Contract: Definition, Types, History & Facts

What is Contract

Edited By Ritika Jonwal | Updated on Jul 02, 2025 05:38 PM IST

What is a Contract?

A Contract, according to the Indian Contract Act 1860, means a mutual agreement between two competent parties under Contract Law. This agreement consists of promises, liabilities, and obligations which both parties are bound to perform in a contract to make the discharge of the contract successful. A contract formed through mutual agreement and the parties to the contract are competent to contract is a valid contract, and a valid contract is enforceable by law. Both parties to a contract are bound by the law to perform all the promises made in an agreement.

This Story also Contains

What is a Contract?
How does a Contract come into Existence
The legal definition of a Contract
What is a digital contract?
Essentials of a Contract:
Elements of a Contract
Capacity to Contract
Types of Contract
Contracts based on the Formation of the Contracts-
Contracts are formed based on the Validity of the Contracts
Contracts based on the Nature of the Contracts
Contracts based on the Execution of the Contract
Case law
Conclusion

What is Contract

How does a Contract come into Existence

1. Through an agreement or contract

An agreement between two competent parties leads to a contract. When two parties to a contract mutually agree to perform their duties, obligations and promises as mentioned in the contract it leads to a valid contract that is enforceable by the law. A contract is mutually negotiated, and both parties to the contract are competent enough to come to an agreement. A contract forms a legally binding contract and can be enforceable by law or the parties can be bound to perform the obligations and promises made in a contract.

2. Through the standard form of contract

There are contracts which are pre-drafted and the pre-drafted contracts are easy to use for a contractual agreement. Companies and organizations have to go through many negotiations, agreements and contracts. So, it becomes impossible for a company to draft a new contract every time they enter into a contract with the opposite company. However, standard forms of contract are used to make the drafting process more efficient time-saving and accurate.

3. Through a promise of Estoppel

The Doctrine of Estoppel is a remedy which says that sometimes there may be no contract or agreement between two parties in a strict sense, but a party or person makes a promise and the person becomes bound to perform the promises laid out by him because of the existence of the Doctrine of Estoppel. Which makes a promisor bound to discharge his promise.

The legal definition of a Contract

According to Section 2(h) of the Indian Contract Act 1860, any agreement which is enforced by law is not a contract as all the agreements that are formed between parties cannot be enforced by law some types of agreements are enforceable by law and the other types are not enforceable by law.

What is a digital contract?

The phrase "digital contract" refers to the process of generating, administering, and executing legally binding agreements by electronic means. Unlike traditional paper contracts, digital contracts reside in a virtual environment and employ a variety of technologies to simplify their development, storage, and implementation.

Also Check,

Fraud

Remedies for Breach of Contract

Contract of Bailment and Pledge

Coercion in Contract Law

Essentials of a Contract:

For the formation of a valid contract, there are some essential conditions that must be fulfilled, they are given below-

There must be two parties to a mutually accepted agreement. And there should be acceptance and a valid offer between the two parties.
Both the parties entering into the contract should be competent enough to enter into a contract. None of them should be of unsound mind or minor, or any person legally disqualified to enter into a contract.
In a valid contract, there should be lawful consideration and a lawful object.
Free consent is essential for a valid contract. Neither party to a contract should be forced.
The contract will be termed invalid when the contract is expressly declared to be invalid in the initial process of the agreement.

Also Check,

Contract of Indemnity

Agreement with Minor

Difference between offer and invitation to offer

Contract of Guarantee

Elements of a Contract

Offer

Offer means the will to do something or not to do something a proposal or offer is put out with the only intention to be accepted by the opposite party.

Illustration-

X will sell his car to Y at a certain price. Now if Y accepts the offer to purchase the car in the amount as set this will be called as a proposal from X’s side for the selling of the Car. But in a case, if a statement is made just without any intention to sell the car to Y this will not be called an offer or proposal.

