“Everyday man makes a variety of contracts in his daily existence from day to night.” A contract is included in one’s day-to-day life. An agreement between parties forms the basis of a contract. Generally, contracts play a major role in the formation of a business for instance in the buying and selling of goods and services and so on. A contract is essentially a verbal or a written agreement between two or more parties which specifies the rights, duties and obligations that each party must uphold. Contracts in India are governed by the Indian Contract act, 1872. The act lays down all the provisions relating to contracts and it also governs the disputes in furtherance with the contracts. The contract act, of 1872 provides the legal framework for the formulation of trade, business and commercial relations and transactions in which a contract is involved. This act is based on the principles of English Common Law and it applies to the whole of India. Let us begin by understanding the concept of a contract and the essential requisites of a contract in a detailed manner.
WHAT IS A CONTRACT?
In the Indian contract act, of 1872 the term contract is defined under Section 2(h), “an agreement enforceable by law is a contract”. A contract is a combination of two elements that is there must be an agreement and the agreement must be enforced by law. The agreements which are not enforced by law are not contracts. An agreement means a promise or a set of promises forming consideration for each other and when this agreement becomes enforceable by law it is a contract. “A” enters into a contract with “B” to sell his car for Rs 5,00,000. Here, A has to sell his car and B has to pay the amount of Rs 5,00,000. Hence this is an example of a valid contract.
So generally, a contract is created as follows;
CONTRACT = AGREEMENT + ENFORCED BY LAW
AGREEMENT = PROMISE + CONSIDERATION
PROMISE = ACCEPTANCE + OFFER
DEFINITION OF A CONTRACT
- According to Pollock – “Every agreement and promise enforceable by law is a contract”
- According to Salmond – “A contract is an agreement creating and defining an obligation between two or more persons by which rights are acquired by one or more to acts or forbearances on the part of others”
- According to Sir William Anson – “The law of contract is that branch of law which determines the circumstances in which a promise shall be legally binding on the person making it”
- According to Halsbury – “A contract is an agreement between two or more persons which is intended to be enforceable at law and is contracted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing the same act”
Types of contracts
Valid contract: A valid contract as per section 2(h) of the Indian contract act, 1872 states that an agreement which is enforced by the court of law is a contract. When all the essential elements of a contract are fulfilled then it is known as a valid contract.
Void contract: Section 2(g) of the Indian contract act states void contracts “a contract which cannot be enforced by law is called the void contract”. For instance, a contract for selling weapons to a country which has a ban on weapons is said to be a void contract. A contract which is effectively unenforceable from the moment it is created is known as a void contract.
Voidable contracts: When a contract is legally enforceable at the discretion of one party but not at the discretion of the other party then it is said to be a voidable contract. Section 2(I) of the act defines a voidable contract as “an agreement which is enforceable by law at the option of one or more of the parties thereto but not at the option of the other or others, is a voidable contract”.
Unenforceable contracts: These contracts cannot be enforced by the court of law due to the expiration of time or any other technical defect.
Express contract: An agreement is said to be expressed when it is made by words. As per section 9 of the Indian contract act, 1872 “A contract is said to be expressed if its terms and conditions are stated verbally or in writing”.
Implied contract: According to Section 9 of the Indian Contract Act, 1872, the terms and conditions of this contract are implied through the actions or conduct of the parties.
Unilateral contracts: Unilateral contracts are often known as one-sided agreements. In this type of contract, only one party is required to carry out the duties and obligations of the contract.
Bilateral contracts: In this type of contract both the contracting parties are required to fulfill their obligations and duties.
Quasi-contracts: This contract is based on the maxim “Nemo debet locupletari ex aliena juncture” which states that no person can gain unjust or unfair benefit from the loss of another person. Generally, quasi-contracts are based on the principles of natural law such as justice and honesty. One of the main features of quasi-contracts is unjust enrichment, one party gains an advantage either intentionally or as a result of the other party’s loss or misfortune. For example, if a parcel addressed to A is delivered to Z, here Z is required to return the parcel to A by the law. A has the right to sue Z if he consumes the parcel for his purpose. In this situation, the court may use quasi-contract law to ask Z to pay A.
ESSENTIALS ELEMENTS OF A VALID CONTRACT
Section 10 of the Indian contract act states the essential requisites of a valid 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”. The following are the essentials of a valid contract:
- Offer and Acceptance
- Free Consent
- Capacity of the parties
- Lawful Consideration
- Not expressly declared void
- Intention to create a legal obligation
OFFER AND ACCEPTANCE
Making an “offer” is the first and foremost step in the formation of an agreement and “acceptance” is the second stage of completing a contract. Section 2(a) of the act defines proposal or offer as “when one person signifies to another his willingness to do or to abstain from doing anything, to obtain the assent of that other to such act or abstinence, he said to propose”. A valid offer from one party and a valid acceptance of that offer by the other party are the basic essentials for a contract. The offer must be made with the intention to create legal relations, or else there will be no agreement. The person making an offer is known as the offeror, and the person accepting the offer is known as the offeree. When the offer is accepted by the offeree a contract is formed. If a contract is made the offeree cannot withdraw from the acceptance and vice versa, the offeror also cannot withdraw from his offer. For instance, Richard sells his car to Charles for Rs 5,00,000(The offer) here Charles agrees to buy Richard’s car (The acceptance). Therefore, we have an offer and an acceptance, Richard is the offeror and Charles is the offeree.
