CONTRACT-I

(General Principles)
Unit-
FORMATION OF CONTRACT
Chapter 1
Definition and Essentials of Contract

Introduction: Evolution of Law of Contract in India

Law is constituted for the benefit of man (Hominium causa
jus constitutum est). According to Blackstone, "Law in its most
general comprehensive sense signifies a rule of action and has applied
indiscriminately to all kinds of action, whether animate, rational or
irrational". Holland defines law as a "general rule of external human
action enforced by a sovereign political authority. The object of law is
the creation and protection of legal right. According to Holland, a
right is "capacity residing in one person, of controlling with the assent
and assistance of the State, the actions of others. Rights may be
classified as 'rights in rem' and 'rights in personam. A
'right in rem
is a right available against the whole world
i.e., a right to freedom,
reputation etc. A 'right to personam' is a right for which the
corresponding duty is, not one owed by the whole world, but by an
individual or a definite number of body of individuals. The 'law of
contract' deals with rights in personam.
Moral basis of contractual obligation in ancient India
a

In ancient India, the laws are found in

Dharmashastras and
the rules governing contract are
part of the law called
Vyavaharmayukha'. 'Smritis' mentioned the law of contract. The
rules governing contract can be found in
'Arthashastra' of Kautilya.
Narada Smiriti lists out the
competent persons to contract as king,
vedic teacher and the head of the household. All
Shastras agreed
that contracts or transactions based on fraud or
force were to be
declared, by the king, as unenforceable. In general, women could not
1
 Contract-1
2
make contract binding on their husbands. It was UA,Ch
possib
competent' to authorise a 'dependent to enter into transact for a
norms laid down in Shastras laid down norms of competence ns. The
contract and stating that the dependents, minors, sanyasineCe
perso
e of
of
devoid of limbs, those edicted to vices ctC., were powerless to
contract.

The provisions of Dharmashastras crept in usages and cist

people. The people feared to break their promises
stoms
of general in India
The concept of debts, law of pious obligation and moral toobligation
pay, law of alienation, law of dispositions and wills of guardianship of
minors. benami transactions etc., are the fundamentals of the lau
of
contract were recognised in Hindu Law on moral grounds. Brihaer
wrote that A person who had received some money as loan from
person should pay it back, otherwise that person will be born hereafte
in his creditor's house, as a slave, a servant, a Woman ora quadruped"
Like this, in Ancient India the law of contracts were purely depended
upon moral obligations.
During Muslim period

During Muslim rule, Islamic law implemented. Islamic law

was
law of contract providing for
had a complete and comprehensive
to all contracts. It also supplied rules to
general principles applicable mercantile and proprietory
contracts of commercial,
govern specific
zamanat and tamin (guarantee and
nature like vakalat (agency),
(bailment). All transactions
indemnity) shirkat (partnership) kafalat
and rules were provided for
were treated as secular contracts,
related to property.
types of disputes,
even
settlement of all

