A contract is a legally binding agreement between parties which has specific legal

obligations, the breach of which will lead to legal consequences. The provisions of
a contract are included in the Indian Contract Act, 1872. Section 2(h) of the Indian
Contract Act, 1872 defines a contract as “an agreement enforceable by law is a
contract”. Section 2 of the Act is an interpretation clause. A contract can be formed
only with mutual consent and meeting of minds (Section 13 – Consensus ad idem).

The type of contracts differs on the basis of:

 Validity
 Formation
 Performance

Types of Contracts Based on Validity:

As stated above, the types of contract based on the validity of it is as follows:

1. Valid
2. Void
3. Voidable
4. Illegal
5. Unenforceable

1. Valid contract:
A valid contract is one which is enforceable in the court of law by fulfilling all the
basic requirements.

The essentials of a valid contract are offer, acceptance, free consent of the parties,
intention to form a legal obligation, lawful consideration, lawful object, capacity to
contract as mentioned in Section 10 of the Indian Contract Act, 1872.

Every contract is an agreement but every agreement is not a contract. When an

agreement fulfills conditions such as consideration (Section 2(d), Section 25),
competent parties (Sections 11 and 12), free consent of the parties (Section 13 to
Section 22) and a lawful object (Section 23 to section 30) it is considered as a valid
contract.
Offer:

Section 2(a) of the Indian Contract Act defines an offer as “When one person
signifies to another his willingness to do or to abstain from doing anything, with a
view to obtaining the assent of that other to such act or abstinence, he is said to
make a proposal”. The first step to initiate a contract is to make an offer.

Acceptance:

Section 2(b) of the Indian Contract Act, 1872 describes acceptance. When the
proposal is approved or accepted by the other party then it is called acceptance.
Thus the acceptance becomes a promise”.

Free consent:

Section 14 of the Indian Contract Act, 1872 talks about Free Consent. When
consent is obtained by force or coercion (Section 15), undue influence (Section
16), fraud (Section 17), misrepresentation (Section 18), or by mistake (Sections 20,
21, 22), then it is not a free consent.

In Ranganayakamma v. Alwar Setti, the husband’s dead body was not allowed for
cremation by the relatives until the widow adopted a 13 year old boy. The court in
this case held that the adoption is not legally binding as the consent of the widow
was obtained by coercion.

Lawful consideration:

Consideration means something in return for the promise of the contract. Section
2(d) of the Indian Contract Act, 1872 includes consideration. If the consideration is
unlawful, then the agreement is void according to section 23 of the Act.

In S.L. Fernandes v. V.M. Fernandes, the plaintiff was the owner of liquor sale and
bar with a license. He made a contract with the defendant where he entrusted his
business to him and received a yearly payment and eventually transferred the full
control later. But the defendant did not hold any license. When the plaintiff
brought an action against the defendant for not paying the yearly payment, the
court held that the business was without license and was prohibited by law. Hence
according to Section 23 of the Act, the plaintiff cannot recover any amount.

Lawful object:
Section 23 of the Indian Contract act, 1872, lists out the considerations or objects
which are unlawful. An agreement is unlawful if the object or consideration is
forbidden by law in the first case. In the second case, if it is not forbidden but if the
permission would breach any other provisions of law. In the third case, if it is
fraudulent, in the fourth case, if it causes injury or damage to property or person or
anything which the court of law considers as immoral and against public policy.

Capacity or competent to contract:

Section 11 of this Act talks about the capacity of the parties to contract. The
section mentions that the person who enters into a contract should be a major
(above 18 years if age according to Indian Majority Act), he should be of sound
mind and he should not be disqualified by any law.

The famous case is Mohori Bibee v. Dharmodas Ghose. In this case, the plaintiff
mortgaged his property to a money lender for loan. The minor brought an action
against him later and contended that he was a minor at the time of the contract and
hence is should be void. The Privy Council allowed the pleading that he was a
minor at the time of contract.

2. Void contract:
Section 2(g) of the Indian Contract Act explains void contract. A contract which
cannot be enforced by law is called a void contract.

