Law of ContractLaw of Contract The law of contract is that branch of law which The law of contract is that branch of law which

determines the circumstances in which promises determines the circumstances in which promises made by the parties to a contract shall be legally made by the parties to a contract shall be legally binding on them. binding on them.

Its rules define the remedies that are available in a Its rules define the remedies that are available in a court of law against a person who fails to perform his court of law against a person who fails to perform his contract, and the conditions under which the remedies contract, and the conditions under which the remedies are available.are available.

It is of particular importance to people engaged in It is of particular importance to people engaged in trade, commerce and industry as bulk of their trade, commerce and industry as bulk of their business transactions are based on contracts.business transactions are based on contracts.

The law of contract introduces definiteness in The law of contract introduces definiteness in business transactions.business transactions.

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Contd..Contd.. The parties to a contract, in a sense, make the law for The parties to a contract, in a sense, make the law for

themselves. So long as they do not infringe some themselves. So long as they do not infringe some legal prohibition, they can make what rules they like in legal prohibition, they can make what rules they like in respect of the subject-matter of their agreement, and respect of the subject-matter of their agreement, and the law will give effect to their decisions.the law will give effect to their decisions.

Salmond has rightly observed that the law of contract Salmond has rightly observed that the law of contract is “not the whole law of agreements, nor is it the whole is “not the whole law of agreements, nor is it the whole law of obligations. It is the law of those agreements law of obligations. It is the law of those agreements which create obligations, and those obligations which which create obligations, and those obligations which have their source in agreements.” It excludes from its have their source in agreements.” It excludes from its purview all obligations which are not contractual in purview all obligations which are not contractual in nature and agreements which are social in nature. nature and agreements which are social in nature.

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Contd..Contd.. Law of contract creates Law of contract creates jus in personam jus in personam as distinguished from as distinguished from

jus in remjus in rem::

Jus in rem means a right available against the whole world. Jus Jus in rem means a right available against the whole world. Jus in personam means a right available only against a particular in personam means a right available only against a particular individual. The Contract Act deals with rights in personam and individual. The Contract Act deals with rights in personam and not with rights in rem.not with rights in rem.

Example: Á’ is the owner of a house. As owner of the house Example: Á’ is the owner of a house. As owner of the house he has the right of its quiet possession and enjoyment against he has the right of its quiet possession and enjoyment against the whole world. This is, therefore, his right in rem. the whole world. This is, therefore, his right in rem.

A is indebted of B to the extent of Rs. 10,000. B’s right to A is indebted of B to the extent of Rs. 10,000. B’s right to recover money from A will be termed as right in personam as it recover money from A will be termed as right in personam as it is available only against A and none else.is available only against A and none else.

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The Indian Contract Act, 1872The Indian Contract Act, 1872

The law relating to contracts is contained in the Indian The law relating to contracts is contained in the Indian Contract Act, it came into force from 1Contract Act, it came into force from 1stst September, September, 1872 and has been amended in 1886, 1891, 1899, 1872 and has been amended in 1886, 1891, 1899, 1930, 1932 and 1997.1930, 1932 and 1997.

The Act has been mainly enacted to ensure that the The Act has been mainly enacted to ensure that the obligations prescribed by agreements and the obligations prescribed by agreements and the reasonable expectations created by them are fulfilled reasonable expectations created by them are fulfilled by the concerned parties to the agreements. by the concerned parties to the agreements.

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Contd… Contd…

The Act largely deals with:The Act largely deals with:

(i)(i) The general principles applicable to contractsThe general principles applicable to contracts

(ii)(ii)The conditions necessary for making a valid contractThe conditions necessary for making a valid contract

(iii)(iii)The principles applicable to quasi contract; and The principles applicable to quasi contract; and

(iv)(iv)The principles applicable to some special contracts The principles applicable to some special contracts like those of Indemnity, Guarantee, Bailment and like those of Indemnity, Guarantee, Bailment and Agency.Agency.

