Business Law (Contract) Module 2
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munzarinBusiness Law (Contract) Module 2
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The Law of Contract deals with agreements which can be enforced through courts of law. The
Law of Contract is the most important part of commercial law because every commercial
transaction starts from an agreement between two or more persons.
According to Salmond a contract is "an agreement creating and defining obligations between
the parties." According to Sir William Anson, "A contract is an agreement enforceable at law
made between two or more persons, by which rights are acquired by one or more to acts or
forbearances on the part of the other or others.
The object of the Law of Contract is to introduce definiteness in commercial and other
transactions. How this is done can be illustrated by an example. X enters into a contract to
deliver 10 tons of coal of Y on a certain date. Since such a contract is enforceable by the courts,
Y can plan his activities on the basis of getting the coal on the fixed date. If the contract is
broken, y will get damages from the court and will not suffer any loss.
Sir William Anson observes as follows : "As the law relating to property had its origin in the
attempt to ensure that what a nan has lawfully acquired he shall retain, so 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."
Application
The Contract Act of 1872 lays down certain general rules regarding contracts. The Act is not
exhaustive. There are other Acts relating to particular types of contracts. e.g. the Negotiable
Instruments Act, the Transfer of Property Act, etc.
THE ESSENTIAL ELEMENTS OF CONTRACT
Definition of Contract
Section ,2(h) of the Contract Act provides that, "An Agreement enforceable by law is a
contract", Therefore in a contract there must be (1) an agreement and (2) the agreement must
be enforceable by law.
An agreement comes into existence whenever one or more persons promise to one or others,
to do or not to do something. "Every promise and every set of promises, forming the
consideration for each other, is an agreement-Sec. 2(e). Some agreements cannot be enforced
through the courts of law e.g. agreement to play cards or go to a cinema. An agreement, which
can be enforced through the courts of law, is called a contract.
The Essential Elements of a Contract
An agreement becomes enforceable by law when it fulfils certain conditions. These conditions,
which may be called the Essential Elements of a Contract, are explained below:
1. Offer and Acceptance: There must be a lawful offer by one party and a lawful acceptance of
the offer by the other party or parties. The adjective "lawful" implies that the offer and
acceptance must conform to the rules laid down in the Indian Contract Act regarding offer and
acceptance.
2. lntention to create legal Relationship: There must be an intention (among the parties) that
the agreement shall result in or create legal relations. An agreement to dine at a friend's house
is not an agreement intended to create legal relations and is not a contract. But an agreement
to buy and sell goods and an agreement to marry, are agreements intended to create some
legal relationship and are therefore contracts, provided the other essential elements are
present.
3. Lawful Consideration: Subject to certain exceptions, an agreement is legally enforceable only
when each of the parties to it gives something and gets something. An agreement to do
something for nothing is usually not enforceable by law. The something given or obtained is
called consideration.
4. Capacity of Parties: The parties to an agreement must be legally capable of entering into an
agreement, otherwise it cannot be enforced by a court of law. Want of capacity arises from
minority, lunacy, idiocy, drunkenness, and similar other factors. If any of the parties to the
agreement suffers from any such disability, the agreement is not enforceable by law, except in
some special cases.
5. Free Consent: In order to be enforceable, an agreement must be based on the free consent
of all the parties. There is absence of genuine consent if the agreement is induced by coercion,
undue influence, mistake. misrepresentation, and fraud. A person guilty of coercion, undue
influence etc. cannot enforce any agreement. The other party (the aggrieved party) can
enforce. Subject to rules laid down in the Act.
6. Legality of the Object: The object for which the agreement has been entered into must not
be illegal, or opposed to public policy.
7. Certainty: The agreement must not be vague. It must be possible to ascertain the meaning of
the agreement, for otherwise it cannot be enforced.
8. Possibility of Performance: The agreement must be capable of being performed. A promise
to do an impossible thing cannot be enforced.
9. Void Agreements: Under Contract Act there are five categories of agreements which are
expressly declared to be void. They are:
Agreement in restraint to marriage. (Sec. 26)
Agreement in restraint of trade. (See. 27)
Agreement in restraint of proceedings. (Sec. 28)
Agreements having uncertain meaning. (Sec. 29)
Wagering agreement. (Sec. 30)
10. Writing, Registration and Legal Formalities: An oral contract is a perfectly good contract,
except in those cases where writing and/or registration is required by some statute In India
writing is required in cases of lease, gift, sale and mortgage of immovable property : negotiable
instrument, memorandum and articles of association of a company etc.(Registration is
compulsory in cases of documents containing within the purview of Section 17 of the
Registration Act) eg, mortgage deeds covering immovable property. The terms of an oral
contact arc sometimes difficult to prove. Therefore important agreements are usually entered
into in writing even in cases where writing is not compulsory.
Conclusion
The elements mentioned above must all be present. If any one of them is absent, the
agreement does not become a contract. An agreement which fulfils all the essential elements is
enforceable by law and is called contract. From this it follows that, every contract is an
agreement but all agreements are not contracts.
Every contract gives rise to certain local obligations or duties on the part of the contracting
parties. The legal obligations are enforced by the courts.
