BUSINESS LAW

1. Indian Contract Act, 1872 :
contract and its Essential
Elements
By- Ms. Anamika Sen
Assistant Professor
Invertis University

2. Contents
1. Meaning of contract
2. Meaning of agreement
3. Essential elements of contract
4. Types of contract
5. Difference between Void and
Voidable Contract
6. Difference between Void and
Illegal Agreement

4. Indian Contract Act, 1872
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It is the
foundation upon which the superstructure of modern business is built.
It affects everybody, more so, trade, commerce and industry. It may be said that the contract is the
foundation of the civilized world.
The Indian Contract Act is divisible into two parts.
1.The first part (Section 1-75) deals with the general principles of the law of contract and therefore
applies to all contracts irrespective of their nature.
2.The second part (Sections 124-238) deals with certain special kinds of contracts, namely contracts of
Indemnity and Guarantee, Bailment, Pledge, and Agency.

5. Contract
The term contract is defined under
section 2(h) of the Indian
Contract Act, 1872 as-
“an agreement enforceable by
law”.

6. The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as-
“an agreement enforceable by law”.
The contract consists of two essential elements:
(i) an agreement and
(ii) its enforceability by law.
Contract = Agreement + Enforceability by law
In terms of Section 10 of the Act, “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
expressly declared to be void”.

7. essential elements of a valid contract

8. All agreements are not contracts, only that agreement which is enforceable at law is a contract. An
agreement which is not enforceable at law cannot be a contract. Thus, the term agreement is wider in scope
than a contract.
All agreement, to be enforceable by law, must possess the essential elements of the valid contract as
contained in Section 10 of the Indian Contract Act.
1. Offer and Acceptance: In order to create a valid contract there must be a lawful offer by one party and
lawful acceptance of the same by the other party.
For example: ‘A’ offers to sell his motorcycle to ‘B’ for 30,000, ‘B’ agrees to pay Rs. 30,000 for the motorcycle.
Here, ‘A’ is the offerer and ‘B’ is the Acceptor
2. Intention to create legal relation: In case, there is no such intention on the part of parties, there is no
contract. Agreements of social or domestic nature do not contemplate legal relations.
The leading case on this point is Balfour vs. Balfour (1919)
For example: An agreement to have lunch at a friend’s house is not an agreement intending to create legal
relation. Agreement between husband and wife generally lack of intention to create legal relation.

9. 3. Lawful consideration: Consideration is an essential element in a contract. Promises made for nothing
are unenforceable under the Indian Contract Act. The law enforces only those promises which are made
for consideration. Consideration may take the form of money, goods, services, a promise to marry, etc. it
may be past, present or future. But it must be real and lawful.
For example: ‘A’ agrees to sell his house to ‘B’ for Rs. 10, 00,000. Here ‘A’s promise to sell his house is, for
‘B’s consideration to pay Rs 10, 00,000.
4. Capacity of parties: The parties to an agreement must be competent to contract. If either of the
parties does not have the capacity to contract, the contract is not valid. According, to section 11 “every
person is competent to contract, who is of the age of majority according to the law to which he is subject,
and who is of sound mind and is not disqualified from contracting by any law to which he is subject.”
For example:
• Minors
• persons of unsound mind
• persons disqualified by law are incompetent to contract

10. 5. Free consent: ‘Consent’ means the parties must have agreed upon the same thing in the same sense.
For example: ‘A’ who owns two cars, one Volvo and other BMW, offers to sell 'B' one car. ‘A’ intending it to
be a Volvo car. ‘B’ accepts the offer thinking that it is the BMW. There is no free consent and hence, no
contract.
6. Lawful object: The object of an agreement must be lawful. The object has nothing to do with
consideration. It means the purpose or design of the contract.
For example: ’A’ hires a house for use as a gambling house, the object of the contract is to run a gambling
house.
7. The certainty of meaning: The terms of the contract must be precise and certain. It cannot be left
vague. A contract may be void on the grounds of uncertainty.
For example: ‘X’ promises ‘Y’ that he will be marrying ‘C’ if war breaks out between India and Pakistan. An
agreement subject to war clause is too vague to be an enforceable contract between ‘X’ and ‘Y’.

