In this article, we shall be covering only ‘What is a contract and how is made?”
An agreement is any understanding or arrangement reached between two or more parties. A contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law.
A contract means an agreement that is enforceable by law. An agreement consists of reciprocal promises between the two parties. In the case of a contract, each party is legally bound by the promise made by them.
The term “contract” is defined in Section 2(h) of the Indian Contract Act, 1872, as follows:
“An agreement enforceable by law is a contract.”
Thus for the formation of a contract, there must be—(1) an agreement, and (2) the agreement should be enforceable by law.
“Agreement” is defined in Section 2(e) as “every promise and every set of promises forming the consideration for each other”. And a promise is defined as an accepted proposal. Section 2(b) says: “A proposal, when accepted, becomes a promise.”
To form an agreement, the following ingredients are required:
- Parties: There need to be two or more parties to form an agreement.
- Offer/ Proposal: When a person signifies to another his willingness of doing or omitting to do something with a view to obtain other’s assent. [Section 2(a)]
- Acceptance: When the person to whom the proposal is made signifies his assent for the same thing in the same sense as proposed by the offeror. [Section 2(b)]
- Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]
- Consideration: It is the price for the promise. It is the return one gets for his act or omission. [Section 2(d)]
An agreement is, therefore, a promise or set of promises forming consideration for all the parties. [Section 2(e)]
For example, when A makes a proposal to sell his motorbike to B for Rs.10,000 and B accepts his proposal there results from a promise between two persons. Thus, when there is a proposal from one side and the acceptance of that proposal by the other side, it results in a promise. This promise from the two parties to one another is known as an agreement.
“All contracts are agreements but, all agreements are not contracts.”
An agreement is regarded as a contract when it is enforceable by law.” In other words, an agreement that the law will enforce is a contract. The conditions of enforceability are stated in Section 10. According to this section, an agreement is a contract when it is made for some consideration, between parties who are competent, with their free consent, and for a lawful object.
When an offer is made with the intention to create a legal obligation it becomes an offer for entering into a contract. Thus an agreement becomes a contract when there is free consent of the parties, the capacity of the parties to contract, lawful consideration, and lawful object or subject matter (Section 10 of the ICA).
For an agreement to become a contract it must give rise to a legal obligation and if it is incapable of doing so, it is not a contract.
In the case of Balfour v Balfour  2 KB 571, Mr. Balfour promised to pay his wife £30/month as she stayed in England for medical reasons. When he failed to pay, Mrs. Balfour sued him. Her action failed because there was no intention to create a legally binding agreement between Mr. and Mrs. Balfour. A contract cannot be made without proper indication about the legal rights and obligations of the parties to the contract. So, if this were to be a contract then the wife would have had a right to receive payment and the husband would have had the obligation to pay his wife.
Contracts may be classified according to: (i) their subject matter; (ii) their parties; (iii) their form ; (iv) their effect.
In B.P.Refinery (Westernport) Pty. Ltd. v Shire of Hastings (1978) 52 PJLR 20 (PC), the privy-council has laid down five conditions which are to be satisfied for implied terms of the contract. These are: (1) It must be necessary to give business efficacy to the contract. (3) It must be so obvious that “it goes without saying”. (4) It must be capable of clear expression. (5) It must not contradict any express term of the contract.