A void contract is not enforceable in the court of law from the time the contract
came into existence. A contract is void when it does not comply with the essentials
of a valid contract. For example: Section 25 of the Indian Contract Act, 1872,
states that an agreement without consideration is void except a few exceptions.
Similarly, Section 23 of the Act states that an agreement with unlawful
consideration is void. The above two sections were considered in case of Kamta
Prasad v. Additional District Judge.

All illegal contracts are void but all void contracts are not illegal.

3. Voidable contract:
Voidable contract is explained under Section 2(i) of the Indian Contract Act, 1872.
According to this section, a contract is valid in the beginning but can be made void
by the aggrieved party to the contract. A voidable contract may or may not be
legally enforceable.
According to Section 19 of the Indian Contract Act, in case of coercion (Section
15), undue influence (Section 16), fraud (Section 17) and misrepresentation
(Section 18), the contract is voidable.

Section 53 of the Indian Contract Act states that, if one party prevents the other
party from fulfilling the promise (in case of reciprocal promises), then the contract
is voidable.

As per Section 55 of the Act, if the party fails to perform something which he
promised to perform within a specified time, then the contract becomes voidable.

4. Illegal contract:
Illegal contracts are those which are forbidden and prohibited by the law. In case of
void contracts the agreement may or may not be forbidden by law but both the
agreements are unenforceable. Money used for illegal purpose is not recoverable.
When the consideration is legal and lawful but purpose of the contract is unlawful
then it makes the contract void according to Section 23 of the Act.

5. Unenforceable contracts:
These are the contracts which cannot be enforced in the court of law due to
expiration of time or any technical defect. They are neither void nor voidable.

Types of Contract Based on Formation:

1. Expressed contract:
According to Section 9 of the Indian Contract Act, 1872, an expressed contract is
one in which the terms and conditions of the contract are expressed in oral or
written form.

2. Implied contract:
In this type of contract, according to Section 9 of the Indian Contract Act, 1872,
the terms and conditions are implied through actions or conduct of the party.

3. Quasi contract:
Quasi contract is a contract which is formed by the court of law to prevent unfair or
unjust benefit of one party at the cost of the other party. The parties do not enter
into a contract with an intention to do so. It is a valid contract. Quasi contract is
mentioned in the English Law. In India this type of contract is called “certain
relations resembling those created by contract”.

Types of Contract Based on Performance:

1. Executed contract:
In this type of contract, both the parties have completed their obligations as per the
contract and the contract is completed. For example, when we pay for a product
and simultaneously receive it.

2. Executory contract:
In this type of contract, one of the parties to the contract has not completed their
obligation and the contract is yet to be completed. For example: yearly payment of
school fees is made and the contract remains for the entire year.

3. Unilateral contract:
It is a one sided contract. The obligation is to be performed by only one party to
the contract. For example: insurance companies.

4. Bilateral contract:
In this type of contract, both the parties to the contract have obligations to
perform.

Understanding the Importance of Contract

in Business
Importance of Contracts and Impact of
Contract Law In Business
A contract is a formal document, accepted by both parties, employer and
employee, and is the base for any flourishing business. Importance of contracts
and contract law is that Contracts in business provide better visibility to meet the
duties and achieve the objectives as agreed per the agreement. It serves as a great
support for building a good rapport with the customer or the desired party.

Concerning this, Contract management is a strategy adapted to manage contracts

in business legally signed with customers, partners, or employees. Contract
management includes adjusting the terms and conditions in contracts and
ensuring adherence to the rules as per contract. Contracts in business guarantee a
standard procedure, by giving clarity of your requirements. It helps to achieve
the desired goals easily and serves as proof in case the expectations of one party
is not fulfilled. It is viewed as breaching the contract and the person has to bear
the loss for the service.

It is important to get your contract drafted and approved by a lawyer legally.

The importance of contract law in business becomes inevitable due to the
following reasons:

Proof of Details (Impact on business)

The prime purpose of creating a contract is related to the recording of details,

which both parties have agreed with mutual consent. It provides a precise
knowledge of the services provided by the third party or monetary expectations
to be met by the person. These details will serve as legitimate proof and are very
important in a contract.

