Meaning of Contract

The law of contract in India is primarily governed by the Indian Contract Act, 1872. This Act defines what a contract is, lays down the essential elements for a valid contract, specifies the circumstances under which contracts become void or voidable, and prescribes the remedies available for breach of contract.

Definition under Section 2(h) of the Indian Contract Act, 1872

Section 2(h) of the Indian Contract Act, 1872 provides a concise definition of a contract:

"An agreement enforceable by law is a Contract."

This definition highlights two fundamental components of a contract:

1. An Agreement

2. Enforceability by law

An agreement enforceable by law

Let's break down the components of the definition:

(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."

Further, Section 2(b) defines "promise": "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."

Therefore, an agreement involves a 'proposal' (or offer) by one party and an 'acceptance' of that proposal by the other party. When an offer is accepted, it results in a promise. If this promise, or set of promises, involves 'consideration' (something of value exchanged between the parties), it becomes an agreement.

In essence, an agreement is the meeting of minds or consensus between two or more parties regarding certain terms. It is the basis of a contract, but not all agreements are contracts.

(2) Enforceability by Law:

For an agreement to become a contract, it must be enforceable by law. This means that if one party fails to fulfil their promise as per the agreement, the other party can go to Court and seek a legal remedy (like damages, specific performance, etc.).

Section 10 of the Act specifies the essential elements of a valid contract, which, if present, make an agreement enforceable by law:

• Offer and Acceptance: There must be a valid offer and a valid acceptance, resulting in an agreement.
• Intention to Create Legal Relationship: The parties must intend to create a legally binding relationship, not just a social or domestic one.
• Lawful Consideration: There must be something of value exchanged between the parties. This consideration must be lawful.
• Capacity of Parties: The parties entering into the agreement must be competent to contract (i.e., they must be of the age of majority, of sound mind, and not disqualified from contracting by any law).
• Free Consent: The agreement must be made with the free consent of the parties. Consent is not free if it is caused by coercion, undue influence, fraud, misrepresentation, or mistake.
• Lawful Object: The purpose or object of the agreement must be lawful. An agreement for an unlawful purpose (e.g., to commit a crime) is not enforceable.
• Agreement not Expressly Declared Void: The agreement must not be one that has been expressly declared void by the law (e.g., agreements in restraint of trade, agreements by way of wager).
• Certainty of Terms: The terms of the agreement must be clear, certain, and not vague or ambiguous.
• Possibility of Performance: The agreement must be capable of being performed. An agreement to do an impossible act is void.
• Legal Formalities (where required): For certain types of contracts (like agreements for sale of immovable property, mortgages), specific legal formalities like writing, registration, and attestation are required by other laws (e.g., Transfer of Property Act, Registration Act).

If an agreement possesses all these essential elements, it is enforceable by law and thus constitutes a valid contract. If any of these essential elements are missing, the agreement may be void, voidable, or illegal, and hence not enforceable as a contract.

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Sources of Contract Law

The law of contract in India is derived from several sources. While the Indian Contract Act, 1872 is the primary source, other sources also contribute to its development and interpretation.

Indian Contract Act, 1872

This is the principal and most important source of contract law in India. The Act is comprehensive, defining core concepts, laying down principles related to offer, acceptance, consideration, capacity, free consent, legality of object, performance of contracts, consequences of breach, and various types of contracts like indemnity, guarantee, bailment, pledge, and agency. The Act has been amended several times to keep pace with changing needs.

English Common Law

The Indian Contract Act, 1872 is largely based on the principles of English Common Law. Before the enactment of the Indian Contract Act, the English Common Law principles were applied in India. Even after the Act, where the Act is silent on a particular point or where the provisions are ambiguous, Indian Courts often look to English Common Law principles and precedents for guidance. However, English law is applied only to the extent that it is consistent with the provisions of the Indian Contract Act and applicable to Indian conditions.

Judicial Decisions

Decisions rendered by Indian Courts, particularly the Supreme Court and the High Courts, play a significant role in interpreting the provisions of the Indian Contract Act. These judicial precedents clarify the meaning and application of the statutory provisions to various fact situations. They help in the evolution and development of contract law by addressing new issues and providing authoritative interpretations. The principle of *stare decisis* (precedent) means that lower courts are bound by the decisions of higher courts.

