SUBJECT- CONTRACT LAW-I

PAPER CODE-BCL-3004 BY-PINKY SINGH ASSISTANT PROFESSOR

UNIT-II
TOPIC- CONTRACT AND ITS ESSENTIAL ELEMENTS

According to section 2(h) of the Indian Contract Act,1872, ‘An agreement which is enforceable
by law is a Contract’.
Agreement is defined in section 2(e) as every promise and every set of promises, forming the
consideration for each other.
A promise is when a proposal is accepted it becomes a promise as defined in section 2(b).
The person who makes the proposal is called the promisor and the person accepting is called the
promisee as defined in section 2(c).
Thus, the definition of contract can be compiled as follows:
When a proposal made by the promisor is accepted by the promisee and a promise is established
between them forming a consideration for each other this becomes an agreement and when this
agreement is enforceable by law it becomes a contract.

Notes:
• An agreement without any consideration is void.
• Agreement can be of many kinds. It can be commercial, domestic or social, but only
commercial agreements are enforceable by law as there is a valid consideration in
commercial agreements but not in domestic and social agreements.
• There should be an intention of creating legal relationship in any agreement.

Pollock- “Every agreement and promise enforceable by law is a contract”.

Salmond- “A contract is an agreement creating and defining obligation between two or more
persons by which rights are acquired by one or more to acts or forbearance on the part of others”.

Anson- “The law of contract is that branch of law which determine the circumstances in which a
promise shall be legally binding on the person making it’.
Now after examining the definitions of contract we can say that-

Contract = Agreement + Enforceability

Illustration- There is an agreement between A and B that A will construct a house for B, and B
will pay Rs. 10 lakhs to A. The agreement between A and B is a contract because it is enforceable
by law.
Essential Elements of a Valid Contract-
According to Sec. 10, “All agreements are contract if they are made by the free consent of parties
competent to contract for a lawful consideration and with a lawful object and are not expressly
declared to be void.”
Thus, Sections 2(h) and 10 of the Act states that there are some essential elements of a valid
contract. If any of these elements is not satisfied by an agreement, it will affect the validity and
will not form a valid contract.
On analyzing the contents of Sec. 10. It is revealed that the following are the essentials of a valid
contract: -
• Offer and acceptance.
• Legal relationship.
• Consensus-ad-idem.
• Competency of parties.
• Free consent.
• Lawful consideration.
• Lawful object.
• Not declared to be void.
• Certainty and possibility of performance.
• Legal formalities.

1. Offer and acceptance:

In a contract there must be at least two parties one of them making the offer and the other accepting
it. There must thus be an offer by one party and its acceptance by the other. The offer when
accepted becomes agreement. The offer or proposal is defined under section 2(a) of the Contract
Act. section 2(b) of the Act provides that when an offer is accepted then it becomes a promise.
Case laws
Felthouse v. Bindley– In this case, it was held that “An offer cannot prescribe silence mode of
acceptance”.
Carlil v. Carbolic Smoke Ball Co. – In this case, a medical firm carbolic smoke ball company
advertised that any person caught influenza after using the medicine of the company (viz. Carbolic
smoke ball), for a specified period, would be 100 pounds. Mrs. C, after using the medicine (as
prescribed by the company) nevertheless caught influenza. It was held that she was entitled to
recover 100 pounds because the Company’s advertisement was something more than an invitation
to transact business.
Lalman Shukla v Gauri Dutt – In this case, it was held that ‘The mere knowledge of an offer
does not imply acceptance by the offeree’.
2. Legal relationship:
Parties to a contract must intend to constitute legal relationship. It arises when the parties know
that if any one of them fails to fulfil his part of the promise, he would be liable for the failure of
the contract.
If there is no intention to create legal relationship, there is no contract between parties. Agreements
of a social or domestic nature which do not contemplate a legal relationship are not contracts.

Case Laws
Balfour v. Balfour– In this case, it was held that if an agreement is domestic in nature then that
agreement is not enforceable by law.
Jones v. Padvattan– In this case, it was held that domestic agreements are presumed not to be
legally binding unless there is a clear intention.

3. Consensus-ad-idem:
The parties to an agreement must have the mutual consent i.e. they must agree upon the same thing
and in the same sense. This means that there must be consensus ad idem (i.e. meeting of minds).

