A Business Encyclopedia


Definition: The term contract is defined as an agreement between two or more parties which has a binding nature, in essence, the agreement with legal enforceability is said to be a contract. It creates and defines the duties and obligations of the parties involved.

Process of Contract

Process of Contract

First and foremost, an offer is made by one party to another, which when accepted by the party to whom it is made, leads to the agreement. If that agreement is enforceable in the court of law, it is known as a contract.

Essential Elements of a Contract

Elements of Contract

  1. Agreement: The primary element that creates a contract between parties is agreement, which is a result of offer and acceptance, which forms consideration for the parties concerned.
  2. Free Consent: Consent of the parties is another important aspect of a contract, which means the parties entering into the contract, must agree upon the same thing in the same sense. The consent of the parties is said to be free when it is not influenced by coercion, undue influence, fraud, misrepresentation and mistake.
  3. Competency: Competency refers to the capacity of the parties to enter into the contract, i.e. he/she has reached the age of maturity, he/she must be of sound mind, and he/she is not disqualified from contracting, as per the law like the alien enemy, foreign sovereigns, etc.
  4. Consideration: It implies the price agreed to be paid for the promisor’s obligation by the promisor. It must be adequate and lawful.
  5. Lawful object: The object for which the contract is created must be lawful, or else it is declared as void.
  6. Not expressly declared as void: The law should not expressly declare the contract as void, such as contract in restraint of marriage, trade or legal proceedings.

Other important elements of Contract

  • There must be at least two parties to constitute a contract, i.e. one who proposes and another accepts the same.
  • The parties entering into the contract must intend to create a legal obligation for one another.
  • It must be in writing.
  • There must be certainty of meaning. The parties must be clear in terms of the contract, i.e. the party should not interpret anything wrong, there must be a consensus ad idem.
  • There must be a possibility of performing the contract.

So, these are some paramount elements of a contract, without which it cannot be enforced in the court of law.

Types of Contract

Types of Contract

  • On the basis of validity
    • Valid Contract: An agreement which is enforceable by law, is a valid contract.
    • Void Contract: The contract which is no longer enforceable in the court of law is a void one.
    • Voidable Contract: A contract in which one of the parties to the contract has a choice to avoid performing his/her part, then it is termed as a voidable contract. When the consent of the party is not free, the contract becomes voidable, at the option of the aggrieved party.
    • Illegal Contract: A contract which is forbidden by law is termed as an illegal contract.
    • Unenforceable Contract: The contract whose substance is good, but due to some issues, it is not enforceable, is called unenforceable contract.
  • On the basis of formation
    • Express Contract: When the terms of the contract are expressed by orally or in writing, it is known as an express contract.
    • Implied Contract: The contract which is constituted by implication of law or action, is an implied one.
    • Quasi-Contract: These are not a real contract, but are identical to a contract, which is formed out of some circumstances.
  • On the basis of Performance
    • Executed Contract: When the contract is performed, it is known as an executed contract.
    • Executory Contract: When the obligation in a contract, is to be performed in future, it is described as an executory contract.
      • Unilateral Contract
      • Bilateral Contract

To sum up, agreements are termed as a contract, if it comprises all the essential elements that constitute a contract.

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