Definition and types of contract

Author: Mallika Kapoor

Definition of Contract:

In our everyday lives, from dawn till dusk, all of us enter into a variety of contracts. These contract making activities of humans have only further increased with the increasing trade, commerce, industry, and technological advancements and here we are today living in this electronic age of digital signatures and E-Contracts. Therefore, it wouldn’t be wrong to say that living in a modern society would be impossible if the law did not recognize this contract making power of the person and the same prompted Roscoe Pound to make his celebrated observation that “Wealth, in a commercial age, is made up largely of promises”.

Due to such an inevitable nature of agreements and contracts in our every life, the study of the Law of Contract is indispensable to the study of law. Therefore, it is important for us to firstly look at the various definitions of the term Contract that have been promulgated by various prominent Jurist and Legal luminaries who have interpreted it in accordance with their own understanding of the term.

According to Salmond, “A contract is an agreement creating and defining obligations between the parties.”

Sir William Anson elucidates that “A Contract is an agreement enforceable at law, made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others”.

Sir Fredrick Pollock defines, “Every agreement and promise enforceable at law is a contract”.

The term Contract has been defined by Section 2(h) of the Indian Contract Act, 1872. It provides that, “An agreement enforceable by law is a contract.”

According to Section 2(e) of the Indian Contract Act, 1872, “Every promise and every set of promises forming the consideration for each other is an agreement.”

All agreements are not enforceable by law, therefore all agreements aren’t contracts. Only those agreements which satisfy the essentials mentioned in Section 10 of the Indian Contract Act, 1872, can be called as contracts.

According to Section 10, “All agreements are contracts if they are made by the 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.”

Intention to create a legal obligation:

In order to ensure that an offer, after its acceptance, results in a valid contract, it is important that the offer must be made with an intention to create a legal relationship and be attached by legal consequences. Generally, the promises that are made in the case of social engagements lack this intention on the part of the parties to bind themselves by the legal obligations and such agreements can therefore not be considered as legally binding contracts.

The agreements such as the one made to go out for a walk together, watch a movie or play a game, etc., cannot be enforced in the court of law as in such cases, there is absolutely no intention on the part of either of the parties to enter into a legally binding agreement. While in some cases, the parties may themselves expressly mention that they do not wish to enter into a formal or legal agreement[1], on the other occasions, such an intention has to be presumed from the terms of the agreement.[2]

The test to ascertain whether the parties intended to enter into a legal binding agreement is objective and not subjective. This means that merely because either of the parties affirms that there was no such intention on their part, would not exempt them from a liability[3] and the Court shall look into the conduct of the parties to deduce the same.

Relevant Case Laws:

·         Balfour v. Balfour (1919)

In this case, the defendant was a government servant employed in Ceylon, who went on leave to England with his wife but due to health issues, the wife could not return back to Ceylon with her husband but the husband had promised her to pay a certain amount every month as maintenance for the time period. However, the husband failed to pay this amount, and when his wife sued him for not fulfilling his promise; he contended that there was no such intention to create a legal relationship.

Atkin L.J. observed that “There are agreements entered into by the parties that do not result in contracts within the meaning of this term in the law. Such agreements are not contracts since the parties did not intend that they should be attended by any legal consequences.”[4]

·         Rose and Frank Co. v. Crompton & Bros. Ltd. (1925)

In this case, when one of the parties made a breach of the agreement, the other party moved the Court of Law for the enforcement of the agreement. It was held that since the arrangement entered into by the parties is not a legal or formal agreement, it shall not be subject to legal jurisdiction and should rather be carried out by the parties themselves through mutual loyalty and friendly cooperation.[5] 

·         Jones v. Padavatton (1969)

In this case, an agreement was made between a mother i.e. Mrs. Jones and her daughter wherein the mother agreed to pay a monthly allowance to her divorced daughter during her studies for the bar in England. Mrs. Jones also bought a house in England and the daughter was allowed to stay in a part of it, while the rest of it was rented. But in the meantime, differences arose between both of them and Mrs. Jones brought an action against her daughter to evict the house. But the daughter contended that her mother was legally bound to maintain her until her studies were completed since she had promised to do the same.

In this case, the Court held that there was no intention to enter into any legal obligations by either of the parties and therefore, Mrs. Jones’s action against her daughter for eviction succeeded.[6]

·         Meritt v. Meritt (1970)

In this case, a couple was a joint owner of a house that was subject to a mortgage. But the husband left the house to live with another woman and signed a note in the name of his wife that said that she would pay the outstanding amount in respect of the house and in return, the property shall be transferred to her sole ownership. In this case, it was held that generally in close relationships, there is no intention to enter into any legal obligations but nothing prevents these persons from entering into a legally binding contract. Therefore, if an agreement clearly manifests an intention to create a legal relationship, the parties shall be bound by the same.[7]

Classification of Contracts: 

On the Basis of Enforceability: 

1. Contract: According to Section 2 (h) of the Indian Contract Act, 1872, a contract is an agreement enforceable by law.
2. Voidable Contract: According to Section 2(i), an agreement which is enforceable by the law at the option of one or more of the parties thereto, but not at the option of the other, is a voidable contract.
3. Void Contract: According to Section 2(j), a void contract is the one which ceases to be enforceable by the law.
4. Unenforceable Contract: A contract that is good in substance but becomes unenforceable because of some technical error and therefore cannot be enforced by the law is an unenforceable contract.
5. Illegal Agreement: When the object and consideration of an agreement are unlawful, it is said to be an illegal agreement and such an agreement is void.

On the Basis of Formation:

1. Express Contract: When the terms of the contract are expressly agreed upon either in words written or spoken, at the time of the formation of the contract, such an agreement is said to be an express contract.
2. Implied Contract: An implied contract is the one that is inferred from the act or conduct of the parties and the circumstances of the case.
3. Quasi Contracts: Sections 68-72 contained in Chapter V of the Indian Contract Act, 1872 deal with “Quasi Contracts” or “certain relations resembling those created by contract”. Such contracts are created by law on the basis of the principle of equity which states that a party must not be allowed to enrich itself at the cost of the other party. In this case, the parties do not have any intention to enter into any legal obligations but the same is imposed upon them by the law.

On the Basis of Performance:

1. Executed Contract: A contract is said to be executed when both the parties have performed their respective contractual obligations and as such nothing is left to be performed. 
2. Executory Contract: An executory contract is the one in which either one or both the parties to the contract have to perform their respective contractual obligations in a future time. Such a contract is, therefore, either wholly unperformed or partially performed.

[1] Appleson v. Littlewood Ltd., (1939) 1 All E.R. 464.

[2] Simpkins v. Pays, (1955) 1 W.I.R. 975.

[3] Carlill v. Carbolic Smoke Ball Co., (1893) 1 Q.B. 256.

[4] (1919) 2 K.B. 571.

[5] (1925) A.C. 445.

[6] (1969) All E.R. 616.

[7] (1970) 2 All E.R. 760; Mc Gregor v. Mc Gregor, (1888) 21 Q.B.D. 424.