Introduction: The Indian Contract Act 1872
The Indian Contract Act came into effect on 1st September 1872 and is one of the oldest mercantile laws of the country. This law provides guidelines that help in the formation and compliance of Contracts in a regulated and organised manner. These rules and regulations provide the framework for the course of Action to be followed in case of any disputes arising from the Contracts. The Act has 266 sections and is applicable to the entire country except for Jammu and Kashmir. An agreement in contract law is a mutual understanding or arrangement between two or more parties that is legally binding and enforceable by law, provided it meets the essential elements such as offer, acceptance, consideration, intention to create legal relations, and the competence of the parties involved.
Let’s understand the key elements of this Act and the definitions of its important features.
The Indian Contract Act, 1872 provides the guidelines for forming a valid Contract. It plays an important role wherever there is an agreement or a Contract. The Contract Act defines the term ‘Contract’ under its section 2 (h) as ‘An agreement enforceable by law’.
This definition has two key elements: agreement and enforceable by law.
Agreement- An agreement is every promise or the set of promises that form the consideration for each other.
Enforceable by law- When these promises are held valid in the court of law and the parties of the Contract can be held liable to complete their promises, the Contract is enforceable by law.
Promise- Section 2(b) of the Indian Contract Act, 1872 defines a promise as: ‘when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal when accepted, becomes a promise’. A promise to do or abstain from doing something becomes an agreement when it is accepted by all the parties involved in the agreement.
Also Read: Overview of the Indian Contract Act, 1872
What is an Agreement?
An agreement is a promise or commitment given by one party to another party. It includes an offer that is made by one person and accepted by the other person. In simple words, an agreement happens when an offer is made by one person and accepted by another person. It consists of two or more parties. It becomes an agreement only if the essential ingredients are fulfilled. There must be a consideration.
Essentials of Forming an Agreement:
Parties - There must be two or more parties to form an agreement.
Offer or proposal - The proposal must be made by one party to the other.
The person(s) to whom the proposal has been made must clearly understand all the aspects and terms of the proposal
Acceptance - The offeree or the person to whom the offer has been made, must accept the proposal and give his assent to all its terms
Promise - When the proposal is accepted it becomes an accepted proposal or a promise. A proposal is not synonymous to a promise but becomes one only after its acceptance
Consideration - An agreement is accepted with a consideration which is the price for the promise made to be paid as a consideration.
Types of Agreement
Written Agreement - Agreements are done by writing in a special layout called written agreement. It contains certain terms and conditions which are accepted by the parties with consideration.
Oral Agreement - An agreement that has a set of gestures and terms agreed via spoken or by spoken communication.
To Sum it Up:
Offer + Acceptance= Agreement
Agreement / Accepted Promise +Enforceable by Law= Contract
What is Agreement in Business Law?
To define agreement in business law, It is an agreement is a mutual understanding or arrangement between two or more parties that outlines their rights and obligations. It can be either written or oral and is formed when there is an offer, acceptance, and consideration (something of value exchanged). For the agreement to be legally enforceable, it must meet certain conditions, including the intention to create legal relations, the competence of the parties, and the lawfulness of the subject matter.
What is a Contract?
An agreement enforceable by law is called a Contract. An agreement cannot be said as a Contract unless and until it is enforced by law. A Contract is an agreement that is accepted by both parties and is enforceable by law. It gives certain rights to all the parties involved and also bestows on them certain obligations that they must fulfill. A Contract is an agreement but not all agreements are Contracts.
Also Check: Indian Contract Act: Classes of Agents
Essentials of a Valid Contract
For a Contract to be valid, it must be enforceable by law and must include the following essentials given under Section 10 of the Indian Contract Act.
Two Parties- A valid Contract must include a minimum of two parties; one that makes the offer and the other to whom the offer has been made and who must accept the proposal for it to become enforceable.
Legal Obligation- The parties entering into a Contract must have the intention of entering into a legal obligation. Social agreements and obligations are not considered a Contract as they do not create any legal obligations on any party.
Certain Terms- A legal Contract must have certainty of meaning.
Example- A agrees to buy B’s house for a reasonable amount. A valid Contract must define the exAct amount that A intends to pay B for buying his house.
Possibility of Performance- A Contract is considered valid only when it does not involve the performance of an impossible Act.
Example- A enters into a Contract with B to bring back to life B’s father for ten thousand rupees. Since the Contract involves the performance of an impossible Act, it is not a valid Contract
Free Consent- The parties entering into a Contract must give their free consent to the Contract.
Competency- The parties must be legally competent to enter into a Contract. According to Section 11 of the Indian Contract Act, people who are considered competent to enter into a Contract include: a person who is of the age of majority as per law, of sound mind, and not disqualified by law from entering into a Contract (this includes convicts, alien enemy, foreign national, etc)
Consideration- The Contract must involve consideration as per the principle of ‘quid pro quo’ or something in return. A valid Contract must include a consideration that must be something of value.
Legal Consideration- Section 23 of the Contract Act defines a legal consideration as something not forbidden by law.
