What a contract must contain to be enforceable

The Indian Contract Act, 1872 draws a distinction that most everyday usage collapses. An agreement is a promise or set of promises; a contract is an agreement enforceable by law. Every contract is an agreement, and a great many agreements are not contracts.

That matters because the failure modes are different and are commonly lumped together as “invalid”. A void agreement is not enforceable by law at all — it never had legal effect. A voidable contract is enforceable at the option of one party but not the other, which is what results when a party's consent was obtained improperly: the wronged party may affirm it or set it aside. And a contract can be perfectly valid yet fail in practice because nobody can prove what its terms were, which is not a legal defect at all but an evidentiary one.

Section 10 sets out what makes an agreement a contract: it must be made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and not be expressly declared void. The elements below are that requirement unpacked, together with certainty, which the Act deals with separately.

This describes what the Act requires. Whether a particular arrangement satisfies it is a question about that arrangement's facts and its documents, which a general explanation cannot resolve.

A contract begins with a proposal by one party and its acceptance by the other, and the Act is specific about both.

A proposal is made when one person signifies to another a willingness to do or abstain from doing something, with a view to obtaining that other's assent. The signification matters: an intention not communicated is not an offer. This is the basis of the familiar distinction between an offer and an invitation to treat — a price list, an advertisement, or goods displayed with a price are generally invitations to make an offer rather than offers capable of being accepted, which is why a displayed price is not usually a binding commitment to sell.

Acceptance must be absolute and unqualified. An acceptance that varies a term is not an acceptance at all; it is a counter-proposal, and it puts the original offer beyond acceptance. This is exactly what is happening in a negotiation conducted by email where each side amends the other's draft: no agreement exists until one party accepts without variation, and the sequence of who accepted what becomes the whole question later.

Communication of acceptance is required, and the Act deals with when communication is complete and with revocation. An offer can be revoked before acceptance is complete; after that it cannot.

Consideration is the element most often missing from arrangements people believe are contracts. It is what each party gives or promises in exchange — an act, an abstinence, or a promise, done or made at the desire of the promisor.

Two points about it are frequently misunderstood in opposite directions. Consideration need not be adequate: the law does not measure whether the exchange was a good bargain, and a plainly one-sided price does not by itself make an agreement unenforceable. But consideration must exist. A bare promise to give something for nothing is, as a general rule, not enforceable however clearly it is expressed and however seriously it was meant.

The Act sets out exceptions where an agreement without consideration is not void. These include an agreement made out of natural love and affection between parties standing in a near relation to each other, where it is in writing and registered; a promise to compensate a person who has already voluntarily done something for the promisor; and a written, signed promise to pay a debt barred by the law of limitation.

The practical reason this element matters is that intra-family and inter-company arrangements, and informal promises of support, are precisely where consideration tends to be absent — which is where the exceptions and their conditions do the work.

Two separate requirements are often merged: the parties must be competent to contract, and their consent must be free.

Competence requires a party to be of the age of majority according to the law to which they are subject, of sound mind, and not disqualified from contracting by any law. An agreement with a minor occupies a distinctive position in Indian law and is not merely voidable at the minor's option.

Free consent is defined negatively: consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. Each of these is separately defined in the Act, and the distinctions between them are substantive rather than shades of the same thing. Coercion involves the use or threat of unlawful means. Undue influence arises where one party is in a position to dominate the will of another and uses it to obtain an unfair advantage — which is why relationships of dependence, real or apparent authority, and fiduciary relationships are dealt with expressly. Fraud requires an intention to deceive; misrepresentation does not, which is the main line between them.

Where consent was caused by coercion, fraud, undue influence or misrepresentation, the contract is voidable at the option of the party whose consent was so caused. Mistake operates differently: a bilateral mistake as to a matter of fact essential to the agreement renders it void rather than voidable.

An agreement can satisfy every element above and still be unenforceable because of what it is about, or because its terms cannot be ascertained.

The consideration or object of an agreement is unlawful where it is forbidden by law, where it would defeat the provisions of any law, where it is fraudulent, where it involves injury to the person or property of another, or where the court regards it as immoral or opposed to public policy. An agreement with an unlawful object is void, and where consideration or objects are only partly unlawful the Act addresses that separately.

Certainty is the requirement most likely to catch a genuine commercial arrangement. An agreement whose meaning is not certain, or is not capable of being made certain, is void. A term left to be settled later — price to be agreed, quantity as required, timelines as mutually convenient — is the standard route to this problem, and it appears most often in exactly the documents drafted quickly to get a deal moving.

The Act also expressly declares certain classes of agreement void. Agreements in restraint of trade are void, subject to a narrow statutory exception concerning the sale of goodwill. Agreements in restraint of legal proceedings are dealt with expressly. Wagering agreements are void. And an agreement to do an impossible act is void.

Nothing above requires writing. As a general rule an oral agreement satisfying the elements is a contract, and it is enforceable.

There are exceptions where a statute requires writing, registration, stamping, or a particular form — and where such a requirement applies, non-compliance has its own consequences, which differ between statutes. Those are specific requirements rather than a general rule, and identifying whether one applies to a given transaction is precisely the sort of question that turns on the transaction.

But the real problem with an oral contract is not validity. It is proof. Establishing an oral agreement means establishing that an offer was made in particular terms, that it was accepted without variation, and what the terms actually were — typically from recollection and surrounding correspondence, years later, with the other party asserting something different. A written contract does not make an agreement more binding; it makes it possible to demonstrate what was agreed. Electronic records and electronic signatures are recognised in Indian law, with certain categories excluded, so the practical choice is rarely between paper and nothing.

One phrase is worth knowing precisely. Marking a document “subject to contract” signals that the parties do not intend to be bound until a formal contract is executed. Its effect depends on the document read as a whole and on conduct, so it is an indication of intention rather than a certainty.