Under British rule

the
the Charters slowly introduced
During British rule in India, of
common and statute
law. The indiscriminate application
English Court
law to natives of India with the jurisdiction of Supreme
English the Statute of 1781
To obviate this,
led to many inconveniences. and
Court)
enpowered the court at Calcutta (being then the Suprme
at Madras and Bombay
the statute of 1797 empowered the courts
determine all actions suits against
being then the Recorders' Courts) to and
the inhahitants of said towns, should be
determined by the laws
U.I, Ch-1 Definition and Essentials of Contract 3
usages of locals. The effect of these statutes was to
law so far as supersede English
regards Hindus and Mohammadans in the case of
contacts and other matters enumerated in the
statutes:
"The Indian legislature had the
power to alter, by legislative
enactment, the provisions of
CI. 19of the Charter of 1865. The Indian
Contract Act was enacted in the exercise of
this by the Indian
legislature to govern matters of contract. The firstpower
draft of the Indian
Contract Act, 1872 made by the Third Indian
Law Commission was a
simplified statement of the English law with modifications suitable to
India. There were differences between
the views of the Indian
legislature and the Commission, and the Commission
drafting of the future statutes fell upon the Indianresigned. The
department. The final draft was the work of Fitzames legislative
proposals of Commissioners were rejected and some were Stephen. Somne
from the draft New York Code of borrowed
1862. Thus the framers of Indian
Contract Act, 1872 borrowed this
other countries to make them sound
provisions from various Codes of
and useful. The Indian Contract
Act, 1872 was amended from time to time and
now it is called as
"Contract Act, 1872" by
deleting word 'India'.
the
Definition of Contract
The term 'contract' is derived from the
Latin word 'contractum
which means 'drawn
together". Contract is an agreement to do or
not to do an act. It is enforceable by law.
John Salmond defines a contract as "An
and agreement creating
defining obligations between the parties".
Sir William Ansan defines a contract as "A
legally binding
agreement between two or more persons by which rights are acquired
by one or more to acts or forbearances on the part of the other or
others"
Blackstone defines a contract as "an agreement
upon a sufficient
consideration to do or not to do a particular thing".
According to Tomlin's Law Dictionary, a contract is "An
enforceable covenant or agreement between two or more
persons
with a lawful consideration or cause".
 Contract-I

Halsbury's
Laws of England, "A contract is an
UA,Ch1
As per
between two hich is iintended
or more persons which
nmde to
agreement constituted
law, and is
the by the acceptance
by accen

by on
enforceaple at
be
offer made to
him by th other party to do or to abstain
Darty of an act"
some
from doing
book on ontracts, says that contract is "A
berate
Story in his
between competent parties, upon
a legal consideratin
engagement
abstain from doing some act".
to do or to
contract 1s "A bargain or agreemens
According to Comyn,
consideration between two or mora
voluntarily made upon
good
to do or forbear to do some law
of contracting
persons capable
act.
on Contracts
states that "Every promise
Chitty, in his book are regarded in the
a contract, and
all contracts
enforceable by law is
or implied, that is to say.
law as founded on promises express
modern the promisor's acts or
in words or implied from
either framed express

conduct"
Restatement of the Law of
Contracts', it has been
In 'American for the breach of
or a set of promises
"A contract is a promise
stated, of which the law /is
remedy or the performance
which the law gives a
as a duty"
some way recognises
1872, a contract is "an
2(h) of the Contract Act,
As per Section
enforceable by law".
agreement
as the source of a legal
contract
As per Leake, "An agreement which
that one party shall
be bound to some perfor:nance,
imports
to enforce".
the other shall have a legal right
described
Pollock,
to "The law of contract may be
According one by
a more or less imperfect
as the endeavor of public authority,
sanction for the expectation
the nature of the case, to establish a positive
of good faith which has grown up in the
mutual dealings of mean of
average right mindedness".

AS per Anson, "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 it".
U.I,Ch-1] Definition and Essentials of Contract 5
"A contract is contract from the time it is
a
made and not from
the time its performance is due". A contract
comes into existence on
the date on which it is entered into between
the parties. The date of
its execution is immaterial for
determining validity of the contract.
the
For example, A agrees to supply 100
bags of wheat to B three months
after 15th January, 2010, the date on which he
enters into a contract
with B. Though performance of the
contract has been deferred or
postponed for three months but the contract will be taken to have
come into existence
right on 15th January.
Examples of Contracts
. A promises to deliver watch to B and in return B
a
promises
to
pay a sum of Rs. 1,000/- to A. Both of them agreed the offer
made by the other party. It is said to be an
and B. Thus a valid contract is concluded
agreement between A
between them.
2. An agreement of lease is a contract.
3. An agreement of hire-purchase is a contract.
4. An agreement to sell a car for consideration is a contract.
Elements or essential ingredients of valid contract
Salmond says, "A contract is
agreement intended to create
an
and actually creating right personam between the contracting
a in
parties. No agreement is a contract unless its effect is to bind the
parties
to each other
by the Vinclulum juris of a newly created personal right.
It commonly takes the form of
promises or a set of promises. That is to
say, a declaration of the consenting wills of two persons that one of
them shal henceforth be under an
obligation to the other naturally
assumes the form of an
undertaking by the one with the other to fulfil
the obligation so created. Not
every promise, however, amounts to a
contract. To constitute a contract there must be not
merely a promise
to do a certain act, but a
promise, express or implied, to do this act as a
legal duty. When I accept an invitation to dine at another man's house,
I make him a promise, but enter into no contract with
him. The reason
is that our wills, though
consenting, not directed to the
are creation of
any legal right or to any alternation of our legal relations towards each
other. The essential fom of a contract is not, I
promise this to you, but
 Contract-I

