A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing, though contracts can be made orally. The remedy for breach of contract can be “damages” or compensation of money. In equity, the remedy can be specific performance of the contract or an injunction. Both of these remedies award the party at loss the “benefit of the bargain” or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract, although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.
“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.” From the above definition of promise, it is obvious that an agreement is an accepted proposal. The two elements of an agreement are:
(i) Offer or a proposal; and
(ii) An acceptance of that offer or proposal.
What agreements are contracts? All agreements are not studied under the Indian Contract Act, as some of them are not contracts. Only those agreements which are enforceable at law are contracts. The Contract Act is the law of those agreements which create obligations, and in case of a breach of a promise by one party to the agreement, the other has a legal remedy.
Thus, a contract consists of two elements:
(i) An agreement; and
(ii) Legal obligation, i.e., it should be enforceable at law.
However, there are some agreements which are not enforceable in a law court. Such agreements do not give rise to contractual obligations and are not contracts.
(1) A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, B goes to the restaurant. To his utter surprise A is not there. Or A is there but refuses to entertain B. B has no remedy against A. In case A is present in the restaurant but B fails to turn-up, then A has no remedy against B.
Before entering into a contract, various statements will often be made by one party in order to encourage or induce the other party to enter into the contract. A dispute may later arise as to which of the statements made should be considered a part, or a term, of the contract, and which should be taken as merely pre-contract talk, and therefore not a part or term of the contract. Parties to a contract are bound only by its terms, not by any peripheral statements that may have been made.
The courts can look at evidence of intention by one or other of the parties that the statement should be part of the contract. For example, the longer the interval is between the making of the statement and the reaching of the final agreement and contract, the less likely it is that the statement will be considered to be a term of the contract.
I. CONTRACT & ITS ESSENTIALS
1. What is a contract?
A contract is an agreement enforceable by law.
a. A finds B’s purse and gives it to him. B promises to give A Rs 50/- This is a contract.
b. A supports B’s infant son, B promises to pay A’s expenses in so doing. This is a contract
2. What is an agreement?
An agreement is an arrangement between parties that creates legal obligations between them. Generally an agreement is said to be arrived at when an offer or proposal made by one person is accepted by another, with the intention of creating mutual obligations between them.
3. What is an offer or proposal?
An offer is an indication from one person to another that he is willing to do or refrain from doing a specified act. An offer is the first step in the formation of a contract.
4. What is an acceptance?
An acceptance is the assent to the offer made by the person to whom the offer is proposed. In order to convert a proposal into a promise, the acceptance must
a.be absolute and unqualified.
b.be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted.
There has to be a lawful offer and acceptance which results in an agreement.
There must be intention between the parties to create a legal obligation.
Consideration must pass: Each party to the agreement must benefit from the agreement.
5. What are the essential features of a contract?
The following features are considered to be essential to a contract:
A minimum of two parties.
Therefore, each party must give and get something. Consideration need not be immediate. It can be for something done in the past, present or future. In a contract, each party puts the other party under some obligation or extracts some promise from him or her. The exchange given for the obligation or promise is called consideration. It can be in cash or in kind.
Lawful consideration: Consideration must be lawful. That means the consideration given by one party to another should not be illegal, fraudulent, or opposed to public policy.
Competent parties: the parties to a contract must be competent to contract. For this they must be 18 years old (must have attained majority).
They must be of sound mind and should not be disqualified by law from entering into contracts. This means that, lunatics, drunkards, etc. cannot enter into a valid contract except in special cases. Sound mind means being able to make a rational decision as a normal person would be able to do. It also implies that one should not be in a state of intoxication in any manner.
Free consent: The parties to a contract must agree to enter into a contract freely. This means that they should not be coerced or be under any kind of undue influence, fraud, misrepresentation or mistake while entering into a contract. When consent is given it must specifically relate to the offer. When a person has the capacity to force another to do or not do something and the other person cannot resist that, the first person is said to have undue influence over the second.
The parties cannot enter into a contract which has terms which are contrary to any law. This means that the contract cannot contain terms which are illegal, fraudulent , immoral or opposed to public policy.
Not expressly declared void: No law should clearly ban contract of that particular nature.
Clarity of terms: The terms of the agreement must be clear. If an agreement is unclear it cannot be enforced under law.
Legal formalities to be complied with: Contracts may be either oral or written. However, certain contracts have to be in writing while some contracts have to be written and registered. For example, a contract to sell property has to be written and registered.
6. Do contracts have to be in a particular format?
No. Contracts can be in any format, oral or written. If it is in the written form it can be entered into through the exchange of letters, or the sending of a fax message. It may be also entered into when a person completes an order form, booking tickets etc.
Elements of a valid contract
- Intention to create legal relationship
- Free and genuine consent
- Parties competent to contract
- Lawful consideration
- Lawful object
- Agreements not declared illegal or void
- Certainty of meaning
- Possibility of performance
- Necessary legal formalities
Consideration is what a party gives in return for rights under a contract. It can be money or a promise to do a certain thing.
