CHAPTER – 1

CONTRACT AND AGREEMENT

Introduction: Law is a basic necessity of every civilized society. Law is the bundle of rules and
principles to be followed by the members of the society. When there is a law in a country, it
brings uniformity and balance in human actions, and provides justice to the aggrieved persons.
According to Holland, “Law is a rule of external human action enforced by the sovereign
political authority.”
In the words of Blackstone,” Law is a rule of civil conduct, prescribed by the supreme
power of state, commanding what is right and prohibiting what is wrong.”

CONTRACT – Definition
Generally, contract may be defined as an agreement which creates rights and obligations
between the parties. These obligations and right s must be of such a nature that these can be
claimed in the court of law.
According to Salmond, “A contract is an agreement creating and defining obligation
between the parties.”
From the above definitions of contract it is clear that a contract essentially consists of
three elements:
1. An agreement
2. Obligation, and
3. Enforceability
1. Agreement: An agreement involves a valid offer by one party a valid acceptance by the
other party.
2. Enforceability: It means contract must be legal in nature and which can be claimed in
the court of law.
For example, X invites Y to a party and Y accepts the invitation, then it is only a social
agreement and not a contract. On the other hand A agrees to sell his house to B for 5, 00,000.
This is a contract.
ELEMENTS OF CONTRACT
An agreement to be enforced in the court has to satisfy certain conditions. On satisfying
these, the agreements become a contract, and those conditions become essentials of a valid
contract. The essential elements of a contract are contained in the definition of contract given in
sec. 10 of the contract Act. According to this Act, “all agreements are contracts if they are made
by free consent of parties competent to contract for a lawful consideration and with a lawful
object and are not hereby expressly declared to be void.” The essential elements of a contract
include:

1.Agreement: - There must be an agreement between the parties of a contract. It involves a

valid offer by one party and a valid acceptance by the other party. Agreement is created by offer
and acceptance. Therefore an agreement is = offer +acceptance. It is only by an agreement a
contractual relation is established between the parties. For example, A sends a proposal to B to
purchase a property for 10 lakhs and B accept the same, then this result into an agreement.
2.Lawful consideration: Consideration means something in return. An agreement is legally
enforceable only when each of the parties to it give something and gets something. It may be
past, present or future and must be real and lawful. A contract without consideration is not a
contract at all. The consideration must be legal, moral and not against public policy.
3.Capacity of parties: The parties to an agreement must be capable of entering into a valid
contract. the following persons are not competent to enter in to a contract.
(a) Persons of unsound mind (Idiots, lunatic person etc.)
(b) Persons disqualified by law to which they are subject.
(c ) Minors
4. Free consent: For the formation of a contract one person must give his consent to
another person. The consent thus obtained must be a free consent. A consent is said to be
free if it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.
If the consent is obtained by unfair means, the contract would be voidable.
5. Consensus ad idem: It means the two parties of the contract must agree upon the subject
matter of the contract in the same manner and in the same sense. That is there must be
identity of minds among the parties regarding the subject matter of the contract.

6. Lawful object: The object of an agreement must be lawful. It must not be illegal or
immoral or opposed to public policy. If it is unlawful, the agreement becomes void.
7. Not declared to be void: There are certain agreements which have been expressly
declared void by the law. It includes:
(a)Wagering agreement
(b) Agreement in restraint to marriage
(c ) Agreement in restraint of trade
etc.
Thus an agreement made by parties should not fall in the above category.
8. Certainty and possibility of performance: - The terms of the contract must be precise
and certain. They should not be vague. The terms of agreement must be capable of
performance. For example A agrees to sell one of his houses. A has four houses. Here the
terms of agreement are uncertain and the agreement is void.
9. An intention to create legal relationship:- There should be an intention between the
parties to create a legal relationship. Mere informal promise is not to be enforced. Social
agreements are not to be enforced as they do not create any legal obligations. An oral
contract is a valid contract except in those cases where writing, registration etc. is
required by some statute.

