This article has been written by Madhumita Raut pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In our everyday chores, we hear about a team contract, which is very frequently used both in a legal and general sense. A contract basically means an agreement between two or more people that is enforceable by the court of law. It is not a new term but has been around for ages. In early years, most agreements were oral, which is now converted into a written form. The Latin term “pacta sunt servanda” lays down the purpose of Indian contract Act, 1872.

Section 2(h) of the Indian Contract Act of 1872 states that an agreement enforceable by law is a contract. The definition contains the term agreement. An understanding of agreement lies in the fact that when one person offers to do something or abstains from doing something, the other person accepts the same, which is termed a promise. When consideration is exchanged in such promises, finally agreement is made. When it comes to enforceability, the intention to create legal relationships is very pivotal.

Illustration: A offers B to sell his house for Rs. 100,000/- and B accepts the offer given absolutely. Both parties intend to create a legal relationship. This agreement is a contract, as it is enforceable by law.

Next, A is husband and B is a daughter. A promised his daughter that if she secures rank 1 in the CLAT 2025 examination, he will give her a brand new scooter. She accepted the challenges. On the result day, it was discovered that B secured rank 1 in the CLAT exam. Her father did not buy a scooter for her. The agreement was not a contract because intent to create a legal relationship was absent because it was a social agreement and as per the facts and circumstances of the case, it was clear that intention to create a legal relationship was absent.

Pillars of contract 

Two or more parties

For a contract to come into existence, there has to be at least 2 people. Moreover, it is equally important that one part tender offers and accepts the same in exchange of consideration.

Capacity of parties

To enter into any agreement, both parties must be majors, as a contract with a minor is void ab initio. Law relating to agreement with minor states states the followings-

1. Minor is never personally liable .
2. Minor can take benefits.
3. Rule of estoppel is not applicable to minors.
4. Minor can always plead minority.
5. Suerity is liable for minors.
6. Parents are not liable if minors do not act on parent’s authority.
7. For necessary, minors are liable, but only to the extent of estate.
8. Agreement cannot be ratified after attaining majority.

Offer and acceptance

In general parlance, an offer means one person, with a view to obtaining assent, expresses his willingness. Section 2{a} of the indian contract Act, 1872 states that “ when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that offer to such act or abstinence, he is said to make a proposal.” From the definition, it can be concluded that the offer must be communicated to the offeree; communication may be expressed or implied; communication of the offer may be general or specific; and the offer must be made with the intent to create a legal relationship.

Acceptance, on the other hand, means that when a person to whom an offer is made signifies his assent to the same, he is absolutely said to accept the offer. Moreover, a valid offer has certain essentialities, which are as follows-

• Acceptance shall be communicated to the offeror.
• Acceptance shall be absolute and unqualified.
• Acceptance shall be made in some usual and reasonable manner, unless the proposal prescribes the manner of acceptance .
• Acceptance shall be made while the offer is still subsisting.

Lawful consideration

In common language, consideration means something in return, which means both parties shall get something or another thing in return. It may be cash or something else. Moreover, consideration must always be at the request of the offeror. There are certain essentialities that need to be duly complied with in order to declare the consideration lawful. They are as follows:

• Consideration must move at the request of the promisor.
• Consideration may come from a promise or from any other person.
• It may be the past,present or future.
• It may be executed or executory.
• It need not be adequate.
• It should not be immoral, unlawful or opposed to public policy.
• Consideration is more than what the person is legally bound to perform.
• It must be real.

In the case of Chinnaya vs. Ramayya, a brief fact of the case was that the old lady gifted her land to her daughter with the direction/condition that she had to pay annuity to the maternal uncle. Daughter promised to pay the annuity but after a few years, she denied paying the annuity by saying  the  maternal uncle is a stranger  to the contract so the same cannot be enforced against her. The court held that consideration may come from either the promisee or any other person and in this case, the old lady gave consideration on behalf of the maternal uncle; therefore, the agreement is enforceable. 