In negotiations, people either sign a contract that’s binding on them to give or do something, expecting in return that the other party, by signing, has promised also to give or do something.
Both parties expect something from each other. That thing that’s expected is consideration. For example, if one agrees to pay $100, that’s his consideration; and if the other party agrees to deliver a box of certain goods, that’s her consideration
Consideration may be defined as a benefit falling due to a promisor or a detriment incurred by the promises. For e.g., A sells a car to B for Rs. 1.00 lakh. Here consideration for A is Rs. 1.00 lakh and B, the car.
The features of consideration:
i) As consideration is the price paid for an obligation that is undertaken by an offeror, it should be paid or given in the way that the offeror wants. That is, the person offering should do so at his wish. Therefore, if a party or a person does something or abstains from doing something voluntarily or without the consent of the Promisor it shall not be valid consideration.
ii) Consideration can move from the Promisee to any other person and from that person to another.
iii) Consideration must be of some value. It may be in the form of a promise to do or not to do something. This promise should be of some value to the Promisor or to the detriment of the Promisee. It must be real, definite and not vague.
iv) Consideration may be past, present or future. This means that it may be: – the doing or not doing of something (called executed or present consideration).
Something that shall be done or not done in the future (executory or future consideration). Something that has already been done or not done in the past (called past consideration). Past
consideration is valid only if it is given by the Promisee at the desire of the Promisor. For example, B wants A’s motorcycle. A gives it to him while saying that it is consideration for B dropping him to college for a year.
v) Consideration need not be adequate i.e. the value of the consideration need not be proportionate to what is received by the offered. It is sufficient for something of value to pass
from one party to another. Consideration must be real and not vague, illusory, physically impossible, uncertain or ambiguous. For example, A tells B if you drop C to college every day I will reward you. Here reward is vague.
vi) Consideration must be legal. For e.g. A cannot tell B that he will kill D for B, if B drops A to college every day.
State the essentials of a valid consideration.
Desire of the promisor
Consideration may be an act or abstinence
Consideration may be past, present or future
Consideration need not be adequate
Consideration must be real and not illusionary
Consideration must be legal and moral.
When is consideration not necessary in a contract?
Or No consideration, no contract.
Consideration is not necessary in case:
i. Love & affection.
ii. Compensation for voluntary services.
iii. Paying a time-barred debt.
iv. Completed gift.
i) Agreements entered into on account of natural love and affection between the parties do not have to have consideration passing.
ii) Compensation for past voluntary service : This occurs when a person compensates wholly or partly a person who does something voluntarily. This can also occur when a person compensates another for something the other person is legally compelled to do. For e.g. B finds A’s motorcycle which was lost and returns it to him. This is in accordance with the law. A promises to give B Rs.1000/- as a reward. This would be a binding contract.
iii) Promise to pay a time barred debt: When an agreement is entered into under which a person undertakes to pay to his Creditor a sum of money wholly or in part even if the debt is time barred (3 years) it is enforceable. Such agreements should be in writing and signed by the Debtor or his authorised representative).
iv) Gifts: Consideration is not required when a gift is made or given.
v) Agency: No consideration is necessary to create a contract of agency.
A contract without consideration is void.
Consideration is a necessary element of a binding contract. Each party to the agreement must benefit from the agreement. Therefore, each party must give and get something. Consideration need not be immediate. It can be for something done in the past, present or future. In a contract, each party puts the other party under some obligation or extracts some promise from him or her. The exchange given for the obligation or promise is called consideration. It can be in cash or in kind. Consideration must be lawful. That means the consideration given by one party to another should not be illegal, fraudulent, or opposed to public policy.
For a contract to be valid, there must be an exchange of goods and/or services. Because the vast majority of contracts are for sales of some type, consideration usually takes the form of an exchange of money for goods or services.
For consideration to be valid (thus making the contract valid, if all the other requirements for the validity of a contract are met), the things exchanged must be of some legal value. However, a court will generally not inquire into whether or not a particular form of consideration is sufficient. So, if you decide to sell your house for $50, and after the deal is done, realize you’ve made a horrible mistake, you can’t go to court and argue that the sale is invalid, because there was no consideration. The fact that $50 is an absurdly low price for any house is irrelevant, as long as you agreed to the sale freely.
However, if there an agreement truly lacks consideration, the agreement is not a valid contract, and can therefore not be enforced. For example, if you promise to give your house to a friend, for free, with no strings attached, and put the agreement in writing, accompanied by every possible formality, you can change your mind at any time. Your friend cannot sue you for breach of contract, because no contract existed in the first place, as it was unsupported by consideration (your friend did not give or promise you anything in return for your house). However, once you actually transfer ownership of your house, you can’t back out (as with any gift, it becomes the property of the recipient once the transfer is complete), but you could do so any time before the gift occurs.
