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l. DEFINITION OF CONTRACT

The law o f contract lays down the legal rules relating to prom ises: their formation,
their performance, and their enforceability. Explaining the object o f the law o f contract.
Sir W illiam A nson observes: “The law o f contract is intended to ensure that what a
man has led to expect shall com e to pass; that what has been prom ised to him shall
be performed."
A nson also said: “The law o f contract d oe s not lay dow n a number o f rights and
duties which the law will enforce; it con sists o f rather a number o f limiting principles
subject to which the parties m ay create rights and duties for them selves w hich the law
will uphold.” Thus the law shall not lay dow n absolute rights and liabilities o f the
contracting parties; rather it shall lay dow n only the essentials o f a valid contract
“The parties to a contract, in a sense, make the law for themselves.”
The law o f contract in India is contained in the Indian Contract Act, 1872. This
A ct is based mainly on English C om m on law consisting o f ju d icia l precedents. The
A ct is not exhaustive as it d oes not deal with all the branches o f the law o f contract.
There are separate Acts which deal with contracts relating to negotiable instruments,
transfer o f property, sale o f goods, partnership, insurance, etc. B efore 1930, the A ct
also contained provision s relating to contracts o f sale o f g o o d s and partnership.
The Act (w.e.f. Septem ber 1, 1872) d oes not affect any usage o r custom o f trade
(not inconsistent with the provision s o f the Act) (Sec. 1). A m inor amendment in Sec.
28 o f the A ct was made by the Indian Contract (Amendment) Act, 1996. The general
principles o f the law o f contract are laid dow n under Secs. 1-75 o f the Act.
“T o consummate a contract there must b e mutuality as w ell as a m eeting o f the
minds o f parties.” ‘Mutuality’ means equality o f rights betw een the parties. Either
party should’ve equal right to enforce the contract. F or example, where on e o f the
parties to a contract is a minor, there is no mutuality. Further, in a contract there is
a consensus a d idem i.e. ‘m eeting o f m inds’. “A contract, like a tort, is not unilateral.”
In a tort, a w rong is com m itted by one person against the other.
A ccordin g to Anson: “A contract is a legally binding agreement betw een two
or m ore persons by which rights are acquired by one o r m ore to acts or forbearances
on the part o f the other or others.” Salm ond said: "It is an agreement creating and
defining obligation s betw een the parties.” W hile, a ccordin g to P ollock: “Every
agreement and prom ise enforceable at law is contract.”

Section 2(h) o f the Indian Contract Act, 1872, defines the term “contract” as ‘an
agreement enforceable by law.’ A n ‘agreement’ is a prom ise and a ‘p ro m ise’ is an
accepted proposal. Thus, every agreement is made up o f a proposal o r offer from one
side and its acceptance by the other (there must be two or m ore persons; on e person
cannot enter into an agreement with himself). A n agreement is a w ider term than a
contract. Every contract is an agreement, but every agreement is not a contract (i.e.

Ml
 2 Law Guide for Competitive Exam inations

legally binding agreement). An agreement becom es a contract when the follow in g

conditions are satisfied (Sec. 10):

(1) There is some consideration for it

(2) The parties are competent to contract.

(3) Their consent is free.

(4) Their object is lawful.

(5) The agreement mustn’t be expressly declared to be void.

(6) The terms o f the agreement must not be vague or uncertain (Sec. 29).

(7) The agreement must be capable o f performance (Sec. 56).

Salmond has rightly observed: ‘T h e law o f contract is not the w hole law o f
agreements, nor is it the whole law o f obligations. It is the law o f those agreements
which create obligations, and those obligations, which have their source in agreements.”

A contract arises from an agreement, which arises m ostly through the p rocess
o f negotiation between the parties, one making the offer and the other accep tin g it.
A contract may be oral or in writing. But in certain special cases the A ct lays dow n
that the agreement, to be valid, must be in writing or/ and registered, viz. an agreement
to make a gift must be in writing and registered (Sec. 25).

Intention to C reate a Legal O bligation

There is no provision in the Indian Contract Act requiring that an offer or its acceptance
should be made with the ‘intention o f creating a legal relationship’, w hile under
English law it is so. The intention o f the parties is to be ascertained from the terms
o f the agreement and the surrounding circumstances. In ‘socia l’/ ‘fam ily’ agreem ents
(viz. agreements between husband and wife, an agreement to entertain a person with
a dinner, or to go to movie, etc.) it is usual that the parties d o not intend legal
consequences, while in ‘business’ agreements it is usual that the parties intend legal
consequences to follow. However, the parties could intend legal co n seq u en ces in
family agreements and likewise do not intend so in business agreements.

