Definition of contract

Many different, and to a certain extent inconsistent, definitions of contracts have been given by
different authors and judges.

Blackstone defines a contract as "An agreement, upon sufficient consideration to do, or not to
do, a particular thing." This definition has been followed by Kent, and by Chief Justices Marshall
and Taney of the United States Supreme Court
According to Pollack- “Every agreement and promise enforceable at law is a contract”

According to Salmond- “A contract is an agreement creating and defining obligation between

two or more persons by which rights are acquired by one or more to acts or forbearance on the
part of others”

According to Sir William Anson-“A legally binding agreement between two or more persons by
which rights are acquired by one or more to acts or forbearance on the parts of others”

Statutory definition-The Indian Contract Act, 1872 defines the term “Contract” under its section 2
(h) as “An agreement enforceable by law”. In other words, we can say that a contract is anything that
is an agreement and enforceable by the law of the land.

The general principles of contracts can be studied under the following three broad heads:

• Formation o f Contracts

• Discharge of Contracts

• Remedies in the Event of Breach o f Contracts

Formation of Contracts

The term contract means, an agreement enforceable by law. Here 'agreement'

means 'every promise and every set of promises forming the consideration for each
other.' And a promise is defined as, a proposal, when accepted, becomes a promise.?
This is another way of saying that an agreement is an accepted proposal. The process of
definitions comes down to this: a contract is an agreement; an agreement is a
promise and a promise and a promise is an accepted proposal. Thus, every agreement,
in its ultimate analysis, is the result of a proposal from one side and its acceptance
by other A question arises in our mind, what agreements are contract? The answer to
this would be agreements which are enforceable by law are qualified to become contracts.
Further, we can say that all agreements are contract if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a
lawful obj ect, and are not hereb y expressly declared to be void.

From above para we can conclude that, to form a contract we require some essentials
ingredients. An agreement becomes a contract when the following conditions are
satisfied:

 Agreement (Offer and Acceptance)

 Capacity

 Free Consent

 Consideration and

 La wful Obj e ct

S. 2(h) of the ICA says that ‘an agreement enforceable by law is a contract’. S. 2(e), ICA
provides the definition of agreement as ‘every promise and every set of promises forming
consideration for each other’. S. 2(b), ICA defines promise as, ‘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 these definitions, it is obvious that a contract is an
agreement; an agreement is a promise; and, a promise is an accepted proposal. Hence, every
contract, in its ultimate analysis, is the result of a proposal from one side, and its acceptance by
the other. As per S. 2 (h) o f the ICA, a contract consists of two elements: i. an agreement; and ii.
the agreement should be enforceable by law.

Essentials of a Contract (S. 10) S. 10 of the ICA provides for the elements which are essential in
order to constitute a valid contract. It reads as follows:

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

An agreement

S. 2 (e) of ICA- to constitute a contract there must be an agreement. An agreement comprises

two elements-—‘offer’ and ‘acceptance’.

The term 'offer' or 'proposal' is defined under Section 2(a) of the Act, as follows:

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.

And according Section 2(b) of the Act,

When the person to whom the proposal is made signifies his assent
t heret o, t he propos al i s sai d t o be accept ed. A proposal, when
accepted, becomes a promise

The party making the offer is called the proposor (offeror), and the party to whom the offer is
made is called the proposee (offeree). Thus, there are fundamentally two parties to an agreement.
There must be consensus-ad-idem (meeting of minds),
An agreement is something which is consisting of offer, acceptance and consideration.
For example, A promises to deliver his watch to B and in return B promises to pay a
sum of Rs. 5000/ - to A. There is said to be an agreement between A and B. Agreement
are of four kinds,

 Valid (Contract) —It is an agreement or set of promises giving rise to

obligations which can be enforce or are recognised by law.

 Voidable—An agreement which is enforceable by law at the option of one or

more of the parties thereto, but not at the option of the party.
 Void — An agreement not enforceable by law

 Illegal — Agreements which are illegal in the sense that the law forbids the
very act.

