January 23, 2022

Law of Contracts: Meaning, Nature and Important Definitions

Contract Law

Contract under Indian Contract Act

Section 2(h) of the Indian Contract Act, 1872 defines the term contract, as if we see the definition:

“An agreement which is enforceable by law is a contract”.

So by the definition we can easily say that an agreement between two or more parties to do or abstain from doing something.

According to Anson, “the law of contract is that branch of law which determine the circumstances inn which a promise shall be legally binding on the person making it”.

Two Important thing for the formation of a contract.

(Contract= Agreement + Enforceability)

Illustration– There is an agreement between X and Y that X will construct a house for Y, and Y will pay Rs. 10 Lakhs to X. The agreement between A and B is a contract because it is enforceable by law.

Agreement under Indian Contract Act

Section 2(e) of the Act, defines the term agreement as “Every promise and every set of promises, forming the consideration for each other, is an agreement”.

Two important things for formation of agreement.

                (Agreement= Promise + Consideration)

Important Case- Balfour Vs Balfour [1919] 2 KB 571

In this case, Mr. and Mrs. Balfour, who used to live together as a married couple in Sri Lanka, went for a vacation to England. During this time, Mrs. Balfour developed rheumatic arthritis. The doctor advised Mrs. Balfour to stay back in England as, according to him, Sri Lankan climate would worsen her health. Before Mr. Balfour returned to Sri Lanka, he promised to send £30 to her per month. During their stay away, the parties drifted apart and separated. It was held in this case that Mr. Balfour’s promise to pay a monthly sum of £30 did not amount to a contract, as there was no intention to create a legal relationship on part of either of the parties.

Classification of agreements

  1. Valid Agreements– These agreements are enforceable by law.
  2. Voidable Agreements– It is an agreement which is enforceable by law at the option of one of the parties.
  3. Void Agreements– This agreement is not enforceable by law at all.
  4. Illegal Agreements– these agreements are also not enforceable by law because they are against the law.
  5. Unenforceable Agreements– An unenforceable agreement is one which cannot be enforced in the court of law on account of some technical defects like want of a written form or stamp.

Promise under Indian Contract Act

According to section 2(B) of the act, when the offer is accepted, then it becomes a promise. When a person to whom the offer is made, signifies his assent then we can say that the offer is accepted.

There are mainly four kinds of Promises-

  1. Express Promise (S.9)– When the promise of any offer or acceptance is made in words, then the promise is said to be express.
  2. Implied Promise (S.9)– When the promise of any offer or acceptance is made otherwise than in words, then the promise is said to be implied.
  3. Reciprocal Promise (S.2f)– Promises which form the consideration for each other, are called reciprocal promises.
  4. Alternative Promise (S.58)– An alternative promise is one which offers the choice of one of two things.

Consideration under Indian Contract Act

Section 2(d) of the Act define the term consideration as follows-

When at the desire of the promisor, the promisee or any other person.

When at the desire of the promisor, promisee does something then it is a valid consideration under section 2(d) of the ICA.

For more details on consideration, click here.

Important Case- Kedarnath Bhattacharji Vs Gorie Mahomed(1887) ILR 14 Cal 64

A Town Hall was planned to build in Howrah. Based on it, all the subscriptions, funds, and interested persons came up for the construction. Municipal Commissioner of Howrah, the Plaintiff entered into an agreement with the contractor and supplied necessary information of the plans. Later on, with an upswing of subscriptions and plans, there was a rise in the cost of construction making it from Rs.20,000 to Rs.40,000. The defendant made a subscription to pay Rs. 100 for the construction of Town Hall. However, he refused to pay the amount. The Plaintiff commenced an action to claim the amount. The Court held that even if the defendant does not benefit from the promise he made for a charitable purpose, he is liable to pay the amount. He was responsible for his promise. A promise once made cannot be taken back after its commencement. It reaffirmed the rule of law by stating that, “Any act done at the will of the promisor’s wish is taken as the fulfillment of consideration of a contract.