4. Competency of parties:
The parties to an agreement must be competent to contract. In other words, they must be capable
of entering into a contract.
According to Sec 11 of the Act, “Every person is competent to contract who is of the age of
majority according to the law to which he is subject to and who is of sound mind and is not
disqualified from contracting by any law to which he is subject.”
Section 11 of the Act states the criteria of parties competent to contract, which is as follows:
• Must attain the age of majority (an agreement with a minor is void ab initio – Mohri bibi
v. Dharmodas Ghose,1903)
• Person of sound mind-
• The person should not be disqualified by law

5. Free consent:
Free consent of the parties is another essential of the contract. Section 14 of the Act defined the
term free consent as follows-
consent is said to be free when it is not caused by –

• Coercion (S.15)– Committing any act forbidden by The Indian Penal Code 1860 or
unlawful detaining of property, or threatening to commit these acts. Chickam Amiraju v.
Chickam Sheshamma – Threat to suicide amounts to coercion
• Undue influence (S.16)– The use by one party to the contract of his dominant position for
obtaining an unfair advantage over the other party.
 • Fraud (S.17)– In Derry v. Peek, it was held that representation made with reckless
indifference amount to fraud.
• Misrepresentation (S.18)– It means a false representation.
• Mistake (S. 20, 21 and 22): there are two types of mistakes i.e. mistake fact and mistake
of law.

6. Lawful consideration (Quid Pro Quo):

The term consideration has been defined under section 2(d) of the act. Consideration is known as
‘something in return’. It is also essential for the validity of a contract. A promise to do something
or to give something without anything in return would not be enforceable at law and, therefore,
would not be valid.
Consideration need not be in cash or in kind. A contract without consideration is a ‘wagering
contract’ or ‘betting’. Besides, the consideration must also be lawful.
In Currie v. Misa, Justice Lush defined consideration “A valuable Consideration in the sense of
law may consist either in some Rights, Interest, Profit or Benefit accruing to one party or some
forbearance detriment, loss or responsibility given, suffered or undertaken by the other’.

Section 25 of the Act declares that an agreement without the consideration is void.

7. Lawful objects:
According to Sec. 10, an agreement may become a valid-contract only, if it is for a lawful
consideration and lawful object. According to Sec. 23, the following considerations and objects
are not lawful:-

(i) If it is forbidden by law;

(ii) If it is against the provisions of any other law;

(iii) If it is fraudulent;

(iv) If it damages somebody’s person or property; or

(v) If it is in the opinion of court, immoral or against the public policy.

Thus, any agreement, if it is illegal, immoral, or against the public policy, cannot become a valid
contract.

8. Agreement not expressly declared void:

An agreement to become a contract should not be an agreement which has been expressly declared
void by any law in the country, as it would not be enforceable at law.
Under different sections of the Contract Act, 1872, the following agreements have been said to be
expressly void, viz :-
(i) Agreements made with the parties having no contractual capacity, e.g. minor and person of
unsound mind (Sec. 11).
(ii) Agreements made under a mutual mistake of fact (Sec. 20).
(iii) Agreements with unlawful consideration or object (Sec. 23).
(iv) Agreements, whose consideration or object is unlawful in part (Sec. 24).
(v) Agreements having no consideration (Sec 25).
(vi) Agreements in restraint of marriage (Sec. 26).
(vii) Agreements in restraint of trade (Sec. 27).
(viii) Agreements in restraint of legal proceedings (Sec. 28).
(ix) Agreements, the meaning of which is uncertain (Sec. 29).
(x) Agreements by way of wager (Sec. 30). and
(xi) Agreements to do impossible acts (Sec. 56).

9. Certainty and possibility of performance:

Agreements to form valid contracts must be certain, possible and they should not be uncertain,
vague or impossible. An agreement to do something impossible is void under Sec. 56.

10. Legal formalities:

The agreement may be oral or in writing. When the agreement is in writing it must comply with
all legal formalities as to attestation, registration. If the agreement does not comply with the
necessary legal formalities, it cannot be enforced by law.

Types of Contracts on The Basis of Validity

Chapter 2 of the Indian Contract Act, 1872 discusses the voidable contracts and void agreements.
On the basis of validity or enforceability, we have five different types of contracts as given below.

