ICSI Notes: Law of Contract | Legal Aptitude for CSEET PDF Download

 Page 1


216
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
LAW OF CONTRACT
INTRODUCTION
A contract is an agreement enforceable at law, made between two or more persons, by which rights 
are acquired by one or more to acts or forbearances on the part of the other or others. A contract is 
an agreement creating and defining obligations between the parties.
The Indian Contract Act, 1872 lays down general principles relating to formation and enforceability 
of contracts; rules governing the provisions of an agreement and offer; the various types of contracts 
including those of indemnity and guarantee, bailment and pledge and agency. It also contains 
provisions pertaining to breach of a contract.
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects 
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation 
of the civilized world.
The Indian Contract Act, 1872 came into force on the first day of September, 1872. The preamble to the 
Act says that it is an Act “to define and amend certain parts of the law relating to contract”. The Act 
is by no means exhaustive on the law of contract. It does not deal with all the branches of the law of 
contract. Thus, contracts relating to partnership, sale of goods, negotiable instruments, insurance etc. 
are dealt with by separate Acts. The Indian Contract Act majorly deals with the general principles and 
rules governing contracts. The Act is divisible into two parts:
 – The first part (Section 1-75) deals with the general principles of the law of contract, and therefore 
applies to all contracts irrespective of their nature.
 – The second part (Sections 124-238) deals with certain special kinds of contracts, namely 
contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
CONTRACT
The Indian Contract Act has defined “Contract” in Section 2(h) as “an agreement enforceable by 
law”. This definition indicate that a contract essentially consists of two distinct parts. First, there must 
be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, 
an agreement must be coupled with an obligation. A contract therefore, is a combination of the two 
elements:
 – An agreement, and
 – An obligation.
AGREEMENT
An agreement gives birth to a contract. As per Section 2(e) of the Indian Contract Act every promise 
and every set of promises, forming the consideration for each other, is an agreement.
It is evident from the definition given above that an agreement is based on a promise. What is a 
promise? According to Section 2(b) of the Indian Contract Act “when the person to whom the proposal 
is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, 
Page 2


216
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
LAW OF CONTRACT
INTRODUCTION
A contract is an agreement enforceable at law, made between two or more persons, by which rights 
are acquired by one or more to acts or forbearances on the part of the other or others. A contract is 
an agreement creating and defining obligations between the parties.
The Indian Contract Act, 1872 lays down general principles relating to formation and enforceability 
of contracts; rules governing the provisions of an agreement and offer; the various types of contracts 
including those of indemnity and guarantee, bailment and pledge and agency. It also contains 
provisions pertaining to breach of a contract.
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects 
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation 
of the civilized world.
The Indian Contract Act, 1872 came into force on the first day of September, 1872. The preamble to the 
Act says that it is an Act “to define and amend certain parts of the law relating to contract”. The Act 
is by no means exhaustive on the law of contract. It does not deal with all the branches of the law of 
contract. Thus, contracts relating to partnership, sale of goods, negotiable instruments, insurance etc. 
are dealt with by separate Acts. The Indian Contract Act majorly deals with the general principles and 
rules governing contracts. The Act is divisible into two parts:
 – The first part (Section 1-75) deals with the general principles of the law of contract, and therefore 
applies to all contracts irrespective of their nature.
 – The second part (Sections 124-238) deals with certain special kinds of contracts, namely 
contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
CONTRACT
The Indian Contract Act has defined “Contract” in Section 2(h) as “an agreement enforceable by 
law”. This definition indicate that a contract essentially consists of two distinct parts. First, there must 
be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, 
an agreement must be coupled with an obligation. A contract therefore, is a combination of the two 
elements:
 – An agreement, and
 – An obligation.
AGREEMENT
An agreement gives birth to a contract. As per Section 2(e) of the Indian Contract Act every promise 
and every set of promises, forming the consideration for each other, is an agreement.
