Contract Act,1872
The Law of Contract is the most important branch of Business Law.It affects everybody, more so,trade, commerce and industry.All contracts are based on agreements which are either express or implied.Disputes do arise,sometimes as to the existence of obligation.
We all enter into a number of contracts every day from sunrise to sun set.Boarding a bus, buying a pen,getting into a phone booth, and all such everyday activities involve contracts.The house we rent,the electricity that is supplied,the telephone and cable we use, all these come to us through contracts.The jobs we do entail contracts and so does putting our money in a bank or savings in shares and bonds.The law relating to contracts is to be found in the Indian Contract Act,1872.
The law of contract is the most important branch of Mercantile Law.Without such a law it would be difficult, if not impossible, to carry on any trade or business in a smooth manner.The law of contract is applicable not only to business but also to all day to day personal dealings.All these transactions are subject to the provisions of law of contract.
Applicability:
The Contract Act,1872 is the most important constituents of Indian Mercantile Law.It affects every person since every one of us enters into contract virtually every day.As discussed above, When a person takes a seat in a Train or sells a book to a customer or deposits money in a bank account or purchases Tv on credit, he enters into a contract though he may not be conscious of this fact.The law of contracts is of immense importance particularly to a businessman since all this transactions are based on contracts.
The Indian Contract Act came into force from 1st September,1872.It has been amended several times.The notable amendments have been in 1886,1899,1930,1932 and 1997. The Act applies to the whole of India except the state of Jammu and Kashmir.
Coverage of the Act↪
Indian Contract Act
relating to Contracts contracts
Sec.1-75 Sec.124-238
General Principles of Contracts (Sec.1-75): General principles of contracts include rules and laws relating to communication, acceptance and revocation of proposal voidable contracts , void agreements, contingent contracts, performance of contracts certain relations resembling those created by contracts and consequences of breach of contract.
Special Types of Contracts:
Sec.124 to 238 deal with special types of contracts.These are contracts of Indemnity and Guarantee ,Bailment and Pledge and Agency Contracts Meaning of Contract
Contract is an agreement made between two or more persons to do or to abstain from doing a particular act. A contract invariably creates a legal obligation between the parties by which certain rights are given to one party and a corresponding duty is imposed on the other party.
Contract-Definitions:
Let us go through some definitions relating to contract.
Salmond: 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 others.
Sir Fredrick Pollock:Every agreement and promise enforceable by law is a contract.
Essential Requirements of Contract:
Let us go through the essential requirements of a contract.
1.Two parties:Two parties are necessary to make contract.The person who makes the promise is known as the promisor and the person to whom the promise is made is known as the Promisee.
2.An agreement:There has to be an agreement between two parties.An offer when accepted becomes an agreement.An agreement implies an offer and acceptance.The term offer implies the willingness of a person to do or not do something and its communication to the other.Acceptance means assent to the party to whom the offer has been made.Thus,
Agreement=Offer +Acceptance
From the above analysis it is clear that there must be at least two parties to an agreement, one making an offer and the other accepting it.No persons can enter into agreement with himself.
3.Consensus-ad-idem:There is another important aspect relating to an agreement i.e., the parties to an agreement must have an identity of minds in respect of the subject matter.They must agree on the same thing in the same sense.This is called Consensus-ad-idem.
For example,A has two cars ,one is blue and the other is a red car.He offers to sell his red car to B,while B is under the impression that he is buying the blue car.Here,there is no identity of minds.Both the parties are thinking about different cars.Hence there is no agreement.
4.Legal obligation:The agreement should give rise to a legal obligation, enforceable by law.Any obligation which is not enforceable by law is not regarded as a contract.Social, moral or religious agreements do not create any legal obligation.
Agreements which are not contracts :
The following two types of agreements are not contracts as there is no intention to create legal relations here.
1.Agreements relating to social matters:An agreement between
two persons to go together to the cinema does not create legal
relationship on their part to abide by it.Similarly,if I promise to buy you a dinner and break that promise I do not expect to be liable to legal penalties.There cannot be any offer and acceptance of hospitality.
2.Domestic agreements between husband and wife:Domestic agreements also do not create any obligation on the part of parties.The following case helps us in understanding the need for creating legal obligation and not the domestic or social obligation.
Balfour Vs. Balfour(1919)
In this case, on leaving England for Ceylon, the husband agreed to pay 30 pounds to his wife every month till she remained in England.As he failed to send the promised amount regularly, the wife sued him for recovery of the amount.But her suit was dismissed on the ground that it was an informal arrangement and there was no intention to create legal relationship.
