We enter into contracts day after day. Taking a seat in a bus amounts to entering into a contract. When you put a coin in the slot of a weighing machine, you have entered into a contract. You go to a restaurant and take snacks, you have entered into a contract. In such cases, we do not even realise that we are making a contract. In the case of people engaged in trade, commerce and industry, they carry on business by entering into contracts. The law relating to contracts is to be found in the Indian Contract Act, 1872.
What Is A Contract?
Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law. Section 2(e) defines agreement as “every promise and every set of promises forming consideration for each other.” Section 2(b) defines promise in these words: “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.”
From the above definition of promise, it is obvious that an agreement is an accepted proposal. The two elements of an agreement are:
- offer or a proposal; and
- an acceptance of that offer or proposal.
What agreements are contracts?
All agreements are not studied under the Indian Contract Act, as some of them are not contracts. Only those agreements which are enforceable at law are contracts. The Contract Act is the law of those agreements which create obligations, and in case of a breach of a promise by one party to the agreement, the other has a legal remedy.
Thus, a contract consists of two elements:
- an agreement; and
- legal obligation, i.e., it should be enforceable at law.
However, there are some agreements which are not enforceable in a law court. Such agreements do not give rise to contractual obligations and are not contracts.
- 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 has no remedy against A. In case A is present in the restaurant but B fails to turn-up, then A has no remedy against B.
- A gives a promise to his son to give him a pocket allowance of Rupees one hundred every month. In case A fails or refuses to give his son the promised amount, his son has no remedy against A.
In the above examples promises are not enforceable at law as there was no intention to create legal obligations. Such agreements are social agreements which do not give rise to legal consequences. This shows that an agreement is a broader term than a contract. And, therefore, a contract is an agreement but an agreement is not necessarily a contract.
What obligations are contractual in nature?
We have seen above that the law of contracts is not the whole law of agreements. Similarly, all legal obligations are not contractual in nature. A legal obligation having its source in an agreement only will give rise to a contract.
- A agrees to sell his motor bicycle to B for Rs. 5,000. The agreement gives rise to a legal obligation on the part of A to deliver the motor bicycle to B and on the part of B to pay Rs. 5,000 to A. The agreement is a contract. If A does not deliver the motor bicycle, 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 motor bicycle and B refuses to make the payment of price, A can go to the court of law and file a suit against B for non-performance of promise.
An obligation which does not have its origin in an agreement does not give rise to a contract. Some of such obligations are
- Torts or civil wrongs;
- Judgements of courts, i.e., Contracts of Records;
- Relationship between husband and wife, trustee and beneficiary, i.e., status obligations.
These obligations are not contractual in nature, but are enforceable in a court of law.
Thus, Salmond has rightly observed: “The law of Contracts is not the whole law of agreements nor is it the whole law of obligations. It is the law of those agreements which create obligations, and those obligations which have, their source in agreements.”
Law of Contracts creates rights in personam as distinguished from rights in rem. Rights in rem are generally in regard to some property as for instance to recover land in an action of ejectment. Such rights are available against the whole world. Rights in personam are against or in respect of a specific person and not against the world at large.
- A owns a plot of land. He has a right to have quiet possession and enjoyment of the same. In other words every member of the public is under obligation not disturbed his quiet possession and enjoyment. This right of A against the whole world is known as right in rem.
- A is indebted to B for Rs. 100. It is the right of B to recover the amount from A. This right of B against A is known as right in personam. It may be noted that no one else (except B) has a right to recover the amount from A. The law of contracts is concerned with rights in personam only and not with rights in rem.