Topic 2: CONTRACT

According to Section 2(h) of the Act, ‘An agreement enforceable by law is a contract.’

Enforceability of the agreement: Every agreement is not a contract. Only an

agreement enforceable by law is a contract. An agreement is enforceable by law only when
it creates legal rights and obligations of the parties. Enforceability of the agreement depends
on the intention of the parties to the agreement as well as the fulfillment of requirements of a
valid contract.

CONTRACT = AGREEMENT + ENFORCEABILITY OF THE AGREEMENT.

ESSENTIALS OF A VALID CONTRACT

Section 10 states.
ƒ All agreements are contracts
ƒ if they are made by the free consent of
ƒ parties competent to contract,
ƒ for lawful consideration and with a lawful object,
ƒ And are not hereby expressly declared to be void.

1. Plurality of parties. There must be at least two persons or parties. One of them is
known as ‘proposer’ or ‘promisor’ and other one is known an ‘offeree’ or ‘promisee’.

2. Proposal and acceptance (i.e. agreement)

3. Intention to create legal relations. For an agreement to be a contract, it must

be able to create legal relations. Whether or not any agreement creates legal relations
between the parties, would depend upon the intentions of the parties to the
contract.
In all social, domestic, moral, religious or political agreements, the usual presumption is
that the parties do not intend to create obligation. However, in business agreements,
usual presumption is that the parties intend to create legal obligations. But, when the
parties in a business transaction intend to rely on good faith and do want to go to the court
of law, such transaction is not legally binding.

4. Contractual Capacity. Only legally competent persons can make valid agreement.
The law presumes that every person is competent to enter into contract if he fulfills the
following conditions:
(i) He is a major.
(ii) He is of sound mind; and
(iii) He is not disqualified from contracting by any law of the land to which he is a
subject.

5. Consent or Consensus ad idem. Consent is the essence of a contract. The parties

are said to consent when they agree upon the same thing in the same sense.(Sec.13)
It means that both the parties must have ‘unision or meeting of mind or mutually of assent’
(i.e. two minds with one intention) with regard to the subject-matter of the contract. This is
technically known as consensus ad idem.

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6. Free consent. Consent is said to be free when it is not caused by (i) coercion, or
(ii) undue influence, or (iii) fraud, or (iv) mis-representation, or (v) mistake.
(Sec.14).

7. Consideration. Generally, every agreement to be enforceable by law must be

supported by consideration’. Consideration means something, which the promisor
receives from his promise. In fact, it is the price for promise paid by the promisee to the
promisor. It may be in cash or kind.
Consideration must be lawful and real and not illusory. It must have some value in
terms of money. However, it may not be adequate. Nominal consideration may even be
enough for a valid contract if the parties are satisfied. But agreements without
consideration are always void subject to certain exception.

8. Lawful objects or consideration. Another essential of a contract is the lawful

object or consideration. Any agreement for an unlawful object or consideration is void ab-
initio. An agreement will be unlawful in any of the following circumstances:
(i) If it (agreement) is forbidden by law; or
(ii) If it is of such a nature that if permitted, would defeat the provisions of any
law; or
(iii) If it is fraudulent; or
(iv) If it involves or implies injury to the person or property of another; or
(v) If the Court regards it as immoral; or
(vi) If the Court regards it against public policy.(Sec.23)

EXAMPLE
Determine In The Following Cases Whether The Consideration Is Lawful Or Unlawful?

Sr. Lawful/ Unlawful

Case
No Consideration
A agrees to sell his house to B for 10,000 rupees. Here B's
promise to pay the sum of 10,000 rupees is the consideration for
1.
A's promise to sell the house, and A's promise to sell the house
is the consideration for B's promise to pay the 10,000 rupees.
‘A’ promises to pay B 1,000 rupees at the end of six months, if C,
who owes that sum to B, fails to pay it. B promises to grant time
2
to C accordingly. Here the promise-of each party is the
consideration for the promise of the other party
‘A’ promises, for a certain sum paid to him by B, to make good to
B the value of his ship if it is wrecked on a certain voyage. Here
3
A's promise is the consideration for B's payment and B's
payment is the consideration for A's promise
A promises to maintain B's child and B promises to pay A 1,000
4
rupees yearly for the purpose.
A, B and C enter into an agreement for the division among them
5
of gains acquired, or- to be acquired, by them by fraud.
A's estate is sold for arrears of revenue under the provisions of
an Act of the Legislature, by which the defaulter is prohibited
6 from purchasing, the estate. B, upon an understanding with A,
becomes the purchaser, and agrees to convey the estate to A
upon receiving from him the price which B has paid.

