Indian Contract Law: An Overview
Contract law lies at the heart of our system of laws and serves as the foundation of our entire society. This is not an exaggeration. It is a simple observation - one that too often goes un-observed.We enter into contracts so many times in a day that ‘contract’ has become an indispensable part of our life. When you purchase a pack of milk or a newspaper in the morning or go to movie in the evening, you are entering into a contract. Contracts makes any agreements enforceable by law, which usually means that it allows one party to a contract to obtain money damages from the other party upon showing that the latter stands in breach.A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money.In this article, I will briefly explain the different types of contracts that can be made, paying special attention to the common problems that arise in their formulation. I will also discuss how contracts are enforced or avoided, and how a wronged party to a contract can obtain recompense and other relief from the wrongdoing party. I will explain the principle of good faith, which in California is known as the "covenant of good faith and fair dealing", and which has been too often overlooked by commentators and practitioners alike.
Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda, which is usually translated "agreements must be kept" but more literally means "pacts must be kept". Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations, along with tort, unjust enrichment, and restitution. As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological, and anthropological terms (see "Contractual theory" below). In American English, the term extends beyond the legal meaning to encompass a broader category of agreements.
Essential Ingredients of a contract:
As per the Indian Contract Act, 1872, an agreement enforceable by law is a contract.
PROPOSAL : When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Thus, a ‘proposal’ can be to do a positive act or abstinence from act.
PROMISE : 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. Thus, when a proposal (offer) is accepted, it becomes a ‘promise’.
PROMISOR AND PROMISEE : The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”.
RECIPROCAL PROMISES : Promises which form the consideration or part of the consideration for each other are called reciprocal promises.
Consideration for promise
The definition of ‘agreement’ itself states that the mutual promises should form consideration of each other. Thus, ‘consideration’ is essential for an agreement. A promise without consideration is not ‘agreement’ and hence naturally, it is not a ‘contract’.
CONSIDERATION : When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
Steps involved in contract
1. Offer and its acceptance
2. Free consent of both parties
3. Mutual and lawful consideration for agreement
4. It should be enforceable by law. Hence, intention should be to create legal relationship.
5. Agreements of social or domestic nature are not contracts
6. Parties should be competent to contract
7. Object should be lawful
8. Certainty and possibility of performance
9. Contract should not have been declared as void under Contract Act or any other law
Acceptance Must be Absolute
In order to convert a proposal into a promise, the acceptance must -
1. It be absolute and unqualified
2. It should be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. Acceptance of offer is complete only when it is absolute and unconditional. Conditional acceptance or qualified acceptance is no acceptance.
Promises- Express or Implied
Insofar as the proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. For example, if a person enters a bus, there is implied promise that he will pay the bus fair.
An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.
1. When consent is obtained by coercion, undue influence, misrepresentation or fraud is voidable at the option of aggrieved party i.e. party whose consent was obtained by coercion/fraud etc. However, other party cannot avoid the contract.
2. When a contract contains reciprocal promises and one party to contract prevents the other from performing his promise, the contract becomes voidable at the option of the party to prevented.
3. When time is essence of contract and party fails to perform in time, it is voidable at the option of other party (section 55). A person who himself delayed the contract cannot avoid the contract on account of (his own) delay.
A contract which ceases to be enforceable by law be¬comes void when it ceases to be enforceable. Thus, initially a contract cannot be void, i.e. a contract cannot be void ab initio.
1. Who are competent to contract: Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
2. Free consent: Consent of both parties must be free. Consent obtained through coercion, undue influence, fraud, misrepresentation or mistake is not a ‘free consent’. Two or more persons are said to consent when they agree upon the same thing in the same sense.
An agreement not enforceable by law is said to be void.Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all.
Following are void agreements –
Both parties under mistake of fact
Unlawful object or consideration
Agreement without consideration
Agreement in restraint of marriage
Agreement in restraint of trade
Agreement in restraint of legal proceedings
Agreement to do an impossible Act
A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Example- A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.
Contracts which must be performed
The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.
Performance of reciprocal promises
Promises which form the consideration or part of the consideration for each other are called reciprocal promises. A mutual promise can be of following types
1. Mutual and independent – Where each party must perform his promise independently and irrespective of whether the other party has performed or willing to perform e.g. Seller agrees to deliver on 5th and Buyer agrees to pay on 15th.
2. Conditional and dependent – Performance of promise by one party depends on prior performance of promise by other party. e.g. Buyer agrees to pay for goods 15 days after delivery. Hence, unless seller delivers goods, buyer’s liability does not arise.
3. Mutual and concurrent – Where the promises of both parties must be performed simultaneously.
Contracts which need not be performed
Normally, a contract is expected to be performed. The performance my be actual or by way of tender, i.e. attempted performance. However, in certain situations as stated below, the contract need not be performed.
‘Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This term is used when one subject resembles another in certain characteristics but there are intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’.
1. Supply of necessaries
2. Payment of lawful dues by interested person
3. Person enjoying benefit of a gratuitous act
4. Finder of goods
5. Goods or anything delivered by mistake or coercion
Consequences of Breach of Contract
Compensation is payable for breach of contract. Penalty is also payable if provided in contract. Breach of contract may be actual or anticipatory.
General damages are those which result from ‘direct and proximate’ consequences from breach of contract. Normally, what can be awarded is compensation for loss or damage which can be directly or proximately attributed to the breach of contract.
Consequential Loss or Special Damages
Special damages or consequential damages arise due to existence of special circumstances. Such damages can be awarded only in cases where the special circumstances were foreseeable by the party committing the breach or were specifically known to the party. Consequential losses like loss of profit due to breach, which may occur indirectly due to breach cannot be normally awarded unless there are special circumstances which parties were aware. Loss of profit can be awarded only in cases where seller could have foreseen those losses and arose directly as result of breach.
Promisee should take steps to Mitigate the Loss or Damage
Explanation to section 73 specifically provides that in estimating loss or damage, the means available for remedying the inconvenience caused by breach of contract shall be taken into account. Thus, promisee should take all reasonable steps to mitigate the losses.
Vindictive or Exemplary Damages
Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances.
Consideration for Guarantee
Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee.
1. B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.
2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so,`C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.
3. A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.
Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property.
Bailment of pledges
Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security.
Contract of Agency
Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent. The principles of contract of agency are:
1. Excepting matters of a personal nature, what a person can do himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a matter of personal nature)
2. A person acting through an agent is acting himself, i.e. act of agent is act of Principal. Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act.
One important distinction is that as per section 185, no consideration is necessary to create an agency.