JAIIB LRAB Unit 40 - Meaning and Essentials of A Contract

MEANING OF CONTRACT

Contract means an agreement enforceable by law. It has two major constituents:

1. An agreement between two persons or more.
2. The agreement must be enforceable by law (i.e. the rights and obligations arising out of it).

KEY COMPONENTS TO FORM A CONTRACT

When one person signifies to another person, his willingness to do or not to do something, with a view to obtaining the consent of that other person, he is said to make a proposal.

When a person to whom the proposal is made, signifies his assent (consent), the proposal is said to be accepted.

A proposal becomes a promise when it is accepted. The person making the proposal is called the 'promisor'. The person accepting the proposal is called 'promisee'.

ESSENTIALS OF A VALID CONTRACT

Proposal and Acceptance

There must be a lawful proposal by one party and the other party must accept the proposal.

An Agreement may be Oral or Written

While an agreement may be Oral or Written, under certain laws an agreement is required to be in writing only and is also required to be registered and attested. If such formalities are not complied with, then the agreement cannot be enforced before a court of law.

The Contract Act defines consideration as under.

When, at the desire of the promisor, the promisee or any other person

• has done or abstained from doing, or
• does or abstains from doing, or
• promises to do or to abstain from doing something.