9. Certainty of meaning. Agreements with certainty of meaning are only enforceable

by law. Agreements, the meaning of which is not certain, or which is not capable of being
made certain are void (Sec.29). The parties must agree upon the terms which are

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 definite without further agreement of the parties. If, however, the meaning of agreement
can be made certain from the facts and circumstances of the case, it will be a valid
contract.

10. Possibility of performance. An agreement to be a valid contract must also be

possible to be performed. The terms of the agreement must be capable of
performance physically as well as legally. An agreement to do an impossible act
is void. (Sec.56).

11. Agreements not declared void. An agreement, which possesses all the
essential of a valid agreement, is generally a valid contract. However, if any such
agreement is expressly declared void by the law of the land, it is void.
Agreements having unlawful object or consideration, agreements without consideration,
agreement in restraint of trade or marriage, etc. are some of the expressly declared void
agreements.

12. Compliance of Legal formalities. Generally no legal formalities are required

to be complied with for a valid contract. A contract may be written, oral or gestural
(by signals).
However, Section 10, states that a contract should be made in writing or in the presence
of witnesses or be registered, if required by any law of the land. Various law of our
country requires that some formalities should be complied with for an agreement to be
enforceable.
For instance, agreements for transfer of property must also be written, witnessed and
registered. These are some examples where certain legal formalities are required to be
complied with the enforcement of agreement by the law.

AGREEMENT VS. CONTRACT

All Contracts are Agreements but

All Agreements are not Contracts
On comparing the meaning of the two terms i.e. contract and agreement, it is revealed that
agreement is a wider terms than the term contract. That is why it is repeated by experts
“All contracts are agreements but all agreements are not contracts.”

All Agreements are not Contracts

The term agreement is a wider term than the term contract. It includes variety of agreements
such as personal, social, domestic, lawful, unlawful, void, voidable, etc. Some of them are
enforceable by law and others are not. Those agreements, which are not
enforceable by law, are definitely not contracts as per section 2(h). Hence,
it is generally said that all agreements are not contracts. A few examples of such
agreements are given to show that all agreements are not contracts.
1. Certain domestic and family agreements.
2. Political agreements/promises.
3. Commercial transactions without legal binding.
4. Agreement not possessing all essentials of a contract.
5. Agreements expressly declared to be void.
6. Agreement to make a contract.

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 CLASSIFICATION OF CONTRACTS / AGREEMENTS

CLASSIFICATION ACCORDING TO ENFORCEABILITY/LEGALITY

1. Valid agreement i.e. contract: A valid agreement is a contract. It gives rise

to legal obligations of all parties to it. Such an agreement possesses all essentials of a
contract laid down by Section 10.

2. Void agreement: “An agreement not enforceable by law is said to be

void.”[Sec.2(g)] Such an agreement lacks essentials of a valid agreement and
consequently does not create legal obligations of the parties. It is also not
maintainable in law and is, therefore, a nullity.
Effects
(i) Void from beginning. The agreement is void from beginning. It does not
create any legal obligation of either party.
(ii) No restitution. No restitution can be granted. Any consideration passed on by
parties to each other, cannot be generally restored.

3. Void Contract: According to Sec 2(j) “A contract which ceases to be

enforceable by law becomes void when it ceases to be enforceable.”
When a contract is valid at the time of its making but later on due to change in
circumstances or in law, it becomes unenforceable, it is a void contract.
Effects
(i) Contract becomes void. Contract is void, when it is discovered to be void or it
becomes void due to change in circumstances.
(ii) Restitution is allowed. Any person who has received any advantage under
void contract, is bound to restore it to the person from whom he got it.(Sec.65)
(iii) Payment or compensation for performance. Any party who has received
any advantage by way of part performance of a void contract (i.e. which later on
becomes void) is also bound to pay or make compensation to the person from
whom he received it. (Sec.65).

Distinction between Void Agreement and Void Contract.

Basis Void Agreement Void Contract
A contract which ceases to be
An agreement not enforceable
1. Definition enforceable by law becomes void
by law is said to be void.
when it ceases to be enforceable
2. Time when It becomes void subsequently
becomes It is void from very beginning. due to change in law or change in
void circumstances.
Generally no restitution is
granted. however, the court may Restitution may be granted
3. Restitution on equitable grounds grant when the contract is discovered to
restitution in case of fraud or be void or becomes void.
misrepresentation by minors.
4.
Such agreements have been There is no mention of void
Description
mentioned as void in the Act. contracts in the Act.
in the Act

