CHAPTER ONE
FRAMEWORK OF LAW
Law and legal system are always very important for the modern society albeit for the very
existence of mankind. Though law is a global concept, it is generally organized on national lines
and represents supreme will of the state that applies only to the citizens of that country. It is
founded on social, economic, and contextual influences to bring about order in human activities
through systematic application of political force or social pressure. In a practical sense, law lays
down rules that govern and guide actions and relations amongst persons, organizations and
governments.
MEANING OF LAW
The word ‘Law’ has been derived from the Teutonic word ‘Lag’ which means ‘definite’.
Accordingly, law can be defined as a ‘definite rule of conduct and human relations’. It can also
be used to denote a uniform rule of conduct which is applicable equally to all the people of a
given state. It prescribes and regulates general conditions of human activity in the state. Though
law consists of a body of rules yet it need not always be in writing. Many of these rules may be
presumed to be known to everyone in the society.. It implies that everyone needs to understand
the meaning of law.
Definition of Law
In an ordinary sense, law is a ‘system of rules and regulations regarded as binding by a country
or society and enforced by the authorities so that any violation thereof is liable to punitive action.
Laws are generally contained in the constitution, legislations and judicial decisions. Quite
surprisingly, the jurists and legal scholars are not unanimous about the definition of law since
many years as is reflected by the prevalence of multiple definitions of the concept of law. Some
jurists consider law as a 'divinely ordered rule' or as 'a reflection of divine reasons'. Many other
definitions have been given from philosophical, theological, historical, social and realistic
angles. On account of the differences in approaches, different concepts of law as postulated by
various schools of law have emerged. Jurists hold different perceptions and understanding of
what constitutes the law and legal systems as described below.
Most popular concept of law is to consider law as “a set of rules, enforceable by the courts,
which regulate the government of the state and govern the relationship between the state and its
citizens and between one citizen and another”.
According to Austin, “Law is the command of the sovereign to an inferior backed by sanctions
of the infractions from it.” Holland believes law as “a general rule of external behaviour enforced
by a sovereign political authority”. Sir John Salmond has defined law as a body of principles
recognized and applied by the state.”
Thus each law is a binding and authoritative rule of particular specie of conduct whose violation
is subject to prescribed type and quantum of punishment.
Features and Functions of Law
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Rule of law, equality before law and equal protection of law for all without any discrimination,
are recognized as the salient features of a modern legal system in liberal democratic states.
Along with these features, the laws serve the following functions.
1. Establishment of Standards of behavior
Law serves as a guidepost for securing minimally acceptable desirable behavior and for
preventing undesirable behavior for preservation of peace and order in a society. All persons
including aliens are equally subject to the laws of the state. Any behavior inconsistent with the
established standards is liable to punishment. By prescribing these standards, the law serves to
foster stability, credibility and predictability of the legal system.
2. Expression of definite will of the State
Though the law is formulated on the basis of public opinion and public needs, in its final form it
signifies the will of the state. It may also lay down the procedure for changing any of its
provisions or even the whole of the law.
3. To maintain law and order
It is an offshoot of establishing standards. Law functions to maintain some semblance of order in
a civil society. Enforcement of law aims to establish order consistent with guidelines of society.
For this purpose, law may punish the violators and order the wrongdoers to compensate the
victim of the offense.
4 To resolve conflicts
Conflicts of values, views and needs cause disputes between various parties are resolved by
courts or alternative means as the legislature may have prescribed. Courts resolve a dispute by
application and interpretation of relevant statutes.
5. To protect liberties and rights
Law functions to protect the rights and freedoms granted to citizenry by the constitution and
other laws from unauthorized intrusions by others or sometimes the state itself.
LEGAL SYSTEMS IN THE WORLD
According to Hart, the term ‘legal system’ is ‘a union of primary rules of obligations as well as
secondary rules of recognition, change and adjudication’. It embodies both the laws of the
country, the sources from which its primary features are derived and the mechanisms for
regulating and enforcing those laws. The mechanisms concerned with a legal system include:
legislature; judiciary; prosecutors; police; and the prison system. The following legal systems are
prevalent in the world.
1. Common Law System
Common law is a historic system of laws formulated in England between 1066 and 1400. It is
based on case laws called ‘precedents’ as well as the principles of equity deriving from fair
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dealings between two parties. The object of principles constituting equity is to supplement but
not to replace the common law. The system has been adopted by many of the former British
colonies besides Australia, Singapore, Malaysia, and the United States of America. It consists of
the body of legal rules common to the whole jurisdiction which is embodied in judicial decisions.
