A contract is the basic legal unit on which nearly all commercial activity — sale of goods, employment, lending, investment, partnership, and service delivery — is built. Yet the difference between a mere agreement and a legally enforceable contract is not always obvious to the parties who sign one. Indian law answers this through a compact but powerful provision: Section 10 of the Indian Contract Act, 1872. This article walks through each ingredient Section 10 demands, explains it in plain terms, sets out the governing statutory text, and traces how the higher judiciary — from the Privy Council to the Supreme Court of India, including judgments delivered as recently as 2025 — has interpreted and refined each requirement. It closes with a recent decision that every commercial party negotiating a transaction in stages (through term sheets, MoUs, or Letters of Intent) needs to know.
1. The Statutory Foundation — Section 10
Section 10 of the Indian Contract Act, 1872 is the gateway provision. It does not create a checklist of formalities; it defines, in substance, when an agreement graduates into a contract.
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.
— Section 10, Indian Contract Act, 1872
Read together with Section 2(h) — which defines a contract simply as “an agreement enforceable by law” — Section 10 yields the following essential ingredients, each of which is examined below: (i) offer and acceptance, resulting in an agreement; (ii) intention to create legal relations; (iii) lawful consideration; (iv) capacity of parties; (v) free consent; (vi) lawful object; (vii) agreements not expressly declared void; (viii) certainty and possibility of performance; and (ix) legal formalities, where a special statute requires them (such as writing, registration, or stamping).
2. Offer and Acceptance
Every contract begins with a proposal by one party and its acceptance by the other. The Act treats this stage with precision because the moment of agreement fixes the parties’ rights and, often, the place and time at which a contract is treated as concluded.
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 to such act or abstinence, he is said to make a proposal.
— Section 2(a), Indian Contract Act, 1872
When the 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.
— Section 2(b), Indian Contract Act, 1872
Acceptance must be absolute and unqualified, and must be communicated in the manner the offer contemplates (Sections 3, 4 and 7). A counter-offer destroys the original offer; it does not create a contract by itself.
Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB 256 (English Court of Appeal; consistently applied by Indian courts as persuasive authority)
This is the classical illustration of a “general offer” — an offer made to the world at large, capable of acceptance by whoever performs its conditions, without any need to communicate acceptance in advance. The reasoning has been repeatedly adopted by Indian courts and text-writers to explain how offers made through advertisements, reward notices, and public schemes are treated under Sections 2(a) and 8 of the Act.
Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co. AIR 1966 SC 543
The Supreme Court held that in the case of instantaneous modes of communication such as a telephone, a contract is completed at the place where acceptance is spoken and heard, rejecting a mechanical application of the postal-rule reasoning that governs acceptance sent by letter or telegram. The case remains the starting point for analysing where and when acceptance communicated through instantaneous or electronic media takes effect — a question of continuing relevance to contracts concluded by email, WhatsApp, or e-signature platforms.
State of Himachal Pradesh v. OASYS Cybernetics Pvt. Ltd. (2025) — Supreme Court of India
In this 2025 decision, discussed further in Part 10 below, the Supreme Court held that a Letter of Intent by itself does not amount to a concluded contract and creates no enforceable rights unless the pre-conditions stipulated in it are fulfilled and a final agreement or letter of acceptance follows. The ruling is a direct, modern application of the offer-acceptance framework to the staged manner in which commercial and government contracts are actually negotiated today.
3. Intention to Create Legal Relations
An agreement, however complete in its terms, is not a contract unless the parties intended their bargain to carry legal consequences. This requirement is not spelt out as a separate section of the Act but is treated by courts as implicit in the very idea of an agreement “enforceable by law” under Section 2(h).
Commercial agreements carry a strong presumption that the parties intended legal consequences; purely domestic or social arrangements carry the opposite presumption, rebuttable by clear evidence to the contrary.
