What is a Contract?

The Contracts or agreements between various parties are framed and validated by the Indian Contract Act.
Contract Act is one of the most central laws that regulates and oversees all the business wherever a deal or an
agreement is to be reached at. The following section will tell us what a contract is.

We will see how a contract is defined by The Indian Contract Act, 1872. We will also define the terms as per
the Act and see what that means. In these topics, we will decipher all the vivid aspects of the Contract Act.
Let us begin by understanding the concept of a contract.

Contract Act

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as
“An agreement enforceable by law”. In other words, we can say that a contract is anything that is an
agreement and enforceable by the law of the land.

This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in order to
understand a contract in the light of The Indian Contract Act, 1872 we need to define and explain these two
pivots in the definition of a contract.

Agreement

The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act defines the
term agreement as “every promise and every set of promises, forming the consideration for each other”.

Now that we know how the Act defines the term “agreement”, there may be some ambiguity in the definition
of the term promise.

Promise

This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise” here as:
“when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted. Proposal when accepted, becomes a promise”.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or
affected by it. This definition thus introduces a flow chart or a sequence of steps that need to be triggered in
order to establish or draft a contract. The steps may be described as under:

i. The definition requires a person to whom a certain proposal is made.

ii. The person (parties) in step one have to be in a position to fully understand all the aspects of a proposal.

iii. “signifies his assent thereto” – means that the person in point one accepts or agrees with the proposal after
having fully understood it.

iv. Once the “person” accepts the proposal, the status of the proposal changes to “accepted proposal”.

v. “accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal to become a
promise, it has to be accepted first.
Thus, in other words, an agreement is obtained from a proposal once the proposal, made by one or more of
the participants affected by the proposal, is accepted by all the parties addressed by the agreement. To sum
up, we can represent the above information below:

Agreement = Offer + Acceptance.

Enforceable By Law

Now let us try to understand this aspect of the definition as is present in the Act. Suppose you agree to sell a
unicorn for ten magic beans with a friend. Can you have a contract for this?

Well if you follow the steps in the previous section, you will argue that once you and your friend agree on the
promise, it becomes an agreement. But in order to be a contract as per the definition of the Act, the agreement
has to be legally enforceable.

Thus we can say that for an agreement to change into a Contract as per the Act, it must give rise to or lead to
legal obligations or in other words must be within the scope of the law. Thus we can summarize it as Contract
= Accepted Proposal (Agreement) + Enforceable by law (defined within the law)

So What Is A Contract?

Now we can define a contract and more importantly, understand what is “Not” a contract. A contract is an
accepted proposal (agreement) that is fully understood by the law and is legally defined or enforceable by the
law.

So a contract is a legal document that bestows upon the parties special rights (defined by the contract itself)
and also obligations which are introduced, defined and agreed upon by all the parties of the contract.

Difference Between Agreement And Contract

Let us see how a contract and agreement are different from each other. This will help you summarize and
make a map of all the important concepts that you have understood.

Contract Agreement

A promise or a number of promises that are not contradicting and are

A contract is an agreement that is enforceable by law.
accepted by the parties involved is an agreement.

An agreement must be socially acceptable. It may or may not be

A contract is only legally enforceable.
enforceable by the law.
A contract has to create some legal obligation. An agreement doesn’t create any legal obligations.

All contracts are also agreements. An agreement may or may not be a contract.

Who Performs the Contract?

There are at least two parties to a contract, a promisor, and a promisee. A promisee is a party to which a
promise is made and a promisor is a party which performs the promise. Three sections of the Indian Contract
Act, 1872 define who performs a contract – Section 40, 41, and 42. In this article, let us take a look at the
following sections to understand the concept of the performance of a contract better.

Section 40

Section 40 of the Indian Contract Act, 1872 states

If the nature of a contract indicates that either of the parties intended that the promise contained in the
contract must be performed by the promisor himself

 then the promisor is obligated to perform the promise

 else the promise can be performed by the promisor or his representatives or an employed agent.

Let’s look at some examples: Peter promises to pay Rs 50 to John. In this case, Peter can perform the promise
himself by paying the moneyto John or can ask someone else to pay him. Also, if Peter dies before fulfilling
his promise, then his representatives are required to perform the promise or employ someone to do the same.

We will take a look at another example. Peter is a singer and he promises to sing a song at John’s wedding
reception. In this case, the nature of the contract requires Peter to perform the promise himself. He cannot
delegate it to someone. So, there are three possibilities for the performance of the promise. It can be done by
the promisor, his representatives or his agent, depending on the nature of the contract.

Promisor Performs the Promise

If a contract indicates that the parties intended for the promisor to fulfil the promise himself, then the
promisor is obligated to perform the promise. Usually, these include promises which involve personal skills,
experience, or expertise and are usually based on trust between the promisor and the promisee.

Example 2 cited above about Peter singing at John’s wedding reception is a good example of a personal skill
being required to perform the promise.

Agent Performs the Promise

If the contract does not require the personal consideration of the promisor, then the promisor can employ a
competent person to perform the promise. Example 1 cited above is a good example of Peter employing an
agent to pay Rs 50 to John.

Legal Representatives Perform the Promise

If the promisor dies before performing the promise, then the legal representatives become responsible for the
same. If the promise involves the utilization of personal skills or expertise, then the consideration ceases with
the death of the promisor.

However, in all other scenarios, the legal representatives are obligated to perform the promise unless the
contract has a contrary intention specified. Also, the liability of the legal representatives is limited to the value
of the property inherited by them.

Peter promises to pay John an amount of Rs 10,000 within one month of delivery of certain goods. John
delivers the goods. However, Peter dies before he can pay the money to John. Now, it is his legal
representative’s responsibility to ensure that John receives thepayment. The representative can pay himself or
employ someone for the same.

Section 41

If the promisee accepts the performance of a promise from a third person, then he cannot enforce it against
the promisor at a later date. Hence, the performance of the promise by a third-party discharges the promisor
of his obligations even if he has not authorized the third-party to perform the promise.

Peter promises to pay John an amount of Rs 10,000 for painting his house. John finishes the job but Peter is
unable to pay him. Oliver, a common friend of Peter and John, offers Rs 6,000 to John on behalf of Peter,
which he accepts. Eventually, John files a suit for recovery against Peter.

The Court holds that:

 John accepted Rs 6,000 from a third-person.

 Peter has not authorized the third-person.

 Hence, John’s act has discharged Peter of his liability to pay the entire amount.

 John can only claim Rs 4,000 from Peter now.

Section 42

If the promisors Agree to perform a promise together – joint promise – then they are jointly obligated to fulfil
the promise, unless the contract specifies a contrary intention. Also, if any of the promisors die, then their
legal representatives must fulfil the promise jointly with the surviving promisors. If all the promisors die, then
the legal representatives of each of them must perform the promise jointly.