Professional Documents
Culture Documents
Nature of Contract
Nature of Contract
CHAPTER
1 Nature of Contract
CHAPTER CONTENTS
O Object of the law of contract
The Indian Contract Act, 1872
Essential Elements Of A Valid Contract
Classification of Contracts
.
Classification according to validity
. Classification according to formation
Classification accordingto performance
OClassification of Contracts in English Law
Summary
Objective Type Questions
OTest Questions
Practical Problems
OBJECT OF THE LAW OF CONTRACT
The law of contract is that branch of law which determines the circumstances in which
promises made by the parties to a contract shall be legally binding on them. Its rules define the
remedies that are available in a court of law against a person who fails to perform his contract, and
the conditions under which the remedies are available. It is the most important branch of business
law. Jt affects all of us in one way or the other. It is, however, of particular importance to people
engaged in trade. commerce and industry as bulk of their business transactions are based on
contracts.
The law of contract introduces detiniteness in business transactions. Sir William Anson observes
in this connection that the law of contract is intended to ensure that what a man has been led to
expect sliall come to pass, and that what has been promised to him shall be performed. In simple
6 GENERAL PRINCIPLES OF LAW OF CONTRACT
words, it may be said that the purpose of the law of contract is to ensure the realisation of
reasonable expectation of the parties who enter into a contract.
Law of contract is not the whole law of agreements nor the whole law
of obligations
There are several agreements which do not give rise to legal obligations. They are, therefore,
not contracts. Similarly, there are certain obligations which do not necessarily spring from an
agreement, e.g., (i) torts or civil wrongs, (i) quasi-contracts, (iii) judgments of Courts. These
obligations are not contractual in nature. But even then they are enforceable.
Salmond has rightly observed that the law of contract is "not the whole law of agreements, nor
it is the whole law of obligations. It is the law of those agreements which create obligations, and
those obligations which have their sources in agreements." It excludes from its purview all
obligations which are not contractual in nature and agreements which are social in nature.
NATURE OF CONTRACT
DEFINITION OF CONTRACT
A contract is an agreement made between two or more p¡rties which the law will enforce. Sec.
2 (h) defines contract as an agreement enforciable by law This definition is based on Pollock's
definition which is as follows: "Every agreement and promise entorceable at law is a contract.
Sir William Anson defines a' contract as "a legally binding agreement between two or more
persons by which rights are acquired by one or more to acts or forbearances (abstaining from doing
something) on the part of the others."
According to Salmond, a contract is "an agreement creating and defining obligations between
the parties.
Agreement and its enforceability. If 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.
agreement is defined as "every promise and every set of promises, forming consideration for
each other (Sec. 2 (e)l. A promise is defined thus: "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" Sec. 2 (6). This, in other words, means that an agreement is an accepted
proposal. In order, therefore, to form an agreement, there 'must be a proposal or offer by one party
and its acceptance by the other. To sum up:
Agreement = Offer + Acceptance.
Consensus ad idem
The essence of an agreement is the meeting of the minds of the parties in full and final
agreement; there must, in fact, be consensus ad idem. The expression agreement' as defined in
Sec. 2 (e) is essentially and exclusively consensual in nature (Sunnam Sattiah v. State, A.l.R. (1980)
A.P. 16], ie., before there can be an agreement between two parties, there must be consensus ad
idem. This means that the parties to the agreement must have agreed about the subject-matter of
the agreement in the same sense and at the same time. Unless there is consensus ad idem, there
can be no contract.
Example. A, who owns two horses named Rajhans and Hansraj, is selling horse Rajhans
to B. B thinks he is purchasing horse Hansraj. There is no consensus ad idem and
consequently no contract.
8 GENERAL PRINCIPLES OF LAW OF
CONTRACT
Obligation
An agreement, to become a contract, must give rise to a legal obligation or duty. The term
'obligation' is defined as a legal tie which imposes upon a definite person or persons the necesity of
doing or abstaining from doing a definite act or acts. It may relate to social or legal matters. An
agreement which gives rise to a social obligation is not a contract. It must give rise to a legal
obligation in order. to become a contract.
Examples. (a) A agrees to sell his car to B for Rs. 50,000. The 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 Rs. 50,000 to A.
This agreement is a contract.
(b) A promises to sell his car to B for Rs. 50,000 received by him as the price of the car.
The agreement gives rise to an obligation on the part of A to deliver the car to B. This agrement
is also a contract.
part of the parties, there is no contract between them. Agreements of a social or domestic nature do
not contemplate legal relationship, as such they are not contracts.
Example. A husband promised to pay his wife a household allowance of £30 every
month. Later the parties separated and th husband failed to pay the amount. The wife sued for
the allowance. Held, agreements such as these were outside the realm of contract altogether
Balfour v. Balfour, (1919) 2 K.B. 571].
In commercial and business agreements, the presumption is usually that the parties intended to
create legal relations. But this presumption is rebuttable which means that it must be shown that the
parties did not intend to be legally bound.
