This Article is written by Palak Nigam (Currently pursuing B.A, LLB degree from KIIT School of Law, Odisha)
Table of Contents
The term ‘contract’ has been extracted from the Latin word ‘contractus’ meaning ‘to work on contract’. The law of contract is dependent on the principle called ‘pacta sunt servanda’ which means ‘argument must be kept’.
There exists an important place of the Indian contract act in business law (commercial laws). Without this law, it would be very difficult to perform any business activities and its employment law. Not only do business activities get affected by this but everyone living in a society can also get affected somehow without the Indian contract act.
The main purpose of the Indian contract act is to ensure the rights and obligations arising out of a contract and in breach of these rights and obligations legal remedies are available to those who are affected. Section 1 of the Indian contract act, 1872 defines this act. This act includes several aspects in a much wider way like it explains what is an offer, acceptance, essentials of contract, valid consideration, voidable agreements, quasi-contracts, privity of contract. Besides this, it also includes the Contract of indemnity, guarantee, bailment, pledge, and Agency.
Provisions of Indian Contract Act:
- General Principles of Law and Contract- Section 1 to Section 75
- Sales of Goods contract- Section 76 to Section 129
- Special Contracts- Section 125 to Section 238
- Partnership Contract- Section 239 to Section 266
Previously, the Indian contract act, 1872 included provisions related to Sales of Goods (Movable property) and Partnership. But now these two provisions are separated from the act and are made into two distinct acts called the Sale of Goods Act, 1930, and the Indian Partnership Act, 1932. At present, there are only the general principles of contract and special contract in the Indian contract act, 1872.
WHAT IS A CONTRACT?
Section 2(h) of the Indian contract act, 1872, defines the term contract as, “An agreement that is enforceable by law is a contract”. So, a contract at the initial stage is an agreement between two or more parties to do or abstain from doing anything. It must be definite and its aim must create a legal relationship between parties. The parties must be competent to form a valid contract. So, a Contract is formed of two essential elements i.e. an agreement and the enforceability of that agreement.
Contract= Agreement + Enforceability
Example: An agreement between A and B that A will construct a roof for B and B will pay Rs. 1 lakh to A. This contract is a valid contract.
General contract: J.K. Industries Ltd V. Mohan Investment and Properties Pvt. Ltd, where a contract can only form when all the terms and conditions have been confirmed or established.
For Proposal: we can refer to the case of Tarsen Singh v. Sukhinder Singh, where the offer or proposal bestows arise to an agreement between the parties only when it is accepted.
The case of Chidambara v. P.S. Renga talks about valid consideration. It was held in this case that in the eyes of a law, consideration must play some important role in the form of value. It should be actual not imagined, whether adequately sufficient or not.
Consensus Ad Idem: One of the essential elements of a contract is ‘Consensus Ad Idem’, which means ‘meeting of minds. Example: There are two parties X and Y. X have two horses one is white and the other is black. Y wants to buy a black horse but X was thinking of his white horse. There exist no consensus ad idem between the parties. Hence, the contract is void.
WHAT IS AN AGREEMENT?
An agreement can be said a contract if it is formed by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and is not against public morality to declare it to be void. Section 2(e) of the Indian contract Act, 1872 defines an agreement as, “Every promise and every set of promises forming consideration for each other, is an agreement.” The agreement is consist of promise and consideration.
Agreement = Promise + Consideration
In Balfour v. Balfour, it was held that if the agreement is domiciliary in character then it will not be legalized by law.
SECTION 10 OF INDIAN CONTRACT ACT, 1872:
Section 10 of the Indian contract act, 1872 defines that “all agreements are contract if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and should not be void.”
The elements essentials for a valid contract are:
- There exist a valid offer and its acceptance.
- There must be an intention to create a legal relationship.
- There must be a lawful consideration and lawful object.
- The parties must be competent to contract i.e. not minor and not of unsound mind at the time of formation of the contract.
- The consent obtained from the parties must be free.
- It should not be expressly declared void.
WHAT IS AN OFFER?
Section 2(a) of the Indian contract act, 1872 defines offer or proposal as ‘When one person signifies his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, is said to make a proposal or an offer.’
For this section, there have been essential elements that one must signify to another his willingness to do or abstain from anything in order to obtain an assent.
The person who makes an offer is called the promisor or offeror and the person to whom the offer is made is called the promise or offeree.