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Meaning of ContractMeaning of Contract A contract is an agreement made between two or more parties A contract is an agreement made between two or more parties

which the law will enforce. Sec 2 (h) defines a contract as an which the law will enforce. Sec 2 (h) defines a contract as an agreement enforceable by law. In other words, “Every agreement enforceable by law. In other words, “Every

agreement and promise enforceable at law is a contractagreement and promise enforceable at law is a contract”. ”. A contract essentially consists of two elements (1) Agreement A contract essentially consists of two elements (1) Agreement

and (2) its enforceability by law.and (2) its enforceability by law. An agreement is defined as “every promise and every set of An agreement is defined as “every promise and every set of

promises, forming consideration for each other.”(Sec.2 (e). A promises, forming consideration for each other.”(Sec.2 (e). A promise is defined “when the person to whom the proposal is promise is defined “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Sec accepted. A proposal, when accepted, becomes a promise. Sec 2 (b). To form an agreement, there must be a proposal or offer 2 (b). To form an agreement, there must be a proposal or offer by one party and its acceptance by the other. To sum up:by one party and its acceptance by the other. To sum up:

Agreement= Offer+Acceptance.Agreement= Offer+Acceptance.

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Contd..Contd.. Before there can be an agreement between two parties, there Before there can be an agreement between two parties, there

must be must be consensus ad idem (meeting of minds). consensus ad idem (meeting of minds). This means This means that the parties to the agreement must have agreed about the that the parties to the agreement must have agreed about the subject –matter of the agreement in the same sense and at the subject –matter of the agreement in the same sense and at the same time . Unless there is consensus ad idem, there can be same time . Unless there is consensus ad idem, there can be no contract.no contract.

Ex: A who owned two cars namely Maruti Swift and Honda Ex: A who owned two cars namely Maruti Swift and Honda City, is selling Maruti Swift to B. B thinks he is purchasing City, is selling Maruti Swift to B. B thinks he is purchasing Honda City. There is no consensus ad idem and consequently Honda City. There is no consensus ad idem and consequently no contractno contract. .

If A says to B will you purchase my Maruti Swift for Rs. If A says to B will you purchase my Maruti Swift for Rs. 3,00,000/- and B says “yes” to it, there is consensus ad idem 3,00,000/- and B says “yes” to it, there is consensus ad idem and an agreement comes into existence. and an agreement comes into existence.

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Contd..Contd..

Obligation:Obligation:

An agreement, to become a contract, must give rise to a legal An agreement, to become a contract, must give rise to a legal obligation or duty. The term ‘obligation’ is defined as a legal tie obligation or duty. The term ‘obligation’ is defined as a legal tie which imposes upon a definite person or persons the which imposes upon a definite person or persons the necessity of doing or abstaining from doing a definite act or necessity of doing or abstaining from doing a definite act or acts. It may relate to social or legal matters. An agreement acts. It may relate to social or legal matters. An agreement which gives rise to a social obligation is not a contract. It must which gives rise to a social obligation is not a contract. It must give rise to a legal obligation in order to become a contract.give rise to a legal obligation in order to become a contract.

Ex: A agrees to sell his car to B for Rs. 10,000. The Ex: A agrees to sell his car to B for Rs. 10,000. The agreement gives rise to an obligation on the part of A to agreement gives rise to an obligation on the part of A to deliver the car to B and on the part of B to pay Rs. 10,000 to deliver the car to B and on the part of B to pay Rs. 10,000 to A. This agreement is a contract.A. This agreement is a contract.

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Contd..Contd.. An agreement may be a social agreement or a legal An agreement may be a social agreement or a legal

agreement. agreement. If A invites B to a dinner and B accepts the If A invites B to a dinner and B accepts the invitation, it is a social agreementinvitation, it is a social agreement. A social agreement does . A social agreement does not give rise to contractual obligations and is not enforceable not give rise to contractual obligations and is not enforceable in a court of law. It is only those agreements which are in a court of law. It is only those agreements which are enforceable in a Court of law which are contracts.enforceable in a Court of law which are contracts.

