- Free consent;
- The object of the contract must be lawful;
- Certainty and possibility of performance.

As stipulated in Section 10 of the Indian Contract Act, "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." This provision underscores that adherence to the essential elements delineates the distinction between a mere agreement and a legally binding contract.

An agreement is a legally binding promise between two or more parties that creates mutual obligations. Section 2(e) of the Indian Contract Act, 1872 defines an agreement as ‘Every promise and every set of promises, forming the consideration for each other, is an agreement’. This definition highlights two essential components of an agreement:

1. Promise: Defined under Section 2(b) of the Indian Contract Act, 1872, a promise occurs when one party proposes to do or abstain from doing something, which constitutes an offer, and the other party accepts this offer. This acceptance transforms the offer into a promise.

2. Types of promises:

- Express Promises: These are explicitly conveyed offers or acceptances, whether orally or in writing, as defined under Section 9 of the Indian Contract Act, 1872.

- Implied Promises: These arise from conduct or circumstances rather than explicit words, as also defined under Section 9 of the Indian Contract Act, 1872.

- Reciprocal Promises: Defined under Section 2(f) of the Indian Contract Act, 1872, these are promises that form the consideration for each other in an agreement.

- Alternative Promises: As defined under Section 58 of the Indian Contract Act, 1872, these give the option to choose between two alternatives.

In essence, an agreement is constituted by promises that are legally enforceable, with each promise forming consideration for the other party’s promise, thus creating mutual obligations.

General Principles of Contracts

Acceptance – Acceptance of a promise may be expressed through words or actions and must be unqualified for the contract to be valid. Acceptance may also be implied through actions when dealing with general offers or offers of continuance. Section 3 of the Indian Contract Act, 1872 governs acceptance, its communication, and revocation.

Consideration – Section 2(d) of the Indian Contract Act, 1872 defines consideration as any act done, or abstained from doing, or promise to do or abstain from doing, at the desire of the promisor. This act, abstinence, or promise forms the basis of the promisor's promise.

Consideration, in essence, signifies 'something in return' or 'quid pro quo'. It is a critical element of a contract as it delineates the reason each party is entering into the agreement. Consideration must possess legal value and can involve the exchange of money, goods, services, or other forms of benefit. It is imperative that consideration be lawful; a contract is void ab initio if its consideration is unlawful.

Types of Consideration: Consideration can be categorized as past, executory, or executed. Past consideration arises when a promise is made after the completion of an act. Executory consideration involves two promises exchanged concurrently, whereas executed consideration involves a promise followed by an act.

Consideration from Promisee: For consideration to enforce a promise, it must be provided by the promisee. This principle dictates that any party failing to furnish consideration regarding a promise lacks the legal standing to enforce that promise. This was illustrated in the case of Tweddle v. Atkinson, where it was ruled that a son could not enforce a promise made to his father since he had not provided consideration.

Legal Value of Consideration: Consideration must possess economic or material value, regardless of its minimal amount. Sentimental or emotional value alone does not suffice. In White v. Bluett (1853), the court determined that a vague promise of compensation for perceived unfair treatment lacked proper consideration.

Sufficiency of Consideration: While consideration need not be equivalent in value to the subject matter of the contract, it must hold some value in the eyes of the other party. The court does not evaluate consideration based on market price, as seen in Chappell & Co Ltd v. Nestlé Co Ltd, where even nominal consideration was upheld.

Partial Payment of Debt: Partial payment of a debt does not discharge the entire debt owed unless agreed upon as a new consideration. In Pinnel's Case, it was established that agreeing to accept a lesser sum, even with consent, does not constitute binding obligation without new consideration to support the agreement.

Competence of Parties: To form a legally binding agreement, parties must be competent to contract. This necessitates they have reached the age of majority, possess mental stability, and are not insolvent or financially incapable at the time of contracting.

Free Consent: Consent to enter into a legal relationship must be freely given, devoid of coercion, undue influence, fraud, misrepresentation, or mistake. Coercion, undue influence, fraud, misrepresentation, and certain types of mistake, as defined under Sections 15, 16, 17, 18, 20, 21, and 22 respectively, invalidate consent when proven to have influenced the agreement's formation.