Test o f contractual intention is objective, not subjective. M erely b eca u se the

promisor contends that there was no intention to create legal obligations w ou ld not
exempt him from liability (See Carlill v C arbolic Smoke Ball Co. case). In M cG re g o r
v McGregor (1888) 21 QBD 424, a husband and a w ife withdrew their com plaints
under an agreement by which the husband promised to pay her an allow an ce and she
to refrain from pledging his credit. Held that there is a binding contract. How ever, in
Balfour v Balfour (1919) 2 K.B. 571, a couple went to England on leave. F or health
reasons the wife was unable to accompany the husband again to C ey lon (H usband’s
place o f work). The husband promised to pay 30 pounds per month to his w ife as
maintenance, but he failed to pay. The husband was held not liable, as there w as n o
intention to create legal relationship.

In Jones v Padavatton (1969) 2 All ER 616, the daughter acting on her m oth er’s
promise left her service and gone to another country for education. T he m other
undertook to foot the expenses. For five long years the daughter could not co m p le te
her education. Differences arose between them and the mother stopped the payments.
Held, the engagement did result in a contract, but only for a reasonable period.
 Law o f Contract 3

Kinds o f C o n tra cts

(A) From the point o f view o f Enforceability

(i) Valid contract- It is an agreement enforceable b y law [Sec. 2{h)\.
(ii) Voidable contract- It is an agreement which is enforceable by law at the
option o f one or m ore o f the parties thereto, but not at the option o f the
other or others [Sec. 2(0]. Until it is avoided or rescinded by the party
entitled to do s o by exercising his option in that beh alf it is a valid
contract; after it is repudiated, it becom es a void contract.
(iii) Void contract- A contract which ceases to be enforceable by law becom es
void [Sec. 2(f)]. Such a contract is a nullity, as for there has been no
contract at all.
‘A n agreement not enforceable by law is said to be v o id ’ [Sec. 2(g)], Thus a
void agreement is void ab initio i.e. no agreement at all from its very inception (e.g.
an agreement with a minor or an agreement without consideration). A ‘void agreement’
never amounts to a contract; a ‘void contract’ is valid when it is entered into, but
subsequent to its formation something happens which makes it unenforceable by law.
A contract cannot b e void ab initio. A valid contract becom es void because o f
supervening im possibility or illegality (Sec. 56) or repudiation o f a voidable contract,
or when the event in a contingent contract becom es im possible (Sec. 32).
(iv) Unenforceable contract- It is one which is valid in itself, but is not
capable o f being enforced in a court o f law because o f som e technical
defect such as absence o f writing, registration, etc., or time barred by
the law o f limitation.
(v) Illegal o r Unlawful contract- The term ‘illegal contract’ is inappropriate
as it w ould mean an agreement enforceable by law and contrary to law.
The term ‘illegal agreement’ is appropriate. A n illegal agreement is
narrower in scop e than a void agreement. ‘All illegal agreements are
void but all void agreements are not necessarily illegal.’ For example,
an agreement with a minor is void as against him but not illegal.

(B) From the point o f view o f M od e o f Creation

(i) Express contract- W here both the offer and acceptance constituting an
agreement are made in words spoken or written, it is an express contract.
(ii) Im plied contract- W here the offer and acceptance are made otherwise
than in w ords i.e. by acts and conduct o f the parties, it is an implied
contract.
Sometimes, an offer is expressed in w ords and the acceptance is im plied from
acts and circumstances. Such contracts may be called as contracts o f mixed character.

(iii) Constructive or quasi-contract- Such a contract does not arise by virtue

o f any agr eement between the parties but the law infers or recognizes a
contract under certain special circumstances. The Contract Act has named
such contracts as “certain relations resembling those created by contract”
(Secs. 68-72). An example- liability o f a person to whom m oney is paid
under mistake to repay it back.
4 Law Guide for Competitive Examinations

(C) From the point o f view o f the Extent o f Execution

(i) Executed contract- A contract is said to be executed when both the
parties tb contract have completely performed their share o f obligation
and nothing remains to be done by either party under the contract. F or
example, when a bookseller sells a book on cash payment.
However, where only one o f the parties to a contract has perform ed his share
o f obligation and the other party is still to perform his share o f obligation, then also
the contract is called ‘executed’. Such contracts are called Unilateral contracts. F or
example, a public advertisement offering a reward to anyone who finds a m issin g
thing/ person.
(ii) Executory contract- A contract is said to be executory when either both
the parties to a contract have still to perform their share o f obligation
in toto or there remains something to be done under the contract on both
sides. Such contracts are called Bilateral contracts or Future contracts.
For example, A agrees to coach B, a pre-medical student, from first day
o f the next month and B promises to pay A Rs. 500 per month.

