Law of Contracts
Law of Contracts
The law of contract is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding in them.
The law relating to contracts is contained in the Indian Contract Act, 1872. The Act deals with (1) the general principles of the law of contracts and (2) some special contracts.
Definition:
A contract is an agreement made between two or more parties which the law will enforce.
Sec. 2(h) defines contract as an agreement enforceable by law. This definition is based on Pollock’s definition which is as follows: “Every agreement and promise enforceable at law is a contract.”
Sir William Anson defines a contract as “a legally binding agreement between two or more persons by which rights are acquired by one or more to acts or forbearances (abstaining from doing something) on the part of others.”
According to Salmond, a contract is “an agreement creating and defining obligations between the parties.”
If we analyse the definitions of contract, we find that a contract essentially consists of two elements, viz., (1) agreement, and (2) its enforceability by law.
An agreement is defined as “every promise and every set of promises, forming consideration for each other” [Sec. 2(e)]
A promise is defined as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise” [Sec. 2(b)]
This, in other words, means that an agreement is an accepted proposal. In order, therefore, to form an agreement, there must be a proposal or offer by one party and its acceptance by the other.
Agreement = Offer + Acceptance
Contract = Agreement + Enforceability at law
Thus, All contracts are agreements but all agreements are not necessarily contracts.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
According to Section 10, 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 expressly declared to be void. In order to become a contract, an agreement must have the following essential elements:
1. Offer and acceptance.
There must be two parties to an agreement, i.e., one party making the offer and the other party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the offeror.
2. Intention to create legal relationship.
When the two parties enter into an agreement, their intention must be to create legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship as they are not contracts. This, however, does not mean that there can never be a contract between a husband and a wife. In commercial and business agreements, the presumption is usually that the parties intended to create legal relations. But this presumption is rebuttable which means that it must be shown that the parties did not intend to be legally bound.
3. Lawful consideration.
An agreement to be enforceable by law must be supported by consideration. Consideration means an advantage or benefit moving from one party to the other. It is the essence of a bargain. In simple words, it means something in return. The agreement is legally enforceable only when both the parties give something and get something in return. A promise to do something, getting nothing in return is usually not enforceable by law. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing something) or promise to do or not to do something. It may be past, present or future. But it must be real and lawful.
4. Capacity of parties - competency.
The parties to the agreement must be capable of entering into a valid contract. Every person is competent to contract if he (a) is of the age of majority. (b) is of sound mind, and (c) is not disqualified from contracting by any law which he is subject. Flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness, etc., and status. If a party suffers from any flaw capacity, the agreement is not enforceable except in some special cases.
5. Free and genuine consent.
It is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same mind on all the material terms of the contract. The parties are said to be of the same mind when they agree about the subject matter of the contract in the same sense and at the same time. There is absence of free consent if the agreement is induced by coercion, undue influence, fraud, misrepresentation, etc.
6. Lawful object.
The object of the agreement must be lawful. In other words, it means that the object must not be (a) illegal, (b) immoral, or (c) opposed to public policy. If an agreement suffers from any legal flaw, it would not be enforceable by law.
7. Agreement not declared void.
The agreement must not have been expressly declared void by law in force in the country.
8. Certainty and possibility of performance.
The agreement must be certain and not vague or indefinite. If it is vague and it is not possible to ascertain its meaning, it cannot be enforced.
9. Legal formalities.
A contract may be made by words spoken or written. As regards the legal effects, there is no difference between a contract in writing and a contract made by word of mouth. It is, however, in the interest of the parties that the contract should be in writing. There are some other formalities also which have to be complied with in order to make an agreement legally enforceable. In some cases, the document in which the contract is incorporated is to be stamped. In some other cases, a contract, besides being a written one, has to be registered. Thus, where there is a statutory requirement that a contract should be made in writing or in the presence of witnesses or registered, the required statutory formalities must be complied with.
CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their validity, formation, performance.
A contract is based on an agreement. An agreement becomes a contract when all the essential elements referred in essentials of contracts are present. If one or more of these elements is/are missing, the contract is either voidable, void, illegal or unenforceable.
Voidable contract:
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. this happens when the essential element of free consent in a contract is missing. A voidable contract continues to be valid till it is avoided by the party entitled to do so.
Eg: B promises to sell his car to C for Rs. 10,000. His consent is obtained by use of force. The contract is a voidable at the option of B. He may avoid the contract or elect to be bound by it.
Void agreement:
An agreement not enforceable by law is said to be void. [Sec. 2(g)]. A void agreement does not create any legal rights or obligations. It is void ab initio, from the very beginning.
Eg: An agreement with a minor or an agreement without consideration.
Void Contract:
A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable [Sec. 2(g)]. A contract, when originally entered into , may be valid and binding on the parties.
Eg: A contract to import goods from a foreign country.
It may subsequently become void.
Eg: when a war breaks out between the importing country and the exporting country.
Illegal agreement
An illegal agreement is one which transgresses some rule of basic public policy or which is criminal in nature or which is immoral. Such an agreement is a nullity and has much wider import than a void contract. All illegal agreements are void but all void agreements or contracts are not necessarily illegal. An illegal agreement is not only void as between the immediate parties but has this further effect that even the collateral transactions to it become tainted with illegality.
2. Classification according to formation
A contract may be (a) made in writing or by word of mouth, or (b) inferred from the conduct of the parties or the circumstances of the case.