Examples. (a) There was an agreement between R Company and C Company 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....as 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 IRose & Frank Co. v. Corruption Bros. (1925) A.C. 445.
(b) In an agreement, a document contained a condition "that it shall not be attended by or
give rise to any legal relationship, rights, duties, consequences whatsoever or be legally
enforceable or be the subject of litigation, but all such arrangements, agreements and
transactions are binding in honour only." Held, the condition was valid and the agreement was
not binding (Jones v. Vemon's Pools. Ltd. (1938) 2.
3. Lawful consideration. 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. It
is the essence of a bargain. In simple words, it means 'something in return'. The agreement is
legally enforceable only when both the parties give something and get something in return. A
promise to do something, getting nothing in return is usually not enforceable by law. Consideration
need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing
something) or promise to do or not to do something. It may be past, present or future. But it must
be real and lawful [Secs. 2 (d), 23 and 25).
4. Capacity of parties-competency. The parties to the agreement must be capable of
entering into a valid contract. Every person is competent to contract if he (a) is of the age of
majority, (6) is of sound mind, and (c) is not disqualified from contracting by any law to which he is
subject(Secs. 11 and 12). Flaw in capacity to contract may arise from minority, lunacy, idiocy
drunkenness, etc., and status. If a party suffers from any flaw in capacity, the agreement is not
enforceable except in some special cases.
5. Free and genuine consent. It is essential to the creation of every contract that there must
be free and genuine consent of the parties to the agreement. The consent of the parties is said to be
free when they are of the same mind on all the material terms of the contract. The parties are said
to be of the same mind when theyagree about the subject-matter of the contract in the same sense
and at the same time (Sec. 13). There is absence of frea consent if the agreement is induced by
etc. (Sec. 14).
coercion, undue influence, fraud, misrepresentation,
6. Lawful object. The object of the agreement must be lawful. In other words, it means that
the object must not be (a) illegal, (6) immoral, or (c) opposed to public policy (Sec. 23). If an
agreement suffers from any legal flaw, it would not be enforceable by law.
7. Agreement not declared void. The agreement must not have been expressly declared
void by law in force in the country (Secs. 24 to 30 and 56).
8. Certainty and possibility of performance. The agreement must be certain and not
vague or indefinite (Sec. 29). lH it is vague and it is not possible to ascertain its meaning, it cannot be
enforced.
10 GENERAL PRINCIPLES OF LAW OF CONTRACT
Examples. (a) A agrees to sell to B "a hundred tons of oil". There is nothing whatever to
show what kind of oil was intended. The agreement is void for uncertainty.
(b) O agreed to purchase a motor van from S"on hire-purchase terms". The hire-purchase
price was to be paid over two years. Held, there was no contract as the terms were not certain
about rate of interest and mode of payment. No precise meaning could be attributed to the
words "on hire-purchase" since there was a wide variety of hire-purchase terms |Scammel v.
Ouston. (1941) A.C. 251].
(c) A company agreed with V that on the expiration of V's existing contract, it would
favourably consider an application by V for a renewal of his contract. Held, the agreement was
not intended to bind the company to renew its contract with V and imposed no obligation on it
to review it |Montreal Gas Co. v. Vasey, (1900) A.C. 595]
The terms of the agreement must also be such as are capable of performance. Agreement to do
an act impossible in itself cannot be enforced [Sec. 56 (1)]. For example, where A agrees with B to
put life into B's dead wife, the agreement is void as it is impossible of performance.
9. Legal formalities. A contract may be made by words spoken or written. As regards the
legal effects, there is no difference between a contract in writing and a contract made by word of
mouth. It is, however, in the interest of the parties that the contract should be in writing. There are
some other formalities also which have to be complied with in order to make an agreement legally
enforceable. In some cases, the document in which the contract is incorporated is to be stamped. In
some other cases, a contract, besides being a written one, has to be registered. Thus where there is
a statutory requirement that a contract should be made in'writing or in the presence of witnesses or
registered, the required statutory formalities must bee complied with (Sec. 10, para 2).
CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their (1) validity, (2) formation, or (3) performance.
Implied contract. An implied contract is one which is inferred from the acts or conduct of the
parties or course of dealings between them. It is not the result of any express promise or promises
by the parties but of their particular acts. It may also result from a continuing course of the parties.
Where the proposal or acceptance of any promise is made otherwise than in words, the promise is
said to be implied (Sec. 9). An implied promise results in an implied contract.
Examples. (a) There is an implied contract when AA-
i) gets into a public bus, or
ii) takes a cup of tea in restaurant, or
(ii) obtains a ticket from an automatic weighing machine, or
(iu) lifts B's luggage to be carried out of the railway station.
(b) A fire broke out in P's farm. He called upon the Upton Fire Brigade to put out the fire which
the latter did. P's farm did not come under the free service zone although he believed to be so. Held,
he was liable to pay for the service rendered as the service was rendered on an implied promise to
pay 1Upton Rural District Councilv. Powell, (1942) All E.R. 220].