Types of Contracts

Contracts encompass various forms established voluntarily through civil obligations. They are classified as follows:

I. Adhesion Contracts – These contracts are created by the dominant party, offering a "take it or leave it" arrangement. The party with superior bargaining power presents terms, leaving the other party with the choice to accept or decline the contract.

II. Aleatory Contracts – These contracts hinge on a mutual agreement activated by an unforeseen event, accident, or natural disaster. Both parties assume a degree of risk. Examples include fire or car insurance contracts.

III. Bilateral and Unilateral Contracts – Bilateral contracts involve obligations between two parties, each committing to perform or refrain from an action. Also known as two-sided contracts, they entail reciprocal promises. In contrast, unilateral contracts involve a promise made by one party, comprising an offeror and an offeree. The offeror pledges to perform an action, legally binding upon acceptance, while the offeree incurs no obligation if the action is not performed.

IV. Express Contracts – These contracts explicitly articulate terms, whether documented in writing or orally.

V. Implied Contracts – In these contracts, terms are inferred from the conduct or circumstances of the parties. For instance, when an individual seeks medical attention, there is an implied contract to receive diagnosis and treatment, allowing recourse for malpractice if necessary.

VI. Void and Voidable Contracts – Void contracts are inherently illegal and lack enforceability from their inception. Voidable contracts differ, as one party is bound while the other retains the right to annul the contract due to lack of obligation.

Additionally, quasi-contracts differ from actual contracts. Salmond defines quasi-contracts as obligations treated by law as if they were contractual, despite lacking explicit agreement. It is crucial to note that while imposed by law, a quasi-contract does not arise from contractual operation. The concept of a quasi-contract is mentioned in chapter-V, section 68 to section 72 of the Indian Contract Act, 1872

Case - State of Rajasthan vs. Basant Nahata (2019)

The Rajasthan High Court ruled that a quasi-contract can arise when a party makes payments on behalf of another party, and such payments are not voluntary or without any obligation. The Court held that the party making the payments is entitled to reimbursement or compensation based on quasi-contractual principles.

Proposal or Offer

A proposal, often referred to as an offer, initiates the process of contract formation. According to Section 2(a) of the Indian Contract Act, 1872, a proposal is defined as the expression of willingness by one person to another to perform or abstain from performing a specific action, with the intention of securing the other person's agreement to such action or abstention.

The person making the offer is termed the "promisor" or "offeror," while the individual who may accept the offer is referred to as the "promisee" or "acceptor."

General Offer

A general offer refers to an offer extended not to a specific individual but to the public or anyone who meets the offer's conditions. It contrasts with an invitation to treat, which invites others to make offers and does not conclude a contract until an offer is accepted under specific terms.

For example, a reward offered to anyone who returns a lost pet constitutes a general offer. It can be accepted by any individual who meets the offer's terms. The acceptance of such an offer requires awareness of its terms and adherence to them for a contract to be binding.

Acceptance of Proposal by Conduct

Section 2(b) of the Indian Contract Act governs acceptance by conduct, recognizing situations where acceptance is indicated through performance rather than explicit communication. For instance, if a reward is offered publicly for completing specified conditions, acceptance occurs by fulfilling those conditions. The landmark case of Carlill v Carbolic Smoke Ball Co. exemplifies this principle, where performance of the conditions outlined in an advertisement constituted acceptance and created a legally enforceable contract. Similarly, in State of Bihar vs Bengal Chemical and Pharmaceutical Works, the act specified in the proposal led to a binding contract without further communication of acceptance due to its nature as a general offer.

General Offer of Continuing Nature

A general offer of continuing nature resembles a general offer but differs in that its validity persists beyond acceptance and fulfillment by one individual, remaining open to subsequent individuals who may meet the offer's terms. While a typical general offer, such as a reward for locating a lost pet, terminates upon fulfillment by one party, a general offer of continuing nature remains active. For instance, if a restaurant offers a cash prize to anyone who can finish a specific meal within a designated timeframe, subsequent individuals who accomplish this challenge are also entitled to the reward. The offer of continuing nature persists until revoked, requiring adequate notice to the general public of its withdrawal.

