NATURE OF CONTRACT NOTES

NATURE OF CONTRACT NOTES

QUESTION: Explain characteristics and kinds of a contract?

ANSWER:

CONTRACT

A contract is a legally binding agreement which recognizes and governs the rights and duties of the parties to the agreement. A contract is legally enforceable as it meets the requirements and approval of the law.

According To Section 2(h) Of The Indian Contract Act 1872

“An agreement enforceable by law is a contract.”

According To Sir Fredrick Pollock

“Every agreement and promise enforceable at law is a contract.”

It is clear that the contract is an agreement creating and defining obligations between the parties.”

ESSENTIAL ELEMENTS OF A CONTRACT AS PER THE INDIAN CONTRACT ACT 1872

There are two essential elements of a contract:

• AGREEMENT: An agreement involves proposal or offer by one party and acceptance of the same by the other party.

According To Section 2(e) Of The INDIAN CONTRACT ACT 1872

“Every promise or every set of promises forming the consideration for each other.”

AGREEMENT = OFFER + ACCEPTANCE

Agreement is the result of two consenting minds i.e. ‘consensus ad idem’.

• ENFORCEABLE BY LAW: An agreement to become a contract must give a rise to a legal obligation.

A contract does not come into existence if it does not give rise to legal obligation.

CONTRACT= AGREEMENT+ ENFORCEABILITY AT LAW

CHARACTERISTICS OF CONTRACT: The characteristics of Contract are mentioned under Section 10 of Indian Contract Act, 1872 which are as follows:

1. OFFER AND ACCEPTANCE: The first characteristic 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.

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.

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.

KINDS OF CONTRACT

The following are the various types of Contract:

ON THE BASIS OF CREATION

• EXPRESS CONTRACT: If the terms of the agreement are expressly agreed upon by the parties in words either spoken or written, at the time of formation, the contract is said to be an express contract.

EXAMPLE: Amar said to Akbar, Will you buy my watch for ₹500. Akbar replies, I am ready to buy. This is an express contract made orally.

• IMPLIED/TACIT CONTRACT: The contract is an implied contract in which a proposal or acceptance is made other than words spoken or written.

These contracts are not created by words, either spoken or written but by an act or conduct of parties.

EXAMPLE:A, a coolie in uniform take up the luggage of B at Railway Station as B allows him to do so. The law implies that B will have to pay for the services of A. This is an Implied contract.

• QUASI CONTRACT: These are the contracts which are created by the law and not by the words or conduct of the parties. This contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another party.

Section 68 to 72 of Indian Contract Act 1872 read about the situations where court can create quasi contract.

Under Section 68 of Indian Contract Act 1872: When necessaries are supplied.

Under Section 69 of Indian Contract Act 1872: When expenses of one person are paid by another person.

Under Section 70 of Indian Contract Act 1872:  When one party is benefitted by the activity of another party.

Under Section 71 of Indian Contract Act 1872: In case of finder of lost goods.

Under Section 72 of Indian Contract Act 1872: When payment is made by mistake and goods are delivered by mistake.

CASE: SHOWAL VS. COOPER

In this case, A’s husband becomes no more. She is very poor and therefore not capable of meeting the cost of cremation. B, one of her relatives, understands her position and spends his own money for cremation. It is done so without A’s request. Afterwards B claims his amount from A where A refuses to pay. Here court applies Section 68 and creates a Quasi Contract between them.

• E-CONTRACT:  An e- contract is the one, which is entered between the parties via Internet. It is one of the most important common ways of contracting in current scenario. The offer and acceptance of the parties do not happen in person but over the internet.

EXAMPLE:Rohit ordered a law book from an online book store. The book store makes the delivery in 4 working days and Rohit pays for the same.

ON THE BASIS OF VALIDITY

• VALID CONTRACT: The contracts which are enforceable in a court of law are called valid contract. The valid contract has essentials like:

1. Offer and acceptance
2. Lawful consideration
3. Intention to create legal relationship
4. Lawful object
5. Possibility of performance
6. Certainty
7. Capacity of parties to contract
8. Legal formalities
9. Not expressly declared void or illegal
10. Free consent

EXAMPLE: Amar offers to sell his horse for ₹ 1000 to Akbar. He accepts the offer it is a valid contract. Here either of the party can enforce the contract.

• VOIDABLE CONTRACT: A voidable contract is one which can be set aside repudiated or avoided at the option of aggrieved party.