Types of offer

Express and Implied Offer

An offer can be expressed or implied which means through writing or orally. According to section 6 of the Indian Contract Act 1872, any offer or promise made through words will be said as an expressed offer and any offer or promise which is set out in writing will be called an implied offer.

For example- Auctions are an example of an expressed offer and a property deal done by signing documents is an implied offer.

Cross offers

Cross offers mean when two persons also called offerers make an offer to each other with the offer containing similar terms and conditions of bargains and negotiations it can be termed as a cross offer.

Illustration-

X wants to sell his car to Y at a certain price of Rs. 5 lacs and X sent a letter containing the information of the deal to Y through a letter of offer on the same day Y also sent a letter to X to buy his car with the same amount of money that is 5 lacs rupees in this case it will be called as a cross offer.

Specific and general offers

An offer if made to a specific person is termed a specific offer where whereas when an offer is not only made to a specific person but to the whole public at large it is called a general offer.

Standing open or continuing the offer

The meaning of standing open or continuing offer is that when an offer made to a party is kept open for acceptance for a certain period it is known as standing open or continuing offer. This means the offer is still open and continuing for the accepter to accept it.

Acceptance

The meaning of acceptance is that an offer or proposal when accepted gives way to an agreement. A contract is only formed after an offer has been accepted by the offeree.

According to Section 2(b) of the Indian Contract Act 1872, when a person accepts the offer or proposal made to him by another party and gives his assent to it the offer or the proposal is said to be accepted. An offer or proposal when accepted becomes a promise.

The essential conditions to be fulfilled to constitute a valid acceptance are given below-

The acceptance should be forwarded by the offeree to the offeror.
It should be unqualified and absolute
It should be set out in a reasonable manner
The offer should still subsist while the offer is made.

Also Check, Communication of Offer and Acceptance

Capacity to Contract

Section 10 of the Indian Contract Act 1872 lays down the capacity for a person to be capable enough to enter into a contract. According to this section, a person should be competent enough to enter into a contract.

Here are the criteria to be fulfilled by a person to enter into a contract-

A minor person cannot enter into a contract
A person of unsound mind cannot enter into a contract
A person who has been disqualified by law cannot enter into a contract.

Types of Contract

A contract is a mutually accepted agreement between two parties to perform certain promises and obligations. The various types of contracts are given below-

Contracts based on the Formation of the Contracts-

Verbal contracts

In this type of contract, the terms and conditions to the contract are orally declared and a verbal contract is not written down anywhere or no party is bound to sign the contract. Verbal contracts are the types of contracts that were made in ancient times as an oral contract cannot be proved in court.. Section 10 of the Indian Contract Act 1872 makes a verbal contract enforceable by law.

Written contracts

As the name goes by a written contract is one which is written down and signed by both the contracting parties. Written contracts are the most common types of contracts which are commonly used in every contractual agreement. A written contract provides security and surety in comparison to a verbal contract.

Section 2(h) of the Indian Contract Act 1872 accepts both oral and written contracts.

Express contracts

Whether the contract is written or oral in an expressed contract the terms and conditions of a contract are expressly mentioned. An expressed contract can be enforced by law.

Section 9 of the Indian Contract Act 1872, says expressed contracts are formed by parties after agreeing to the terms and conditions of the contract.

Implied contracts

Implied contracts are the ones in which the terms and conditions of the contract are not expressed but it is inferred from the actions and behaviour of the parties to a contract.

Quasi Contract

The word Quasi is derived from the Latin word ‘Pseudo’ which means ‘as if’ or ‘almost’. Quasi-contracts are a contract that is a dispute resolution clause for the parties who are in a dispute. Quasi-contracts help the parties in finding an alternative way in cases when the parties are not in a contractual relationship. Quasi Contracts are based on the values of Justice, equity and good conscience.

E- contracts

E-contracts are contracts that are made through electronic mediums such as electronic signatures, mail etc. And an E-contract is also legally binding.

Contracts are formed based on the Validity of the Contracts

Valid Contracts

A contract that is formed by mutual consent of the parties and has met all the criteria of a competent contract is enforceable by law and is known as a valid contract. Essential criteria of competency such as the capacity to contract, legal object, legal person, free consent etc.