11. 8. Possibility of performance: If the act is impossible in itself,
physically or legally it cannot be enforceable by law.
For example: Mr. A agrees with Mr. B to discover treasure by
magic. Such an agreement is not enforceable.
9. Not declared to be void or illegal: The agreement though
satisfying all the conditions for a valid contract must not have
been expressly declared void by any law in force in the country.
For example: Agreements in restraint of trade, marriage, legal
proceedings etc.
10. Legal formation: An oral contract is a perfectly valid contract
except in those cases where writing, registration etc are required.
For example: In India writing is required in cases of sale,
mortgage, lease, negotiable instrument etc

13. a) On the basis of the Validity
1. Valid Contract: An agreement which is binding and enforceable is a valid contract. It contains all the
essential elements of a valid contract.
2. Void Contract: Section 2 (j) states as follows: “A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable”. Thus a void contract is one which cannot be enforced by a court of law.
3. Voidable Contract: Section 2(i) defines that “an agreement which is enforceable by law at the option of one
or more parties thereto, but not at the option of the other or others is a voidable contract”. This in fact means
where one of the parties to the agreement is in a position or is legally entitled or authorized to avoid
performing his part, then the agreement is treated and becomes voidable.
4. Illegal Contract : It is a contract which the law forbids to be made. The court will not enforce such a contract
but also the connected contracts. All illegal agreements are void but all void agreements are not necessarily
illegal.
5. Unenforceable Contract: Where a contract is good in substance but because of some technical defect i.e.
absence in writing, barred by limitation etc. one or both the parties cannot sue upon it, it is described as an
unenforceable contract

14. b) On the basis of the Formation
1. Express Contracts: A contract would be an express
contract if the terms are expressed by words spoken or in
writing. Any promise is made in words the promise is said to
be express.
2. Implied Contracts: Implied contracts in contrast come into
existence by implication. Most often the implication is by law
and or by action. Any promise is made otherwise than in
words the promise is said to be implied.
3. Quasi-Contract: A quasi-contract is not an actual contract
but it resembles a contract. It is created by law under certain
circumstances.

15. c) On the basis of the Performance
1. Executed Contract: The consideration in a given contract could be an
act or forbearance. When the act is done or executed or the
forbearance is brought on record, then the contract is an executed
contract.
2. Executory Contract: In an executory contract the consideration is
reciprocal promise or obligation. Such consideration is to be performed
in future only and therefore these contracts are described as executory
contracts.
3. Unilateral Contract: Unilateral contract is a one sided contract in
which one party has performed his duty or obligation and the other
party’s obligation is outstanding.
4. Bilateral Contract: A Bilateral contract is one where the obligation or
promise is outstanding on the part of both the parties

16. Difference between Void and Voidable Contract
Sr
no.
Basis Void Contract Voidable Contract
1 Meaning A Contract ceases to be enforceable by
law becomes void when it ceases to be
enforceable.
An agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option of
the other or others, is a voidable
contract
2 Cause A contract becomes void due to change
in law or change in circumstances
beyond the contemplation of parties.
A contract becomes a voidable contract if the consent of a
party was not free.
3. Performance of
contract
A void contract cannot be performed If the aggrieved party does not, within reasonable time,
exercise his right to avoid the contract, any party can sue
the other for claiming the performance of
the contract
4. Rights A void contract does not grant any right
to any party.
The party whose consent was not free has the right to
rescind the contract

17. Difference between Void and Illegal Agreement
Sr Basis Void agreement Illegal agreement
1 Scope A void agreement is not necessarily
illegal
An illegal agreement is always void
2 Nature Not forbidden under law. Are forbidden under law.
3 Punishmen
t
Parties are not liable for any
punishment under the law
Parties to illegal agreements are liable for
punishment
4 Collateral
Agreement
It’s not necessary that agreements
collateral to void agreements may also
be void. It may be valid also.
Agreements collateral to illegal agreements
are always void.

18. References:
1) M.C. Kuchhal & Vivek Kuchhal- Business Law, Vikas Publishing House
2) Dr. G. K. Varshney- Business Law , Sahitya Bhawan Publications
3) learnaturdesk.blogspot.com
4) castudyweb.com

19. - Anamika Sen