CHAPTER TWO

NATURE AND KINDS OF CONTRACTS

INTRODUCTION

A contract is fundamental to business for establishing binding commercial relationship between

two or more parties. The commercial transactions belong to the private law. These are regulated
by the Contract Act, 1872. This law has laid down the general principles in Sections 1 to 75
subject to which the contracting parties may create their respective rights and duties. In addition,
the law of contract deals with five categories of special contracts, namely: (i) Indemnity and
Guarantee, (ii) Bailment and Pledge, and (iii) Agency. Other contracts relating to partnership;
sale of goods; negotiable instruments; insurance are technically based on the law of contracts but
have been actually covered by separate enactments.

FEATURES OF LAW OF CONTRACT

Principal features of the law of contract are as follows:
(a) Contract Act is a substantive law dealing with the rights and duties of parties involved in
commercial transactions

(b) It is a private law of a facilitative nature giving the contracting parties the right to frame
their own terms while remaining within the ambit of the principles contained in the Act.

(c) Consistent with the right to frame their own law, contacting parties adopt the following
two routes to frame the contract:

(i) General Conditions of Contract (GCC)

Many firms may frame rules in the form of a rule book called “GCC’ for guidance of prospective
contractors / suppliers. The contract may then be concluded within the ambit of these guidelines.

(ii) Special Conditions of Contract (SCC)

These are complementary to GCC. For instance, the main clause in GCC may permit the
contractor to take advance money. But a clause in the SCC may limit the amount of advance only
to 10% of the total contract price
A contract based on GCC & SCC is generally be a one page document incorporating the scope of
technical specifications, bid made by the contractor, and notification of the award and any other
matter in accordance with various clauses of GCC & SCC. This route is used when large number
of parties are expected to respond to invitation such as in case of works contracts.

‘Self Contained Contract’

It is the second route to contract and is based on negotiations about all the contractual terms
which may be included in a comprehensive document. This method is adopted in case of high
value contracts and where number of parties responding to invitation is small.

(d) The Act is not exhaustive since it does not provide for several types of transactions such as
infrastructure
(e) It does not override customs or usages applicable to commercial transactions
(f) The law of contracts is not the whole law either of agreements or of obligations. It is the
law of only those obligations which have their source in agreement between the parties.
For instance, it does not deal with obligations arising under tort such as loss caused by
negligence since it has been created by law

CONCEPT OF CONTRACT
It may be noted that a contract is initiated by means of an agreement. Only after fulfilling the
conditions prescribed for its enforceability, the agreement matures into a contract. It is why
Section 2(h) has defined a contract as ‘an agreement enforceable by law’. Thus, we need to
discuss both the concept of ‘agreement’ and the conditions which would lead to its
enforceability.

1. Agreement
Contract law has used the term ‘promise’ and ‘agreement’ in an interchangeable sense.
Agreement is the starting point of a contract which involves the exchange of promises between
two or more parties. Section 2(e) has defined an ‘agreement’ as, “every promise and every set of
promises, forming consideration for each other”. There are five essential requirements for the
making of an agreement. These are as follows:
i. Minimum Two Parties
There must be a minimum of two parties since no one can make a contract with oneself.
ii. Offer by a Party
There must be an offer by one of the parties.
iii. Acceptance by the Other Party
The offer must be followed by its acceptance by the other party.
iv. Intention to create legal relations
The parties must have the intention to create legal relationship. Such an intention is presumed in
commercial transactions but not in the case of agreements of a social or domestic nature. For
instance, an agreement to dine at a friend’s place, to play a friendly match, or to go to see a
movie lacks the intention to create legal relations. Hence, these are incapable of creating any
rights or obligation under law. But how does law find out the subjective intention of the parties?
Its function is to enforce objectively the intention of parties as expressed in their agreement than
to subjectively ascertain their real intention. Nonetheless, the law continues to make a distinction
between social and domestic agreements as compared to those made in a commercial context to
decide their enforceability.
Example:
In Balfour vs. Balfour (1919) 2 KB 571, a husband agreed with his wife to send her certain sum
of money until she could join him at his station of posting. On default to send money, the wife
filed a suit for recovery. The wife’s claim was rejected by the court on the ground that
agreements of a social nature do not intend to create legal relations. The husband was thus under
no obligation to pay the amount.
Presumption of absence of intention to create legal relations in domestic and social relations:
The judgment in Balfour’s case raises a presumption that the intention to create legal relations is
presumed to be absent in domestic and social types of agreements. To presume otherwise will
open flood gate of litigation. Principles of common laws do not intrude in domestic and social
___domain except in rare cases. Enforceability of a contract is based on theory of private autonomy
and also the manifestation by both the parties of common intention to enter into mutually
communicated legal obligations [Rose & Frank Company v. J.R. Crompton & Bros Ltd 2 KB
261, 1923]. However, a person’s will depend on several factors including socio cultural factors
as may be noted in the following example:

“An Indian goes to a Singapore hotel and orders a vegetarian pizza. When it was served, he
noticed with surprise that it contained sea food in it. The pizza was non- vegetarian as per Indian
standards. But was a perfectly vegetarian pizza according to Singapore cultural background.
Though both the parties are willing to perform the contractual obligation but problem has arisen
due to different perceptions of a vegetarian pizza.
How will the contract law theories or the courts enforcing contract law principles deal with such
situations?