After acceptance of a proposal, the proposal becomes a promise,' and the person making the
proposal is called the ‘promisor’ and the person accepting the proposal is called the ‘promisee’

Capacity to contract (Ss 11- 12):

Section 11 of the Indian Contract Act says, every person is competent to contract who is
of the age of majority according to the law to which he is subject, and who is sound
mind and is not disqualified from contracting by any law to which he is subject. If we
analyze the above provision negatively, we come across list of persons who are
incompetent to make contract. Following are the persons who are not having capacity to
form contract:The parties to a contract must be competent to enter into a contract. As stated in
S .ll of the ICA, every person is competent to contract if he

(i) is of the age of majority,

(ii) is of sounmind, and
(iii) is not disqualified from contracting by any law to which he is subject.
 Accordingly, there may be a flaw in capacity of parties to the contract, and the flaw in capacity
may be because of minority, lunacy, idiocy, drunkenness or status. If a party to a contract
suffers from any of these flaws, the agreement is, as per the general rule, void.

The age of majority is eighteen, except when a guardian of minor's person or property
has been appointed by the court, in which case it is twenty one. As per Section 10 of
the Act the parties to a contract must be competent and Section 11 of the Act declares
that a minor is not competent to make contract. Neither of the sections makes it clear
that whether the minor's agreement is void or voidable. It was the Privy Council in
Mohori Bibi v. Dharmodas Ghosh held minor's contract is void ab initio. Sir Lord North
observed:

Looking at Section 11 their Lordships are satisfied that the Act makes it
essential that a contracting parties should be competent to contract and
expressly provides that a person who by reason of infancy is incompetent
to contract cannot make a contract within the meaning of the Act. The
question whether a contract is void or voidable presupposes the
existence of contract within the meaning of the Act, and cannot arise in
the case of an infant.

Further a minor cannot ratif y his contract on attaining age of majority. Whatever
contract made during infancy such contract shall be deemed as void ab initio. The only
contracts which are absolutely binding on a minor are contracts for necessaries. Apart
from contracts for necessaries and contracts of apprenticeship, education and service,
the general rule at common law is that a minor's contracts are voidable at his option, i.e.
not binding on the minor but binding on the other party

It should be for a lawful consideration s. 2 (d). 10, 23. 25]:

Every agreement must be supported by consideration from both sides, if it is to be enforceable

by law. Consideration is the price for which the promise of the other contracting party is bought.
Nevertheless, this price need not be in terms of money. If the promise is not supported by
consideration, the promise will be nudum pactum (a bare promise) and is not enforceable at law.
Furthermore, the consideration must be real and lawful.

Discharge of Contracts

After the discussion of formation of a contract, the next stage is fulfillment of the
intention of the parties. When the object is fulfilled, the liability of either party under
the contract comes to conclusion. The contract is then said to be discharged. But
'performance' is not the only way in which a contract is discharged Discharge of a
contract means termination of the contractual relationship between the parties. A contract is said
to be discharged when it ceases to operate, i.e. when rights and obligations created by it come to
an end

. A contract can be discharged in following modes:

 By Performance; [Sections 31-67]

 By Impossibility of Performance; [Section 56]

 By Agreement; [Sections 62-67] and

 Of By breach [section 39&73]

Performance of a Contract

Performance means doing of that which is required by the contract. Discharge by performance
takes place when the parties to the contract fulfill their obligations arising under the contract
within the stipulated/ reasonable time and in the manner prescribed by the contract. However, if
only one party performs his obligations, he alone is discharged and not the other party. The party
so discharged can bring an action against the other, who is guilty of breach. Performance can be
either:

(i) Actual or
(ii) attempted.

Actual Performance- In actual performance the parties to a contract have actually performed
their promises. They have done what they had promised each other to do under the contract.
They have fulfilled all their obligations under the contract. As a result the contract comes to an
end.

Illustration- On Monday Mala offered to sell her car for rupees thirty thousand to Sweetie and
Sweetie agreed to buy the car and pay in cash by Friday evening. On Friday evening Sweetie
paid rupees thirty thousand in cash to Mala and Mala gave the car to Sweetie. Thus the contract
came to an end by discharge of contract.

Attempted Performance- In attempted performance one party offers to perform what he/she
had promised but the other party no longer wants him/ her to perform. The party which is ready
to carry out its obligation is excused from performing and the contract is discharged. However it
can sue the other party for breach of contract.

