NATURE OF CONTRACT

NATURE OF CONTRACT NOTES

NATURE OF CONTRACT NOTES – INDIAN CONTRACT ACT, 1872

QUESTION: “All contracts are agreements but all agreements are not contracts.”. Discuss?

ANSWER:

Yes, it is true that “All contracts are agreements but all agreements are not contracts.” It is so because in order to become an agreement a contract, enforceability at law is required. Only those contracts which create some legal obligation for the parties and are enforceable at law can be called contract.

According to section 2(h) of Indian Contract Act, 1872: “An agreement enforceable at law is a contract”.

NATURE OF CONTRACT NOTES
NATURE OF CONTRACT NOTES

An agreement to become a contract must possess all the valid essentials mentioned under section 10 of the Indian Contract Act, 1872 which are as follows:

NATURE OF CONTRACT NOTES
  1. OFFER AND ACCEPTANCE: The first essential of valid contract is offer by one party and acceptance of the same by the another. Thus, an accepted offer, becomes a contract.

Offer: When a person signifies to another his willingness to do or to abstain from doing something is termed as an offer. An offer must be:

  1. Definite
  2. Given to create legal relations
  3. Communicated

Acceptance: Acceptance is when a person made a proposal to another and the proposal is assented thereto. Acceptance must be given:

  1. In the mode prescribed by the offeror.
  2. Before lapse of time.

The offer and acceptance must be valid.

2. INTENTION TO CREATE LEGAL RELATIONSHIP: The agreement must create legal obligation. Both the parties must have an intention to go to the court of the law.

CASE There was an agreement between R & Co. And C & Co. By means of which the former was appointed as the agent of the latter. One clause in the agreement was “this agreement is not entered into a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts.” Held, there was no binding contract as there was no intention to create legal relationship.  

Thus, the legal relationship is created in commercial contracts not in case of social agreements.

3. LAWFUL CONSIDERATION: The agreement must be supported by consideration. Consideration refers to something in return i.e. ‘quid pro quo’

ACCORDING TO BLACKSTONE

“Consideration is recompense given by the party contracting to another”

ACCORDING TO POLLOCK

“Consideration is the price for which the promise of another is brought.”

Consideration

  1. Must move at the desire of the promisor
  2. Need not to be adequate/ sufficient
  3. Must not be illegal, immoral and opposed to the public policy
  4. Must be real not illusory.

A promise to do or to give something without anything in return is invalid as it would not be enforceable at law.

4. CAPACITY OF PARTIES: The parties to agreement must be competent to contract. It means, they must be capable of entering into the contract.

Section 11 of the Indian Contract Act 1872 states that

“Every person is competent to contract who is of age of majority according to the law to which he is subject to and who is of sound mind and is not disqualified from contracting and law to which he is subject.”

EXAMPLE Parthiv, a minor borrowed a sum of ₹1,00,000 from Sachin, a major. Held, Sachin could not recover the sum lent since it was not a valid contract as Parthiv was not competent to contract.

5. FREE CONSENT: “Consent” means the parties must have agreed upon the same thing in the same sense. This is called consensus ad idem in English law.

According to Section 14 of Indian Contract Act 1872

Consent is said to be free if it is not created by:

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

According to section 13 of the Indian Contract Act 1872:

“Two or more persons are said to consent when they agree upon the same thing in the same sense.”

EXAMPLE A who own 2 cars, one Maruti and other Santro, offers to sell B one car. A intending it to be the Maruti car. B accepts the offer thinking that it is the Santro. Held, there is no consensus, hence no contract.

An agreement should be made by the free consent of the parties.

6. LAWFUL OBJECT: The object of an agreement must be lawful. If an agreement suffers any legal flaw, it shall not be enforceable by law.

According to Section 23 of Indian Contract Act 1872, an object is unlawful if it is:

  1. Forbidden by law
  2. Against the provisions of any of the law
  3. Fraudulent
  4. Damages any person or property
  5. Against or immoral to the public policy in the opinion of the court.
EXAMPLE Amar offers to pay ₹11,000 to Akbar if Akbar kidnap Anthony. The agreement is void as the object is unlawful.

7. CERTAINTY OF MEANING: The meaning of an agreement must be certain and should be capable of being made certain.

According to Section 29 of Indian Contract Act 1872

“Agreements the meaning of which is not certain or capable of being made certain are void.”

If the terms of agreement are vague, confusing or uncertain, it shall lead to no binding obligation for the parties.

EXAMPLE: Amar agrees to sell 5 tons of coconut oil to Akbar at whatever price Akbar may pay. The agreement is void due to uncertainty of price.

8. POSSIBILITY OF PERFORMANCE: The agreement must be capable of being performed. If the parties have agreed on a contract that contains any promise, the agreement will not be considered as valid. The impossibility makes an agreement void if the parties are aware of the same or not.

EXAMPLE A promises to put life in B’s dead wife if B pays him a sum of ₹10,000. Such agreements are not enforceable at law as the performance of such act is impossible in nature.

9. NOT DECLARED TO BE VOID OR ILLEGAL: An agreement to become a contract should not be an agreement which has been expressly declared or void by any law in the country, as it would not be enforceable at law.

Following agreements are expressly void: :

Under Section 20 of Indian Contract Act 1872: Agreements made under mutual mistake of law.

Under Section 23 of Indian Contract Act 1872: Agreements with unlawful consideration.

Under Section 25 of Indian Contract Act 1872: Agreements having no consideration.

Under Section 26 of Indian Contract Act 1872: Agreements in restraint of marriage.

Under Section 27 of Indian Contract Act 1872: Agreements in restraint of trade.

Under Section 56 of Indian Contract Act 1872: Agreements to do impossible acts.

EXAMPLE Amar promises to pay ₹50,000 to Akbar if Akbar does not marry at all. This agreement is void as marriage as right of every individual. Restraint of marriage is expressly declared void by the law.

10. LEGAL FORMALITIES: A contract may be made by word, spoken or written. If there is a statutory requirement that contract should be in writing, registered or altered, then agreement must be so, otherwise is shall not be enforceable.

EXAMPLE: An oral agreement for sale of immovable property is unenforceable because the law requires such agreements to be in writing or registered.

CONCLUSION: So only those agreements which can be enforceable at law become the contract and they must possess the valid essentials as given in Section 10.

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