What is Contract?

Synopsis

Definition of Contract

Section 2(h) of the Indian Contract Act, 1872, provides the definition of a contract:

“An agreement enforceable by law is a contract.”

This definition establishes that a Contract is a combination of two elements:

Contract = Agreement + Enforceability by Law

Definition of Agreement, As All Contracts are Agreements

Since a contract is an enforceable agreement, there must first be an Agreement. Section 2(e) of The Indian Contract Act, 1872, provides the definition of an Agreement:

“Every promise and every set of promises, forming the consideration for each other, is an agreement.”

Agreement = Offer (Proposal) + Acceptance + Consideration

Definition of promise, As Agreements are pomises or set of promises

The term ‘Promise’ is itself defined in Section 2(b) of The Indian Contract Act, 1872:

“When the 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.”

Promise = Offer (Proposal) + Acceptance

However, All Contracts are Agreements.

Example

1. Valid Contract

A agrees to sell his car to B for ₹5,00,000. B agrees to buy it and pays an advance of ₹50,000.

Explanation: All essential elements of a valid contract are present — Offer and acceptance (A offers to sell, B accepts), Lawful consideration (₹5,00,000), Competent parties, Free consent, and Lawful object. Hence, this is a valid contract enforceable by law (Sections 2(h) and 10).

2. Void Agreement (Not a Contract)

A and B enter into an agreement that A will pay B ₹1,00,000 if B smuggles goods into India.

Explanation: The consideration and object of this agreement are unlawful (illegal act of smuggling). Under Section 24, such agreements are void and unenforceable by law.

3. Agreement (Not a Contract)

A promises to give his friend B ₹10,000 as a gift on his birthday. B accepts the offer.

Explanation: This is merely a social or moral agreement, not supported by consideration. Since there is no intention to create legal obligation, it is an agreement but not a contract (Section 2(e)).

4. Agreement to Do an Impossible Act

A agrees with B to do an impossible act, such as bringing a dead person back to life.

Explanation: The act promised is impossible in itself, and according to Section 56, an agreement to do an impossible act is void from the beginning.

Important case Law

1. Balfour vs. Balfour

Facts:

Mr. and Mrs. Balfour were married and living in Ceylon. They came to England on leave. Mrs. Balfour became ill during a vacation in England and was advised to remain in England dueto the health issues. Mr. Balfour, who had to return to Ceylon for his work, promised to pay his wife £30 per month as a maintenance until she recovered and rejoined him. When Mr. Balfour stopped making the monthly payments, Mrs. Balfour sued him to enforce the promise.

Issues:

Whether the agreement between a husband and wife for a monthly allowance was intended to create legal relations and thus be an enforceable contract?

Analysis:

Judgment:

The court held that there was no contract between the parties. The court observed that agreements between husband and wife, made in the course of ordinary domestic life, are not intended to create legal relations. Such promises are social or moral arrangements, not contracts. Hence, Mrs. Balfour could not enforce the promise in court.

2. Mohori Bibee vs. Dharmodas Ghose

Facts:

Dharmodas Ghose, a minor, mortgaged his property to a moneylender, Brahmo Dutt, to secure a loan of Rs 20,000. The moneylender’s attorney was aware of the minor’s age. Later, the minor’s mother brought a legal action against Brahmo Dutta, seeking a declaration that the mortgage was void and should be canceled because her son was a minor when he entered the agreement.

Issue:

Analysis:

The mortgage was void because a minor is not competent to contract under Section 11 of the Indian Contract Act.

Judgment:

A contract entered into by a minor is void ab initio (void from the very beginning) and cannot be grant or confirmed even after the minor attains majority. Minor could not be forced to return the borrowed money. Because the agreement was void ab initio, there was no valid contract upon which an obligation for repayment could be based.

3. Lalman Shukla v. Gauri Datt

Facts:

The defendant’s (Gauri Datt’s) nephew ran away from home. The defendant sent his servant (Lalman Shukla) to search for him. Subsequently, Gauri Datt issued a handbill offering a reward of ₹501 to anyone who found the boy. Lalman Shukla found the boy and returned before seeing the handbill. Lalman Shukla sued Gauri Datt to claimed the reward later.

Issues:

Can a person accept an offer (reward) without having knowledge of the offer?

Analysis:

A valid contract requires both a proposal and communication of acceptance (Sec. 2(b) read with Sec. 3). The plaintiff performed his duty as a servant, which was before and independent of the knowledge of the offer.

Judgment:

The court held that the servant was not entitled to the reward because he could not accept the offer in ignorance of its existence. An acceptance must be communicated to the offeror, and there can be no acceptance without knowledge of the proposal. Hence, no valid contract existed between the parties.