It is evident from the definition given above that an agreement is based on a promise. What is a 
promise? According to Section 2(b) of the Indian Contract Act “when the person to whom the proposal 
is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, 
217
Legal Aptitude  
and Logical Reasoning
becomes a promise. An agreement, therefore, comes into existence when one party makes a proposal 
or offer to the other party and that other party signifies his assent thereto. In a nutshell, an agreement is 
the sum total of offer and acceptance.”
Example: Mr. A orally agreed to supply 50 Kg Rice of a certain brand and quality to Mr. B and to 
receive payment against it. Is it an agreement?
Yes, it is an agreement.
An analysis of the definition given above reveals the following characteristics of an agreement:
OBLIGATION
An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from 
doing. A contractual obligation arises from a bargain between the parties to the agreement who are 
called the promisor and the promisee. Section 2(b) says that when the person to whom the proposal is 
made signifies his assent thereto, the proposal is said to be accepted; and a proposal when accepted 
becomes a promise. In broad sense, therefore, a contract is an exchange of promises by two or more 
persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is 
recognised and enforced by law.
Rights and Obligations
Where parties have made a binding contract, they have created rights and obligations between 
themselves. The contractual rights and obligations are correlative, e.g., A agrees with B to sell his car for 
Rs.10,00,000/- to him. In this example, the following rights and obligations have been created:
 (i) A is under an obligation to deliver the car to B. B has a corresponding right to receive the car.
 (ii) B is under an obligation to pay Rs.10,00,000/- to A. A has a correlative right to receive 
Rs.10,00,000/-.
Lesson 2 – Elements of General Laws
Page 3


216
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
LAW OF CONTRACT
INTRODUCTION
A contract is an agreement enforceable at law, made between two or more persons, by which rights 
are acquired by one or more to acts or forbearances on the part of the other or others. A contract is 
an agreement creating and defining obligations between the parties.
The Indian Contract Act, 1872 lays down general principles relating to formation and enforceability 
of contracts; rules governing the provisions of an agreement and offer; the various types of contracts 
including those of indemnity and guarantee, bailment and pledge and agency. It also contains 
provisions pertaining to breach of a contract.
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects 
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation 
of the civilized world.
The Indian Contract Act, 1872 came into force on the first day of September, 1872. The preamble to the 
Act says that it is an Act “to define and amend certain parts of the law relating to contract”. The Act 
is by no means exhaustive on the law of contract. It does not deal with all the branches of the law of 
contract. Thus, contracts relating to partnership, sale of goods, negotiable instruments, insurance etc. 
are dealt with by separate Acts. The Indian Contract Act majorly deals with the general principles and 
rules governing contracts. The Act is divisible into two parts:
 – The first part (Section 1-75) deals with the general principles of the law of contract, and therefore 
applies to all contracts irrespective of their nature.
 – The second part (Sections 124-238) deals with certain special kinds of contracts, namely 
contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
CONTRACT
The Indian Contract Act has defined “Contract” in Section 2(h) as “an agreement enforceable by 
law”. This definition indicate that a contract essentially consists of two distinct parts. First, there must 
be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, 
an agreement must be coupled with an obligation. A contract therefore, is a combination of the two 
elements:
 – An agreement, and
 – An obligation.
AGREEMENT
An agreement gives birth to a contract. As per Section 2(e) of the Indian Contract Act every promise 
and every set of promises, forming the consideration for each other, is an agreement.
It is evident from the definition given above that an agreement is based on a promise. What is a 
promise? According to Section 2(b) of the Indian Contract Act “when the person to whom the proposal 
is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, 
217
Legal Aptitude  
and Logical Reasoning
becomes a promise. An agreement, therefore, comes into existence when one party makes a proposal 
or offer to the other party and that other party signifies his assent thereto. In a nutshell, an agreement is 
the sum total of offer and acceptance.”
Example: Mr. A orally agreed to supply 50 Kg Rice of a certain brand and quality to Mr. B and to 
receive payment against it. Is it an agreement?
Yes, it is an agreement.
