Law and You > Business Laws > Indian Contract Act, 1872 > Ingredients of Contract
A contract is a legally binding agreement between two or more parties that creates specific obligations enforceable by law. At its core, a contract involves an offer made by one party and acceptance by another, alongside mutual consideration, which refers to something of value exchanged between the parties. Contracts can be written, oral, or implied, although written contracts are generally preferred for clarity and enforceability. In this article, let us understand the ingredients of contract
The fundamental purpose of a contract is to ensure that the parties involved understand their rights and responsibilities. Contracts can govern a wide range of transactions, from simple agreements like renting an apartment to complex arrangements like mergers and acquisitions.
First Ingredient: An Offer or Proposal:
According to Section 2(a) of the Indian Contract Act, 1872 when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
- Just information is not an offer: An offer to do or not to do something must be made for the purpose of being agreed to. If agreement from another party is not expected then it is just a piece of information in the form of simple statement or threat.
- Just telling intention is not an offer: If A tells B “I am interested in buying your car”. Then A is just expressing his intention that he is interested in buying a car.
Making of a Proposal:
If A tells B “I am interested in buying your car. Will, you sell the car to me for Rs. 2 lakh”. Here A is expecting an ascent from B. Thus this is a proposal.
Thus Proposal = Offer + Expectation of assent from another party.
Second Ingredient: Acceptance
According to Section 2(b) of the Indian Contract Act, 1872 when a 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.
According to Section 2(c) of the Indian Contract Act, 1872 the person making the proposal is called the “promisor”, and the person accepting the proposal is called “promisee”.
Making of a promise:
If A tells B “I am interested in buying your car. Will, you sell the car to me for Rs. 2 lakh” with an expectation of agreement from B. B accepts the proposal. When the proposal made by proposer accepted by the proposee, then the proposal is said to be accepted and it becomes a promise. Now the proposer is called the “promisor” and the proposee is called the “promisee”. The consent should be free.
Promise = Offer from offeror + Free consent from Offeree
Third Ingredient: Consideration
According to Section 2(d) of the Indian Contract Act, 1872 when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
Fourth Ingredient: Valid Agreement
According to Section 2(e) of the Indian Contract Act, 1872 every promise and every set of promises, forming the consideration for each other, is an agreement.
According to Section 2(f) of the Indian Contract Act, 1872 promises which form the consideration or part of the consideration for each other are called reciprocal promises;
Making of an agreement:
If A tells B “I am interested in buying your car. Will, you sell the car to me for Rs. 2 lakh” Here it is a proposal with legal consideration and if B agrees to it, then the understanding becomes an agreement.
Forming a Contract:
If A tells B “I am interested in buying your car for 2 lakh rupees. Will, you sell the car to me?” Here it is a proposal with consideration and if B agrees to it. Both of them know that the agreement is legally bound to them. Now the agreement becomes a contract.
Thus, Contract = Agreement + Enforceability of the agreement by law
From the above explanation, we can conclude that a contract is an agreement; an agreement is a promise and promise is accepted proposal.
According to Section 2(h) of the Indian Contract Act, 1872 an agreement enforceable by law is a contract.
Essential Elements of Contract:
- There are Minimum Two Parties: In a contract minimum, two parties are involved. A contract can only be bilateral and the same party cannot be a party on both sides. Hence, there cannot be a contract between A on both sides. A person cannot enter into a contract with himself.
- It is An Agreement: An agreement occurs when two minds meet for a common purpose i.e., the same thing in the same sense at the same time. This meeting of the mind is called consensus ad idem, i.e., consent to the matter. The consent to the proposal should be free (free from coercion, fraud, misrepresentation, mistake and undue influence).
- It is An Agreement with Consideration: It is an agreement with legal consideration.
- Other Essentials: The agreement should be among competent parties and should be for lawful acts.
- It is an Obligation: An obligation is a legal duty to do or abstain from doing something. The agreement enforceable by law is obligatory on all the parties involved in the contract. Thus social, religious and domestic obligations cannot be termed as a contract because in such obligation there is no intention to give rise to any legal obligation. An agreement to agree in the future is not a contract because unless all important terms of the contract are settled, there cannot be any binding obligation. The parties that are subject to a contract must have clear intentions of creating a legal relationship between them.
All contracts are agreements but all agreements are not contracts.
- An agreement is a much wider concept than a contract. Actually, the set of contracts is a subset of the set of agreements. Mere agreements without legal enforceability are not contracts.
- The essential element of the contract is an agreement with the intention to have a legal relationship or enforceability of the agreement by the law.
- Social, religious and domestic obligations are agreements and not contract because in such obligation there is no intention to give rise to any legal obligation. Agreement to call a friend to a party is social agreement. To accept to donate money to a temple is a religious agreement. To accept to give a new necklace to the wife is domestic agreement. In such cases, no party has the intention to take another party to the court of law. Thus these agreements don’t have enforceability by the law. They may be just “honoured pledges” and expressly stated to be “outside the jurisdiction of any court”. (Rose Frank Co. v. Crompton Bs. (19257).
- Thus there are many agreements which are not contracts. But each contract satisfies the criteria of agreement and thus all contracts are agreement.
All Obligations are not contracts:
Any obligation, which arises independently of an agreement, cannot be the basis of a contract. To look after children at their young age is the obligation of parents or look after parents in their old ages is the obligation of children. But it is a social and domestic arrangement and there is no intention to create legally binding relations. Hence all obligations are not contract.
Conclusion:
The Indian Contract Act 1872 states the term contract is like an agreement that creates an obligation between parties. According to the act, the contract is “an agreement enforceable by law.” According to the Indian Contract Act 1872, “Agreements are also contracts made by the consent of parties, competent to contract to consider with a lawful object and are not hereby expressly declared to be void”. Agreement must be free from coercion, undue influence, misrepresentation, mistake or fraud and it is made between parties competent to contract.