Contract System


A contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a binding legal Agreement.

CONTRACT As Defined by Eminent JURISTS

“Every agreement and promise enforceable at law is a contract.” – Pollock.
 “A Contract is an agreement between two or more persons which is intended to be enforceable at law and is contracted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some act.” – Halsbury.
“A contract is an agreement creating and defining obligation between the parties”    –  Salmond.



  • A Promise enforceable by Law
  • Offer +Acceptance (Legally binding)
  • To be legally binding as a contract, a promise must be exchanged for adequate consideration. i.e., benefit a party receives

Origin of Contract

  • Governed by the Indian Contract Act, 1872.
  • Enacted by British India on 25th April, 1872 [Act 9 of 1872].
  • Subsequently came into force on the first day of September 1872.
  • Modeled on that of the English Common Law.
  • Applicable to all the states of India except the state of Jammu & Kashmir.
  • Deals with the enforcement of the rights and duties on the parties in India mainly with general and limiting principles such as – formation, Validity, performance or breach and remedies thereof.
  • Last amendment by Act 4 of 2003.

Contents of INDIAN CONTRACT ACT 1972

The Indian Contract Act (applicable to whole Indian except the state of jammu & Kashmir) consists of the following two parts:

  • General Principals of the Law of Contract as Part 1. (The general principals of the Law of Contract are contained in Sections 1 to 75 (up to chapter VI) of the Indian Contract Act. These principles apply to all kinds of contracts irrespective of their nature).
  • Contract relating to Sale of Goods - Sections 76 to 123 (originally part of it but subsequently deleted/repealed and incorporated as a separate Act namely Sale of Goods and Movables Act 1930).
  • Special kinds of contracts as Part 2. (Special contracts are contained in Sections 124 to 238 (in chapters VII to X) of the Indian Contract Act. These special contracts are Indemnity, Guarantee, Bailment, pledge and Agency).
  • Contracts relating to Partnership - Sections 239 to 266 (originally part of it but subsequently deleted/repealed and incorporated as a separate Act namely Indian Partnership Act 1932).

Important Sections of INDIAN CONTRACT ACT 1972

  • Offer (i.e. Proposal) [section 2(a)]:-When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other person either to such act or abstinence, he is said to make a proposal.
  • Acceptance [SECTION 2(b)]:- When the person to whom the proposal is made, signifies his assent there to , the proposal is said to be accepted.
  • Promise [SECTION 2(b)]:- A Proposal when accepted becomes a promise. In simple words, when an offer is accepted it becomes promise.
  • Promisor and promise [Section 2(c)] :- When the proposal is accepted, the person making the proposal is called as promisor and the person accepting the proposal is called as promisee.
  • Consideration [Section 2(d)] :- When at the desire of the promisor, the promisee or any other person has done or abstained from doing something or does or abstains from doing something or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.
  • Agreement  [Section 2(e)] :- Every promise and set of promises forming the consideration for each other. In short, agreement = offer + acceptance.
  • Contract [Section 2(h)] :- An agreement enforceable by Law is a contract.
  • Void Agreement [Section 2(g)]:- An agreement not enforceable by law is void.
  • Voidable contract [Secion 2(i)]:- An agreement is a voidable contract if it is enforceable by Law at the option of one or more of the parties there to (i.e. the aggrieved party), and it is not enforceable by Law at the option of the other or others (Result of coercion, undue influence, fraud and misrepresentation).
  • Void contract [Secion 2(j)]:- A contract which ceases to be enforceable by Law becomes void when it ceases to be enforceable (by mistake of facts, w/o consideration, unlawful etc).

Note:- Price paid by the one party for the promise of the other Technical word meaning QUID-PRO-QUO i.e. something in return.

Essentials of a Valid Contract [Section 10]

  1. There must be an agreement or meeting the minds
  2. The agreement must be between parties competent to enter into a contract
  3. The Parties must give free consent
  4. The agreement must be supported by lawful consideration.
  5. Subject matter must be definite and lawful


“ Every promise and every set of promises forming the consideration for each other is an agreement ” section  2 (e)  of the Indian Contract Act 1872 ( as ammended by Act 1 of 1997).

