What is contract

As per s. 2(h), ‘Contract’ is an ‘agreement’ enforceable by law. Thus, for the

formation
of a contract, there must be an agreement and something in addition to that,
i.e. an
agreement and its enforceability at law.
An agreement, therefore to submit minimum, is a reasonable and definite
understanding
between two or more persons as to what each party is to do.
Mr. A agrees to sell his Maruti 800 car to Mr. Y for Rs. 70,000/-, this is an
agreement.
But while Mr. Y agrees to purchase thinking that he is purchasing Maruti 1000,
then no
agreement is made.
An agreement is a promise or a set of reciprocal promises. A promise comes
into
existence when a proposal is made by one and accepted by the other. These
mutual
promises must form consideration, i.e. something in return to each other.
 Whether an agreement is legally enforceable or not would
depend upon two factors-

1. Intention of parties to enforce it legally

2. Presence of all essentials elements of a contract as per s.10.
What does one mean by ‘intention of the parties to enforce and
agreement legally’?
A legal obligation will arise only when the parties to an
agreement want to make
themselves legally bound to perform the duties assigned in the
agreement. For example when we agree to meet a friend for
dinner or we agree with an electrician, that he will install new
switch for fan next day, we may not have any intention to legally
bind the other person who is accepting it, but when we agree
10. a.m. delivery of urgent letter
with a courier service and pay extra charges for the same, the
intention here is to make the things legally binding as non-
delivery of such letter in time may lead one to suffer losses.
 Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act, 1872 provides that, "All agreements
are
contracts if they are made by the free consent of the parties competent to
contract,
for a lawful consideration and with a lawful object, and are not hereby
expressly
declared to be void."
Thus to form a contract, there must be-
(1) an agreement
(2) which is legally enforceable
(3) where the concerned parties are competent to contract
(4) their consent is free
(5) lawful consideration is present
(6) its object is lawful
(7) Contract Act has not expressly declared it void.
(8) certainty of the terms
(9) Possibility of performance
 Competency of parties - When we say that the parties must be competent to
contract, first question arises as to who can be considered as competent to
contract.
Section 11 of the Indian Contract Act provides that the law recognise a person
as
Competent to contract, provided:
1. He is of the age of majority, like when a person attains the age of 18 years;
he is considered as major by the Indian Law,
2. He is of sound mind, i.e., he should not be insane, and
3. He is not specifically disqualified by any law to enter into a contract. Like
when a person's estate is under court's custody for decree, he is disqualified
from entering into a contract to sell it.
Example – ‘A', a minor borrowed Rs. 500 from B and agreed to repay it within
two months. This is not a valid contract as A is not competent to contract. If
later on A refuse to repay the money to B, he has no remedy available to him to
recover his money through court of law.
 Free Consent - The concept of free consent has two aspects, one, a consent
should be made; second, it should be free from any pressure or misunderstanding.
The parties entering in an agreement must have a mutual consent on it. Two or more
parties are said to consent when they agree upon the same thing in the same sense.
Like when A agrees to sell his 'Maruti' car to B, where B is ready to pay Rs. 1 lakh for
the same, there is a consensus ad idem, i.e., identity of minds. But when A agrees to
buy a car from B thinking that the B is talking about his 'Maruti' while B in fact was
talking about his 'Fiat', there is no identity of minds and no consent is said to be
made.
The consent should be genuine i.e., the person concerned should make the consent
out of his free will. It should not be affected by any kind of influence or
misunderstandings. Law recognise a consent to be free when it is not caused by :
Coercion - using physical force such as obtaining consent on gun point.
Undue influence - using psychological pressure.
Fraud - deceiving or misleading the other person by intentionally providing wrong
information.
Misrepresentation - providing wrong information without having knowledge that it
is wrong.
Mistake - misconception as to a matter of fact, or as to a matter of law.
 Lawful consideration - Consideration means something in
exchange. If a person
makes an agreement, to do something for the other
without expecting anything in
return (i.e., consideration); it does not constitute a valid
contract. Presence of
consideration is a must to form a contract.
Moreover this consideration should be lawful. It should
not be fraudulent, or immoral,
or opposed to the public policy, or forbidden by any law.
Examples:
1. A promised to pay Rs. 500 per month to B after
December, 1999. Here A is not
getting anything from B in return of his promised payment.
This cannot form a valid
contract.
 Lawful Object - Object means the purpose or design of the
contract. The object of
an agreement must be lawful. The object is said to be unlawful if
:
(a) it is of such a nature that if permitted it would defeat the
provisions of any law;
(b) it is fraudulent;
(c) it involves an injury to the person or property of the another;
(d) the court regards it as immoral or opposed to public policy.
Example - A hires a house for use as a gambling house, the
object of the contract to
run gambling house is unlawful, the agreement of hiring the
house is not valid.
 Classification of contracts :
For the purpose of our discussion we may classify the contracts according
to their:
Validity /Formation/ Performance
(a) Valid contract (a) Express contract (a) Executed contract
(b) Void contract (b) Implied contract (b) Executory contract
(c) Voidable contract (c) Quasi contract (c) Bilateral contract
(d) Illegal or unlawful contract (d) Unilateral contract
(e) Unenforceable contract
Valid contract - Contracts which have all essential elements as laid down
by
section 10 of the Indian Contract Act, are enforceable at law. Such
contracts are
called valid contracts.