Types of contracts

There are various types of contracts that are formed voluntarily via civil obligations. They are as follows:

(I) Adhesion Contracts – This type of contracts are those which are formed by the stronger party. It is a sort of, “Opt for it or do not” contract. The stronger party or the one that has the bargaining power leaves the other party with a choice whether to accept or reject the contract.

(II) Aleatory Contracts – This type of contract involves a mutual agreement that comes into being after an unexpected occurrence, accident, or a natural calamity. In this type of contract both the parties have an element of risk. Fire or Car insurances are this type of contract.

(III) Bilateral and Unilateral Contracts – Bilateral contracts involve two parties. Both parties are obliged to one another for performing or abstaining to perform any act. It is also called a two-sided contract as it involves two way promises. Meanwhile, unilateral contracts are those in which the promise is made by only one party. They consist of an offeror and offeree. The offeror makes a promise to perform an action and is bound by the law to do so. The offeree is not bound to the court even if he fails to execute the requested action because he does not promise anything at all.

(IV) Express Contracts – These contracts are those wherein the terms of the contracts are expressed clearly whether in written documents or orally.

(V) Implied Contracts – There is no oral or written terms in this type of contract. The contracts are assumed owing to the facts of the parties. If an individual visits a medical professional, he expects to be diagnosed for a disease or illness and be advised a cure. This is an implied contract and a patient is capable of suing a medical practitioner for malpractice.

(VI) Void and Voidable Contracts – Void contracts are illegal from the very beginning and hold no validity under law. They are thereby un-enforceable. Voidable contracts are unlike void contracts in the sense that one party is bound by the contract and the unbound party is capable to terminate the contract as they are unbound to it.

And a quasi-contract is unlike a real contract. Salmond defines quasi contracts as “there are certain obligations which are not in truth contractual in the sense of resting on agreement, but which the law treats as if they were”. It is important to remember that even though it is imposed by law, it is not created by the operation of the contract.

Proposal under Indian Contract Act

According to Section 2(a) of the Indian Contract Act, 1872 proposal has been defined as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.”

The person making the offer/proposal is known as the “promisor” or the “offeror”. And the person who may accept such an offer will be the “promisee” or the “acceptor”.

-What is a General Offer?

A general offer is any offer which is not made to a definitive person but rather to the public at large or the entire world which includes any individual that may understand the offer and accept it.

Important Case: Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. – When the goods are displayed either in a show-window or inside the shop and such goods bear price-tags, the question which arises in such case is, whether that amounts to an offer to sell goods at prices mentioned on the price tags. In this case, it was held that display of goods alongwith price tags merely amounts to invitation to treat and therefore if an intending buyer is willing to purchase the goods at a price mentioned on the tag, he makes an offer to buy the goods. Thus, the shopkeeper has the right to accept or reject the same. The contract would arise only when the offer is accepted.

Can a Offer lead to a Contract?

Case: Carlill Vs Carbolic Smoke Balls Company

In this case, a company carried out advertisements about their product, carbolic smoke balls, that claimed that any person who took the smoke balls in the prescribed manner (i.e., three times daily for two weeks) will not catch influenza. In case someone does, the company promised to pay 100£ to them immediately. To show their sincerity regarding this offer, the company deposited a sum of 1000£ in a public bank. Now, the plaintiff, Carlill bought the smoke balls and used them as prescribed in the advertisement, but still ended up catching the flu. She filed a suit for the recovery of 100£ as promised in the advertisement. The company denied the payment saying there existed no contract between them and the plaintiff. It was held that a contract came into existence between the plaintiff and the company as soon as the plaintiff bought the smoke balls and used them as prescribed.

Important Case- (1887) ILR 14 Cal 64 When the contract formed between the parties was discovered to be under a mistake as to the matter of fact on part of both the parties, it was held that the earnest money cannot be forfeited as the contract was void ab initio.

For more articles on Law of Contracts, Click Here.

For law notes, Click Here.

Author Details: Ankur Srivastava [Student, ICFAI Law School, Hyderabad]

Law Library LawBhoomi

Leave a Reply