Law of Contracts: An Introduction

The Indian Contract Act, 1872 constitutes the legal framework for all commercial and civil obligations in India. Whether it is a multinational corporation signing a merger deal or a local vendor supplying construction materials, the validity and enforceability of their promises are governed by this statute. It is one of the oldest and most pivotal statutes in the Indian legal canon, drafted during the British Raj, yet it remains the bedrock of Indian trade, commerce, and daily interaction.

Unlike criminal law, which imposes specific duties upon individuals (e.g., “Thou shall not kill”), the law of contracts is unique because it allows individuals to create their own laws. It empowers parties to define their own rights and duties towards one another. However, for these self-imposed duties to be recognized by the state, they must adhere to specific legal principles.

This comprehensive guide analyzes the fundamental concepts of Contract, Agreement, Proposal, and Consideration, supported by landmark judicial precedents that have shaped the law.

1. Definition of Contract

The central pillar of the Act is the definition of a “Contract.” It is the destination where all other legal elements—offer, acceptance, and consideration—converge.

Statutory Definition

According to Section 2(h) of the Indian Contract Act, 1872:

“An agreement enforceable by law is a contract.”

This seemingly simple definition contains two distinct components that act as the pillars of the law. To understand what a contract is, we must break it down into a legal equation:

Contract = Agreement + Enforceability

Analyzing the Elements

1. Agreement: There must be a mutual understanding between at least two parties. A person cannot contract with themselves. It requires a “meeting of minds” or consensus ad idem.
2. Enforceability: This is the legal validity. An agreement to go for a movie is an agreement, but it is not enforceable by law. If one party backs out, the court will not intervene. For an agreement to be enforceable, it must create a legal obligation, where the parties intend to face legal consequences if the promise is broken.

According to jurist 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.”

Illustration:

If X agrees to construct a house for Y, and Y agrees to pay ₹10 Lakhs to X, this is a contract. Why? Because it involves an agreement (mutual promises) and it is enforceable (the law recognizes the exchange of services for money as a valid legal bond).

2. Definition of Agreement

If a contract is the roof, the Agreement is the foundation. Without an agreement, there can be no contract.

Statutory Definition

According to Section 2(e) of the Act:

“Every promise and every set of promises, forming the consideration for each other, is an agreement.”

Here again, the Act provides us with a formula:

Agreement = Promise + Consideration

This implies that a mere promise is not enough. It must be supported by “Consideration” (something in return). If A promises to give B a car for free, it is a gift (social promise), not an agreement in the commercial sense. If A promises to give B a car for ₹5 Lakhs, it is an agreement because there is a promise and consideration on both sides.

3. Intention to Create Legal Relations

For an agreement to transition into a contract, there must be a clear intention to create legal relations. In domestic and social arrangements, the law presumes this intention is missing. This principle was firmly established in one of the most famous cases in contract law history.

Landmark Case: Balfour v. Balfour [1919] 2 KB 571

Facts:

Mr. and Mrs. Balfour were a married couple living in Sri Lanka (then Ceylon). They went to England for a vacation. During their stay, Mrs. Balfour developed rheumatic arthritis. Her doctor advised her to stay back in England as the Sri Lankan climate would worsen her health. Mr. Balfour had to return to Sri Lanka for work. Before leaving, he promised to send her £30 per month for her maintenance.

Over time, the relationship soured, and the parties drifted apart. Mr. Balfour stopped sending the money. Mrs. Balfour sued him to enforce the promise.

Held:

The Court rejected Mrs. Balfour’s claim. Lord Atkin held that agreements between spouses in the daily course of life are not contracts because the parties did not intend to be legally bound.

• Reasoning: Domestic commitments are often made without the thought of legal consequences. If the courts started enforcing every domestic promise between a husband and wife, the legal system would be overwhelmed with trivial family disputes.
• Principle: For a contract to exist, there must be an Intention to Create Legal Relations. In social and domestic agreements, this intention is presumed to be absent.

4. The Proposal (Offer)

Every contract begins with a spark—an initiative taken by one party. This is legally termed as a “Proposal.”

Statutory Definition

According to Section 2(a) of the Indian Contract Act, 1872:

“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.”

The person making the proposal is called the “Promisor” or “Offeror,” and the person to whom it is made is called the “Promisee” or “Acceptor.”

Types of Offers

• General Offer: An offer made to the public at large. Anyone who fulfills the conditions of the offer is deemed to have accepted it.
• Specific Offer: An offer made to a definitive person or group. Only that specific person can accept it.

General Offer and Contract Formation

Can an advertisement be an offer? This was answered in the famous case below.

Landmark Case: Carlill v. Carbolic Smoke Ball Co. (1893)Facts: The Carbolic Smoke Ball Company advertised that their product would prevent influenza. They promised to pay £100 to anyone who used the ball for two weeks according to printed directions and still caught the flu. To show their sincerity, they deposited £1000 in a public bank. Mrs. Carlill bought the ball, used it as directed, and still caught the flu. The company refused to pay, arguing there was no contract with her specifically.Held: The advertisement was a General Offer to the world. By performing the conditions (using the smoke ball), Mrs. Carlill accepted the offer. A contract was formed, and she was entitled to the £100.

Offer vs. Invitation to Offer

A vital distinction exists between making an offer and inviting someone else to make an offer.