TYPES OF AGREEMENTS
Void agreements: “An agreement not enforceable by law is said to be void”. A void agreement
has no legal significance from the beginning. No contract comes out from a void agreement ie it
is void ab initio. The following agreements are examples of void agreements:-
 a) Agreement without consideration
b) Agreement with persons like minors
c) Agreement made without consideration
d) Uncertain agreement
e) Impossible agreements
Illegal agreements: - An agreement which is either prohibited by law or otherwise against the
policy of law is an Illegal agreement. All illegal agreements are null and void but void
agreements are not illegal. All collateral transaction to an illegal agreement are also illegal.
CLASSIFICATION OF CONTRACTS
Contracts made by the parties can be classified into different types on the following bases.
1. Formation of Contract
2. Performance of Contract
3. Extend of validity of Contract
A. On the basis of Formation:-On this basis, contracts may be grouped into three
a. Express contract: - These are the contracts, which are entered into between the parties,
by words spoken or written. For example, A writes to B , “ I am willing to sell my Car to
you for 2,00,000.” B accepts A’s offer by another letter. This is an express contract.
b. Implied contract: - Implied contracts are formed on the basis of implied promises on the
part of parties. When the proposal or acceptance is made otherwise than in words, the
contract formed is called implied contract. Thus in implied contract, making an offer and
giving acceptance to it is manifested by the act on the part of party. For example, X gets
into a public bus, and then he enters into an implied contract with the authorities of the
bus that he wishes to travel in the bus.
c. Quasi contracts:-In certain circumstances law itself creates legal rights and obligations
against the parties. These obligations are known as quasi contracts. It is also known as
constructive contract. For example, the finder of lost goods is under an obligation to find
out the owner and return the goods.
B. On the basis of Performance:- It includes
a. Executed Contract:-Executed contract is one that has been performed. If both parties of
a contract have performed their respective obligations, contract is known as executed contract.
b. Executory contract :-An executor contract is one in which both the parties have not yet
performed their obligations either wholly or partly. For example, A makes an agreement
for buying a car from a car dealer and has made payment. The car has been delivered, but
the ownership is yet to be transferred.

C. On the basis of extend of Validity:- On this basis contract may be classified as under
a. Valid contract:- Contract is said to be valid if it satisfies all conditions required for its
enforceability. In other words an agreement enforceable by law is a valid contract.
 b. Void Contract: A contract which ceases to be enforceable by law become void. No
party has right to claim it in the court of law. A void contract not necessarily be unlawful
but it has
no legal effects. A contract with alien friend becomes subsequently void when alien friend
become alien enemy.
c. Voidable contract:- According to sec.2(i) “ An agreement which is enforceable by law
at
the option of one or more parties, but not at the option of other or others is a voidable
contract.” Generally a contract becomes voidable when the consent of one of the parties to
the
contract is obtained by coercion, undue influence or misrepresentation. For example, if the
consent of the party was caused by coercion the contract is enforceable at the option of the
party whose consent was not free.
d. Illegal contracts: - The contract is said to be illegal, if its object is illegal. A contract
arising out of an illegal agreement is illegal ab initio . For example, an agreement to commit
murder is an illegal one.
e. Unenforceable contract: - It is a contract, which is valid, but not capable of being
enforced in a court of law because of some technical defects. Technical reasons affecting
validity of contract may be that contract is not in writing or is not registered or has no
adequate stamp duty on it etc.
“All contracts are agreements but all agreements are not contracts”
An agreement, in order to become a contract must satisfy certain conditions which are the
essential elements of a contract. For example, if an agreement is not indented to create legal
relationship, agreement not made with the free consent of the parties, agreement not made for a
lawful object etc. These agreements are not valid contracts. An agreement which does not create
legal obligation is also not a contract. Thus all contracts are agreements but all agreements are
not contracts.