Consent is the most essential part of a contract. Consent generally means the approval of the parties concerned. A contract is made when one person makes an offer meanwhile the other person accepts the offer. Acceptance of the offer should be made without any compulsion. The parties to the contract must enter into the contract with free consent. Consent from the parties should not be obtained by coercion, misrepresentation, fraud, undue influence or mistake. The parties to the contract must enter into the contract by their own free will and consent.
CAPACITY OF THE PARTIES
The third essential part of a valid contract is the capacity of the parties to the contract. The parties to the contract must be capable and competent. An agreement with a minor person will be “void ab initio” (void from the beginning). Section 11 of the Indian contract act, states the competency of the parties to the contract as follows:
- The parties to the contract must attain the age of majority (18 years of age or above)
- The parties to the contract must be of sound mind while initiating the contract.
- The parties must not be disqualified by law from entering into the contract.
For instance, A enters into a contract with Z who is a minor to sell A’s land to Z. Hence Z is a minor, this contract is not valid and it is void ab initio. This contract does not fulfill the essentials of a valid contract.
Generally, consideration means something in return. Sir Fredrick Pollock has defined consideration “as an act or forbearance of one party, or the promise thereof is the price for which the promise of the other is bought”. Consideration is one of the most essential elements in a contract. The consideration made must be lawful. An agreement which contains unlawful consideration is said to be a void contract. 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”. There must always be a transfer of consideration from both parties for a contract to be enforceable. For example, B promises to sell his house to C for Rs.10,00,000. Here C promises to pay Rs.10,00,000 to B. This is an example of valid and lawful consideration.
NOT EXPRESSLY DECLARED VOID
An agreement cannot be one of those that are explicitly declared void. The Indian Contract Act expressly deems some contracts unenforceable. A contract that violates the law, either expressly or impliedly, is said to be illegal. An agreement that has no legal consequences is invalid. For instance, threatening to kill, publishing libelous things, or making agreements that are against the rules of society and law are all prohibited.
INTENTION TO CREATE LEGAL OBLIGATION
The intention of the parties to the contract must create a legal relationship between them. There is no contract between the parties if there is no such intention on either party. Contracts of social or domestic nature do not come under legal relationships and they do not fall under the category of contracts. For instance, a mother promises her daughter to buy her a car if she scores 100% in her math exam. Later on, the mother refuses to buy her car even after scoring 100%. This will not amount to any breach of contract as there is no intention to create a legal obligation between the mother and her daughter.
- Carlill V. Carbolic Smoke Ball Co.
In this instance, the company announced a reward of £ 100 for anyone who acquired influenza after using the company’s smoke balls in accordance with instructions. Despite using the smoke balls in accordance with the manufacturer’s instructions, Mrs Carlill became ill with influenza. Since Mrs Carlill had accepted the offer by acting in accordance with the advertisement, it was determined that the corporation could not escape its liability by claiming that it had not taken the offer seriously. She deserved to receive the reward.
In India, the principle was applied in the case of Har Bhajan. Lal V, Han Charan Lal. In this case, a prize was offered to anyone who could locate and return a lost boy. The boy was found and taken to the police station by Harbhajan Lal, who was aware of the reward. It was decided that he was qualified to receive the reward.
- Mohori Bibi Vs Dharmodas Ghose.
This famous case deals with contracts with minors. Dharmodas Ghose, a minor, executes a mortgage contract by mortgaging his property in Brahmo Dutt’s favor in order to secure a loan of 20,000 rupees. Kedar Nath, who had Brahmo Dutt’s approval, was aware that he was entering into a contract with a minor. The mother of the child complained to the court that her son’s mortgage was invalid because he was a minor. The court held that a contract with a minor is null and void and hence the mortgage executed by the minor is void.
Contracts play a significant role in daily life. Contracts or agreements between different parties are governed by the Indian Contract Act. A promise, commitment, or group of reciprocal promises or obligations is referred to as an agreement. An agreement is the result of one party making an offer or proposition and another party accepting it. Any arrangement that can be legally enforced qualifies as a contract. The aforementioned prerequisites must be met by the parties in order for a contract to be formed. Therefore, it’s crucial to include all of the components listed above when forming a contract. Only if an agreement satisfies all of the aforementioned requirements will it be considered a legally binding contract.