2. Civil Law System
The civil law system originated in continental Europe from the ancient Roman legal system as
comprised in Justinian ‘Corpus juris civilis’. It dates back to 450 BC and occurs generally but
not mandatorily in the codified form of statutes and administrative regulations.
Comprehensibility and certainty are its other features. Besides the European countries, it is also
followed in Japan, China, Indonesia and Brazil. Though the civil law system is much younger
than common law yet it has quite an old legal heritage.
3. Sharia law
This system of law is significantly different in both purpose and practice from common and civil
law systems as it is based on Quran and Sunnah i.e., the sayings of the Prophet (called Ahdith).
Shariat has influence on the interpretation of law in most of the Islamic countries worldwide.
There are five secondary sources of muslim known as ‘ Madhab’. Thesederive from writings of
various jurists namely: the Shia school (Iran); Hanafi school (Imam Abu Hanifa) ;the Maliki
school (Imam Malik); the Hanbali school (Imam Ahmad Ibn Hanbal); the Shafii school (Imam
As-Shafii). Jurists in the muslim countries can only interpret i.e., confirm, explain, clarify or
introduce a rule where Quran is silent but they cannot alter the injunctions contained in the holy
book. To derive an answer to a legal question, the jurists have to follow the process of ‘Ijtihad’
requiring intellectual exertion. According to ‘Hadith’, the Prophet had ordained that an Imam
shall decide by relying firstly on the Quran, and then on the Sunnah. The rules of ijtihad provide
as follows:
a. It cannot be exercised on certain matters such as the existence of Allah.
b. The judge called ‘muhtahid’ must be suitably qualified in terms of his being well versed
in the study of the Quran; traditions of the Prophet; understanding of the principle of ijma,
and conditions for qiyas besides being just, reliable, trustworthy, and a good and practicing
Muslim,
c. The muhtahid shall use recognized methods of interpretation including:
(i) Ijma: i.e., reaching a consensus of opinion after consultation between jurists;
(ii) Qiyas which is an analogical deduction based on a comparison and evaluation such as the
conclusion that drugs are forbidden on the ground that there is prohibition on alcohol in
Quran;
(iii) Istihsan: involving exercise of equity, or fairness within the bounds of the Sharia;
(iv) Maslahah mursalah - something very similar to Istihsan;
(v) 'Urf under which local custom may be subsumed into the law if not contrary to Sharia;
(vi) Istishab providing for the legal presumption that the current state of affairs continues
until the contrary is proved or it is shown that it is forbidden
CLASSIFICATION OF LAWS
Following are the various ways in which the laws may be classified:
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A: According to Mode of Creation
1. Natural or Moral Law
Natural Law is often thought to be a divine law which is not written anywhere but is based on the
reason by which the world is governed. It is abstract, eternal, universal, value oriented and moral
in its nature. Exponents of natural law believe that law and morality are linked since an unjust
law is not a true law based on the maxim ‘lex iniusta non est lex’. Generally, the 'rule of law' and
'due process of law' are considered as new incarnations of natural justice in the modern era. In
India, the principles of natural justice are firmly grounded in Articles 14 & 21 of the
Constitution. Violation of principles of natural justice as ingrained in Article will ipso jure lead
to denial of equality as contained in Article 14. The two principles of natural justice forbid bias
(Nemo judex in causa sua i.e., no one should be a judge in his own cause) and condemning
without opportunity of hearing (Audi alteram partem ).
2. Positive Law:
It is a body of man-made laws consisting of codes, regulations, and statutes enacted or imposed
by a political authority. It is imperative in its nature reflecting the sovereign power of the state so
that its violation shall lead to punishment. The jurisprudence of positive law is contained in the
works of seminal philosophers such as Plato, St Thomas Aquinas, Thomas Hobbes, and John
Austin
B: According to Geographical applicability
1. International law
International law is the body of rules which by custom or treaty make civilized states to regard it
as binding upon them in their relations with other states, and on the violation whereof, the
injured party can assert its legal right. It may be divided in two categories:
(a) Public International Law
It regulates matters concerning relationships between sovereign states; formation and
recognition of states; acquisition of territory; war; law of sea and space; treaties; treatment of
aliens i.e., foreigners; human rights; international crimes and international judicial settlement of
disputes.
(b) Private international law
It regulates relationships between individuals in an international context i.e. across borders.
Private international law has a dualistic character of balancing international consensus with
sovereign actions. In the event of a dispute between two parties belonging to different countries
pursuing different legal systems, it is by recourse to private international law that a court can
determine as to which country's substantive law will be applied to decide the matter. Though
called 'international law', it is actually a body of domestic law applied in an international context.