Lawful object 

Object of the agreement shall be lawful. If the object could be discovered at the time of entering into the agreement and turns out to be illegal or unlawful, then the agreement is declared void.

Illustration: A promised B, a government official, to pay Rs,10,00,000/- if he passed his tender. B passed the tender in favour of A. After this event, a payment of Rs, 10,00,000/- to Mr. B. Now Mr. B cannot enforce this agreement as the object was unlawful.

Free consent 

Presently, the most important question arises: what is consent? Section 12 of ICA, 1872, defines consent by stating that when two people agree to the same thing in the same sense, then it is called consent.

Further, free consent is obtained when the consent is free from coercion, undue influence, fraud, misrepresentation and mistake.

Case1: A made an offer to sell his flat no. 10/3, Gkuldham society, powder gali, Lalpur, Ranchi, to Mr. B for Rs. 20,000/- B accepted the offer and is ready to pay Rs. 20,000/-. Here, consent is free.

Case 2: A made an offer to Mr. B to buy his flat no. 10/3, Gokuldham society, powder gali, Lalpur, Ranchi for Rs. 20,000/-. actual price of the fault is 20,00,000/-Mr. A said to Mr. B that if he doesn’t transfer the flat, then he will kidnap Mr. B’s daughter. B accepted the offer in fear and is ready to transfer. Here, consent is taken through coercion and hence, consent is not free.

Intention to create legal relationship

Offer and acceptance, coupled with consideration, will only form an agreement if the intention to create a legal relationship is absent. The term intention to create a legal relationship means a person is willing to perform his part and expects the other party to perform his task. If any party fails to perform its part, then the aggrieved party may enforce the same through the court of law.

In social agreements, generally, it is presumed that there is no intention to create a legal relationship. For example, Mr. A, husband of Mrs. B, promises to buy diamond necklaces on their marriage anniversary. On the day of the marriage anniversary, Mr. A denied. Now Mrs. B cannot sue Mr. A for breach of contract. The reason being that it is social  contact and the parties did not have the intention to create a legal relationship.

In commercial or business agreements, it is presumed that there is an intention to create legal relationships. For example,Mr. Raj promised to supply 100 litres of milk everyday for making sweets. Mr. Sonu had a sweet shop in the market and they accepted the offer from Mr. Raj. One fine day, Mr. Raj denied it without any legal cause. Now, Mr. Sonu can enforce the contract through the court of law, as Mr. Raj breached his part of the promise in the contract.

Certainty of meaning

Certainty of meaning, as defined in Section 29 of the ICA, states that the subject matter shall be certain or capable of being made certain.

Illustration: Mr. A went to a bike showroom and said, give me a red coloured Pulsar 200, 150CC engine. The owner of the showroom, Mr. B, accepted the offer and said that yes, we have a red  pulsar 200, 150CC engine for Rs 2,00,000/-. This is an agreement which has a certain meaning.

Possibility of performance

In the list of essentialities, the possibility of performance is an important pillar, which states that if an agreement is of such nature that it is impossible to perform, then such an agreement is void ab initio. For example: Mr. A offers to pay Rs 10,00,000/- to Mr. B if he manages to call aliens to the  earth. This agreement is impossible to perform and, hence, void.

The Indian Contract Act, 1872

The Indian Contract Act of 1872 is a landmark piece of legislation that governs the law of contracts in India. It is considered to be one of the most comprehensive and well-drafted contract laws in the world. The Act has 238 sections, each of which deals with a different aspect of contract law. The Act has also been adopted by several other countries, such as Bangladesh, Myanmar, and Sri Lanka.

Some of the key sections of the Indian Contract Act are:

Section 2(h) defines a contract as “an agreement enforceable by law.” This means that a contract is a legally binding agreement between two or more parties that creates, modifies, or terminates a legal relationship. For an agreement to be considered a contract, it must meet certain requirements, such as offer, acceptance, consideration, and legality.

Section 7 lays down the essential elements of a valid contract. 