that hencetorth you shall have a

UA,C
legal right to
with you
I
and
agree
receive this from me. Promises that are not redice
is form
are not contracts. Therefore the consent that is requisite for thee ce
deman
of nghts way of contract
by
is essentially the same as rer
that required
their transter of the consenting parties"

Section 10 of the Contract Act. 1872 provides th

agreements are contracts it they are made by the free conse
that: "Al
fof
parties competent
to contract. for a lawful consideration and
iawful object. and are not hereby expressly declared to be vojd
witha
Nothing herein contained shall affect any law in force in Indi
and not hereby expressly repealed, by which any contract is equired
to be made in wnitung or in the presence of witnesses or any l

relating to the registration of documents."

According to Section 10 of the Contract Act, 1872, the valid
contract must contain the following essentials:
1. it must be an agreement between the two parties

According to Section 2(e) of the Contract Act, "Every promise

and every set of promises forming the consideration for each
other is an agreement".
An agreement enforceable by law is a contract. It must be an
agreement made between two or more persons which is intended
to be. and is enforceable at law. It is constituted by the acceptance
by the one party of an offer made to him by the other to do or to
abstain from doing an act. An offer when accepted becomes a
promise. And the term 'contract' denotes the legal obligation
which is thereby created by one party to perform the promise
and the other to accept the performance of it.
TTere must be two parties to a contract. A contract can only be
bilateral. The same party cannot be a party to a contract on both
Sides and hence there cannot be a contract between X on one
Side and X and Y on the other side. However, Section 5 of the
Transfer of Property Act, 1882 provides an exemption to this
rule of contract. The minds of both the parties to the contract
ust be ad-idem which means identity of minds. This means
U., Ch-1] Definition andEssentials of Contract
that the two parties must have agreed about the subject matter
of the contract at the same time and in the same sense. In State
w. Hindustan Development Board, AIR 1960 Punj. 583, it was
pointed out that "it is essence of a contract that there should be
aggregatio mentium', the meeting of the minds of the
contracting parties". The existence of the consensus of the parties
could be verified by the test of offer and acceptance. Absence
of consensus of parties makes a contract null and void.
2. The parties must be competent to contract
At least two parties are essential for every valid contract and
these parties must be legally competent to contract i.e., they must
be competent to bind themselves by promise. According to Section
11 of the Contract Act, "Every person is competent to the contract
who is of the age of majority according to the law to which he is
subject, and who is of sound mind and is not disqualified from
contracting by any law to which he is subject". Thus the parties
must be of the age of majority.
A valid contract may be made by natural persons, and
by any
other persons who have a legal personality, namely, corporations,
companies, universities, statutory corporations, governments, and
foreign states. Some bodies cannot contract except through their
constituents, namely partnership firms, trusts, clubs, and registered
societies. Certain persons are incapable of contracting due to
political status, mental deficiency or artificiality of personality.
Similarly some persons may be incompetent to contract, namely
minors, persons of unsound minds, insolvent persons.
A person may contract for himself or on behalf of another. If he
contracts on behalf of another, the capacity of that other is
relevant.
It is necessary and sufficient that the
identity of the parties be
ascertainable.
3. There must be free consent of the parties
The agreement must have been made by the free consent of
the
parties. The consent of the parties to the agreement must be true,
8 Contract-I