Example - A offers to sell his house to B for Rs. 1 lakh. B agrees to buy it
for this
price. It is a valid contract.
Void contract - Legal meaning of the term 'void' is - null and ineffectual having no
legal force or binding effect, and unable in law to support the purpose for which it
was intended.
A void agreement or a void contract is a total nullity and has no legal effect in the
eyes of law. It creates no rights or obligations. None of the parties can enforce it in
the court of law.
Void agreement - An agreement not enforceable by law is said to be void [Section
2(g)].
If an agreement fails to meet the basic criteria to become a contract as per section
10 of the Act, it is termed as void ab initio. The literal meaning of the term void ab
initio is void since beginning. It may be noted here that a void agreement never
attains the form of a contract. To quote a few examples, agreements made by a
minor or lunatic, agreements made with unlawful object, agreements made without
consideration are void agreements.
Void contract - It may happen that a valid contract is formed initially which
subsequently becomes void. The Indian Contract Act provides that a contract which
ceases to be enforceable by law becomes void when it ceases to be enforceable
[Section 2(j)].
A valid contract may become void subsequently due to
supervening impossibility or
illegality etc.
Examples
1. A agrees to sell his house to B after two days. His
house is burnt next day.
Subject matter of the contract is destroyed due to
supervening impossibility. The
contract becomes void.
2. A agrees to sell 100 Kg. of cement to B at a certain
price. Subsequently law
imposes a ban on private sale of cement. The contract
has become void due to its
subsequent illegality.
 Voidable Contracts
Voidable contract - A contract which can be put to an end at the option of some
of the parties to the contract, is a voidable contract. The party(s) entitled to avoid
the contract may or may not do so. If the parties decide to avoid it, it no longer can
be enforced in the court of law. If the parties opt not to avoid the contract, it is as
good as any other valid contract.
An agreement which is enforceable by law at the option of one or more of the
parties
thereto, but not at the option of other or others, is a voidable contract [Section
2(i)].
When a contract becomes voidable -When the consent of one or more of the
parties
to a contract is obtained by coercion, or undue influence, or misrepresentation, or
fraud, the contract becomes voidable at the option of the party(s) whose consent
was so obtained. Such party is termed as aggrieved party. [Sections 15 to 18].
When a contract contains reciprocal promises, and one party to the contract
prevents the other from performing his promise, the contract becomes voidable at
the option of the party so prevented [Section 53]. The idea is that no man can
complain of another's failure to do something which he has himself prevented the
other from doing or performing.
When time is the essence of a contract and it is required to be performed by a
specified time, and a party fails to perform it within this time, the contract becomes
voidable at the option of the other party [Section 55].
Examples:
1. A, by misrepresentation leads B to believe that his factory has a production
capacity of 100 lakh Kg. of Polyester yarn per annum. B agrees to buy the factory for
Rs. 10 lakh. A contract is formed. The actual production capacity is 50% of what was
told to B. The contract is voidable at the option of B. B has two options:
(i) B may set aside the contract - in this case contract will stop existing.
(ii) B may still want to buy the factory for Rs. 10 lakh He does not opt to set
aside the contract - in this case A and B both will be bound to perform the
contract. In the above example if B decides to set aside the contract after
incurring Rs. 10,000 to observe formalities of transfer of factory in his
name, he can claim Rs. 10,000 from A.

