The Law of Contracts forms the foundation of modern commerce and personal relationships by providing a structured framework for creating, enforcing, and resolving agreements between individuals, organizations, and governments.
It establishes legally binding obligations, enabling parties to confidently exchange goods, services, or promises while protecting their rights.
Governed by the Indian Contract Act, 1872, the law defines essential elements such as offer, acceptance, and consideration, ensuring that all parties involved in a contract have a clear understanding of their duties and benefits.
General Features of Contracts
- Classification and Historical Development:
- Contracts are classified as void, voidable, and valid.
- Historical Development: The Indian Contract Act, 1872, is based on English common law principles but adapted to Indian conditions. For example, while the Doctrine of Consideration is central in English law, Indian law takes a more flexible approach (Section 2(d)).
- Formation of Contracts:
- Offer (Section 2(a)) and Acceptance (Section 2(b)): A contract is created when one party makes an offer, and the other accepts it.
- Example: In the case of Carlill v. Carbolic Smoke Ball Co. (1893), the company made an offer to the public and Mrs. Carlill accepted by using the smoke ball, leading to a valid contract.
- Consideration (Section 2(d)): Consideration is the price paid for the promise of the other party.
- Case Law: Chinnaya v. Ramaya (1882) – A person made a gift to her daughter on the condition that the daughter paid an annuity to a third party. Even though the third party was not part of the original contract, it was held enforceable since consideration had passed.
- Privity of Contract: Only parties involved in a contract can sue or be sued.
- Case Law: Dunlop Pneumatic Tyre Co. v. Selfridge & Co. Ltd. (1915) – Dunlop couldn’t sue Selfridge as there was no privity of contract between them.
- Offer (Section 2(a)) and Acceptance (Section 2(b)): A contract is created when one party makes an offer, and the other accepts it.
- Charitable Subscriptions:
- Case Law: Kedar Nath v. Gorie Mohammad (1886) – A promise made for a charitable purpose, like building a town hall, was enforceable as the charity incurred liability based on the promise.
- Doctrine of Accord and Satisfaction: If parties agree to settle a contract differently from the original terms, the original contract is discharged.
- Example: A owes B ₹50,000. If B agrees to accept ₹30,000 in full settlement, this is accord and satisfaction.
Capacity of Parties
- Minority:
- Section 11 of the Indian Contract Act specifies that minors (under 18) cannot enter into a valid contract.
- Case Law: Mohori Bibee v. Dharmodas Ghose (1903) – A minor misrepresented his age and took a loan. The court held that the contract was void ab initio (from the beginning) because a minor cannot enter into contracts.
- Mental Incapacity and Drunkenness:
- Section 12 states that a person of unsound mind or drunk at the time of contracting cannot form a valid contract.
- Example: A contract entered into by a person who was drunk to the point of being unable to understand the consequences will be void.
- Invalidating Factors:
- Mistake (Sections 20-22):
- Case Law: Bell v. Lever Brothers Ltd. (1932) – Both parties were mistaken about a fact essential to the contract, and the contract was void.
- Coercion (Section 15):
- Case Law: Chikkam Ammiraju v. Chikkam Seshayya (1912) – A threat to commit suicide was considered coercion under Section 15.
- Undue Influence (Section 16):
- Case Law: Mannoj Kumar v. Pratibha Rani (1986) – The court found that one party had used its dominant position to influence the other, making the contract voidable.
- Fraud and Misrepresentation (Sections 17-18):
- Case Law: Derry v. Peek (1889) – Fraud was defined as a false representation made knowingly, without belief in its truth, or recklessly.
- Mistake (Sections 20-22):
Void Agreements and Voidable Contracts
- Void Agreements:
- Wagering Agreements (Section 30): These are void in India, except in some states where betting on horse racing is legal.
- Example: Betting on cricket matches would be a void agreement.
- Wagering Agreements (Section 30): These are void in India, except in some states where betting on horse racing is legal.
- Contingent Contracts (Section 31):
- A contract dependent on the occurrence of a future uncertain event.
- Case Law: Fateh Chand v. Balkishan Das (1963) – The court upheld the concept that certain contracts could be contingent on future events.
- Performance of Contracts (Sections 37-55):
- Reciprocal Promises (Section 51): When each party to a contract makes a promise, the performance by one depends on the performance by the other.
- Case Law: Mackinnon Mackenzie & Co. Ltd. v. Kendal Ltd. (1967) – The court interpreted reciprocal promises in terms of the performance of obligations.
Breach and Impossibility
- Breach of Contract:
- Anticipatory Breach: When one party refuses to perform their obligations before the performance is due (Section 39).
- Example: If A hires B for a concert, and B declares he won’t show up before the event, A can treat this as a breach.
- Anticipatory Breach: When one party refuses to perform their obligations before the performance is due (Section 39).
- Impossibility of Performance (Doctrine of Frustration) (Section 56):
- When unforeseen events make it impossible to fulfill the contract, it is void.
- Case Law: Satyabrata Ghose v. Mugneeram Bangur & Co. (1954) – The court held that the doctrine of frustration applied to situations beyond the control of the parties, such as war or natural disasters.
- Damages:
- Rule in Hadley v. Baxendale (1854): Damages are recoverable if they arise naturally from the breach or were within the contemplation of both parties at the time of contract.
- Example: If a mill owner’s machinery part is delayed, leading to loss of profits, only foreseeable losses can be claimed.
- Penalty and Liquidated Damages (Section 74): Courts can award reasonable compensation even if the contract specifies a penalty.
Quasi-Contracts and Specific Relief
- Quasi-Contracts (Sections 68-72): These are not real contracts but obligations imposed by law.
- Quantum Meruit: When services are rendered without a contract, the party is entitled to reasonable compensation.
- Example: A contractor does 80% of the work before the contract is terminated. He can claim payment for the work done under quantum meruit.
- Specific Relief:
- Specific Performance (Specific Relief Act, 1963): When damages are inadequate, the court may order specific performance.
- Case Law: Ardeshir H. Mama v. Flora Sassoon (1928) – The court ordered specific performance because monetary damages would not compensate for the unique property involved.
- Rescission, Rectification, and Injunction:
- Rescission allows a contract to be canceled when a party fails to perform or when fraud/misrepresentation is involved.
- Case Law: Shyam Singh v. Daryao Singh (2003) – The court rescinded a contract due to fraud.
- Injunctions are issued to prevent parties from breaching a contract.
- Case Law: Motorola Inc. v. UOI (2004) – An injunction was granted to prevent a breach of an intellectual property contract.
Conclusion
Contracts are pivotal in daily transactions, from purchasing goods to complex business deals, and they help prevent disputes by ensuring mutual consent and equitable terms.