Avoids Misunderstanding (Impact on business)

Misunderstanding is a common problem confronted in any business due to

several reasons. To avoid such cases, drafting a contract is important and it is
required for both parties to read the consented rules and abide by them. It has a
large impact on the business as breaching the contract rules can lead to conflicts
between the parties and thereby affect the business overall. Therefore contracts
in business are important.

Provides Security (Impact on business)

A contract document plays a pivotal role in making the parties secure as it

clearly specifies the tenure of the contract and set of responsibilities. Here, an
employer is lawfully responsible to pay the committed salary on time and the
employee is responsible to perform his duties as designated. Any deviation is
considered contract breaching and, either of them has the sole rights to take
appropriate action. Therefore it is pivotal to understand the importance of law of
contracts.

The contract can act as legal evidence if any of the party files a case against the
other at times of contract breaching.

Provides Confidentiality

It includes an NDA (Non-disclosure agreement, which protects confidential

information. According to this agreement, concerned parties are not entitled to
reveal the business and monetary transactions between them with any third
person. In case of disclosure, either of them will be subjected to suffering as per
contract rules, enforced by the law legally.

Acts as a Record of the Business (Impact on business)

A written contract is a relevant record stating the mutual consent of the

proceedings listed in the agreement. It can be used for future reference and,
comprises information regarding the stipulated delivery timeline of any work
assigned as per contract. The tenure of the contract is also highlighted in the
agreement, which provides more clarity regarding the termination details.
However, the contract may be terminated in the worst case if the other party is
not fulfilling the rules mentioned in the contract or bypassing the terms.

Importance of Contract Law

Law of contracts is important because it can be found practically anywhere, and

it can effect our purchases, jobs, and a variety of other elements of our lives. If
someone breaks a contract, they may face legal consequences.

Parking tickets are an example of law of contracts that directly affects people.
There are various stages to this process. When a car enters a paid parking lot and
pays attention to the signs, it is effectively entering into a contract.

Despite not formally consenting to the contract, they accept an invitation to treat
by observing the signs and parking their automobile. If a parking ticket is issued,
it means that the car has broken the conditions of the contract, such as not
paying. This implies the driver will have to pay a fine until they pay it, appeal it,
or go to court to fight it. People have won lawsuits against parking corporations
in the past.

Conclusion
The above reasons make contracts inevitable for small-scale businesses to keep
their information secure and protect them from crooked investors. Besides, it can
safeguard employees when employers refuse to abide by the contract rules by
giving false commitments to employees and misleading them. In this era,
the importance of law of contracts in business needs to be understood.

However, drafting a contract agreement, taking into account all these factors is a
challenging and time-consuming process. So, it is advised to seek the help of an
expert law attorney to help you through the process.
 Strict legal action to be taken against people who breach the contract agreement.
This, in turn, will reduce the future chances of people failing to follow the rules
stated in the contract. Most contracts are written based on the governing law
section, which depends on the state in which the contract was enforced and the
law acts over the contract's viability.

In a general sense, the word ‘Contract’ is derived from the Latin

word Contractum which means to meet together or to bring together.
Therefore, we can say that bringing two or more people together to make an
agreement is called a contract, where two or more people have to agree on the
same thing in the same sense. In this law note, we will learn about the definition of
a contract and after that we will focus on the essential elements of a valid contract.
Let us start.

Definition of Contract
A contract is defined as an agreement enforceable by law, according to section 2(h)
of the Indian Contract Act, 1872. Certain conditions need to be fulfilled for an
agreement to be called a valid contract under law. According to Anson, the law of
contract is the field of law that establishes the conditions under which a promise is
legally binding on the person who makes it.

Essentials of a Valid Contract

Section 10 of the Indian Contract Act mentions that all agreements are contracts if
they are made by:-

 Free consent of parties,

 Parties competent to contract,
 For a lawful consideration and with a lawful object, and
 Not expressly declared void.

Expanding the above points, we can say that the essential elements or
necessary conditions of an agreement to become a valid contract are as
follows:-
1. More than one party.
2. Agreement.
3. Intention to create legal relationship.
4. Lawful consideration.
5. Capacity of parties to contract.
6. Free consent.
7. Lawful object.
8. Certainty of meaning.
9. Agreements not expressly declared void.