Alternatively, if B has received possession of the factory, and after coming to know
about the misrepresentation, decide to set aside the contract, he will have to return it
to A.
 Illegal or unlawful contract [Section 23] - A contract is considered as illegal or
unlawful, if its consideration, or its object is :
1. Forbidden by law- All states have criminal statutes; these not only prohibit
certain acts but provides for the imposition of fine, or imprisonment on persons
who violate the relevant laws. Any contract for commission of a crime is clearly
unlawful. Some other statutes simply prohibit the performance of the certain acts
without imposing a penalty. Contracts for the performance of these acts are also
unlawful.
2. Of such nature, that if permitted would defeat the provisions of any law - The
term 'law' include any enactment or rule of law for the time being in force in India.
Any agreement defying the provisions of law is unlawful. For example, as per the
Indian Companies Act, 1956, A trading partnership of more than 20 persons is
illegal unless registered as a company. If 21 persons make an agreement to form
a trading partnership, the agreement is unlawful as it would defeat the provisions
of the Companies Act.
3. Fraudulent - Where the parties agree to impose a fraud on third person,
their
agreement is unlawful.
4. Injurious to the person or property of another - An agreement between
two
persons to injure the person or property of another is unlawful.
5. Immoral - What is 'immoral' depends on the standards of morality
prevailing in
the society. From time to time courts establish what is immoral through
the cases
presented before them. Certain kinds of acts have been regarded as
immoral by
the courts like prostitution, interference with the marital relations, etc. An
immoral
agreement is considered as unlawful.
6. Against public policy - Where the court or the state feels that the
performance
of certain acts will have an adverse effect on the society, contracts for
performance of such acts are unlawful.
 Unenforceable contracts - A contract which cannot be enforced in a court of law
because of some technical defect is known as unenforceable contract. In certain
cases there are special provisions of law which require certain formalities to be
fulfilled for formation of a contract like the contract must be registered, or it must
be
attested by notary, or it must be stamped, etc. If such formalities are not observed,
the contract cannot be enforced by law. Some of such contracts can be enforced, if
the technical defect can be removed.
Example - A share transfer deed is required to be stamped in order to give effect to
the transfer. If it is not stamped, the transfer of shares cannot be executed, neither
it
can be enforced in the court of law in case of a dispute. But if it is stamped later,
the
defect is removed and it becomes executable as well as enforceable in the court of
law.
 Classification on the Basis of Formation
A contract may be either expressed or implied or may be inferred from
the
circumstances. It may also be of mixed character that is partly
expressed or partly
implied. Contract whether implied or express or constituted by
circumstances gives
an equal cause of action.
(a) Express contract - Section 9 of the Indian Contract Act provides
that, in so far as
the proposal or acceptance of any promise is made in words, the
promise is said to be express'. In other words, a promise made in
words is called an express promise.
The express promises results in express contracts. Express contracts
can be made by words spoken or written.
A writes to B "I am prepared to sell my watch to you for Rs. 500." B
accepts A's offer by telegram. This is an express contract in writing.
 Implied contract - Section 9 of the Indian Contract Act provides
that, "in so far as
such proposal or acceptance is made otherwise than in words,
the promise is said
to be implied." An implied promise results in implied contract. An
implied contract is
one which is not expressly agreed upon between the parties. It is
inferred from the acts or conduct of the parties or course of
dealings between them or from the surrounding circumstances.
Example - A went into a restaurant and took a cup of tea. In this
case, there is an implied contract that he will pay for the cup of
tea.
Quasi-contract - In a quasi-contract rights and obligation arise
not by any
agreement between the parties but by operation of law. These
obligations are imposed by law because of existence of some
special circumstances between the parties. For example, the
finder of a lost article is under an obligation to find the
owner and return it. Such contracts are based on the
principle that "none should be
allowed to enrich himself unjustly at the expense of
another. There is no consensus,
no offer and no acceptance; still the law implies a
contract. As a matter of fact, these
are not contracts, instead these are relations
resembling contract. But Contract Law
views such relations as contracts.
Example - A, a tradesman, leaves goods at B's house
by mistake. B treats the goods
as his own. B is therefore bound to pay for them.
 Classification on the Basis of Performance
Contracts can be classified depending upon the extent to which they have been
performed. They may be executed, or executory, or bilateral, or unilateral.
Executed contract - Where all the parties to a contract have performed their
obligations under the contract, it is known as executed contract.
Example - A sells his car to B for Rs. 50,000. B pays the price and A gives delivery
of the car. It is an executed contract, since both the parties have fulfilled their
respective obligations.
Executory contract - Where all the parties to a contract have still to perform their
respective obligations in a contract, the contract is known as executory contract.
Example - A agrees to paint a picture for B for Rs. 5,000. Here A has not yet painted
a picture and B has not made the payment. The contract is executory, since both
the
parties are yet to perform their respective obligations.
 Bilateral contracts - These are contracts where as soon as the contract is made,
both parties are bound by it. A typical example of bilateral contract is where A promises to
sell goods
to B in return for B promising to pay the purchase price. In relation
to services, the same applies, so that an agreement between A and B that B will dig
A's garden for Rs. 500 next Sunday is a bilateral agreement.

Unilateral contracts - In a unilateral contract only one party makes a commitment.

If we make a slight change in the above example, and A says to B, 'If you dig my
garden next Sunday, I will pay you Rs. 500.' B makes no commitment, but says, 'I
am not sure that I shall be able to, but if I do, I shall be happy to take Rs. 500.' This
arrangement is not bilateral-A has committed himself to pay Rs. 500 in certain
circumstances, but B has made no commitment at all. He is totally free to decide
whether he wants to dig A's garden or not. If B does not turn up on Sunday to dig the
garden, A cannot do anything about it. If, however, B reaches to A's place on Sunday
to do the work, it will amount to his acceptance and a contract will be formed where
both parties will be bound by their performance.
 Free Coercion
Consent
The term 'coercion' means forcibly compelling a person to enter into a contract.
Acts amounting to coercion:
'Committing of any act forbidden by the Indian Penal Code'.
Examples:
1. A took B into unlawful confinement and asked B that he would not be released
until he executed a gift deed of his property in A's favour. Unlawful confinement is
forbidden by the Indian Penal Code. The gift deed is voidable as it is caused by
coercion.
'Threatening to commit' any act forbidden by the Indian Penal Code
Example - A threatens to kill B if he does not lend him Rs. 2,000. B lends the
amount. This threat amounts to coercion. Under IPC threat to commit suicide is not
punishable. However, an abetment of suicide is punishable under section 306 and
an attempt to commit suicide is punishable under section 309 of IPC. Thus, threat
to
commit suicide amounts to coercion as it is forbidden by law.