Introduction to Indian Contract Act
The law relating to contracts in India is contained in the Indian Contract Act, 1872. The Act was passed by British India and is based on the principles of English common law. It is applicable to all the states of India except the state of Jammu & Kashmir. It determines the circumstance in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting parties. Hence this legislation, the Indian Contract Act 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India.
History of Indian Contract Act
It was enacted mainly with a view to ensure reasonable fulfillment of expectation created by the promises of the parties and also enforcement of obligations prescribed by an agreement between the parties. The Third law commission of British India formed in 1861 under the stewardship of chairman Sir John Romilly, with initial members as Sir Edward Ryan, R. Lowe, J.M. Macleod, Sir W. Erle ( Succeeded by Sir, W .M. James ) and justice Wills ( succeeded by J. Henderson ) , had presented the report on contract law for India as Draft Contract law (1866) . The Draft Law was enacted as The Act 9 of Indian Contract Act, 1872 on 25 April 1872 and the Indian Contract Act, 1872 came into force with effect from 1 September 1872.
Role of East India Company
Before the enactment of the Indian Contract Act, 1872, there was no codified law governing contracts in India. In the Presidency Towns of Madras, Bombay and Calcutta law relating to the contract was dealt with the Charter granted in 1726 by King George I to the East India Company. Thereafter in 1781, in the Presidency Town, Act of Settlement passed by the British Government came into force.
Act of settlement required the Supreme court of India that questions of inheritance and succession and all matters of contract and dealing between party and party should be determined in case of Hindu as per Hindu law and in case of Muslim as per Muslim law and when parties to a suit belonged to different persuasions, then the law of the defendant was to apply . In outside Presidency Towns matters with regard to the contract was mainly dealt with through English Contract Laws: the principle of justice, equity and good conscience was followed.
Nature of Contract
What is Contract?
According to section 2 (h) of the India Contract Act,’’ An agreement enforceable by law is a contract ‘.
Thus for the formation of a contract, there must be –
- An agreement, and
- The agreement should be enforceable by law.
All agreements are not enforceable by law and therefore, all agreements are not contracts. Some agreement not enforceable by law.
For example- An agreements to sell a radio set any be a contract, but an agreement to go to see a movie may be a mere agreement not enforceable by law.
Illustration – if the agreement between the farmer and the tractor owner is given force under the law, then it becomes a contract.
According to section 2 (e) defines agreement as, “Every promise and every set of promise, forming the consideration for each other, is an agreement.”
In agreement, there is a promise from both sides. For example, A promises to deliver his watch to B and in return B promises to pay a sum of Rs. 2000 to A, there is said to be an agreement between A and B.
A promise is a result of an offer (proposal ) by one person and its acceptance by the other. For example – when A makes a proposal to sell his watch to B for Rs. 2,000 and B accept his proposal, it results from a promise between the two persons.
Illustration – Such a promise between the tractor owner and the farmer which involves a consideration of an Rs. 1000 is called an agreement.
The promise in the Indian Contract Act
According to section 2 (b) defines promise as, When the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.’’
Thus, when there is a proposal from one side and the acceptance of that proposal by the other side, it results in a promise. This promise from the two parties to one another is known as an agreement. The person who makes the proposal is called the promisor. The person who accepts such a promise is called the promise.
Illustration – if in the given example, the farmer accepts the proposal of the tractor owner to transport his produce from the farms to the market, the proposal then becomes a promise.
“All contracts are agreements but all agreements are not contracts” , because agreements of moral, religious or social nature e.g.., a promise to lunch together at a friend’s house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences.
In business agreements the presumption is usually that the parties intend to create legal relation for e.g. An agreement to buy certain specific goods at an agreed price e.g.., 10 bags of wheat at Rs. 500 per bag is a contract because it gives rise to a duty enforceable by law , and in case of default on the part of either party an action for breach of contract could be enforced through a court provided other essential elements of a valid contract as laid down in Section 10 are present, namely, if the contract was made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object.
The various agreements may be classified into two categories :
- Agreement not enforceable by law (Any essential of a valid contract is not available )
- An agreement enforceable by law(All essentials of a valid contract are available )
Thus we see that an agreement may be or may not be enforceable by law, and so all agreement does not contract. Only those agreements are contracts, which are enforceable by law, In short.
Contracts = Agreement = Enforceability by law
Hence, we can conclude “All contracts are agreement, but all agreements are not contracts .”
