contract are expressly agreed upon (whether spoken
or written) at the time of formation of contract, it is said to be an express contract.
 Implied Contract – inferred from the acts or conduct of the parties or course of dealings
between them. Ex: ‘A’ gets into a public bus.
 Quasi-contract – It rests on the ground of equity that “a person shall not be allowed to
enrich himself unjustly at the expense of another.” Ex: T, a tradesman leaves his goods at
C’s house by mistake. C treats the goods as his own. C is bound to pay for the goods.
A quasi contract is a retroactive arrangement between two parties who have no
previous obligations to one another. It is created by a judge to correct a circumstance in
which one party acquires something at the expense of the other. A quasi contract is a legal
obligation imposed by law to prevent unjust enrichment. This is also called a contract
implied in law or a constructive contract. Because a quasi contract is not a true
contract, mutual assent is not necessary, and a court may impose an obligation without regard
to the intent of the parties. When a party sues for damages under a quasi-contract, the
remedy is typically restitution or recovery. Liability is determined on a case-by-case
basis.

 E- Commerce Contract – is one which is entered into between two parties via Internet.
3. Classification according to
performance
1. Executed Contract – an executed contract is one in which both the
parties have performed their respective obligations. Ex: A agrees to paint
a picture for B for Rs.100. When A paints and B pays the price, i.e both
parties have performed their obligations, the contract is executed.
2. Executory Contract – an executory contract is one in which both the
parties are yet to perform their obligations. In the above ex:, the contract
is executory if A has not yet painted the picture & B has not yet paid the
price.
 A contract may sometimes be partly executed and partly executory.
3. Unilateral or one sided Contract – is one in which only one party
has to fulfil his obligation at the time of the formation of the Contract.
Ex: A coolie carrying luggage.
4. Bilateral Contract – is one in which the obligations on the part of both
the parties to the contract are outstanding at the time of the formation of
the contract.