Basics of Contract
Since time immemorial, every person has entered into some or the other kind of contract. It has become an inherent part of a person’s life. Unknowingly or knowingly, we enter into various contracts daily, rather every minute we exist outside our homes. We enter into a contract when we buy something from a shop and pay for it with money. That’s called consideration. Every contract is made in furtherance of a consideration.
Under the Indian Contract Act, of 1872 a contract is defined as “An Agreement enforceable by law”. Hence, any agreement which has the force of law is a contract. Now, being a legally enforceable contract, it gives certain rights to all the parties involved. But with those rights are attached certain obligations as well which must be fulfilled.
Hence, for an agreement to be a contract, it must be legally enforceable by law. It shall consist of two parties intending to enter into a legal obligation and shall also include a worthy consideration.
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Understanding Agreements and Contracts
The Indian Contract Act, 1872 defines a contract under Section 2(h). It states that a contract is an agreement enforceable by law. Thus we can establish that a contract is a legally enforceable agreement that contains two parties or more who intend to form a legal relationship that enforces upon them certain rights and obligations that they must fulfill. A contract is valid only when it has “quid pro quo” i.e. Consideration- something for something.
Similarly, an agreement under the Indian Contract Act, 1872 is defined under Section 2(e) and it is an essential part of a contract because ‘every contract is an agreement, but not every agreement is a contract’. An agreement contains an offer by one party and acceptance of it by the other. There is no legal obligation attached to an agreement as it is not a contract.
Types of Agreements
There are various types of agreements-
a) Valid Agreement- An agreement that is enforceable by law which later becomes a contract.
b) Void Agreement- An agreement that cannot be enforced by law.
c) Contingent Agreement- An agreement executed on the basis of a promise, which is a contingency. The agreement is dependent on the happening or non-happening of an event.
d) Wagers- An agreement which is based on an uncertain event. It is similar to a bet. Such agreements are void.
e) Voidable Agreement- An agreement which can be revoked by either of the parties due to various reasons.
f) Illegal Agreement- An agreement entered into in furtherance of illegal consideration or object, which is against the provisions of law.
Types of Contracts
The Various types of Contracts are:
a) Valid Contracts- Contracts that are legally binding and satisfying all essential elements of a contract.
b) Void contracts- Any contract that is not legally enforceable. It is treated as if it never exists and it doesn’t create any legal obligations.
c) Voidable contracts – A contract that is valid initially but it can be rejected by any party on the failure of anything. It is a contract that can be canceled or changed due to changed circumstances.
d) Verbal Contracts- Contracts that are formed by oral communication. These contracts are difficult to prove in court as there isn’t any physical proof except hearsay of the parties involved.
e) Written Contracts- Contracts that are formed by writing the terms and conditions and it is tangible. These contracts, in contrast to verbal contracts, hold significant evidentiary value in a court of law due to their tangible nature. If such contracts are legally registered as well, their evidentiary value only increases with it.
f) Express and Implied Contracts- Express contracts are when the proposal is made in words which is an express offer i.e. an express contract is made in words or through verbal actions. On the other hand, an offer or acceptance made through anything else other than words is an implied offer i.e. an implied contract is based on the actions and gestures of the other party.
g) Quasi-contracts- Certain relations that resemble a contract are known as quasi-contracts.
h) E-contracts- Electronic contracts or more commonly known as an E-Contracts refers to any contract that is executed through e-commerce or through any online mode, where the parties aren’t necessarily in the same place at the same time.
Elements of a Contract
Section 10 of the Indian Contract Act provides for the elements necessary to create a legally valid and enforceable contract.
A contract must include the following elements:
a) Offer and Acceptance- These are the two most important elements of a contract. A party offers and the other party accepts the offer. A party who makes the offer is known as the offeror. The party who accepts the offer is known as the acceptor.
b) Two Parties- There must be a minimum of two parties where one party makes an offer and the other party accepts the proposal.
c) Promise- One party to the contract intends to promise to do something or abstain from doing anything. This is called a promise. It is an essential part of a contract.
d) Definite Terms- The terms of the contract must not be vague and ambiguous. A thorough read of the contract must make the reader understand the meaning of it.
e) Consideration- A contract must have some consideration i.e. a reasonable amount, which must be defined exactly. The principle of ‘Quid Pro Quo’ is applied in a contract.
f) Legal Obligation- Parties of the contract must have consensus ad idem i.e. similar intention of entering into a legal obligation.
g) Performance- A contract to be valid must be performed by the parties. If it involves an impossible act, then the contract will not be enforceable.
h) Consent and Competency- The parties intending to enter into a contract must give their free consent and be legally competent to enter into the contract i.e. they shall not be a minor, of unsound mind and not be disqualified by law.
i) Free Consent- A consent is said to be free when it’s free from
Coercion (Section 15),
Undue influence (Section 16),
Fraud (Section 17),
Misrepresentation (Section 18),
Mistake (Section 20, 21 & 22).
Legal Enforceability of a Contract
For a contract to be enforceable, there must be an offer by one party and acceptance by another. It must include a consideration that has considerable weightage. The parties must show their intention to enter into legal relations. The parties should possess the legal capacity to enter into the contract. All of the legal formalities attached to the creation of a contract must be fulfilled. It must be executed properly, which means the promise must be doable.
