What Is Contract

According to Section 2 (h) of the Indian Contact Act, 1872, “A contract is “an agreement enforceable by law”. A contract therefore, is an agreement the object of which is to create a legal obligation i. e. , a duty enforceable by law. From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i. e. , a duty enforceable by law. As per section 2 (e) “Every promise and every set of promises, forming the consideration for each other, is an agreement. ” Thus it is clear from this definition that a ‘promise’ is an agreement.

Section 2 (b) states that “When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise. ” An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i. e. , gives his acceptance) thereto. In short, an agreement is the sum total of ‘offer’ and ‘acceptance’. Example, A promises B to sell his horse for Rs. 10,000/-. The Law of Contract deals with such promises which create legal obligations.

This excludes those promises made in common life which may be morally binding but creates no legal binding. Promises which do not give rise to legal obligations are not contracts. For example, if A promises B to attend the dinner and fails to attend then B cannot sue A for the price of non-consumed food. The Law of contract creates obligation between the parties to the contract and not against the whole world. According to Section 10, “All agreements are contracts if they are made by free consent of parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void”.

The essential elements of a valid contract are: 1. At least two person: There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself. 2. Proposal and acceptance: The first step towards creating a contract is that one person shall signify or make proposal or offer to the other, with a view to obtaining the acceptance of that another person to whom the offer is made. A proposal when accepted becomes a promise. 3. Consensus-ad-idem (meeting of minds): To constitute a valid contract, there must be meeting of minds i. e.

consensus-ad-idem. The parties should agree to the same thing in the same sense and at the same time. 4. Intention to create legal relationship: When the two parties enter into an agreement, there must be an intention by both parties to legally bind the other as a result of such agreement. Thus, agreements of social or household nature are not contracts. 5. Consideration: Consideration is the most important element of contract. Consideration has been defined as the price paid by one party for the promise of the other. Consideration means “something in return” (quid pro quo).

A promise is often made in return for a promise, e. g. a buyer realizes the goods for the price. Therefore price for goods is consideration. The promise for a promise in return is Consideration. An agreement is a contract only if it is made for a lawful consideration and with a lawful object. The consideration or object of an agreement is unlawful if- * it is forbidden by law; or * is of such a nature that, if permitted it would defeat the provisions of any law; or * is fraudulent; or * involves or implies injury to the person or property of another; or * is immoral; or is opposed to public policy.

Every agreement of which the object or consideration is unlawful is void. (Section 23) 6. Capacity of parties (competence): The parties to the agreement must be capable of entering into a valid contract. According to Section 11, every person is competent to contract if he or she, * is of the age of majority; * is of sound mind; and * is not disqualified from contracting by any law to which he is subject. 7. Free consent: To constitute a valid contract the parties must give their free and genuine consent. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense (sec.

13). Mere consent is not enough. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i. e. , the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void (sec. 20) 8.

Lawful object: For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law.

9. Writing and registration: A contract may be oral or in writing. If, however, the law requires for a particular contract, it should comply with all the legal formalities as to writing, registration and attestation. 10. Certainty: Section 29 of the contract Act provides that “Agreements, the meaning of which is not certain or capable of being made certain, are void. ” The terms of contract should be clear. In other words the contract must be not vague. Contracts which are vague cannot be enforced. Such a contract can be avoided by showing that there is ambiguity.

In such a case there is nothing which either party can enforce. Illustration. A, agrees to sell B “a hundred ton of oil” there is nothing whatever to show what kind of oil was intended. The agreement is void because of uncertainty. 11. Possibility of performance: Contracts based on impossibility of performance are not valid. Section 56 lays down that “An agreement to do an act impossible in itself is void”. If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. Illustration. A agrees with B, to discover treasure by magic.

The agreement is not enforceable. 12. Not expressly declared void: The agreement must not have been expressly declared to be void under the Act. For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an agreement by way of wager have been expressly declared void under sections 26, 27 and 30 respectively. All agreements are Contract, but all contracts are agreements: A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts.

A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce. An agreement in order to constitute a contract must possess essentials elements. All the essential elements must exist together. All contracts are agreement because there must be mutual understanding between two parties for a contract to be formed. All parties should agree and adhere to the terms and conditions of an offer. Therefore, we can say that all agreements are not contract but all contracts are agreements.

