 The law of contracts forms the oldest

branch of the law relating to business

transactions.
 It affects every person in one way or the
other, as all of us enter into some kind of
contract every day.
 The law of contracts is applicable not
only to the business community but also
to others.
 Every one of us enters into a number
of contracts almost every day.
 When a person takes a seat in a bus
or deposits his luggage in a railway
cloak room or entrusts his car to the
mechanic for repairs etc., he enters
into a contract though he may not be
aware of this fact.
 Such contracts create legal rights and
obligations.
 The law relating to contracts in india is
contained in the Indian Contract Act 1872.
 The Act came into force on the first day of
September 1872.
 It is not an exhaustive code containing the
entire law of contracts.
 The Indian Contract Act may be divided
into two parts : Section 1 to 75 deals with
the general principles of the Law of
Contract. Section 124 to 238 deals with
special types of contracts such as,
a) Contract of Indemnity and guarantee
(Sec. 124 to 147)
b) Contract of Bailment and Pledge (Sec.
148 to 181)
c) Contract of Agency (Sec. 182 to 238)
 An agreement which creates legal
obligations is a contract. The obligation is
an undertaking to do or abstain from doing
some definite act or acts.
 Section 2(h) of the Indian Contract Act
1872 defines a contract as follows :
"An agreement enforceable by law is a
contract."
 In other words, an agreement which can
be enforced in a court of law is known as a
contract.
(1) An agreement and
(2) The agreement must be enforceable by
law.
The term agreement is defined in Section
2(e) of the Indian Contract Act which
reads as under :
"Every promise and every set of promises,
forming consideration for each other, is
an agreement."
 Sec. 2(b) defines promise as
"A proposal when accepted, becomes a
promise".
 Thus an agreement is an accepted
proposal.
 We can easily conclude from the above
mentioned provisions that an agreement
consists of an offer or proposal from one
party and its acceptance by the other.
So, agreement means a
promise. It is created when a
person makes an offer to
another person and that other
person signifies his assent or
accepts it.
 Obligation is a legal tie which imposes
upon determinate person or persons the
necessity of doing or abstaining from
doing a definite act or acts.
 Obligations are also said to be varied;
such as social obligations, obligations
arising out of torts, obligations arising out
of compromise decree, obligations
arising out of quasi-contracts etc.
 Consensus ad idem means identity of
mind. Two or more persons are said to
consent witt each other when they
agree upon the same thing in the same
sense.
 Example : Balfour V Balfour (1919)
 A husband and wife were residents in Ceylon, where
husband was employed. They went to England on
nine months leave. At the end of the time the
husband had to return alone as the wife was advised
to remain in England because of illness. The husband
promised to send her a maintenance allowance of £
30 a month until she returned to Ceylon. The husband
failed to pay the amount. The wife sued for the
allowance.
 It was held that there was no binding contract. She
could not recover as it was a social agreement and
parties did not intend to create any legal relations.
 According to Section 10 of the Act lay
down the essentials of a valid contract.
According to the section:
 "All agreements are contracts if they
are made by the free consent of the
parties competent to contract, for a
lawful consideration and with a lawful
object, and are not hereby expressly
declared to be void".
1. Offer and Acceptance
2. Intention to create legal relations
3. Lawful Consideration
4. Capacity of parties
5. Free and genuine consent
6. Lawful object
7. Agreement not declared void
8. Certainty and possibility of performance
9. Legal formalities.
 An agreement comes into existence by
acceptance of an offer. In an agreement
there must be atleast two parties, one of
them making the offer and the other
accepting it. Acceptance must be in
accordance with the terms and conditions
of the proposal.
 An acceptance to be valid must be
absolute and unqualified and in
accordance with the exact terms of the
offer. A proposal, when accepted
becomes a promise.
 Example :
A proposes to sell his car to B for
Rs. 50,000 and B conveys his
acceptance. The agreement
comes into existence.
 There must be an intention (among the
parties) that the agreement shall result in
or create legal relations. An obligation is
the legal duty to do or abstain from
doing a definite act or acts. If the parties
do not intend to create legal obligations,
there is no contract between them. An
agreement which gives rise to a moral or
social obligation is not contract.
 I invited you for a dinner. You
accepted the invitation. It is a social
agreement. If I fail to serve you, you
cannot go to Courts of Law for
enforcing the agreement. Similarly, if
you fail to attend the dinner, I cannot
go to Court of Law for enforcing the
agreement.
 The agreement must be supported by
lawful consideration on both sides. Each
party to the agreement must give or
promise something and receive
something or a promise in return.
Consideration is the price for which the
promise of the other is sought.
 If A offers t0 sel1 his scooter t0 B
for Rs. 10'000 and B accepts
the offer, then for A Rs.10 000 is
the consideration and for B
the scooter is the
consideration.
 The parties to an agreement must be
competent to a contract, otherwise it
cannot be enforceable by a Court of Law.
 Minors, Lunatics, Drunkards, Idiots, Alien
enemy, Convicts etc. are incompetent to
contract.
 Under section 11 of the act, "Every person is
competent to contract who is the age of
majority according to the law to which he is
subject, and who is of sound mind, and not
disqualified from contracting by any law to
which he is subject"
 The consent of the parties to the
agreement must be free and genuine.
The consent of parties should not be
obtained by misrepresentation, fraud,
undue influence, coercion or mistake;
If the consent is obtained by any of
these flaws, then the contract is not
valid.
 The object for which the agreement has
been entered must not be illegal or
immoral or opposed to public policy.
That is, the object of the agreement must
be lawful and not one of which law
disapproves.
 The agreements must not have been
expressly declared to be void by any
law in force in the country.
 Under Indian Contract Act, there are
five categories of agreements which
are expressly declared to be void.
They are:-
1. Agreement in restraint to marriage (Sec.
26)
2. Agreement in restraint of trade (Sec. 27)
3. Agreement in restraint of proceedings
(Sec. 28)
4. Agreements having uncertain meaning
(Sec. 29)
5. Wagering agreement (Sec. 30).
 Agreements to form valid contracts must
be certain. If it is vague and it is not
possible to ascertain its meaning, it
cannot be enforced. The performance
of an agreement must be possible. An
agreement to do an impossible act is not
valid.
9. Legal Formalities

 A contract may be oral or in writing. If,

however, a particular type of contract is
required by law to be in writing, it must
comply with the necessary formalities as to
writing, registration and attestation, if
necessary. If these legal formalities are not
carried out, then the contract is not
enforceable at law.
 The Indian Contract Act contains rules
regarding each of the elements mentioned
above These rules are to be discussed in the
subsequent chapters.
1. There must be an offer and valid acceptance
2. The consent of the parties must be free and
genuine.
3. The parties must intend to create legal relationship,
4. The parties must be competent to contract.
5. There must be lawful consideration on both sides.
6. There must be lawful object.
7. The agreement not declared void or illegal
8. The terms of a contract should be clear.
9. 9. The performance must not be impossible,
10. Legal formalities, if any.
1. Define the term ‘Contract’
2. What are the essentials of a valid
contract?
3. “All contracts are agreements, but all
agreements are not contracts.” Discuss.