Introduction
Sir William Anson aptly described the purpose of the law of contract as ensuring that โwhat a man has been led to expect shall come to pass, and what has been promised to him shall be performed.โ The law of contract does not impose predetermined rights and duties; rather, it lays down limiting principles within which parties are free to create rights and obligations that the law will uphold. This flexibility forms the cornerstone of modern commercial and private dealings.
Indian contract law, primarily governed by the Indian Contract Act, 1872, balances this freedom of contract with safeguards necessary to promote fairnessโespecially in situations involving unequal bargaining power.
Forms of Contract and Judicial Approach
From the perspective of form, contracts may be classified into:
- Ordinary Contracts
- Standard Form Contracts
Standard form contracts, often used by corporations, involve predetermined terms with little scope for negotiation. Recognising the inherent inequality in bargaining power, Indian courts have evolved protective doctrines, including:
- Requirement of Reasonable Notice
- Reasonableness of Terms
- Theory of Fundamental Breach
- Strict Interpretation of Exemption Clauses
- Contractual liability cannot exclude tortious liability
These principles ensure fairness and prevent exploitation in adhesive contracts.
A key judicial affirmation of the importance of written contracts is found in Roop Kumar v. Mohan Thedani (AIR 2003), where the Supreme Court emphasised that integration of an act into a single memorialโtypically a written documentโconstitutes strong evidence of the partiesโ intent and terms.
What Is a Contract?
Statutory Definition
Section 2(h) of the Indian Contract Act defines a contract as:
โAn agreement enforceable by law is a contract.โ
Section 2(h)
This definition implies two essential components:
- A valid agreement, and
- Its enforceability by law.
Elements of an Agreement
1. Proposal / Offer (Section 2(a))
A proposal is made when one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the otherโs assent.
The emphasis is on significationโan external expression of willingness.
2. Acceptance and Promise (Section 2(b))
When the person to whom the proposal is made signifies his assent, the proposal becomes a promise. Assent may be communicated through words, writing, or conduct.
3. Consideration (Section 2(d))
Consideration refers to anything done, abstained from doing, or promised to be done at the promisorโs desire. It is the value exchanged that makes the promise legally binding.
4. Agreement (Section 2(e))
Every promise and every set of reciprocal promises forming consideration for each other constitute an agreement.
Thus, an agreement is essentially a bundle of promises flowing from both sides.
Agreement vs. Contract
While all contracts begin as agreements, not all agreements become contracts.
A contract arises only when an agreement is legally enforceable.
Requirements for Enforceability (Section 10)
For an agreement to be enforceable:
- Competency of Parties
Parties must be major, of sound mind, and not disqualified by law. - Free Consent
Consent must not be vitiated by coercion, fraud, misrepresentation, undue influence, or mistake. - Lawful Consideration and Lawful Object
Agreements involving illegal acts (e.g., theft, fraud) are void. - Not Expressly Declared Void
The Act expressly declares certain agreements void (e.g., restraint of trade).
Example:
An agreement to supply goods is a contract if Section 10 requirements are met.
However, an agreement to watch a movie together is merely a social agreementโunenforceable in law.
Types of Agreements and Contracts
1. Contracts
Legally enforceable agreements satisfying all essential elements.
2. Void Agreements (Section 2(g))
Agreements not enforceable by law from the very beginning.
Example: agreements with minors; agreements opposed to public policy.
3. Voidable Contracts (Section 2(i))
Enforceable at the option of one party but not the other.
Commonly arise when consent is not free.
4. Illegal Agreements
Opposed to public policyโsuch as agreements to commit crimes.
They are not only void but also punishable and cannot form consideration for another agreement.
Difference:
- A void agreement is void from the outset.
- A voidable contract is valid until rescinded by the party with the right to avoid it.
Consensus ad Idem and Intention to Create Legal Relations
A foundational requirement for any contract is consensus ad idemโagreement on the same thing in the same sense.
Section 13 of the Act encapsulates this idea: โConsent means that two or more persons agree upon the same thing in the same sense.โ
Judicial Recognition
- In Smith v. Hughes, Lord Hannen observed that for a contract to be formed, both parties must be of the same mind concerning the same subject matter.
- The Indian Supreme Court, in Bahamas Oil Refining Co. v. Kristiansands Tankrederie, emphasised that contractual intention is assessed through an objective test, not a subjective one.
- In CWT v. Abdul Hussain Mulla Mohd Ali (1988), the Court held that beyond agreement and consideration, the parties must also intend to create legal relations.
Thus, the modern approach focuses less on internal mental states and more on outward expressions that create legal expectations.
Conclusion
Contract law, as envisaged by classical jurists like Sir William Anson and developed through Indian judicial interpretation, rests on the pillars of agreement, consideration, and enforceability. It balances the freedom of parties to structure their relationships with safeguards designed to ensure fairness and prevent exploitation.
By insisting on free consent, competency, lawful object, and intention to create legal relations, the law ensures that only genuine and rational agreements receive the force of law. The doctrine of consensus ad idem, reinforced through judicial reasoning, forms the moral and legal foundation of all contractual obligations.
EXAM NOTES (Crisp and High-Scoring)
Exam Quick Revision
1. Definition of Contract
Section 2(h), Indian Contract Act, 1872:
โก๏ธ โAn agreement enforceable by law is a contract.โ
Therefore:
Contract = Agreement + Enforceability
2. What Is an Agreement?
Agreement (S.2(e))
โก๏ธ Promise(s) forming consideration for each other.
Promise (S.2(b))
โก๏ธ Proposal + Acceptance.
Proposal (S.2(a))
โก๏ธ Signification of willingness to do/abstain to obtain assent.
Consideration (S.2(d))
โก๏ธ Act/abstinence at promisorโs desire.
3. Essentials of a Valid Contract (Section 10)
- Competent parties
โ Major, sound mind, not disqualified - Free Consent
โ No coercion, undue influence, fraud, misrepresentation, mistake - Lawful consideration
- Lawful object
- Not expressly void
4. Key Distinctions
Agreement vs Contract
- All contracts are agreements
- All agreements are not contracts
Void Agreement (S.2(g))
- Not enforceable from the beginning
Voidable Contract (S.2(i))
- Enforceable at the option of one party
- Valid until avoided
Illegal Agreements
- Opposed to public policy
- Void + punishable
- Taints collateral transactions
5. Consensus ad Idem
โก๏ธ Parties must agree on the same thing in the same sense (S.13).
โก๏ธ Based on Smith v Hughes.
6. Intention to Create Legal Relations
- Must exist for a contract
- Supported in CWT v. Abdul Hussain Mulla Mohd Ali (1988)
- Test is objective, not subjective
(Bahamas Oil Refining Co. v. Kristiansands Tankrederie)
7. Contracts by Form
- Ordinary Contracts
- Standard Form Contracts
โ Unequal bargaining power โ court protections:- Reasonable notice
- Reasonable terms
- Fundamental breach doctrine
- Strict interpretation of exemption clauses
- Cannot exclude tort liability through contract
8. Important Case Law
- Roop Kumar v. Mohan Thedani (2003):
Importance of written (integrated) contract. - Smith v Hughes:
Consensus ad idem โ objective test. - CWT v Abdul Hussain Mulla Mohd Ali (1988):
Intention to create legal relations. - Bahamas Oil Refining Co. case:
Courts use objective test, not subjective.
Proposal โ Acceptance โ Promise โ Agreement โ Enforceability โ Contract
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