Law of Contracts: Definition, Meaning and Nature

 

Definition of Contract

A contract is an agreement between two or more persons with give their assent to be enforceable by law. It is constituted by the acceptance of the acceptor. When one person made an offer to another person to do something or abstain from doing something. If the person on it, he accept the promise hence agreement comes into existence. 

Section 2(h) of the Indian Contract Act, 1872 defines what is contract. Which describe as follows:-

"An agreement enforceable by law is a contract"

Hence, Contract includes two important terms:

(1) An Agreement 

(2) Enforceable by law

Agreement which is enforceable by law creates legal obligation between the parties. Means if anyone of the parties are not following the terms and conditions of the contract then the other party can move to the court for enforcing it.

Illustration - An agreement between A and B to buy a house from A at Rs.10 Lakh. B has to pay this amount to A. If agreement become enforceable by law, It will considered a valid contract.

It is important to have legal obligation in a valid contract but it must be arise out of an agreement. These both elements are discussed below:

#1. Agreement

According to the Indian Contract Act, 1872, the term "agreement" is defined under Section 2(e). "Every promise and every set of promises, forming the consideration for each other" is an agreement. In simpler language, an agreement is a mutual understanding between the parties where each party makes reciprocal promises.

Section 2(b) talks about what is promise, it says "when a proposal accepted, it becomes promise". hence an agreement is an accepted proposal. when a person made an offer to another person and the proposal is accepted becomes promise. Thus, agreement includes an offer which going to be accepted by other party.

Example: A makes an offer to sell his house to B at Rs 20 lakh. B accepts the proposal, Now it becomes promise. This promise becomes the agreement between the parties (A and B).

As follows, there must be two or more persons required to enter into an agreement. Single person can not make agreement. 

Key elements of an agreement include:-

1. Promise: 

A proposal, when accepted becomes promise. An agreement involves one party make a proposal and other party accept it to make a promise. It is lays down under section 2(b) of the ICA, 1872.

2. Consideration: 

There must be something of value which is going to exchanged between the parties. In simple words, consideration means something in return as part of the agreement. It is essential for the enforceability of the agreement without this the agreement is said to be void.

3. Consensus ad idem: 

It is one of the essential condition or making a valid agreement which means "identity of minds". It is manifest that parties are agreed about the same thing in the same sense. Consequently, an agreement is said to be performed when both the parties are coincide to agree on same things in the same sense or when they are ad idem.

An agreement can be Express or Implied. Express consist oral and written form of the promise whereas implied talks about the conduct of the parties to make an offer. 

 

#2. Legal Obligation

There must be legal obligation should be present to make a complete agreement. It means a duty which is enforceable by law. By this, parties binding to follow the contract and imposing necessity of doing or to abstain from doing some act or acts.

If an agreement does not create legal duty then it will not considered as a contract which is enforceable by law. Hence, agreement is wider in sense than contract. Agreement creating social obligation is not sufficient to make a contract.

Example: X invited Y for dinner at his home. Y accepted the invitation. The obligation of X to prepare food and Y to come for dinner is a social obligation not legal obligation. So, this can not be enforceable by law. If any party failed to perform his part that no one can file a suit to perform it.

In cases of business agreement, it is generally believe that the parties are intended to create legal obligation.

Example: Agreement to sell 10kg tomato at rupees of 120. It will considered a contract because it give rise to legal obligation. Thus, it can be enforce by law. It any of the parties breach the contract then other party can go to the court to perform the contract.

All contracts are agreements but all agreements are not contracts. Only those agreements are contract which create legal obligation between the parties. What agreements are contracts? it is defined under section 10 of the Indian Contract Act, 1872. Which says that all agreements are contracts which is made by:-

1. Free Consent

2. Competent to parties

3. Lawful object

4. Lawful consideration and

5. Not hereby expressly declare to be void

On other hand, It is important to see that all legal obligation are not comes under the category of contract. Only the legal obligation becomes contract which arise out of agreement. The obligations which imposed under the general law of the land and does not arise out of agreement, will not considered as contract. These obligations are includes:-

1. Judgement of court

2. tort or civil wrong

3. quasi-contract

4. status obligation

Obligations that are imposed by the judgement of the court and entered in court records do not have their source in agreements. A tortious liability is imposed by the general rule of the land.