Section 10 provides for the classification of contracts based on their enforceability. The four main types of contracts are:

• Void contracts: Void contracts are contracts that are not legally enforceable because they lack one or more of the essential elements of a valid contract.
• Voidable contracts: Voidable contracts are contracts that are valid but can be canceled by one or both of the parties under certain circumstances, such as fraud, mistake, or duress.
• Valid contracts: Valid contracts are contracts that are legally enforceable and binding on the parties.
• Illegal contracts: Illegal contracts are contracts that are void because they violate the law.

Section 23 states that a proposal may be revoked at any time before it is accepted. This means that the party making the offer can withdraw the offer at any time before the other party accepts it.

Section 30 provides for the rules governing the communication of acceptance. Acceptance of an offer must be communicated to the party making the offer. Acceptance can be communicated orally, in writing, or by conduct.

Section 45 defines consideration as “something which is of some value in the eyes of the law.” This means that consideration can be anything that is of value to the parties to a contract, such as money, goods, services, or a promise to do something.

Section 56 lays down the rule that agreements without consideration are void. This means that a contract that lacks consideration is not legally enforceable.

Section 72 provides for the consequences of a breach of contract. A breach of contract occurs when one party to a contract fails to perform their obligations under the contract. The consequences of a breach of contract can include damages, specific performance, and rescission of the contract.

Section 73 states the rule that the measure of damages for breach of contract is the loss directly and naturally resulting from the breach. This means that the party who has been injured by a breach of contract is entitled to recover damages for the losses that they have suffered as a direct result of the breach.

Section 75 provides for the rule of mitigation of damages, which states that a party who has been injured by a breach of contract must take reasonable steps to minimise the loss suffered. This means that the party who has been injured by a breach of contract cannot recover damages for losses that they could have avoided by taking reasonable steps to mitigate the loss.

It has been in force since 1872 and has undergone several amendments over the years to keep pace with changing legal and economic conditions. The most recent amendment to the Act was made in 2015. The 2015 Amendment introduced significant changes to the Indian Contract Act, including:

• The introduction of a new chapter on electronic contracts, which provides a legal framework for the formation and enforcement of contracts entered into electronically.
• Amendments to the provisions on arbitration, which streamline the arbitration process and make it more efficient.
• Changes to the rules on limitation extend the time period within which a party can file a suit for breach of contract.

The 2015 Amendment to the Indian Contract Act is a welcome step that brings the law in line with modern commercial practices and international standards. It is expected to have a significant impact on the way contracts are formed and enforced in India.

In addition to the changes introduced by the 2015 Amendment, the Indian Contract Act has also been amended on several other occasions. These amendments have addressed a wide range of issues, including:

• The addition of new provisions to protect consumers from unfair contract terms.
• Changes to the rules on liquidated damages.
• Amendments to the provisions on specific performance.

Landmark case laws

Super Cassettes Industries Ltd. vs. M/s. Entertainment Network (India) Ltd. (1999)

This landmark Indian case established the legal principle of anticipatory breach of contract. Central to the case were the actions of Super Cassettes Industries Ltd. (SCIL), a renowned music company, and M/s. Entertainment Network (India) Ltd. (ENIL), a music distribution company. SCIL had entered into an exclusive distribution agreement with ENIL for the sale and distribution of its music cassettes.

However, before the agreement’s stipulated performance period commenced, SCIL informed ENIL of its intention to terminate the contract. ENIL promptly filed a suit against SCIL, alleging an anticipatory breach of contract. The court, in its judgement, held that SCIL’s premature repudiation of the contract constituted an anticipatory breach.

The Court recognised that anticipatory breach occurs when one party, prior to the time of performance, clearly and unequivocally expresses an intention not to fulfil their contractual obligations. The innocent party, in this case, ENIL, is entitled to treat the contract as discharged or wait until the performance date arrives and then seek damages for the breach.

