Contract (s.10)

By Asok Nadhani

1.6 Contract (s.10)

i.      A Contract is an Agreement enforceable by Law. When an Agreement is valid as per the law of land and legally enforceable, it becomes a Contract. A contract gives rise to rights and obligations to specified persons.

ii.    Any contract, whether spoken by word or written are equally enforceable except where certain law exclusively requires the contract to be in writing.

1.6.1 Essential Elements of Contact

Based on the above broad definition, a contract should have following essential elements.

i.          Offer & Acceptance : There must be a clear and unambiguous offer by one Party. The offer must be clearly understood and accepted by the other party to constitute a valid contract.

Ex. A shows his Maruti 800 car to B and asks, will you purchase my car at Rs.1 Lac (the offer). B says Yes (Acceptance). Now it constitutes a Contract.

Ex. X, makes an offer to sell his bike to Y for Rs.15000. When X shows his willingness to sell his bike to Y it becomes an offer to Y. If Y accepts the offer of sale, then it becomes an agreement between X and Y.

Ex. A offered to sell his Maruti 800 car to B at Rs.1 lac. B did not confirm to buy at that price at that time. Later on, B asked the car from A at Rs.1 lac. A refused. B cannot compel A to sell as the offer was not accepted by B at that time and so the contract was not complete.

ii.        Legally binding Relationship: The contract must be intended to create a legally binding relationship between the parties.

Ex. An agreement having a clause like ‘….shall not be subject to legal jurisdiction in any court of law …’ is not enforceable as there is no intention to create Legal Relationship.

iii.       Lawful Consideration : The contract must involve some lawful consideration (benefit etc).

Ex. A rendered some service to B on his request. Later B agreed to pay A for the service done. A can now recover the amount promised from B. Here the promise is made on past consideration.

Ex. A agrees to sell to B his watch for a consideration which is accepted by B.

Ex. Husband promised to pay a monthly allowance of Rs.2,000 to wife. Husband refused when they were separated. Wife cannot claim because there was no lawful consideration. 

Ex. X promised to pay donation to a club. This is not a valid contract as there is no benefit accruing to X.

Ex. A saved B’s goods from fire without being asked by B. A cannot demand payment from B for the voluntary services not asked by B.

iv.       Capacity to Contract : Both the parties must be capable of entering the contract.

Ex. Agreement with person of unsound mind, minor, insolvent, disqualified under certain law, is not valid.

v.         Free Consent : There must be free and genuine consent of the parties (no undue coercion, influence etc).

Ex. A, under threat to kill, makes B to execute a promissory note o0f Rs 10,000 in B’s favour. A is not bound to pay as it was obtained against his free consent.

vi.       Lawful Object : The object of the agreement must be lawful.

Ex. A promises to B to get him an employment in Public Service Commission on payment of Rs.1,00,000 to him. B cannot enforce A to get the job as the object of the contract is not lawful.

vii.      Certainty & Possibility : An agreement must be certain and not vague or indefinite (sec. 29).

Ex. A says to B, I may buy 100 kg of oil from you and pay you later. This is not a valid contract. The object (oil) is not specified. The date of payment is also not specified. The price is not specified.

Ex. A says to B, I may buy 100 kg of oil from you and pay you later. This is not a valid contract. The object (oil) is not specified. The date of payment is also not specified. The price is not specified.

Ex. A agrees to sell to B "100 tons of oil" without specifying the nature of oil. The agreement is void for uncertainty.

Ex. A, a dealer in mustard oil only, agrees to sell to B, who is his regular customer of mustard oil "100 quintals of oil @ Rs.5500 per quintal”. The nature of A's trade is an indication of the specific meaning of the word ‘Oil’. So, this becomes a valid contract of sale of 100 Qtl of Mustard oil @ Rs.5500 per qtl.

Ex. A agrees to sell 100 quintals of rice to B, at a price to be fixed by C. As the article & price is capable of being made certain, such contract is valid. C must fix the price. If he does not, B should pay the market price.

viii.     Statutory Rules: Statutory requirements (e.g. in writing, stamped, registered etc), if any, under the respective law must be fulfilled.