full and free. The absence of free consent would ULCh-1

affect th
enforceability of a contract. According to Section 14 of the C legal
Act. "Consent is said to be free when it is not caused
by_dct
i)coercion, as defined in Section 15, or
) undue influence, as defined in Section T6, or
iü) fraud, as defined in Section 17, or

iv) misrepresentation, as defined in Section 18, or

v) mistake, subject the provisions of Sections 20, 21
to
and 22
Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence.
fraud, misrepresentation or mistake.
There is distinction between the total lack of consent and a tainted
consent. It is only in those cases in which a tainted consent has
been obtained or procured from one of the parties that a contract
at his instance shall be held to be voidable and may be set aside.

Example: A, at the point of pistol, asks B, to sell his car worth

Rs. 4,00,000 for Rs. 1,00,000 only. B accepted to sell his car. B's
consent is not free. The agreement, therefore, is not enforceable.

4. The consideration and object of contract must be lawful

Consideration means 'something in returm'. It means 'something

in exchange for something'. It is the price for the promise. Every
valid agreement must be supported by consideration. As per
Section 2(d) of the Contract Act, "When, at the desire of the
abstained
promisor, the promisee or any other person has done or
do to
from doing, or does or abstains from doing, or promises to
or abstinence or
or abstain from doing, something, such act
promise is called a consideration for the promise".

Consideration for promise must be lawful. It must be real and of

some value in the eyes of law. It need
not be adequate. It need

not necessarily be in cash or even in kind.

It may be an act or a
It may
to do. It may be positive or negative.
promise to do or not
Contract Act states
be present or future. Section 25 of the
past,
U.ICh-1 Definition and Essentials of Contract
that an agreement without consideration is, void, unless it is in
writing and registered, or is a promise to compensate for
something done, or is a promise to pay debt barred by limitation
law.
The words 'consideration' and 'object' in Section 10 of the Act
are not synonymous, but distinct in
meaning. The word object
means purpose or design. The consideration may not be
objectionable yet the purpose for which the contract was entered
into may be unlawful. But the agreement would be void in either
case.

Section 23 of the Contract Act explains what considerations and

objects are lawful and what not thus:
"The consideration or object of an agreement 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

the court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an
agreement is said to be unlawful. Every agreement of which the
object or consideration is unlawful is void."
5. The agreement must not have been declared expressly to
be void
If the agreement is declared void by the Contract Act (Secs. 20-
30) or by any other law, it is not enforceable. Under the Contract
Act, the following agreements are declared void:
a) Where both the parties to an agreement are under a mistake
of fact essential to the agreement (Sec. 20); or

b) Every agreement of which the object or consideration is

unlawful is void (Sec. 23); or
10 Contract-I

c)Agreements void, if considerations and objects uinln.

U.L,Ch-1
part (Sec. 24); or unlawful in
d Agrecment without consideration void (Sec. 25); or
c) Agrecment in restraint of the marriage of a person othe.
than a minor (Sec. 26); or ther
Agreement in restraint of trade (Sec. 27); or

gAgreement in absoluterestraint of judicial proceedings (Se

28): or
h)An agreement the meaning of which is uncertain and io
incapable of being made certain (Sec. 29); or
i Agreement by way of wager (Sec. 30); or

Agreement to do an act which is impossible in itself or which

subsequently becomes impossible without any default of a
party.
6. The agreement must fulfil the requirement of a particular
law
An agreement must fulfil the requirements of any particular law.
Certain agreements which must be reduced to writing and
registered before they can be legally enforced, are enumerated
beiow

a) Agreement to pay a time barred debt; or

b Agreement for transfer of immovable property; or

C Agreement to refer the matter to an arbitrator in case of

disputes.
The agreement must be in writing, attested and registered if so
required by the law prevailing in India at the time when the
agreement was made.
For example, sale deeds, mortgage deed, etc., of the immovable
property must compulsorily registered under the Transfer or
Property Act, Indian Registration Act, Indian Stamp Act. Such
Iransactions of immovable property not only be in writing, but
 11
UL,Ch-1] Definition and Essentials of Contract
they must be registered according to the provisions of the existing
laws.
A contract in writing does not require signature of both the parties.
A bond signed by one party and delivered to the other and accepted
by him completes the agreement. A signature may be affixed by
way of a digital signature in all cases where any law requires any
document to be signed or bear the signature of any person or any
matter.