Quasi-contract. Strictly speaking, a quasi-contract is not a contract at all. A contract is
intentionally entered into by the parties. A quasi-contract, on the other hand, is created by law. It
resembles a contract in that a legal obligation is imposed on a party who is required to perform it. It
rests on the ground of equity that "a person shall not be allowed to enrich himself unjustly at the
expense of another."
Example. T, a tradesman, leaves goods at C's house by mistake. C treats the goods as his
own. C is bound to pay for the goods.
E-Commerce contract. An E-commerce contract is one which is entered into between two
parties via Internet. In Internet, different individuals or companies create networks which are linked
to numerous other networks. This expands the area of operation in commercial transactions for any
person.
Example. Aagrees to paint picture for B for Rs. 100. When A paints the picture and B
a
pays the price, 1.e., when both the parties perform their obligations, the contract is said to be
executed.
In some cases, even though a contract may appear to be completed at once, its effects may still
continue. Thus when a person buys a bun containing a stone and subsequently breaks one of his
NATURE OF CONTRACT
13
teeth, he has a right to recover damages from the seller [Chapronlere v. Mason, (1905) 21 T.L.R.
633
(2) Executory contract. 'Executory' means that which remains to be carried into effect. An
executory contract is one in which both the parties have yet to perform their obligations. Thus in
the above example, the contract is executory if A has not yet painted the picture and B has not paid
the price. Similarly. if A agrees to engage B as his servant from the next month, the contract is
executory.
A contract may sometimes be partly executed and partly executory. Thus if B has paid the
price to A and A has not yet painted the picture, the contract is executed as to B and executory as
to A.
Another classification of contracts according to the performance is as follows:
Unilateral or one-sided contract. A unilateral or one-sided contract is one in which only one
party has to fulfil his obligation at the time of the formation of the contract, the other party having
fulfiled his obligation at the time of the contract or before the contract comes into existence. Such
contracts are also known as contracts with executed consideration.
Example. A permits a railway coolie to carry his luggage and place it in a carriage. A
contract comes into existence as soon as the luggage is placed in the carriage. But by that time
the coolie has already performed his obligation. Now only A has to fulfil his
obligation, i.e., pay
the reasonable charges to the coolie.
Bilateral contract. A bilateral contract is one in which the obligations on the part of both the
parties to the contract are outstanding at the time of the formation of the contract. In this sense.
bilateral contracts are similar to executory contracts and are also known as contracts with executory
consideration.
land, including leases of land for more than three years, and (iu) a transfer of a British ship. or any
share therein.
Contracts of record and contracts under seal are known as formal contracts because their
validity depends on the form in which they are made.
2. Simple contracts. All contracts which are not made under seal are simple contracts. They
may be in writing or may be made by word of mouth. All simple contracts must be supported by
consideration. These contracts are also known by the older name-parol contracts.
The classification of contracts as formal and simple is according to the English Law. u r laws
know nothing of the formal contracts. Subject to certain exceptions, all contracts under the Indian
Law must be supported by consideration. But there are certain types of contracts which must be in
Summary
DEFINITION OF CONTRACT
A contract is an agreement made between two or more parties which the law will enforce. According to Sec. 2 (h), a
contract is an agreement enforceable by law. An agreement comes into existence by the process of offer by one party and its
unqualified acceptance by the other party.
The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the same time,
i.e., there must be consensus ad idem.
An agreement may be a social agreement or a legal agreement. A social agreement is that which does not give rise to
law Court to enforce right. A legal agreement is that
legal consequences. In case of its breach the parties cannot go to the
a
which gives rise to legal consequences and remedies in the law Court in case of its breach.
Essentials of contract. (1) There must be an agreement. This involves two parties, one party making the offer and
the other party accepting it. (2) The parties must intend to create legal relationship. (3)
The parties must be capable of
The agreement must be supported by consideration on
enternng into an agreement as regards age and understanding. (4)
must be lawful (7) The
both sides. (5) The consent of the parties must be free and genuine. (6) The object of the agreement
tems of the agreement must be certain and capable of performance. (8) The agreement must not have been expressly
declared as uoid.
CLASSIFICATION OF CONTRACTS
Void agreement-An agreement not enforceable by law [Sec. 2 (g)l.
Void contract-A contract which ceases to be enforceable by law ISec. 2 (]
Voidable contract-A contract which is enforceable by law at the option of one party thereto, but not at the option ol
illegality.
Express contract-A contract in which the terms are stated in words (written or spoken) by the parties.
Implied contract-A contract which is inlerred from the circumstances of the case or from the conduct of the parties.
Quasi-contract-An obligation created by law, regardless of agreement.
Executed contract-A contract which is wholly performed by both the parties.
Executory contract-A contract in which the prontises of both the parties have yet to be performed.
Partly excutory, partly executed-A contract in which one party has performed his obligation, but the other party has