According to section 10 of the Indian Contract Act 1872, any contract that meets all the required criteria is valid.

Void Contracts

Void contracts are the ones that the law does not claim and are unenforceable by law. And void contracts are the ones which the Indian Contract Act 1872 terms as illegal are void contracts.

According to section 2(J) of the Indian Contract Act 1872 a contract which cannot be enforceable by law is void ab initio.

Voidable Contracts

Voidable contracts are the ones that are enforceable by law but at the condition that it is only valid for one or more parties but not for others. A voidable contract can be avoided by a party at the initial stage of the contract.

Void-ab-initio Contracts

The meaning of Void-ab-initio means something illegal or void from the very beginning of the contract formation. A contact can be illegal from the beginning for various reasons like unlawful objects, incompetent parties etc. Those contracts which do not meet the requirements of a valid contract fall in the category of void ab initio.

Unenforceable contracts

A contract which is illegal and cannot be enforced by law is unenforceable. A contract can be unenforceable for many reasons like if it does not meet the requirements of a valid contract or is termed illegal by the court itself.

Illegal Contracts

A Contract Law forbids and terms as illegal is known as an illegal contract. Section 23 of the Indian Contract Act 1872 marks an illegal contract as a void contract.

Contracts based on the Nature of the Contracts

1. Unilateral Contracts

Section 2(f) of the Indian Contract Act says that a unilateral contract is one where a party makes a promise or offer in exchange for something. In a unilateral contract, a party make a promise or an offer in exchange for something or a specific performance.

2. Bilateral contracts

When both parties to a contract promise to perform the promises and obligations as mentioned in the contract it is known as a bilateral contract. To form a bilateral contract both parties should agree to the given terms and conditions.

3. Unconscionable Contracts

When one party to a contract tries to take advantage of the weaker position of another party it is known as an unconscionable contract. One party puts up unreasonable constraints on another party in such contracts.

4. The standard form of contracts

In a standard form of contract, one party to the contract has all the powers relating to the negotiation and bargaining which keeps the other party in unfair advantage is known as standard form of contracts.

5. Contingent Contracts

Section 31 of the Indian Contracts Act 1872 deals with contingent contracts which means the Contingent Contracts depend on the happening or not happening of an event. This contract depends on un-conditional events that are to be occurring in the future.

Illustration- X comes into a contract with Y to pay him Rs. 20,000 if he damages his car this can be termed as a contingent contract where the contract is based on a future event.

6. Option contracts

When one party to a contract gives the option to another party to buy or sell any asset it is known as an option contract. According to Section 2(h) of the Indian Contract Act 1872 option contracts are enforceable agreements that give a party the right to sell or buy any property or asset.

Contracts based on the Execution of the Contract

1. Executory Contract

A contract which is yet to be performed is known as an executory contract. Which still the promises and obligations made in a contract by a party are on hold. According to Section 2(e) of the Indian Contract Act 1872, a contract in which the obligations are yet to be fulfilled are executory contract.

2. Executed Contract

A contract in which all the promises and obligations are fulfilled or discharged is known as an executed contract. It is the opposite of an executory contract. According to section 2(d) of the Indian Contract Act 1872 in an executed contract both the parties have executed their part of the contract.

Case law

In the case of Mohori Bibee v. Dharmodas Ghose (1903)

In the following case, a minor named Dharmodas Ghose mortgaged his property under Mohori Bibee for a certain amount of loan. The issue raised in this case was whether the contract that was formed between the two parties was a valid agreement or void agreement as one party to the contract was a minor. The contract can only be enforced after the minor attains majority.

The privy council held that the contract with a minor was valid from the very beginning. So, the agreement between Mogori Bibee and Dharmodas Ghose was void.