An analysis of the definition given above reveals the following characteristics of an agreement:
OBLIGATION
An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from 
doing. A contractual obligation arises from a bargain between the parties to the agreement who are 
called the promisor and the promisee. Section 2(b) says that when the person to whom the proposal is 
made signifies his assent thereto, the proposal is said to be accepted; and a proposal when accepted 
becomes a promise. In broad sense, therefore, a contract is an exchange of promises by two or more 
persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is 
recognised and enforced by law.
Rights and Obligations
Where parties have made a binding contract, they have created rights and obligations between 
themselves. The contractual rights and obligations are correlative, e.g., A agrees with B to sell his car for 
Rs.10,00,000/- to him. In this example, the following rights and obligations have been created:
 (i) A is under an obligation to deliver the car to B. B has a corresponding right to receive the car.
 (ii) B is under an obligation to pay Rs.10,00,000/- to A. A has a correlative right to receive 
Rs.10,00,000/-.
Lesson 2 – Elements of General Laws
218
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
Agreements which are not Contracts
Agreements in which the idea of bargain is absent and there is no intention to create legal relations 
are not contracts. These are:
 (a) Agreements relating to social matters : An agreement between two persons to go together 
to the cinema, or for a walk, does not create a legal obligation on their part to abide by it. 
Similarly, if I promise to take you for dinner and break that promise, I do not expect to be liable 
to legal penalties. There cannot be any offer and acceptance to hospitality.
 (b) Domestic arrangements between husband and wife : In Balfour v. Balfour (1919) 2 KB 571, a 
husband working in Ceylone, had agreed in writing to pay a housekeeping allowance to his 
wife living in England. On receiving information that she was unfaithful to him, he stopped the 
allowance. He was held to be entitled to do so. This was a mere domestic arrangement with no 
intention to create legally binding relations. Therefore, there was no contract.
Three consequences follow from the above discussion
 – To constitute a contract, the parties must intend to create legal relationship.
 – The law of contract is the law of those agreements which create obligations, and those 
obligations have their source in agreement.
 – Agreement is the genus of which contract is the specie and, therefore, all contracts are 
agreements but all agreements are not contracts.
Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act, 1872 provides that “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”.
The essential elements of a valid contract are:
 (i) An offer or proposal by one party and acceptance of that offer by another party resulting in an 
Agreement – consensus-ad-idem.
 (ii) An intention to create legal relations or an intent to have legal consequences.
 (iii) The agreement is supported by a lawful consideration.
 (iv) The parties to the contract are legally capable of contracting.
 (v) Genuine consent between the parties.
 (vi) The object and consideration of the contract is legal and is not opposed to public policy.
 (vii) The terms of the contract are certain.
 (viii) The agreement is capable of being performed i.e., it is not impossible of being performed.
Therefore, to form a valid contract there must be:
 – An agreement
 – Based on the genuine consent of the parties
 – Supported by a lawful consideration
Page 4


216
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
LAW OF CONTRACT
INTRODUCTION
A contract is an agreement enforceable at law, made between two or more persons, by which rights 
are acquired by one or more to acts or forbearances on the part of the other or others. A contract is 
an agreement creating and defining obligations between the parties.
The Indian Contract Act, 1872 lays down general principles relating to formation and enforceability 
of contracts; rules governing the provisions of an agreement and offer; the various types of contracts 
including those of indemnity and guarantee, bailment and pledge and agency. It also contains 
provisions pertaining to breach of a contract.
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects 
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation 
of the civilized world.
The Indian Contract Act, 1872 came into force on the first day of September, 1872. The preamble to the 
Act says that it is an Act “to define and amend certain parts of the law relating to contract”. The Act 
is by no means exhaustive on the law of contract. It does not deal with all the branches of the law of 
contract. Thus, contracts relating to partnership, sale of goods, negotiable instruments, insurance etc. 
are dealt with by separate Acts. The Indian Contract Act majorly deals with the general principles and 
rules governing contracts. The Act is divisible into two parts:
 – The first part (Section 1-75) deals with the general principles of the law of contract, and therefore 
applies to all contracts irrespective of their nature.
 – The second part (Sections 124-238) deals with certain special kinds of contracts, namely 
contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
CONTRACT
The Indian Contract Act has defined “Contract” in Section 2(h) as “an agreement enforceable by 
law”. This definition indicate that a contract essentially consists of two distinct parts. First, there must 
be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, 
an agreement must be coupled with an obligation. A contract therefore, is a combination of the two 
elements:
 – An agreement, and
 – An obligation.
AGREEMENT
An agreement gives birth to a contract. As per Section 2(e) of the Indian Contract Act every promise 
and every set of promises, forming the consideration for each other, is an agreement.
It is evident from the definition given above that an agreement is based on a promise. What is a 
promise? According to Section 2(b) of the Indian Contract Act “when the person to whom the proposal 
is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, 
217
Legal Aptitude  
and Logical Reasoning
becomes a promise. An agreement, therefore, comes into existence when one party makes a proposal 
or offer to the other party and that other party signifies his assent thereto. In a nutshell, an agreement is 
the sum total of offer and acceptance.”
Example: Mr. A orally agreed to supply 50 Kg Rice of a certain brand and quality to Mr. B and to 
receive payment against it. Is it an agreement?
Yes, it is an agreement.
An analysis of the definition given above reveals the following characteristics of an agreement:
OBLIGATION
An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from 
doing. A contractual obligation arises from a bargain between the parties to the agreement who are 
called the promisor and the promisee. Section 2(b) says that when the person to whom the proposal is 
made signifies his assent thereto, the proposal is said to be accepted; and a proposal when accepted 
becomes a promise. In broad sense, therefore, a contract is an exchange of promises by two or more 
persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is 
recognised and enforced by law.
Rights and Obligations
Where parties have made a binding contract, they have created rights and obligations between 
themselves. The contractual rights and obligations are correlative, e.g., A agrees with B to sell his car for 
Rs.10,00,000/- to him. In this example, the following rights and obligations have been created:
 (i) A is under an obligation to deliver the car to B. B has a corresponding right to receive the car.
 (ii) B is under an obligation to pay Rs.10,00,000/- to A. A has a correlative right to receive 
Rs.10,00,000/-.
Lesson 2 – Elements of General Laws
218
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
Agreements which are not Contracts
Agreements in which the idea of bargain is absent and there is no intention to create legal relations 
are not contracts. These are:
 (a) Agreements relating to social matters : An agreement between two persons to go together 
to the cinema, or for a walk, does not create a legal obligation on their part to abide by it. 
Similarly, if I promise to take you for dinner and break that promise, I do not expect to be liable 
to legal penalties. There cannot be any offer and acceptance to hospitality.
 (b) Domestic arrangements between husband and wife : In Balfour v. Balfour (1919) 2 KB 571, a 
husband working in Ceylone, had agreed in writing to pay a housekeeping allowance to his 
wife living in England. On receiving information that she was unfaithful to him, he stopped the 
allowance. He was held to be entitled to do so. This was a mere domestic arrangement with no 
intention to create legally binding relations. Therefore, there was no contract.
Three consequences follow from the above discussion
 – To constitute a contract, the parties must intend to create legal relationship.
 – The law of contract is the law of those agreements which create obligations, and those 
obligations have their source in agreement.
 – Agreement is the genus of which contract is the specie and, therefore, all contracts are 
agreements but all agreements are not contracts.
Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act, 1872 provides that “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”.
The essential elements of a valid contract are:
 (i) An offer or proposal by one party and acceptance of that offer by another party resulting in an 
Agreement – consensus-ad-idem.
 (ii) An intention to create legal relations or an intent to have legal consequences.
 (iii) The agreement is supported by a lawful consideration.
 (iv) The parties to the contract are legally capable of contracting.
 (v) Genuine consent between the parties.
 (vi) The object and consideration of the contract is legal and is not opposed to public policy.
 (vii) The terms of the contract are certain.
 (viii) The agreement is capable of being performed i.e., it is not impossible of being performed.
Therefore, to form a valid contract there must be:
 – An agreement
 – Based on the genuine consent of the parties
 – Supported by a lawful consideration
219
Legal Aptitude  
and Logical Reasoning
 – Made for a lawful object, and
 – Between the competent parties.
Example: There is an agreement with a term that A will provide 50 kg of Wheat on a price of more 
than Rs. Per 50 Kg?
An agreement cannot be on ambiguous terms. Therefore, this agreement is not valid.
Offer or Proposal and Acceptance
One of the early steps in the formation of a contract lies in arriving at an agreement between the 
contracting parties by means of an offer and acceptance. Thus, when one party (the offeror) makes 
a definite proposal to another party (the offeree) and the offeree accepts it in its entirety and without 
any qualification, there is a meeting of the minds of the parties and a contract comes into being, 
assuming that all other elements are also present.
A proposal is also termed as an offer. The word ‘proposal’ is synonymous with the English word “offer”. 
An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual 
obligation in return for a promise, act or forbearance. Section 2(a) of the Indian Contract Act defines 
proposal or offer as “when one person signifies to another his willingness to do or abstain from doing 
anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make 
a proposal”. The person making the proposal or offer is called the proposer or offeror and the person to 
whom the proposal is made is called the offeree.
Rules Governing Offers
A valid offer must comply with the following rules:
 (a) An offer must be clear, definite, complete and final. It must not be vague. For example, a 
promise to pay an increased price for a horse if it proves lucky to promisor, is too vague and is 
not binding.
 (b) An offer must be communicated to the offeree. An offer becomes effective only when it has 
been communicated to the offeree so as to give him an opportunity to accept or reject the 
same.
 (c) The communication of an offer may be made by express words-oral or written-or it may be 
implied by conduct.
 (d) The communication of the offer may be general or specific. Where an offer is made to a specific 
person it is called specific offer and it can be accepted only by that person. But when an offer 
is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and 
can be accepted by any member of the general public by fulfilling the condition laid down in 
the offer’.
Lapse of Offer
Section 6 deals with various modes of lapse of an offer. It states that an offer lapses if–
 (a) It is not accepted within the specified time (if any) or after a reasonable time, if none is specified;
 (b) It is not accepted in the mode prescribed or if no mode is prescribed in some usual and 
reasonable manner, e.g., by sending a letter by mail when early reply was requested;
Lesson 2 – Elements of General Laws
Page 5


216
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
LAW OF CONTRACT
INTRODUCTION
A contract is an agreement enforceable at law, made between two or more persons, by which rights 
are acquired by one or more to acts or forbearances on the part of the other or others. A contract is 
an agreement creating and defining obligations between the parties.
The Indian Contract Act, 1872 lays down general principles relating to formation and enforceability 
of contracts; rules governing the provisions of an agreement and offer; the various types of contracts 
including those of indemnity and guarantee, bailment and pledge and agency. It also contains 
provisions pertaining to breach of a contract.
The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects 
everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation 
of the civilized world.
The Indian Contract Act, 1872 came into force on the first day of September, 1872. The preamble to the 
Act says that it is an Act “to define and amend certain parts of the law relating to contract”. The Act 
is by no means exhaustive on the law of contract. It does not deal with all the branches of the law of 
contract. Thus, contracts relating to partnership, sale of goods, negotiable instruments, insurance etc. 
are dealt with by separate Acts. The Indian Contract Act majorly deals with the general principles and 
rules governing contracts. The Act is divisible into two parts:
 – The first part (Section 1-75) deals with the general principles of the law of contract, and therefore 
applies to all contracts irrespective of their nature.
 – The second part (Sections 124-238) deals with certain special kinds of contracts, namely 
contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.
CONTRACT
The Indian Contract Act has defined “Contract” in Section 2(h) as “an agreement enforceable by 
law”. This definition indicate that a contract essentially consists of two distinct parts. First, there must 
be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, 
an agreement must be coupled with an obligation. A contract therefore, is a combination of the two 
elements:
 – An agreement, and
 – An obligation.
AGREEMENT
An agreement gives birth to a contract. As per Section 2(e) of the Indian Contract Act every promise 
and every set of promises, forming the consideration for each other, is an agreement.
It is evident from the definition given above that an agreement is based on a promise. What is a 
promise? According to Section 2(b) of the Indian Contract Act “when the person to whom the proposal 
is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, 
217
Legal Aptitude  
and Logical Reasoning
becomes a promise. An agreement, therefore, comes into existence when one party makes a proposal 
or offer to the other party and that other party signifies his assent thereto. In a nutshell, an agreement is 
the sum total of offer and acceptance.”
Example: Mr. A orally agreed to supply 50 Kg Rice of a certain brand and quality to Mr. B and to 
receive payment against it. Is it an agreement?
Yes, it is an agreement.
An analysis of the definition given above reveals the following characteristics of an agreement:
OBLIGATION
An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from 
doing. A contractual obligation arises from a bargain between the parties to the agreement who are 
called the promisor and the promisee. Section 2(b) says that when the person to whom the proposal is 
made signifies his assent thereto, the proposal is said to be accepted; and a proposal when accepted 
becomes a promise. In broad sense, therefore, a contract is an exchange of promises by two or more 
persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is 
recognised and enforced by law.
Rights and Obligations
Where parties have made a binding contract, they have created rights and obligations between 
themselves. The contractual rights and obligations are correlative, e.g., A agrees with B to sell his car for 
Rs.10,00,000/- to him. In this example, the following rights and obligations have been created:
 (i) A is under an obligation to deliver the car to B. B has a corresponding right to receive the car.
 (ii) B is under an obligation to pay Rs.10,00,000/- to A. A has a correlative right to receive 
Rs.10,00,000/-.
Lesson 2 – Elements of General Laws
218
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
Agreements which are not Contracts
Agreements in which the idea of bargain is absent and there is no intention to create legal relations 
are not contracts. These are:
 (a) Agreements relating to social matters : An agreement between two persons to go together 
to the cinema, or for a walk, does not create a legal obligation on their part to abide by it. 
Similarly, if I promise to take you for dinner and break that promise, I do not expect to be liable 
to legal penalties. There cannot be any offer and acceptance to hospitality.
 (b) Domestic arrangements between husband and wife : In Balfour v. Balfour (1919) 2 KB 571, a 
husband working in Ceylone, had agreed in writing to pay a housekeeping allowance to his 
wife living in England. On receiving information that she was unfaithful to him, he stopped the 
allowance. He was held to be entitled to do so. This was a mere domestic arrangement with no 
intention to create legally binding relations. Therefore, there was no contract.
Three consequences follow from the above discussion
 – To constitute a contract, the parties must intend to create legal relationship.
 – The law of contract is the law of those agreements which create obligations, and those 
obligations have their source in agreement.
 – Agreement is the genus of which contract is the specie and, therefore, all contracts are 
agreements but all agreements are not contracts.
Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act, 1872 provides that “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”.
The essential elements of a valid contract are:
 (i) An offer or proposal by one party and acceptance of that offer by another party resulting in an 
Agreement – consensus-ad-idem.
 (ii) An intention to create legal relations or an intent to have legal consequences.
 (iii) The agreement is supported by a lawful consideration.
 (iv) The parties to the contract are legally capable of contracting.
 (v) Genuine consent between the parties.
 (vi) The object and consideration of the contract is legal and is not opposed to public policy.
 (vii) The terms of the contract are certain.
 (viii) The agreement is capable of being performed i.e., it is not impossible of being performed.
Therefore, to form a valid contract there must be:
 – An agreement
 – Based on the genuine consent of the parties
 – Supported by a lawful consideration
219
Legal Aptitude  
and Logical Reasoning
 – Made for a lawful object, and
 – Between the competent parties.
Example: There is an agreement with a term that A will provide 50 kg of Wheat on a price of more 
than Rs. Per 50 Kg?
An agreement cannot be on ambiguous terms. Therefore, this agreement is not valid.