Types of Contract
Valid Contract - A Contract is said to be a valid Contract when the Contract has all the essential ingredients present in it.
Void Contract - A Contract is said to be void when a Contract is void from the beginning when it was made, and which cannot be enforceable by law. It lacks enforceability.
Voidable Contract - A voidable Contract is a Contract, not a void Contract. This contAct can be affirmed or rejected by the parties. This Contract starts as valid but later there will be an option for the parties to move forward with it or deny it. It can be declared invalid at the request of any party because of any defect.
Illegal Contracts - When the subject matter or the terms or conditions are not accepted by society and it is already unlawful then it becomes an illegal Contract.
Breach of Contract
Breach of Contract occurs when one of the parties fails to abide by the terms and conditions accepted in the Contract. It can happen by the non-performance of certain terms and conditions as mentioned in the Contract. The breach of Contract can be resolved among the parties and if it is still not resolved then they can approach the court.
There are Three Conditions to Breach of Contract -
If party fail to deliver certain conditions in a certain duration of time
If the party does not meet the terms of the Contract
If the party fails to perform.
Breach of Contract is a civil wrong. One who breaches the Contract may face legal Actions.
Importance of Indian Contract Act 1872
Clear Rules for Contracts: The Act sets out clear rules for making and following contracts, so everyone knows what is expected of them.
Protection of Rights: It protects the rights of both parties in a contract, ensuring fairness and preventing exploitation.
Solving Disputes: If there’s a problem or breach in a contract, the Act helps resolve the issue by providing legal solutions like compensation.
Encourages Business: It creates a safe legal environment for business deals, helping the economy grow and encouraging trade.
Prevents Fraud: The Act stops dishonest actions like lying or tricking people into contracts, protecting individuals and businesses from fraud.
Key Provisions of the Indian Contract Act, 1872: A Brief Overview
Section 10 of Indian Contract Act – What Agreements are Contracts:
For an agreement to be a valid contract, it must be made with free consent.
The parties must be competent to contract (i.e., of sound mind, and above the age of 18).
The object and consideration must be lawful.
The contract should not be void or illegal.
Section 23 of Indian Contract Act – What Considerations and Objects are Lawful, and What are Not:
The consideration or object of a contract must be lawful.
If the consideration or object is illegal, immoral, or forbidden by law, the contract is void.
It ensures that contracts do not involve unlawful activities.
Section 25 of Indian Contract Act – Agreement Without Consideration:
A contract without consideration is void.
Exceptions to this rule include:
Natural love and affection.
A promise to pay a time-barred debt.
These agreements are valid even without consideration.
Section 27 of Indian Contract Act – Restraint of Trade:
Any agreement that restrains a person’s right to trade or work is void.
Such agreements are not enforceable unless the restraint is reasonable and protects the legitimate interest of the parties involved.
Section 28 of Indian Contract Act – Agreement in Restraint of Legal Proceedings:
Any agreement that completely restricts legal proceedings is void.
This includes contracts that prevent one party from filing lawsuits or limit the time period for legal action.
Contracts that limit access to the courts or legal remedies are unenforceable.
Section 73 of Indian Contract Act – Compensation for Loss or Damage Caused by Breach of Contract:
If a contract is breached, the aggrieved party can claim compensation.
The compensation should cover the loss or damage caused by the breach.
The loss must be foreseeable at the time the contract was made.
Solved Questions on the Indian Contract Act, 1872
1. A Agrees to Buy B’s House for a Sum of Fifty Lakh Rupees. Is this a Valid Contract?
Ans: It will be a valid Contract only if:
B has been made a party to this Contract
Since the statement says that A ‘agrees’ to buy the house, it denotes that an offer has been made to A and if he accepts the offer he must communicate his acceptance to B.
2. James Puts an Advertisement Outside His House for Selling it for One Lakh Rupees. Jack Sees the Advertisement and Agrees to Buy the House but James Refuses to Sell the House to Him. Can Jack Sue James for Breach of Contract?
Ans: The advertisement was only an invitation to offer and not an offer by itself. Since James had not accepted Jack’s offer or bid of purchase there was no Contract between them. Acceptance is an integral part of a valid Contract. Hence Jack cannot sue James for a breach of Contract.
3. Sarah places an advertisement in the newspaper offering her car for sale at Rs. 50,000. Mark sees the ad and immediately agrees to buy the car at the stated price. However, Sarah refuses to sell the car to Mark. Can Mark sue Sarah for breach of contract?
Answer: No, Mark cannot sue Sarah for breach of contract. An advertisement is generally considered an invitation to treat, not an offer. This means Sarah’s ad is an invitation for Mark to make an offer, which Sarah can accept or reject. Until Sarah accepts Mark's offer, no binding contract exists.
4. Tom posts an ad on social media offering his laptop for sale at Rs. 30,000. Alice contacts him, agreeing to buy the laptop at the specified price. However, Tom later refuses to sell the laptop to Alice. Can Alice take legal action against Tom for breach of contract?