Compliance with terms of contract may however create legal relationship

In Parker v Clark (1960) 1 WLR 286, an aged couple held out a promise through a letter to their
niece and her husband (plaintiffs) to leave the young couple a portion of their estate by way of a
will provided the couple sells off their house and come to live with the aged couple. It was also
mentioned that the young couple would also share the old couple’s household and other
expenses. The young couple disposed of their cottage and started living with the aged couple.
Later on, due to differences between both the parties, the aged couple repudiated the agreement
and asked the young couple to stay somewhere else. The young couple sued the aged couple for
the breach of promise. Held that the letter by the old couple contained their intention to create
legal relations and the young couple could recover damages.

There is a Rebuttable Presumption of Intention to create legal relationship in Commercial

Agreements
Contract law is about giving effect to the promises made by the parties exercising their free will
and autonomy. The court does not have to go into the obscure question of whether parties
contemplated the enforcement of their contract through court. For instance, if you walk into the
cafe and order a coffee, it will neither occur to you nor to the cafe owner that they are entering
into a legally binding relationship unless one of the parties fails to perform.
However, if the contract itself provides that the arrangement was not intended to be a formal
legal agreement and was not subject to jurisdiction of either the US or UK, the contract has
specifically provided for the intention of the parties to not create legal relations [Rose & Frank
Company v. J.R. Crompton & Bros Ltd 2 KB 261, 1923]. The ratio of the case is as follows:
(a) It is generally assumed that parties in business relations intend to be bound
(b) If parties in the agreement expressly state the intention not to be bound, the court must
honour their intention.

v. Consensus ad idem
Consensus ad idem means identity of minds on the part of both the parties. Accordingly, the
parties to a contract must agree upon the same thing in the same sense.
Example:
A seller having two houses in two different localities in Delhi offers to sell one of his houses to a
party. The person to whom the offer is made has another house in his mind of which he is aware.
Due to confusion about the property being offered for sale and the one presumed by the intended
buyer, there is no consensus ad idem.

2. Enforceability of the Agreement:

In terms of Section 2(h), a contract is “an agreement enforceable by law”. Hence, a contract is
the sum of the following:
Contract = Agreement + Its Enforceability
Accordingly, only an enforceable agreement is a contract. An agreement may become
enforceable only after complying with the essential requirements of a valid contract. Section 10
has specified the requirements of a valid contract as follows:

“All agreements are contracts if they are made by the free consent of the parties competent to
contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void.”

ESSENTIAL INGREDIENTS OF A VALID CONTRACT

On the basis of the provisions of Section 10, the following are the ingredients of a valid contract:

(a) Free Consent:

The contracting parties must give their consent freely. It must not be given due to coercion
(duress), undue influence, fraud, misrepresentation or mistake. The absence of free consent
would lead to a ‘voidable contract’ which has adverse affect on the legal enforceability of the
contract.
(b) Contractual Capacity:
The parties making the contract must be legally competent in the sense that each of them must be
of the age of majority, of a sound mind, and not expressly disqualified from contracting (Section
11). An agreement by incompetent parties shall be a legal nullity.
(c) Lawful Consideration:
Consideration is the price for which the promise of the other party is bought. Without
consideration, a contract is regarded as a nudum pactum. Each of the contracting parties must
both ‘give as well as get something’. Moreover, the consideration must also be lawful.
(d) Lawful object:
The object of the agreement must be lawful in the sense that it must not be (i) illegal (ii)
immoral, (iii) fraudulent, (iv) defeating the provisions of any law, (v) injurious to the person or
property of another, or (vi) opposed to public policy.
Example: A lets his house for being used as a gambling den. The agreement is illegal as the
object of agreement is unlawful.
(e) Agreement must not be expressly declared to be void:
The agreement must not have been declared void by any law in force in India. Sections 24 to 30
of the Act have expressly declared certain types of agreements to be per se void such as those in
restraint of marriage, or restraint of trade, or restraint on legal proceedings, or wagering
agreements.
(f) Legal formalities:
In terms of second paragraph of Section 10, the agreement must fulfill the formalities prescribed
in any other applicable law. Therefore, where law requires an agreement to be put in writing,
stamped, witnessed or to be registered, these formalities must be complied with. For instance, the
Indian Trusts Act, 1882 requires the creation of a trust to be reduced to writing. Under the
Transfer of Property Act 1882, every sale and purchase of immovable property of one hundred
rupees or more must be in writing and registered.