Accordingly, each country has its own set of private international law with the potential to lead
to the problem of conflict of laws. World conventions such as the New York Convention 1958
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and the UN Convention on Contracts for the International Sale of Goods (UNCISG) have been
concluded to deal with issues arising from conflict of laws. Model Laws have been developed by
the UNO for their adoption to bring about uniformity in national laws of various countries
relating to different legal areas.
ii. Municipal or Domestic or State Law
These are the laws framed by each state to govern and regulate the relationship between the State
and its citizens as well as amongst the citizens. Municipal law can be further classified into
public and private laws as described further.
III Classification According to Subject matter
A: Public Law
It is a body of laws governing the structure and operation of the government as well as the
relations between a state and its citizens. Constitutional law, Administrative law, tax laws,
and criminal law fall within the scope of public law.
1. Constitutional law
Constitutional law is the foundation of state and the supreme law of a country. It sets out the
form of government; the division of power and responsibilities among various branches of the
government namely legislative, executive and the judiciary. It lays down the political, civil, and
human rights of citizens.
2. Administrative law
Considered subordinate to constitutional law, it is defined as the body of rules which regulates
the relations of the administrative authorities with private citizens. The function of administrative
law is to deal with the powers and functions of executive departments. It also provides the
mechanism whereby executive actions are controlled by means of provision of legal remedies in
case of any violation of the rights of the people
3.Criminal law
It is considered a part of public law since a crime is directed not against an individual but against
the society as a whole. The object of criminal law is to define, prohibit and punish criminal
depending on whether the offense is serious or minor. It not only protects the society but also
satisfies the demands for retribution, rehabilitation, and deterrence. The Indian Penal Code, 1860
(also known as IPC) is the penal law of the country that has defined different kinds of offences
along with the relevant sanctions for each of them.
B: Private Law
It is that part of civil law which deals which jus commune i.e., definition, regulation and
enforcement of mutual rights and duties of individuals through civil courts. Much of the life of a
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society is regulated by this set of private laws or civil rights. The legal process is set in motion by
the aggrieved citizen and not by the state. Following types of laws belong to the category of
private laws.
1. Personal Law:
It is related to matters such as marriage, divorce and succession i.e., inheritance. Most of these
matters are governed by respective personal laws which derive from their religions. For example,
marriage amongst Hindus is governed by the Hindu Marriage Act, 1955 while Muslim marriages
are governed by the Muslim customary law which is largely uncodified.
2. Property Law:
This branch of law deals with the rights and obligations arising from the ownership or possession
of tangible or intangible properties whether immovable, movable or of an intellectual variety.
Examples of these laws include: the Transfer of Property Act, 1882 dealing with immovable
property, and the Sales of Goods Act, 1930 which deals with movable property.
3. Law of Contract:
This branch of the law pertains to performance of certain actions arising from the making of an
enforceable agreement. On failure to fulfill the promise, the aggrieved party can enforce the
same through a legal action. The Contract Act, 1872 contains the principles that govern the
formation, and performance of contractual obligations besides the remedies available to the
aggrieved party on breach by the other party.
4. Law of Torts:
Tort is a civil wrong for which compensation can be recovered by the victim. A tort deals with
cases of both negligence such as an accident as well as the intentional wrongs For instance, if 'A'
throws a stone to pick a fruit from a tree but it hits another person namely 'B' on the head, 'B'
may sue 'A" for the injury caused by the accident.
Nature of legal liability
Legal liability of following two kinds may arise either from breach of a legal obligation under
either civil law or criminal law.
(a) Civil liability
The aim of civil liability is to award compensation against the losses suffered by the aggrieved
party from breach in contact or due to a tort.
(b) Criminal liability
For criminal liability which is regarded an offense against the state, the prosecution must firstly
establish that there has occurred a prohibited act called ‘actus reus’ act with a guilty mind called
‘mens rea’. For instance, if someone picks somebody else’s umbrella up thinking it as his own,
he cannot be held guilty of theft because of the absence of a guilty mind. However, the state may
declare statutory offences in which there may be no need to prove mens rea. The very doing of
the act may make the offender liable and such crimes are known as crimes of strict liability.