Valid Contracts
The Valid Contract as discussed in the topic on “Essentials of a Contract” is an agreement that is
legally binding and enforceable. It must qualify all the essentials of a contract.

Void Contract or Agreement

The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not
enforceable by a court of law as void.
Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A die of
natural causes in 4 years. The contract is no longer valid and becomes void due to the non-
enforceability of the agreed terms.

Voidable Contract
These types of Contracts are defined in section 2(i) of the Act: “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.” This may seem difficult to wrap your head around but consider the
following example:
Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This
contract would be valid, the only problem is that person B is a minor and can’t legally enter a
contract.
So, this contract is a valid contract from the point of view of A and a “voidable” contract from the
point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus,
this is a voidable contract.
A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be
bound to the terms of the contract. For example, person A in the above example.

The other party is not bound and may choose to repudiate or accept the terms of the contract. If
they so choose to repudiate the contract, the contract becomes void. Otherwise, a voidable contract
is a valid contract.

Illegal Contract
An agreement that leads to one or all the parties breaking a law or not conforming to the norms of
the society is deemed to be illegal by the court. A contract opposed to public policy is also illegal.
Several examples may be cited to illustrate an illegal contract. For example, A agrees to sell
narcotics to B. Although this contract has all the essential elements of a valid contract, it is still
illegal.
The illegal contracts are deemed as void and not enforceable by law. As section 2(g) of the Act
states: “An agreement not enforceable by law is said to be void.”
Thus, we can say that all illegal contracts are void but the reverse is not true. Both the void contracts
and illegal contracts can’t be enforceable by law. Illegal contracts are actually void ab initio (from
the start or the beginning).

Also because of the criminal aspects of the illegal contracts, they are punishable under law. All the
parties that are found to have agreed on an illegal promise are prosecuted in a court of law.
Unenforceable Contracts
Unenforceable contracts are rendered unenforceable by law due to some technical. The contract
can’t be enforced against any of the two parties.
For example, A agrees to sell to B 100kgs of rice for 10,000/-. But there was a huge flood in the
states and all the rice crops were destroyed. Now, this contract is unenforceable and cannot be
enforced against either party.

DIFFERENCES BETWEEN VOID AND VOIDABLE CONTRACT

Void Contract Voidable Contract
“A contract which ceases to be enforceable by “An agreement which is enforceable by law at
law becomes void when it ceases to be the option of one or more of the parties thereto,
enforceable”. but not at the option of the other or others, is a
voidable contract.”
A contract becomes void if either it lacks the A contract becomes a voidable contract when
essential elements, the law changes drastically at least one of the parties reserves its consent
or the terms of the contract change such that it or the consent of one of the parties was not free
is no longer possible to enforce the contract in at the time of the formation of the contract.
a court of law.
Void contracts can’t be fulfilled. The validity and enforceability of the voidable
contract depend on the choice of the unbound
party. If the unbound party decides to repudiate
the contract it becomes void.
This type of contract can’t grant any rights or The right to rescind a voidable contract is
considerations to any of the involved parties. retained by the unbound party.

Agreement-An agreement is any understanding or arrangement reached between two or more

parties. A contract is a specific type of agreement that, by its terms and elements, is legally binding
and enforceable in a court of law.

DIFFERENCE BETWEEN AGREEMENT AND CONTRACT

BASIS AGREEMENT CONTRACT
Definition An arrangement (usually A formal arrangement between two or
informal) between two or more more party that, by its terms and
parties that is not enforceable by elements, is enforceable by law.
law.
Validity based on Mutual acceptance by both (or all) Mutual acceptance by both (or all)
parties involved. parties involved.
 Does it need to be No. No, except for some specific kinds of
in writing? contracts, such as those involving land
or which cannot be completed within
one year.
Consideration No Yes
required
Legal effect An agreement that lacks any of the A contract is legally binding and its
required elements of a contract has terms may be enforceable in a court of
no legal effect. law.

Conclusion
Contracts play a very important role in the day-to-day life of every person. Contracts or agreements
between various parties are framed and validate by the Contract Act. So, for the formation of a
contract, the above-given conditions must be fulfilled by the parties.