The requirement for consideration is why you will sometimes hear of very expensive items being sold for very small amounts of money, such as a house or car being sold for $1. These transactions are essentially gifts, but the token consideration is there to ensure that the agreement is legally binding, in case the donor tries to back out. By making the agreement legally binding, the donor shows good faith.
Consideration is considered to be an essential element of a valid contract largely for historical reasons. Because contract law was created to protect the rights and interests of parties to commercial transactions (essentially, its purpose is to ensure that people keep their promises). Commercial transactions always involve some exchange, so it just became an underlying assumption that all contracts would involve an exchange.
Also, when an agreement which is completely unsupported by consideration is breached, the victim of the breach hasn’t really lost anything, since they didn’t give anything up in the first place, so it is not very important for such an agreement to be enforced by a court.
However, if there is a breach of a promise supported by consideration, the victim of the breach has suffered a loss, especially if they have already performed their end of the agreement, and are now getting nothing in return.
Buxani v. Nussbaum, 940 S. W. 2d 350, 352 (Tex App.-San Antonio 1997, no writ); and Hallmark v Hand, 885 S.W.2d 471, 476 (Tex.App.-El
Paso 1994, writ denied): see also McCulley Fine Arts Gallery, Inc. v “X” Partners, 860 S.W.2d 473, 477 (Tex. App. – El Paso, 1993, no writ).
ii See Roark v. Stallworth Oil and Gas Inc., 813 S.W.2d 492,496 (Tex. 1991); and see also Federal Sign v. Texas Southern University, 951 S.W.2d
401,408 (Tex. 1997) rehearing of cause overruled (Oct 02, 1997).
iii Restatement (Second) of Contracts §24 (1981).
iv Restatement (Second) of Contracts §50 (1) (1981).
v United Concrete Pipe Corp. v Spin-Line Co., 430 S.W.2d 360, 364 (Tex. 1968).
vi Antonini v. Harris County Appraisal Dist. 999 S.W.2d 608, 611 (Tex.App.-Houston [14th Dist] 1999, no pet.)
vii Weynand v Weynand, 990 S.W.2d 843, 846 (Tex. App.-Dallas 1999, pet. denied).
viii Copeland v Alsobrook, 3 S.W.2d 598, 604 (Tex. App. – San Antonio 1999, pet. denied).
ix Wiley V. Bertelson, 770 S.W.2d 878,882 (Tex. App.-Texarkana 1989, no writ).
x Gulf Coast Farmers Co-op v. Valley Co-op Oil Mill. 572 S.W.2d 726, 737(Tex. Civ. App. – Corpus Christi 1978, no writ).
Runnells v. Firestone 746 S.W.2d 845, 849 (Tex. App. – Houston [14th Dist.] 1988), writ denied per curiam, 870 S.W.2d 240 (Tex. 1988).
Copeland, 3 S.W.3d at 605
T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex. 1992).
Komet v. Graves, 40 S.W.3d 596, 602 (Tex. App.-San Antonio 2001, no pet.); Hardin Constr. Group, Inc. v Strictly Painting, Inc. 945 S. W. 2d
308, 313 (Tex App. – San Antonio 1997, orig. proceeding): Texas Oil Co. v. Tenneco Inc., 917 S.W.2d 826, 830 (Tex. App.-Houston [14th Dist.]
1994), rev’d on other grounds sub nom. Morgan Stanley & Co., Inc. v. Texas Oil Co., 958 S.W.2d 178 (Tex. 1997).
T.O. Stanley Boot Co., 847 S.W.2d at 221; Scott v. Ingle Bros. Pac., Inc. 489 S.W. 2d 554, 555 (Tex. 1972); Texas Oil Co, 917 S.W.2d at 830;
Komet, 40 S.W.3d at 602.
Texas Oil Co, 917 S.W.2d at 830.
 Restatement (Second) of Contracts §24 (1981).
 United Concrete Pipe Corp. v Spin-Line Co., 430 S.W.2d 360, 364 (Tex. 1968).
 See Roark v. Stallworth Oil and Gas Inc., 813 S.W.2d 492,496 (Tex. 1991); and see also Federal Sign v. Texas Southern University, 951 S.W.2d
 Copeland v Alsobrook, 3 S.W.2d 598, 604 (Tex. App. – San Antonio 1999, pet. denied).
 Weynand v Weynand, 990 S.W.2d 843, 846 (Tex. App.-Dallas 1999, pet. denied).
 Wiley V. Bertelson, 770 S.W.2d 878,882 (Tex. App.-Texarkana 1989, no writ).
 T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex. 1992).
 see also McCulley Fine Arts Gallery, Inc. v “X” Partners, 860 S.W.2d 473, 477 (Tex. App. – El Paso, 1993, no writ).
 Komet v. Graves, 40 S.W.3d 596, 602 (Tex. App.-San Antonio 2001, no pet.); Hardin Constr. Group, Inc. v Strictly Painting, Inc. 945 S. W. 2d