Essentials of contract
According to of section 10, as All agreement 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. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.
ESSENTIALS OF VALID CONTRACT
Offer + Acceptance = Promise + Consideration = Agreement +Enforceability by law Contract
The essential elements of a valid contract are as follows :
- Lawful offer and Acceptance
These must be a ‘ lawful offer ‘ and a ‘ lawful acceptance ‘ of the offer, thus resulting in an agreement. The adjective ‘ lawful ‘ implies that the offer and acceptance must satisfy the requirements of the Indian Contract Act in relation thereto.
- Intention to create legal relation
There must be intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of social or domestic nature do not contemplate legal relations, and as such, they do not give rise to a contract.
- An agreement to dine at a friend’s house is not an agreement intended to create legal relations and therefore is not a contract.
- An agreement between husband and wife also lack the intention to create a legal relationship and thus do not result in a contract.
- Suraj promises his wife Megha to get her jewelry if she will make a special dish. Megha made a dish but Suraj did not bring the jewelry for her. Megha cannot bring an action in a court to enforce the agreement as it lacked the intention to create legal relation.
CASE LAW: BALFOUR V/S BALFOUR
Where the defendant was a civil servant stationed in Ceylon. He and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, his wife could not accompany him because if her health. The defendant agreed to send her Rs. 300 a month as maintenance expenses during the time they were thus forced to live apart. She sued for breach of this agreement. Her action was dismissed on the ground that no legal relation had been contemplated and therefore, there was no contract.
- Lawful consideration
The third essential element of a valid contract is the presence of consideration. Consideration has been defined as “the price paid by one party for the promise of the other.” An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called ‘consideration’. But only those considerations are valid which ‘lawful’.
According to Section 23, the consideration is unlawful if:
- Law forbids it;
- It is fraudulent;
- Involves or implies injury to the person or property of another;
- It is of such a nature that, if permitted it would defeat the provision of any law;
- Is immoral or is opposed to public policy.
- Capacity of parties
The parties to an agreement must be competent to contract; otherwise, it cannot be enforced by a court of law. In order to be competent to contract according to section 11 the parties must be :
- Of the age of majority;
- Of sound mind:
- Must not be disqualified from contracting by any law to which they are subject.
Thus, if any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness, etc.
- Free consent
Consent’ means that the parties must have agreed upon the same thing in the same sense ( section 13). Free consent of all the parties to an agreement is another essential element of a valid contract.
There is an absence of ‘free consent’. If the agreement is induced by any of the following factors:
- Undue influence,
- Misrepresentation, or
If the agreement is vitiation by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, under influence, etc. The other party ( i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. But, if the agreement were induced by mutual mistake that is material to the agreement, it would be void.
- Lawful object
For the formation of a valid contract, it is also necessary that the parties to an agreement must agree for a lawful object.
The object for which the agreement has been entered into must be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or property of another (section 23 ).
If the object is unlawful for one or the other of the reason mentioned above the agreement is void.
For example – When a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law.
- Oral, Writing and Registration
According to the Indian contract act, a contract may be oral or in writing. But in certain special cases, it lays down that the agreement, to be valid, must be in writing or/ and registered.
For example – under section 25 of the act – It requires that an agreement to pay a time-barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered.
Similarly, certain other cats also require writing or/and registration to make the agreement enforceable by law, which must be observed.
Illustration – The agreement for a sale of immovable property must be in writing and registered under the Transfer of Property Act, 1882 before they can be legally enforced.
Section 29 of the contract act provided that, ‘Agreement’, the meaning of which is not certain, or capable of being made certain, are void.’’
In order to give rise to a valid contract, the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced.
Illustration- A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
- Possibility of performance
Another essentials feature of a valid contract is that must be capable of performing.
Section 56 lays down that, “An agreement to do an act impossible in itself is void.” If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.
Illustration- Ajay agrees with Vijay to discover treasure by magic. The agreement is not enforceable because it is physically impossible to perform.
- Not expressly declared a void agreement
The agreement must not have been expressly declared to be void under the Indian Contract Act. Section 24 – 30 specify certain types of agreements, that have been expressly declared to be void.
- An agreement in restraint of marriage, ( section 26)
- An agreement in restraint of trade, and ( section 27)
- An agreement by way of the wager (section 30)
Has been expressly declared void agreement. We shall discuss each of the void agreements in detail in the next chapter.
Also Read: Types Of Contract