may seem like an intimidating word to many, who picture in mind,
complex formal agreements executed by big companies when they hear it. However,
contracts have been existing since the ancient of times through trade and barter
systems. They form an integral part of a common man's day-to-day activities. We
enter into contracts every day, knowingly or unknowingly when we buy tickets to
the movies or groceries from the mart.
Contracts are nothing but agreements between parties in which one party gets a
benefit and the other party receives consideration for it. They can be oral,
written or implied. E.g., While buying tickets to the movie, we get ticket as a
benefit and pay the theatre a consideration (price) for it. Parties entering
into a contract may include common people, companies, nonprofit or government
What are contracts?
The whole process of entering into a contract starts with an offer by one party,
an acceptance by another party, and an exchange of consideration (something of
However, mere exchange of something for something does not give birth to
contracts. One of the most important elements of contracts is the intention to
get into a legal obligation.
If I don't pay money as consideration for buying clothes from a
store, the owner may bring an action against me in a competent court of law. But
in another situation, if I promise my brother to buy ice-cream for him, he
cannot sue me for noncompliance to the promise as there was no such intention of
entering into a legal relationship.
Salmond defines contract as:
"An agreement creating and defining an obligation between two or more persons by
which rights are acquired by one or more, to acts or forbearance on the part of
On the other hand, Sir William Anson in his Book, The Law of Contracts
says ''The law of contract is that branch of law which determines the
circumstances in which a promise shall be legally binding on the person making
The law governing contractual agreements in India, is a pre-constitutional
legislation, formed in the year 1872 - The Indian Contract Act. Section 2 (h) of
the Act tells us that agreements enforceable by law are contracts. The
substances, which make an agreement a legally enforceable contract, are referred
to as the Essential Elements of a Contract.
Section 10 in Chapter II of the Indian Contract Act mentions the essential
elements in agreements which result into contracts.
"All agreements are contracts if they're made with free consent of the parties
able to get into contractual relationship, with a lawful object and
Essential Elements of a contract:
Offer And Acceptance A Contract always involves two or more parties where one proposes and other
The first step towards formation of a contract is a proposal/offer - it is
when someone offers to do or not to do something.
E.g., A proposes to buy B's house. The Indian contract act defines proposal
in its interpretation clause - section 2 (a).
Section 2 (a), Indian Contract Act - When a person expresses his desire
to do or not to do something, with a view of getting their approval for
the same, is said to be making a proposal.
An offer should be definite, clear and not ambiguous. It should be
communicated duly to the other party. It should be lawful. An offer to kill
a human cannot give rise to a valid contract.
In Ghaziabad Development Authority vs. UoI, 2003, Hon'ble Supreme
Court observed that when development authority announces a scheme for
allotting plots, it is an invitation to offer. Public made applications to
avail the benefits. Those applications by members of public are valid
Communication of an offer is complete when it comes to the knowledge of the
person to whom it is made - Section 4, ICA.
E.g., Person A writes via email to Person B, "Will you sell me your Parker
pen for Rs. 500?" When the email reaches B, communication is complete.
The second step is acceptance of that proposal, defined in section 2 (b) of
the Act. E.g., B accepts A's offer of buying the house.
Section 2 (b), Indian Contract Act - When that person to whom the
proposal was communicated to, gives assent for it is said to have
accepted the proposal.
Just like an offer, an acceptance of an offer should also be definite and
clear, not ambiguous and should be duly communicated to the proposer.
What is a definite acceptance?
Leading Case: Harvey v/s. Facey, 1893
Facts: Plaintiff, Harvey telegraphed the defendant, Facey offering to buy a
Jamaican property referred to as "Bumper Hall Pen". Defendant replied, "The
lowest price is 900 pounds." Plaintiff agreed to buy it and communicated the
same to plaintiff immediately. Defendant did not sell him the property.
Harvey sued Facey for contractual breach.
Was there a concluded contract between the two and was Harvey
entitled to "Bumper Hall Pen"?
It was observed by House of Lords that the there was there was no acceptance
by defendants to plaintiff's proposal.
Only the lowest price was communicated and not their desire to sell.
Hence, it was held that there was no enforceable contract between the
plaintiff and defendant.
Communication of acceptance is complete when (Section 4, ICA):
when it is put in a course of transmission to him, out of
when it comes to the knowledge of the proposer.
E.g., Aman proposes to buy Raghav's sports bike. Raghav accepts Aman's
proposal and writes him a letter of acceptance. The acceptance is complete
against Aman when letter is posted by Raghav, out of his power to take it
back and it is complete against Raghav when Aman receives the letter.
Proposal + Acceptance = Promise.
A promise involves promisor (person who makes a proposal) and promisee
(person who accepts the proposal).
Lawful ConsiderationAfter proposal and acceptance, the third step towards formation of a contract is
a consideration. Consideration is something to be given in return of a promise.