  • An agreement not enforceable by law is said to be void;
  • An agreement enforceable by law is a contract;
  • An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract; i.e Consent of all – must.
  • Two or more person are said to consent when they agree upon the same thing in the same sense.

Agreements are Contracts

  • An agreement which is enforceable by law is considered to be a contract – section 2 (h) of the Indian Contract Act.
  • An agreement is contract if it is
  1.  Made by free consent of the parties
  2. Made by parties who are competent to contract
  3. For lawful consideration – With a lawful object
  4. Made in writing if required by law
  5. Not expressly declared void
  • The conditions of the contract define basic rights, responsibilities, and relationships of the parties involved in the construction process in greater detail than the Agreement.

Persons not competent to contract

  • Minors
  • Insane persons
  • Persons subject to disqualifications under any other law


Contract between private parties is absolutely binding and valid if section 10 of the Indian Contract Act 1872 is satisfied.


“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______” 
Contracts by Government

  • Government is, by far, the largest contractor in any country, so too in India. supply products (purchases ) and services (consultancy, labour etc.,)
  • Under the Constitution of India, the power to enter into contract is conferred under article 298 (as amended in 1956). This article gives power to Union of India and the states to enter into contracts for any purpose.
  • Contracts entered into between private persons and the Governments are governed by article 299 of constitution of India. The procedure and the form in which the Government contracts are to be made are laid down in the article 299 of the constitution of India.
  • Terms and Conditions of the contracts relate to the performance of the contract whereas the above mentioned procedural requirements are to be fulfilled for the validity of a contract.
  • Article 299 stipulates “all contracts made in exercise of the executive power of the union or the state shall be expressed to be made by the president or by the governor of the state as the case may be and all such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of the president or the governor by such person and in such manners as he may direct or authorise”
  • Neither the president nor the governor shall be personally liable_______”

Article 299

  • Deed must be by authorised person
  • Transparency in the deal
  • Public Interest in accepting Tenders should prevail
  • Negotiations should be done with a purpose and prudence.


  • Many types of contract systems are adopted for development and maintenance of engineering infrastructure. The key factors and conditions in any such construction contract are those which have impact on,
  1. Time for completion of assigned contract
  2. Mutually agreed cost and deliverances
  3. Quality Construction
  4. No or least litigations
  5. Cordial relationship between employer and contractor
  • By and large, when one refers to contracts in Government, it is the contract for execution of works or for procurement of materials & or both etc (K2, LS & EPC (incl of design) contract systems)).


  • formulated in advance
  • not individually negotiated
  • any ambiguity in the interpretation of clauses is likely to lead to litigation, loss of resultant goodwill and waste of time.


  • The terms of the contract must be clear and precise.
  • Time is the essence of contracts
  • The terms of contract should be enforced strictly. this responsibility rests with both parties.
  • Revision of rates in accepted agreements during the currency of such agreement is prohibited.


Fundamental principles to be followed during the execution of project works

  • Ensuring good workmanship by proper supervision
  • Keeping proper account of materials used.
  • Ensuring scheduled inspections.
  • Recording measurements and obtain signature of the contractor.
  • Carrying out prescribed test checks as stipulated.
  • Ensuring adherence to specifications and drawings. 

Execution Of State Govt Project Works

  • By following the specifications, rules and regulations laid down in:
  1. Standard Specifications (APSS)
  2. ISI, IRC, MOST, CPWD  etc specifications
  3. Departmental  code  (PWD ‘D’ Code)
  4. Accounts  code (PWD ‘A’ Code)
  5. Financial Code (PWD ‘F’ Code)
  6. Standard Schedule of Rates and Standard Data.
  7. General Guidelines in the form of G.O’s and circulars issued from time to time.
  • The above intend to describe

a) the method of execution of work,

b) Character of the ingredients to be put to use,

c) the Contractors responsibilities and liabilities,

d) Procedure for the estimations and revised estimates,

e) duties and responsibilities of all the party entities involved in the work project etc.

  • Every contractor registered with the Government is presumed to be in knowhow of all such of the above and the contractor is bound to give undertaking to that effect.