Ex: A father promises to pay his son Rs.100 every month as Ex: A father promises to pay his son Rs.100 every month as pocket allowance. Later he refuses to pay. The son cannot pocket allowance. Later he refuses to pay. The son cannot recover as it is a domestic agreement and there is no intention recover as it is a domestic agreement and there is no intention on the part of the parties to create legal relations.on the part of the parties to create legal relations.

To conclude: Contract= Agreement + Enforceability at lawTo conclude: Contract= Agreement + Enforceability at law

Thus all contracts are agreements but all agreements are not Thus all contracts are agreements but all agreements are not necessarily contracts. necessarily contracts.

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Essential Elements of a Valid ContractEssential Elements of a Valid Contract According to Sec. 10 “All agreements are contracts if they According to Sec. 10 “All agreements are contracts if they

are made by free consent of parties competent to contract, are made by free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.hereby expressly declared to be void.

In order to become a contract, an agreement must have the In order to become a contract, an agreement must have the following essential elements:following essential elements:

1.1. Agreement:Agreement:

To constitute a contract there must be an agreement. An To constitute a contract there must be an agreement. An agreement is composed of two elements-offer and agreement is composed of two elements-offer and acceptance. The party making the offer is known as the acceptance. The party making the offer is known as the offeror, the party to whom the offer is made is known as offeror, the party to whom the offer is made is known as the offeree. Thus, there are essentially to be two parties the offeree. Thus, there are essentially to be two parties to an agreement. They both must be thinking of the to an agreement. They both must be thinking of the same thing in the same sense. In other words, there same thing in the same sense. In other words, there must be consensus-ad-idem. must be consensus-ad-idem.

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Contd…Contd…

2. Intention to create legal relationship:2. Intention to create legal relationship:

There should be an intention on the part of the parties to the There should be an intention on the part of the parties to the agreement to create a legal relationship. An agreement of agreement to create a legal relationship. An agreement of

purely social or domestic nature is not a contractpurely social or domestic nature is not a contract..Balfour Vs. BalfourBalfour Vs. Balfour

A husband agreed to pay 30 pounds to his wife every month A husband agreed to pay 30 pounds to his wife every month while he was abroad. As he failed to pay the promised amount, while he was abroad. As he failed to pay the promised amount, his wife sued him for the recovery of the amount. Held, she his wife sued him for the recovery of the amount. Held, she could not recover as it was a social agreement and the parties could not recover as it was a social agreement and the parties did not intend to create any legal relations.did not intend to create any legal relations.

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Contd…Contd…

3. Lawful Consideration:3. Lawful Consideration:

The agreement must be supported by consideration on both The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise sides. Each party to the agreement must give or promise something and receive something or a promise in return. something and receive something or a promise in return. Consideration is the price for which the promise of the other is Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the case the promise is not supported by consideration, the promise will be a bare promise and is not enforceable at law. It promise will be a bare promise and is not enforceable at law. It must be real and lawful.must be real and lawful.

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Contd…Contd…

4. Capacity of parties-competency:4. Capacity of parties-competency:

The parties to the agreement must be capable of entering into a The parties to the agreement must be capable of entering into a valid contract. Every person is competent to contract if he valid contract. Every person is competent to contract if he

(a)(a) is of the age of majority,is of the age of majority,

(b)(b) is of sound mind, andis of sound mind, and

(c)(c) is not disqualified from contracting by any law to which he is is not disqualified from contracting by any law to which he is subject.subject.

Flaw in capacity to contract may arise from minority, lunacy, Flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness, etc., If a party suffers from any flaw in idiocy, drunkenness, etc., If a party suffers from any flaw in capacity, the agreement is not enforceable except in some capacity, the agreement is not enforceable except in some special cases.special cases.