Balfour v. Balfour [1919] 2 KB 571
A husband’s promise to pay his wife a monthly allowance while they lived apart was held unenforceable because the arrangement was made in the ordinary course of domestic life, without any intention that legal consequences should attach to it. The case established the enduring, rebuttable presumption that domestic and social arrangements are not contracts, while commercial dealings are presumed to be.
CWT v. Abdul Hussain Mulla Mohammed Ali (1988) 3 SCC 562
The Supreme Court examined the utility of treating intention as a free-standing requirement in Indian law, noting that the test for such intention, where relevant, is objective — judged from how a reasonable person would view the parties’ words and conduct — rather than by inquiring into what either party subjectively meant.
Banwari Lal v. Sukhdarshan Dayal Supreme Court of India
The Court recognised intention to create legal relations as a factor relevant to whether a binding family or domestic arrangement had in fact come into existence, giving the doctrine limited but real application within Indian contract jurisprudence.
4. Lawful Consideration
Consideration is the price for which the promise of the other party is bought, and Indian law, unusually among common-law systems, allows consideration to move from a third person and permits certain natural-love-and-affection promises to stand without fresh consideration.
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, such act, abstinence or promise is called a consideration for the promise.
— Section 2(d), Indian Contract Act, 1872
An agreement made without consideration is void, unless it is expressed in writing and registered… or is a promise to compensate… or is a promise to pay a debt barred by limitation law.
— Section 25, Indian Contract Act, 1872 (summarised)
Consideration must be lawful; Section 23 renders an agreement void where the consideration or object is forbidden by law, defeats the provisions of any law, is fraudulent, involves injury to person or property, or is regarded by the court as immoral or opposed to public policy. Consideration need not be adequate, but it must be real.
Chinnaya v. Ramayya (1882) ILR 4 Mad 137
This early Madras High Court decision confirmed the Indian rule, distinct from English law, that consideration may move from a person other than the promisee — here, a sister who received property from her mother could enforce her aunt’s promise to pay her an annuity, even though the consideration for that promise had been furnished by the mother, not by the sister herself.
Currie v. Misa; adopted position on adequacy Recent High Court practice, 2023–2025
Indian courts have continued to reaffirm, in commercial suits concerning loan restructuring, settlement agreements and family arrangements, that courts do not sit in judgment over the adequacy of consideration under Section 25, Explanation 2, so long as the consent to the bargain was free — the sufficiency of the price is a matter for the parties, not the court, to negotiate.
5. Capacity of Parties
A contract requires that both parties be legally competent to bind themselves. Competence is defined negatively — by identifying who is not competent — rather than by an exhaustive positive test.
Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
— Section 11, Indian Contract Act, 1872
A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.
— Section 12, Indian Contract Act, 1872
Mohori Bibee v. Dharmodas Ghose (1903) 30 IA 114 (Privy Council)
A minor mortgaged his property to a moneylender to raise a loan. The Privy Council held the mortgage void ab initio, since a minor lacks the capacity to contract under Section 11 and an agreement by a minor is not merely voidable but void from its inception — a position that continues to govern every transaction involving a minor’s property or business interests in India.
Recent application — corporate and NBFC lending practice High Court decisions, 2023–2025
Indian courts examining loan and guarantee documentation have continued to strike down or refuse to enforce obligations undertaken on behalf of a minor beneficiary without following the safeguards under the Hindu Minority and Guardianship Act and the Guardians and Wards Act, reaffirming that capacity is assessed strictly and cannot be cured merely by a guardian’s signature absent the statutorily required court permission for alienation of a minor’s property.
6. Free Consent
Two parties may agree on identical terms and yet the agreement may be vitiated if that agreement was not freely given. Free consent is where the Act’s protective, equitable character is most visible.
Two or more persons are said to consent when they agree upon the same thing in the same sense.
— Section 13, Indian Contract Act, 1872
Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake.
