The
Law of Contracts is the basis of business law because the bulk of transactions
of the people engaged in trade, commerce and industry is based on contracts. In
India, the Law of Contracts is governed by the Indian Contract Act, 1872. The Act lays down the general
principles relating to formation, performance and enforceability of contracts
and the rules relating to certain special types of contracts like, Indemnity
and Guarantee; Bailment and Pledge, and Agency. The Transfer of Property Act;
The Sale of goods Act; The Indian Partnership Act; The negotiable Instruments
Act The Companies Act, though technically belonging to the Law of Contracts,
have been covered by separate enactments. However, the general principles of
the Contract Law are the basis for all such contracts as well.
The
Main features of the Law of Contract
are:
- The parties to the contract make
the law for themselves.
- The Act is not exhaustive since it
does not take into its purview all the relevant legislations.
- It does not override customs or
usages.
- The Law of Contracts is not the
whole law of agreements.
Indian Contract Act, 1872, Define -“contract" is an
agreement enforceable by law. The agreements not enforceable by law are not
contracts. An "agreement" means 'a promise or a set of promises'
forming consideration for each other. And a promise arises when a proposal is
accepted. By implication, an agreement is an accepted proposal. In other words,
an agreement consists of an 'offer' and its 'acceptance'.
An
"offer" is the starting point in the process of making an agreement.
Every agreement begins with one party making an offer to sell something or to
provide a service, etc. When one person who desires to create a legal
obligation, communicates to another his willingness to do or not to do a thing,
with a view to obtaining the consent of that other person towards such an act
or abstinence, the person is said to be making a proposal or offer.
An
agreement emerges from the acceptance of the offer. "Acceptance" is
thus, the second stage of completing a contract. An acceptance is the act of
manifestation by the offeree of his assent to the terms of the offer. It
signifies the offeree's willingness to be bound by the terms of the proposal
communicated to him. To be valid an acceptance must correspond exactly with the
terms of the offer, it must be unconditional and absolute and it must be
communicated to the offeror.
An
"agreement" is a contract if 'it is made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful
object, and is not expressly declared to be void'. The contract must be
definite and its purpose should be to create a legal relationship. The parties
to a contract must have the legal capacity to make it. According to the
Contract Act, " Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is of a sound
mind, and is not disqualified from contracting by any law to which he is
subject". Thus, minors; persons of unsound mind and Persons disqualified
from contracting by any law are incompetent to contract.
Types of Contract
Express Contract: A contract wherein both the offer and acceptance are made in
words, spoken or written.
Implied
Contract: A
contract which is inferred from the conduct of parties or course of dealings
between them.
Quasi
Contract: It is a
contract which does not arise by virtue of an agreement, express or implied,
but the law recognises the contract under certain special circumstances. These
contracts are based on the principle of equity, justice and good conscience.
The Act describes the obligations arising under these contracts as 'certain
relations resembling those created by contracts'. Some of the transactions that
will be considered as 'quasi-contract' under the law are:-
- When a person who is interested in
the payment of money which another person is bound by law to pay, and who
therefore pays it, is entitled to be reimbursed by the other person
- When a person finds goods
belonging to another person, it is his duty to restore them to the
rightful owner;
- A person to whom money is paid or
anything delivered, by mistake or under coercion, is liable to repay or
return it
- Where necessaries are supplied to
a person, who is incompetent to contract such as minors or to someone whom
he is legally bound to support, the supplier is entitled to recover the
price of the property of the incompetent person,etc.
Valid
Contract: A valid
contract is a 'contract which satisfies all the requirements of the Act'. Such
a contract creates rights in personam and is legally enforceable.
Void
Agreement: It 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. However, it is different from unlawful agreements which
are forbidden by the law. An illegal agreement must necessarily be void but a
void agreement need not be illegal.The following agreements that have been
declared void by the Contract Act:-
- Agreements by incompetent persons
- Agreements wherein consideration
and objects are unlawful
- Agreements in restraint of
marriage
- Agreements in restraint of trade
- Agreements in restraint of legal
proceedings
- Agreements the meaning of which
are uncertain,etc.
Void
Contract: A
contract which ceases to be enforceable by law becomes void. In other words, an
agreement may be enforceable initially and due to certain circumstances may
become void subsequently. Thus a contract is not void from its inception.Some
of such circumstances which makes a contract void are:-
- An agreement without lawful
consideration becomes void
- A contingent contract to do or not
to do something on the happening of an event becomes void when the event
becomes impossible
- When the party, whose consent is
not free, repudiates the contract,etc.