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IV: Classification by Nature of Law
Substantive vs. Procedural Law
Any of the laws may be either (a) Substantive, or (b) Procedural. While substantive law creates,
defines, and regulates the rights, duties, and powers of parties whether under public or private
law; the use of procedural laws is made for the enforcement of the rights and duties notified
under the substantive law. The procedural laws govern the process of litigation. With the help of
procedural laws, the court can conduct its proceedings in a uniform manner. General examples of
procedural laws include the rules of evidence, jurisdiction, pleading and practice under either
civil or criminal law. A specific example of a procedural law is the statute of limitations. This
law has prescribed the time limit for filing any suit starting from the date of arising of cause of
action
Sources of Law
Sources of law specify the points from where the law or the binding rules of human conduct
originate. Jurists and other legal experts have approached the sources of law from various angles.
For instance, Austin considers sovereign as the source of law while Savigny and Henry Maine
consider custom as the most important source of law. Natural law school considers nature and
human reason as the sources of law, while theologians consider the religious scripts as sources of
law. Despite various claims and counter claims regarding the sources of law, the law is deemed
to have been derived from similar sources as described below.
1. Customs:
Customs are long established practices or unwritten rules which have acquired binding or
obligatory character. To be valid, a custom must meet the tests of antiquity i.e., having been
exercised for long beyond human memory without any kind of interruption and as a matter of
right. It must also be reasonable, moral, and not opposed to public policy such as adopting a girl
for immoral purpose. However, not every custom may become a law. For example, under the
Hindu Marriages Act, 1955 marriages within the prohibited degrees of relationship are
prohibited except when there is a proven custom to the contrary within a certain community.
2. Religion and Morality:
Religion has pervaded and regulated the behavior of people through invocation of divine powers
which are prescribed in the form of definite codes of conduct. They are supplemented by rules of
morality in terms of something being regarded morally right and wrong. On their adoption by
the State, they partake the character of a source of Law.
3. Legislation:
Since the emergence of legislatures in the 13th century, legislation has emerged as the chief
source of law. Supreme Legislation are the laws which have been directly enacted by the
sovereign such as the Parliament or state legislatures on subjects falling within their area of
legislative authority as laid down in the constitution. On the other hand, the Subordinate /
Delegated Legislation is made by any authority subordinate to the supreme authority. The
origin, validity, existence and continuance of such legislation totally depend on the will of the
sovereign authority. Their need has arisen for proliferation in the demand for more of laws so
that the legislative bodies provide only the fundamental part of the legislation leaving it to the
executive to fill the gaps.
4. Judicial Precedents:
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A judicial precedent is a judgment of a court which is the highest in the hierarchy of courts. A
judicial decision consists of the following two parts:
(I) Ratio decidendi
It literally means ‘reasons for the decision as deduced by the court from the facts of a particular
case. It is binding on the lower courts in future cases involving similar questions of law.
(ii) Obiter dicta
It refers to those parts of a judicial decision which consists of general observations of the judge
and do not have any binding authority. These are the things said ‘by the way’. However, obiter of
a higher judicial body is given due consideration by lower courts and may operate as a
persuasive precedent.
Citation of a judgment
It includes the name of the plaintiff / claimant / appellant versus the particulars of the defendant /
respondent along with the year in which the case has been decided, the court which gave the
judgment, name of the publication and the page number of the report. For instance consider the
citation Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Ltd (2011) 9 SCC
735. In this case, the first mentioned party is the appellant; the second party is the respondent.
The judgment has been given in 2011 and reported in the ninth volume of Supreme Court Cases
at page number 735.
5. Equity:
Equity meaning’ fairness and sense of justice’ is also a source of law. In some of the cases, the
laws may not fully fit in or even may be silent in some respects. To decide such cases, the judges
may depend on equity and act in accordance with their sense of fair play and justice. Equity is
used to provide relief to the aggrieved parties and such decisions perform the function of laying
down rules for the future. As such equity acts as a source of law.
6. Scientific Commentaries:
The works of eminent jurists always include scientific commentaries in which they may discuss,
explain and point out the loopholes besides suggesting possible remedial course of legal action.
Interpretations given by scholars may help in interpretation and application of rules to specific
cases. The works of jurists like, Blackstone, Dicey, Wade, Phillips, Seeravai, and others have
been always held in high esteem by the judges in India. In contemporary times, scientific
commentaries by jurists have helped in the development and evolution of law.
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CHAPTER TWO
NATURE AND KINDS OF CONTRACTS
INTRODUCTION
A contract is fundamental to business for establishing binding commercial relationship between
two or more parties. The commercial transactions belong to the private law. These are regulated
by the Contract Act, 1872. This law has laid down the general principles in Sections 1 to 75
subject to which the contracting parties may create their respective rights and duties. In addition,
the law of contract deals with five categories of special contracts, namely: (i) Indemnity and
Guarantee, (ii) Bailment and Pledge, and (iii) Agency. Other contracts relating to partnership;
sale of goods; negotiable instruments; insurance are technically based on the law of contracts but
have been actually covered by separate enactments.