Ex. A says B, his son, ‘I gift this house to you’. B cannot claim the house as gift of immovable property requires to be written and registered as per rules.

ix.       Performance : The performance of the agreement must not be impossible (sec. 56).

x.         Consensus-ad-idem : Two or more persons are said to consent, when they agree upon the same thing in the same sense (s.13). It means that the contracting parties must have similarity of understanding about the subject matter i.e., consensus-ad-idem.

xi.       Agreements not expressly declared to be Void : To become a contract an agreement should not be expressly declared as void and unenforceable by law under Indian Contract Act, 1872. Such an agreement does not give rise to any legal obligation and is void ab initio.

1.6.2 Classification of Contract

 

                                                                                     

 

Contract may be classified in several ways:

i.      As per Formation:

a.     Express Contract: Contracts in which terms are specified and the respective parties expressly give their consent. It may be oral or written.

Ex. A agrees to sell his Maruti 800 car to B at Rs.1,00,000. B agrees and pays 1,00,000 to A and asks A to deliver the car. Now it constitutes a Contract and A is obliged to deliver the car to B.

b.    Implied Contract: The contract is inferred according to the acts or conduct of the parties.

Ex. A mower comes to B’s lawn and starts mowing voluntarily. B watches and allows him to mow. On finishing the work A asks B to pay mowing charges. B is obliged to pay reasonable charge, as an implied contract has been established by the conduct of A & B.

Ex. A passenger boards a public bus. The passenger is to pay the fare and the bus is to carry him to the destination. This is an Implied Contract.

c.     Quasi Contract: It is an obligation created by law regardless of agreement between the parties.

Ex. A supplies B, a lunatic with necessities. A is entitled to be reimbursed from B’s property.

ii.    As per Performance:

a.     Executed Contract: When a contract has been executed completely in which both the parties performed their respective promises and nothing remains to be done by either party it is termed as executed contract.

Ex. A agrees to pay B Rs.200 for mowing his garden. B mows. A pays Rs.200 to B. This is an Executed contract as each party has performed their respective obligation.

b.    Executory Contract: A contract where one or both the parties to the contract have still to perform their obligations in future.

Ex. A agrees to sell B his maruti 800 car at Rs.1,00,000. This is an Executory Contract. A has to deliver the Car to B and B has to pay the price to A.

Ex. A agrees to sell Maruti 800 car to B at Rs.1 Lac and B pays the money immediately at the time of contract. This is executory contract as only A has to fulfill his obligation (to deliver the Car).

iii.   As per Obligation:

a.     Unilateral Contract: A contract in which one party has performed his obligation while the other party has yet to perform his obligation. Thus, an unilateral contract is a one-sided contract in which only one party has to perform his obligation. In such contracts, promise on one side is exchanged for an act on the other side.

b.    Bilateral Contract: Contracts in which both the Parties are yet to fulfill their obligations.

iv.   As per Enforceability:

a.     Valid Contract. An agreement which satisfies all the requirements prescribed by law is called as a valid contract.

b.    Void Contract

i.      A contract which ceases to be enforceable by law becomes void.

ii.    All the essentials of the contract are satisfied at the time of formation of a void contract (So, at the time of formation, it is a valid contract). When subsequently, the legal obligations created under a contract come to an end (due to change in law or change in circumstances), the contract becomes void.

iii.   Any party who has obtained any benefit under a void contract, must restore it back to the other party.

c.     Voidable Contract.

i.      A contract which is enforceable by law at the option of one or more of the parties, but not at the option of the other, is a voidable contract.

ii.    A contract becomes a voidable if the consent of a party was not free (consent was obtained by coercion, undue influence, fraud or misrepresentation). The party whose consent was not free is entitled to rescind the contract.

d.    Unenforceable Contract. A contract which fulfils all the requirements of a contract except some technical requirement is called as an unenforceable contract. If the legal formalities required by some other Act are not fulfilled (e.g., where an agreement is not made in writing or is not stamped or is not registered, when it is so required), the contact is said to be unenforceable contract. When the defect is subsequently removed (i.e., legal formalities are fulfilled), it becomes enforceable.

 For more details, refer to Mercatile Law, by Asok Nadhani, BPB Publications www.bpbonline.com, sales@bpbpublications@gmail.com