Legislation (e.g., Sale of Goods Act, Partnership Act)

While the Indian Contract Act provides general principles, certain specific types of contracts are governed by separate, dedicated statutes. These Acts were originally part of the Indian Contract Act but were later repealed and re-enacted as independent legislations. Important examples include:

• The Sale of Goods Act, 1930: Deals specifically with contracts for the sale of goods. It covers aspects like conditions and warranties, transfer of ownership, performance of the contract of sale, and rights of the unpaid seller.
• The Indian Partnership Act, 1932: Deals with contracts of partnership. It defines partnership, outlines the rights and duties of partners, and governs the dissolution of firms.

These specific Acts supplement the general principles of the Indian Contract Act and take precedence in matters specifically covered by them.

Other Sources:

Besides these, local customs and usages, if reasonable and not contrary to law, can also sometimes influence contractual practices, although their role is less prominent than statutory and judicial sources.

Distinction between Void and Voidable Contracts

The Indian Contract Act classifies agreements that are not fully enforceable into categories like void agreements and voidable contracts. Understanding the difference between these is crucial.

Void Agreement (Section 2(g))

Section 2(g) defines a "void agreement" as: "An agreement not enforceable by law is said to be void."

A void agreement has no legal effect from the beginning (*void ab initio*). It creates no legal rights or obligations. Examples include agreements with a minor (Section 11, Mohori Bibee case), agreements without consideration (Section 25, with exceptions), or agreements whose object or consideration is unlawful (Section 23).

Some agreements may also become void subsequent to their formation, for example, due to supervening impossibility or illegality (Section 56).

Voidable Contract (Section 2(i))

Section 2(i) defines a "voidable contract" as: "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 voidable contract is initially valid and binding on both parties. However, it suffers from a defect (e.g., lack of free consent) which gives one of the parties (the aggrieved party) the option to either affirm (validate) it or avoid (repudiate/cancel) it. Until the aggrieved party chooses to avoid it, the contract remains valid and enforceable.

Voidable contracts arise when consent is caused by coercion (Section 15), undue influence (Section 16), fraud (Section 17), or misrepresentation (Section 18).

Comparison Table: Void Agreement vs. Voidable Contract

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Agreement (Section 2(e))

As established earlier, a contract is defined as an agreement enforceable by law. Therefore, the concept of 'agreement' is the foundation upon which the law of contract is built. Without an agreement, there can be no contract.

Definition under Section 2(e) of the Indian Contract Act, 1872

Section 2(e) of the Indian Contract Act, 1872 defines the term "agreement":

"Every promise and every set of promises, forming the consideration for each other, is an agreement."

This definition indicates that an agreement is essentially an exchange of promises supported by consideration. To understand this, we need to look at how a 'promise' is formed under the Act.

Section 2(b) defines 'promise' 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."

Offer and Acceptance

The definition of agreement thus relies heavily on the concepts of 'Proposal' (or Offer) and 'Acceptance'. The process of reaching an agreement begins with one party making a proposal to another, and the other party signifying their assent to that proposal.

• Proposal (Offer): 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 (Section 2(a)). This is the 'making' of the proposal.
• Acceptance: The person to whom the proposal is made signifies his assent thereto (Section 2(b)). This is the 'acceptance' of the proposal.

When a valid offer is met with a valid acceptance, it results in a promise. An agreement is formed when there is a promise, or a set of promises, where each promise serves as consideration for the other. This exchange of promises with consideration establishes the mutuality essential for an agreement.

In simple terms, an agreement is formed when one party makes an offer, and the other party accepts that offer. This exchange of offer and acceptance leads to a meeting of minds (consensus ad idem) on the terms of the agreement.

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Proposal/Offer (Section 2(a))

The starting point of any agreement is a proposal or offer. Section 2(a) of the Indian Contract Act, 1872 defines "Proposal" as follows:

Meaning and Definition

"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."