Let us learn about all these 9 essential elements of a valid contract in detail.

1. More than one party.

To create a valid contract, there must be two parties, and both the parties must be
major, of sound mind, and not disqualified by law. A single person cannot
constitute a contract.

2. Agreement.

Agreement is necessary to constitute a contract. Offer and acceptance together

make a contract. Any agreement made by two parties will be legally enforced
unless it is declared void by law.

3. Intention to create a legal relationship.

A contract must be made with the intention to create a legal relationship. It means
that if one of the parties fails to perform his promise, then that person will be
answerable under the law.
Case Law: Balfour vs Balfour

Mr and Mrs Balfour lived in Ceylon, but during holidays they went to England.
Mrs Balfour had developed rheumatic arthritis, and doctors recommended her to
remain in England because the environment in Ceylon is unsuitable for her health.
Therefore, while leaving, Mr Balfour promised her wife to pay $30 per month till
she comes back to Ceylon. After some time, Mr Balfour denied paying the money,
and Mrs Balfour filed a suit against him for breach of contract. The court held that
Mrs Balfour was not entitled to any money as there was no intention to create a
legal relationship between the parties, and hence there was no contract.

4. Lawful consideration.

Consideration means a reasonably equivalent or corresponding benefit passed on

by the promisor to the promisee. It is something that has value in the eyes of the
law.

Consideration must be lawful, i.e., it must not be forbidden by law, or not be

fraudulent or must not involve or imply injury to the person or property of another.
Moreover, it must not be immoral or opposed to public policy.

Illustration: A promises to obtain employment for B in a government organisation,

for which B promises to pay Rs. 100000 to A. Here consideration is unlawful as it
amounts to a bribe which is forbidden by law.

5. Capacity of parties to contract.

Section 11 of the Indian Contract Act states that a minor, lunatic, idiot and a
drunken person cannot enter into a valid contract.
6. Free consent.

According to section 14 of the Indian Contract Act, consent is said to be free when
it is not caused by:-

A. Coercion (Section 15) – When a person commits or threatens another person to

commit an act that is forbidden by law. The agreements made under coercion are
voidable, which can be declared void by an option of any of the parties to the
contract.

B. Undue Influence (Section 16) – When a contract is made because of the

dominant position of one party and due to this dominant position, the other person
cannot deny that contract.

C. Fraud (Section 17) – According to Section 17 of the Indian Contract Act, when
a party contracts with the other party with the intention to deceive, it amounts to
fraud by misleading the facts.

D. Misrepresentation (Section 18) – It is called misrepresentation when a contract

is made by false representation of facts or when a party misleads the other by
showing false things and making them look genuine

E. Mistake (Section 20 to 22)

(i) Mistake of fact by both the parties (Section 20) – An agreement will be
considered void if both the parties to an agreement are under a mistake of fact.
 (ii) Mistake of fact by one party (Section 22) – An agreement will not be
considered void if there will be a mistake of fact by only one party.

(iii) Mistake of law (Section 21) – Mistake of law will not be considered avoidable
if a mistake is caused against any law force in India. But a mistake as to a law not
in force in India will have the same effect as a mistake of fact.

Related Law Note: What Is Free Consent in Contract

7. Lawful object.

Section 23 of the Indian Contract Act states that the object of contract will not be
lawful if it is:-

 Illegal.
 Defeats the provisions of law.
 Fraudulent.
 Immoral or opposed to public policy.
 Causes harm to a person or property.

Illustration: A hires a house from B to use it as a gambling place. Gambling being

an illegal act, the contract of hiring is void.

8. Certainty of meaning.

Section 29 of the Indian Contract Act states that the terms of a contract must be
clear and shall not be uncertain, vague, or indefinite.

9. Agreements not expressly declared void.

 The agreements which are not enforceable by the court of law will be declared
void. They include:-

 Agreement with unlawful consideration and object.

 Agreement having no consideration.
 Agreement in restraint of trade, marriage, legal proceedings.
 Agreement without certain meaning.
 Wagering agreements.

