The Law of Contract deals with the law relating to the general principles of contract. It is the most important part of Mercantile Law or Business Law. It affects every person in one way or the other as all of us enter into some kind of contract every day. When a person lends a book to a friend, takes a seat in a bus, goes to cinema to see a movie, deposits his luggage in a railway cloak room etc., he enters into a contract. Such contract creates certain rights and obligations. Without the law of contract, it would have been difficult to determine and enforce the rights and obligations of the persons.
For business community, the Law of Contract is of great significance as all the business transactions are on the contracts. The law of contract determines the circumstances under which a promise or an agreement shall be legally binding on the person making it. It also provides the remedies which are available in a court of law against a person who fails to fulfil his obligations.
Indian Contract Act 1872
In India, the laws relating to contract are contained in the Indian Contract Act, 1872. The act came into force on the first day of September 1872, and it applies to the whole of India except the state of Jammu and Kashmir The Act does not deal with all the branches of law of contracts There are some contracts which are governed by separate Act. For example, contract relating to partnership, sale of goods and negotiable instruments. The Act governing them are The Indian Partnership Act 1932, Sale of Goods Act, 1930 and The Negotiable Act 1881.
The Indian Contract Act consists of two parts:
1.General principles of the Law of Contract.
2. Special kinds of contracts.
The general principles of the law of contract are contained in sections 1 to 75 of the Indian Contract Act. These principles apply to all kinds of contract irrespective of their nature. Special contracts are contained in section 124 to 238 of the Indian Contract Act. These special contracts are Indemnity, Guarantee, Bailment, Pledge and Agency.
The general principles of contract deal with the different stages in the formation of a contract, its essential elements, its performance or breach and the remedies for breach of contract. It may be noted that the Indian Contract Act does not affect any usage or customers of trade. The knowledge of law of contract is essential to all particularly to the people in the commercial activities.
Meaning and Definitions of Contract
The word 'contract' is derived from the Latin word, 'contractum', which means "drawn together'. It denotes drawing together the minds of two or more persons to form a common intention giving rise to an agreement. A contract is an agreement made between two or more parties which the law will enforce.
Section 2 (h) of the Indian Contract Act defines a contract as "an agreement enforceable by law".
According to Halsbury, "a contract is an agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain from doing some acts.
When 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. So, an agreement enforceable by law is a contract.
Thus, a contract is a combination of an agreement and its enforceability.
contract = Agreement + Enforceability by law.
Example
(a) A agrees to sell his cow to B for 5,000. B accepts the offer. This is a contract because it is enforceable in a court of law.
(b) A invites B to a dinner and B accepts the invitation. Here is an agreement between A and B. But it is not a contract because it is only a social agreement and not enforceable in a court of law.
Agreement
The term agreement is defined as "every promise and every set of promises, forming the consideration for each other" [See. 2(e)]
Therefore, for an agreement there must be proposal or offer by one party and its acceptance by another party.
agreement = Offer + Acceptance
Example: A offers to sell his car for 15,000 to B. B accepts this offer. So is an agreement between A and B.
Legal Obligation
Mere agreement alone cannot constitute a contract. The agreement must create legal obligation, i.e., an obligation which is enforceable by law. An obligation is a legal duty to do or abstain from doing a definite act or acts. Moreover, the parties must have intention to create legal obligations. If the parties do not intend to create legal obligations, there is no contract between them. In business transactions, the usual presumption is that the parties intend to create legal obligations. An agreement which gives rise to moral or social obligations is not a contract. So, it must give rise to a legal obligation in order to become a contract.
Example
(a) A agrees to sell his car to B for 2 lacs. This 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 2 lacs to A. This agreement is a contract.
(b) A invited B to attend a dinner. B accepted the invitation. It is a social agreement. If A fails to serve dinner to B. B cannot go to court of law for enforcing the agreement. if B fails to attend the dinner. A cannot go to court of law for enforcing the agreement.
Jus in Rem and Jus in Personam
Jus in Rem' means a right against or in respect of a thing. Jus in Personam' means a right against or in respect of a specific person. A 'Jus in rem' is available against the world at large; a 'Jus in Personam' is available only against particular person.
In the case of 'Jus in Personam, the contractual relationship is limited to the parties of the contract alone. Third parties do not come in the picture. On the other hand, 'Jus in Rem' refers to those rights associated with conveyance or enjoyment of property.
Example 1: A owes 1000 to B. B has the right to recover the amount from A. This right can be exercised only by B and no one else against A. This right of B is a Jus in Personam.
Example 2: A is the owner of a plot of land. He has a right to have quiet possession and enjoyment of that land against every member of the public. Similarly, every member of the public is under an obligation not to disturb A's possession and enjoyment of property. This right of A is Jus in Rem'.
Essential elements of a Valid Contract
The essential elements of a valid contract are contained in Sec. 10 of the Indian Contract Act, 1872.
According to Sec. 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 hereby expressly declared to be void."
In order to become a contract, an agreement must have the following essential elements:
1. There must be two parties
To make a valid contract, there must be two parties - The 'promisor' and the 'promisee or the 'offeror' and 'offeree'. The person making the proposal is called the "promisor' or "offeror' and the person to whom the proposal is made is called the 'promisee' or 'offeree'.
2. Agreement
To make a valid contract, there must be an agreement between the parties of a contract. An agreement involves a valid offer by one party and a valid acceptance by the other party. The offer when accepted becomes agreement. The terms of the offer must be definite, and the acceptance of the offer must be absolute and unconditional. Acceptance must also be according to the mode prescribed and must be communicated to the offeror himself.
Example: A sends a proposal to B to purchase his house, B accepts the proposal. There is an agreement between A and B.
A lawful offer and a lawful acceptance make an agreement. An agreement is necessary for a contract.
3. 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. An agreement must create legal obligations, i.e., an obligation which is enforceable by law. An obligation is a legal duty to do or abstain from doing a definite act or acts.
Agreement of a social or domestic nature do not contemplate legal relationship, as such they are not contracts.
Example:
A invited B to a dinner at his house on a particular day. B accepted the invitation. When B went to A's house on the particular day for the dinner, A was not available in the house and the dinner also was not ready. In such a case, B could not claim any compensation for expenses incurred by him and for the inconvenience caused to him by A, because A's invitation to dinner did not give rise to a legally binding agreement but is only social affair.
4. Lawful Consideration
Consideration is the foundation of every contract. 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.
Consideration means 'something in return'. The agreement is legally enforceable only when both the parties give something and get something in return. Consideration is the price of the contract.