All contracts are agreements but all agreements are not contracts:
As discussed above, an agreement may or may not give rise to a legal obligation.If no legal binding is intended, a contract does not arise.Agreements of moral or social nature do not make contracts because parties never intend to create binding legal obligation.In such cases no one can sue the other party in case of default.
But all contracts are necessarily composed of agreements.It is because of making a contract there must be an agreement first and then it should be enforceable by law.
All obligations do not constitute contracts:
On the other hand, all obligations are not contractual.Only those obligations which arise out of agreement are contractual.In other words, only those obligations which directly contemplates to have legal consequences is a contract.The following types of obligations do not arise out of agreements.
(a) Torts or civil wrongs: A tort is a civil wrong liability is created by general law of the land due to violation of a duty imposed by law.If any assaults another, he is liable for it.
(b)Quasi contracts: Quasi contracts arise in condition where the law creates and enforces legal rights and obligations even though there is no agreement between the parties.
(c)Judgements of Courts
(d)Status of obligations like relationship of husband and wife.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
In order to become a contract there must be an agreement which is enforceable by court of law.An agreement becomes enforceable by court of law if it fulfills certain laid down conditions.These conditions are called essentials or elements of a valid contract.
According to Section 10 all agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.Thus, an agreement becomes a valid contract if it has the following elements.
Offer and acceptance:
An agreement involves two parties, one making the offers and the other accepting it.The offer is the starting point of a contract.Unless there is an offer from one party and it is accepted by the other , no agreement can arise.The offer must be certain and must be communicated to the offeree. Similarly acceptance must be absolute and unconditional .It should be given in the mode prescribed and be communicated.Until, such conditions with regard to the offer and the acceptance are satisfied the agreement does not become enforceable.
Intention to create legal relationship:
When two parties enter into an agreement, their intention must be to create legal relationship between them.If the intention is not create legal relations no valid contract is formed.Agreements of social, moral or religious nature do not create any legal obligations.Similarly agreements between husband and wife do not intend to create any legal obligation.
For example,if A agrees to come to the house of B for a dinner at B's request,there is an agreement,but it cannot be termed as a contract because it does not carry and legal obligation
Lawful Consideration
The agreement must be supported by consideration on both sides.Section 25 provides that an agreement without consideration is not enforceable. Each party to an agreement must give and receive something in return. This something in return for the promise is consideration for promise.For example,A agrees to sell his house to B for Rs.2 lakhs ,and for B it is the house.
Consideration may consist of some act or abstinence or a promise.Consideration may consist of some act or abstinence or a promise to do or abstain from doing something.It may be past,present or future.It need not be adequate but must have some value in the eyes of law.Further, it should be lawful also, i.e., it should not be forbidden by law, should not be fraudulent, or immoral or opposed to public policy.
For example,A agrees to sell his house to B for Rs. 2 lakhs. Here, the consideration for A is Rs.2 lakhs, and for B it is the house.
Consideration may consist of some act or abstinence or a promise.Consideration may consist of some act or abstinence or a promise to do or abstain from doing something.It need not be adequate but must have some value in the eyes of law.Further, it should be lawful also, i.e., it should not be forbidden by law, should not be fraudulent, or immoral or opposed to public policy.
For example , A sells his car worth Rs.1,00,000 to B for 10,000 only.This is a valid promise provided the consent of A is free.
Thus, consideration provides some guarantee of deliberation and a certain protection against hasty and ill considered contracts.It helps in determining the enforceability of promises.Consideration ensues reciprocity and mutuality of promises.Hence consideration is very important for a contract.
Competence of parties to Contract:
The parties to the contract must be capable of entering into a valid contract.According to Sec.11 every person is competent to contract who is of the age of majority, of sound mind and not disqualified from contracting by any law to which he is subject. Thus , there may be a flaw in capacity of parties to the contract which may be due to minority, lunacy, idiocy or status.If a party suffers from any of these flaws the agreement with such a person is void and not enforceable.The following persons are incapable of contracting.
1. A minor
2. A person of unsound mind
3.Persons disqualified from contracting by law.
For example, a contract with or by a minor is void ab-initio and the minor therefore cannot bind himself by a contract.
Free consent:
The parties must have entered into the contract out of their own free will.Consent implies agreeing upon the same thing in the same sense.Free consent implies consent which is not vitiated by coercion, undue influence, fraud, misrepresentation or mistake.If the consent is obtained by any of the above four factors except mistake,the agreement is voidable at the option of party whose consent is not free.The party can either reject the contract or accept it.If the agreement is induced by mutual mistake, the agreement is void.