FEATURES OF LAW OF CONTRACT
Principal features of the law of contract are as follows:
(a) Contract Act is a substantive law dealing with the rights and duties of parties involved in
commercial transactions
(b) It is a private law of a facilitative nature giving the contracting parties the right to frame
their own terms while remaining within the ambit of the principles contained in the Act.
(c) Consistent with the right to frame their own law, contacting parties adopt the following
two routes to frame the contract:
(i) General Conditions of Contract (GCC)
Many firms may frame rules in the form of a rule book called “GCC’ for guidance of prospective
contractors / suppliers. The contract may then be concluded within the ambit of these guidelines.
(ii) Special Conditions of Contract (SCC)
These are complementary to GCC. For instance, the main clause in GCC may permit the
contractor to take advance money. But a clause in the SCC may limit the amount of advance only
to 10% of the total contract price
A contract based on GCC & SCC is generally be a one page document incorporating the scope of
technical specifications, bid made by the contractor, and notification of the award and any other
matter in accordance with various clauses of GCC & SCC. This route is used when large number
of parties are expected to respond to invitation such as in case of works contracts.
‘Self Contained Contract’
It is the second route to contract and is based on negotiations about all the contractual terms
which may be included in a comprehensive document. This method is adopted in case of high
value contracts and where number of parties responding to invitation is small.
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(d) The Act is not exhaustive since it does not provide for several types of transactions such as
infrastructure
(e) It does not override customs or usages applicable to commercial transactions
(f) The law of contracts is not the whole law either of agreements or of obligations. It is the
law of only those obligations which have their source in agreement between the parties.
For instance, it does not deal with obligations arising under tort such as loss caused by
negligence since it has been created by law
CONCEPT OF CONTRACT
It may be noted that a contract is initiated by means of an agreement. Only after fulfilling the
conditions prescribed for its enforceability, the agreement matures into a contract. It is why
Section 2(h) has defined a contract as ‘an agreement enforceable by law’. Thus, we need to
discuss both the concept of ‘agreement’ and the conditions which would lead to its
enforceability.
1. Agreement
Contract law has used the term ‘promise’ and ‘agreement’ in an interchangeable sense.
Agreement is the starting point of a contract which involves the exchange of promises between
two or more parties. Section 2(e) has defined an ‘agreement’ as, “every promise and every set of
promises, forming consideration for each other”. There are five essential requirements for the
making of an agreement. These are as follows:
i. Minimum Two Parties
There must be a minimum of two parties since no one can make a contract with oneself.
ii. Offer by a Party
There must be an offer by one of the parties.
iii. Acceptance by the Other Party
The offer must be followed by its acceptance by the other party.
iv. Intention to create legal relations
The parties must have the intention to create legal relationship. Such an intention is presumed in
commercial transactions but not in the case of agreements of a social or domestic nature. For
instance, an agreement to dine at a friend’s place, to play a friendly match, or to go to see a
movie lacks the intention to create legal relations. Hence, these are incapable of creating any
rights or obligation under law. But how does law find out the subjective intention of the parties?
Its function is to enforce objectively the intention of parties as expressed in their agreement than
to subjectively ascertain their real intention. Nonetheless, the law continues to make a distinction
between social and domestic agreements as compared to those made in a commercial context to
decide their enforceability.
Example:
In Balfour vs. Balfour (1919) 2 KB 571, a husband agreed with his wife to send her certain sum
of money until she could join him at his station of posting. On default to send money, the wife
filed a suit for recovery. The wife’s claim was rejected by the court on the ground that
agreements of a social nature do not intend to create legal relations. The husband was thus under
no obligation to pay the amount.
Presumption of absence of intention to create legal relations in domestic and social relations:
The judgment in Balfour’s case raises a presumption that the intention to create legal relations is
presumed to be absent in domestic and social types of agreements. To presume otherwise will
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open flood gate of litigation. Principles of common laws do not intrude in domestic and social
domain except in rare cases. Enforceability of a contract is based on theory of private autonomy
and also the manifestation by both the parties of common intention to enter into mutually
communicated legal obligations [Rose & Frank Company v. J.R. Crompton & Bros Ltd 2 KB
261, 1923]. However, a person’s will depend on several factors including socio cultural factors as
may be noted in the following example:
“An Indian goes to a Singapore hotel and orders a vegetarian pizza. When it was served, he
noticed with surprise that it contained sea food in it. The pizza was non- vegetarian as per Indian
standards. But was a perfectly vegetarian pizza according to Singapore cultural background.