— Section 14, Indian Contract Act, 1872
Sections 15 to 22 elaborate each vitiating factor. A contract caused by coercion or undue influence is voidable at the option of the party whose consent was so caused (Sections 19 and 19A); a contract induced by fraud or misrepresentation is likewise voidable, subject to the innocent party’s duty to exercise ordinary diligence (Section 19); and an agreement made under a bilateral mistake of fact essential to the agreement is void (Section 20).
Dularia Devi v. Janardan Singh AIR 1990 SC 1173
An elderly, illiterate executant believed she was signing a single gift deed in favour of her daughter, but was in fact made to execute two documents, one of which transferred property to other defendants entirely. The Supreme Court held her consent was vitiated because she never applied her mind to, and never intended to enter into, the second transaction — a form of fraud going to the very nature of the document (non est factum) rather than a mere misrepresentation of its contents.
Recent guarantor and family-settlement disputes High Court and Supreme Court decisions, 2023–2025
Courts have continued to set aside guarantee deeds, family settlements, and release deeds executed by elderly or dependent family members where the dominant party occupied a position enabling them to dominate the will of the other, applying the two-stage test under Section 16 — first asking whether the relationship was capable of dominance, and only then shifting the burden onto the dominant party to prove the transaction was fair and the weaker party’s consent genuinely free.
7. Lawful Object
Even where offer, acceptance, consideration, capacity and consent are all in order, the agreement fails if its object or purpose is unlawful.
The consideration or object of an agreement is lawful, unless it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.
— Section 23, Indian Contract Act, 1872
Section 24 extends this further: if any part of a single, indivisible consideration for one or more objects is unlawful, the entire agreement is void.
Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781
The Supreme Court held that a wagering agreement, though void under Section 30, is not necessarily unlawful or immoral under Section 23 so as to taint a related partnership formed to carry on such transactions collectively — clarifying that “void” and “unlawful” are not synonymous under the scheme of the Act.
Recent NBFC and lending covenants High Court decisions, 2023–2025
Several High Courts, examining loan agreements with usurious or circular interest structures designed to circumvent RBI directions applicable to NBFCs, have applied Section 23 to hold that clauses structured to defeat regulatory provisions are void as opposed to the object of a validly made law, even where the underlying lending transaction itself is not inherently illegal.
8. Agreements Not Expressly Declared Void
Section 10 requires, finally, that the agreement not fall within any category the Act itself declares void. Sections 24 to 30 list several such categories, independent of whether the agreement otherwise satisfies consideration, capacity, consent, and object.
The principal categories include:
- Agreements in restraint of marriage (Section 26), trade (Section 27), or legal proceedings (Section 28).
- Agreements void for uncertainty (Section 29).
- Wagering agreements (Section 30).
- Agreements to do impossible acts (Section 56).
Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd. AIR 1967 SC 1098
The Supreme Court upheld a negative covenant restraining an employee from working for a competitor during the subsistence of employment, distinguishing such reasonable restraints operative during employment from post-employment restraints, which Section 27 renders void except in the narrow case of a sale of goodwill. The case remains the leading authority cited in nearly every Indian non-compete and confidentiality dispute.
Recent employment and start-up ESOP litigation High Court decisions, 2023–2025
Indian High Courts have continued to strike down post-termination non-compete clauses in employment and consultancy agreements as void under Section 27, while upholding narrowly drawn non-solicitation and confidentiality clauses that do not amount to a blanket restraint on the employee’s right to earn a livelihood — a distinction of direct practical importance in drafting founder, employee, and consultant agreements for startups.
9. Certainty and Possibility of Performance
An agreement the meaning of which is not certain, or capable of being made certain, is void under Section 29. Similarly, an agreement to do an act impossible in itself is void under Section 56, and a contract lawful when made becomes void if the act contracted for becomes impossible or unlawful after the contract is made.
Agreements, the meaning of which is not certain, or capable of being made certain, are void.