Illustration - On Monday Mala offered to sell her car for rupees thirty thousand to Sweetie and
Sweetie agreed to buy the car and pay in cash by Friday evening. On Friday Sweetie refused to
buy the car. Hence this was an attempted performance. The promisor Mala offered to execute her
promise but Sweetie refused to buy the car. Thus Mala can sue Sweetie for breach of contract.

The general rule is that a party to a contract must perform exactly what he undertook to
do. Section 37 of the Act says, the parties to a contract must either perform, or offer to
perform, their respective promises, unless such performance in dispensed with or
excused under the provision of this Act, or of any other law. Further it states that,
promises bind the representative of the promisor in case of the death of such promisors
before performance, unless a contrary intention appears from the contract. The
parties to contract have a duty to, perform or offer to perform.

Various High Courts while interpreting S.37 held that the proviso to it maintains that the
promise binds the representatives. In the case of Basanti Bai v. Prafulla Kumar Routral [(2006)
Cut LT 686 (Ori)] Cuttack High Court held that “if the contract is legal, and enforceable, then
even if one of the parties to the contract dies leaving no legal heir, the persons, who acquire
interest over the subject- matter of the contract through that deceased party would be bound by
the contract and specific performance can be enforced against such persons.”

Offer of performance: this aspect is looked into under S.38 of the Indian Contract Act. If the
promisor ‘offers’ to perform his obligation under the contract to the promise, this offer is then
termed ‘tender of performance’. This then, has to be accepted by the promisee, if the promisee
doesn’t accept the offer, then the promisor will not be responsible for any non-performance. It
entitles him to sue the promisee for breach of contract. It can be said that a tender of performance
is equivalent to performance. For example, in case of Food Corporation of India v. Surana
Commercial Co (2003) 8 SCC 636 where the obligation of a contracting party was for
conversion of arhar, whole pulse into dal and the work was completed and accepted by the other
party, the obligation of the contractor came to an end.

The tender of performance in order to be termed as fulfilled must comply with the following
conditions:

1. The tender of performance must be unconditional.

This is mentioned in S. 38(1) of the Contract Act. A tender is said to be conditional when it is not
in accordance with the terms of the contract.

2. The tender must be made at a proper time and place, and under such circumstances that
the person to whom it is made may have a reasonable opportunity of ascertaining that the
person by whom it is made is able and willing there and then to do the whole of what he
is bound by his promise to do.
In case of Arunachela Chetty v. Krishna Iyer [90 IC 481], held that the tender must be made
within the time and at the place specified as in the contract. If so made, the promisor is under no
further responsibility, if the tender is not accepted. This principle was first established in the case
of Startup v. Macdonald in which, the defendant bought of the plaintiff ten tons of linseed oil to
be delivered within the last 14 days of the month of March. The plaintiff tendered on the last of
the 14 days at 9 in the night. The defendant refused to accept owing to the lateness of the hour.
He was held liable for the breach as the jury found out that, though the hour was unreasonable,
yet there was time for the defendant to have taken in and weighed the goods before midnight. He
should, therefore have accepted the tender and “then no doubt, the contract would have been
literally performed”.

3. The tender must be made in such a manner that the other party has an opportunity to
determine whether the person making the tender is able and willing to his obligations
under the contract. In the case of Alcon Constructions v. Board of Trustees [AIR 1982
Goa 9] it was held that a tender made to any one of the promisees’ has the same legal
consequence as a tender to all of them.

By whom the Contract must be Performed

Section 40 of the Act says, if it appears from the nature of the case that it was the
intention of the parties to any contract that any promise contain in it should be
performed by the promisor himself, such promise must be p e r f o r m e d b y t h e
p r o m i s o r . In o t h e r c a s e s , t h e p r o m i s o r o r h i s representative may employ a
competent person to perform it.

It means that if the contract is one which is based on personal confidence, or involves
the exercise of personal skill, like painting, dancing, singing, marrying or writing a
book, etc., it would be apparent that he intention of the parties is that it should be
performed by the promisor himself and nobody else. E.g. if A promises to paint a
picture for B, A must perform this promise personally. On the other hand, if the contract
is not of a above kind stated above, i.e. it does not involve the exercise of personal skill,
the promisor or his representatives may employ a competent person to perform
the same.

