What is Law of contract?
"The Law of Contract is not the whole law of agreement, nor it is the whole law of obligation; it is the law of those agreements which creates obligations which have their source in agreements."
The law of contract is one of the important branches of law. It determines the circumstances in which promises given by the parties to a contract shall be legally binding on them.
The term Contract is derived from the Latin word 'contractum' which means drawn together.
- Contract is an agreement to do or not to do an act.
- It is enforceable by law.
Contract as defined by various authorities
Sir John Salmond, "The Law of Contract is not the whole law of agreement, nor it is the whole law of obligation; it is the law of those agreements which creates obligations which have their source in agreements."
In common parlance the term contract is used to denote a agreement or a promise made by two or more persons.
Sir Fedrick Pollock, “Every agreement and promise enforceable at law is a Contract".
Sir William Ansan, “A legally binding agreement between two or more persons by which rights are acquired by one or more acts or forbearances on the part of the other or others".
Blackstone, “Agreement upon a sufficient consideration to do or not to do a particular thing".
Halsbury’s Laws of England, “a contract is an agreement made between two or more persons which is intended to be enforceable at law, and is constituted by the acceptance by one party of an offer made to him by the Other party to do or to abstain from doing some act”.
Section 2(h) of the Indian Contract Act, 1872, "An agreement enforceable by law is Contract."
The law of contract forms the basis of the commercial/business law. It is concerned with enforceability of promises. It also throws light on the remedies which are available in a court of law against a person who fails to perform his contract. This law affects every person living in a society as everyone has to enter into contracts virtually every day.
When one purchases a commodity either by paying cash or on credit basis or deposits his money into his bank account and the like, he enters into contract.
For example, if a supplier ‘S' has promised to supply goods to a manufacturer ‘M’ on a specific date, there is a binding contract. Based on this promise, the manufacturer M will plan his production schedule and accept orders from his customers. Now if the supplier fails to supply the goods in time (i.e. commits breach of promise), M can claim damages for the loss he has suffered.
The purpose of the Law of Contract is to ensure that the expectations created by promises of the parties are fulfilled and obligations created by agreements are enforced.
In the absence of the Law of Contract, it will be impossible to carry on trade and commerce. The businessman who has made a promise should fulfill it or else he will be liable to pay damages to the other party.
The object of law of contract is to introduce certainty and definiteness in business transaction.
To quote Anson, "The law of contract is intended to ensure that what a man has been led to expect shall come to pass and that what has been promised to him shall be performed".
Sources of Law of Contract
- The law of contract in India is contained in the Indian Contract Act, 1872.
- Prior to this law, British law of contract was followed in India.
- This Act came into force from 1st Day of September, 1872.
- It extends to whole of India.
- It contains 11 chapters and 238 sections.
The Act mentions elements necessary for a valid contract; It says which persons are capable of entering into enforceable agreements; it mentions the cases in which agreements are voidable; it declares certain kinds of agreements void; it deals with general principles of law of contracts and some special contracts such as those of surety agreements and agreements of agency and bailment and it prescribes remedies for breach of contracts. The law of contract does not prescribe any precise rights or duties which the law will enforce or protect. It lays down the basic principles of contract and within these parameters the parties are free to frame any rules (rights/duties) in regards to the subject matter of their agreement. In this sense, the parties are makers of law for themselves.
Apart from Indian Contract Act 1872, the other sources of law of contract are:
- Judicial decisions or precedents;
- Old customs and usages of trade.
The decisions of the Supreme Court are binding on the lower courts. The judicial decisions constitute an important source of the law of contract, especially when the Act is silent or there is ambiguity.
Customs/usages refer to a generally accepted practice or behaviour among members of a business community. A custom or usage to be legally binding must not be inconsistent with statutory law and must be widely known, certain and reasonable.
The Act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate Acts which deal with contracts relating to negotiable Instruments, transfer of property, sale of goods, partnership, insurance, etc. Again, the Act does not affect any usage or custom of trade.
The scheme of the Act may be divided into two groups:
a. General Principles of the Law of Contract (Sections 1 - 75)
b. Specific kinds of Contracts, viz;
1. Contracts of Indemnity and Guarantee (Sections 124 - 147).
2. Contracts of Bailment and Pledge (Sections 148 - 181)
3. Contracts of Agency (Sections 182 - 238).
Sections 76-123 relating to Contracts of Sale of Goods were repealed in 1930 and a separate Act called the Sale of Goods Act was enacted. Similarity, Sections 239 - 266 relating to partnership were repealed in 1932 when the lndian Partnership Act was passed.
Analysis of the term ‘Contract’ under Indian Contract Act
According to Section 2(h) of the Indian Contract Act, “An agreement enforceable by law is a Contract". Thus a contract consists of two elements.
a. An agreement &
b. Legal obligation i.e., a duty enforceable by law.
Agreement
An agreement is defined in Section 2(e) "Every promise and every set of promises, forming the consideration for each other is an agreement"
AGREEMENT= OFFER+ACCEPTANCE
Accepted Proposal
An agreement comes into existence when one party makes a proposal or offer to the other party and that other party gives his acceptance thereto. There must be two or more persons 0 make an agreement because one person cannot enter into an agreement with himself. There should also be consensus-ad-idem i.e. both the parties must agree on the same thing in he same sense.
Legal Obligation
For an agreement to become a contract, it must give rise to a legal obligation i.e. a legal duty which is enforceable by law. The parties must have the intention to impose a duty on the promisor to fulfil the promise and bestow a right on the promisee to claim its fulfilment. This obligation must not be merely moral alone; it must be legal.
For example, A invites B to join his marriage party and B promisee to do so. But B eventually fails to keep his promise. In this case, there is a full-fledged agreement between A and B. But behind this agreement there is no intention on the part of the parties to impose a duty on the promisor (i.e. A) and bestow a right on the promisee (i.e., B) to claim the fulfillment of the contract. Therefore, the agreement is not enforceable by law.
"All Contracts are Agreements but all Agreements are not Contracts"
Agreement is the genus of which contract is the species. An Agreement is a wider term than a contract. It may be a legal agreement or social agreement. Agreements relating to social matters like an agreement to go to a movie together or a visit to a hotel do not create legal obligations between the parties and hence are not contracts. Only those agreements grow into contracts which create legal obligations.
Type of Legal Obligations which are Dealt with by the Law of Contracts
The law of contract deals only with such legal obligations which spring from agreements. Obligations which are not contractual in nature are outside the purview of the law of contract. For example, obligations to observe traffic rules do not fall within the scope of the Contract Act.
Salmond has rightly observed: "The law of contracts is not the whole law of agreements, nor is the whole law of obligation. it is the law of those agreements which create obligations, and those obligations, which have their source in agreements".
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