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4. Voidable contract: According to Sec.2 (i), “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 others, is a voidable contract.”
Therefore, a voidable contract is an agreement, which is voidable at the option of the
aggrieved party. Voidable contracts may be of two types:
(i) Voidable from beginning. There are certain contracts, which are voidable from
the very beginning. It is so when the consent of the party is caused either by
(a) coercion,
(b) undue influence,
(c) fraud or
(d) mis-representation.
(ii) Voidable subsequently. There are certain cases where one part may treat a
contract as voidable. In other words, when one of the parties to the contract
elects to treat the contract as void, then such a contract becomes voidable
subsequently. A contract becomes voidable subsequently in the following three
circumstances.
(a) On refusal of performance: When a party to a contract has refused to
perform his promise in entirety, the other party may put an end to the
contract, unless he has signified by words or conduct, his consent to its
continuance.(Sec.39)
(b) When a party prevents another from performing. When one party to the
contract prevents the other from performing a reciprocal promise, the
contract becomes voidable at the option of the party so prevented. [Sec.53].
(c) When a party fails to perform within a specific time. When a party to a
contract promises to do a certain thing at or before a specific time and fails to
perform it at or before such time, the contract becomes voidable at the option
of the promisee, if the parties intended that the time should be of essence of
the contract.

Effects
(i) Voidable at the option of aggrieved party.
(ii) Valid till rescinded. A voidable contract continues to be valid till the aggrieved
party rescinds it.
(iii) Other party relieved from performing. When aggrieved party rescinds the
contract, the other party need not perform any promise therein contained. (Sec.64)
(iv) Restitution / Compensation is allowed if aggrieved party rescinds the contract..

Distinction between Void Agreement and Voidable Contract

Basis Void Agreement Voidable Contract
An agreement not A contract, which is enforceable by
1. Definition enforceable by law is said to law at the option of the aggrieved
be void. party, is a voidable contract.
2. Period of It is void from the beginning It is valid till the aggrieved party to
validity i.e. void ab initio. the contract avoids it.
3. Legal It is nullity, hence does not It has its existence in the eye of law
existence exist in the eye of law. till it is repudiated.
Status of void agreement does Status of such contract change
4. Change in
not change with the change when the aggrieved party elects
status
in circumstances. to avoid it within a reasonable time.

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 A contract is voidable when the
Any agreement is void when it
consent of the party is caused by
is made with incompetent
coercion or undue influence or
parties or for unlawful objects
5.Causes fraud or misrepresentation.
and consideration or it is
Moreover, parties can treat the
expressly declared to be void
contract voidable under the
under the law.
provisions of Secs.39, 53 and 55.
The party obtaining goods under
voidable agreement can transfer a
The party obtaining goods
good title to the third party if the
6. Transfer of under void agreement cannot
third party obtains it in good faith and
title transfer a good title to the
for consideration and the aggrieved
third party.
party has not avoided the contract
before such transfer.
Parties do not have right to
restore the benefits passed on
If the party rescinding the contract
to the other unless the parties
has received may benefit under the
were unaware of the
7. Restitution contract from other party, he must
impossibility of performance at
restore such benefit, so far as may
the time of agreement or the
be, to the other party.
party to the agreement was
minor.
If a party rightfully rescind (i.e. puts
No party has a right to get
an end) the contract, he can claim
compensation for damages
8. Damages compensation or damages
because such agreement has
sustained by him due to non-
no legal effects.
fulfillment of the promise.

Distinction between Void and Voidable contract

Basis of
Void contract Voidable Contract
distinction
A contract, which ceases to be
A contract, which is enforceable by
enforceable by law become
1. Definition law at the option of the aggrieved
void, when it ceases to be
party, is voidable contract.
enforceable.
2. Period of It remains valid till it does not It remains valid till the party, at whose
validity cease to be enforceable. option it is voidable, avoids the same.
Its validity is not affected by
3. Will of the Its validity is affected by the will of
the will of any party. The court
party the aggrieved party.
decides it.
Contract is voidable when the
Contracts become void due to
consent of the party is caused by
4. Causes change in circumstances or
coercion, undue influence, fraud
in the law of the land.
or misrepresentation.

5. Illegal Agreement. Generally speaking, an agreement, which is expressly

or impliedly prohibited by law, is an illegal agreement. Such an
agreement may either be against the law of the land or opposed to public policy
or be criminal or immoral in nature.
The term ‘illegal agreement’ has not been defined in the Indian Contract Act. However,
Section 23 of the Act states that the object or consideration of an agreement is unlawful if-
(i) it is forbidden by law; or
(ii) it is of such a nature that, if permitted, it would defeat the provisions of any law; or
(iii) it is fraudulent; or

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 (iv) it involves or implies, injury to the person or property of another; or
(v) The Court regards it as immoral; or
(vi) The court regards it apposed to public policy.
Thus, the term unlawful agreement is wider in its scope that the term illegal agreement. All
the agreements covered under the above stated six heads are not illegal agreements. Only
the agreements forbidden by law, agreements opposed to public policy, agreement of
criminal or immoral nature are included in illegal agreements. Therefore, it is true that
every illegal agreement is unlawful but every unlawful agreement is not
necessarily illegal.

