What is a Contract according to Indian Contract Act?

Indian Contract Act frames and validates the contracts or agreements between various parties. Contract Act is one of the central laws that regulate and oversee all the business wherever there is a case of a deal or an agreement. The following section will tell us what a contract is.

We will see how the Indian Contract Act, 1872 defines a contract. We will also define the terms as per the Act and see what that means. In these topics, we will decipher all the vivid aspects of the Contract Act. Let us begin by understanding the concept of a contract.

Contract Act

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.

This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in order to understand a contract in the light of The Indian Contract Act, 1872 we need to define and explain these two pivots in the definition of a contract.

Agreement

In section 2 (e), the Act defines the term agreement as “every promise and every set of promises, forming the consideration for each other”.

Now that we know how the Act defines the term “agreement”, there may be some ambiguity in the definition of the term promise.

Promise

The Act in its section 2(b) defines the term “promise” here as: “when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal when accepted, becomes a promise”.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or affected by it. This definition says that in order to establish or draft a contract, we need to initiate some steps:

1. The definition requires a person to whom a certain proposal is made.
2. The person (parties) in step one has to be in a position to fully understand all the aspects of a proposal.
3. “signifies his assent thereto” – means that the person in point one accepts or agrees with the proposal after having fully understood it.
4. Once the “person” accepts the proposal, the status of the “proposal” changes to “accepted proposal”.
5. “accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal to become a promise, it has to be an accepted proposal.

To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

Enforceable By Law

Now let us try to understand this aspect of the definition as is present in the Act. Suppose you agree to sell a bike for 30,000 bucks with a friend. Can you have a contract for this?

Well if you follow the steps in the previous section, you will argue that once you and your friend agree on the promise, it becomes an agreement. But in order to be a contract as per the definition of the Act, the agreement has to be legally enforceable.

Thus we can say that for an agreement to change into a Contract as per the Act, it must give rise to or lead to legal obligations. In other words, must be within the scope of the law. Thus we can summarize it as Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law)

(Source: lawmantra)

So What Is A Contract?

Now we can define a contract and more importantly, understand what is “Not” a contract. A contract is an accepted proposal (agreement) that is fully understood by the law and is legally defined or enforceable by the law.

So a contract is a legal document that bestows upon the party’s special rights (defined by the contract itself) and also obligations that are introduced, defined, and agreed upon by all the parties of the contract.

Difference Between Agreement And Contract

Let us see how a contract and agreement are different from each other. This will help you summarize and make a map of all the important concepts that you have understood.

Contract	Agreement
A contract is an agreement that is enforceable by law.	A promise or a number of promises that are not contradicting and are accepted by the parties involved is an agreement.
A contract is only legally enforceable.	An agreement must be socially acceptable. It may or may not be enforceable by the law.
A contract has to create some legal obligation.	An agreement doesn’t create any legal obligations.
All contracts are also agreements.	An agreement may or may not be a contract.

Solved Question on Contract Act

Q1: “A person A agrees to sell his house to a person B for 50 lakh.” This is an example of:

1. A contract
2. An agreement
3. Neither a Contract nor an Agreement
4. It is a contract as soon as A gets the money.

Answer: Let us see what we need for the above to be a contract. We need Accepted Proposal (Agreement) + Enforceable by law (defined within the law). We have an “accepted proposal” by A as inferred from the phrase “A agrees to sell..”, but we don’t know whether B has been made a party to the agreement or not. So this is neither a contract nor an agreement and the answer is C) Neither a Contract nor an Agreement.