Express contract
If the terms of a contract are expressly agreed upon (whether by words spoken or written) at the time of formation of the contract, the contract is said to be an express contract. Where the offer or acceptance of any promise is made in words, the promise is said to be express (Sec. 9). An express promise results in an express contract.
Implied contract
An implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between them. The act or conduct must be clear and not vague or subject to any other interpretation. It is not the result of any express promise or promises by the parties but of their particular acts. It may also result from a continuing course of the parties. Where the proposal or acceptance of any promise is made other than in words, the promise is said to be implied (Sec. 9). An implied promise results in an implied contract.
Eg: Mr. A gets into public bus,
Miss B takes a cup of tea in a restaurant
Quasi-contract
A quasi contract is not a contract at all. A contract is intentionally entered into by the parties. A quasi contract, on the other hand, is created by law. It resembles a contract in that a legal obligation is imposed on a party who is required to perform it. It rest on the ground of equity that “a person shall not be allowed to enrich himself unjustly at the expense of another.
Eg: X, a tradesman, leaves goods at Y’s house by mistake. Y treats the goods as his own. Y is bound to pay for the goods.
E-Commerce contract
An e-commerce contract is one which is entered into between two parties via Internet. In Internet, different individuals or companies create networks which are linked to numerous other networks. This expands the area of operation in commercial transactions for any person.
3. Classification according to performance
To the extent to which the contracts have been performed, these may be classified as
Executed contract
‘Executed’ means hat which is done. An executed contract is one in which both the parties have performed their respective obligations.
Eg: Mr. S agrees to paint Mr. M’s house for Rs. 1000. When S paints the house and pays the price, i.e., when both the parties perform their obligations, the contract is said to be executed.
Executory contract
‘Executory’ means that which remains to be carried into effect. An executory contract in one in which both the parties have yet to perform their obligations.
Thus, in the above example, the contract is executory if S has not yet painted the house and M has not paid the price.
Unilateral or one sided contract
A unilateral or one sided contract is one in which only one party has to fulfil his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes into existence, such contracts are also known as contracts with executed consideration.
Bilateral or both-sided contract
A bilateral contract is one in which the obligations on the part of the parties to the contract are outstanding at the time of the formation of the contract. In this sense, bilateral contracts are similar to executory contracts and are also known as contracts with executory consideration.
Quasi-Contracts
Under certain circumstances, a person may receive a benefit to which the law regards another person as better entitled, or for which the law considers he should pay to the other person, even though there is no contract between the parties. Such relationships are termed quasi-contracts, because, although there is no contract or agreement between the parties, they are put in the same position as if there were a contract between them. These relationships are termed quasi contracts or constructing contracts under the English Law and "certain relations resembling those created by contracts" under the Indian Law. Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi-contract on the other hand, is created by law.
KINDS OF QUASI-CONTRACTS
Secs. 68 to 72 deal with five kinds of quasi-contractual obligations:
1. Supply of Necessaries (Sec. 68)
If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. This has already been considered in detail in connection with minors' agreements in Chapter on "Capacity of Parties".
2. Payment by an Interested Person (Sec, 69)
A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it is entitled to be reimbursed by the other.
The essential requirements of Sec. 69 are
1. The payment made should be bona fide for the protection of one's interest
2. The payment should not be a voluntary one.
3. The payment must be such as the other party was bound by law to pay.
3. Obligation to Pay for Non-gratuitous Acts (Sec. 70)
When a person lawfully does anything for another person or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered
4. Responsibility of Finder of Goods (Sec. 71)
A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee. He is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value. He must also take all necessary measures to trace its owner. If he does not, he will be guilty of wrongful conversion of the property. Till the owner is found out, the property in goods will vest in the finder and he can retain the goods as his own against the whole world (except the owner, of course).
The finder can sell the goods in the following cases:
1. when the thing found is in danger of perishing;
2. when the owner cannot, with reasonable diligence, be found out;
3. when the owner is found out, but he refuses to pay the lawful charges of the finder; and
4. when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of the value of the thing found (Sec. 169).
5. Mistake or Coercion (Sec. 72)
A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it to the person who paid it by mistake or under coercion. The word "coercion' is used in Sec. 72 in its general sense and not as defined in Sec. 15
QUANTUM MERUIT
"Quantum meruit" literally means "as much as earned" or "as much as is merited". When a person has done some work under a contract, and the other party repudiates the contract, or some event happens which makes the further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done. Likewise, where one person has expressly or impliedly requested another to render him a service without specifying any remuneration, but the circumstances of the request imply that the service is to be paid for, there is implied a promise to pay quantum meruit, i.e., so much as the party rendering the service deserves. The right to claim quantum meruit does not arise out of contract as the right to damages does; it is a claim on the quasi-contractual obligation which the law implies in the circumstances.
The claim for quantum meruit arises only when the original contract is discharged. If the original contract exists, the party not in default cannot have quantum meruit remedy: he has to take resort to remedy in damages. Further, the claim for quantum meruit can be brought only by the party who is not in default.
Redrafted for Educational Purpose.
Deekshith Kumar,
Assistant Professor of Commerce
Book Reference:
1. Elements of Mercantile Law by N. D. Kapoor
2. Principles of Mercantile Law by Avtar Singh
3. A Textbook of Business Law by Dr. Umesh Maiya
4. Business Law by B.S. Raman
Comments
Post a Comment