Effects:
(i) Void agreement. The agreement is void ab initio.
(ii) Collateral agreement void. Every collateral agreement to an illegal agreement is also
void. It should be noted that if the main agreement were void but not illegal, its
collateral agreement would not be affected.
(iii) Legal part enforceable. If any part of a single agreement is illegal, the whole
agreement will be illegal and void. However, where the agreement consists of two parts,
one legal and the other illegal, and they are severable or separable from each other, the
legal part is enforceable and the illegal part will be void.
(iv) Punishment. The parties to an illegal agreement are punishable as per the law of the
land.

Similarities and Distinctions

Void and illegal agreements are similar in certain respects. The similarities are as under:
(i) Both are un-enforceable agreements, hence void.
(ii) Restitution (Restoration of benefits) is not possible in either kind of agreements.

Distinction between Void and Illegal Agreement

Basis of
Void Agreement Illegal Agreement
distinction
An agreement, which is
An agreement not enforceable by
1. Definition expressly or impliedly
law.
prohibited by law.
2. Effect on The agreement collateral to the void The agreement collateral to an
collateral agreement is not necessarily illegal agreement is always
agreement void. void.
All void agreements need not be
3. Scope All illegal agreements are void.
illegal agreements.
The Court may grant restitution
of money advanced if the party to an Restitution of money is not
4. Restitution agreement is minor or if the parties granted in case of an illegal
were unaware of the impossibility of agreement.
performance of the agreement.

6. Unenforceable contract. A contract, which is good in substance but cannot be

forced in a law court due to some technical defects, is said to be unenforceable
contract. Technical defects in a contract may be due to non-compliance of some of the
legal formalities. For instance, a particular law may require that the contract must be in
writing, witnessed, stamped and registered. In such a case, the contract cannot be
enforced if all the legal formalities are not complied with properly. Even the absence of
signature of witness or stamps of lesser amount than required on the deed may render
the contract unenforceable. As soon as the technical defect is removed, the contract
becomes enforceable.

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 Classification according to enforceability

VOID VOID VOIDABLE ILLEGAL

AGREEMENT CONTRACT CONTRACT CONTRACT

ENFORCEABLE NOT
CEASES TO ENFORCEABLE
NOT AT OPTION OF
BE
ENFORCEABLE AGGRIEVED (Collateral also
ENFORCEABLE
PARTY void)

RESTITUTION /
NO RESTITUTION / NO
PAYMENT /
RESTITUTION COMPENSATION RESTITUTION
COMPENSATION

II. Classification According to Mode of Formation

Contracts may be classified on the basis of their mode of formation in three heads:
1. Express Contract. A contract is express when the parties state its terms and conditions
and show their assent by words, either oral or written.

2. Implied contract. Where a contract is made otherwise than in words, is said to be

implied.(Sec.9). An implied contract arises from the acts and conduct of the parties or by
their surrounding circumstances.

3. Tacit Contract: tacit contracts are those which are inferred from the conduct of the
parties. For example cash withdrawn by a customer from the bank ATM.

4. Quasi-contract. A quasi-contract is not a result of agreement, express or implied. It is a

contract imposed by the law on the parties and gives rise to obligations similar to that
arising under a contract. The parties do not intentionally make such a contract.

III. Classification According to Extent of Execution

Contract may be classified according to extent of execution or performance under 2 heads:
1. Executed contract. A contract in which all the parties to the contract have
performed their respective obligations, is known as executed contract. Nothing remains
to be done by the parties under such a contract.

2. Executory contract. A contract in which the parties to the contract have still to
perform their side of the contract, it is known as executory contract.
Where in a contract, one party has performed the contract but the other is yet to perform
his part of the contract, the contract will be known as partly executed and partly
executory contract.

On the basis of extent of execution or performance, the contracts can also be classified as
follows:
1. Bilateral contract. A bilateral contract is one in which both the parties exchange a
promise to each other. One party promises to perform some act in the future in exchange
for the other party’s promise to perform some act. In such a contract, obligations on part
of both the parties are outstanding at the time of formation of the contract.
Thus, it is similar to an executory contract. It is also known as contract with executory
consideration

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Unilateral contract. It is a one-sided contract in which one party has already performed
his obligation at or before the point of time when the contract comes into existence
and the other party remains liable to perform his obligation after the contract comes
into existence.

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