This definition highlights the essential elements of a valid proposal:

• Must be made by one person to another: The offer must be communicated to an ascertainable person or group of persons, or the public at large.
• Must signify willingness: It must express the offeror's readiness to do (a positive act) or to abstain from doing (a negative act) something.
• Must be with a view to obtaining assent: The offer must be made with the intention of getting the acceptance of the person to whom it is made. It's not just a statement of intention or a casual remark.

A proposal must be clear, definite, and complete. It must also be communicated to the offeree (Section 4). An offer cannot be accepted unless the offeree knows about it.

Types of Offer

Offers can be classified in various ways:

• General Offer: An offer made to the public at large. It can be accepted by anyone who, having knowledge of the offer, performs the condition specified in the offer. The famous case of Carlill v. Carbolic Smoke Ball Co. (an English case followed in India) is a classic example of a general offer.
• Specific Offer: An offer made to a definite person or a specific group of persons. Only that specific person or group can accept such an offer.
• Express Offer: An offer made by words, spoken or written.
• Implied Offer: An offer made by conduct or circumstances, without the use of words. For example, boarding a public bus implies an offer to pay the fare.
• Cross Offers: When two parties make identical offers to each other, in ignorance of each other's offer, at the same time. Cross offers do not constitute acceptance of one another, and therefore no agreement is formed.
• Counter Offer: When the offeree accepts the offer subject to some modifications or conditions. A counter offer is not an acceptance; it is treated as a rejection of the original offer and the making of a new offer by the original offeree to the original offeror.
• Standing or Open Offer: An offer which is allowed to remain open for acceptance over a period of time.

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Acceptance (Section 2(b))

For a proposal to become a promise and subsequently form an agreement, it must be accepted by the person to whom it is made. Section 2(b) defines "Acceptance":

Meaning and Definition

"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."

Acceptance is the act of conveying willingness to be bound by the terms of the offer. It transforms a proposal into a legally binding promise.

Essentials of a Valid Acceptance

For an acceptance to be valid and effective, it must meet certain conditions:

• Must be Absolute and Unqualified (Section 7): Acceptance must be unconditional and without any variation in the terms of the offer. If it is conditional or introduces new terms, it is not a valid acceptance but a counter offer.
• Must be Communicated to the Offeror (Section 4): Acceptance is not complete until it is communicated to the person who made the offer. Mental acceptance or mere intention to accept is not sufficient. The communication can be express (by words) or implied (by conduct) (Section 3).
• Must be in the Prescribed or Usual Mode (Section 7): If the offeror prescribes a specific mode of acceptance, the acceptance must be in that mode. If no mode is prescribed, it must be in some usual and reasonable manner. If the offeror requires a specific mode but the offeree uses a different one, the offeror may reject it, but if they don't object within a reasonable time, they are deemed to have accepted the alternative mode.
• Must be Made Within a Reasonable Time: If a time limit for acceptance is specified in the offer, acceptance must be made within that time. If no time is specified, it must be made within a reasonable time. What is a 'reasonable time' depends on the facts and circumstances of each case.
• Cannot Precede Offer: Acceptance must be given only after the offer has been made and the offeree has knowledge of it.
• Must be By the Person to Whom Offer is Made: A specific offer can only be accepted by the person to whom it is made. In the case of a general offer, acceptance can be by any person who performs the conditions of the offer.
• Must be Made Before the Offer Lapses or is Revoked: Acceptance is valid only if it is made while the offer is still open. An offer can be revoked before acceptance.

Communication of Offer and Acceptance (Section 4)

Section 4 explains when the communication of offer, acceptance, and revocation is complete:

• The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.
• The communication of an acceptance is complete:
  • As against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor;
  • As against the acceptor, when it comes to the knowledge of the proposer.

  This rule for acceptance applies particularly when acceptance is sent by post (the 'postal rule'). As against the offeror, the contract is complete when the letter of acceptance is posted. As against the acceptor, the contract is complete when the letter reaches the offeror.

• The communication of a revocation is complete:
  • As against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;
  • As against the person to whom it is made, when it comes to his knowledge.

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Consideration (Section 2(d))

For an agreement to be enforceable as a contract, it must be supported by lawful consideration (Section 10). Consideration is a crucial element, often referred to as the 'price of the promise' or 'something in return' (*Quid pro quo*).

