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Nature of Contract – Detailed Notes | CA Foundation
CA Foundation · Business Laws

Nature of Contract

The Indian Contract Act, 1872 — Chapter 2, Unit 1

Detailed Study Notes with Examples, Case Laws & Section References

Section 2(a) – 2(j) & Section 10–11 Offer · Acceptance · Essentials · Types Communication & Revocation

Contents

  1. What is a Contract? — Key Definitions
  2. Essentials of a Valid Contract (Section 10)
  3. Classification / Types of Contracts
  4. Offer (Proposal) — Section 2(a)
  5. Acceptance — Section 2(b)
  6. Communication of Offer & Acceptance — Section 4
  7. Revocation of Offer & Acceptance — Section 5 & 6
  8. Important Case Laws
  9. Key Distinctions (Comparison Tables)
1

What is a Contract? — Key Definitions

Proposal + Acceptance = Promise → Promise + Consideration = Agreement → Agreement + Enforceability by Law = CONTRACT

Sec 2(h) Contract

An agreement enforceable by law is a contract. Two essential components: (i) an Agreement, and (ii) Enforceability by law.

Sec 2(e) Agreement

Every promise and every set of promises forming the consideration for each other.
Agreement = Offer + Acceptance + Consideration

Sec 2(b) Promise

When the person to whom a proposal is made signifies his assent, the proposal is accepted, and an accepted proposal becomes a promise.

Sec 2(d) Consideration

When, at the desire of the promisor, the promisee has done / abstains from doing / promises to do something — that act, abstinence or promise is called consideration. Also called quid pro quo (something in return).

Example
A agrees to sell his books to B for ₹100. B’s promise to pay ₹100 is consideration for A’s promise, and A’s promise to sell is consideration for B’s promise to pay.

Agreement vs. Contract — Key Difference

BasisAgreementContract
MeaningPromise + ConsiderationAgreement + Legal Enforceability
ScopeWider — includes social & legalNarrower — only legally enforceable
Legal ObligationMay not create legal obligationNecessarily creates legal obligation
NatureAll agreements are NOT contractsAll contracts ARE agreements
Social Agreement (Not a Contract)
Father promises son ₹500 pocket money monthly. Later refuses. Son CANNOT recover in court — it was a social agreement, not a contract.
Status Obligations — Outside Contract Act: Obligation to maintain wife/children, court orders — these are “status obligations” and are outside the scope of the Indian Contract Act.
2

Essentials of a Valid Contract

Sec 10 “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 expressly declared void.”

Given by Section 10
  • Offer & Acceptance (Agreement)
  • Free Consent
  • Competency of Parties
  • Lawful Consideration
  • Lawful Object
  • Not expressly declared Void
Not in Sec 10 — But Also Essential
  • Two Parties
  • Intention to create legal relationship
  • Fulfilment of legal formalities
  • Certainty of meaning
  • Possibility of performance
1

Two Parties

One cannot contract with himself. Minimum two parties — identity must be ascertainable. (State of Gujarat v. Ramanlal S & Co.)

2

Intention to Create Legal Relations

Social/domestic agreements (husband-wife, parent-child) have no legal intention → not contracts. Balfour v. Balfour

3

Free Consent Sec 13-14

Parties must agree on the same thing in the same sense (consensus ad idem). Not caused by coercion, undue influence, fraud, misrepresentation, or mistake.

4

Capacity of Parties Sec 11

Must be: (a) Age of majority (18+), (b) Sound mind, (c) Not disqualified by law. Minors, lunatics, drunkards are incompetent.

5

Lawful Consideration Sec 23

Must not be forbidden by law, fraudulent, immoral, or opposed to public policy.

6

Lawful Object Sec 23

Object must not be illegal, immoral, or against public policy. Contract is void if object is unlawful.

7

Not Expressly Declared Void Sec 24-30, 56

Agreements in restraint of trade, marriage, legal proceedings etc. are void even if all other essentials are met.

8

Certainty of Meaning

Agreement must be certain and not vague. “100 tons of oil” — what kind? → Void for uncertainty.

9

Possibility of Performance

“A agrees to discover treasure by magic” — impossible → cannot be enforced. Agreement to do impossible act = void.

10

Legal Formalities

Some contracts require writing + registration (e.g., immovable property, insurance contracts). Non-compliance = unenforceable.