Agreements and Contracts

All agreements are not contracts, but all contracts are

agreements
Section 2(e) of the Contract Act states that Every promise and
every promises, forming the consideration for each other, is an
set of
the
agreement". An agrement is a promise or set of promises. It is
result of offer and acceptance. In other words, an agreement is formed
it. It
where party makes the proposal and the other party accepts
one
establishes relationship between the parties. An agreement requires
two parties, one to make a proposal, and the other
to accept the
called the 'promiser
proposal. The person making the proposal is
and the person accepting the proposal is called the 'promisee'.
of mutual
Between the promiser and promisee, there arises a process
is offer plus
negotiations through the agreement. The agreement
acceptance.
An agreement is either a single promise or a group of promises,
consideration would not be
and therefore it appears that an executed
is an act of both parties
reckoned as an agreement. An agreement
one or by both of them. The
whether a legal obligation is incurred by
the consensuality required in a
stresses on
expression 'agreement'
transaction.

Essentials of a valid agreement

The following are the essentials of a valid agreement:

i) There must be at least two parties;

definite act or acts
i) The agreement must relate to
 Contract-1
12

m) l must nelate to legal

matlers but not to social matte
atters
ULCh
) The parties to it must have identity of mind
commuunicate with cach other.
) T h e parties must

Types of agreements

Agrements may
be of four types. They are:

i) Agements which destroy rights and obligations like release or

sumender
Agrements which transter rights from one party to another
i
to social, religious and moral
Agreements which relate
mate
ü) atters;
and obligations.
in) Agreements which create legal rights
Note: Write here the matter relating to 'definition of contract
and 'elements of contracts" J.
The law of contracts deals with only agreements which create
rise to social obligations
legal rights and obligations. Agreements giving
will not constitute binding contracts. Agreements of domestic nature
do not give rise to contracts. Thus, all agreements are not contracts,
but all contracts are agreements. The Law of Contract excludes from
its purview all obligations which are not contractual in nature and all
and obligations. Hence
agreements which do not create legal rights
Salmond rightly observed that "The law of contracts is not the whole
law of agreements, nor is it the whole law of obligations. It is the law
of those agreements which create obligations and those obligations
which have their source in agreements".
Examples of agreements which are not contracts:

. An agreement to kill a person is not a contract as an agreement

to do illegal act is not enforceable by law.

2 An agreement to come to dine is not a contract as it cannot be

enforceable by law because the agreement depends upon the
Voliuon.

3 A contract entered for the purpose of another contract cannot be

enforceable and hence not a contract.
 Definition and Essentials of Contract 13
.LCh-1
A contracts to marry B. B cannot enforce specific performanCe
4.
of this contract.

All agreenents enforeceable by law are contracts and valid. But

all agreements are not entorceable by law and therefore all agreements
are not contracts.

The law of contracts is not the whole law of agreements, nor

is it the
whole law of obligations"
- John Salmond

(Discuss here the topic of *agreements and elements of

agreements.)

A contract is an agreement creating and defining obligations

between the parties. A contract consists of two connected elements,
namely, obligation and agreement.
Obligation
Obligation is an undertaking to do or not to do a certain act. It
is also called 'Vinculum juris' or legal bond. It is defined as 'a legal
tie which imposes upon a definite person or persons the necessity
other
of doing or abstaining from doing a definite act or acts'. In
words, an obligation is the legal duty to do something or to absain
from doing something. So an obligation binds on two
or more

individuals. It may relate to social or legal matters. But the contract

or moral
law does not have any concern with social, religious
obligation.
Essentials of a valid obligation
essentials:
A valid obligation must have the following
There must be two parties

i) It must relate to definite act or acts

It relate to legal matters but not to social matters.