Meaning and Definition

Section 2(d) of the Indian Contract Act, 1872 defines "Consideration":

"When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise."

This definition is broad and covers various forms of consideration:

• At the desire of the promisor: The act or abstinence constituting consideration must be done at the request or desire of the person making the promise (the promisor). If something is done voluntarily or at the instance of a third party, it is not consideration.
• Promisee or any other person: Consideration may move from the promisee or any other person. This means a person can be a stranger to the consideration, although they must be a party to the contract. (This is different from English law, where consideration must move from the promisee).
• Has done or abstained from doing (Past Consideration): Refers to an act or abstinence that has already taken place before the promise is made.
• Does or abstains from doing (Present Consideration): Refers to an act or abstinence that is done or is in the process of being done simultaneously with the promise.
• Promises to do or to abstain from doing (Future Consideration): Refers to a promise to do or to abstain from doing something in the future. This is also known as executory consideration.

Consideration can be positive (doing something) or negative (abstaining from doing something).

Essentials/Rules Regarding Valid Consideration

Judicial interpretation and other provisions of the Act have laid down several rules regarding valid consideration:

• Must Move at the Desire of the Promisor: This is directly from Section 2(d). The act or abstinence must be at the instance of the promisor.
• May Move from the Promisee or Any Other Person: As stated in Section 2(d), the person providing consideration does not have to be the promisee.
• Need Not Be Adequate, But Must Be Real: The law does not require consideration to be of equal value to the promise (Section 25, Explanation 2). The Court will not generally question the adequacy of consideration, but it must be *something* of value in the eyes of the law. It must not be illusory, impossible, or illegal.
• Must Be Lawful: The consideration must not be forbidden by law, or be of such a nature that, if permitted, it would defeat the provisions of any law, or be fraudulent, or involve or imply injury to the person or property of another, or be immoral, or opposed to public policy (Section 23).
• Must Not Be Something Which the Promisor is Already Bound to Do: Performance of an existing legal or contractual duty owed to the promisor is generally not considered fresh consideration for a new promise by the same promisor.
• Past Consideration is Valid in India: Unlike English law, past consideration (something already done voluntarily before the promise) is valid consideration in India, as Section 2(d) uses the phrase "has done or abstained from doing".

Agreements without consideration are generally void (Section 25), with some exceptions:

• Agreement made on account of natural love and affection between parties standing in a near relation, provided it is in writing and registered.
• Promise to compensate a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do.
• Promise to pay a debt barred by limitation.
• Completed gift.
• Contract of agency.
• Contribution to charity (in some cases, if acted upon).

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Promisor and Promisee

These terms are fundamental to understanding who is making a promise and who is receiving it within an agreement. They are defined in Section 2(c) of the Indian Contract Act, 1872.

Meaning and Definition

Section 2(c) states:

"The person making the proposal is called the 'promisor', and the person accepting the proposal is called the 'promisee'."

• Promisor: This is the person who makes the offer or proposal. They are the one undertaking an obligation to do or abstain from doing something.
• Promisee: This is the person to whom the offer is made and who accepts it. They are the recipient of the promise.

In a simple agreement with promises on both sides, each party is both a promisor and a promisee. For example, if A promises to sell goods to B, and B promises to pay for them, A is a promisor regarding the delivery of goods but a promisee regarding the payment, and vice versa for B.

Reciprocal Promises

Many contracts involve promises from both sides. These are known as reciprocal promises. Section 2(f) defines "Reciprocal Promises":

"Promises which form the consideration or part of the consideration for each other are called reciprocal promises."

In agreements involving reciprocal promises, each party is making a promise in exchange for a promise from the other party. The promise of one party serves as the consideration for the promise of the other party.

Examples of reciprocal promises include contracts for sale (seller promises to deliver goods, buyer promises to pay), contracts for service (one party promises to perform a service, the other promises to pay), etc.

The Act contains specific rules (Sections 51 to 58) regarding the performance of reciprocal promises, dealing with issues like the order of performance and the consequences of failure to perform by one party.

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