Important Concepts and Definitions under the Indian Contract Act, 1872: Agreement, Contract, Promise, Proposal, Consideration and the Classification of Contracts

Almost every question in contract law is answered by fitting the facts to a definition. The Indian Contract Act, 1872 supplies most of those definitions itself, in Section 2, and the rest have been supplied by the courts and by commercial practice. This topic collects them in one place: first the definitional chain the Act builds in Section 2, then the classification of contracts by enforceability, by stage of performance, by mode of formation and by the nature of the obligation, and finally the four distinctions that are most often confused. Each definition is stated as the Act states it, with the consequence that follows from it.

Each definition builds on the last, and what is missing names the result

1. The Definitional Chain in Section 2

Section 2 is not a glossary of unrelated terms. Its clauses build on one another in sequence, so that each definition uses the one before it. Reading them in order is the quickest way to see how the Act constructs a contract out of a proposal.

1.1 Proposal or offer

A proposal is a signification of willingness made with a view to obtaining the assent of the other party. Three elements follow from the definition. There must be a signification, so an uncommunicated intention is not a proposal. It must be made to another person, though that person may be the world at large, as in the case of a general offer. And it must be made with a view to obtaining assent, which distinguishes a proposal from a mere statement of intention, a supply of information, or an invitation to treat. A price list, a catalogue, an advertisement of an auction and the display of goods in a shop are ordinarily invitations to treat, and the customer makes the proposal.

1.2 Promise, promisor and promisee

The moment of acceptance converts a proposal into a promise. The person who proposed becomes the promisor and the person who accepted the promisee. In a bilateral contract both parties occupy both roles simultaneously, each being promisor as to his own undertaking and promisee as to the other's. Section 2(c) is therefore read distributively, promise by promise, and not once for the contract as a whole.

1.3 Consideration

Section 2(d) is deliberately wider than the English definition. It includes an act, an abstinence or a promise; it permits consideration to move from the promisee or any other person, so that privity of consideration is not required in India; and it covers something already done, so that past consideration is good consideration here, unlike in England. The one indispensable requirement is that whatever moves must move at the desire of the promisor. An act done voluntarily, or at the desire of a third person, is not consideration, however much it benefits the promisor.

1.4 Agreement and reciprocal promises

An agreement is a promise or a set of promises which form the consideration for each other. Where there are two or more such promises they are reciprocal promises under Section 2(f), and Sections 51 to 58 govern the order in which they must be performed. Reciprocal promises may be mutual and independent, where each party must perform without waiting for the other; mutual and dependent, where one party's performance is conditional on the other's; or mutual and concurrent, where both are to be performed simultaneously.

2. Classification by Enforceability

The most consequential classification is by legal effect. Five categories must be kept apart, and the differences between them decide whether a party can sue, whether the other party can escape, and whether money already paid can be recovered.

2.1 Void agreement and void contract

The distinction turns on timing. A void agreement is stillborn: it was never a contract because an essential of Section 10 was absent when it was made. Agreements by a minor, agreements affected by bilateral mistake of fact under Section 20, and the classes declared void by Sections 24 to 30 fall here. A void contract was born valid and dies later, most commonly through supervening impossibility under the second paragraph of Section 56. The practical difference lies in the intervening period: rights that accrued while the void contract was alive remain effective, whereas nothing ever accrued under a void agreement.

2.2 Void agreement and illegal agreement

Every illegal agreement is void, but not every void agreement is illegal. A wagering agreement is void under Section 30 yet not unlawful, which is why a loan advanced to pay a wagering debt is generally recoverable. An agreement to commit an offence is illegal, and the taint spreads: a transaction collateral to it is also unenforceable. The test is whether the object or consideration falls within Section 23, which covers agreements forbidden by law, defeating the provisions of any law, fraudulent, involving injury to person or property, immoral, or opposed to public policy.

3. Classification by Stage of Performance

• Executed contract. Both parties have completely performed their obligations. Nothing remains outstanding on either side. A cash sale over a counter is executed the moment goods and price change hands.
• Executory contract. Something remains to be done by both parties. An agreement to sell goods next month against payment on delivery is wholly executory.
• Partly executed and partly executory. One party has performed and the other has not, which is the commonest commercial position. Goods delivered on credit produce an executed obligation on the seller's side and an executory one on the buyer's.

4. Classification by Mode of Formation

4.1 Express and implied contracts

Section 9 makes the classification statutory. In so far as a proposal or acceptance is made in words, the promise is said to be express; in so far as it is made otherwise than in words, the promise is said to be implied. Boarding a bus, taking goods from a self-service shelf to the till, and consulting a professional without discussing fees are all implied contracts. The legal effect is identical; only the mode of signification differs, and the difference is one of proof rather than of substance.

