Agreement and Contract under the Indian Contract Law

The Indian Contract Act, 1872, provides the legal framework governing agreements and contracts in India. Understanding the nuances of agreement and contract formation is essential for individuals and businesses alike to ensure their rights and obligations are protected under the law.

I. Definition of Contract:
Section 2(h) of the Indian Contract Act defines a contract as “An agreement enforceable by law.” This succinct definition highlights the core principle that not all agreements are contracts unless they meet certain criteria laid down by law.

II. Elements of a Valid Contract:
For an agreement to qualify as a contract under Indian law, it must satisfy the essentials outlined in Section 10 of the Indian Contract Act. These essentials include:
1. Agreement between parties: A contract arises from mutual agreement, where one party makes an offer and the other accepts it.
2. Competency of parties: Both parties entering into the contract must be competent to do so, i.e., they must be of sound mind and legal age.
3. Lawful consideration and object: The contract must involve a lawful consideration and object, meaning it cannot involve illegal activities or go against public policy.
4. Free consent: The consent of both parties must be freely given without any coercion, fraud, or undue influence.
5. Not expressly declared void: The contract must not fall under any category of agreements expressly declared void by law.

III. Definition of Agreement

An agreement, as per Section 2(e) of the Indian Contract Act, refers to every promise or set of promises where one party offers something and the other accepts. This exchange of promises forms the basis of an agreement.

For instance, if A promises to sell his watch to B for Rs. 2,000, and B agrees to buy it, there’s an agreement between them. It’s essentially a mutual understanding where one party proposes something, and the other accepts it.

In essence, when a proposal is made and accepted, it transforms into a promise, thereby creating an agreement between the parties involved.

IV. Types of Agreements:
1. Void Agreements: Section 2(g) of the Indian Contract Act defines a void agreement as one not enforceable by law. Examples include agreements without consideration or agreements in restraint of marriage.
2. Voidable Contracts: According to Section 2(i), a voidable contract is enforceable by law at the option of one or more parties but not at the option of others. These contracts can be avoided by the aggrieved party if consent was obtained through coercion, undue influence, fraud, or misrepresentation.
3. Illegal Agreements: Agreements that are forbidden by law due to their illegal nature, such as agreements to commit a crime or defraud public revenue, fall under this category. Illegal agreements are void and unenforceable.

V. Classification of Contracts:
Contracts may be classified based on various criteria, including:
1. Subject matter: Contracts can vary based on the nature of the subject involved, such as contracts for sale of goods, services, or property.
2. Parties involved: Contracts may involve individuals, businesses, or other legal entities.
3. Form: Contracts can be in written or oral form, or implied from the conduct of the parties.
4. Effect: Contracts can be bilateral (where both parties have obligations) or unilateral (where only one party has obligations).
5. Validity: Contracts may be valid, void, or unenforceable based on compliance with legal requirements and the presence of any vitiating factors.

VI. Interpretation and Implied Terms:
Interpreting contracts requires consideration of various principles, including:
1. Ascertainment of meaning: Courts interpret contracts based on the meaning they would convey to a reasonable person with all relevant background knowledge.
2. Matrix of fact: The context surrounding the contract, known as the “matrix of fact,” informs its interpretation.
3. Exclusion of subjective intent: Previous negotiations and declarations of subjective intent are excluded from the interpretation process.
4. Natural and ordinary meaning: Words in a contract are given their natural and ordinary meaning unless context suggests otherwise.
5. Implied terms: Courts may imply terms into contracts if they are reasonable, necessary for business efficacy, clear, capable of expression, and consistent with express terms.

VII. Case Law and Precedents:
Judicial decisions have played a significant role in shaping contract law in India. Landmark cases such as B.P. Refinery (Westernport) Pty. Ltd. v. Shire of Hastings have established principles for implied terms in contracts, emphasizing reasonableness, necessity, clarity, and consistency with express terms.

VIII. Practical Considerations:
In real-world scenarios, agreements and contracts may vary in complexity and formality. It is essential for parties to ensure clarity, certainty, and completeness in their contracts to avoid ambiguity and potential disputes.

The Indian Contract Act, 1872, provides the legal framework for agreements and contracts in India, outlining the essentials for contract formation, types of agreements, and principles of interpretation. Understanding the nuances of contract law is crucial for individuals and businesses to protect their rights and interests in commercial transactions and legal proceedings. By adhering to legal requirements and best practices in contract drafting and interpretation, parties can mitigate risks and ensure fair and equitable outcomes in contractual relationships.


Dr. R.K. Bangia, Principles of Mercantile Law.



Leave a Reply

Your email address will not be published. Required fields are marked *