When any of the essential elements is missing, it ceases to be a contract though it may be a valid agreement. An agreement is a wider term than a contract. LAW OF CONTRACT CREATES RIGHT IN PERSONAM AND NOT RIGHT IN REM “Right in Rem” means a right available against the whole world or world at large. Example, A is a owner of a flat in Mumbai. He has a right to possess and enjoy the flat against the whole world. “Right in Personam” means a right against a particular person. Example, A owes a sum of Rs. 25,000/- to B. Here B has a right to recover Rs.

25,000/- from A only. This right of B is called Right in Personam. The Contract creates obligations between the parties to the contract and not against the whole world. It is, therefore, rightly said that the law of contract creates right in personam and not right in rem. KINDS OF CONTRACT 1. 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 the other or others, is a voidable contract. A contract is voidable when one of the parties to the contract has not exercised his free consent.

One of the essential elements of a formation of a contract for example, free consent, is absent. All voidable contracts are those which are induced by coercion fraud or misrepresentation. The person whose consent is not freely given may avoid a contract. It therefore continues to be valid till the party whose consent is caused by coercion, undue influence, fraud or misrepresentation choose to avoid the contract within a reasonable time. Contract then is not binding on the other party. 2. Void Contract: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.

A void contract is a nullity from its inception. No rights accrue there under. A contract may also be originally valid when entered into but subsequently due to change in the events or circumstances, it may become void. It should be noted that there cannot be a void contract because when the contract is void, it is no contract at all. The right expression therefore is void agreement and not void contract. 3. Unenforceable Contract: A contract which cannot be enforced is a valid contract in law, but is incapable of proof, and therefore cannot be enforced in the Court of Law.

4. Executed Contract: Where both the parties have performed their obligation, it is an executed contract. Even when one party to the contract has performed his share of the obligation, the contract is executed though to the other party is still under an outstanding obligation to perform his part of the promise. 5. Executory Contract: Here neither party to the contract has performed his share of the obligation, for example, both the parties have yet to perform their promises, the contract is executory.

In an executed contract one party has already performed his part of he agreement while the other party has to perform his par. In an executory contract both the parties have to perform their mutual promises and the fact that they have to perform their parts of the contract does not affect the validity of the contract. 6. Express Contract: When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation, the contract is express. 7. Implied Contract: The terms of a contract are inferred from the conduct or dealing between the parties.

When the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Such an implied promise leads to an implied contract. For example, A boards a bus. It is implied from his conduct that A has entered onto an implied promise to purchase a ticket. 8. Quasi-Contract: ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’.

These are – (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (e) Goods or anything delivered by mistake or coercion (section 72). Illustration: ‘A’ supplies necessities to ‘B’ who is not capable of contracting and reimbursing to ‘A’. A is entitled to be reimbursed from B’s property. Quasi contracts rise out of obligation enjoyed by one person from the voluntary acts of the other which are not intended to be performed gratuitously 9.

Contingent Contract: A contingent is one in which a promise is conditional and the contract shall be performed only on the happening of some future uncertain event. Illustrations: ‘A’ contracts to pay B Rs 10,000, if B’s house is burnt. This is a contingent contract. Here the liability of A arises, only when a particular event takes place, i. e. burning of B’s house. This is an event, collateral to the main contract. 10. Contracts of Record: A contract of record is one which is taken to the records of a Court, for example judgment of a court. Such judgments create a binding effect through the authority of the Court.

11. Specialty Contract: A specialty contract is a contract which is in writing signed, sealed and delivered by the parties. It is also called a contract under seal. Consideration is not necessary in a specialty contract. 12. Simple Contract: A simple contract s one which is not under seal. All contracts which are not under seal are simple contracts. All simple contracts require consideration. They may be made by written or spoken words. Contracts of Record and Specialty Contracts are also known as Formal Contracts. The classification of contracts into Contracts of Record, Specialty and simple is under the English Law.

Indian Law does not recognize contracts without consideration. All contracts must have consideration in order the valid subject to exceptions under section 25 of the Act. 13. Statutory Contract: When all or some of the terms and conditions of contract are statutory then the entire contract, or that extent as the case may be, would be regarded as statutory contract. Quasi Contract Quasi means “almost” or apparently but not really or as if it was. A Quasi contract is a contract that exists by the order of the court, not by agreement of the parties.

