Definitions to be used for understanding the term “Contract”:
- Proposal: Definition (Section 2a): 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
- Promise (Section 2b): When a 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;
- Promisor and Promisee (Section 2c): The person making the proposal is called the “promisor”, and the person accepting the proposal is called “promisee”,
- Consideration for the Promise (Section 2d): 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;
- Agreement (Section 2e): Every promise and every set of promises, forming the consideration for each other, is an agreement;
- Reciprocal Promises (Section 2f): Promises which form the consideration or part of the consideration for each other are called reciprocal promises;
- Void (Section 2g): An agreement not enforceable by law is said to be void;
- Contract (Section 2h): An agreement enforceable by law is a contract;
Building Blocks of a Contract:
- An offer to do or not to do something must be made for the purpose of being agreed to. If agreement from another party is not expected then it is just a piece of information in form of simple statement or threat.
- Just telling intention: If A tells B “I am interested in buying your car”. Then A is just giving information that he is interested in buying a car.
- Making of a Proposal: If A tells B “I am interested in buying your car. Will, you sell the car to me?”. Here there is an expectation of an ascent from B. Thus this is a proposal.
Thus Proposal = Offer + Expectation of assent from another party.
- Making of a promise: If A tells B “I am interested in buying your car. Will, you sell the car to me?” with an expectation of agreement or disagreement from B. B accepts the proposal. When the proposal made by proposer accepted by the proposee, then the proposal is said to be accepted and it becomes a promise. Now the proposer is called the “promisor” and the proposee is called the “promisee”.
Promise = Offer from offeror + Free consent from Offeree
- Making of an agreement: If A tells B “I am interested in buying your car for 2 lakh rupees. Will, you sell the car to me?” Here it is a proposal with consideration and if B agrees to it, then the understanding becomes an agreement.
- Making of an agreement: If A tells B “I am interested in buying your car for 2 lakh rupees. Will, you sell the car to me?” Here it is a proposal with consideration and if B agrees to it, Both of them agree that the agreement is legally bound to them. Now the agreement becomes a contract.
Thus, Contract = Agreement + Enforceability of the agreement by law
- From above explanation we can conclude that a contract is an agreement; an agreement is a promise and promise is accepted proposal.
Essential Elements of Contract:
There are Two Parties:
- In a contract minimum, two parties are involved.
- A contract can only be bilateral and the same party cannot be a party on both sides. Hence, there cannot be a contract between A on both sides. A person cannot enter into a contract with himself.
It is An Agreement With Consideration:
- an agreement occurs when two minds meet for a common purpose. i.e. the same thing in the same sense at the same time. This meeting of mind is called consensus ad idem, i.e., consent to the matter.
- This concent should be free (free from coercion, fraud, misrepresentation, mistake and undue influence).
- An agreement is a proposal with consideration.
- The agreement should be among competent parties.
- The agreement should be for lawful acts.
- An obligation is a legal duty to do or abstain from doing something. The agreement enforceable by law is obligatory on all the parties involved in the contract. Thus social, religious and domestic obligations cannot be termed as a contract because in such obligation there is no intention to give rise to any legal obligation.
- An agreement to agree in future is not a contract because unless all important terms of the contract are settled, there cannot be any binding obligation.
- The parties that are subject to a contract must have clear intentions of creating a legal relationship between them.
All contracts are agreements but all agreements are not contracts.
- An agreement is a much wider concept than a contract. Actually, the set of contracts is a subset of the set of agreements. Mere agreements without legal enforceability are not contracts.
- The essential element of the contract is an agreement with the intention to have a legal relationship or enforceability of the agreement by the law.
- Social, religious and domestic obligations are agreements and not contract because in such obligation there is no intention to give rise to any legal obligation. Agreement to call a friend to a party is social agreement. To accept to donate money to a temple is a religious agreement. To accept to give a new necklace to the wife is domestic agreement. In such cases, no party has the intention to take another party to the court of law. Thus these agreements don’t have enforceability by the law. They may be just “honoured pledges” and expressly stated to be “outside the jurisdiction of any court”. (Rose Frank Co. v. Crompton Bs. (19257).
- Thus there are many agreements which are not contracts.
- Each contract satisfies the criteria of agreement and thus all contracts are agreement.
All Obligations are not contracts:
- Any obligation, which arises independently of an agreement, cannot be the basis of a contract. To look after children at their young age is the obligation of parents or look after parents in their old ages is the obligation of children. But it is a social and domestic arrangement and there is no intention to create legally binding relations.
- Hence all obligations are not contract.