Landmark Case: Pharmaceutical Society of Great Britain v. Boots Cash ChemistsFacts: A pharmacy displayed medicines on shelves with price tags. The question was whether the display constituted an “Offer” to sell.Held: No. The display of goods with price tags is merely an Invitation to Offer. When the customer takes the goods to the cash counter, he is making the offer to buy. The shopkeeper has the right to accept or reject that offer.

5. The Promise

Once an offer is accepted, it transforms into a Promise.

Statutory Definition

According to Section 2(b):

“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.”

Kinds of Promises

1. Express Promise (Section 9): When the proposal or acceptance is made in words (written or spoken).
2. Implied Promise (Section 9): When the proposal or acceptance is made otherwise than in words (by conduct). For example, stepping onto a bus implies a promise to pay the fare.
3. Reciprocal Promise (Section 2(f)): Promises which form the consideration for each other.
4. Alternative Promise (Section 58): A promise to do one of two things, where one offers a choice.

6. Consideration

Consideration is the “Quid Pro Quo” (Something for Something). It is the price paid for the promise. Without consideration, a promise is usually a void gift.

Statutory Definition

Section 2(d) defines consideration as:

“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.”

This definition highlights that consideration must move “at the desire of the promisor.” If you do something voluntarily, you cannot later claim compensation for it under contract law.

Landmark Case: Kedarnath Bhattacharji v. Gorie Mahomed (1887)Facts: The Municipal Commissioners of Howrah planned to build a Town Hall. They invited subscriptions (donations) from the public. The defendant subscribed to pay Rs. 100. Relying on these promises, the Commissioners engaged a contractor and started construction. Later, the defendant refused to pay, arguing there was no consideration for his promise (since he got nothing in return).Held: The Court held the defendant liable. While a bare promise to donate is not enforceable, in this case, the Commissioners had incurred liability (hired a contractor) based on the defendant’s promise. This act of starting construction at the promisor’s desire constituted valid consideration.

7. Classification of Agreements

Not all agreements stand on equal footing. They are classified based on their legal validity:

1. Valid Agreement: An agreement that fulfills all the essentials of Section 10 (Free Consent, Competency, Consideration, Lawful Object). It is enforceable by law.
2. Void Agreement: An agreement that is not enforceable by law is said to be void (Section 2(g)). It is void ab initio (null from the beginning).
   • Example: An agreement with a minor or an agreement to commit a crime.
   • Case Note: In Mohori Bibee v. Dharmodas Ghose, contracts with minors were declared void ab initio.
3. Voidable Agreement: An agreement that is enforceable by law at the option of one of the parties, but not at the option of the other (Section 2(i)).
   • Example: If a person is coerced into signing a contract, the contract is voidable at the option of the victim.
4. Illegal Agreement: An agreement that creates an act forbidden by law. All illegal agreements are void, but not all void agreements are illegal.
5. Unenforceable Agreement: A valid agreement that cannot be enforced due to technical defects, such as the absence of a written document, signature, or proper stamp duty. Once the defect is cured, it becomes enforceable.

8. Types of Contracts (Based on Nature and Formation)

Modern jurisprudence classifies contracts into various types based on how they are formed and the nature of the obligation.

(I) Adhesion Contracts

These are “Take it or Leave it” contracts formed by a stronger party who dictates the terms to a weaker party. The weaker party has no bargaining power.

• Example: Insurance policies, software Terms of Service, or railway tickets. Courts construe these strictly to protect the weaker party.

(II) Aleatory Contracts

These are contingent contracts where the performance depends on an uncertain future event.

• Example: A fire insurance policy. The company only pays if a fire occurs. If there is no fire, there is no payout, even though premiums are paid. Both parties accept an element of risk.

(III) Bilateral and Unilateral Contracts

• Bilateral Contract: Both parties have mutual obligations to perform. It is a “promise for a promise.”
  • Example: A promises to paint a house; B promises to pay ₹10,000.
• Unilateral Contract: Only one party makes a promise, which is accepted by the other party’s action.
  • Example: A “Lost Dog” reward poster. The owner promises to pay. The finder does not promise to look for the dog, but if they find it, the owner is bound to pay.

(IV) Express Contracts

These are contracts wherein the terms of the contracts are expressed clearly, whether in written documents or orally. The intention is explicitly stated.

(V) Implied Contracts

There are no oral or written terms in this type of contract. The contracts are assumed owing to the facts of the parties.

• Example: If an individual visits a medical professional, he expects to be diagnosed for a disease or illness and be advised a cure. This is an implied contract, and a patient is capable of suing a medical practitioner for malpractice if the standard of care is not met.

(VI) Quasi-Contracts

A Quasi-Contract is unlike a real contract. Salmond defines quasi contracts as “there are certain obligations which are not in truth contractual in the sense of resting on agreement, but which the law treats as if they were”.

It is important to remember that even though it is imposed by law, it is not created by the operation of the contract. It is based on the principle of preventing Unjust Enrichment.

• Example: If A leaves his goods at B’s house by mistake, and B uses them, B is bound to pay A for them (Section 70).

Conclusion

The Indian Contract Act, 1872 provides a comprehensive structure for civil obligations. From the initial Proposal to the final Contract, every step is governed by specific legal tests. Whether it is the requirement of Consideration (as seen in Kedarnath Bhattacharji) or the necessity of Intention (as seen in Balfour v. Balfour), these principles ensure that the law protects only those promises that are meant to be taken seriously. Understanding these definitions is the first step toward mastering commercial law.