All legal and commercial activity depends on contracts. Whether they are aware of it or not, people and companies make a lot of agreements every day, whether they are involving the purchase of commodities, the rental of services, or the leasing of real estate. These agreements become legally binding when they meet the requirements of a contract as specified by the Indian Contract Act, 1872.
The definition, character, extent, and fundamentals of contracts under the Act are thoroughly examined in this article, along with significant case law for a deeper understanding.
Meaning of Contract
The Latin word
"contractum," which meaning "to bring together," is where
the word "contract" originates. It describes a contract between two
or more people that aims to establish binding legal duties.
According to Section
2(h) of the Indian Contract Act, 1872:
“An agreement enforceable
by law is a contract.”
So, in simple terms:
Contract = Agreement + Enforceability by law
What is an agreement?
As per Section 2(e):
“Every promise and every
set of promises forming the consideration for each other is an agreement.”
A promise arises when a
proposal by one party is accepted by another (Section2(b)).
Therefore:
- Proposal + Acceptance = Promise
- Promise + Consideration = Agreement
- Agreement + Legal enforceability =
Contract
Agreement vs. Contract
Not every arrangement is
a contract. Contracts are only agreements that are enforceable by law. For example:
A commitment to go out to dinner with a friend does not constitute a contract
or, a contract is created when a commitment to provide products at a price is
accepted.
Case: Balfour v. Balfour
(1919)
While working overseas, a
husband made a commitment to provide his wife with money. The court determined
that because the agreement was a domestic arrangement rather than a contract,
it was not legally enforceable.
Nature of a
Contract
The nature of a
contract refers to its essential features and characteristics:
1-Legal Obligation-
A contract establishes a
legal relationship between the parties, as opposed to merely social or moral
agreements. One party can apply to the court for enforcement if the other party
does not fulfill.
Case: Rose & Frank
Co. v. Crompton Bros. (1923)
A written agreement that
specifically excluded legal enforcement was seen to be only a "moral
obligation" and therefore unenforceable.
2- Mutual Consent-
Parties must freely
consent to a contract Section 13, which means that both parties must
agree to the same thing in the same sense (consensus ad idem).
Case: Raffles v.
Wichelhaus (1864)
Peerless is the name of
two distinct ships that both parties considered. There was no consensus, hence
the contract was void.
3- Lawful Object and
Consideration-
The contract's intent and
consideration must be lawful. Any contract created for illegal purposes is null
and void Section 23.
Case: Narayanamma v.
Govindappa (1962)
Since the agreement was
made for an illegal purpose, it was deemed null and void.
4- Competency of Parties-
As per Section 11,
parties must be: of the age of majority, of sound mind and not legally disqualified by
law.
Case: Mohori Bibee v.
Dharmodas Ghose (1903)
A minor is incapable of
entering into contract, hence their mortgage deed was declared null and void.
5- Free Consent-
Coercion, undue
influence, fraud, misrepresentation or mistake are all prohibited methods of
obtaining consent. The contract is voidable if permission is not freely given Sections
14–19.
Case: Rani Annapurna v.
Swaminath (1905)
An uneducated widow's
consent that was gained due to undue influence was overturned.
6- Certainty of Terms-
The conditions of the contract must be clear and unambiguous in accordance with Section 29.
7- Not Declared Void-
Under the Act, some agreements are specifically null and void, including:
- Restraining trade (Section 27)
- Restraining marriage (Section 26)
- Wagering agreements (Section 30)
Scope of the
Indian Contract Act, 1872
Enacted to define and
regulate contracts, the Indian Contract Act, 1872, is applicable
throughout (with the exception of states where state-specific changes may be
applicable). It regulates both general principles of the law of contract and
certain specific types of contracts. The Act is separated into two different parts:
Part 1: General Principles
Sections 1–75
contain general principles applicable to all contracts:
- Proposal and acceptance
- Consideration
- Capacity of parties
- Lawful object
- Free consent
- Void and voidable agreements
- Performance of contract
- Discharge of contract
- Breach of contract and remedies
These principles apply to
all contracts, unless the special nature of a specific contract overrides them.
Part 2: Special Kinds of
Contracts
The Act also deals with
specific contracts that have unique features and requirements. These include:
1. Contract of Indemnity and Guarantee
(Sections 124–147)
- Indemnity:
One party promises to save the other from loss caused by the promisor or
any other person.
- Guarantee: One party promises to protect the other from harm brought on by the promisor or third parties.
Essentials:
- Lawful object
- Consideration
- Free consent
Case: Punjab National
Bank v. Vikram Cotton Mills (1970)
The guarantee contract holds the guarantor accountable.
2. Contract of Bailment and Pledge (Sections
148–181)
- Bailment: Delivery of goods under contract for a specific purpose, with the expectation that they will be returned once that purpose has been fulfilled.
- Pledge:
Bailment of goods as security for repayment of debt or performance of a
promise.
Essentials of Bailment:
- Delivery of goods
- Consent
- Purpose
- Return of goods
Case: Kaliaperumal Pillai
v. Visalakshmi (1938)
Bailee held liable for
negligence in keeping goods safe.
3. Contract of Agency (Sections 182–238)
A contract in when one
individual (the agent) is permitted to enter into agreements with third parties
on behalf of another (the principal).
Essentials:
- Intention to create agency
- Competency of principal
- Lawful purpose
Case: P. Krishna Bhatta
v. Mundila Ganapathi Bhatta (1913)
Principal is bound by the actions of agents acting under their authority.
Conclusion
A strong legal basis for
guaranteeing that agreements between parties are fair, valid, and enforceable
is provided by the Indian Contract Act, 1872. A contract is a legally
recognized relationship that binds parties to their promises; it is
considerably more than merely a promise.
Comprehending the definition, character, and extent of a contract supports both
individuals and companies in guaranteeing the legitimacy and enforceability of
their agreements. Through important judgments, courts have continuously
maintained these values, guaranteeing fairness and clarity in business
transactions.
To prevent future disagreements and legal issues, make sure that each
arrangement you enter into satisfies the requirements for a legally binding
contract.
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References
1-https://thelegalschool.in/blog/essential-elements-of-contract
2- https://www.thelegalvidya.in/analysis-of-section-2h-of-the-indian-contract-act
3- https://www.law.cornell.edu/wex/contract
4- https://quizlet.com/in/592846840/contract-act-flash-cards
5- https://vaquill.com/blog/contract-of-indemnity
Case References
1-Balfour v. Balfour (1919)
2- Rose & Frank Co. v. Crompton Bros. (1923)
3- Raffles v. Wichelhaus (1864)
4- Narayanamma v. Govindappa (1962)
5- Mohori Bibee v. Dharmodas Ghose (1903)
6- Rani Annapurna v. Swaminath (1905)
7- Punjab National Bank v. Vikram Cotton Mills (1970)
8- Kaliaperumal Pillai v. Visalakshmi (1938)
9- P. Krishna Bhatta v. Mundila Ganapathi Bhatta
(1913)
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