According to section 2(1) of Indian Contract Act 1872

“An agreement which is enforceable by law at option of one or more parties but not at the option of others or other’s is voidable contract.”

Until the contract is repudiated or suspended by the aggrieved party, it remains a valid contract.

Features of voidable contract

1. Consent of one of the parties is not free.
2. It is voidable from ab initio i.e. from very beginning.
3. Aggrieved party may affirm or set aside the contract.
4. Aggrieved party must exercises option within a reasonable time.

EXAMPLE: Amar promises to sell his house to Akbar for ₹ 10 and Amar’s consent was obtained forcefully. The contract is voidable at the option of Amar. If he fail to avoid, the contract remains valid.

• VOID CONTRACT: Void contract is a contract which was enforceable by law, when originally created, but because of the happening of some events, it ceases to be enforceable by law.

According to section 2(j) of Indian Contract Act 1872

“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”

Circumstances in which contract can become void:

1. Destruction of subject matter.
2. Contract becoming unlawful.
3. Death of the party.
4. Party is becoming unsound mind.
5. Party is becoming alien enemy.

EXAMPLE: Amar offers to marry Lakshmi. Lakshmi accepts the offer and dies. The contract which was valid at the time of formation becomes void on the death of Lakshmi.

• UNENFORCEABLE CONTRACT: It is the contract having good substance but due to some technical defects cannot be enforced by law. A contract which has not properly fulfilled legal formality is called unenforceable contract. It suffers from some technical defects like insufficient stamp etc. After rectification of that technical defect it becomes enforceable or valid contract.

EXAMPLE: A and B have drafted their agreement on ₹ 10 stamp where it is to be written actually on rupees 100 stamp it is an impossible contract.

• ILLEGAL AGREEMENT: The term illegal refers to an act which is in contravention of law. So the agreement which is forbidden by law and against the policy and provisions of the law is termed as illegal contracts.

EXAMPLE: Salman agrees to pay ₹ 1,00,000 to Virat if he kills Smith. Such agreements are criminal in nature and therefore cannot be enforced in the court of law.

ON THE BASIS OF EXECUTION

• EXECUTED CONTRACT: An executed contract is the one in which both the parties have performed their respective obligation. It is contract where, in terms of contract nothing remains to be fulfilled by the parties.

EXAMPLE: Hussain agrees to paint a picture for Amitabh for ₹ 5,000. Hussain paints and Amitabh pays the price so the contract is executed contract as both the parties have performed their obligations.

• EXECUTORY CONTRACT: An executory contract is one wherein both the parties to the contacts is yet to perform their obligation.

EXAMPLE: A agrees to make furniture for B for ₹ 5,000. Mr A has yet to make furnitures and Mr B has not made the payment. So both A and B are yet to perform their obligation so it is an executory contract.

ON THE BASIS OF LIABILITY

• UNILATERAL CONTRACT: Unilateral contract is one in which a promise on one side is exchanged for an act on the other side.

A contract is unilateral wherein one party has just asked his obligations before or at the time of entry into contract.

EXAMPLE:Raj make payment for train tickets for his journey from Delhi to Mumbai. He has performed his promise. It is now for the railway company to perform the promise.

• BILATERAL CONTRACT: This is a contract in which both the parties have an obligation to perform at the time of its formation or as both have made promise for the future. Bilateral contract being similar to executory contract, are known as contract with Executory Consideration.

EXAMPLE: R promises to sell his scooter for ₹ 15000 to Akbar and agrees to deliver the two wheeler on the respect of the payment by the end of the month. The contracts is bilateral as both the parties have exchanged a promise to be performed within a stipulated time period in future.

ON THE BASIS OF FORMALITY

• FORMAL CONTRACT: These include the:

1. CONTRACT OF RECORDS: A contract of records is either judgement of a court or a recognizance. When the court imposed an obligation upon one or more persons in the favour of another, it is known as judgement. Strictly speaking, it is not a contract which rests on agreement. It is usually made up in connection with criminal proceeding.EXAMPLE: A person arrested, may released on a promise to appear in the court or to be in good behavior, subject to money penalty. If this obligation is broken, it is a recognizance.
2. CONTRACT UNDER SEAL: A contract under seal is the one which derive its binding force from its form alone. It is in writing and is signed, sealed and delivered by the parties and also called deed or speciality contract. The contract under seal includes:

1. Contract made without consideration.
2. Contract made by Corporation.
3. Gift deeds.

• SIMPLE CONTRACT: A simple contract is the contract which is informal. It can be made orally or in writing and must be supported by the consideration.