In addition to the above, the contract must also meet the following requirements:

(g) Certainty of Meaning:

The terms of the agreement must be certain, or capable of being made certain. For instance, a
term in the contract that “the company would favourably consider a request for renewal of the
contract” was held to lack certainty and hence incapable of creating a binding contract [Montreal
Gas Co. v. Vasey (1900) A.C. 595]. Agreement to agree in future is also not a contract.
In May and Butcher v The King [1934] 2 KB 17, the parties had arranged to sell tentage at prices
to be agreed, and to be delivered at times also to be agreed. The bargain was held to be non
binding for want of certainty. 

CLASSIFICATION OF CONTRACTS

1. On the basis of Enforceability

(a) Valid Contract:

It is a contract which satisfies all the requirements of Section 10 of the Act as described above.
Such a contract creates rights in personam and is legally enforceable.

(b) Void Agreement:

Under section 2(g), a void agreement is, “an agreement not enforceable by law.” It is void ab
initio because it lacks one or more of the essentials of a valid contract. Such an agreement does
not create any legal relations and is a nullity. Instances of this type of agreements are those made
with a minor or those without consideration.

(c) Void Contract:

Section 2(j) provides that “a contract which ceases to be enforceable by law becomes void when
it ceases to be enforceable.” An agreement may be enforceable initially. However, due to certain
circumstances which are neither foreseen nor controllable on their happening and known as
‘force majeure’ may render the contract void. Parties need not perform their promise in case of
natural calamities, changes in law, death of either party, war or government intervention. In the
Law of contract, these events are known as ‘supervening impossibility’. Similarly, if
performance of a contract is contingent upon on the happening of an event, it shall become void
on the happening of the event becoming impossible (Section 32)

DIFFERENCE BETWEEN VOID AGREEMENT AND VOID CONTRACT

A void agreement is void from the very beginning. On the other hand, a void contract is valid
when originally made but becomes void subsequently due to certain circumstances.
A void agreement is destitute of legal effects. It cannot create any legal rights or obligations. On
the other hand, a void contract is perfectly legitimate until it ceases to be enforceable. The money
paid or property delivered under a contract which subsequently becomes void is recoverable.

(d) Voidable Contract:

Under Section 2(i), it refers to an ‘agreement which is enforceable by law at the option of one or
more of the parties thereto, but not at the option of other or others’
A contract becomes voidable in the following circumstances:
(i) If consent of one of the parties is not free, it will be considered an aggrieved party. It shall
have the dual option to either affirm or rescind the contract. The other party does not have any
such right. However, the right of rescission must be exercised within a reasonable time. On the
expiry of reasonable time, the contract shall be deemed to have become a valid contract.
(ii) If a party to an executor contract prevents the other party from performing his part of the
contract, the contract shall be voidable at the option of the party so prevented.
(iii) In case of a contract in which time of performance is the essence of contract, failure to
perform within the fixed time shall make the contract voidable at the option of the promise
(Aerosan Enterprises Ltd v Union of India & Anr 51 (1993) DLT 280)

In the case of a voidable contract, the aggrieved party can recover damages from the other party
which it may have suffered but it must restore the benefits received by him (Sec. 64).

DIFFERENCE BETWEEN VOID AGREEMENT AND VOIDABLE CONTRACT

(i) Enforceability
A void agreement is void ab initio. As against this, a voidable contract is perfectly valid unless it
is repudiated by the aggrieved party at its option. Until its repudiation, it continues to be valid.
A void agreement cannot be enforced at all. But a voidable contract is capable of being enforced
at the option of the aggrieved party.
No one can acquire any title to the goods obtained under a void agreement. But in the case of a
voidable contract, a bona fide buyer for value will acquire a better title to goods which he has
obtained from a person holding them under a voidable contract.
(ii) Restitution
Except where illegality or void nature of the agreement is known to both the parties, restitution is
always allowed. The recipient of any benefit under the agreement, must restore it to the person
from whom he has received it (Sec. 65). On repudiation of a voidable contract, restitution
follows. (Sec. 64)

(iii) Effect of expiry of a reasonable time:

The expiry of reasonable time does not affect a void agreement. But a voidable contract cannot
be rescinded after the expiry of a reasonable time.
(iv) Compensation
No compensation is recoverable on non-performance of a void agreement because it is incapable
of conferring any rights or obligations. But the aggrieved party, in case of a voidable contract,
can claim compensation for loss or damage suffered by him.
(v) Collateral Transactions
Transactions collateral to a voidable contract are not effected. The same is the case with void
agreements except where it was void on account of illegality of object or consideration.

