Meaning and Essentials of Contract

The Indian Contract Act, 1872 governs law relating to contracts in India. In this article, we will discuss about the Meaning and Essentials of Contract.

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Meaning and Essentials of Contract

A Contract is an agreement enforceable by law. An agreement between two or more parties is a contract, if it satisfies following conditions:

It is made by free consent of all the parties.
All the parties are competent.
It is made for lawful consideration.
It is made with lawful object.
It is not declared void expressly in Indian Contract Act, 1872.

Contract = Agreement + Enforceability

All contracts are agreement but all agreements are not contract.

Definition of Contract by Eminent Personalities

Some of the eminent personalities have given definition of contract as under:

Pollock: Every agreement and promise enforceable at law is a contract.
Halsbury: A Contract is an agreement between two or more persons which is intended to be enforceable at law and is contracted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act.
Salmond: A contract is an agreement creating and defining obligation between the parties.

Key Components to Form a Contract

The key components to form a contract are:

Proposal/Offer – When one person signifies to other to do something, with view to obtain consent of other person.
Acceptance – When a person to whom proposal is made, signifies his consent, the proposal is said to be accepted.
Promise – A proposal when accepted becomes a promise.
Proposal + Acceptance = Promise
Promisor and Promise: When the proposal is accepted, Person making proposal is called Promisor/Offeror and Person accepting the proposal is called Promisee/Offeree
Agreement – A promise with consideration is called Agreement.
Promise + Consideration = Agreement
Contract – An agreement enforceable by law is called Contract. In a contract, all essential of a valid contract are available.
Contract = Agreement + Law Enforceability
Void Agreement – An agreement not enforceable by law is called Void Agreement. In a void agreement, some essential of a valid contract is not available
Voidable Contract – An agreement is a voidable contract if it is enforceable by Law at the option of one or more of the parties there to, and it is not enforceable by Law at the option of the other or others.
Void Contract – A contract which ceases to be enforceable by Law becomes void when it ceases to be enforceable.

Essentials of a Valid Contract

Section 10 of Indian Contract Act provides the essentials elements of contract. According to the act:

Promisor: An offer of proposal is made by one party known as Promisor.
Promisee/Offeree: The proposal is accepted by another party known as offeree.
There must be two parties in a contract.
Offer must be clear, definite, complete and final. It should be communicated to offeree.
Acceptance of proposal should be absolute and unconditional.

The essentials of valid contract are:

Intention to create legal relationship
The intention of parties entering into the contract must be to create legal relationship between them. If there is no such intention, then there is no contract. Agreements of social nature are not contract because there is no intention to create legal relationship.
Agreement may be oral/written
Valid contract can be made through oral agreement. As per section 10(2) of Indian Contract Act, 1872, wherever there is statutory requirement, that contract must be in writing. The statutory requirement must be complied. Otherwise, agreement may be oral.
Lawful Consideration
There must be lawful consideration for both parties entering into the agreement. Considerations means ‘something in return’.
Agreement not acceptable by law is called void.
Agreement acceptable by law is contract.
An agreement which is acceptable by law at the option of one or more parties thereto, but not at the other of other or others is a voidable contract.
Lawful Object
The object of the contract should be lawful. It must not be illegal or immoral or opposed to public policy.
Free and Genuine Consent
The free and genuine consent of parties to contract is required. Consent is said to be free when it is not caused by:
- Undue influence
- Fraud
- Misinterpretation
- Mistake
Certainty and Possibility of Performance
The agreement in which meaning is uncertain is deemed void. Contract must be certain and not vague. Terms must be capable of performance and something not impossible.
Agreement not declared void
Agreement must not have been expressly declared void by law.
Capacity of Contact (Section 11 of Indian Contract Act, 1872)
The parties to agreement must be legally competent to enter into contact.
- The age of majority as per law
- Sound mind i.e., capable of understanding and forming rationale judgement
- Not disqualified from contracting by any law

Contract Act and Banking

Banking is a trust-based relationship between customer and bank. The customer and bank have transactional relationship. Depending upon the type of transaction, they enter into different type of relationships. The following are the relationships between banker and customer: