Contract Law Fundamentals: Validity, Void Agreements, and Termination

Contracts are Agreements, but Not All Agreements are Contracts

The statement "All contracts are agreements, but all agreements are not contracts" is a fundamental principle in Business Law, derived from Section 2(h) of the Indian Contract Act, 1872, which states:

“A contract is an agreement enforceable by law.”

Thus, every contract is essentially an agreement, but only those agreements which are enforceable by law become contracts. Agreements that lack legal enforceability are not contracts.

Agreement vs. Contract: Defining the Difference

• Agreement [Sec. 2(e)]:
  An agreement is defined as “every promise and every set of promises forming the consideration for each other.”
  ➤ Example: A agrees to sell his book to B for ₹200. This is an agreement.

• Contract [Sec. 2(h)]:
  A contract is “an agreement enforceable by law.”
  ➤ Example: If A agrees to sell his car to B for ₹2,00,000, and both give consent, it becomes a contract because it is legally binding.

Hence, the relationship can be summarized as: Agreement + Legal Enforceability = Contract.

Essential Elements of a Valid Contract

For an agreement to be a valid contract, it must fulfill the following essential elements as per the Indian Contract Act, 1872:

1. Lawful Offer and Acceptance

There must be a lawful offer by one party and a lawful acceptance of the offer by the other party, resulting in an agreement. Both offer and acceptance must be clear, definite, and properly communicated.

2. Lawful Consideration

Consideration is something of value exchanged between the parties. It must be lawful, real, and not vague or illusory.

3. Intention to Create Legal Relations

The parties must intend to enter into a legally binding agreement. Social or domestic agreements usually lack this intention and are not contracts.

4. Capacity of Parties [Section 11]

Parties must be competent to contract, meaning they must be:

• Of sound mind

• Not minors (above 18 years)

• Not disqualified by law (e.g., insolvents)

5. Free Consent [Sections 13 to 22]

Consent of the parties must be free and genuine, without being obtained through:

• Coercion

• Undue influence

• Fraud

• Misrepresentation

• Mistake

6. Lawful Object

The object of the contract must be legal and not forbidden by law or against public policy.

7. Possibility of Performance

The terms of the contract must be capable of being performed. An agreement to do something impossible is void.

8. Not Expressly Declared Void

The agreement must not fall under categories declared void by law (e.g., wagering agreements).

9. Certainty of Terms [Section 29]

The terms must be certain or capable of being made certain. Vague agreements are void.

Void Contracts and Expressly Void Agreements

Meaning of a Void Contract [Section 2(j)]

According to Section 2(j) of the Indian Contract Act, 1872:

“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.”

A void contract is an agreement that was valid at the time of formation but later becomes unenforceable due to certain reasons (e.g., subsequent impossibility). It creates no legal rights or obligations once it becomes void.

Characteristics of a Void Contract:

• It does not give rise to legal obligations.

• It cannot be enforced in a court of law.

• It may be void from the beginning (void ab initio) or become void later.

Agreements Expressly Declared Void under the Indian Contract Act:

The Act expressly declares certain agreements as void, meaning they are not legally enforceable from the very beginning:

1. Agreement in Restraint of Marriage [Section 26]

Any agreement that restricts a person (other than a minor) from marrying is void.

2. Agreement in Restraint of Trade [Section 27]

Every agreement that restrains anyone from carrying on a lawful profession, trade, or business is void, subject to certain statutory exceptions (e.g., sale of goodwill).

3. Agreement in Restraint of Legal Proceedings [Section 28]

Any agreement that restricts legal rights to approach the court or limits the time period for legal action is void.

4. Uncertain Agreements [Section 29]

Agreements whose meaning is not certain or capable of being made certain are void.

5. Wagering Agreements [Section 30]

An agreement where money or money’s worth is payable upon the outcome of an uncertain event is void. (Note: In some states like Maharashtra, they are also unlawful.)

6. Agreements to Do Impossible Acts [Section 56]

An agreement to do something impossible or unlawful is void.

7. Agreements Made Without Consideration [Section 25]

An agreement made without consideration is void, unless it falls under specific exceptions (e.g., natural love and affection, compensation for past voluntary service, or time-barred debt).

8. Agreements by Incompetent Persons [Section 11]

Agreements made by minors, persons of unsound mind, or those disqualified by law are void.

9. Agreements Opposed to Public Policy

Any agreement which is against public morals, welfare, or the interest of society is void (e.g., agreements to commit a crime or corrupt public officials).

Modes of Discharge and Termination of a Contract

Meaning of Discharge of Contract

A contract is said to be discharged when the rights and obligations created by it come to an end. Once discharged, parties are no longer legally bound to perform their contractual duties.

1. Discharge by Performance

When both parties fulfill their contractual obligations, the contract is discharged. This includes Actual Performance (duties completed) and Attempted Performance (Tender) (offer to perform refused by the other party).

2. Discharge by Mutual Agreement

A contract may be discharged when the parties mutually agree to terminate or alter the original contract. This includes:

• Novation (Sec. 62): Substitution of a new contract.

• Alteration: Changing terms by mutual consent.

• Rescission: Canceling the contract.

• Remission (Sec. 63): Acceptance of lesser performance or sum.

3. Discharge by Lapse of Time

If a contract is not performed within the prescribed period under the Limitation Act, 1963, it becomes unenforceable and is discharged.

4. Discharge by Operation of Law

A contract may be discharged automatically by operation of law in cases such as the death or insolvency of a party, merger of rights, or unauthorized material alteration of contract terms.

5. Discharge by Impossibility of Performance (Frustration)

If the performance becomes impossible or unlawful due to unforeseen events (e.g., natural calamity, war, change in law), the contract is discharged under Section 56 (Subsequent Impossibility or Doctrine of Frustration).

6. Discharge by Breach of Contract

When one party refuses or fails to perform their obligation, it amounts to a breach, and the injured party is discharged from their duties and may claim damages. Breach can be Actual (at the time of performance) or Anticipatory (before the due date).

7. Discharge by Waiver or Accord & Satisfaction

Parties may settle the contract by accepting alternate satisfaction (Accord and Satisfaction) or by voluntarily abandoning their rights (Waiver), leading to discharge.

Conclusion

The statement that “A contract is an agreement enforceable by law” emphasizes that enforceability is the key differentiator. Only agreements meeting all essential legal criteria—including free consent, lawful object, capacity, and consideration—are recognized as valid contracts. The Indian Contract Act, 1872, further provides clear grounds for when agreements are void and how valid contracts may be legally discharged, ensuring fairness and stability in commercial dealings.