Substituted performance- this is also known as ‘vicarious performance’. In the case of Legh v.
Lillie [(1860) 6 H & N. 165] the promisor in the absence of waiver cannot substitute for the
agreed performance anything different, even though the substituted performance might appear to
be better than, or at least equivalent to, the agreed performance. Sec. 40 and Sec. 41 of the Indian
Contract Act deal with this aspect. In Davies v. Collins [1945] All ER 247] it was held that If
there was a personal performance was intended then, the contract has to be performed by the
promisor himself. He cannot delegate the performance to any other person. This is general in
cases where in the personal skill of the promisor is required.The nature of promise is itself an
indication whether the promisor has to perform it personally or not.In the matter above
mentioned, if the promisor dies, then the contract cannot be enforced against his legal
representatives nor can they enforce the promise.

Joint Promises

According to Section 42 joint promisors must, during their joint lives, fulfill the
promise. And if any of them dies, his representatives must, jointly with the surviving
promisors, fulfill the promise and so on. On the death of the last survivor, the
representatives of all of them must fulfill the promise. But this is subject to any
private arrangement between the parties. They may expressly or impliedly prescribe a
different rule.

In the case of Mukund Das Raja Bhagwan Das v. State Bank of Hyderabad [(1970) 2 SCC
766] it was held that when a joint promise is made and there is no express agreement to the
contrary, the promisee may compel any one or more of the joint promisors to perform the whole
of the promise. And a joint promisor, who has been compelled to perform the whole of the
promise, may require the other joint promisors to make an equal contribution towards the
performance unless there is a different intention cropping up from the agreement. If any of the
promisors makes a default in such contribution, the remaining joint promisors must bear the
deficiency in equal shares.In England, in the case of a joint contract only a single cause of action
can exist can be sued only once, as held in case of R v. Hoare [(1844) 13 M& W 494]But the
case in India is that, Sec. 43 of the Contract Act allows an action to be brought against any one
of the joint promisors without impleading others as defendants. And there is no bar on the point
that if creditor sues one joint promisor, can he sue the others at a later point? The answer is that
a subsequent suit against other promisors should be allowed to proceed as answered in case of
Mohd Askari v. Radhe Ram Singh [(1900) 22 All 307]

Section 43 of the Act lays down three rules for joint promisors:

 Firstly, when a joint promise is made, and there is no express agreement to

the contrary, the promisee may compel anyone or more of the joint promisors
to perform the whole of the promise.

 Secondly, a joint promisor who has been compelled to perform the whole of the
promise, may require the other joint promisors to make an equal
contribution to the performance of the promise, unless a different intention
appears from the agreement.

 Thirdly, if anyone of the promisors makes a default in such cont ri but i on,
t he rem ai ni n g j oi nt prom i sors m ust be ar the deficiency in equal shares.

Under S.44 of the Contract Act, the creditor is conferred upon the right to release anyone of
the joint promisors form his liability and this does not discharge the others from their
liability. English Law takes a stand which is contrary to this view. Under it discharge of one
joint promisor amounts to a discharge of all, unless the creditor expressly preserves his rights
against them.

Time and Place of Performance

Sections 46-49 provide for some rules regarding the time and place of performance
of a contractual obligation. They may be summarized as follows:

 Where no time for performance is specified and the promisor is to perform his
promise without application by the promisee the performance must be done
within a reasonable time.

 Where a promise is to be performed on a certain day and the performance is

to be done without application by the promisee, the promisor may perform it at
any time during the usual hours of business on such day and at the place at
which the promise ought to be performed.

 If the date of performance is fixed but the promisee is bound to apply for
performance he must apply for performance at a proper place and within the
usual hours of business.

 Where no place of performance is fixed and the promisor is bound to perform

without application by the promisee, the promisor is bound to apply to the
promisee to fix a reasonable place for performance and to perform it at that
place.

