What is Contract?
The word contract is derived from the Latin term contractum, which means drawing together. According to section 2(h) of the Contract Act, “An Agreement enforceable by law is a Contract”.
As per Sir William Anson, “A contract is an agreement enforceable at law made be- tween two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others”.
Table of Contents
- 1 What is Contract?
- 2 What is Indian Contract Act 1872?
- 3 Essentials of a Valid Contract
- 4 Nature of Contract
- 5 Difference Between Contractual Obligation and Legal Obligation
- 6 Agreement to Sell
- 7 Offer and Invitation to Offer
- 8 Communication of Offer
- 9 Acceptance and Modes of Acceptance
- 10 Express and Implied Terms
- 11 Standard Forms of Contract
- 12 Doctrine of Privity of Contract
- 13 Consideration in Indian Contract Act
The contract is nothing but an agreement that is enforceable by law. Now, what is the term agreement? An agreement is a promise or a set of related promises made by a party to another for performing a task.
There must be an offer or proposal for an agreement to be entered. If the bid or proposal is accepted, an agreement can be entered. However, a promise cannot be termed as an agreement until and unless it includes a consideration. Thus, an agreement is completed when it includes a consideration. However, all agreements cannot be regarded as contracts.
What is Indian Contract Act 1872?
According to section 2(e) of the Indian Contract Act, an agreement means “every promise or a set of promises that forms a consideration for each other”. Thus, the essential element for an agreement is a promise and consideration.
The Indian Contract Act defines a contract as “An agreement enforceable by law”. Thus, in short, it can be summarized that a promise that involves a consideration is an agreement, and an agreement that is legally enforceable by law is a contract.
Essentials of a Valid Contract
Section 10 of the Act says, “all agreements are contracts that are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void”.
- Acceptance and Offer
- Consent (Acceptance)
- The Capacity of the Parties in the Contract
- Not Declared to Be Void
Acceptance and Offer
The essential ingredient of a valid contract is an agreement, i.e., the element of the offer and its acceptance. The offer made by one party must be accepted by the other party. It creates a responsibility to perform a task by a party. Similarly, it gives a party a right to claim the promise’s fulfillment.
Consent means acknowledgment of the party to whom an offer is made without any adverse circumstances like coercion, fraud, undue influence, misrepresentation, and mistake. It signifies the approval of both parties to a contract.
Also, the consent of the parties should be free. This means that the consent of any party is not obtained by coercion, under the influence, mistake, or fraud. When the consent of a party is not free, the contract is voidable. The party whose consent is not freely obtained
can either accept the contract or reject it.
The Capacity of the Parties in the Contract
The parties to the contract must be capable of entering into it. Section 11 of the Contract Act, of 1872 provides certain factors that help in deciding the capability of a party.
These factors are as follows:
- The party has attained the age of majority.
- The party is not of unsound mind.
- The party is not disqualified to enter into a contract by any law to which the party is subject.
Thus, if all of the above factors are present, it is assumed that the party is capable of entering into the contract.
Consideration means compensation to be paid by a party to another party for performing the promised task. The consideration should be lawful and should not be against the law or illegal in nature.
Not Declared to Be Void
The last element of a contract is that the activities performed under the contract must not be illegal and must not be such that the law has declared it to be void. For example, a contract to kill someone is void and illegal. This agreement cannot be enforced by the law and is not a contract.
Nature of Contract
A contract creates a legal obligation on the party that accepts the proposal or had agreed to perform the valid task. It also creates a right with the other party to ensure that the task accepted must be performed. Hence, each party is placed with an obligation to perform as per the terms of the agreement. A contract not just lays down responsibilities and duties that are enforceable by the law.
There are many instances when two parties enter into a formal or informal agreement. These agreements may be commercial or social. If the agreements are enforceable by the law, they are regarded as a contract.
As an agreement forms the basis of a contract, agreements of a social, illegal, or prohibited nature may not be legally enforced. Thus, it can be said that “all contracts are agreements but all agreements are not contracts.”
A contract must have the following two elements:
- An agreement
- Its enforceability (legal obligation)
In the form of an equation, it can be shown as follows:
Contract = An agreement + its enforceability
According to the Act, “Every promise and every set of promises forming the consideration for each other is an agreement.” (Section 2(e))
According to the Act, “A proposal when accepted becomes a promise.”
For example, Ram offers to sell his car to Shyam for ₹2,00,000. Shyam accepts the offer. This offer after acceptance becomes a promise, and this promise is treated as an agreement between Ram and Shyam.
Thus, an agreement consists of a proposal (offer) by one party and its acceptance by the other.