Courts create quasi contract to avoid unjust enrichment of a party in a dispute over a payment for a good or service. Sections 68 to 72 of the Indian Contract Act, 1872 deal with “certain relations resembling those created by contract”. Illustration A victim slips on a banana skin and falls down a flight of stairs. Doctor, a stranger, who happened to be walking by, administers emergency treatment to unconscious victim. Doctor does not enter into a contract with the Victim. But, Doctor could now recover fee for his services on the theory of unjust enrichment. This is where “Quasi Contract” comes into play.

The law in this case creates a fictional contract to grant benefits to the doctor. Kinds of Quasi contracts: (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (e) Goods or anything delivered by mistake or coercion (section 72) Supply of necessities [S. 68] – When necessities are supplied to a person who is incompetent of contract or to someone who is legally bound to support, the supplier is entitled to recover the price from the property of the incompetent person.

“incompetency to contract”, here, would mean parties that are not competent to contract as per sec. 10 of the Act, i. e. , in following circumstances: * Minors * Persons of unsound mind * Persons disqualified by law to which they are subject Illustration- A supplies B, lunatic with necessaries suitable to his conditionof life, is entitled to be reimbursed from B’s property. Payments by interested persons [S. 69] – A person who is interested in the payment of money which another is bound by law to pay and who therefore pays it is entitled to be reimbursed by the other.

This section is subject to certain conditions: * The plaintiff must be interested in making the payment. The interest which the plaintiff seeks to protect must be legally recognizable; * It is necessary that the plaintiff himself should not be bound to pay. He should be interested in making the payment in order to protect his own interest; * The defendant should have been “bound by law” to pay the money; * The plaintiff should have made the payment to another person and not to himself. Liability for non-gratuitous act [S. 70] – S. 70 creates liability to pay for the benefit of an act which the doer did not intend to do gratuitously.

Where a person does something for another person not intending to do so gratuitously and such person is entitled to enjoy benefits from it. And then such a person who has used the thing has to compensate the other or restore or deliver the thing. For example, A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay A for them. Conditions of liability under this section are as follows: * One of the purposes of the section is to assure payment to a person who has done something for another voluntarily and yet with the thought of being paid.

* The person for whom the act is being done is not bound to pay unless he had the choice to reject the services * It is necessary that the services should have been rendered without any request * Services should have been rendered lawfully * The person rendering services should not have intended to act gratuitously Finder of goods [S. 71] – Section 71 lays down the responsibility of a finder of goods. The duties and liability of a finder is treated at par with the bailee. The finder’s position, therefore, has been considered along with bailment.

* Duties of the finder of the goods:- * He must find out the owner: The finder of the goods shall make reasonable effort to find the actual owner of the goods. If he does not do that, he will be held to be responsible of interfering with the another’s property as a trespasser. * He must not use the goods: He must not use the goods for his own purpose and he shall not fix the goods with his own goods. * Taking due care of the goods: It is the duty of the finder of the goods to take due care of the goods as a prudent man would take care of the goods of the same value and quantity.

* Return goods to the owner: It become duty of the finder of the goods to return the goods to the actual owner of the goods. * Rights of the finder of the goods:- * Right to retain the goods: The finder of the goods is entitled to retain the goods until he receives the lawful charges or compensation for retaining the goods and for care and preservation thereof. * Right to possess the goods: He is entitled to possess the goods till the true owner is not found. * Right to sue for reward: He is entitled to any reward which the owner of the goods has offered for the return of the goods.

* Right to sell goods: He can sell the goods if- a) The commodity is perishable b) The owner cannot be found; c) The owner refuses to pay the lawful charges; d) The lawful charges amount to the two-third of the value of the commodity. Mistake or coercion [S. 72] – Section 72 states that payments or delivery made under mistake or coercion must be made good or be returned. Illustration A and B jointly owe Rs. 1,000/- to C. A pays alone the amount to C and B not knowing this fact pays Rs. 1,000/- over again to C. C is bound to repay the amount B.

A Railway company refuses to deliver certain goods to the consignee except upon the payment of an illegal charge for carriage, The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charges as was illegally excessive. PROPOSAL Definition – Section 2(a) A proposal is the first step towards formation of contract. Proposal is a medium through which a person signifies to another his willingness to do or not to do something with a view to obtain assent of that other to such act or abstinence. The person making an often is called the offerer or Proposer.

