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The Law of Contract

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oLaw means a ‘set of rules’. It may be defined as the rules of conduct recognized and enforced by the state to control and regulate the conduct of people, to protect their property and contractual rights with a view to securing justice, peaceful living and social security.

oMeaning of contract-According to section 2(h) of the Indian Contract Act,1872, “An agreement enforceable by law is a contract.”

oContract = Agreement +Enforceability by law

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ESSENTIAL ELEMENTS

oThere are two essential elements of contract

o1 Agreement: Section2(e) as, Every promise and set of promises forming consideration for each other.

oA promise is defined as section 2(b) A proposal when accepted become a promise.

oAgreement =Offer+ acceptance

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o2.Enforceable at law. An agreement to become a contract must give rise to legal obligation.

oExample: X offers to sell his car to Y for Rs. 100000. Y accepts this offer. Such an agreement between X and Y is a contract because it creates legal obligation.

o Mukesh invites Vijay to a dinner at his house Vijay accept the invitation. It is purely social agreement. If Vijay fails to arrive at dinner or Mukesh has to go out and is not available at place at the dinner time due to some important work either of the parties can not sue other for not fulfilling the promise the reason being there was no intention between parties to create any legal obligation.

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Other kind of obligation which do not constitute a contract are domestic agreement, made with no intention to create legal relationship.

Leading case on this point is Balfour v.Balfour (1919)

Mr. Balfour was employed in Ceylon .Mrs. Balfour owing to ill health had to stay in England and could not accompany him to ceylon. Mr. Balfour promised her to send her 30 ponds every month while he was abroad. But Mr.Balfour failed to pay that amount. So Mrs. Belfour filed a suit against Mr. Balfour for recovering the said amount.

The court held that it was mere domestic agreement and that the promise made by the husband in this case was not intended to be a legal obligation

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Definition - Law of Contract

“Every agreement and promise enforceable by Law is a Contract”.

“An agreement which create and define obligations between the parties is Law of Contract.”

“A contract is an agreement enforceable at law made between two or more persons by whom rights are acquired by one or more to acts or absent on the part of the other or others”

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ESSENTIAL ELEMENTS OF A VALID CONTRACT

1. Offer and Acceptance: In order to create a valid contract there must be a lawful offer by one party and lawful acceptance of the same by the other party.

The adjective lawful means offer and its acceptance must confirm to the rules laid down in the Indian Contract Act regarding valid offer and acceptance and its communication.

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2.Intention to create legal relationship: If there is no intention to create legal relationship then there will be no contract.

Example: ABC Ltd agreed with S that when existing contract expires, it would favorably consider an application of S for renewal of his contract. Held the agreement was not intended to bind the company to renew its contract with S and imposed no obligation on it to renew it.

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3.Lawful consideration: Consideration is the price for which promise of other one is bought. The law enforces only those promises which are made for the consideration.

In the absence of consideration a promise is purely gratuitous creates no legal obligation. Consideration may take any form of goods money, service.

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4.Capacity to party :The parties to an agreement must be competent to contract. If either of the parties does not have the capacity to contract, the contract is not valid.

The following persons according to law are incompetent to contract.

a) Minors

b) persons of unsound mind

c) Persons disqualified by law

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5.Free Consent: Consent means the parties must have agreed upon the same thing in the same sense

According to section 14 Consent is said to be free when it is not caused by

1) Coercion. 2) Undue influence. 3) Fraud. 4) Misrepresentation. 5) Mistake.

An agreement should be made by free consent of the parties

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6.Lawful Object : The object of an agreement must be

lawful The object is said to be unlawful if

oIt is forbidden by law .

oIt is of such nature that if permitted it would defeat the provision of any law

oIt is fraudulent

oIt involves an injury to the person or property of any other

oThe court regards it as immoral or opposed to public policy

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7. Certainty of meaning :According to Section29 Agreement the meaning of which is not certain are void .The terms of the contract must be precise and certain. It cannot be left vague. A contract may be void on the ground of uncertainty.

8. Possibility of performance :

oIf the act is impossible in itself ,physically or legally it can not be enforced at law .

oNot declared to be void or illegal. Agreements mentioned in Section 24 to 30 of the act have been expressly declared to be void for example agreement in restraint of trade and marriage , legal proceeding etc.

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9.Legal Formalities: The agreement must comply with the necessary formalities as to writing, registration, stamping etc. if any required in order to make it enforceable by law.

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Classification of contracts

On the basis of Creation

On the basis of Execution

On the basis of Enforceability

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On the basis of Creation

oExpress Contract: it is one which is made by words spoken or written.

oImplied Contract: It is one which is made otherwise than by words spoken or written. It is inferred from the conduct of a person or the circumstances of the particular case.

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On the basis of Execution

oExecuted Contract: It is a contract where both the parties to the contract have fulfilled their respective obligations under the contract.

oExecutory Contract: It is a contract where both the parties to the contract have still to perform their respective obligations.

oPartly executed and partly Executory contract: Where one party has fulfilled his obligation and the other party has still to perform his obligation.

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On the basis of Enforceability

o1)Valid contracts: An agreement enforceable at law is valid contract.

o2)Void Contracts: An agreement when entered was legally enforceable but which has become void due to supervening impossibility of performance.

For example a contract between the citizen of Pakistan and India is a valid contract during peace but if war breaks out between the two countries the agreement will become void contract.

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oVoid Agreement : According to Section 2(g) An agreement which is not enforceable by law by either of the parties is void .It is void ab initio. For example an agreement with minor and without consideration.

oVoidable Contracts - An agreement made 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. When the consent of a party to a contract is not free, the contract is voidable at his option. [Sec. 2(i)].

oUnenforceable Contracts - An unenforceable contract is one which cannot be enforced in a Court of law because of some technical defect such as absence of writing or where the remedy has been barred by lapse of time.

oIllegal Agreements - An illegal agreement is one which transgresses some rule of basic public policy or which is criminal in nature or which is immoral.