Conclusion

A Contract according to the Indian Contract Act 1860 means a mutual agreement between two competent parties. This agreement consists of promises liabilities and obligations which both parties are bound to perform in a contract to make the discharge of the contract successful. A contract formed through mutual agreement and the parties to the contract are competent to contract is a valid contract and a valid contract is enforceable by law. This article gives an overview of the meaning types and requirements of a contract under Legal Studies.

Frequently Asked Questions (FAQs)

1. What is the definition of a contract?

2. What are the elements of a contract?

Offer and acceptance are the important elements of a contract.

3. What are the essentials of acceptance?

The essentials of acceptance are:

The acceptance should be forwarded by the offeree to the offeror.
It should be unqualified and absolute
It should be set out in a reasonable manner
The offer should still subsist while the offer is made.

4. What are the types of contracts based on execution?

The types of contracts based on execution are

Executory contracts
Executed Contracts

5. What is a unilateral contract?

6. What is a unilateral contract?

A unilateral contract is one where only one party makes a promise. It's typically fulfilled by the performance of a specified act, rather than a promise to perform. A common example is a reward offer.

7. What do you mean by law of contract?

The contract law definition refers to the regulating body that enforces and interprets contractual agreements. Most contract laws are governed by the state in which the contract was formed. Contracts should include a governing law language outlining state-specific legislation.

8. What are the 7 Rule of a contract?

Understanding the seven key parts of a contract—offer, acceptance, consideration, legally competent parties, meeting of the minds, contract terms, and legality of purpose—will assist you in determining if any arrangement you sign into is a solid, legally binding contract.

9. Can minors enter into legally binding contracts?

Generally, minors (typically those under 18) can enter into contracts, but these contracts are usually voidable at the minor's option. There are exceptions for necessities and beneficial contracts of service.

10. How does the statute of limitations affect contract disputes?

The statute of limitations sets a time limit within which legal action must be initiated for breach of contract. Once this period expires, the right to sue is generally lost, even if the claim is otherwise valid.

11. How does misrepresentation affect a contract?

Misrepresentation occurs when a false statement of fact induces a party to enter a contract. Depending on the type (fraudulent, negligent, or innocent), it can make the contract voidable or may lead to damages.

12. How does the contra proferentem rule apply in contract interpretation?

The contra proferentem rule states that ambiguous terms in a contract should be interpreted against the interests of the party that drafted the contract. It encourages clear drafting and protects the party that didn't write the terms.

13. How does the parol evidence rule affect contract interpretation?

The parol evidence rule generally prevents parties from introducing external evidence to modify or contradict the terms of a written contract. It aims to preserve the integrity of written agreements.

14. What is the difference between liquidated damages and penalties in contracts?

Liquidated damages are a genuine pre-estimate of loss in case of breach and are enforceable. Penalties are designed to punish the breaching party rather than compensate for loss and are generally not enforceable.

15. What is the significance of "time is of the essence" clause in contracts?

A "time is of the essence" clause makes the specified time for performance a vital term of the contract. Failure to perform by the specified time can be grounds for termination of the contract and potential damages.

16. What is the difference between void and voidable contracts?

A void contract is invalid from the beginning and cannot be enforced. A voidable contract is valid but can be cancelled by one or both parties under certain circumstances, such as fraud or undue influence.

17. How does duress affect the validity of a contract?

Duress occurs when one party is forced into a contract through threats or pressure. Contracts made under duress are typically voidable, meaning the party under duress can choose to cancel the contract.

18. Can silence constitute acceptance in contract law?

Generally, silence does not constitute acceptance. However, in certain circumstances, such as previous dealings between parties or where it would be reasonable to expect a response, silence might be interpreted as acceptance.

19. How does mistake affect the validity of a contract?

Mistakes can affect contract validity depending on their nature. Mutual mistakes about a fundamental aspect of the contract may render it void. Unilateral mistakes generally don't invalidate a contract unless the other party was aware of the mistake.

20. What is the difference between conditions and warranties in contract terms?

Conditions are essential terms that go to the root of the contract; breach of a condition allows the innocent party to terminate the contract. Warranties are less important terms; breach of a warranty typically only allows for damages, not termination.