In the form of an equation, it can be shown as follows:
Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer)
The term agreement shows the following two characteristics:
- Plurality: It implies that there must be two or more persons to make an agreement.
- Consensus-ad-idem: It implies that both parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.
Difference Between Contractual Obligation and Legal Obligation
An obligation is a requirement for some task or a course of action, whether legal or contractual. We all have some obligations to our society, family, nation, and environment. But, we are not forced to perform these obligations.
Contractual obligations are those obligations that are enforced to be carried out under a contract. For example, for constructing a building, the builder is under a contractual obligation to construct as he is bound to do so in the contract entered with the administration or purchaser of the flats of the building.
On the other hand, legal obligation refers to those obligations that are enforceable by the law. For example obligation for safety at the workplace.
Obligations may arise out of different sources, such as torts, civil wrongs, judicial decisions, and decrees of a court. The subject matter of the law of obligations may also include obligations that do not necessarily arise out of an agreement.
Agreement to Sell
A contract is called an agreement to sell when something is to be done in the future period. It can be made for the transfer of property or for the performance of an act. But, it will be done in the future. In this case, it is regarded as an agreement to sell.
Here, only an agreement is made for the transfer of some consideration in the future. The actual transfer is not executed. The ownership of the property does not get transferred at the time of an agreement to sale. Thus, in the agreement to sale, the party in the contract has a right to revoke the contract or refuse to cancel the contract.
Offer and Invitation to Offer
As we have already discussed that in order to execute a contract, there must be an offer. The terms “Offer” and “Proposal” are used interchangeably.
As per the Indian Contract Act, Section 2(a) an offer is defined as:
Thus, in the case of an offer, two important facts are:
- A person signifying to do something or to abstain from doing something.
- An expression is made to obtain the assent of the other person.
A mere offering does not mean an offer. When A shows B his badminton racket, it is not an offer. But, when A shows the racket to B and asks him to buy it for a specific amount, it is an offer.
But, offer and invitation to offer do not mean the same. The difference between the two can be understood from the fact that an invitation to offer is the preceding step to offer. An offer leads to an agreement, but an invitation to offer does not lead to an agreement, rather it leads to an offer after due negotiation.
In an invitation to offer, there is no willingness on the part of the offeror, and he is not bound by his offer. When a shopkeeper makes a display of the items in the wardrobe, it is an invitation to offer by him to the public or his customers. There is no offer in it.
But, when he shows his willingness to sell it to a particular customer, he gives an offer. In such a case, when a consideration price is fixed between them, the offer leads to the contract.
Offer, in other words, is in the nature of “Personam” (addressed to a specific individual or a group of individuals), whereas an Invitation to Offer is in the nature of “Rem” (addressed to the world at large).
Communication of Offer
According to Section 4 of the Act, “Communication of offer is complete when it comes to the knowledge of the person to whom the offer is made”.
Communication of an offer is done when knowledge is being passed to the party either in writing, by mouth, or by any other mode of communication. For example, suppose A wants to sell his building to B. A writes a letter on 25th July and the same reaches B on 30th July. In such a case, the communication of the offer is completed on 30th July as the knowledge of the offer comes to B on 30th July only and not on 25th July.
Acceptance and Modes of Acceptance
Acceptance means giving assent to the offer or proposal. As per Section 2(b) of the Act, acceptance is defined as:
“A proposal is said to have been accepted when the person to whom the proposal is made gives his assent of acceptance to that proposal or offer”.
A proposal is of no value until and unless it has been accepted. A contract is entered only when the offer is accepted and consideration is fixed.
Rules Governing Acceptance
The rules governing acceptance are as follows:
- The acceptance must be absolute and unqualified. If there are any clauses or conditions in the acceptance, it cannot be said to be the acceptance of the offer.
- The acceptance must be communicated to the desired person offering such acceptance. If the acceptance is not communicated, it has no value.
- The acceptance must be made at the prescribed time. A late acceptance may be void. If there is a time clause in the offer, the approval must be given in that time frame only and not later than that time.
Modes of Acceptance
Generally, there are two ways of acceptance. These modes of acceptance of an offer are as follows:
By an Act (express)
Acceptance by act means to communicate the assent either by written or oral means or by some other act. Written acceptance includes a letter, fax, or e-mail. Oral acceptance is through verbal conversation, including telephonic conversion.
By Omission (implied)
Acceptance by omission is done by the conduct of the person who is giving his assent or willingness to accept the offer. However, keeping silent does not mean acceptance. For example, A offers some fruits to B and sends them to his house and B receives them but does not tell A about them. This silence does not mean acceptance as A does not get the information about the acceptance of fruits from B.
