Contract - Elements, Types

(a) What is a contract? How is it different from agreement?

(b) What are the essential elements of a contract?

Whenever two or more parties agree upon something or transact business with each other with the obvious intention that such agreement should have a legal binding force, there is a contract. Section 2 (h) of the Contract Act defines a contract as “an agreement enforceable by law.”

It therefore follows that an agreement, when possesses certain features which confer upon it the legally binding force with respect to the parties, it is a contract. An agreement is defined as “every promise and every set of promises forming the consideration for each other”. An agreement comes into existence when one party makes an offer or proposal to other party and the other party accepts the same. Thus an agreement is the sum total of offer and its acceptance. However, to become a contract, the agreement must give rise to legal obligations. If the agreement is incapable of creating a duty enforceable at law, it is not a contract. In other words, if the agreement is legally binding in nature or if the breach of agreement leads to legal consequences, it is a contract. If not, it is merely an agreement and not a contract.

Agreements of moral or social nature cannot be contracts because they do not create any legal obligations. The parties also do not intend that breach of such agreement should be followed by legal consequences. For example, agreement to have lunch together at a friend’s house or to have a walk together, or an agreement to speak truth with each other are the agreements, where there is no intention to create a duty enforceable by law. They are all agreements but not contracts. Hence it is said that all contracts are agreements, but all agreements are not contracts. Agreement is a wider term than contract.

Essential elements of contract: The features or elements which, when present in agreement, convert the agreement into a contract are known as the essential elements of contract. All of such elements have to be present in the agreement. If any of them is absent, the agreement will not be legally enforceable and hence will be merely an agreement and not a contract. Following are the essential elements of contract, discussed one by one.1) Offer and Acceptance: There must be a lawful offer by one party and its lawful acceptance by the other, to whom the offer is made. Thus, where A offers to sell his house to B for Rs. 50000/- and B accepts the offer, a contract comes into existence, provided the other essential elements are present. The term ‘lawful’ implies that the rules laid down under the Act relating to offer and acceptance must be satisfied.

 2) Intention to create legal relations: There must be a declared intention among the parties that the agreement should give rise to legal relations. In commercial or business transactions, there is a presumption that the parties intend to create a legal relation and legal obligation. Where the husband offers to buy a new sari for his wife if she sings a song, and she sings in acceptance, it is not a contract. If the husband fails to buy a sari, the wife cannot prosecute the husband for breach of agreement, because there is no intention to create legal relationship and hence the agreement cannot give rise to a legal obligation.

Similarly, where in an agreement, it is expressly provided that the parties do not intend to create legal relations between them, the agreement will not become a contract though it may apparently look like a contract. 
3) Lawful Consideration: An agreement is legally enforceable only when each party to the agreement gives something and in return gets something. This ‘something’ given and received in return is called Consideration. It is a price paid by one party to the other in return of what the other party gives. When one buys a pen from the shopkeeper for Rs. 10/-, the pen is the consideration for the buyer and the amount of Rs. 10/- is the consideration for the shopkeeper. Consideration may be in the form of doing something or in the form of abstaining oneself from doing something. It can also be in the form of promising to do something or promising to abstain from doing something. Consideration must be of some value in the eyes of law and it should not be forbidden by law. It should not involve injury to another and must not be opposed to public policy. If, in an agreement, there is no consideration for either party, the agreement is not a contract.4) Capacity of parties:The parties to agreement must be competent to enter into contract; otherwise the agreement will not be enforceable by law. The persons who, 1) have attained the age of majority, 2) are of sound mind and 3) are not disqualified from contracting under any other law, are competent to enter into contract. If any of the parties is suffering from minority, lunacy, drunkenness or any other legal disqualifications, the agreement will not be capable of being enforceable by law.5) Free consent:Consent means that all the parties must have agreed upon the same thing in the same sense. For an agreement to become contract, such consent must be a free consent. If the consent of any party is obtained by coercion, undue influence, fraud, misrepresentation or mistake, the consent is not free. In the absence of free consent, an agreement cannot become contract, except with the choice of the party whose consent is so obtained. In other words, the agreement will not be legally enforceable by the parties who have obtained the consent of the other party by using any of the above means. The contract is voidable at the option of the party whose consent is so obtained.6) Lawful Object:It is also necessary that the object with which the parties enter into agreement must be lawful. The object of the parties must not be illegal, fraudulent, immoral or opposed to public policy. If it is so, the agreement is void and cannot become a contract.7) Certainty:Agreements, the meaning of which is not certain or capable of being made certain, are void. In order to give rise to a contract, the agreement must not be vague or uncertain. The terms of the agreement should be such that the meaning of the agreement must become certain. Otherwise it cannot be enforced. If A agrees to sell to B 5 Kg. of oil and if it is not clear as to what kind of oil is intended to be sold, the agreement cannot become a contract because there is no certainty.8) Possibility of performance:A contract has to be capable of being performed. An agreement to do an act impossible in itself is void. Whatever that has been agreed to be done under an agreement must be possible to be done physically and legally. If not, it is not a contract. For example, where A agrees with B to discover a treasure by magic, the agreement is not enforceable by law.9) Not expressly declared vo:The Contract Act expressly declares certain agreements to be void i.e. not contracts. Such agreements are not legally enforceable. For example, an agreement in restraint of marriage or in restraint of trade, or gambling agreements etc. have been declared to be void. Hence it is essential that the agreement must not suffer on this ground in order to be a contract.10) Writing and Registration:An oral contract is a good and perfect contract as per the provisions of the Contract Act. The Act does not require that contracts have to be in writing. But under certain cases, it lays down that the contract must be in writing. For example, a promise to pay a time-barred debt must be in writing and signed by the promisor. Similarly, certain other Acts also require that certain contracts must be in writing and additionally they must be registered with the competent authorities. A contract whereby immovable property is sold and purchased has to be in writing and it must be registered with the Registering Authority. Therefore, whenever any law requires that the contract has to be writing and registered, an agreement without following such formalities cannot be a contract and hence cannot be enforceable by law.

Classification of Contract: A contract is based on an agreement. An agreement becomes a valid contract when all the essential elements referred in the above-mentioned sections are present. If one or more these elements are missing, the contract is voidable, void, illegal of unenforceable. Voidable Contract: Voidable contract is an agreement that is binding & enforceable, but due to lack of one or more essential elements of a valid contract, the aggrieved party may opt to repudiate it.Void Contract: A void contract which is not enforceable by law is a void contract. It confers no right no right on any person & creates no obligations.Illegal Contract: An illegal contract is the one that is opposed to statutory law or public morals. It is criminal in nature. The effect of an illegal contract is that, it not only makes the transaction between the immediate parties void, but also render the collateral transactions void.Unenforceable Contract: A contract which cannot be enforced in Court of law because of some technical defect is termed as unenforceable contract.