3

Classification / Types of Contracts

On Basis of Validity
  • Valid: All essentials present
  • Void Sec 2(j): Ceases to be enforceable
  • Voidable Sec 2(i): Enforceable at option of one party
  • Illegal: Forbidden by law; also avoids connected contracts
  • Unenforceable: Good in substance but technical defect
On Basis of Formation
  • Express: By words (spoken/written)
  • Implied/Tacit: By conduct (boarding a bus)
  • Quasi Contract: Law creates obligation even without real contract
  • E-Contract: Formed electronically
On Basis of Performance
  • Executed: Both parties performed
  • Executory: Both yet to perform
  • Unilateral: Only one party yet to perform
  • Bilateral: Both parties still to perform

Void Contract vs. Voidable Contract — Key Distinction

BasisVoid ContractVoidable Contract
MeaningCeases to be enforceable by law [Sec 2(j)]Enforceable at option of one party [Sec 2(i)]
EnforceabilityCannot be enforced at allEnforceable only at option of aggrieved party
CauseChange in law / circumstances beyond parties’ controlConsent obtained by coercion/fraud/undue influence
PerformanceCannot be performedCan be performed if aggrieved party does not rescind
RightsNo legal remedyAggrieved party can rescind within reasonable time

Void Agreement vs. Illegal Agreement

BasisVoid AgreementIllegal Agreement
ScopeNot necessarily illegalAlways void
NatureNot forbidden under lawForbidden by law
PunishmentNo punishment to partiesParties liable for punishment
Collateral contractsMay be validCollateral contracts also become void
Key Rule: All illegal agreements are void. But NOT all void agreements are illegal. Both are void ab initio (from the beginning).

When does a contract become Voidable? (3 Situations)

Situation 1
Consent obtained by coercion, undue influence, fraud, or misrepresentation — contract is voidable at option of the aggrieved party.
Situation 2
One party prevents performance by the other — contract is voidable at option of the party who was prevented.
Situation 3
Promisee cannot perform within a specified time — contract is voidable at option of the promisee.
4

Offer (Proposal) — Section 2(a)

Definition [Sec 2(a)]: “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.”

Classification of Offers

General Offer

Made to the world at large. Anyone can accept. (Carlill v. Carbolic Smoke Ball Co.)

Specific Offer

Made to a definite, identifiable person. Only that person can accept.

Cross Offer

Two parties make identical offers to each other simultaneously — does NOT constitute acceptance; no contract formed.

Counter Offer

Offeree imposes conditions modifying the original offer. Original offer lapses; counter offer is a new offer.

Standing / Open / Continuing Offer

Offer to public at large, open for acceptance over a certain period. (E.g., tender for supply of goods)

Essentials of a Valid Offer

  • Must be made with intent to create legal relationship
  • Terms must be certain, definite and unambiguous
  • Must be communicated to the offeree
  • Must be made with a view to obtaining assent
  • May be conditional
  • Must NOT contain a term the non-compliance of which amounts to acceptance (silence cannot = acceptance)
  • May be general or specific, express or implied
  • Must be distinguished from an Invitation to Offer

Offer vs. Invitation to Offer

Invitation to Offer (Invitation to Treat): Not an offer itself, but an invitation for others to make offers. Examples: Goods displayed in shop windows with price tags, advertisements, catalogues, auction bids by the public, prospectus of a company. The shopkeeper’s display is an invitation — the customer’s act of bringing goods to the counter is the offer.
5

Acceptance — Section 2(b)

Definition [Sec 2(b)]: “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.”

Legal Rules for Valid Acceptance

R1

By Whom

Given ONLY by the person to whom the offer is made. A general offer can be accepted by anyone.

R2

Absolute & Unqualified

Must be unconditional — any condition = counter offer, which rejects the original offer.

R3

Must be Communicated

Mere mental acceptance is not enough. Must be communicated by act, omission, or conduct.

R4

In Prescribed Mode

If offeror prescribes a mode, acceptance must follow that mode. Otherwise, usual/reasonable mode.

R5

Silence is NOT Acceptance

Mere silence or inaction does NOT constitute acceptance unless conduct clearly implies it.

R6

Acceptance by Conduct

[Sec 8] Performance of conditions of a proposal = acceptance. (Boarding a bus, dropping coin in machine)

Landmark Case — Carlill v. Carbolic Smoke Ball Co.
Carbolic Smoke Ball Co. advertised that they would pay £100 to anyone who contracted influenza after using their medicine. Mrs. Carlill used it and contracted influenza. Held: She was entitled to £100. Key principles laid down: (i) offer must contain a definite promise; (ii) offer may be to public at large; (iii) performance of the act = acceptance even without prior communication.
Acceptance by Conduct — Example
A subscribed to a weekly magazine for 1 year. After expiry, the company continued sending it for 5 years. A continued to use the magazine but denied payment. Held: A’s continued use = implied acceptance → A liable to pay.
6

Communication of Offer & Acceptance — Section 4

Modes of Communication [Sec 3]: (a) By any Act (written/spoken words, conduct), (b) By Omission (intentional abstinence), (c) By Conduct

When is Communication Complete? [Sec 4]

Communication of Offer

Complete when it comes to the knowledge of the offeree. (Not merely when letter is received — must be read!)