21. What is the statute of frauds in contract law?

The statute of frauds requires certain types of contracts to be in writing to be enforceable. This typically includes contracts for the sale of land, agreements that cannot be performed within one year, and contracts for the sale of goods over a certain value.

22. What is the mailbox rule in contract law?

The mailbox rule (or postal rule) states that acceptance of an offer is effective when it is posted, not when it is received by the offeror. This rule applies primarily to acceptances sent by mail or similar means.

23. What is the concept of "privity of contract"?

Privity of contract is the principle that only parties to a contract can enforce its terms or be bound by them. This doctrine has exceptions, such as third-party beneficiary rights in some jurisdictions.

24. How does public policy affect contract enforceability?

Contracts that violate public policy (such as those promoting illegal activities or those deemed harmful to society) are generally unenforceable, even if all other elements of a valid contract are present.

25. How does the doctrine of frustration apply to contracts?

The doctrine of frustration applies when an unforeseen event makes it impossible to fulfill the contract or radically changes the nature of the contractual rights or obligations. It can discharge the parties from their obligations.

26. What is the role of offer and acceptance in contract formation?

Offer and acceptance form the basis of mutual assent in contract formation. The offer proposes terms, and acceptance indicates agreement to those terms, creating a meeting of the minds necessary for a valid contract.

27. How can acceptance be communicated in contract formation?

Acceptance can be communicated through words (verbal or written), actions, or in some cases, silence. The method of acceptance should generally match the method of offer unless otherwise specified.

28. What is the significance of "subject to contract" in negotiations?

"Subject to contract" indicates that negotiations are ongoing and no binding agreement exists yet. It helps prevent premature formation of a contract before all terms are finalized and agreed upon.

29. How does the battle of the forms affect contract formation in commercial transactions?

The battle of the forms occurs when businesses exchange forms with different standard terms. It raises questions about which terms apply and whether a contract has been formed. Different legal approaches exist to resolve these conflicts.

30. What is the role of consideration in option contracts?

In an option contract, consideration is required to keep the offer open for a specified time. Without consideration, the offeror can revoke the offer at any time before acceptance.

31. Can a contract be verbal, or does it have to be in writing?

Contracts can be verbal or written. Many contracts are valid when made verbally, but some types of contracts are required by law to be in writing (e.g., real estate transactions, contracts lasting more than one year).

32. How does a bilateral contract differ from a unilateral contract?

In a bilateral contract, both parties exchange promises to perform, creating mutual obligations. In a unilateral contract, only one party makes a promise, which is accepted by the other party's performance of a specified act.

33. What is the difference between express and implied terms in a contract?

Express terms are explicitly stated in the contract, either orally or in writing. Implied terms are not stated but are understood to be part of the contract based on the nature of the agreement, custom, or law.

34. How do standard form contracts differ from negotiated contracts?

Standard form contracts (or adhesion contracts) are pre-printed agreements where most terms are set by one party. Negotiated contracts involve both parties discussing and agreeing on terms. Courts may scrutinize standard form contracts more closely for fairness.

35. How does a contract differ from a mere promise?

A contract is legally enforceable, while a mere promise is not. Contracts require specific elements like offer, acceptance, and consideration, whereas promises may lack these formal requirements and legal backing.

36. What are the essential elements of a valid contract?

The essential elements of a valid contract are: offer, acceptance, consideration, capacity to contract, intention to create legal relations, and legality of purpose.

37. What is "consideration" in contract law?

Consideration is something of value exchanged between the parties to a contract. It can be money, goods, services, or a promise to do (or not do) something. Consideration is essential for a contract to be legally binding.

38. What makes an offer different from an invitation to treat?

An offer is a definite promise to be bound on specific terms, while an invitation to treat is merely an invitation to make an offer. For example, displaying goods in a shop window is typically an invitation to treat, not an offer.

