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The law relating to contracts in India is contained in Indian Contract Act, 1872. It came into force from September 1872. It is applicable to All the States of India except the State of Jammu & Kashmir.
Each contract creates some right and duties upon the contracting parties. Indian Contract deals with the enforcement of these rights and duties upon the parties in India.
Indian Contract Act 1872
Indian Contract Act embodied the simple and elementary rules relating to Sale of goods and partnership. The developments of modern business world found the provisions contained in the Indian Contract Act inadequate to deal with the new regulations or give effect to the new principles.
Subsequently the provisions relating to the sale of goods and partnership contained in the Indian Contract Act were repealed respectively in the year 1930 and 1932 and new enactments namely
- Sale of Goods and Movables Act 1930 and
- Indian Partnership act 1932 were re-enacted.
At present the Indian Contract Act includes:
- General Principles of Law of Contract- Section 1 to 75
- Special kinds of Contracts (includes indemnity, guarantee, bailment & pledge)- Section 125 to 238.
- Salmon defines contact as “An agreement creating and defining obligation between the parties “
- Sir Federick Pollock defines it as “Every agreement and promise enforceable at law is a contract.”
- Section 2(h) of the Act defines the term contract as “an agreement enforceable by law is a contract”. The definition resolves that a contract is fundamentally an agreement that binds the parties legally, thus,
- Contract = Agreement + Enforceability
An agreement occurs when two minds meet upon a common purpose, i.e. they mean the same thing in the same sense at the same time. The meeting of the minds is called consensus-ad-idem, i.e., consent to the matter.
Section 2(e) defines the term ‘agreement’ as “Every promise and every set of promise, forming the consideration for each other”
In other words, an agreement consist of an offer by one party and its acceptance by the other party whom the offer was made
Thus, Agreement = Offer + Acceptance
Offer: Section 2 (a) defines proposal (offer) as “When one person signifies to another his willingness to do or to abstain from doing something with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal.”
Promise: Section 2 (b) defines “a proposal (offer) when accepted becomes a promise.” Thus an accepted offer is a promise.
Acceptance: Section 2(b) “when the person to whom the offer is made signifies his assent there to, the proposal is said to be accepted.”
Enforceability: Enforceability means creation of some legal obligations. An agreement is said to be enforceable only after complying all the requirements under section 10 of Indian contract act and only those agreements called contracts which have enforceability.
Rights available to parties under Indian Contract Act
1. Rights in Rem (jus in rem)
A right in rem is available against the world at large. This right protects interest against the world and there is a duty upon every person of the world not to interfere with other’s rights. It is available against an open or indefinite class of persons. The freedoms given in article 19 of the Indian constitution with its restrictions are the rights in rem.
- Y has a house. The people of the world have a duty not to interfere with his ownership. Nobody has right to disturb his possession.
2. Rights in Personam (jus in personam)
A right in personam is available only against a particular person or party. This right protects an interest solely against determinate individuals and duty imposed upon determinate individuals.
Indian Contract Act, 1872 provides right in personam to the parties who enters in to the contract thus, the parties to the contract can exercise their contractual rights against each other only.
Y let his house to Z-tenant. Y has a right to receive rent from his tenant. This right to receive rent from his tenant, is a right in personam. The rest of the world is not concerned with this right.
Law of contract is not the whole law of agreements
The law of contract is concerned with those agreements which contains all essentials under section 10 and where the parties have intension to create legal obligation thus the law of contract does not covers all agreements such as social, political, religious and other agreements without legal intensions.
The law of contract is not the whole law of obligation
The Indian contract act shall not lay down absolute rights and obligations of the contracting parties. It enforce only those obligations which are agreed by the parties under a contract i.e. contractual obligation. Thus it is not concerned with obligations arising by the statutes, torts or judgment of courts.
It has no retrospective effect
The law of the contract enacted as on 1st September, 1872, and applies only on those contracts which are formed as on 1st September, 1872 or after it. It does not have retrospective effect therefore, does not enforce those contract which are formed prior to 1st September, 1872.
Essential Elements of a Valid Contract [Section 10]
According to Section 10, “All agreements are contracts if they are made by 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”.
Two Parties: To constitute a contract there must be at least two parties, i.e. one party making an offer (offerer/proposer) and the other party accepting the offer (offeree / proposee). The terms of the offer must be definite.
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Agreement: A contract is initially an agreement when person whom the offer has given signifies his acceptance on it there arises an agreement which is the foundation of a contract.
Consent: There must be consensus-ad-idem (meeting of minds) to constitute a valid contract unity of minds i.e. consensus-ad-idem means that the parties must agree to the same thing in the same sense and at the same time. An agreement without consent is void.
Intention to create legal relationship: There must be an intention by both parties to create legal relationship and to legally bind themselves as a result of such agreement. Thus, agreements of social or household nature are not contracts, as the usual presumption is that the parties do not intend to create legal relationship unless otherwise agreed upon. However, in case of commercial transaction the usual presumption is that parties intend to create legal relationship.
Contractual Capacity: The parties to the agreement must be capable of entering into a valid contract. According to Section 11, every person is competent to contract if he or she,
(a) is of the age of majority;
(b) is of sound mind; and
(c) is not disqualified from contracting by any law to which he/she is subject.
Consideration: An agreement by incompetent person is void. A valid contract must be supported by consideration. Consideration means “something in return” (quid pro quo). It can be cash, kind, an act or abstinence. It can be past, present or future. However, consideration must be real and lawful. An agreement without consideration is void however, it need not to be adequate, if parties are agreed in it.
Free consent: The parties are said to be in consent when they are agree upon the same thing in the same sense, in addition to it, to constitute a valid contract there must be free and genuine consent of the parties to the contract, consent is said to be free if it is not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. If the consent is not free, the contract becomes voidable.
Lawful object and consideration: The object as well as consideration of the Contract must not be unlawful. According to Section 23, the consideration or object of an agreement is un lawful, if
- It is forbidden by law; or
- it Is of such nature that, if permitted it would defeat the provisions of any law or
- It is fraudulent; or
- it Involves or implies, injury to the person or property of another; or
- The court regards it as immoral
Agreement not declared void: Under the provisions of Indian Contract Act, 1872 certain agreement are expressly declared as void. Agreements which have been expressly declared void are not enforceable at law; hence does not constitute a valid contract. For example agreement of wager, agreement in restraint of trade and marriage.
Certainty of meaning: The terms of agreement must be certain and not vague. It must be either certain or be certained at the time of execution. If it is not possible to ascertain the meaning of the agreement, it is not enforceable at law.
Possibility to Perform: The promises made under a valid contract must be executable. An agreement to do some impossible act is void from the beginning and never converted into contract.
Legal formalities: Although Indian contract Act does not provide any formality to enter into contract therefore a contract may be express (oral or written) or even implied (by conduct). However, where the law requires for a particular contract, it must comply with all the legal formalities such as in writing, registration and attestation.
Discharge by Impossibility or Frustration (Section 56)
A contract which is entered into to perform something that is clearly impossible is void.
For instance, A agrees with B to discover treasure by magic. The agreement is void by virtue of Section 56 para 1 which lays down the principle that an agreement to do an act impossible in itself is void.
Sometimes subsequent impossibility (i.e. where the impossibility supervenes after the contract has been made) renders the performance of a contract unlawful and stands discharged; as for example, where a singer contracts to sing and becomes too ill to do so, the contract becomes void.
In this connection, para 2 of Section 56 provides that 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.
If the impossibility is not obvious and the promisor alone knows of the impossibility or illegally then existing or the promisor might have k