- General Offer
- Specific Offer
- Counter Offer
- Cross Offer
- Implied Offer
- Express Offer
- Standing Offer
Illustration: A wants to sell his house and for that, he made an advertisement in a newspaper in order to communicate his offer to the general public. This is a valid offer.
Here, A made an offer to B to buy the house. Hence, A is an offeror and B is the offeree.
In Lalman Shukla v. Gauri Dutt, the High Court of Allahabad contended that knowledge and acceptance of a proposal or offer must be communicated or comes to the knowledge of the person in order to form a valid contract. The person can claim the reward in form of compensation if he gives his consent and performs the terms of the proposal.
In Pharmaceutical Society of Great Britain v. Boots cash chemists (Southern) Ltd., it was held that the exhibition or display of goods or items by a shopkeeper does not amount to an offer or proposal to sell. On selecting the goods or items, it is a proposal or offers by the customer to buy and the sale is not effected until the buyer’s proposal price is accepted by the shopkeeper.
WHAT IS AN ACCEPTANCE?
Section 2(b) of the Indian Contract Act 1872 defines acceptance as ‘When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal as soon as accepted, becomes a promise.
As mentioned in this section, if the offer made by the offeror is accepted without putting any condition by the offeree, it would amount to acceptance. When the proposal or an offer is accepted it becomes a promise.
There are various types of acceptance:
- Expressed Acceptance
- Implied Acceptance
- Conditional Acceptance
Example: X offers Y to buy X’s house at Rs. 15 lacs. Y accepts an offer. Now, it has become a promise between X and Y., and now it is irrevocable. No legal obligation can be created by a proposal.
In Carlill v. Carbolic Smoke Ball Co., it was held that if a person making the offer expressly or impliedly confident in his offer that it will be adequate to act on the offer without imparting acceptance of it to himself, the execution of circumstances is adequate acceptance without notification.
Place of Acceptance – When the contract is formed through the post the place of the contract shall be the place of acceptance i.e. from where the acceptance is posted. In the case of the phone, where the acceptance is heard is the place of contract. In the case of e-mail same rule applies to post.
WHAT IS CONSIDERATION?
Consideration is a fundamental requirement of the creation of a contract, but no consideration is necessary in the discharge or modification of the contract. It is the value of a promise made between the parties. It can be present, past or future. Stoicism to sue establishes a valid consideration provided the plaintiff has a bonafide belief that he has a reasonably good claim against the defendant.
Section 2(d) of the Indian Contract Act 1872 defines consideration as ‘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 or abstinence or promise is called a consideration for the promise’
Consideration can be defined by a maxim ‘QUID PRO QUO’ meaning ‘something in return.
Example: X decided to sell his land to Y for Rs. 20 lacs. Y promises to pay the sum of Rs. 20 lacs to X which is a consideration for X’s promise to sell his land and X’s promise to sell the land is a consideration for Y’s promise to pay Rs. 20 lacs.
In Currie v. Misa, the word consideration is defined as, ‘ A valuable consideration in the ambit of law may include either in some right, interest, profit or benefit accruing to the party, or some ignorance, detriment or loss given, suffered or undertaken by other.’
There are some instances where an agreement made without consideration does not affect its validity:
1. Natural Love and affection
2. Past Voluntary service
3. Time-barred Debt
4. In case of a gift
5. In order to create an agency, no consideration is required.
THE RIGHTS UNDER THE INDIAN CONTRACT ACT, 1872:
There are two types of rights available to the person one is Right in rem and the other is Right in personam.
The act gives the right in personam to the parties who have bound their promise in a contract. Thus, the parties in such a condition can only enforce their contractual rights against each other only and not against the world at large.
Example: A and B enter into a contract for delivering 20 kg of rice on a specified date. If B fails to deliver the same to A, then A can sure only B and not anyone else. There is no concern with the rest of the world.
The contract is essential for any business as stated above. There must be a valid contract. All agreements are not contract. All contracts are not agreement but only a valid agreement can become a contract. The essentials of a contract must be followed at the time of the formation of a contract. After this requirement is fulfilled, the next stage is the object of the parties in mind at the time of forming the contract. Once this objective is fulfilled, the liability of the parties comes to an end. Indian Contract Act, 1872 is very important for everyday exchanging and managing the terms of the business. This act helps a person to perform and function lawfully and also provides remedies to the ones affected by it. Hence, it is one of the important statues in India.