Thus, to make a contract valid, not only consent is necessary but the consent should also be free.According to Sec.14 consent is said to be free when it is not caused by any of the following
1. Coercion
2. Undue influence
3. Misrepresentation
4. Fraud
5. Mistake
For example, when the consent of a person is obtained by committing any act which is forbidden by the indian Penal code, the consent is set to be obtained by coercion.Committing a murder, kidnapping , causing hurt, rape, defamation, theft etc. are some of the examples of the acts forbidden by the Indian Penal Code.
Ranganayakamma Vs Alwar Setti
In this case, a Hindu Widow of 13, was forced to adopt a boy under threat that her husbands dead body would not be allowed to be removed unless the adopts the boy.The widow adopted the boy and subsequently applied for cancellation of the adoption.It was held that the adoption was voidable at her option as her consent was obtained by coercion because preventing the dead body from being removed for cremation of an offence under Section 298 of the Indian Penal Code.
Lawful object:
The object of agreement should be lawful.The object would be lawful if it is forbidden by law, fraudulent, causes injury to the person or property of another, immoral or opposed to public policy.If the object is unlawful, the agreement is not valid. For example,if A rents out a house for use as a gambling den, the agreement is void because the object of the agreement is unlawful. If the object is unlawful for any of the reasons mentioned in Section 23, the agreement shall be void.Under Section 23, the following considerations and objects are not lawful.
(a) If it is forbidden by law; or
(b) If it is against the provisions of any other law; or
(c) If it is fraudulent; or
(d) If it damages somebody's person or property; or
(e)If it is, in the opinion of court, immoral or against the public policy.
Thus, any agreement, if it is (1) illegal (2) immoral or (3) against the public policy , cannot become a valid contract.
Agreement not declared as void:
Enforceability of an agreement also depends upon whether it is expressly declared void by any law in force in the contract or not.There are certain types of agreements which have been expressly declared void by the Act.Agreement in restraint of marriage , trade or legal proceedings, wagering agreements, and agreements with uncertain meaning are declared void. In such cases even if the agreement possesses all the elements of a valid agreement, it will not be enforceable by law. For example, A agreed to pay Rs.1 lakh to B if he does not marry throughout his life.B promised not to marry at all.This agreement shall not be valid because it is in restraint of marriage which has been expressly declared void under Section 26.
The following agreements have been expressly void under different sections of the Contract Act.
- Agreements made with the parties having no contractual capacity,e.g., minor and person of unsound mind
- Agreements made under a mutual mistake of fact
- Agreements with unlawful consideration or object
- Agreements, whose consideration or object is unlawful in part
- Agreements having no consideration.
- Agreements in restraint of marriage.
- Agreements in restraint of trade.
- Agreements in restraint of legal proceedings
- Agreements, the meaning of which is uncertain.
- Agreements by way of wager
- Agreements to do impossible acts
Certainty and possibility of performance :
The meaning of the agreement must be certain or capable of being certain, otherwise the agreement will not be enforceable by law.For example, if A agrees to sell to B 100 liters of oil @Rs.10 per liter, the agreement is not enforceable as there is nothing to show the type of oil being sold.
Further, the act contemplated in the agreement should be capable of performance.An agreement to do an act impossible in itself cannot be enforced.This is because the law does not compel to do what is impossible.For Example, A enters into agreement with B for discovering treasure by magic.The agreement is not enforceable as the act is impossible in itself, physically or legally.
Legal formalities:
The last essential of a valid contract is that it must be written, attested or registered, if it is so essential under any law prevailing in the country, e.g., arbitration agreements, insurance agreements, mortgage and lease of an immovable property can only be done under a written and registered contracts as per the provisions of concerning Acts.Some of these are:
a.A bill of exchange, cheque , promissory note, etc., under the Negotiable Instruments Act, 1881;
b.A memorandum of association of a company registered under the Companies Act,1956;
c.An articles of association of a company registered under the Companies Act,1956.
d.An application for shares in a company.
e.An application for transfer of shares in a company.
f.A lease, gift, mortgage, or sale of immovable property under the transfer of Property Act,1882;
g.An agreement to refer a dispute to arbitration under Arbitration and Conciliation Act,1996
There are some contracts and documents which are required to be not only in writing but , in addition, are required to be registered with some competent authority or the other. Some of these are:
- Transfer of immovable property,i.e., lease,sale mortgage or gift thereof.
- A memorandum of association of company;
- An articles of association of a company.
- Mortgage and charges of properties by a company
- Documents coming within the purview of the Registration Act,1908.
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