The Indian Contract Act codifies the legal principles which govern the ‘contracts’. It frames and validates the contracts or agreements between various parties. The Indian Contract Act constitutes the most important branch of Mercantile or Commercial Law. The Act consists of the following two parts: a) General Principals of the Law of Contract, b) Special kinds of contracts such as contractual relationships like indemnity, guarantee, bailment, pledge, agency, quasi contracts, etc.
What is a Contract?
As per section 2 (h) of the Indian Contract Act, A contract is an agreement enforceable by law. Here are the important steps for formation of a valid contract:
- Offer or Proposal
- Legal Enforceability
Essentials ingredients of a valid contract-
1. Capacity to Contract-The parties to a contract must have legal capacity. For example: A person is not in capacity to make a legal contract where he is of unsound mind or a minor or disqualified from contracting by any law to which he is subject.
2. Offer and Acceptance- There must be an offer or proposal by one party and acceptance of that proposal by another party which results in an agreement.
3. Legal Relationship- The intention of the parties to a contract must be to create a legal relationship. Agreements of social nature are not a valid contract. For instance- when a father makes promised to give a car to his son if he ranks number one in his exam, but fails to fulfill his promise. Then the son cannot sue the father as there was no intention to create a legal relation.
4. Consideration of the Contract-The consideration of the contract must not be unlawful, immoral or opposed to the public policy.
5. Free Consent-The consent means when both the parties agree to a thing in the same sense of mind.The principle of ‘consensus-ad-idem’ which means ‘meeting of minds’. The consent between the parties must be a free consent.Consent is said to be free when it is not given by coercion, undue influence, fraud, mistake or misrepresentation which are explained under-
a. Coercion-When a person commits or threatens to commit an act forbidden by the Indian Penal Code with a view to obtaining the consent of the other person to an agreement, the consent in the following case is deemed to have been obtained by coercion.
ChikkamAmmiraju v/s ChickamSeshamma[ ILR(1918) 41 Mad 33]
In this case the husband by a threat of suicide, induced his wife and son to execute a release deed in favour of his brother in respect of a certain properties claimed as their own by the wife and son. The Court held that threatening to commit suicide amounted to coercion within the meaning of section 15 of the Indian Contract Act and therefore release deed was voidable.
b. Undue Influence-Where the relations subsisting between both the parties are such that one of the parties is in a position to dominate the will of the other party. Thus the one dominating party uses that position to obtain an unfair advantage over the other party.
Illustration- ‘A’ a religious guru influenced ‘B’ his disciple to donate his property in gift by promising to secure benefits to ‘B’ in the next birth. Here, ‘B’ under influence donates his property to the ‘A’.
c. Fraud- Any of the following act committed by a party to a contract or with his connivance or by his agent with intent to deceive another party thereto or his agent or to induce him to enter into the contract-
a. Knowingly suggests any fact which he knows is not true.
b. Knowingly conceals any fact by having knowledge or belief of the fact.
c. Knowingly made a promise without any intention of performing it.
d. Knowingly committed any act to deceive the other party.
e. Any act or omission of an act which law declares to be fraudulent.
d. Mistake- A mistake is when one party to a contract misunderstood the other party or when both the parties misunderstood each other. Therefore, the contract is considered as a void contract.
Illustration- ‘A’ made an offer to ‘B’ to sell his horse. ‘A’ intended to sell his black horse but ‘B’ believed that ‘A’ would sell his white horse. Therefore the terms of the contract were not certain. There was no meeting of mind.
e. Misrepresentation-When a person asserts something which is not true though he believes it to be true. There was no malafide intention on the behalf of the person asserting the facts.
In the case of Derry v/s Peak [(1889) LR 14 App Cas 337], a company issued a prospectus to run tramways with steam or mechanical power rather than animal power. The directors believed that the Board of trade will accord its sanction but it refused to accord the sanction. The respondent who had taken shares bought an action for the tort of deceit. House of Lords held that statement has not been made with an intention to deceive hence no fraud is committed by the company.
6. Lawful Object-The object of the contract must be lawful and legal.
7. Certainty of Performance-The terms of contract must be certain because any contract which is uncertain or not capable of being made certain is considered void. Also the contract must be capable of performance and should not enforce impossible act.
Classification of Contract-
1. Valid Contract-An agreement which satisfies all the requirements prescribed by law.
2. Voidable Contract-An agreement which is enforceable by law at the option of one or more the parties but not at the option of the others.
3. Void Contract- A contract is a void contract when the both parties to an agreement are:-
a. Under mistake of facts
b. The consideration or object of an agreement is unlawful.
c. The agreement made without consideration.
d. The agreement is in restrain of marriage.
e. There is a restraint of trade.
f. The agreement is in restrain legal proceeding.
4. Illegal Contract- A contract which is immoral, opposed to public policy and forbidden by law are illegal contract.
5. Unenforceable Contract- A contract which is a valid contract but the court will not enforce that contract. Therefore, if both the parties perform the contract then it will be valid contract. However, the parties cannot go to the court for the performance of the contracts.
The Indian Contract Act plays a major role in the day to day life of a person. Many of the time people enter into contract without realizing it. Thus, to avoid legal issues in the future parties must consider the relevant facts affecting the contract prior to the formation of the contract.
Associate at Aggarwals & Associates, S.A.S Nagar, Mohali