Though both the parties are willing to perform the contractual obligation but problem has arisen
due to different perceptions of a vegetarian pizza.
How will the contract law theories or the courts enforcing contract law principles deal with such
situations?
Compliance with terms of contract may however create legal relationship
In Parker v Clark (1960) 1 WLR 286, an aged couple held out a promise through a letter to their
niece and her husband (plaintiffs) to leave the young couple a portion of their estate by way of a
will provided the couple sells off their house and come to live with the aged couple. It was also
mentioned that the young couple would also share the old couple’s household and other
expenses. The young couple disposed of their cottage and started living with the aged couple.
Later on, due to differences between both the parties, the aged couple repudiated the agreement
and asked the young couple to stay somewhere else. The young couple sued the aged couple for
the breach of promise. Held that the letter by the old couple contained their intention to create
legal relations and the young couple could recover damages.
There is a Rebuttable Presumption of Intention to create legal relationship in Commercial
Agreements
Contract law is about giving effect to the promises made by the parties exercising their free will
and autonomy. The court does not have to go into the obscure question of whether parties
contemplated the enforcement of their contract through court. For instance, if you walk into the
cafe and order a coffee, it will neither occur to you nor to the cafe owner that they are entering
into a legally binding relationship unless one of the parties fails to perform.
However, if the contract itself provides that the arrangement was not intended to be a formal
legal agreement and was not subject to jurisdiction of either the US or UK, the contract has
specifically provided for the intention of the parties to not create legal relations [Rose & Frank
Company v. J.R. Crompton & Bros Ltd 2 KB 261, 1923]. The ratio of the case is as follows:
(a) It is generally assumed that parties in business relations intend to be bound
(b) If parties in the agreement expressly state the intention not to be bound, the court must
honour their intention.
v. Consensus ad idem
Consensus ad idem means identity of minds on the part of both the parties. Accordingly, the
parties to a contract must agree upon the same thing in the same sense.
Example:
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A seller having two houses in two different localities in Delhi offers to sell one of his houses to a
party. The person to whom the offer is made has another house in his mind of which he is aware.
Due to confusion about the property being offered for sale and the one presumed by the intended
buyer, there is no consensus ad idem.
2. Enforceability of the Agreement:
In terms of Section 2(h), a contract is “an agreement enforceable by law”. Hence, a contract is
the sum of the following:
Contract = Agreement + Its Enforceability
Accordingly, only an enforceable agreement is a contract. An agreement may become
enforceable only after complying with the essential requirements of a valid contract. Section 10
has specified the requirements of a valid contract as follows:
“All agreements are contracts if they are made by the free consent of the parties competent to
contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void.”
ESSENTIAL INGREDIENTS OF A VALID CONTRACT
On the basis of the provisions of Section 10, the following are the ingredients of a valid contract:
(a) Free Consent:
The contracting parties must give their consent freely. It must not be given due to coercion
(duress), undue influence, fraud, misrepresentation or mistake. The absence of free consent
would lead to a ‘voidable contract’ which has adverse affect on the legal enforceability of the
contract.
(b) Contractual Capacity:
The parties making the contract must be legally competent in the sense that each of them must be
of the age of majority, of a sound mind, and not expressly disqualified from contracting (Section
11). An agreement by incompetent parties shall be a legal nullity.
(c) Lawful Consideration:
Consideration is the price for which the promise of the other party is bought. Without
consideration, a contract is regarded as a nudum pactum. Each of the contracting parties must
both ‘give as well as get something’. Moreover, the consideration must also be lawful.
(d) Lawful object:
The object of the agreement must be lawful in the sense that it must not be (i) illegal (ii)
immoral, (iii) fraudulent, (iv) defeating the provisions of any law, (v) injurious to the person or
property of another, or (vi) opposed to public policy.
Example: A lets his house for being used as a gambling den. The agreement is illegal as the
object of agreement is unlawful.
(e) Agreement must not be expressly declared to be void:
The agreement must not have been declared void by any law in force in India. Sections 24 to 30
of the Act have expressly declared certain types of agreements to be per se void such as those in
restraint of marriage, or restraint of trade, or restraint on legal proceedings, or wagering
agreements.
(f) Legal formalities:
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In terms of second paragraph of Section 10, the agreement must fulfill the formalities prescribed
in any other applicable law. Therefore, where law requires an agreement to be put in writing,
stamped, witnessed or to be registered, these formalities must be complied with. For instance, the
Indian Trusts Act, 1882 requires the creation of a trust to be reduced to writing. Under the
Transfer of Property Act 1882, every sale and purchase of immovable property of one hundred
rupees or more must be in writing and registered.