) must

in agreements or not.
Obligations may have their
sources

Obligations which
Obligations may arise even without any agreement. So
in agreements are not contracts.
do not have their source
 14
Contract-
[U.L,Ch-1
arising
trom (a) torts,

regarde
(b)
si-contract, dand
quasi-con.

as contracts
cinnot be
obligations
of courts
and hildren
children does not.
not arise
For For
udgments wile
the various out
maint:ain
to
obligation
the provisions of
f
cample.
Obligation
to
observe
contracts a
Acts
The law of
in clude
contract.
f contract.
arise out of
a
not contractual
also does which a r e not
obligations
fnom its purview all are Outside
the purview o f
obligations of
words. such agreements are enforco
In other
created by
The 1
eablee
ontracts. Only obligations contractual in nature.
of
are
of law since they
in a court whicn create and
legal rights
with only agreements
ontracts deals
contract is"the
union of several in an
states, a
obligations. Savigny of creating an obligation
of will with the object
accordant expression
hetween them.
thus, is not the whole law agreements of
of contracts,
The law arise fromn
the whole law of obligations. Obligations may
it
contract is an obligation but al
nor is

So it follows that a
contracts is the law of those
agreements.
not be contracts. Law of
obligations may
create obligations
and of those obligations which
agreements which
have their source in agreements.

Problems to solve

1. A. B and C into an agreement to share the

enter goods which
they attained through fraud. Is it a valid contract?

Solution:
No. The contract is not valid as it is against the public policy and
having illegal object.
2. A agrees to sell to B "my white horse for rupees five hundred or
rupees one thousand". Is the agreement valid?

Solution:
No. t is not valid agreement because the terms of the agreement
are not certain. It is not definite as to which of the two prices is
to be accepted.

3. A invites B to a dinner. B
accepts the invitation. B failed to turn
up. Can A sue B for the loss he had suffered?
 EGE
G
oF LAAW LI lo673
N
UI,Ch-1] t i o n and Essentialhof Contract 15
A.C.C.NO.
Solution:
No, A cannot s t h thee she has suffered because the
UNTU
agreement is of a socki Haduke, and hence lacks the intention to

create legal relationship.

4. A agrees to pay B Rs. 2,000 and in consideration B agreed to
write for him 500 pages within 10 minutes. Is it a valid contract?

Solution:
This is not a valid contract. It is impossible to write 500 pages
within 10 minutes. Section 56 of the Contract Act lays down that
"an agreement to do an act impossible in itself is void".
5. A engages B for a certain work and promises to pay such
remuneration as shall be fixed by C. B does the work. Is it valid
contract?

Solution:
There is a contract between A, B and C and A is bound to pay B,
the remuneration as shall be fixed by C. If C does not fix or
refuse to fix remuneration, A is bound to pay reasonable

compensation.

promised contribution of Rs. 10,000/- for constructing

a
6. A
community hall to B. Is he bound to pay?
Solution:
To donate certain amount to a temple, church, society, etc.,
is a
moral duty. A moral obligation cannot be enforced by law.
However, this moral duty changes into legal duty, if the promisee
is in liability.

7. State whether there is any contract in the following cases:

a) A and B promise to marry each other

b) P takes a seat in a public vehicle
c) A and B agrees to go for fishing
d) A invites B to a card party and B accepts the invitation.
 Contract-
U.I, Ch-1
16
Solution:
between A and B.
contract
is a Tran
a)There
etween PP and
between
and Public
Public Transport
contract

b ) T h e r e is
a
Corporation or Company
there is no intentin.
between A and B as tion
contract
There is no
relations.
to create legal
is no intention to creat

contract since there

There is no
d legal relations.