Law of Contract: Definition, essentials and Types of Contract

A contract is an agreement made between two or more parties which the law will enforce.

Sec 2(h) defines contract “as an agreement enforceable by law”.

Contract=Agreement + Enforceability at law.

Agreement

Agreement is defined as “every promise and every set of promises, forming consideration for each other”.

Promise= a proposal when accepted becomes a promise.

Agreement = Offer+ Acceptance

Consensus Ad Idem

The parties to the agreement must have agreed about the subject matter of the agreement in the same sense and at the same time.

Unless there is consensus ad idem, there can be no contract.

Enforceable by law

An agreement, to become a contract, must give rise to a legal obligation or duty.

An agreement may be social agreement or legal agreement.

But only those agreements which are enforceable in a court of law are contracts.

“All contracts are agreements, but all agreements are not necessarily contract”

Essential elements of a Valid Contrac

1. Offers and Acceptance
2. Legal Relationship
3. Lawful Consideration
4. Capacity of Parties
5. Free Consent
6. Lawful Objects
7. Writing and Registration
8. Certainty
9. Possibility of Performance
10. Not Expressly Declared Void

1. Offers and Acceptane

It is one of the essentials of valid contract. There must an offer and acceptance of the same.

2. Legal Relationship

The parties to an agreement must create legal relationship. Agreements of a social or domestic nature do not create legal relations and as such cannot give rise to a contract

Example, X invited Y to a dinner Y accepted the invitation. It is a social agreement. If X fails to serve dinner to Y, Y cannot go to the courts of law for enforcing the agreement.

3. Lawful Consideration

Consideration is “something in return.” Consideration has been defined as the price paid by one party for the promise of the other. Example,: X agrees to sell his motor bike to Y for Rs. 1,00,000. Here Y’s promise to pay Rs. 1, 00,000 is the consideration for X’s promise to sell the motor bike and X’s promise to sell the motor bike is the consideration for Y’s promise to pay 1, 00,000.

4. Capacity of Parties

It means that the parities to an agreement must be competent to contract. A contract by a person of unsound mind is void ab-initio. Thus, a contract entered into by a minor or by a lunatic is void.

Example: X a minor borrowed Rs 8,000 from Y and executed mortgage of his property in favour of the lender. This was not a valid contract because X is not competent to contract.

5. Free Consent

For a valid contract it is necessary that the consent of parties to the contact must be free.

Example: X threatens to kill Y if he does not sell his car to X. Y agrees to sell his car to X. In this case, Y’s consent has been obtained by coercion and therefore, it cannot be regarded as free.

6. Lawful Objects

It is also necessary that agreement should be made for a lawful object. Every agreement of which the object or consideration is unlawful is illegal and the therefore void.

7. Writing and Registration

According to Contract Act, a contract may be oral or in writing. Although in practice, it is always in the interest of the parties that the contract should be made in writing so that it may be convenient to prove in the court.

8. Certainty

For a valid contract, the terms and conditions of an agreement must be clear and certain.

9. Possibility of Performance

If the act is legally or physically impossible to perform, the agreement cannot be enforced at law.

Example: A agrees with B to discover treasure by magic and B agrees to pay Rs 1,000 to A. This agreement is void because it is an agreement to do an impossible act.

10. Not Expressly Declared Void

An agreement must not be one of those, which have been expressly declared to be void by the Act.

Kinds of Contract

Contracts may be classified as follows:

1. On the basis of enforceability

(a) Valid Contracts.

(b) Void Contracts.

(c) Voidable Contracts. (d) Illegal Contracts.

(e) Unenforceable Contracts.

2. On the basis of mode of creation

(a) Express Contracts

(b) Implied Contracts.

3. On the basis of the extent of execution

(a) Executed Contracts

(b) Executory Contracts.

Valid contract: The Contracts which are enforceable in a court of law are called Valid Contracts.

Voidable Contract: If one party to the contract has the option of enforcing a contract by law, but not at the option of the other or others, it is a voidable contract.

Void contract: An agreement may be enforceable at the time when it was entered into but later on,due to certain reasons, for example impossibility or illegality of the contract, it may become void and unenforceable.

Illegal contract: If the contract has unlawful object it is called Illegal Contract.

Example: There is a contract between X and Z according to which Z has to murder Y for a consideration of Rs. 10000/- from X. It is illegal contract.

Unenforceable contract: A contract which has not properly fulfilled legal formalities is called unenforceable contract. That means unenforceable contract suffers from some technical defect like insufficient stamp etc. After rectification of that technical defect, it becomes enforceable or valid contract.

Example: A and B have drafted their agreement on Rs. 10/- stamp where it is to be written actually on Rs. 100/- stamp. It is unenforceable contract.

All illegal Contracts are void, but all void contracts are not illegal

Express contract – Where the offer or acceptance of any promise is made in words, the promise is said to be express. For example: A has offered to sell his house and B has given acceptance. It is Express Contract.

Implied contract – An implied contract is one which is inferred from the acts of the parties or course of dealings between them. Sitting in a Bus can be taken as example to implied contract between passenger and owner of the bus.

Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so, actually there will be no Contractual relations between the partners. Such a Contract which is created by Virtue of law is called Quasi Contract.

Executed contract – In a contract where both the parties have performed their obligation.

Unilateral contract – In a contract one party has performed his obligation and other person is yet to perform his obligation.

Bilateral contract – It is a contract where both the parties are yet to perform their obligation. Bilateral & Executory are same and inter – changeable.