What is Contract?

According to section 2(h) of the Indian Contract Act: “ An agreement enforceable by law is a contract.” A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law.

From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements detail.

1.     Agreement. As per section 2 (e): “ Every promise and every set of promises, forming the consideration for each other, is an agreement.” Thus it is clear from this definition that a ‘promise’ is an agreement. What is a ‘promise’? the answer to this question is contained in section 2 (b) which defines the term.” When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise.” An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an agreement is the sum total of ‘offer’ and ‘acceptance’.

On analyzing the above definition the following characteristics of an agreement become evident:

(a)      At least two persons. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself.

(b)   Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.

2.     Legal obligation. As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract. “ All contracts are agreements but all agreements are not contracts,” Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend’s house or to take a walk together are not contracts because they are not likely to
create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences.

I shall give you a very simple example to explain this point.

An agreement to sell a car may be a contract but an agreement to go for lunch may be a mere agreement not enforceable by law. Thus all agreements are not contracts. In business agreements the presumption is usually that the parties intend to create legal relations. Thus an agreement to buy certain specific goods at an agreed price e.g., 200 bags of rice at Rs.100 per bag is a contract because it gives rise to a duty enforceable by law, and in case of default through a court provided other essential elements of a contract was made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object .

Thus it may be concluded that the Act restricts the use of the word contract to only those agreements, which give, rise to legal obligations between the parties.

It will be appropriate to point out here that the law of contract deals only with such legal obligations which arise form agreements, obligations which are not contractual in nature are outside the purview of the law of contract.

Before moving further we must know the conditions which must be satisfied for the contract to become valid.

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