For the purpose of acceptance, as per Section 4 of the Contract Act, 1872, the communication of acceptance is:
- as against the proposer, when it is put in the course of transmission to him so as to be out of the power of the acceptor
- as against the acceptor, when it comes to the knowledge of the proposer
Express and Implied Terms
A contract can be an express contract or an implied contract. An express contract is one in which the terms of the contract are expressed verbally or in a written form. On the other hand, an implied contract is a type of contract in which the terms are not expressed in words.
An express contract is completed when acceptance is made to the offer and the terms and conditions are accepted by both parties. For example, when A asks B to perform some accounting work under some terms and conditions and then B accepts the offer by accepting all the conditions, the contract is known as an express contract.
In the case of an implied contract, it is not necessary to declare acceptance. It is implied that the contract has to be accepted. For example, when a patient a visits doctor, it is implied that he will pay fees to the doctor. If he does not give the fees, he has caused a breach of contract.
Standard Forms of Contract
“Model or standard forms of contract are Conditions of Contract, which have been prepared for general use in a particular industrial sector by an appropriate or representative authority”. — Smith (1995)
A standard form of contract is the most popular and widely used contract. It is also referred to as an “Adhesion” or “Boiler Plate Contract”. An example of a standard form of contract is insurance policies, where the insurer decides the items to insure and the language of the contract.
Contracts with government agencies or standard service providers like electricity or telephone service provider are another example, where certain clauses must be included by the law or regulation. We come across standard forms of contracts regularly while making any legal purchase of products or services. These contracts cannot be customized or modified regularly.
Thus, when planning to launch a new product or service, the following challenges are faced while forming the standard form of a contract:
- The first challenge is deciding the type of clauses or conditions required to be included in the contract, considering all the aspects of the products/services and preservation of each party’s rights.
- The second challenge that arises is the design of the contract. The contract design should be final because it cannot be altered frequently with demand or objection.
Standard forms of contracts need not always be inflexible. While each party having its own “standard” agreement form could insist that this standard form should be the basis for the negotiation (for the simple reason that it is always easier that way to have the advantage of playing on “home grounds”),
An agreement is invariably found on the basic (seller’s or buyer’s – more often than not, the latter’s) document the final agreement would be based on (with due deference to the modifications suggested by the other party and mutually agreed upon.)
Exclusion clauses are the clauses that are generally written in the contract to limit the scope. These clauses say that one party to the contract cannot be held responsible for a certain mishappening. For example, if a person attends a gym and while exercising, he broke his joints, the gym owner cannot be held responsible for that accident or incident.
These clauses are valid on the basis of two important conditions:
- The clauses have been properly expressed in the contract and explicitly carve out the exclusion.
- The clauses that are named exclusion clauses are not conflicting with any law. The clauses must be valid in terms of the law.
Kinds of Agreement
An agreement is a promise or a set of related promises made by a party to another to perform some task. For an agreement to be entered, there must be an offer or proposal. If the offer or proposal is accepted, an agreement can be entered. However, a promise cannot be termed as an agreement until and unless it includes a consideration. All agreements cannot be regarded as a contract. However, all contracts are agreements.
These types of agreements are discussed as follows:
An agreement that is not enforceable by law is known as a void agreement. A void agreement does not have any legal consequences and cannot be enforced by the law. It does not bring any legal obligation to any party to the contract.
An example of a void agreement is an agreement made with a minor as it is expressly declared void in the Act. An agreement where there is no consideration is also a void agreement. Similarly, an agreement to kill any person is a void agreement as it is bad in the eyes of the law and prohibited. Thus, an agreement that has no validity in the law is termed a void agreement.
An agreement that is valid in terms of the law at the option of one or more parties is termed a voidable agreement. A voidable agreement is a valid agreement until it is revoked by any of the party.
A voidable agreement can be rescinded at the option of one party. The agreement made through mistake, coercion, fraud, undue influence and misrepresentation is an example of a voidable con-
tract. These are voidable at the option of the aggrieved party.
All agreements that satisfy all the basic essentials of a valid contract are known as valid agreements. These agreements are enforceable by the law as well and are valid in any court. These agreements are known as contracts.
Unilateral, Bilateral and International Contracts
In unilateral contracts, only one party is obligated to perform the duty. If the duty is fulfilled by the party, it will be eligible to the required consideration. It is a one-sided agreement in which one party
performs the contract for the other party.
For example, if a person puts an advertisement in the newspaper for his lost watch and admitted to pay the prize to find it. Then, in such case, the person will be obliged to pay the prize to the party who finds
A bilateral contract is a type of contract in which both parties have an obligation to perform a task for the other party. It is a type of reciprocal agreement. Each party has to perform its own promise for
the other party.
