FORMATION OF A CONTRACT
Meaning – Contract, Agreement, Offer, Acceptance and
Essentials of a valid contract
Interpretation Clause
(Section 2)
(a) Offer/ Proposal - When one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said
to make a proposal;
(b) Acceptance - When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted.
Promise - A Proposal when accepted becomes a promise. In simple words, when an offer is
accepted it becomes promise.
(c) Promisor and Promisee - The person making the proposal is called the “promisor”, and the
person accepting the proposal is called the “promisee”;
(d) Consideration - When, at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing,
something, such act or abstinence or promise is called a consideration for the promise;
(e) Agreement - Every promise and every set of promises, forming the consideration
for each other, is an agreement;
(f) Reciprocal Promises - Promises which form the consideration or part of the
consideration for each other are called reciprocal promises;
(g) Void Agreement - An agreement not enforceable by law is said to be void;
(h) Contract - An agreement enforceable by law is a contract;
(i) Voidable 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 the other or others, is a
voidable contract;
(j) Void Contract - A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable. (Read Sec.56)
OFFER/PROPOSAL + ACCEPTANCE = PROMISE
PROMISE + CONSIDERATION = AGREEMENT
AGREEMENT+ ENFORCEABILITY BY LAW =
CONTRACT
Definition of Agreement [Sec.2(e)]
◼ An agreement gives birth to a contract. As defined in Sec. 2(e), ‘Every
promise and every set of promises, forming the consideration for each
other’ is an agreement.
◼ An agreement, therefore, comes into existence when one party makes a
proposal or offer to the other party and that other party signifies his assent
thereto. In a nutshell, an agreement is the sum total of offer and
acceptance.
◼ Points to remember –
(i) Proposal made + Acceptance of Proposal = Promise
(ii) Promise from both the parties to one another with a consideration is
known as an agreement.
•Agreement
•Plurality of 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
•The meeting of the minds is called consensus ad idem. It means both the parties to an
agreement must agree about the subject matter of the agreement in the same sense and at
same time
Definition of Contract [Sec. 2(h)]
◼ A contract means an agreement which is enforceable by law. An agreement
consists of reciprocal promises between the two parties. In case of contract each
party is legally bound by the promise made by him.
◼ The term ‘contract’ is defined in Section 2(h) of the Act as ‘An agreement
enforceable by law is a contract.’
◼ Two important things to remember –
(i) An agreement,
(ii) The agreement should be enforceable by law
◼ All agreements are not enforceable by law and therefore, all agreements are
not contracts.
Two types of Agreements that cannot
become a Contract
1. Agreements relating to social matters
2. Domestic arrangements between husband and wife
Three consequences from the
discussion
◼ To constitute a contract, the parties must intend to
create legal relationship
◼ The law of contract is law of those agreements which
create obligations and those obligations which have
their source in agreement.
◼ Agreement is the genus of which contract is the specie
and, therefore, all contracts are agreements but all
agreements are not contracts.
Essentials of a Valid Contract
◼ According to Section 10 –
“All agreements are contracts, if they are made –
by free consent of the parties, competent to
contract,
for a lawful consideration
with a lawful object, and
not hereby expressly declared to be void.”
The essential elements of a valid contract are –
(i) A valid offer or proposal by one party and acceptance of that offer by
another party resulting in an Agreement.
(ii) An intention to create legal relations or an intent to have legal consequences.
(iii) The agreement is supported by a lawful consideration.
(iv) The parties to the contract are legally capable of contracting.
(v) Free consent between the parties.
(vi) The object of the contract is legal and is not opposed to public policy.
(vii) The agreement is capable of being performed i.e., it is not impossible of
being performed, otherwise it is a void agreement.
(viii) Contract should not have been declared as void under Contract Act or any
other law.
(ix) Necessary legal formalities must be fulfilled.
⚫ Points to remember –
Therefore, to form a valid contract there must be:
✔ An agreement,
✔ Based on the free consent of the parties,
✔ Supported by a lawful consideration,
✔ Made for a lawful object, and
✔ Between the competent parties.
