Indian Contract Act, 1872
Introduction
This branch of law is different from other branches of law in a very important respect. It does not prescribe so many rights and duties, which the law will protect or enforce; it contains a number of limiting principles subject to which the parties may create rights and duties for themselves.
We enter into contracts every day. Some of these are made consciously, for example, purchase or sale of a share of a company or a plot of land. Sometimes we do not even realize that we are making a contract, e.g., hiring a taxi, buying a book, etc. In any case, a contract, howsoever made, confers legal rights on one party and subjects the other party to some legal obligation.
In the case of people engaged in business, they carry on business by entering into contracts. Thus, business executives, corporate counsels, entrepreneurs, and professionals in different fields deal frequently with contracts. At times, they have to draft one such contract or scrutinize it or provide inputs to its making or even interpret it. Therefore, it is necessary for them to know what constitutes a contract.
The law relating to contracts is contained in the Indian Contract Act, 1872. For business executives, contract law is tremendously significant because it underlies or is related to all major areas of law affecting business.
The Indian Contract Act, 1872
The law relating to contracts in India is contained in the Indian Contract Act, 1872
It came into force from September 1872.
It determines the circumstances 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 upon the contracting parties.
Indian Contract deals with the enforcement of these rights and duties upon the parties in India
At present the Indian Contract Act includes Provisions related:
General Principles of Law of Contract in sections 1 to 75
Special kinds of Contracts (includes indemnity, guarantee, bailment & pledge) in sections 124 to 238
Rights available to parties under Indian Contract Act is Right in Personam
Law of contract is not the whole law of agreements:
The law of contract is concerned only with only those agreements which contain all essentials under section 10 and where the parties have intention to create legal obligation thus the law of contract does not cover all agreements such as social, political, religious, and other agreements without legal intensions.
The law of contract is not the whole law of obligation
The Indian contract act enforces only those obligations which are agreed by the parties under a contract i.e. contractual obligation. Thus it is not concerned with obligations arises by the statutes or judgment of courts. For Example- a legal obligation not to create a nuisance for others does not give rise to a contract; but nevertheless, it is actionable by law.
What is a Contract?
Indian Contract Act defines a contract as “an agreement, enforceable by law” [Section 2(h)]
Contract = An agreement + Its enforceability by law.
The two main elements of contracts are:
1. An agreement between two or more persons "To Do" or "Not to Do" something.
2. Enforceability by law: It means Agreement must give rise to legal obligation i.e. personal rights and personal obligations created and defined by agreement must be recognized by law. Note: It does not mean all legal obligations are contract.
What is Agreement?
Section 2(e) defines an agreement as “every promise and every set of promises forming consideration for each other”.
What is a Promise?
A proposal, when accepted becomes a promise [S.2(b)].
We can say an accepted offer or proposal is a promise.
In other words, an agreement consists of an offer or proposal by one party and its acceptance by the other party to whom the offer was made.
Thus, Agreement = Offer + Acceptance
Enforceability by law. The agreement must be such which is enforceable by law so as to become a contract. Thus, there are certain agreements which do not become contracts as this element of enforceability by law is absent.
For example, an agreement to go for dinner does not become a contract, and therefore, neither rights nor obligations are created on the part of the parties to the agreement. Thus, all agreements are not contracts; but all contracts are agreements.
Legal obligations are not contractual. Only those legal obligations which have their source in an agreement are contractual. Thus, a legal obligation not to create a nuisance for others does not give rise to a contract; but nevertheless, it is actionable by law.
Ex- An obligation to maintain wife and children, on the order of the court of law, etc are status obligations and so out of the scope of the Contract Act.
Example:
(i) A agrees to sell his motorcycle to B for ` 10,000. The agreement gives rise to a legal obligation on the part of A to deliver the motorcycle to B and on the part of B to pay 10,000 to A. The agreement is a contract. If A does not deliver the motorcycle, then B can go to a court of law and file a suit against A for non-performance of the promise on the part of A. On the other hand, if A has already given the delivery of the motorcycle and B refuses to pay the price, A can go to the court and file a suit against B for non-performance of promise.
(ii) A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, B goes to the restaurant. To his utter surprise, A is not there or A is there but refuses to entertain B. B shall have no remedy against A. Similarly, in case A is present in the restaurant but B fails to turn up, then A shall have no remedy against B.
In examples (ii) the promises are not enforceable by law as there was no intention to create a legal obligation. Such agreements are social agreements that do not give rise to legal consequences.
In example (i) the obligation has its source in an agreement and the parties intend
to be bound by the same and therefore it gives rise to a contract
All contracts are agreements but all agreements are not contracts.
According to Section 2(h) of the Indian Contract Act, a contract is “an agreement enforceable by Law”. Thus when an agreement enables a person to compel another to do something or not to do something it is called a contract. Thus all contracts are agreements but all agreements are not contracts.
Agreements which are not Contracts: Agreements in which the idea of a bargain is absent and there is no intention to create legal relations are not contracts. These are:
(a) Agreements relating to social matters: An agreement between two
Persons to go together to the cinema, or for a walk, does not create a legal obligation on their part to abide by it. Similarly, if I promise to buy you a dinner and break that promise I do not expect to be liable to legal penalties. There cannot be any offer and acceptance to hospitality.
(b) Domestic arrangements between husband and wife: In Balfour v. Balfour (1919) , a husband working in Ceylone, had agreed in writing to pay a housekeeping allowance to his wife living in England. On receiving information that she was unfaithful to him, he stopped the allowance: Held, he was entitled to do so. This was a mere domestic arrangement with no. intention to create legally binding relations. Therefore, there was no contract.
Three consequences follow from the above discussion.
(i) To constitute a contract, the parties must intend to create a legal relationship.
(ii) The law of contract is the law of those agreements which create obligations and those obligations which have their source in agreement.
(iii)Agreement is the genus of which contract is the specie and, therefore, all contracts are agreements but all agreements are not contracts.
Difference between Agreement and Contract
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