The legal maxim, "quid pro quo" i.e., something for something explains it. E.g.,
A has to pay a price of Rs. 1 crore to B to buy his house.
Consideration has been defined u/s 2 (c) of the Indian Contract Act.
Section 2 (c), Indian Contract Act - When at the will of promisor, the
promisee (or any other person with interest in the agreement) does or
abstains from doing something, in present or in future, he gives
consideration for that proposal.
However, the phrase "does or abstains from doing" does not imply unlawful
activities or restraints. Section 24 of the Act says that agreements with
unlawful considerations are void.
E.g., A promises a seat in government medical college to B who does not have a
good rank, for consideration of Rs. 1 crore. The contract is void since the
promise and consideration, both are unlawful.
Section 25 of the Act mentions that agreements without considerations are void
and hence there can be no contract without consideration.
It need not to be of a perfect value but anything given in return. If A
contracts with B to sell his phone only for Rs. 250 when the actual value is Rs.
10,000, the contract is still valid because both parties have agreed to it.
Promise + Consideration = Agreement.
Intention Of Giving Rise To Legal ObligationsAn Agreement has all characters of a valid contract except for one thing - A
legal obligation or enforcement.
Section 2 (h), India Contract Act - Agreements enforceable by law are
Agreement + Legal Obligation = Contracts.
Hence, agreement becomes a wider term than contract giving rise to a popular
saying that "All Contracts are agreements but not all agreements are Contracts".
Leading case: Balfour v/s. Balfour, 1919
Facts: Mr. and Mrs. Balfour, a Ceylon-based couple, go to England for
vacations, wherein Mrs. Balfour falls sick and is advised to stay back while Mr.
Balfour returns back home. Before returning, the couple signed an agreement
where husband had to pay 30 pounds/month as maintenance to wife for her
expenses. After returning to Ceylon, Mr. Balfour's relations with his wife, gets
strained and he refuses to send any more maintenance money. Mrs. Balfour files a
suit against him.
Issue: Was there any contract between the parties and was Mr. Balfour therefore
under any legal obligation to pay maintenance due?
Decision (Lord Atkin)
There are many agreements entered into by a husband or a wife or between members
of a family with no intention of forming a legal obligation.
If all such agreements are allowed to be enforced by a court of law, the courts
would be overburdened with trifles and the law does not take account of trifles.
Agreements of this nature are outside the realm of contracts altogether.
The agreement was purely domestic in nature with no intention of getting into a
legal relationship. Hence, Mr. Balfour is not liable under breach of contract.
The above landmark case shows that only where there is an intention to get into
a legal relationship, can there be a contract between the parties. E.g., between
retailer and purchaser, companies, consumers etc.
CapacityThe laws do not prohibit people from contracting. However, they declare certain
classes of persons as incapable of entering into contracts. Hence, it is
important for people to know if they are contracting with the right person or
not, to avoid bad consequences. Incapacity is a state which defeats the whole
purpose of a contract and the liability arising out of it.
The Indian Contract Act of 1872 precisely mentions who are capable of entering
Who are parties competent to contract?
Section 11 says - Every person is capable of contracting if:
Who is a major?
- He/she has age of majority
As per Section 3 of Indian Majority Act - Every Indian who is 18 years of age
Why can minors not contract?
They are not in an age where they can fully understand everything about a
contractual agreement they are getting into. If allowed to contract, they can be
tricked into unprofitable agreements by persons with a malicious intention.
Has a sound mind
Person should be free from any mental ailment. Persons with periodically unsound
minds can contract when they are sound and are able to understand the clauses of
Not disqualified by law from contracting
These include aliens (people outside India, people of enemy countries), Convicts
and insolvent persons until he is discharged from his insolvency by a competent
court of law.
Leading case: Mohori Bibi v/s. Dharmodas Ghose, 1903
Facts: Dharmodas Ghose, the defendant-minor had entered into an agreement to
mortgage his property in return of money, to a money-lender, Bramho Dutt. Bramho
Dutt's attorney comes to know about his age and still proceeds with the
agreement. Dharmodas Ghose refuses to return the money and files a suit for
recovery of his land. The lower courts grant it in his favour. When post Bramho
Dutt's death, his heirs appeal to upper courts, Ghose pleads for non-enforcement
of contract as he was a minor when the agreement was entered into.
Issues: Could the agreement between parties be enforced?
Plaintiff's attorney knew that the defendant was a minor, yet proceeded with the
agreement at his own risk
As per provisions of s. 11, ICA, nature of a minor's agreement is void ab initio.
No relief could be granted to the plaintiffs.
All Agreements are supposed to be bilateral which means both parties should gain
something and both should be liable to each other. This forms one of the most
important pillars of contract - Consensus ad idem - Prior meeting of minds.
Section 13 of the Contract Act defines consent which is the foremost requirement
of a contract. It says that two or more people can be said to have consented for
a thing if they agree upon the same thing in the same manner.