When a contract is made between two parties of two different countries, the contract is said to be an international contract. These contracts are also like normal contracts but the laws of both the nations
must be satisfied in order to sustain the contract.
Doctrine of Privity of Contract
The doctrine of privity says that a contract cannot create any legal obligations or right in the hands of persons or parties other than the parties involved in it. The rules and the terms and conditions of the contract are applicable only to the parties who have entered the contract. Under the Roman Law, a third party was neither liable nor entitled under a contract. Similarly, under the French Civil Code, contracts bind only contracting parties.
Only the parties who are there in the contract can sue or can be sued by the party in the agreement. However, there exists some problems in the doctrine of privity when the contract is entered, for the benefit of any third party who is unable to enforce any obligation on the parties involved in such a contract.
Exceptions to Privity of Contract
There are certain exceptions to the doctrine of privity of contract. These are as follows:
- The Beneficiary of a Contract can enforce the contract on the behalf of the parties who had contracted, for the benefit of such beneficiary or a third party.
- In case of a trust, the beneficiary of the trust can sue the parties for his rights even though he is not a party to the contract.
- In case of a family settlement or partitions, when the terms of settlement are made in writing, the members of families who are not a part of the settlement can also enforce their rights.
- In case of a marriage contract or settlement, a female can enforce her right of claiming for the marriage expense based on the petition made by the Hindu Undivided Family.
- In case of a relationship between the principal and agent, the agent can sue the third party on behalf of the principal.
- An assignee of a debt can sue the original debtor without the consent of the creditor.
- A person who purchases land with a notice that the seller is bound by certain restrictive covenants, affecting the land is bound by those covenants even though he was not a party to the original contract.
- Third-party insurance, where a stranger to the contract may recover from the insurance company where third-party risks are covered under the insurance policy.
- If a person by his words or conduct (Estoppel) creates a privity between himself or the stranger, he cannot be permitted to plead the action.
Consideration in Indian Contract Act
According to Section 2(d) of the Indian Contract Act “When at the desire of the promisor, the promisee or any other person has done or has abstained from doing or does or abstains from doing promises to do or to abstain from doing something, such an act, abstinence or promise is called as a Consideration for the promise”.
- Features of Consideration
- Past, Present and Future of Consideration
- Essentials of Valid Consideration
- Sufficiency of Consideration
- Consideration and Promissory Estoppels
For example: If A agrees to pay B ₹5,000 on the promise that B will wash and paint his car, then the amount of ₹5,000 is the consideration for the work that B will do for A. Consideration means the compensation to be paid by a party to another party for performing the promise. It means something in return for doing anything or even abstaining from doing anything. The consideration should be lawful and should not be against the law.
Features of Consideration
Consideration must be paid at the desire of the promisor. It has the following features:
- It may move from one person to another person.
- It may be paid on the past, present or future.
Past, Present and Future of Consideration
In simple terms, the consideration are of three types.
- Past consideration is the consideration that is paid before the formation of the contract.
- Present consideration is the consideration that is paid at the time of the formation of the contract.
- Future consideration is to be paid in the future period after the contract is executed.
As per the Indian Contract Act, all the three types of contracts are valid but as per English law, past consideration is not valid.
Essentials of Valid Consideration
The essentials of valid considerations can be defined as follows:
- The consideration must be paid at the request of the offeror by the offeree. In case the offeror received an unwanted consideration, it will be treated as void.
- The consideration may move from the promisor or from any other person. It is not necessary that the promisor is only authorized to pay it. However, the English law does not allow it, as the consideration should only flow from the promisor.
- The consideration may be past, present or future. Past consideration is paid before the contract is entered. Present consideration is paid at the time of the execution of the contract. Future consideration is paid in the future, i.e., after entering into the contract.
- The consideration paid must be lawful and should not include anything that is prohibited by the law.
- The consideration may be inadequate. It must be fully paid as per the terms to the promisor and must not be less than the decided one.
- The consideration must not be a virtual one. It must be real.
Sufficiency of Consideration
As discussed above, the consideration may not be adequate. It must be discharged as per the terms of the contract and not be less than what is decided in the contract.
Consideration and Promissory Estoppels
According to the legal principle of the Contract Act, the promisor must have to fulfil the promise made by him to the promise. In case the promisor denies the fact of the promise, the concept of promissory
stopple comes into force.
Promissory estoppel is used to stop the promisor from denying the fact, statement, words and conduct. It allows the party to recover on a promise. In order to invoke the provision of the promissory estoppel,
the following three elements must be present:
- The promisee must be present.
- The promisor must be present.
- An economic loss has occurred on the part of the promise.