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Contd…Contd…5. Free and genuine consent:5. Free and genuine consent:

The consent of the parties to the agreement must be free and The consent of the parties to the agreement must be free and genuine. The consent of the parties should not be obtained by genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. misrepresentation, fraud, undue influence, coercion or mistake. If the consent is obtained by any of these flaws, then the If the consent is obtained by any of these flaws, then the contract is not valid.contract is not valid.

6. Lawful object:6. Lawful object:

The object of the agreement must be lawful. In other words, it The object of the agreement must be lawful. In other words, it means that the object must not be illegal, immoral, or opposed means that the object must not be illegal, immoral, or opposed to public policy. If an agreement suffers from any legal flaw, it to public policy. If an agreement suffers from any legal flaw, it would not be enforceable by law.would not be enforceable by law.

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Contd..Contd..

7.7. Agreement not declared illegal or void:Agreement not declared illegal or void:

There are certain agreements which have been expressly There are certain agreements which have been expressly declared illegal or void by the law. In such cases, even if the declared illegal or void by the law. In such cases, even if the agreement possesses all the elements of a valid agreement, agreement possesses all the elements of a valid agreement, the agreement will not be enforceable at law.the agreement will not be enforceable at law.

8.8. Certainty and possibility of performance:Certainty and possibility of performance:

The agreement must be certain and not vague or indefinite. If it The agreement must be certain and not vague or indefinite. If it is vague and it is not possible to ascertain its meaning , it is vague and it is not possible to ascertain its meaning , it cannot be enforced.cannot be enforced.

Ex: A agrees to sell to B “a hundred tons of oil”. There is Ex: A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.agreement is void for uncertainty. 1515

Contd..Contd..The terms of the agreement must also be such as are capable The terms of the agreement must also be such as are capable of performance. Agreement to do an act impossible in itself of performance. Agreement to do an act impossible in itself cannot be enforced . cannot be enforced .

For example, where A agrees with B to put life into B’s death For example, where A agrees with B to put life into B’s death wife, the agreement is void as it is impossible of performance.wife, the agreement is void as it is impossible of performance.

9. Legal Formalities:9. Legal Formalities:

A contract may be oral or in writing. If, however, a particular A contract may be oral or in writing. If, however, a particular type of contract is required by law to be in writing, it must type of contract is required by law to be in writing, it must comply with the necessary formalities as to writing, registration comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not and attestation, if necessary. If these legal formalities are not carried outcarried out , then the contract is not enforceable at law. , then the contract is not enforceable at law.

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Test Your KnowledgeTest Your Knowledge X invites Z to a dinner in his house on Sunday. Z hired a taxi X invites Z to a dinner in his house on Sunday. Z hired a taxi

and reaches X’s house at the appointed time, but X fails to and reaches X’s house at the appointed time, but X fails to perform his promise. Can Z recover any damages from X?perform his promise. Can Z recover any damages from X?

Amitab forced Akshay to enter into a contract at the point of Amitab forced Akshay to enter into a contract at the point of pistol. What remedy is available to Akshay, if he does not want pistol. What remedy is available to Akshay, if he does not want to be bound by the contract?to be bound by the contract?

State whether there is any contract in the following cases:State whether there is any contract in the following cases:

1. Ramgopal Verma engaged the services of Urmila as an 1. Ramgopal Verma engaged the services of Urmila as an actress in a film and promised to pay such remuneration as actress in a film and promised to pay such remuneration as shall be fixed by Mahesh Butt. Urmila acted in the film.shall be fixed by Mahesh Butt. Urmila acted in the film.

2. Bipasha boarded RTC bus at ICBM Campus to go to Palasa. 2. Bipasha boarded RTC bus at ICBM Campus to go to Palasa.

3. Rakhi Shawant invited Shahid Kapoor for a party. Shahid 3. Rakhi Shawant invited Shahid Kapoor for a party. Shahid accepted the invitation. accepted the invitation.

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