A posts offer on 10 March → B receives letter on 12 March but reads it on 15 March → Communication complete on 15 March.

Communication of Acceptance — As against Proposer

Complete when acceptance is put into course of transmission (e.g., letter posted) — out of power of acceptor to withdraw.

Communication of Acceptance — As against Acceptor

Complete when acceptance comes to the knowledge of the proposer (i.e., when proposer reads/receives it).

Contract through Post vs. Telephone

Contract Through Post

  • English Law: Once acceptance posted, contract concluded. Acceptance irrevocable.
  • Indian Law: Acceptor CAN revoke acceptance before the letter reaches the offeror (revocation telegram must arrive before/with acceptance letter).

Contract Over Telephone

  • Same rules as face-to-face contract — instantaneous communication.
  • Contract formed when offer is accepted AND heard by offeror.
  • If phone goes dead, acceptor must re-confirm.
Communication of Revocation [Sec 4]: Complete — (i) as against the person making it: when put into course of transmission; (ii) as against the person receiving it: when it comes to his knowledge.
7

Revocation of Offer & Acceptance — Sections 5 & 6

Revocation of Proposal [Sec 5]: A proposal can be revoked at any time BEFORE the communication of its acceptance is complete as against the proposer (i.e., before the letter of acceptance is posted).
Revocation of Acceptance [Sec 5]: Acceptance can be revoked at any time BEFORE the communication of acceptance is complete as against the acceptor (i.e., before the letter of acceptance reaches the offeror).

Modes of Revocation of Offer [Sec 6]

1

By Notice

Offeror communicates notice of revocation before acceptance.

2

By Lapse of Time

Acceptance not given within specified/reasonable time. (Ramsgate Victoria Hotel v. Montefiore)

3

Non-Fulfilment of Condition Precedent

Offeree fails to fulfil a condition before acceptance — offer lapses automatically.

4

Death or Insanity of Offeror

Offer lapses IF the fact of death/insanity comes to the knowledge of acceptor before acceptance.

5

Counter Offer

Making a counter offer rejects and revokes the original offer.

6

Subsequent Illegality

If the subject matter of the offer becomes illegal after making the offer but before acceptance, the offer lapses.

Revocation Example [Sec 5]
A proposes (by post) to sell his house to B. B accepts by post. A may revoke at any time BEFORE B posts the letter. B may revoke at any time BEFORE the letter of acceptance reaches A.
8

Important Case Laws

Balfour v. Balfour (1919)
Facts: Husband promised wife ₹X/month maintenance while abroad. Failed to pay. Held: Wife could NOT recover — social/domestic agreement, no intention to create legal relations.
Carlill v. Carbolic Smoke Ball Co. (1893)
Facts: Company advertised £100 reward for anyone contracting flu after using their product. Mrs. Carlill did so. Held: She was entitled to £100 — general offer, performance = acceptance.
Ramsgate Victoria Hotel Co. v. Montefiore (1866)
Facts: Applied for shares in June. Allotment made in November. Held: NOT bound — offer lapsed as acceptance not made within a reasonable time.
State of Gujarat v. Ramanlal S & Co.
Facts: On dissolution of partnership, assets divided among partners. Sales tax officer tried to tax this. Held: NOT a sale — partners being joint owners cannot be both buyer and seller; one cannot contract with himself.
9

Quick Reference — Section Numbers

Key Definitions

  • Proposal — Sec 2(a)
  • Promise — Sec 2(b)
  • Promisor/Promisee — Sec 2(c)
  • Consideration — Sec 2(d)
  • Agreement — Sec 2(e)
  • Void Agreement — Sec 2(g)
  • Contract — Sec 2(h)
  • Voidable Contract — Sec 2(i)
  • Void Contract — Sec 2(j)

Formation Rules

  • Essentials — Sec 10
  • Capacity — Sec 11
  • Free Consent — Sec 13
  • Coercion — Sec 15
  • Undue Influence — Sec 16
  • Fraud — Sec 17
  • Misrepresentation — Sec 18
  • Mistake — Sec 20–22
  • Unlawful Consideration — Sec 23

Communication & Revocation

  • Acceptance by conduct — Sec 8
  • Communication [how] — Sec 3
  • Communication [when] — Sec 4
  • Revocation (time) — Sec 5
  • Revocation (modes) — Sec 6
CA Foundation · Business Laws · Nature of Contract — The Indian Contract Act, 1872 · Detailed Study Notes