Answer: No, Alice cannot sue Tom for breach of contract. Like the previous example, an advertisement is typically an invitation to treat, not an offer. Even though Alice agrees to the price, Tom has not formally accepted her offer. Therefore, no contract is formed, and Tom is not legally bound to sell the laptop.
5. Emily advertises her house for rent at Rs. 15,000 per month. John sees the advertisement and agrees to rent the house at the advertised rate. Emily, however, refuses to rent the house to John. Can John sue Emily for breach of contract?
Answer: No, John cannot sue Emily for breach of contract. The advertisement is considered an invitation to treat, meaning it is not a binding offer. For a contract to exist, Emily must accept John’s offer to rent the house. Since no formal acceptance occurs, no legal contract is formed between them.
FAQs on Indian Contract Act 1872 Overview: What is Agreement in Law?
1. How does the Indian Contract Act, 1872 define an 'agreement'?
Under Section 2(e) of the Indian Contract Act, 1872, an agreement is defined as ‘every promise and every set of promises, forming the consideration for each other’. It is formed when one party makes a proposal (or offer) and the other party signifies their assent (or acceptance) to that proposal.
2. What are the essential elements required to form a valid agreement?
To form a valid agreement, the following essential elements must be present:
- Parties: There must be two or more parties.
- Offer/Proposal: One party must make a clear proposal to the other.
- Acceptance: The party to whom the offer is made must accept it in its entirety.
- Promise: Once the offer is accepted, it becomes a promise.
- Consideration: There must be something of value exchanged between the parties, known as consideration.
3. What is the main difference between an agreement and a contract?
The primary difference lies in legal enforceability. While an agreement is a promise or a set of promises between parties, a contract is an agreement that is enforceable by law. An agreement becomes a contract only when it meets all the conditions specified in Section 10 of the Indian Contract Act, such as free consent, competent parties, and a lawful object.
4. Why are all contracts considered agreements, but not all agreements are contracts?
This is because a contract is a specific type of agreement that has legal backing. The journey starts with an agreement (offer + acceptance). For that agreement to become a legally binding contract, it must also be enforceable by law. Many social or domestic agreements, like promising to attend a dinner, are not intended to be legally binding and thus remain agreements, not contracts.
5. What are the different types of agreements recognised in law?
Agreements can be broadly classified based on their formation:
- Written Agreement: An agreement where the terms and conditions are documented in writing and signed by the parties. This provides clear evidence of the arrangement.
- Oral Agreement: An agreement made through spoken words. While legally valid for many transactions, proving the terms of an oral agreement can be challenging.
6. What distinguishes a 'void' contract from a 'voidable' contract?
A void contract is invalid from the very beginning (void ab initio) and cannot be enforced by law. An example is an agreement with an unlawful object. In contrast, a voidable contract is a valid contract that can be cancelled or affirmed at the option of one of the parties. This typically occurs when consent is obtained through coercion, undue influence, or fraud.
7. Can a minor (a person below 18 years) enter into a contract in India?
No, under the Indian Contract Act, 1872, a minor is not competent to contract. Any agreement entered into by a minor is considered void from the beginning (void ab initio) and cannot be enforced against them. However, a minor can be a beneficiary and can enforce a contract that is for their benefit. Contracts for necessities like food and clothing are an exception.
8. What is 'consideration' and why is it important for an agreement?
Consideration is the legal term for 'something in return' (quid pro quo). It is the price paid for a promise and is essential for an agreement to be legally enforceable. It can be an act, a forbearance, or a promise to do or not do something. An agreement without consideration is generally void, subject to certain exceptions outlined in Section 25 of the Act.
9. What are the exceptions to the rule 'an agreement without consideration is void'?
Section 25 of the Indian Contract Act, 1872, specifies certain exceptions where an agreement is valid even without consideration. These include agreements made out of natural love and affection between parties in a near relationship, a promise to compensate for something voluntarily done, and a written promise to pay a time-barred debt.
10. How can you tell the difference between a legal 'offer' and an 'invitation to offer'?
An offer is a definite promise to be bound, provided certain terms are accepted. Accepting an offer creates a binding agreement. An invitation to offer (or invitation to treat) is merely an invitation for others to make an offer. For example, a price tag on an item in a shop is an invitation to offer. The customer makes the offer by taking the item to the counter, which the shopkeeper can then accept or reject.
11. Why is the 'intention to create legal relations' a crucial element for a contract?
The 'intention to create legal relations' is a crucial, though often unstated, element that separates legally binding contracts from casual social promises. Courts presume that commercial agreements are intended to be legally binding, while social or domestic agreements (e.g., a promise between family members) are not. This principle prevents the legal system from being flooded with disputes over informal arrangements.
12. What happens when a party to a contract fails to perform their promise?
When a party fails to fulfil their obligations under a contract, it is called a breach of contract. The party who suffers from the breach (the aggrieved party) has legal remedies available. They can sue for damages to get monetary compensation for the loss suffered, or in some cases, ask the court to order the other party to perform the contract as promised (specific performance).