Proper
Acceptance +
Proper Offer intention Capacity
to create legal
relationship
Lawful Lawful Free
Object Consideration Consent
(i) Proper offer and proper acceptance with intention to create legal relationship – In
order that an offer, after acceptance, can result in a valid contract, it is necessary that the
offer should be made with an intention to create a legal relationship. Promise in the case of
social engagements is generally without the intention to create legal relationship. Such an
agreement therefore, cannot be considered to be a contract.
▪ Case – Balfour vs. Balfour (1919)
In this case, the defendant and his wife were enjoying leave in England. When the defendant
was due to return to British Ceylon, where he was employed, his wife was advised, by
reason of her heath, to remain in England. The defendant agreed to send her an amount of
£30 a month for the probable expenses of maintenance. He did send the amount for
sometime, but later differences arose which resulted in their separation and the allowance
fell into arrears. The wife’s action to recover the arrears was dismissed. It was stated in the
judgment that such agreements are not contracts because the parties did not intend that they
shall be attended by legal consequences. In case of social agreement there is no intention to
create legal relationship and there the is no contract.
⚫ The intention of the parties is naturally to be ascertained from the terms of
the agreement and the surrounding circumstances. It is for the court to find
out whether the parties have intended to enter into legal obligations.
Family or social matters can also produce legally binding contract in some
cases.
Case - McGregor vs. McGregor (1888)
In this case the husband and wife withdrew their complaints under an
agreement by which the husband promised to pay her an allowance and
she was to refrain from pledging his credit, the agreement was held to be a
binding contract.
Case - Chandrakant Manilal Shah vs. CIT (1992)
The Hon’ble Supreme Court held that a agreement of any kind including
that of partnership between the undivided members of a Hindu family can
be legally binding.
(ii) Capacity- The parties to a contract must have capacity (legal ability) to make valid
contract.
Section 11 of the Indian contract Act specify that every person is competent to contract
provided.
Is of the age of majority according to the Law which he is subject, and
Who is of sound mind and
Is not disqualified from contracting by any law to which he is subject.
o Person of unsound mind can enter into a contract during his lucid interval.
o An alien enemy, foreign sovereigns and accredited representative of a foreign state.
Insolvents and convicts are not competent to contract.
(iii) Free consent - consent of the parties must be genuine consent means agreed upon same
thing in the same sense i.e. there should be consensus – ad – idem. A consent is said to be
free when it is not caused by coercion, undue influence, fraud, misrepresentation or
mistake.
(iv) Lawful consideration - Consideration must not be unlawful, immoral or opposed to the
public policy.
(iv) Lawful object - The object of agreement should be lawful and legal. Two persons
cannot enter into an agreement to do a criminal act. Consideration or object of an
agreement is unlawful if it –
(a) is forbidden by law; or
(b) is of such nature that, if permitted, would defeat the provisions of any law; or
(c) is fraudulent; or
(d) Involves or implies, injury to person or property of another; or
(e) Court regards it as immoral, or opposed to public policy.
•ALL CONTRACTS ARE AGREEMENTS, BUT ALL AGREEMENTS ARE NOT
CONTRACTS
•Agreements not enforceable by law
•*Any essential of a valid contract is not available
•Agreements enforceable by law
•*All essentials of a valid contract are available
Basis Contract Agreement
1. Section : Sec. 2(h) Sec. 2(e)
2. Definition : A contract is an agreement Every promise or every set of
enforceable by law. promises forming consideration
for each other is an agreements.
3. Enforceability : Every contract is Every promise is not
enforceable enforceable.
4. Interrelationship :
A contract includes an An agreement does not include
agreement. a contract.
