Legal Framework Of Business and

Management
Indian Contract Act 1872
The Indian Contract Act, 1972
The law of contract in India is contained in
the Indian Contract Act 1872. This Act is
based mainly on English common Law.
It extends to the whole of India except the
state of Jammu and Kashmir and came into
force on the first day of September
1872(Sec.1 Indian Contract Act 1872). It
does not deal with all the branches of the law
of contract. There are separate acts, which
deal with contracts relating to negotiable
instru­ments, transfer of property, sale of
goods, partnership, insurance, etc.
Definition of contract

According to section 2(h) of the Indian

Contract Act: “ An agreement enforceable
by law is a contract.” A contract therefore, is
an agreement the object of which is to create
a legal obligation i.e., a duty enforceable by
law.
From the above definition, we find that a
contract essentially consists of two elements:
(1) An agreement and (2) Legal obligation
i.e., a duty enforceable by law.
1. Agreement.
• As per section 2 (e): “ Every promise and every
set of promises, forming the consideration for each other,
is an agreement.” Thus it is clear from this definition that a
‘promise’ is an agreement. What is a ‘promise’? the answer
to this question is contained in section 2 (b) which defines
the term.” 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.”
• An agreement is an accepted proposal.
An agreement, therefore, comes into existence only when
one party makes a proposal or offer to the other party and
that other party signifies his assent (i.e., gives his
acceptance) thereto.
• Agreement = Offer + Acceptance
 On analyzing the above definition the
following characteristics of an agreement
become evident:
At least two persons. There must be two or
more persons to make an agreement because
one person cannot enter into an agreement
with himself.
Consensus-ad-idem. Both the parties to an
agreement must agree about the subject
matter of the agreement in the same sense
and at the same time . i.e. before there can
be any contract between the two parties there
must be Consensus ad idem
2. Legal obligation
 As stated above, an agreement to become a contract must
give rise to a legal obligation i.e., a duty enforceable by law.
 If an agreement is incapable of creating a duty enforceable by
law. It is not a contract. “ All contracts are agreements but
all agreements are not contracts,”
 Agreements of moral, religious or social nature e.g., a
promise to lunch together at a friend’s house or to take a walk
together are not contracts because they are not likely to create
a duty enforceable by law for the simple reason that the
parties never intended that they should be attended by legal
consequences.
 The term ‘obligation’ is defined as a legal tie which imposes
upon a definite persons or persons the necessity of doing or
abstaining from doing a definite act or acts. It may relate to
social and legal matters.
Contract= Agreement + Enforceability by Law
Contd…
Thus it may be concluded that the Act
restricts the use of the word contract to
only those agreements, which give, rise to
legal obligations between the parties.
It will be appropriate to point out here
that the law of contract deals only with
such legal obligations which arise form
agreements, obligations which are not
contractual in nature are outside the
purview of the law of contract.
Essential Elements of a Valid
Contract
A contract has been defined in section 2(h) as “an
agreement enforceable by law.” To be enforceable
by law, an agreement must possess the essential
elements of a valid contract as contained in
sections 10, 29 and 56.
According to section 10, all agreements are
contracts if they are made by the free consent of
the parties, competent to contract, for a lawful
consideration, with a lawful object, are not
expressly declared by the Act to be void, and
where necessary, satisfy the requirements of any
law as to writing or attention or registration.
1.Offer and acceptance
There must a ‘lawful offer’ and a ‘lawful
acceptance’ of the offer, thus resulting in
an agreement. The adjective ‘lawful’
implies that the offer and acceptance must
satisfy the requirements of the contract act
in relation thereto.
 2.Intention to create legal
Relationship
There must be an intention among the
parties that the agreement should be
attached by legal consequences and create
legal obligations. Agreements of a social
or domestic nature do not contemplate
legal relations, and as such they do not
give rise to a contract.
Illustrations.