TIME AND PLACE FOR PERFORMANCE:

According to sec. 46 of Indian contract act, when no time for performance is specified in the
contract, it must be done within a reasonable time. In case of in case of Hungersford Investment
Trust Ltd v. Haridas Mundhra [(1972) 3 SCC 684] it held that, What is a reasonable time is in
each particular case, a question of fact. Unreasonably long delay cannot be regarded as
reasonable. As per s.47, In a contract where in the date of performance is fixed, it must be
performed during the usual business hours of the day and at the place where such a performance
ought to be performed. When a promise has to be performed within a certain time, it must be
performed on any day before the lapse of that time. If the promisor brings the goods after the
business hours and they are not received, it cannot be said that the promise has been performed.

Under s.49, When a promise is to be performed and no place is fixed, it is the duty of the
promisor to apply to the promisee to appoint a reasonable place for the performance of the
promise, and to perform it at such a place. In the case of L.N.Gupta v. Tara Mani where in a
promissory note executed at Bangalore stated that it would be payable at Bangalore or at any
place in India. The payee settled in New Delhi and demanded payment there. It was held that
under Sec.49 it is the duty of the debtor to seek his creditor and to pay him there. The time and
manner of performance of any promise can be sanctioned by the promise under s.50.

Reciprocal promises:

As per Promises which form the consideration or part of the consideration for each other are
called reciprocal promises. When reciprocal promises have to be simultaneously performed, the
promisor is not bound to perform unless the promisee is ready and willing to perform his promise
under s.51. In Hashman v. Lucknow Improvement Trust [(1927) 101 IC 874] wherein the
defendant had to pay a certain sum for levelling charges of the land; the question was that
whether the amount had to be paid before the levelling or after the levelling. The Hon’ble
Allahabad High Court held that “in ordinary course of business, work is not usually paid for
before it is done. It is the custom in some cases for payment to be made in instalments as the
work progresses but the person for whom work is done is not expected to pay the entire cost in
advance without an express agreement to that effect.” This ruling emphasises that the order in
which reciprocal promises must be performed may be fixed by the contract and the order so fixed
must be followed. In case, if there is no such order present, then they will have to be performed
in a manner which the nature of transaction requires them to be.

Under s.52, Liability of party preventing the other one from performance is that the agreement
becomes voidable at the option of the party so prevented and he is entitled to compensation from
the other party for any loss which he might sustain in consequence of the non-performance of the
contract.In the case Har Prasad Choubey v. Union of India [ (1973) 2 SCC 746]

wherein a bidder to whom a coal mine was knocked down was allowed to have refund of his
deposit when the coal commissioner refused to permit him to take coal to U.P., any such
restriction being not present in the terms of the auction. This principle is embodied in Sec. 53 of
the Contract Act. Effect of a party’s default is laid down in the case of Nathulal v. Phoolchand
](1969) 3 SCC 120]
in which the plaintiff was the owner of a ginning factory constructed on an agricultural land and
nominally held in the name of his brother. He sold the factory to the defendant who paid half the
price at once and was put in possession, the balance being payable on a fixed date. The buyer
defaulted in paying up on that date and the seller rescinded the contract and brought an action for
possession.The Hon’ble court held that, if the obligations have to be performed in an order as
under the contract, one of the parties to the contract cannot require compliance with obligation
by the other party without in the first instance performing his own part of the contract which in
the sequence of obligations is to be performed by him earlier. An offer of payment before the
time fixed is not valid performance so as to demand performance from the opposite side as held
in case of Vidya Vati v. Devi Das (1977) 1 SCC 293.

Appropriation of Payment

The underlying principle of Section 59 is that where there are several debts owing to one
person, any payment made by the debtor either with an express intimation or under
circumstances from which intimation may be implied, must be applied to the
discharge of the debt in the manner intimated or which can be implied from the
circumstances.

In England, 'it has been considered a general rule since Clayton's Case(Devaynes v. Noble,
(1816) 1 Mer 57) that when a debtor makes a payment he may appropriate it to any debt he
pleases, and the creditor must apply it accordingly'. Where several distinct debts are
owed by a debtor to his creditor, the debtor has the right when he makes a payment to
appropriate the money to any of the debts that he pleases, and the creditor is bound, if he
takes the money, to apply it in the manner directed by the debtor. If the debtor
does not make any appropriation at the time when he makes the payment, the
right to appropriation devolves on the creditor.
As per Section 59 the payment is to be appropriated according to the following
rules:

i. Appropriation as desired by the Debtor

ii. Appropriation by the Creditor