The person to whom the offer is made called Offeree. When the offeree accepts the offer he is called acceptor or promise and the offere is called as promisor. Example, A says B, “Will you buy my house for Rs. 10,00,000/-“ In this example A is making an offer to B, because he signifies to B his willingness to sell his house for Rs. 10,00,000/- with a view to obtain B’s assent to purchase his house. TOWHOM CAN A OFFER BE MADE? a) To definite person (specific offer): An offer can be made to a particular person. It is called as specific offer. Example, A says to B,”will you buy my car for Rs. 50,000/-?

“ Here A is specifically offering B to purchase his car. This is an offer to a definite person i. e. B. b) To definite class of persons: An offer can be made to a group of class of persons. Example, College puts a up a notice to offer a reward of Rs. 100/- to any student who return the lost book. Here a offer is made to a definite class of persons i. e. the students of college. c) The world at large (General Offer): An offer can be made to public in general. Example, A advertises in newspaper a reward of Rs. 1000 to anyone who would found and reyurn the lost passport. This is an offer to the world at large.

RULES / ESSENTIALS OF VALID PROPOSAL OR OFFER 1. To obtain Acceptance: – The offer must be made with a view to obtain acceptance of the person to whom the offer is made. 2. Intention to create legal obligation: – Offer must be made with the intention to create legal obligation between the parties. In such intention is not present then it is not an offer in the eyes of law. Example, A invites B for tea. Even if B accepts the invitation it does not creates any legal obligation. 3. Definite terms: – The terms of the offer must be definite, unambiguous and certain and not vague. Example, A says to B, “I will sell you a horse.

” A owns 10 different horses, the offer is not definite. 4. Different from mere declaration of Intention: – The offer must be distinguished from mere declaration of intention or invitation of offer. Example, A advertises in the newspaper that he wants to sell his house. B and C offer to purchase the house at particular prise. Here A has not made an offer but only invites people to make an offer. B and C have made an offer and it is for A to accept the same or not. 5. Communication: – An offer must be communicated to offeree. Unless an offer is properly communicated thee can be no acceptance of it.

An acceptance of offer, in ignorance of the offer is no acceptance at all and does not create any legal rights or obligation. Example A sent his servant B in search of his missing nephew. A then announced a reward for the information concerning the boy. B traced the boy in ignorance of such announcement. Therefore, B cannot claim reward as he was not aware of the announcement regarding reward. 6. No burden of acceptance:- offer should not contain the non-compliance of which may be assumed to amount to acceptance. Example, A writes to B, “I will sell you my cycle for Rs. 100/-.

If you do not reply, I shall assume you have accepted the same. ” Here the offer is not vale. Mere silence cannot amount to acceptance. 7. Conditional offer:- An offer may be conditional but the conditions must be clearly communicated. A conditional offer lapses, when the condition is not accepted by the offeree. 8. Made to a definite person: – The offer must be made to a definite person to create legal relationship. 9. Implied or Express offer: – The offer can be express or implied from the circumstances. Example, stepping into a restaurant and consuming food creates an implied promise to pay. ACCEPTENCE.

The acceptance of an offer is the second and very important step towards forming contract. A contract is formed when an offer is accepted. The offeree’s willingness to be bound by the terms of the offer is known as “acceptance”. Section 2 (b) of the Contract Act defines acceptance as “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise”. Thus acceptance is the assent or consent given to a proposal. Effect of acceptance Acceptance converts offer into a promise. Acceptance is essential to convert offer into an agreement.

RULES / ESSENTIALS OF VALID PROPOSAL OR OFFER / HALLMARK OF ACCEPTANCE / HOW AN ACCEPTANCE CAN BE MADE? 1. Acceptance must be absolute and unconditional: – An acceptance, in order to be binding, must be absolute and unconditional. It must correspond with all the terms of the offer. Offer must be accepted in toto. Every offer must be accepted as it is. For example; Sunil offers to sell his site to Sridhar for Rs. 100000. Sridhar accepts to purchase it for Rs. 80000. This acceptance is not valid. It is a counter-offer.