Standard Form C on tract

When a large number o f contracts have got to be entered into by a person, from a
practical point o f view and for the sake o f convenience, a standard form for the
numerous contracts may be used. An insurance policy, shares or a railway ticket are
few examples o f such standardized contracts. The “special terms and conditions”
becom e binding as part o f the contract only i f they are brought to the n otice o f the
acceptor before or at the time o f contract. In view o f the unequal bargaining p ow er
o f the two parties, the courts and the legislature have evolved certain rules to protect
the interest o f the weaker party: -
(1) Reasonable notice - e.g. by printing on a ticket, ‘T o r conditions see
back”, or obtaining signatures on the document containing terms, or
otherwise explaining the terms. Where an adequate notice is not given
the offeree is not bound by the terms.
(2) Notice should be contemporaneous with the contract - I f a party to the
contract want to have exemption from liability he must give a notice
about the exemption while the contract is being entered into and not
thereafter (Olley v M arlborough Court, Ltd. (1949) 1 K.B. 532).
(3) Terms o f contract should be reasonable - I f the terms o f the contract are
unreasonable and opposed to public policy, they will not be enforced.
(4) Fundamental breach o f contract - N o exemption clause is allow ed to
permit the non-compliance o f the basic contractual obligation i.e.
obligation which is fundamental or ‘core’ o f the contract. Thus, a dry
cleaner has to be answerable, even i f the contract contains all sorts o f
exemption clauses, i f the cloth is altogether lost.
(5) Strict construction - A strict construction shall be applied to exemption
clause, and any ambiguity is to be resolved in favour o f the weaker
party.
 Law o f Contract 5

(6) Statutory protection - The English Unfair Contract Terms Act, 1977
severely limits the right o f the contracting parties to exclude or limit
their liability through exemption clauses in the agreement. India lacks
such an Act; Indian Airlines v Madhuri Chowdhury (AIR 1965 Cal
252) highlights the inadequacy o f the Indian Contract A ct in providing
relief to the weaker party against the exemption clauses.
(Note: Government Contracts include tenders, auctions and standard form
contracts).

2. BASIC ELEMENTS OF A CONTRACT

The four basic elements o f a contract are: Offer, Acceptance, Consideration, and
Contractual capacity.

[I] O ffer (Proposal)

(1) The first essential for creating a contract is a valid offer or proposal (the
term ‘offer’ has been used in English law and the term ‘proposal’ under the
Indian law). A s per Sec. 2(a), an offer or p roposal has the follo w in g
ingredients:
(i) one person signifies to another,
(ii) his willingness to d o or abstain from d oin g anything,
(iii) with a view to obtaining the assent o f that other.
(2) A c c o r d in g to Sec. 3, to ‘s ig n ify ’ m ean s that the p ro p o sa l m ust b e
communicated to the other party. Sec. 9 provides that a valid proposal may
b e m ade by w ords (written or spoken) or b y conduct. Thus stepping into a
taxi and consum ing eatables at a restaurant, both create im plied prom ise to
pay for the benefits enjoyed. Similarly, a bid at an auction. In Upton Rural
District C ou n cil v P ow ell (1942) i All E R 220, a fire broke out in the
defendant’s farm. B elieving that he was entitled to the free service o f Upton
F ire B rigad e (which he w as not), he su m m on ed it. U p ton cla im ed
com pensation for its services. Held, the services were rendered on an im plied
prom ise to pay for them.
(3) Certainty o f offer- The terms o f the offer must b e certain and not vague (Sec.
29). A agrees to sell to B “m y white horse for Rs. 500 or Rs. 1000”. There
is nothing to show which o f the tw o p rices was to be given, thus it is not a
valid offer.
(4) Com m unication o f offer - A ccordin g to Sec. 4, the com m unication o f a
proposal is com plete when it com es to the know ledge o f the person to whom
it is made. A cting in ignorance o f an offer d oe s not amount to the acceptance
o f that offer. Thus, kn ow ledge o f an offer is must before the offer can be
accepted. In Lalman Shukla v Gauri Dutt (1913) 11 All LJ 489, the defendants
by handbills offered to pay Rs. 501 to anyone discovering the lost boy. The