5. Scope :
The scope of a contract is Its scope is relatively wider, as
limited, as it includes only it includes both social
commercial agreements. agreement and commercial
6. Validity : agreements.
Only legal agreements are
called contracts. An agreement may be both
7. Legal Obligation legal and illegal.
Every contract contains a
legal obligation. It is not necessary for every
agreement to have legal
Types of Contract
•Types of Contracts
•On the basis of formation
• a. Express
• b. Implied
• c. Quasi
•On the basis of validity
• a.Valid
• b.Void
• c. Voidable
• d. Illegal
•On the basis of execution
•a. Executed
•b. Executory
•c. Party Executed and partly executory
•On the basis of liability
• a. Bilateral
• b. Unilateral
On the basis of formation
(i) Express contract –
Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time
of formation.
According to Sec. 9 in so for as the proposal or acceptance of any promise is made in words, the
promise is said to be express.
Eg. A says to B ‘will you purchase my bike for Rs.20,000?” B says to A “Yes”.
(ii) Implied contract -A contract inferred by:
The conduct of person, or
The circumstances of the case.
According to Sec.9, where a proposal or acceptance is made otherwise than in words, the promise is
said to be implied.
Eg. A stops a taxi by waving his hand and takes his seat. There is an implied contract that A will
pay the prescribed fare.
(iii) Quasi Contracts – These are contracts which are created –
Neither by word spoken
Nor written
Nor by the conduct of the parties.
But these are created by the law.
▪ Such cases are not contracts in the strict sense, but the Court recognizes them as relations
resembling those of contracts and enforces them as if they were contracts, hence the term
quasi- contracts (i.e., resembling a contract).
▪ A quasi-contract rests on the equitable principle that a person shall not be allowed to enrich
himself unjustly at the expense of another.
▪ Eg. If Mr. A leaves his goods at Mr. B’s shop by mistake, then it is for Mr. B to return the
goods or to compensate the price.
On the basis of validity
(i) Valid contract- An agreement which satisfies all the
requirements prescribed by law for formation.
(ii) Void contract or Void agreement –
A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable.
A void agreement is one which is destitute of all legal effects. It
cannot be enforced and confers no rights on either party. Void
means a lack of existence or a nullity.
(iii) Voidable 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 the other or others, is a voidable contract.
A voidable contract is one which a party can put to an end. He can exercise his option, if his consent
was not free.
The contract will, however be binding, if he does not exercise his option to avoid it within a
reasonable time.
Eg. The consent of a party is not free and so he is entitled to avoid the contract, if he has given his
consent due to misrepresentation, fraud, coercion or undue influence
(iv) Illegal Agreement –
It is an agreement which the law forbids to be made.
All illegal agreements are void but all void agreements or contracts are not necessary illegal. Eg.
Hiring a person to murder another.
Contract that is immoral or opposed to public policy are illegal in nature.
Eg. An agreement to wage a war against the Government is an illegal agreement because the object is
unlawful.
On the basis of execution
(i) Executed Contract –
The parties have fulfilled their obligations
Nothing remains to be performed
Eg. A contracts to buy a car from B by paying cash, B instantly delivers his car.
(ii) Executory Contract –
A contract in which both the parties have to still fulfil their obligations.
Eg. D agrees to buy V’s cycle by promising to pay cash on 15th July. V agrees to deliver the cycle
on 20th July.
(iii) Partly executed and partly executory –
One party has fulfilled the obligation and the other party has not.
Eg. A sells his car to B and A has delivered the car but B is yet to pay the price. For A, it is excuted
contract whereas it is executory contract on the part of B since the price is yet to be paid
On the basis of liability
(i) Bilateral contract –
A contract in which both the parties commit to perform their respective promises
Eg. A offers to sell his fiat car to B for Rs.1,00,000 on acceptance of A’s offer by B,
there is a promise by A to Sell the car and there is a promise by B to purchase the car
there are two promises.
(ii) Unilateral contract –
A unilateral contract is a one sided contract in which only one party has to perform his
promise or obligation party has to perform his promise or obligation to do or forbear.
Eg. A wants to get his room painted. He offers Rs.500 to B for this purpose. B says to A
“ if I have spare time on next Sunday I will paint your room”. There is a promise by A to
pay Rs 500 to B. If B is able to spare time to paint A’s room. However there is no
promise by B to paint the house. There is only one promise.
Q&A
