Understanding Contracts and Agreements Under the Indian Contract Act, 1872

By Sharanya Gupta, Maharashtra National Law University, Nagpur.

Have you ever ordered food online and the delivery never arrived? Have you ever booked a cab but the driver canceled at the last minute? Or have you paid in advance for an item you ordered online but the seller later cancelled the delivery?

In all these cases you might have wondered if there is any legal protection? Can you do anything about it? Does the law protect you? All these questions are answered by one word – CONTRACTS!

Contracts are an essential part of all of our daily lives. From renting a house to buying a mobile phone to buying a thing as small as a candy, we enter into contracts all the time. But most of us never stop to think about what exactly is a contract? How does the law view agreements between people or businesses? It is important to break it down in the simplest way possible to know your legal rights and remedies when dealing with such situations.

A contract is nothing but a legally enforceable agreement.[i] In simple words, it is a promise or a set of promises[ii] that the law will protect. If one party does not follow the promise, the other can go to court. Let us imagine a simple situation to understand it better. You decide to buy a bicycle from your friend for a price, say ₹5,000. You both agree on the price and shake hands. This is an agreement. Now, if you both write it down and sign it, it becomes a contract - provided it meets legal conditions.

These legal conditions are inscribed in The Indian Contract Act, 1872[iii] that governs contracts in India. It tells us what makes a contract valid and what happens if someone breaks it.

Not all agreements are contracts. For an agreement to become a contract, it must fulfill certain conditions. There must be an offer[iv] and acceptance[v] and one person must make a clear proposal, and the other must accept it. Both parties should intend to be legally bound.[vi] There must be something in return such as money, goods, or services, for the promise and is known as lawful consideration[vii]. The people involved must be capable of entering into a contract, meaning they should not be minors, mentally unfit, or intoxicated[viii]. The agreement must be made without force, fraud, or undue influence[ix] and the purpose of the contract must not be illegal or against public policy.[x] Finally, the contract should be clear and not vague.[xi] If any of these elements are missing, the contract may not be legally enforceable.

A simple way to remember this is through a formula:

Contract = Offer + Acceptance + Consideration + Legal Intention + Capacity + Free Consent + Lawful Object

Let us understand this with another example. Ravi wanted to sell his phone for ₹10,000 (offer). Aman agreed to buy it (acceptance). Aman paid ₹10,000, and Ravi gave the phone (consideration). Both seriously intended to complete the deal (legal intention), were adults (capacity), and agreed without force or fraud (free consent). The sale was legal (lawful object). Since all conditions were met, they had a contract!

Contracts come in different forms. Some contracts are valid and enforceable, while others may be void, voidable, or even illegal. A valid contract meets all legal conditions and is enforceable[xii], such as the one explained earlier. A void contract was valid but later became unenforceable due to some legal issue.[xiii] A voidable contract is one where one party has the option to cancel it.[xiv] An illegal contract deals with unlawful activities and is not enforceable at all.[xv]

Contracts can also be classified based on performance. An executed contract is one where both parties have completed their obligations,[xvi] while an executory contract is one that is still to be performed.[xvii]

Another way to classify contracts is based on how they are formed. An express contract is one where the terms are clearly stated in words[xviii]. An implied contract is one where the terms are understood through actions[xix]. There are also quasi-contracts,[xx] which are not real contracts but are treated as such by law to prevent unfair advantage.

Take the case of Ramesh, who wanted to sell his old car. He met Suresh, who agreed to buy it for ₹2,00,000. They wrote down the details and signed an agreement. Suresh paid ₹50,000 as advance and promised to pay the rest within a week. However, after a few days, Suresh changed his mind and refused to pay the balance. What can Ramesh do? Since they had a valid contract with offer, acceptance, consideration, and written proof, Ramesh can go to court and demand either the full payment or compensation.

If a contract is broken, the affected party has legal options. They can ask for damages, meaning the person who suffered a loss due to the breach can ask for compensation.[xxi] A court can order the breaching party to fulfil their promise, known as specific performance.[xxii] A court can also issue an injunction,[xxiii] stopping a party from doing something that violates the contract. If needed, the contract can be canceled and both parties return to their original positions, known as rescission.[xxiv] There is also the concept of quantum meruit where if partial work is done, the person can ask for fair payment for the work completed.[xxv]

A key distinction in contract law is between unilateral and bilateral contracts. A unilateral contract is one where only one party makes a promise[xxvi] like a reward offer for finding a lost pet. The other party is not obliged to act but if they do, the contract is fulfilled. In contrast, a bilateral contract involves promises from both sides[xxvii], like a typical sale agreement where one party agrees to deliver goods and the other agrees to pay.

One interesting fact is that oral contracts are valid in India,[xxviii] except in cases where the law requires written agreements, such as in the sale of land agreements.[xxix] However, proving an oral contract in court can be difficult which is why written contracts are always preferable.

Another important aspect of contract law is contingency. Many contracts include conditions that must be met before they become binding.[xxx] For example, a job offer letter may be conditional on the candidate passing a background check. If the condition is not fulfilled, the contract does not take effect. This protects parties from unexpected risks.

From the above, we can safely say that contracts are everywhere! Understanding contracts is crucial because they help keep transactions smooth and fair. Whether you are buying a house, signing a job agreement, or lending money to a friend, knowing the basics of contracts can save you from future trouble.

So, next time you agree to something, wait and ask yourself, “Is this a contract?” If it is, make sure it meets the legal conditions so that you don’t face any issues later. Remember, a well-understood contract is a legal suit avoided!

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[i] § 2(h), The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India).

[ii] Ibid, § 2(e).

[iii] The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India).

[iv] Supra note 1, § 2(a).

[v] Supra note 1, § 2(b).

[vi] Balfour v. Balfour, [1919] 2 K.B. 571 (England).

[vii] Supra note 1, § 2(d).

[viii] Supra note 1, § 11.

[ix] Supra note 1, § 16.

[x] Supra note 1, § 23.

[xi] Trollope & Colls Ltd. v. Atomic Power Constructions Ltd., [1963] 1 W.L.R. 333 (England).

[xii] Supra note 1.

[xiii] Supra note 1, § 2(g) & § 2(j).

[xiv] Supra note 1, § 2(i).

[xv] Supra note 1, § 2(g)

[xvi] Bolton v. Mahadeva, [1972] 1 W.L.R. 1009 (England).

[xvii] Robinson v. Davidson, (1871) L.R. 6 Ex. 269 (England).

[xviii] South Eastern Railway Co. v. Associated Portland Cement Manufacturers (1900) Ltd., [1910] 1 K.B. 927 (England).

[xix] Brogden v. Metropolitan Railway Co., (1877) 2 App. Cas. 666 (H.L.).

[xx] Moses v. Macferlan, (1760) 2 Burr. 1005, 97 Eng. Rep. 676 (K.B.).

[xxi] Supra note 1, § 73-75.

[xxii] § 10-14, The Specific Relief Act, No. 47 of 1963, Acts of Parliament, 1963 (India).

[xxiii] Supra note 22, §36-42.

[xxiv] Supra note 22, §27-30.

[xxv] Cutter v. Powell, (1795) 6 Term Rep. 320, 101 England Rep. 573 (K.B.).

[xxvi] Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256 (England).

[xxvii] Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] A.C. 847 (H.L.).

[xxviii] Bai Mamubai v. Madhavdas, (1949) 51 BOMLR 217.

[xxix] The Transfer of Property Act, No. 4 of 1882, § 54, Acts of Parliament, 1882 (India).

[xxx] Supra note 1, § 31-36.