Voidable
Contract: A
voidable contract is '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'.
In such a contract, the consent of one of the parties is not free and the law
regards it as an aggrieved party. The aggrieved party has the option to either
affirm or rescind the contract within a reasonable time.The other party does
not have any such right. However,the aggrieved party is entitled to recover
from the other party the damages which it may have suffered but it must restore
the benefits received by it.
Contracts of Indemnity and Guarantee
A
contract of indemnity is one whereby a person promises to save the other from
loss caused to him by the conduct of the promisor himself or of any third
person.For example,a shareholder executes an indemnity bond favouring the
company thereby agreeing to indemnify the company for any loss caused as a
consequence of his own act.The person who gives the indemnity is called the
'indemnifier' and the person for whose protection it is given is called the
'indemnity-holder' or 'indemnified'. A contract of indemnity is restricted to
cover the loss caused by the promisor himself or by a third person.The loss
must be caused by some human agency.Loss arising from accidents like fire or
perils of the sea are not covered by a contract of indemnity.
A
contract of 'guarantee' is a contract,whether oral or written,to perform the
promise,or discharge the liability,of a third person in case of his default. A
contract of guarantee involves three persons,viz. a person who gives the
guarantee is called the 'surety'; the person in respect of whose default the
guarantee is given called the 'principal debtor'; and the person to whom the
guarantee is given is called the 'creditor'. A contract of guarantee is a
conditional promise by the surety that if the principal debtor defaults he
shall be liable to the creditor.
Difference between Indemnity and Guarantee:
- In a contract of indemnity there
are two parties i.e. indemnifier and indemnified. A contract of guarantee
involves three parties i.e. creditor, principal debtor and surety.
- An indemnity is for reimbursement
of a loss, while a guarantee is for security of the creditor.
- In a contract of indemnity the
liability of the indemnifier is primary and arises when the contingent
event occurs. In case of contract of guarantee the liability of surety is
secondary and arises when the principal debtor defaults.
- The indemnifier after performing
his part of the promise has no rights against the third party and he can
sue the third party only if there is an assignment in his favour. Whereas
in a contract of guarantee, the surety steps into the shoes of the
creditor on discharge of his liability, and may sue the principal debtor.
Contracts
of Bailment and Pledge
A
'bailment' is the delivery of goods by one person to another for some purpose
upon a contract that they shall, when the purpose is accomplished,be returned
or disposed of according to the directions of the person delivering them. The
person delivering the goods is called the 'bailor' and the person to whom the
goods are delivered is called the 'bailee'. The examples of a contract of
bailment are:- delivering a watch or radio for repair; leaving a car or scooter
at a parking stand; leaving luggage in a cloak room; delivering gold to a
goldsmith for making ornaments; leaving garments with a dry cleaner,etc. The
essence of bailment is the transfer of possession. The ownership remains with
the owner. There cannot be a bailment of immovable property.
A
'pledge' is a bailment of goods wherein the goods are delivered as a security
for payment of a debt or performance of a promise.The bailor is called the
'pledgor' or 'pawnor' and the bailee is called the 'pledgee' or 'pawnee'. Thus,
pledge is a special kind of bailment. Pledge can be made only of movable
properties. In order to make the pledge legally valid it is essential that the
pledgor has the legal right or title to retain the goods.
Difference
between Bailment and Pledge:
- Purpose: A pledge is made for a specific
purpose, while bailment can be made for any purpose.
- Property: In bailment, the bailee gets
only the possession of goods bailed. The ownership remains with the
bailor. In the case of pledge, the pledgee acquires a special property in
the goods pledged whereby he gets possession coupled with the power of
sale, on default.
- Right of sale : Bailee can exercise a lien on
the goods bailed. He has no right of sale. But in case of a pledge, the
pledge can sell the goods after due notice to pawner.
Contracts
of Agency
An
'Agent' is a person employed to do any act or to represent another in dealings
with third persons. The person who employs the agent and for whom such act is
done,or who is so represented,is called the 'principal'. The relation between
the agent and the principal is called 'Agency'. It is only when a person acts
as a representative of the other in the creation,modification or termination of
contractual obligations,between that order and third persons,that he is an
agent. The essence of a contract of agency is the agent's representative
capacity coupled with a power to affect the legal relations of the principal
with third persons.
Contracts
of agency are based on two important principles:
- Whatever a person can do
personally shall also be allowed to be done through an agent except in
case of contracts involving personal services such as painting, marriage,
singing, etc.
- He who does an act through a duly
authorised agent does it by himself i.e. the acts of the agent are
considered the acts of the principal.
