Introduction

A contract means when two parties put into writing an agreement which contains certain obligations (promises) which are to be performed by such parties, and when such written agreement becomes enforceable by law, it becomes a contract.

Definition

• The Indian Contract Act, 1872 defines the term ‘Contract’ under its section 2 (h) as ‘An agreement enforceable by law’.
• This definition has two key elements: agreement and enforceable by law.
  • Agreement- An agreement is every promise or the set of promises that form the consideration for each other.
  • Enforceable by law- When these promises are held valid in the court of law and the parties of the contract can be held liable to complete their promises, the contract is enforceable by law.
  • Promise- Section 2(b) of the Indian Contract Act, 1872 defines a promise as: ‘when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal when accepted, becomes a promise’. A promise to do or abstain from doing something becomes an agreement when it is accepted by all the parties involved in the agreement.
• Agreement
  • An agreement is a promise or commitment given by one party to another party. It includes an offer that is made by one person and accepted by the other person.
  • Essentials of forming an agreement:
    • Parties - There must be two or more parties to form an agreement.
    • Offer or proposal - The proposal must be made by one party to the other.
      • The person(s) to whom the proposal has been made must clearly understand all the aspects and terms of the proposal.
    • Acceptance - The offeree or the person to whom the offer has been made must accept the proposal and give his assent to all its terms.
    • Promise - When the proposal is accepted it becomes an accepted proposal or a promise. A proposal is not synonymous to a promise but becomes one only after its acceptance.
    • Consideration - An agreement is accepted with a consideration which is the price for the promise made to be paid as a consideration.

Offer + Acceptance= Agreement

Agreement / Accepted Promise +Enforceable by Law= Contract

• Contract
  • An agreement enforceable by law is called a contract. An agreement cannot be said as a contract unless and until it is enforced by law. A contract is an agreement that is accepted by both parties and is enforceable by law.
  • Essentials of a Valid Contract: For a contract to be valid, it must be enforceable by law and must include the following essentials given under Section 10 of the Indian Contract Act.
    • Two Parties- A valid contract must include a minimum of two parties; one that makes the offer and the other to whom the offer has been made and who must accept the proposal for it to become enforceable.
    • Legal Obligation- The parties entering into a contract must have the intention of entering into a legal obligation. Social agreements and obligations are not considered a contract as they do not create any legal obligations on any party.
    • Certain Terms- A legal contract must have certainty of meaning.
      • Example- A agrees to buy B’s house for a reasonable amount. A valid Contract must define the exact amount that A intends to pay B for buying his house.
    • Possibility of Performance- A contract is considered valid only when it does not involve the performance of an impossible act.
      • Example- A enters into a contract with B to bring B’s father back to life for ten thousand rupees. Since the Contract involves the performance of an impossible Act, it is not a valid Contract.
    • Free Consent- The parties entering into a contract must give their free consent to the contract.
    • Competency- The parties must be legally competent to enter into a contract. According to Section 11 of the Indian Contract Act, people who are considered competent to enter into a contract include: a person who is of the age of majority as per law, of sound mind, and not disqualified by law from entering into a contract (this includes convicts, alien enemy, foreign national, etc.)
    • Consideration- The contract must involve consideration as per the principle of ‘quid pro quo’ or something in return. A valid contract must include a consideration that must be something of value.
    • Legal Consideration- Section 23 of the ‘Contract Act’, 1872 defines a legal consideration as something not forbidden by law.

Case Law

• Lalman Shukla v Gauridutt (1913):
  • In this case, defendant's (Gauridutt) nephew has absconded from Gauridutt's house. Allahabad High Court held that when the Lalman Shukla (servant) had found the missing boy, he was having no knowledge about the offer, hencethere is no question reward if a person is having knowledge about the offer and then is acting accordingly with the terms then it amounts to acceptance of the offer otherwise not.
• Union of India v. M/s Uttam Singh Dugal and Co. Pvt. Ltd (1971):
  • In this case, Delhi High Court held that in respect to any material term when there is variance between the offer & acceptance and when the agreement if is absolute then it will not result in the formation of a valid contract.
• Mohori Bibee v. Dharmodas Ghose (1903):
  • In this case ‘Privy Council’ held that the contract with minor is void-ab-initio that is void from the very beginning as because a minor is incompetent to contract.

Conclusion

In simple terms, a contract means when two parties put into writing an agreement which contains certain obligations (promises) which are to be performed by such parties, and when such written agreement becomes enforceable by law, it becomes a ‘Contract’. Enforceable by law means when the agreement has acquired the force of law only for those who are a party to it and a violation of those obligations would attract legal action, including repudiation of the entire contract.