What is law of contract?
- The Law of. Contract deals with agreements which can be enforced through courts of law.
- The Law of Contract is the most important part of commercial law because every commercial transaction starts from an agreement between two or more persons.
According to Salmond a contract is
“an agreement creating and defining obligations between the parties” According to Sir William Anson2, “A contract is-an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others.”
Object & scope
The object of the Law of Contract is to introduce definiteness in commercial and other transactions. How this is done can be illustrated by an example-
X enters into a contract to deliver 10 tons of coal of Y on a certain date. Since such a – contract is enforceable by the courts, Y can plan his activities on the basis of getting the coal on the fixed date. If the contract is broken, Y will get. damages from the court and will not suffer any loss.
Sir William Anson observes as follows :
“As the law relating to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass; and that what has been promised to him shall be performed.”
The Indian Contract Act of 1872 (Act IX of 1872) lays down certain general rules regarding contracts. The Act is not exhaustive. There are other Acts relating to particular types of contracts. e.g., the Negotiable Instruments Act, the Transfer of Property Act, etc.
The Contract Act does not affect any usage or custom of trade, or any incident of any contract not inconsistent with the provisions of the Act.-Sec. I.
Definition of Contract
- Section 2(h) of the Indian Contract Act provides that, “An Agreement enforceable by law is a contract”.
- Therefore in a contract there must be –
(I) an agreement and
(II) the agreement must be enforceable by law.
- An agreement comes into existence whenever one or more persons promise to one or others, to do or not to do something,
“Every promise and every set of promises, forming the consideration for each other, is an agreement-Sec. 2(e). Some agreements cannot be -enforced through the courts of law, e.g., an agreement to play cards or go to a cinema. An agreement, which can be enforced through the courts of law, is called a contract.”
Essential Elements of a Contract
An agreement becomes enforceable by law when it fulfils certain conditions. These conditions, which may be called the Essential Elements of a Contract, are explained below.
1. offer and Acceptance :
- There must be a lawful offer by one party and a lawful acceptance of the offer by the other party or parties.
- The adjective “lawful” implies that the offer and acceptance must conform to the rules laid down in the Indian Contract Act regarding offer and acceptance. (See ch. 2)
2. Intention to create Legal Relationship :
- There must be an intention (among the parties) that the agreement `shall result in or create legal relations.
- An agreement to dine at a friend’ house is not an agreement intended to create legal relations and is not a contract.
- But an agreement to buy and sell goods or an agreement to marry, are agreements intended to create some legal relationship and are therefore contracts, provided the other essential elements are present. (See ch. 3)
3. lawful Consideration :
- Subject to certain exceptions, an agreement is legally enforceable only when each of the parties to it gives something and gets something.
- An agreement to do something for nothing is usually not enforceable by law. The something given or obtained is called consideration. (See ch. 4)
- The consideration may be ;in act (doing something) or forbearance (not doing something) or a promise to do or not to do something.
- Consideration may be past (something already done or not done).
- It may also be present or future: But only those considerations are valid which are “lawful
4,. Capacity of Parties :
- The parties to an agreement must be legally capable of entering into an agreement otherwise it cannot be enforced by a court of law.
- Want of capacity arises from minority, lunacy, idiocy,– drunkenness, and similar other factors. If any of the parties to the agreement suffers from any such disability, the agreement is not enforceable by law, except in some special cases.
5. free Consent :
- In order to be enforceable, an agreement must be based on the free consent of all the parties.
- There is absence of genuine consent if the agreement is induced by coercion, undue influence, mistake, misrepresentation, and fraud.
- A person guilty of coercion, undue influence etc. cannot enforce the agreement. The other party (the aggrieved party) can enforce it, subject to rules laid down in the Act.
6.legality of the Object :
- The object for which the agreement has been-entered into must not be illegal, or immoral or opposed to public policy.
- The agreement must not be vague. It must be possible to ascertain the meaning of the agreement, for otherwise it cannot be enforced.
8.Poissiblity of Performance :
- The agreement must be capable of being performed.
- A promise to do an impossible thing cannot be enforced.
- An agreement so made must not have been expressly declared to be void.
- under Indian Contract Act there are five categories of agreements which are expressly declared to be void. They are :
- Agreement in restraint, to marriage. (Sec. 26)
- Agreement in restraint of trade. (Sec. 27)
- Agreement in restraint of proceedings. ;(Sec. 28)
- Agreements having uncertain meaning.. (Sec. 29}
- Wagering agreement. (Sec. 30)
10. Writing, Registration and Legal Formalities :
- An oral, contract is a perfectly good contract, except in those cases where writing and/or registration is required by some statute.
- In India writing is required in cases of lease, gift, sale and mortgage of immovable property : negotiable instruments ; memorandum and articles of association of a company etc. Registration is compulsory in cases of documents coming. within the purview of Section 17 of the registration Act, e.g., mortgage, deeds covering immovable property.
- The terms of an oral contract are sometimes difficult to prove.
- Therefore important agreements are usually entered into in writing even in cases where writing is not compulsory.
- The elements mentioned above must all be present. If any one of them is absent, the agreement does not become a contract. An agreement which fulfils a11 the essential elements is enforceable by law and is called a contract. From this it follows that, every contract is an agreement but all agreements are not contracts.
- Every contract gives rise to certain legal obligations or duties on the part of the contracting parties. The legal obligations are enforced by the courts.
- The Indian Contract Act contains rules regarding each of the elements mentioned above. These rules are discussed in the subsequent chapters. .
In the Law of Contract certain terms are used indicating their meaning. The terms also show that contracts can be classified into four broad divisions, namely,
(I) the method of formation of a ,contract,
(2) the time of its performance,
(3) its parties, and
(4) its legality or validity:
i. Method of Formation
1. Express Contract
Express Contract is one which is. expressed in words spoken or written. When such a contract is formed, there is no difficulty in understanding the rights and obligations of the parties.
2. Implied Contract
The conditions of an implied contract is to be understood from the acts, the conduct of the parties and/or the course of dealing between them.
There are certain dealings which are not contracts strictly, though the parties act as if there is a contract.
The Contract Act specifies the various situations which come within what is called Quasi Contract. (Sections 68-72 )
ii. The time of Performance
There are contracts where the parties perform their obligations immediately, i.e., as soon as the contract is formed
2. Executory Contract
In this contract the obligations of the parties are to be performed at a later time.
iii.The Parties of the Contract
There must be at least two parties to the contract. Therefore all contracts are bilateral or multilateral.
(2) Unilateral Contract
In certain contracts one party has to fulfill his obligations whereas the. other party has. already performed his obligations. Such a contract is called unilateral contract.
iv. Legality or validity of the Contract
Contracts can be classified into the following :
(4) illegal and