In addition to the above, the contract must also meet the following requirements:
(g) Certainty of Meaning:
The terms of the agreement must be certain, or capable of being made certain. For instance, a
term in the contract that “the company would favourably consider a request for renewal of the
contract” was held to lack certainty and hence incapable of creating a binding contract [Montreal
Gas Co. v. Vasey (1900) A.C. 595]. Agreement to agree in future is also not a contract.
In May and Butcher v The King [1934] 2 KB 17, the parties had arranged to sell tentage at prices
to be agreed, and to be delivered at times also to be agreed. The bargain was held to be non
binding for want of certainty.
CLASSIFICATION OF CONTRACTS
1. On the basis of Enforceability
(a) Valid Contract:
It is a contract which satisfies all the requirements of Section 10 of the Act as described above.
Such a contract creates rights in personam and is legally enforceable.
(b) Void Agreement:
Under section 2(g), a void agreement is, “an agreement not enforceable by law.” It is void ab
initio because it lacks one or more of the essentials of a valid contract. Such an agreement does
not create any legal relations and is a nullity. Instances of this type of agreements are those made
with a minor or those without consideration.
(c) Void Contract:
Section 2(j) provides that “a contract which ceases to be enforceable by law becomes void when
it ceases to be enforceable.” An agreement may be enforceable initially. However, due to certain
circumstances which are neither foreseen nor controllable on their happening and known as
‘force majeure’ may render the contract void. Parties need not perform their promise in case of
natural calamities, changes in law, death of either party, war or government intervention. In the
Law of contract, these events are known as ‘supervening impossibility’. Similarly, if
performance of a contract is contingent upon on the happening of an event, it shall become void
on the happening of the event becoming impossible (Section 32)
DIFFERENCE BETWEEN VOID AGREEMENT AND VOID CONTRACT
A void agreement is void from the very beginning. On the other hand, a void contract is valid
when originally made but becomes void subsequently due to certain circumstances.
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A void agreement is destitute of legal effects. It cannot create any legal rights or obligations. On
the other hand, a void contract is perfectly legitimate until it ceases to be enforceable. The money
paid or property delivered under a contract which subsequently becomes void is recoverable.
(d) Voidable Contract:
Under Section 2(i), it refers to an ‘agreement which is enforceable by law at the option of one or
more of the parties thereto, but not at the option of other or others’
A contract becomes voidable in the following circumstances:
(i) If consent of one of the parties is not free, it will be considered an aggrieved party. It shall
have the dual option to either affirm or rescind the contract. The other party does not have any
such right. However, the right of rescission must be exercised within a reasonable time. On the
expiry of reasonable time, the contract shall be deemed to have become a valid contract.
(ii) If a party to an executor contract prevents the other party from performing his part of the
contract, the contract shall be voidable at the option of the party so prevented.
(iii) In case of a contract in which time of performance is the essence of contract, failure to
perform within the fixed time shall make the contract voidable at the option of the promise
(Aerosan Enterprises Ltd v Union of India & Anr 51 (1993) DLT 280)
In the case of a voidable contract, the aggrieved party can recover damages from the other party
which it may have suffered but it must restore the benefits received by him (Sec. 64).
DIFFERENCE BETWEEN VOID AGREEMENT AND VOIDABLE CONTRACT
(i) Enforceability
A void agreement is void ab initio. As against this, a voidable contract is perfectly valid unless it
is repudiated by the aggrieved party at its option. Until its repudiation, it continues to be valid.
A void agreement cannot be enforced at all. But a voidable contract is capable of being enforced
at the option of the aggrieved party.
No one can acquire any title to the goods obtained under a void agreement. But in the case of a
voidable contract, a bona fide buyer for value will acquire a better title to goods which he has
obtained from a person holding them under a voidable contract.
(ii) Restitution
Except where illegality or void nature of the agreement is known to both the parties, restitution is
always allowed. The recipient of any benefit under the agreement, must restore it to the person
from whom he has received it (Sec. 65). On repudiation of a voidable contract, restitution
follows. (Sec. 64)
(iii) Effect of expiry of a reasonable time:
The expiry of reasonable time does not affect a void agreement. But a voidable contract cannot
be rescinded after the expiry of a reasonable time.
(iv) Compensation
No compensation is recoverable on non-performance of a void agreement because it is incapable
of conferring any rights or obligations. But the aggrieved party, in case of a voidable contract,
can claim compensation for loss or damage suffered by him.
