What Is a Contractual Agreement? Definition, Types, and Legal Remedies

A contractual agreement is another name for a contract: an agreement between two or more parties that is enforceable by law. Under Section 2(h) of the Indian Contract Act, 1872, a contract is “an agreement enforceable by law”, and it is the basis of trust, accountability, and legal certainty in business and personal transactions.

Whether it is the hiring of an employee or a vendor, a lease agreement for property, or the purchase of goods, contractual agreements establish the rights and responsibilities of the parties involved. Understanding what a contractual agreement is, the different types of contracts, and their legal implications helps avoid disputes and ensures that the contract is enforceable.

This article discusses the definition of contractual agreements, the legal aspects of contractual agreements under Indian law, the different types of contracts, and their legal implications. For a fuller treatment of the basics, see what is a contract.

Contractual Meaning in Law

The word contractual means relating to or arising from a contract. It describes anything that exists because of a contract, as opposed to something that exists by law alone or by custom.

The word appears in many common legal phrases:

• Contractual obligation: a duty that a party owes under a contract, such as paying for goods or delivering a service.
• Contractual liability: responsibility for loss that arises from breaking the terms of a contract.
• Contractual rights: the entitlements a party has under a contract, such as the right to be paid or to terminate.
• Contractual terms: the provisions written into the contract. See contract terms and conditions.

What Is a Contractual Agreement?

A contractual agreement is a binding promise between two or more parties that establishes enforceable rights and duties. In simpler words, it is an agreement that is recognised and enforced by the law.

Although the words “agreement” and “contract” are often used interchangeably, they are not the same. An agreement can only be considered a contract if it meets certain legal requirements. If not, the agreement may exist in practice but is not enforceable in a court of law. See contract vs agreement for the distinction.

Legal Definition Under Indian Law

According to Section 2(h) of the Indian Contract Act, 1872, a contract is defined as “an agreement enforceable by law.” This definition emphasises the following two aspects:

• Every contract is an agreement
• Not all agreements are contracts

An agreement becomes a contract only if it fulfils the requirements set by law, and thus becomes enforceable by law. Section 10 provides that an agreement is a contract when it is made with the free consent of competent parties, for a lawful consideration and with a lawful object, and is not expressly declared void.

Essential Elements of a Valid Contract

For a contractual agreement to be valid and enforceable, the following elements must be present in the agreement:

1. Offer

An offer is a specific and definite proposal made by one party to another, showing willingness to enter into a contract on certain terms.

2. Acceptance

Acceptance is the act of the other party agreeing to the offer without any conditions or alterations. Acceptance must match exactly with the terms of the offer.

3. Lawful Consideration

Consideration is something of value given in exchange between the two parties, such as money, goods, services, or a promise to do or refrain from doing something. Consideration must be lawful. See consideration in contract law.

4. Capacity to Contract

The parties to a contract must possess legal capacity. This requires that they be at least 18 years old, of sound mind, and not disqualified by law.

5. Free Consent

The consent must be free and not affected by coercion, undue influence, fraud, misrepresentation, or mistake.

6. Intention to Create Legal Relations

The parties must intend that the agreement be legally binding. Social or domestic agreements lack this intention and are therefore not enforceable.

7. Lawful Object

The object of the contract must be legal. Agreements with illegal objects are void and therefore unenforceable.

8. Not Declared Void by Law

The agreement must not be one that the Act expressly declares void, such as an agreement in restraint of trade or a wagering agreement.

Types of Contractual Agreements

Contracts can be categorised in various ways depending on the formation, performance, and validity of the contract.

1. Types of Contracts Based on Formation

Express Contracts

Express contracts are made through the use of explicit language, either written or verbal. This is the most common type of contract. See express contracts.

Implied Contracts

Implied contracts are created through the actions or behaviour of the parties involved. The contract is not created through written or verbal language. The intention to create a contract is inferred from the circumstances.

Quasi-Contracts

Quasi-contracts are not created by agreement but are created by law to avoid unjust enrichment. In India they are dealt with in Sections 68 to 72 of the Indian Contract Act, which cover situations such as supplying necessaries to a person who cannot contract, paying a sum that another person owes, and money paid by mistake. They are used to ensure fairness where one party is enriched at the expense of another.