When the essential elements aren’t met, the contract becomes unenforceable. If an agreement is made in furtherance of an illegal or fraudulent consideration, then it becomes unenforceable.
The key elements mentioned above i.e. two parties, legal consideration, consensus ad idem, consent, competency, written agreement etc. make a contract enforceable. It ensures that a contract is genuine and binds both parties legally.
A contract automatically becomes unenforceable when the key elements mentioned are not fulfilled. If any party lacks the capacity to enter into a contract i.e. if any party is a minor, is mentally unsound or is under the influence of drugs, the contract becomes unenforceable.
Similarly, any contract made in furtherance of any unlawful purpose or involving illegal activities is unenforceable.
Like any other traditional contract, an e-contract is valid and legally enforceable as long as it fulfils the essential elements mentioned under Section 10A of the Indian Contract Act i.e
An offer is made by one party and is accepted by another in the same sense.
There is ‘consensus ad idem’ between the parties and there exists a desire to establish legal relations on behalf of both parties.
Parties to the e-contract are legally competent to enter into it.
Provisions of the contract are unambiguous.
Among many others…….
Further, electronic signatures as defined under section 3 of the Information Technology Act can be affixed to validate an e-contract.
Legal Maxims Used in Contract Law
1. Ex nudo pacto action non oritur-
“A contract without consideration cannot give rise to legal action”. This was referenced in the
case of S. Parameswari v. Balasubramanian. It means that no action arises from a bare promise. A promise which does not include a consideration cannot be legally enforced.
2. Quid pro quo
Something in exchange for something. This generally means that there must be a mutual exchange in any contract. If one person wishes to buy a thing, he shall pay for it with adequate consideration to the person selling it. So, the buyer gets the thing and the seller receives monetary consideration in return. This was evident in the case of Carlill v. Carbolic Smoke Ball Co. (1893)
3. Consensus ad idem
Meeting of minds of both parties to a contract is the most necessary thing. This maxim emphasizes on the need for the same intention and a mutual agreement or understanding between the parties.
4. Void ab initio
This means void from the beginning. It means that a contract is invalid from the moment it was created. Such a contract is treated as having never been in existence as it lacks either one or more fundamental elements that are required. Contracts formed based on illegality, misrepresentation or mutual consent are void ab initio. This was mentioned in the case of Balfour v. Balfour
5. Ut res magis valeat quam pereat
This maxim translates to “It is better for a thing to have effect than to be made void.” Following this maxim, the court, when interpreting a contract shall strive to find a solid interpretation that upholds the validity of the agreement instead of rendering it void. This was applied in the case of Fitzgerald v. Masters (1956).
6. Rebus sic stantibus
It is a Latin phrase which translates to “Things standing thus”. This maxim allows for a contract to be modified or even terminated if the performance of the contract is deemed impossible due to changed circumstances. This maxim overpowers the maxim of “Pacta sunt servanda”.
7. Pacta sunt servanda
The maxim translates to “Agreements must be kept”. It means the parties to the contract cannot opt to disregard the agreements. It serves as the foundation for both contract law and international law. It stipulates that the concerned parties have to uphold the agreement they have made.
Purpose and Importance of a Contract
As we have seen, a contract is an important legal document that binds two or more parties and gives them legal rights and obligations which they are legally obligated to fulfil.
The purpose of a contract is to ensure that the parties understand the subject matter they’re agreeing on. A well-written contract leaves no room for misinterpretation. A contract is used as a reference point for future mishappenings.
Contracts represent obligations and rights of the parties in writing.
Contracts act as a binding legal document which is enforceable in court of law
Contracts ensure that the necessary details and expectations of the agreement are well-highlighted
Contracts establish a sense of trust and confidence between the parties.
A well-written contract prevents disputes that are likely to happen between the parties.
A contract elaborately specifies the subject-matter of the agreement which helps the parties in understanding their duties.
Conclusion
In conclusion, a contract is an essential element of an individual and a business organization’s life. They govern and regulate the transactions which are entered into by them. It is essential to understand the basics of a contract as it forms the basis of every “give and take” in our lives. It is a legally binding settlement between the parties. The contract includes a legal consideration and object too. The law governing contracts is known as the Indian Contract Act, 1872. Every contract that fulfills the list of essential elements is valid in court. It can be enforced. A written contract has a lot of benefits attached to it.
Frequently Asked Questions
Q1) What is a contract?
A) A contract is an agreement between parties that ascertains the rights and obligations of the parties and it is legally enforceable.
Q2) How many types of contracts are there?
A) Generally, there are 5 to 6 types of contracts- Verbal, Written, Express, Implied, Contingent, E-contracts. This is not limited as there are many more types.
Q3) Is the competency of parties an essential element of a contract?
A) Yes, parties to a contract must be competent to enter into an agreement. They shall not be a minor or of unsound mind at the time of making of contract. This was referenced in the case of Mohri Bibi v. Dharmodas Ghose.
Q4) What is the meaning of “Quid pro quo”?
A) This is a legal maxim which translates to “something for something”. It is generally described as consideration.
Q5) What does an illegal agreement mean?
A) An illegal agreement means any agreement that is entered into in furtherance of unlawful object or illegal consideration. These agreements are ‘void ab initio’.
This Article is written by Tanaya Moholkar, a final year law student at Yashwantrao Chavan Law College, Pune.
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Amazingly worded :)