— Section 29, Indian Contract Act, 1872
A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
— Section 56, Indian Contract Act, 1872
Satyabrata Ghose v. Mugneeram Bangur & Co. AIR 1954 SC 44
The Supreme Court held that the doctrine of frustration under Section 56 in India is not founded on an implied term as in English law, but is a positive rule of Indian statutory law; impossibility need not mean literal physical impossibility, but includes a change of circumstances that strikes at the very root and foundation of the contract as understood by the parties.
Post-pandemic and force majeure jurisprudence Supreme Court and High Court decisions, 2023–2025
Building on Satyabrata Ghose and the Supreme Court’s COVID-19 era rulings, courts have continued to hold that a party cannot invoke Section 56 to escape a contract merely because performance has become onerous or commercially unattractive; frustration applies only where the very foundation of the contract has collapsed, and a properly drafted force majeure clause is generally treated as the parties’ own allocation of that risk, to be construed on its own terms rather than through Section 56.
10. A Recent Judgment Every Commercial Party Should Know: Letters of Intent Are Not Contracts
Commercial and government transactions in India are rarely concluded in one step. Parties typically move through a term sheet, a Letter of Intent (LoI), and only then a definitive agreement. The Supreme Court’s 2025 decision addresses precisely this sequence.
State of Himachal Pradesh & Anr. v. OASYS Cybernetics Pvt. Ltd. (2025) — Supreme Court of India
The Supreme Court held that a party cannot claim enforceable contractual rights on the strength of a Letter of Intent alone, unless every pre-condition stipulated in that LoI has actually been fulfilled and a final, definitive agreement or a letter of acceptance has followed. An LoI, the Court clarified, reflects only a preliminary intention to contract — it generates a commercial expectation on the part of its recipient, but not a legal entitlement enforceable in a court of law.
The significance of this ruling extends well beyond government tenders. Startups negotiating investment through a term sheet, businesses exchanging MoUs ahead of an acquisition, and NBFCs issuing sanction or in-principle approval letters ahead of a facility agreement all rely on preparatory documents of exactly this kind. The judgment is a reminder that unless such a document itself uses binding, unconditional language, or satisfies every element discussed in Parts 2 through 9 above in its own right, a party cannot treat it as a substitute for the definitive, executed agreement. For transacting parties, the practical lesson is to state expressly, in every term sheet or LoI, whether and to what limited extent (if any) it is intended to bind the parties — commonly, only as to confidentiality, exclusivity, and cost allocation — pending execution of the final agreement.
11. Conclusion — Practical Takeaways
Section 10 of the Indian Contract Act, 1872 remains, after more than a century and a half, the master template for testing whether a business arrangement is legally enforceable. The judgments discussed above — from Mohori Bibee’s foundational statement on capacity to the Supreme Court’s 2025 clarification on Letters of Intent — show a consistent judicial approach: form is tested, but so is substance; and it is the substance of offer, acceptance, intention, consideration, capacity, consent, and lawful object, taken together, that a court will examine before enforcing any bargain.
For businesses, founders, and professionals, this translates into a short discipline to apply before signing anything:
- Record offer and acceptance clearly, and specify the mode and moment of communication for electronic exchanges.
- State expressly whether preparatory documents (term sheets, MoUs, LoIs) are intended to bind the parties, and to what extent.
- Ensure consideration is real and lawful, and that regulatory or statutory provisions are not being indirectly defeated.
- Verify the capacity of every signatory, particularly where minors, trusts, or corporate authorisations are involved.
- Watch for undue influence or unequal bargaining power in family settlements, guarantees, and employment exits.
- Keep restraint clauses (non-compete, non-solicit) narrowly and reasonably drawn to survive scrutiny under Section 27.
- Build a considered force majeure clause rather than relying on Section 56, which courts apply narrowly.
This article is intended for general informational purposes and does not constitute legal advice. For advice on a specific transaction or dispute, please consult VNC Corporate & Legal, Advocates & Solicitors.