(v) Collateral Transactions
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Transactions collateral to a voidable contract are not effected. The same is the case with void
agreements except where it was void on account of illegality of object or consideration.
(e) Illegal Contract:
The term “Illegal Contract” appears to be a contradiction. Therefore, it is better to use the term
‘Illegal Agreement’ instead. It is an agreement in which either the object or consideration or
both are illegal as defined in Section 23 of the Act. Such an agreement is destitute of legal
effects.
Since an illegal agreement is wider in scope than a void agreement, it is right to say that “all
illegal agreements are void but all void agreements need not be illegal.” An illegal agreement is
void not only between the immediate parties but also renders illegal even the collateral
transactions. On the contrary, if the main agreement is void, the collateral transactions to it are
not affected. Money paid or property delivered under an illegal agreement is not recoverable.
But it need not be so in a void agreement.
(f) Unenforceable Contract
It is a contract which has all the essentials of a contract yet it is not enforceable in law because
of non- compliance of certain legally prescribed formalities such as writing, attestation,
registration, stamping, etc. After removal of these deficiencies, the contract can become
enforceable.
Example:
A makes an oral arbitration agreement with B. This agreement is unenforceable because an
arbitration agreement must mandatorily be made in writing.
2. On the Basis of Formation
(a) Express Contract:
A contract stating its terms in words—whether spoken or written, is said to be an express
contract. There is definite offer and acceptance in words demonstrating the conclusion of a
contract.
(b) Implied Contract
It is a contract which is reasonably inferred from the circumstances, conduct, or course of
dealings between the parties. For example a person who boards a public transport is considered
to have entered an implied contract. Similarly, where the parties continue to transact business
even after the expiry of the existing contract, it may be implied that the new contract is being
continued on the existing terms. It is implied in fact. A contract will not be implied if it would
result in inequity or harm
(c) Quasi Contract
It is not a contract in the strictest legal sense but it resembles a contract. In it, the law imposes
certain obligations on a person on the ground of equity, justice and good conscience. It is not
voluntarily made by the parties but still regarded to be a contract for the purpose of providing
legal remedy. Since the obligations in this category of contract are created by law, it is also
known as ‘implied in law contract’. The Contract Act has described this contract as ‘certain
relations resembling those created by contracts’. For example, where a person finds some goods
belonging to another, it is his quasi legal duty to restore them to the rightful owner.
3. On the Basis of Performance
(a) Executed Contract
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It is a contract in which both the contracting parties have performed their respective promises
and nothing remains to be done by either. Example of such a contract is a cash sale. The term is a
misnomer to some extent since the completion of performance by the parties signifies that the
contract does not exist anymore.
(b) Executory Contract
A contract in which something remains to be done by either both the parties or one of them.
Example:
A agreed to sell his car to B for Rs. 30,000. The car was to be delivered by the end of next month
while balance payment was to be made after 10 days of the delivery. It is an executory contract
as both parties have still to perform their respective obligations.
4. On the Basis of Initiation
(i) Unilateral Contract
Where a party initiates a promise without reciprocation from the other party. On the fulfillment
of conditions mentioned in the offer, the initiating party is irrevocably obliged to honour its
promise. Offers of reward fall into the category of unilateral contracts. Thus, the owner of a
missing dog who has given an advertisement to reward the finder of the missing dog, will be
obliged to give the award to the finder. Moreover, his promise will be irrevocable.
(ii) Bilateral Contract
It is a contract in which the offeror and offree mutually exchange promises with one another .
Such contracts are routine. These are made when we go the market to buy groceries, visit the
doctor for consultation, or borrow books from the library.
1.
2.
3.
4.
5.
6.
QUESTIONS
How does a contract differ from an agreement.
How is a proposal converted into a promise?
When is a contract taken to have been validly concluded?
Discuss the essential elements of a valid contract?
Distinguish between void and voidable contract.
Discuss the statement that every contract is an agreement but every agreement is not
a contract.
PROBLEMS
1. A agrees to sell to B, “my white horse for rupees five hundred or rupees one thousand”. Is the
agreement valid?
Ans. No, the agreement is not valid because the terms of the agreement are not certain. It is not
definite as to which of the two prices was to be accepted. The agreement is void for want of
certainty [Section 29]. The instant problem is based on illustration (f) to Section 29.
2. A father promises to pay Rs. 2000 per month as pocket money to his son. He however, does
not honour his promise. Can A’s son enforce this promise against him.
Ans. No. This is a social agreement. (Balfour vs. Balfour)
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