Offer or Proposal and Acceptance
One of the early steps in the formation of a contract lies in arriving at an agreement between the 
contracting parties by means of an offer and acceptance. Thus, when one party (the offeror) makes 
a definite proposal to another party (the offeree) and the offeree accepts it in its entirety and without 
any qualification, there is a meeting of the minds of the parties and a contract comes into being, 
assuming that all other elements are also present.
A proposal is also termed as an offer. The word ‘proposal’ is synonymous with the English word “offer”. 
An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual 
obligation in return for a promise, act or forbearance. Section 2(a) of the Indian Contract Act defines 
proposal or offer as “when one person signifies to another his willingness to do or abstain from doing 
anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make 
a proposal”. The person making the proposal or offer is called the proposer or offeror and the person to 
whom the proposal is made is called the offeree.
Rules Governing Offers
A valid offer must comply with the following rules:
 (a) An offer must be clear, definite, complete and final. It must not be vague. For example, a 
promise to pay an increased price for a horse if it proves lucky to promisor, is too vague and is 
not binding.
 (b) An offer must be communicated to the offeree. An offer becomes effective only when it has 
been communicated to the offeree so as to give him an opportunity to accept or reject the 
same.
 (c) The communication of an offer may be made by express words-oral or written-or it may be 
implied by conduct.
 (d) The communication of the offer may be general or specific. Where an offer is made to a specific 
person it is called specific offer and it can be accepted only by that person. But when an offer 
is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and 
can be accepted by any member of the general public by fulfilling the condition laid down in 
the offer’.
Lapse of Offer
Section 6 deals with various modes of lapse of an offer. It states that an offer lapses if–
 (a) It is not accepted within the specified time (if any) or after a reasonable time, if none is specified;
 (b) It is not accepted in the mode prescribed or if no mode is prescribed in some usual and 
reasonable manner, e.g., by sending a letter by mail when early reply was requested;
Lesson 2 – Elements of General Laws
220
CSEET Reference Reading Material - I
Legal Aptitude  
and Logical Reasoning
 (c) The offeree rejects it by distinct refusal to accept it;
 (d) Either the offeror or the offeree dies before acceptance;
 (e) The acceptor fails to fulfil a condition precedent to an acceptance.
 (f) The offeree makes a counter offer, it amounts to rejection of the offer and an offer by the 
offeree may be accepted or rejected by the offeror.
Revocation of Offer by the Offeror
 – An offer may be revoked by the offeror at any time before acceptance.
 – Revocation must be communicated to the offeree, as it does not take effect until it is actually 
communicated to the offeree. Before its actual communication, the offeree, may accept the 
offer and create a binding contract. The revocation must reach the offeree before he sends 
out the acceptance.
 – An offer to keep open for a specified time (option) is not binding unless it is supported by 
consideration.
Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the 
offeree to an offer. Under Section 2(b) of the Contract Act when a person to whom the proposal is 
made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted 
becomes a promise.
Rules Governing Acceptance
 (a) Acceptance may be express i.e. by words spoken or written or implied from the conduct of the 
parties.
 (b) If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed 
manner.
 (c) Acceptance must be unqualified and absolute and must correspond with all the terms of the 
offer.
 (d) A counter offer or conditional acceptance operates as a rejection of the offer and causes it to 
lapse, e.g., where a horse is offered for Rs.1,000 and the offeree counter-offers Rs.990, the offer 
lapses by rejection.
 (e) Acceptance must be communicated to the offeror, for acceptance is complete the moment 
it is communicated. Where the offeree merely intended to accept but does not communicate 
his intention to the offeror, there is no contract. Mere mental acceptance is not enough.
 (f) Mere silence on the part of the offeree does not amount to acceptance.
  Ordinarily, the offeror cannot frame his offer in such a way as to make the silence or inaction 
of the offeree as an acceptance. In other words, the offeror can prescribe the mode of 
acceptance but not the mode of rejection.
 (g) If the offer is one which is to be accepted by being acted upon, no communication of 
acceptance to the offeror is necessary, unless communication is stipulated for in the offer itself.