Discharge of Contract
The discharge of the contract takes place when the obligations of the contract between the parties of the
contract come to an end. This also ends the legal validity of the contract. The discharge of the contract is
also referred to as the termination of the contract. The best way to discharge a contract is by going in
accordance with the terms of the contract until the end of the contract. In addition to that, a contract can be
discharged by six other ways, which are discussed in this article.

By Performance
Performance regards to the completion of the deal in accordance with the terms of the contract. To have a
closure of the deal, both parties must live up to the end of their bargain. The contract remains open until
the parties perform correctly under the contract. The performance can be either actual or attempted.

Actual
Both the parties in a contract must perform, or offer to perform, their promises. Unless The Indian
Contract Act, 1872 or any other law excuses or dispenses such performance. The representatives of the
promisors are bound by the promises in the case where a promisor dies before performance unless the
contract denotes a contrary intention. This is the actual performance.

Illustration: A promises to deliver the goods to B on a particular day with payment of Rs.1,000. But A
dies before such day. So A’s representatives are to deliver the goods to B, in turn, B has to pay Rs.1,000 to
A’s representatives.

Attempted
Attempted performance is a tender or form which the promisors predict and perform in the contract.
However, an attempted performance should always be:

 Unconditional
  Should be for the complete obligation of the contract
 Formulate at a proper place and time
 A proper person or adequate agent for that person must formulate it

Illustration: The person A contracts to deliver to person B at his warehouse, on a certain day, a 100 bales
of cotton of a certain quality. To make an offer of performance, person A must take the cotton to B’s
warehouse, on that day. The delivered 100 Bales of cotton must be of said quality for person B to be
satisfied to contract.

By Mutual Agreement
The parties of the contract need not perform if they come into a mutual agreement. This requires the
agreement of substituting with a new contract or altering the existing contract. If the performance misleads
from the terms of the agreement, then there would occur a breach of the contract.

Illustration: Consider A owes a certain amount of money to B under a contract. A, B and C agree to the
contract that B will henceforth consider C as his debtor and not A as his debtor. The old debt of A and B
comes to an end, and a new contract debt from C to B is initiated.

Novation
At times the payment or performance does not coincide with the terms of the agreement. Sometimes the
debtor will also go into bankruptcy unless there is a reconstruction of the debt. In such a case, the parties
use the novation as it is the only way to pay the funds.

Rescission
It is the cancellation of the contract and unwinding of the transaction. This is to bring the parties of the
contract to the position they were before entering the contract.

Alteration
The modification or alteration of the contract with the consent of the parties. The effect of the alteration is
the formation of a new contract.

Remission
One of the parties allows the other to delay or extend the time of the performance or allows to remit in part
or as a whole. This means the discharge from the due, a release from the penalty, forfeiture or debt, pardon
of transgression, relinquishment of a right, claim or obligation.

Waiver
The waiver refers to a voluntary abandonment or surrender of the rights or privilege of the contract. The
waiver is generally in the form of writing. An example of it is the disclaimer, which after its acceptance
becomes a waiver. Sometimes the action of a person also acts as a waiver. The waiver has different other
names. They are releases, exculpatory clauses or a holding of the harmless clauses.
By Lapse of Time
There will be a discharge of the contract if the performance is not completed within the given period. This
will likewise lead to the breach of contract. In such a case, the person can file a suit in the court to enforce
his rights from the contract. The person can file in the court in regard to The Limitation Act, 1963. If the
time period expires as stated in the Act, then there is a discharge of the contract, and the promisee cannot
enforce the promisor.

By Operation of Law
The provisions of the law do not allow the performance of the contract. This regards to the changes in the
existing laws also. But it does not concern the court order or an agreement. The following are the situations
where the law authorises the termination of the contract:

 Insolvency
 Death
 Alterations in the unauthorised materials
 Merger

Illustration: Michael Jackson had to perform on a world tour. But he was met with an unfortunate death;
this made all his contracts void and null.

By Supervening Impossibility
This states the provisions which were possible at the establishment of the contract would become
impossible in the course of time. The following are the impossibilities:

Physical: This regards to the destruction of the subject matter.

Practical: It relates to the death of the incapacity of the party.

Legal: The changes in the law cease the existence of the foundation of the contract.