Communication of Proposal and Acceptance

Under the Indian Contract Act, 1872, communication of a proposal occurs through actions taken by the party proposing or accepting an agreement, intending to convey such proposal or agreement to the other party or effectively achieving such communication.

Acceptance of an offer must be unequivocal and not subject to arbitrary interpretation. For example, if 'A' intends to purchase a black horse from 'B' who owns both a white and a black horse, 'A' must specify in their acceptance that they wish to buy the black horse to ensure clarity and completeness of acceptance.

In a valid contract, acceptance must be communicated in the manner stipulated by the proposer. If the proposer requires acceptance via email, then the acceptance must be transmitted through email for the contract to be valid.

Implied Proposals – Section 9

An implied proposal is inferred rather than explicitly stated. For example, when a consumer buys a product, they assume it functions properly without the seller explicitly warranting its functionality. The transaction proceeds based on the implicit offer, which under the Contract Act, binds the seller regarding the product's implied condition.

Completion of Communication

Communication of a proposal is deemed complete when it reaches the party to whom it is addressed or when that party becomes aware of its content.

Communication of acceptance is considered complete:

- As against the proposer, when it is dispatched and beyond the acceptor's control during transmission.
- As against the acceptor, when the acceptance is received by the proposer.

Illustrations:

'A' sends a letter proposing to sell a car to 'B' at a specified price. The communication of the proposal is complete when 'B' receives the letter.

'B' accepts 'A's proposal by sending a letter via post. As against 'A', communication is complete when the letter is posted. As against 'B', communication is complete when 'A' receives the letter.

Revocation of Proposals and Acceptances – Section 5

A proposal may be revoked at any time prior to the completion of communication of acceptance against the proposer, but not thereafter.

An acceptance may be revoked at any time before the completion of communication of acceptance against the acceptor, but not afterwards.

Illustration

'A' sends a letter proposing to purchase a computer from 'B'. 'B' accepts the proposal to sell the computer.

'A' can withdraw his proposal at any time before 'B' posts his acceptance letter, but not after.

'B' can withdraw his acceptance at any time before 'B' posts the acceptance letter, but not after.

Intention to Contract and its Significance

Intention to contract refers to the mental determination and willingness to enter into legally binding relations through a contract. It is a fundamental element in contract formation, signifying the parties' readiness to commit to a legal agreement. The significance of intention to contract includes:

- Demonstrating that the parties are serious about entering into a legally binding contract and have freely consented to its terms.

- Without intention to create legal relations, an agreement cannot constitute a legally enforceable contract.

- Lack of intention to enter into a legal relationship means parties cannot sue each other for breach of contract; instead, it may only remain a promise without legal force.

- In the case of Banwari Lal v. Sukhdarshan Dayal (1973), Supreme Court held that an offer made over a loudspeaker is not a valid legal offer, but rather an "invitation to offer". The case involved a dispute over the sale of Plot No. 19, which was originally reserved for a dharamshala but was later sold to the defendant. The plaintiffs argued that the co-owners had announced over a loudspeaker that Plot No. 19 would be reserved for a dharamshala, and that this announcement was legally binding. However, the Supreme Court disagreed, stating that such announcements made over a loudspeaker are not legally binding and do not create a valid contract. The Court emphasized that for a contract to be formed, there must be an intention to create legal relations, which was lacking in this case. The mere announcement over a loudspeaker, without any further negotiation or confirmation, was not sufficient to constitute a valid offer under the Indian Contract Act, 1872

Application of Intention to Enter into a Contract in Family and Social Matters

In social and family relationships, agreements are generally presumed not to be legally binding unless there is evidence to the contrary, which is rebuttable.

For instance, in the case of Simpkins v. Pays, 1955, where a lodger and a homeowner participated in a competition, contributing equally without formal agreement on sharing the winnings. The court ruled in favor of the lodger, applying the objective test to establish sufficient mutuality in the arrangements and ordering the homeowner to share the winnings.

Similarly, in family matters like Balfour v. Balfour, 1919, where a husband promised to pay his wife a monthly allowance during their separation due to medical reasons, the court found no intention to create a legally binding agreement due to lack of consideration and enforceable intention. In such cases, the burden lies on the party asserting a binding contract to prove the mutual intent to create legal obligations.