1. M promises his wife N to get her a necklace

if she will sing a song. N sang the song M
did not bring the necklace for her.
2. The defendant was a civil servant in
Ceylon. He and his wife were enjoying
leave in England. When the defendant was
due to return to Ceylon, his wife could not
accompany him because of her health. The
defendant agreed to send her £ 30 a month
as maintenance expenses during the time
they were thus forced to live apart. She
sued for breach of this agreement.
Answers.
N cannot bring an action in a court to
enforce the agreement as it lacked the
intention to create legal relations.
Her action was dismissed on the ground
that no legal relations had been
contemplated and therefore there was no
contract.(Balfour vs. Balfour)
Point to think upon…
In commercial agreements an intention to
create legal relations is presumed. Thus,
an agreement to buy and sell goods
intends to create legal relationship hence
is a contract, provided other requisites of
a valid contract are present. But if the
parties are under a legal obligation, even a
business agreement does not amount to a
contract
Illustration
R Company entered into an agreement with
C Company. By means of which the former
was appointed as the agent of the latter. One
clause of the agree­ment was as follows.
“This arrangement is not entered into as a
formal or legal agreement. And shall not be
subject to legal jurisdiction in the law
courts.”
It was held that there was no intention to
create legal relations on the part of parties to
the agreement and hence there was no
contract.
3. Lawful consideration
Consideration has been defined as the
price paid by one party for the promise of
the other. An agreement is legally
enforceable only when each of the parties
to it gives something and gets something.
The something given or obtained is the
price for the promise and is called
‘consideration’.
Contd…
The ‘consideration’ may be an act (doing
something) or forbearance (not doing something)
(consideration in negative form)or a promise to do
or not to do something.
It may be past, present or future. But only those
considerations are valid which are ‘lawful’.
The consider­ation is ‘lawful’. unless it is
forbidden by law; or is of such a nature that, if
permitted it would defeat .
The provisions of any law; or is fraudulent; or
involves or implies injury to the person or
property of another; or is immoral; or is opposed
to public policy (sec.23).
Analyzing Consideration
An act: Doing of something i.e.
consideration in affirmative from
An abstinence or forbearance: Abstaining
from or refraining from doing something.
A return promise.
4. Capacity of parties
Theparties to an agreement must be
competent to contract.
But the question that arises now is that
what parties are competent and what are
not.

?
Contd…
Every person is competent to contract if he
(a)Is of the age of majority
(b)Is of sound mind
(c)Is not disqualified from contracting by
any law to which he is subject.
5.Free consent
 This concept has two aspects.(1) consent should be made and (2) it
should be free of any pressure or misunderstanding.
 ‘Consent’ means that the parties must have agreed upon the same
thing in the same sense (sec. 13).
 There is absence of ‘free consent,’ if the agreement is induced by
(i)coercion,
(ii) undue influence,
(iii) fraud,
(iv) mis-representation, or
(v) mistake (sec. 14).
 If the agreement is vitiated by any of the first four factors, the
contract would be voidable and cannot be enforced by the party
guilty of coercion, undue influence etc. The other party (i.e., the
aggrieved party) can either reject the contract or accept it, subject to
the rules laid down in the act.
6.Lawful object.

 For the formation of a valid contract it is also

necessary that the parties to an agreement must
agree for a lawful object.
 The object for which the agreement has been
entered into must not be fraudulent or illegal or
immoral or opposed to public policy or must not
imply injury to the person or the other of the
reasons mentioned above the agreement is void.
 Thus, when a landlord knowingly lets a house to a
Smuggler as a godown to carry on smuggling he
cannot recover the rent through a court of law.
7.Certainty
Section 29 of the contract Act provides
that “ Agreements, the meaning of which
is not certain or capable of being made
certain, are void.” In order to give rise to a
valid contract the terms of the agreement
must not be vague or uncertain.
It must be possible to ascertain the
meaning of the agreement, for otherwise,
it cannot be enforced
8.Possibility of performance.
Yet another essential feature of
a valid contract is that it must be capable
of performance. Section 56 lays down that
“An agreement to do an act impossible in
itself is void”. If the act is impossible in
itself, physically or legally, the agreement
cannot be enforced
at law.
9. Legal formalities
Stir your mind….
A invites B to see a picture with him. B
accepts the offer. A purchase a ticket for B
and waits for him outside the cinema hall. B
does not turn up has A any cause of action
against B.
A agrees with B to murder C for Rs. 10,000.
Is this a valid contract?
X agrees to pay Y Rs. 1000 if Y writes 100
pages for him
in one minute. Is it a valid contract?
Some more…
State whether there is any valid contract in
the following
cases?
(i) X boards a DTC bus at Mayur Vihar for
Shalimar
Bagh.
(ii) X and Y agree to go for fishing
(iii) X buys an evening paper
(iv) X a minor borrows Rs. 5000 from Y and
agreed to repay back the same within a
week.
Have a Great Day Ahead…