4.2 Quasi-contract

Sections 68 to 72 are grouped under the heading 'certain relations resembling those created by contract'. The heading is careful. These obligations arise by operation of law to prevent unjust enrichment and not from any agreement, and the drafters refused to call them contracts for that reason. They cover necessaries supplied to a person incapable of contracting, payment by an interested person of money another is bound to pay, the obligation of a person enjoying the benefit of a non-gratuitous act, the responsibility of a finder of goods, and money paid or a thing delivered by mistake or under coercion.

4.3 Online and electronic contracts

An electronic contract is not a separate legal species; it is an ordinary contract formed through electronic means. Section 10A of the Information Technology Act, 2000 provides that a contract is not unenforceable merely because electronic records were used for the proposal, acceptance or revocation, and Sections 11 to 13 of that Act deal with attribution and with the time and place of despatch and receipt of an electronic record. The forms encountered in practice are the click-wrap agreement, where the user affirmatively clicks acceptance; the browse-wrap agreement, where terms are said to be accepted by continued use, and where the adequacy of notice is often in issue; and the shrink-wrap licence packaged with software.

5. Classification by the Nature of the Obligation

5.1 Unilateral and bilateral contracts

In a bilateral contract each party undertakes an obligation, and the contract is formed when promises are exchanged. In a unilateral contract only one party makes a promise, and the other accepts not by a counter-promise but by performing the act called for. Rewards for the return of lost property, general offers to the public, and prize competitions are the standard examples. The distinction matters for acceptance and for revocation: in a unilateral contract there is no need to communicate acceptance in advance, and Section 8 recognises this by providing that performance of the conditions of a proposal is an acceptance of the proposal.

The Indian counterpart is the line of reward cases beginning with Lalman Shukla v. Gauri Datt, (1913) 11 All LJ 489, where a servant who traced his master's missing nephew without knowing of the announced reward was held not entitled to claim it. Knowledge of the proposal is a precondition of acceptance, because Section 2(b) requires the acceptor to signify assent, and one cannot assent to what one does not know.

6. Classification by Bargaining Position

Two further categories are not defined in the Act but are indispensable in modern practice. A standard-form contract is one whose terms are drawn in advance by one party and offered to all counterparties without negotiation. A contract of adhesion is a standard-form contract in which the weaker party's only choice is to accept the whole or to go without, typically because the supplier holds a monopoly or the service is a necessity. Every contract of adhesion is a standard-form contract; a standard-form contract between commercial equals who could have negotiated is not necessarily one of adhesion. These are treated at length in the dedicated topic on standard-form contracts.

7. The Essential Elements of a Valid Contract

Section 10 collects the requirements, and the sections that follow supply the detail. An agreement becomes a contract if, and only if, all of the following are present.

1. Agreement, that is, proposal and acceptance. Sections 2(a), 2(b), 3 to 9. The acceptance must be absolute and unqualified under Section 7.
2. Intention to create a legal relationship. Not expressly required by the Act, but read into the requirement that there be a promise at all.
3. Free consent. Sections 13 and 14. Consent must be ad idem and not caused by coercion, undue influence, fraud, misrepresentation or mistake, under Sections 15 to 22.
4. Capacity of parties. Sections 11 and 12. Majority, soundness of mind and absence of disqualification by any law.
5. Lawful consideration. Sections 2(d), 23 and 25. Consideration must be present, must move at the promisor's desire, and must be lawful, though it need not be adequate.
6. Lawful object. Section 23. The purpose must not be forbidden, fraudulent, immoral, injurious or opposed to public policy.
7. Certainty of terms. Section 29. An agreement whose meaning is not certain, or capable of being made certain, is void.
8. Possibility of performance. Section 56, first paragraph. An agreement to do an act impossible in itself is void.
9. Not expressly declared void. Sections 20, 24 to 30 and 56 list the classes the Act itself excludes.
10. Compliance with required formalities. The second paragraph of Section 10 preserves every law requiring writing, attestation or registration.

8. The Four Distinctions Most Often Confused

• Agreement and contract. Every contract is an agreement; an agreement becomes a contract only when it satisfies Section 10. Treated in full in the dedicated topic.
• Void and voidable. A void agreement never had legal effect; a voidable contract is fully effective until the party entitled to avoid it does so. Treated in full in the dedicated topic.
• Void and illegal. Both are unenforceable between the parties, but illegality taints collateral transactions while mere voidness does not.
• Void and unenforceable. A void agreement has no legal existence; an unenforceable agreement exists and is valid but cannot be sued upon because of a technical or procedural defect, which may sometimes be cured.

9. Related Topics and Provisions