State of Maharashtra vs. M/s. Hanmantrao Bhagwantrao Shelke & Ors. (2006)

The Indian legal framework surrounding the concept of frustration of contract was significantly shaped by this pivotal case. At the heart of the dispute was a contract entered into between the State of Maharashtra and M/s. Hanmantrao Bhagwantrao Shelke & Ors. for the construction of a bridge.

During the course of the project, unforeseen circumstances arose. A substantial change in the river’s course, attributed to natural causes, rendered the construction of the bridge impracticable and financially unviable. Consequently, the State of Maharashtra sought to terminate the contract on the grounds of frustration.

The Court, in its ruling, acknowledged the doctrine of frustration of contract. It held that when, after the formation of a contract, a change in circumstances occurs that makes it impossible or unlawful to perform the contract, the contract is discharged by frustration. The court emphasised that the change in circumstances must be unforeseen, fundamental, and beyond the control of the parties involved.

Mohori Bibee vs. Dharmodas Ghose (1903)

The landmark case of Mohori Bibee vs. Dharmodas Ghose, decided in 1903 by the Privy Council, established the fundamental principle of void contracts in Indian contract law. This principle holds that a contract entered into by a minor is void ab initio, meaning it is considered legally invalid from the very beginning. The case has served as a precedent in numerous subsequent cases involving the validity of contracts.

Facts of the case

• Mohori Bibee, a minor, executed a mortgage deed in favour of Dharmodas Ghose to secure a loan.
• The mortgage was executed without the consent or knowledge of Mohori Bibee’s guardian.
• Dharmodas Ghose, aware of Mohori Bibee’s minority, proceeded with the transaction.
• Mohori Bibee later repudiated the mortgage, arguing that it was void due to her status as a minor.

Legal issues

• The primary legal issue in this case was whether a contract entered into by a minor is valid and enforceable.
• The court had to determine the legal consequences of a contract involving a minor and the rights and liabilities of the parties involved.

Judgement of the Court

• The Privy Council, the highest court of appeal for India at the time, held that the mortgage deed executed by Mohori Bibee was void.
• The court emphasised that a minor is not competent to enter into a legally binding contract, and any such contract is void from the outset.
• The court reasoned that allowing minors to enter into contracts would leave them vulnerable to exploitation and deprive them of the protection afforded by the law.

Significance of the case

• Mohori Bibee v. Dharmodas Ghose established the principle of void contracts, which has become a fundamental tenet of Indian contract law.
• The case serves as a cautionary reminder that contracts involving minors are generally not enforceable, safeguarding minors from potential legal and financial consequences.
• The principle of void contracts has been applied in various contexts, including employment contracts, property transactions, and financial agreements involving minors.
• The case has contributed to the development of laws and regulations aimed at protecting the rights and interests of minors in contractual matters.

Subsequent developments

• The principle established in Mohori Bibee v. Dharmodas Ghose has been affirmed and reinforced in subsequent case law in India.
• The Indian Contract Act, 1872, which governs contract law in India, specifically states that a minor is not competent to contract (Section 11).
• The Indian Majority Act, 1875, defines the age of majority as 18 years, and individuals below the age of 18 are considered minors.
• The principle of void contracts has been extended to other types of agreements, such as guarantees and promissory notes, entered into by minors.

Conclusion

Whenever any agreement is coupled with the intention to create a legal relationship, that will be converted into a contract. A contract is a term that has a vast general use. In our day-to- day lives, we encounter them very frequently. Promises have many essentials that are finally able to provide the same status as a contract.

Contract is a term that is not new to the human being but has been around for ages. Almost all business runs on the basis of some or other forms of contract. For an agreement to become a contract, there are several essentialities that need to be complied with. Section 10 of the ICA, 1872, is among the most important compliances to convert an agreement into a contract.

References

• https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-i/essentials-of-a-contract/
• https://legalserviceindia.com/legal/article-5512-essentials-of-a-valid-contract-under-the-indian-contract-act-1872-a-comprehensive-analysis.html
• https://www.linkedin.com/pulse/essentials-valid-contract-under-indian-act-suhasini-singh/