2. Types of Contracts Based on Performance

Executed Contracts

In an executed contract, both parties have completely performed their obligations.

Executory Contracts

An executory contract is one where the obligations of one or both parties are yet to be performed. See executory contracts.

Unilateral Contracts

In unilateral contracts, one party gives a promise in return for an act. The contract arises only after the act is performed. See unilateral contracts.

Bilateral Contracts

Bilateral contracts involve mutual promises where both parties are bound to perform their respective promises.

3. Types of Contracts Based on Validity

Valid Contracts

Valid contracts are those that satisfy all the legal requirements and are fully enforceable by law.

Void Agreements and Void Contracts

Under Section 2(g), an agreement that is not enforceable by law is void from the start, for example because its object is illegal or impossible. Under Section 2(j), a contract that is valid when made becomes void when it ceases to be enforceable.

Voidable Contracts

Voidable contracts are valid contracts that can be cancelled at the option of one of the parties, which is often due to the absence of free consent.

Contingent Contracts

Contingent contracts are dependent on the occurrence or absence of an uncertain future event. See contingent contracts.

Common Examples of Contractual Agreements

Contractual agreements are used across various personal and commercial contexts. Practical examples include:

• Employment agreements, including a contractual agreement between employer and employee
• Service and consultancy agreements
• Lease and rental agreements
• Sales and purchase contracts
• Non-disclosure agreements (NDAs)
• Vendor and supplier contracts

Legal Implications of a Contractual Agreement

Breach of Contract

Breach of contract takes place when one of the parties involved in the contractual agreement fails to fulfil their obligations. In practice, breaches are often described as:

• Minor breach of contract, which does not affect the essence of the contract
• Material breach of contract, which has a significant effect on the contract and is a reason to terminate the contract

Under Section 39 of the Indian Contract Act, a party that refuses to perform its promise in its entirety, or disables itself from performing it, allows the other party to put an end to the contract. This is known as an anticipatory breach when it happens before performance falls due.

Remedies for Breach of Contract

In case of a breach of contract, the affected party is entitled to approach the court for the following remedies:

• Damages: Compensation for the loss incurred, under Section 73 of the Indian Contract Act
• Specific Performance: A court order requiring the breaching party to perform their obligations under the contract
• Rescission: Cancelling the contract
• Injunction: A court order restraining a party from performing a specific act

A contract also ends when it is discharged, whether by performance, by agreement or by breach. See discharge of contract.

When Is a Contract Not Enforceable?

Certain agreements are not enforceable under law, including:

• Agreements with unlawful objects or consideration
• Agreements that are vague or uncertain
• Agreements expressly declared void by law
• Agreements without consideration, unless covered by the exceptions in Section 25

Importance of Contractual Agreements in Business

Contractual agreements play a crucial role in business operations and regulatory alignment by:

• Clearly defining rights and responsibilities
• Reducing legal and commercial risks
• Providing clarity in case of disputes
• Ensuring accountability and compliance
• Supporting structured and predictable business relationships

How Legistify Helps Legal Teams Manage Contractual Agreements

Legistify is an AI-native legal operations platform for enterprises, and its contract lifecycle management tools help legal teams manage contractual agreements from drafting to renewal.

• Drafting and review: Legistify AI CLM works as a Microsoft Word add-in with a clause library and playbooks that check a contract against internal rules and suggest redlines.
• Negotiation: Contracts are shared in real time, and track changes and version control make it easy to compare versions.
• Approvals and tracking: Approval workflows route each contract to the right approver, and a dashboard shows each contract at every stage, with monitoring of key milestones and deadlines.
• Signing: The e-signature module supports Aadhaar integration and keeps a secure audit trail of signature activity.
• One repository: Executed contracts are stored in a central repository with AI-powered clause extraction and search, and analytics and reporting give visibility across the portfolio.

Explore Legistify’s contract management software, contract workflow and e-signature features to see how they fit your team’s contracts.

Conclusion

A contract is more than just a piece of paper. It is a legally binding document that regulates the relationship between the parties involved. The definition, types, and legal aspects of contracts are important to ensure that one protects his or her interests. A contract is effective only if it is drafted in a clear manner and meets the legal requirements.

FAQs