C1- CONTRACT-MEANING, ESSENTIALS & TYPES

24 August 2023 00:11

• INDIAN CONTRACT ACT, 1872:

○ The law of contracts differs from other branches of law in a very important respect.

○ It does not lay down so many precise rights and duties which the law will protect and
enforce; it contains rather a number of limiting principles, subject to which the parties may
create rights and duties for themselves which the law is expected to uphold.

○ Thus, we can say that the parties to a contract make law for themselves. So long as the
parties to a contract do not transgress the general law of the land, they are free to frame
any rules they like in regard to the subject matter of their contract and the law gives effect
to their contract.

○ The Act is not exhaustive since it does not take into its purview all the relevant legislations.
○ It does not override customs or usages.

• The law of contract creates Jus in Personam and not Jus in Rem which means that the rights
protected by a valid contract are enforceable only against a person who is a party to the contract,
not against the whole world.
○ Jus in Personam is a Latin term which means right against a person.
○ Jus in Rem means the right against a thing at large.

• Section 2(h) of the Act defines a contract thus:

“An agreement, enforceable by law is a contract.”
From the above definitions we can understand that a contract essentially has two following
elements:
1. An Agreement 2. Enforceability, or legal obligation

1. Agreement Section 2(e) of the Act defines agreement as:

“Every promise and every set of promises forming the consideration for each other is
an agreement.”
From this definition it is clear that the promise means a proposal or offer which has been
accepted. It can be further explained with the following example.

Offer + Acceptance = Agreement

○ Plurality of parties: It is worth noticing here that for making a valid agreement, there have
to be two parties—one party who makes an offer and the other party who accepts the offer.

○ Consensus ad idem: Another important aspect of a valid agreement is consensus ad idem

that is the identity of minds. Difference in opinion of two parties involved in forming an
agreement will render the agreement void. Therefore, both parties must agree for the deal
and there must be identity of minds in respect of the subject matter of the contract.

2. Enforceability: To treat an agreement as a contract, the contract must give rise to legal
obligation. If an agreement is not enforceable by law then it cannot be called a contract.
There is no legal obligation for moral, religious or social agreements. That is why an
agreement to go to watch a cricket match or eat dinner together will not lead to a valid

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 agreement to go to watch a cricket match or eat dinner together will not lead to a valid
contract because such agreements do not create a duty enforceable by law. In such cases,
the involved parties do not intent to create legal relation and this kind of agreement is just
of social nature having no enforceability in the eyes of law. On the other hand, all business
agreements are created with an intention to create legal obligation with the parties who
enter into that agreement.

"All Contracts are agreements but all agreements are not contracts."
ESSENTIAL ELEMENTS WHEN ADDED TO AN AGREEMENT MAKE A CONTRACT.

OFFER + ACCEPTANCE = AGREEMENT

AGREEMENT + ENFORCEABILITY
(INCLUDES ESSENTIAL ELEMENTS & LEGAL OBLIGATION) = CONTRACT

• ESSENTIAL ELEMENTS OF A VALID CONTRACT

“All agreements are contracts if they are made by 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.”

A contract must have the following elements:

1. Intention to create legal relationship : As per surrounding circumstances if a reasonable

person would regard the agreement as intended to be binding legally. Social, Moral or Domestic
obligations are not legally binding.
Domestic, Social or Moral agreements : Presumption - not intended to be legally binding. (Unless
consequences are grave such as the agreement making livelihood or basic rights impossible
otherwise)
Commercial agreements: Presumption - intended to be legally binding.

2. Lawful object : The objective of the agreement must be lawful. Any act prohibited by law will
not be valid

3. Agreement not expressly declared void : Any agreement that is not legally tenable is declared
void. e.g., restraint of legal proceedings, agreement in restraint of trade, and agreement by way
of wager and agreement in restraint of marriage”, has been expressly declared void.

4. Proper offer and its acceptance : To create a valid contract, there must be two or more
parties–one party to make an offer (offeror) and the other party to accept the offer (offeree).
Also the offer must be clear and properly communicated to the other party. Similarly, acceptance
must be communicated to the other party. The given acceptance must be unconditional and
properly communicated to the offeror.

5. Free consent : Consent is said to be free when it is not caused by (i) coercion, (ii) undue
influence (iii) fraud, (iv) misrepresentation, or (v) mistake.

6. Capacity of parties to contract : Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is of sound mind, and is capable / is
authorised to or is not disqualified from contracting by any law to which he is subject.

7. Certainty of meaning : According to Sec. 29 of the Act, an agreement, the meaning of which is
not certain or capable of being made certain, is void.

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 8. Possibility of performance : As per Sec. 56, if the act is impossible of performance, physically or
legally, the agreement cannot be enforced by law.

9. Lawful consideration : An agreement must be supported by a consideration of something in

return. The consideration must be of ‘something’ to which law attaches a value. The value need
not be adequate for the validity of the contract.

10. Legal formalities : The Contract Act does not insist that the agreement must be in writing—it
could be oral. However, in some cases the law strictly insists that the agreement must be in
writing, like agreement to sell immovable property must be in writing and should be registered
under the Transfer of Property Act, 1882. Such agreements are valid only when they fulfil all the
formalities, like writing, registration, signing by both the parties.

• KINDS OF CONTRACTS
○ ON THE BASIS OF VALIDITY
1. VALID CONTRACT: Meets all essential elements of a contract.

2. VOID CONTRACT: Ceases to be enforceable by law from the ends of both parties. (Could
have been enforceable at the time of entering into the contract.)

3. VOIDABLE CONTRACT: Enforceable by law at the option of one or more parties but not at
the option of other or others. One of the essential elements such as free consent or capacity
or consideration is missing on one end.

4. ILLEGAL AGREEMENT: Law prohibits to be made. ab-initio or initially incorrect.

5. UNENFORCEABLE CONTRACT: Good in substance but with some technical defect, i.e.,
absence of writing, no stamp duty, barred by limitation etc.

○ ON THE BASIS OF FORMATION

1. EXPRESS CONTRACT: Explicitly said or written.

2. IMPLIED CONTRACT: Not expressed but implied/inferred by action or conduct.

3. QUASI CONTRACT: Based on the principle that a party must not enrich itself at the expense
of the other party. Intent missing to enter into the contract however, to maintain fairness it
is imposed on a party required to perform it.

4. E-COMMERCE CONTRACT: Modelled, specified, executed and deployed by a software

system. The must meet the conditions of a valid contract through a software conduit.
WAYS TO FORM E-COMMERCE CONTRACTS:
□ CLICK WRAP: By clicking, 'I accept' on terms and conditions.
□ BROWSE WRAP: Mere use (browsing) of the website/app makes it binding on the
contracting party.
□ SHRINK WRAP: By reading terms and conditions after opening the box upon delivery.

○ ON THE BASIS OF PERFORMANCE

1. EXECUTED CONTRACT:
□ If the consideration for the promise in a contract is given or executed.
□ If both parties have performed their respective obligations of providing and agreeing
to consideration.

2. EXECUTORY CONTRACT: when the reciprocal promises which serve as consideration is to be

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2. EXECUTORY CONTRACT: when the reciprocal promises which serve as consideration is to be
performed in future.
□ UNILATERAL: One party has to perform promise or obligation in future at the time of
formation of contracts.
□ BILATERAL: Both parties have to perform promise or obligation in future at the time of
formation of contracts.

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