E.g., A and B enter into an agreement for delivery of Kashmiri apples. While
delivering, B mistakenly thinks A asked for Shimla apples. There can be no
contract because parties had different objects in mind.
Sometimes contracts are entered into, not by free consent of parties but my a
few vitiating elements. Such contracts cannot be truly enforceable because there
is no consensus ad idem.
Section 14 of the Act lists down the vitiating elements in a contract. They are:
These vitiating factors render a contract VOIDABLE at the choice of party who
has suffered. If party wants non-enforceability, he can get the contract
declared void by competent court of law. However, if party proceeds to go ahead
with the agreement without raising any objection, the contract is implicitly
- Coercion (section 15):
Doing or threatening to do any Act which is an offence
under the Indian Penal Code, in order to get them entered in an agreement
- Undue Influence (section 16):
Using position of power to obtain advantage by
dominating a person's will to enter in agreement
- Fraud (section 17):
knowing that a fact is not true and still telling the other
party it is true or actively concealing something or having no intent of doing
an act and still entering into an agreement
- Misrepresentation (section 18):
misleading the other party to make a mistake or
making them believe something to be true.
Salmond says that when consent to contract is obtained by any of the vitiating
elements like coercion, undue influence, fraud or misrepresentation, it is
called 'Error in Causa'.
Mistake, (sections 20, 21 and 22):
When both parties are in a factual mistake,
the agreement is VOID because the whole object and purpose of that agreement is
What is enforced by law can never be unlawful. Since contracts are agreements
which are enforced by law, the object creating contracts can never be unlawful/
E.g., Contract killing is not a valid contract because the object of such a
contract is unlawful from the beginning.
A gets into an agreement to sell his children to child trafficking rackets. That
agreement is void ab initio and A is liable to face serious criminal charges.
Section 23 of the Act tells us which considerations are lawful and unlawful. All
objects or considerations would be unlawful if they are:
- Forbidden by law of the land
- Contradictory to present law
- Hint at injury to one person (physical, mental, reputation or legal injury)
- Court takes it as an immoral or unjust cause
Agreements Not Expressly Declared VoidAgreements cannot be enforced if they are declared void from the very beginning.
E.g., Restraint in marriage, restraint in a person's legal right, uncertain
agreements or wagers etc., are agreements void from the start and parties cannot
approach the court to seek remedy for it.
Wagering agreement is one where money (or any consideration) is payable only
after happening of a future, uncertain condition. E.g., Suresh and Ramesh get
into an agreement that Suresh will pay a sum of Rs. 5000 to Suresh if their city
gets heavy rains with thunderstorms and if not, then Ramesh will pay the same
amount to Suresh. This is a wager and hence a void contract.
Section 29 of the Act mentions that agreements which don't have any certainty or
are not capable of being certain even in future, are void.
E.g., A fruit seller enters into an agreement to sell 20 kg fruits to a
purchaser without specifying which fruit is to be sold. This agreement is not
certain and is hence void for uncertainty.
However, had the fruit seller been only selling apples, if purchaser and seller
enter into an agreement of sale-purchase of fruit, it is implied that they mean
apples. Hence, the agreement can be enforceable.
Possibility Of Performance How can a contract be valid if it cannot be performed?
Section 56 of the Act says that Agreements with impossibility of performance are
not valid contracts.
E.g., A promises to B to get him flowers from the garden of heaven. This
agreement is not possible to be performed and hence not valid.
A singer who had a contract with a theatre falls extremely sick on the day of
his performance. The agreement cannot be enforced on account of impossibility of
Impossibility also arises when the object of the contract is completely lost.
E.g., Ram contracted to temporarily stay in Shyam's premises to see the Republic
Day parade in Delhi. On account of emergency, the parade, had to be cancelled.
There is no contract between Ram and Shyam because the object of the contract
was completely lost.
In everyday life, rural or urban, contracts are increasingly becoming common and
important, even in today's marriages as pre-nuptial agreements. Hence it is
important not just for lawyers but even the general public to know the basic
elements of a contractual agreement and their nature, in order to avoid
pecuniary losses or unprofitable deals and to protect one's economic interests
free from attacks of the bad elements of the society.
In Punj Sons Pvt. Ltd vs
, the petitioners Punj Sons had contracted to deliver containers coated with
dip tin to the government. Tin ingots were needed for the coating but were not
available without government's licence. Government did not issue the ingots, and
contract could not be performed. Government sued plaintiffs for contractual
breach. Court held that it was impossible to perform the contract without
ingots. Hence, the contract was cancelled in plaintiff's favour.
- The Indian Contract Act, 1872
- Anson's Law of Contract
- Avtar Singh's Law of Contract & Specific Relief
- Balfour v Balfour  2 KB 571
- Harvey v Facey  AC 552
- Mohori Bibee v. Dharmodas Ghose (1903) 30 Cal. 539