2. Acceptance must be communicated: – Acceptance must be communicated. (Carlill v.Carbolic Smoke Ball Co) Communication need not be in writing or by word of mouth. It may also be implied from the conduct of the acceptor. Mere desire to accept a proposal is not acceptance. Uncommunicated or mental acceptance is not a valid acceptance. The person who has authority to accept should communicate acceptance. 3. Acceptance must be in the mode prescribed: – If the offeror prescribes the mode or manner of acceptance, the acceptance must be made in accordance with the mode prescribed. For example, if the offeror says “acceptance to be sent by email”, the offeree must send an email.

If the acceptance is not made in the mode prescribed, the offeror may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the prescribed mode. But if he does not inform the offeree as to this effect, he is deemed to have accepted the acceptance. If no mode is prescribed by the offeror, the acceptance must be made according to some usual and reasonable mode. 4. Acceptance must be given within a reasonable time: – If the offeror has prescribed a time within which offer must be accepted, it must be accepted within the prescribed time.

If no time is prescribed for acceptance, the offer must be accepted within a reasonable time. Otherwise, the proposal will lapse. What is reasonable time depends upon the nature of the subject matter of the offer. 5. Acceptance must be given only by the offeree: – An offer made to a particular person can be accepted by him alone. If any other person accepts it, there is no valid acceptance. An offer made to a class of persons can be accepted by any member of that class. Any offer made to the world at large may be accepted by any person who had the knowledge of such an offer. 6.

Acceptance must be after an offer: – There can be no acceptance without an offer. The acceptor must be aware of the proposal at the time of acceptance. Thus, acceptance must succeed the offer. In other words, acceptance should follow the offer and not precede it. 7. Acceptance must be given before the offer lapses or its revocation: -Offer must exist at the time of acceptance. If an offer had already lapsed or been revoked, subsequent acceptance will be of no effect. An offer once rejected cannot be accepted again unless a fresh offer is made. Under English law acceptance is irrevocable.

But under Indian law acceptance is revocable. Who can accept? An offer can be accepted only by the person or persons for whom the offer is intended. An offer made to a particular person can only be accepted by him be cause his is the only person intended to accept. An offer made to a class of persons can be accepted by any member of that class. An offer made to the world at large can be accepted by ny person whatsoever. X sold his business to Y without disclosing the fact to his customers. Z sent an order for goods to X by name. Y received it and sent letter of acceptance.

Held, there was no contract between Y and Z because Z never made any offer to Y. (Boulton v. Jones) Implied acceptance / acceptance by conduct: Acceptance by conduct means entering into an agreement by performing certain actions rather than by signing an agreement or orally agreeing to be bound. Section 8 of the Indian Contract Act states that Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. Example, A trader receives an order from a customer and executes by sending the goods.

Here customer’s order is an offer. Sending the goods is an acceptance. COMMUNIACTION OF OFFER AND ACCEPTANCE According to section 4, the communication of offer is complete when it comes to the knowledge of the person to whom it is made. Example, A proposes, by letter, to sell his house to B at a certain price. the communication of a proposal is complete when B receives the letter. Communication of acceptance is complete as against proposer, when it is put in the course of transmission to him so as to be out of power of the acceptor, as against the acceptor, it is complete when it comes to the knowledge of the proposer (sec 4).

Example, B accepts A’s proposal by a letter sent by post. The communication of the acceptance is completed ad against A, when the letter is posted, as against B, when the letter is received by A. Revocation of proposal and acceptance: Revocation means “taking back” or “cancellation” or “recalling” or “withdrawal”. Revocation of Proposal – A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards (sec 5). Therefore, in case of posting of a letter of acceptance the same can be revoked by a telegram reaching earlier than letter.

A proposal can be revoked – * the communication of notice of revocation by the proposer to the other party before the other party’s acceptance has been communicated to the proposer; * the lapse of the time prescribed in the proposal for its acceptance or, if no time is prescribed, the lapse of a reasonable time without communication of the acceptance; * the failure of the acceptor to fulfill a condition precedent to acceptance; or * the death or serious mental illness of the proposer.

Revocation of Acceptance – An Acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards (sec 5). Example, A proposed by a letter sent by post to sell his house to B. B accepts the proposal by letter sent by post. A may revoke his proposal his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterward. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterward.

Communication of Revocation – Communication of revocation is complete (i) As against the person who makes it, when it is put in the course of transmission to the person to whom it is made so as to be out of power of the person who makes it ; (ii) As against the person to whom it is made when it comes to his knowledge. CONSIDERATION ME