(e) Illegal Contract:

The term “Illegal Contract” appears to be a contradiction. Therefore, it is better to use the term
‘Illegal Agreement’ instead. It is an agreement in which either the object or consideration or
both are illegal as defined in Section 23 of the Act. Such an agreement is destitute of legal
effects.
Since an illegal agreement is wider in scope than a void agreement, it is right to say that “all
illegal agreements are void but all void agreements need not be illegal.” An illegal agreement is
void not only between the immediate parties but also renders illegal even the collateral
transactions. On the contrary, if the main agreement is void, the collateral transactions to it are
not affected. Money paid or property delivered under an illegal agreement is not recoverable.
But it need not be so in a void agreement.
(f) Unenforceable Contract
It is a contract which has all the essentials of a contract yet it is not enforceable in law because
of non- compliance of certain legally prescribed formalities such as writing, attestation,
registration, stamping, etc. After removal of these deficiencies, the contract can become
enforceable.
Example:
A makes an oral arbitration agreement with B. This agreement is unenforceable because an
arbitration agreement must mandatorily be made in writing.
2. On the Basis of Formation
(a) Express Contract:
A contract stating its terms in words—whether spoken or written, is said to be an express
contract. There is definite offer and acceptance in words demonstrating the conclusion of a
contract.
(b) Implied Contract
It is a contract which is reasonably inferred from the circumstances, conduct, or course of
dealings between the parties. For example a person who boards a public transport is considered
to have entered an implied contract. Similarly, where the parties continue to transact business
even after the expiry of the existing contract, it may be implied that the new contract is being
continued on the existing terms. It is implied in fact. A contract will not be implied if it would
result in inequity or harm
(c) Quasi Contract
It is not a contract in the strictest legal sense but it resembles a contract. In it, the law imposes
certain obligations on a person on the ground of equity, justice and good conscience. It is not
voluntarily made by the parties but still regarded to be a contract for the purpose of providing
legal remedy. Since the obligations in this category of contract are created by law, it is also
known as ‘implied in law contract’. The Contract Act has described this contract as ‘certain
relations resembling those created by contracts’. For example, where a person finds some goods
belonging to another, it is his quasi legal duty to restore them to the rightful owner.

3. On the Basis of Performance

(a) Executed Contract
It is a contract in which both the contracting parties have performed their respective promises
and nothing remains to be done by either. Example of such a contract is a cash sale. The term is a
misnomer to some extent since the completion of performance by the parties signifies that the
contract does not exist anymore.
(b) Executory Contract
A contract in which something remains to be done by either both the parties or one of them.
Example:
A agreed to sell his car to B for Rs. 30,000. The car was to be delivered by the end of next month
while balance payment was to be made after 10 days of the delivery. It is an executory contract
as both parties have still to perform their respective obligations.

4. On the Basis of Initiation

(i) Unilateral Contract

Where a party initiates a promise without reciprocation from the other party. On the fulfillment
of conditions mentioned in the offer, the initiating party is irrevocably obliged to honour its
promise. Offers of reward fall into the category of unilateral contracts. Thus, the owner of a
missing dog who has given an advertisement to reward the finder of the missing dog, will be
obliged to give the award to the finder. Moreover, his promise will be irrevocable.

(ii) Bilateral Contract

It is a contract in which the offeror and offree mutually exchange promises with one another .
Such contracts are routine. These are made when we go the market to buy groceries, visit the
doctor for consultation, or borrow books from the library.

QUESTIONS
1. How does a contract differ from an agreement.
2. How is a proposal converted into a promise?
3. When is a contract taken to have been validly concluded?
4. Discuss the essential elements of a valid contract?
5. Distinguish between void and voidable contract.
6. Discuss the statement that every contract is an agreement but every agreement is not
a contract.

PROBLEMS
1. A agrees to sell to B, “my white horse for rupees five hundred or rupees one thousand”. Is the
agreement valid?
Ans. No, the agreement is not valid because the terms of the agreement are not certain. It is not
definite as to which of the two prices was to be accepted. The agreement is void for want of
certainty [Section 29]. The instant problem is based on illustration (f) to Section 29.

2. A father promises to pay Rs. 2000 per month as pocket money to his son. He however, does
not honour his promise. Can A’s son enforce this promise against him.
Ans. No. This is a social agreement. (Balfour vs. Balfour)