39. What is the "meeting of the minds" in contract law?

The "meeting of the minds" refers to mutual agreement and understanding between the parties about the essential terms of the contract. It's a crucial element in determining whether a valid contract has been formed.

40. What is the role of intention to create legal relations in contract formation?

Intention to create legal relations is a necessary element for a valid contract. It distinguishes legally binding agreements from social or domestic arrangements that are not intended to have legal consequences.

41. How does the concept of "reliance" factor into contract law?

Reliance in contract law refers to actions taken based on promises made. It's relevant in promissory estoppel, where a promise may be enforced even without consideration if the promisee reasonably relied on it to their detriment.

42. How does the doctrine of promissory estoppel relate to consideration in contracts?

Promissory estoppel can sometimes substitute for consideration, making a promise enforceable if the promisee reasonably relied on it to their detriment, even if traditional consideration is absent.

43. What is the role of "severability" clauses in contracts?

Severability clauses allow the rest of a contract to remain valid even if specific provisions are found to be unenforceable. They aim to preserve the overall agreement in case parts of it are invalidated.

44. How does the parol evidence rule interact with the concept of merger clauses in contracts?

Merger clauses (or integration clauses) state that the written contract is the complete agreement between parties. They reinforce the parol evidence rule by explicitly excluding prior or contemporaneous agreements not included in the written contract.

45. What is the significance of "incorporation by reference" in contract drafting?

Incorporation by reference allows external documents or terms to become part of a contract by referring to them in the main agreement. It can simplify contracts but requires clear identification of the incorporated material to be effective.

46. How does the concept of "good faith" apply in contract law?

Good faith in contract law refers to honest dealing and observance of reasonable commercial standards. Some jurisdictions imply a duty of good faith in all contracts, while others apply it more narrowly.

47. How does the concept of "course of dealing" affect contract interpretation?

Course of dealing refers to previous conduct between the parties in similar transactions. It can be used to interpret ambiguous terms in a contract or to imply terms based on the parties' established practices.

48. What is the difference between a condition precedent and a condition subsequent in contracts?

A condition precedent is an event that must occur before certain contractual obligations arise. A condition subsequent is an event that, if it occurs, will end certain contractual obligations.

49. What is the difference between assignment and novation in contracts?

Assignment transfers the benefits of a contract to a third party, while the original party remains liable for obligations. Novation replaces one party to the contract with a new party, transferring both rights and obligations.

50. How does unconscionability affect contract enforceability?

Unconscionability refers to contract terms that are excessively unfair. Courts may refuse to enforce unconscionable contracts or specific unconscionable terms to prevent injustice and abuse of bargaining power.

51. What is the difference between an executory and an executed contract?

An executory contract is one where some or all obligations remain to be performed. An executed contract is one where all obligations have been fully performed by both parties.

52. How does force majeure affect contractual obligations?

Force majeure clauses excuse a party from performance due to extraordinary events beyond their control (like natural disasters). These clauses define what events qualify and how they affect the contract.

53. What is a contract?

A contract is a legally binding agreement between two or more parties that creates mutual obligations enforceable by law. It typically involves an offer, acceptance, consideration, and the intention to create legal relations.

54. How does the concept of "efficient breach" factor into contract law?

Efficient breach theory suggests that breaking a contract and paying damages can be economically efficient if the breaching party gains more than the other party loses. It's a controversial concept in contract law and economics.

55. What is the role of consideration in contract modifications?

In common law jurisdictions, modifications to existing contracts generally require fresh consideration to be enforceable. However, some jurisdictions have relaxed this requirement if the modification is fair and equitable.

56. What is the significance of "quantum meruit" in contract disputes?

Quantum meruit ("as much as he deserved") is a legal principle used to determine reasonable payment for services when no specific amount has been agreed upon or when a contract is unenforceable.

57. What is the difference between substantial and strict performance in contract law?

Substantial performance occurs when a party has completed the essence of their contractual obligations, even if minor defects exist. Strict performance requires exact adherence to all contract terms. The distinction affects remedies available for breach.