The Indian Contract Act, which became operative on September 1, 1872, is among the country’s earliest commercial laws. This law offers rules to aid in the controlled and structured formulation and execution of contracts. The basis for the process of action to be taken if any disputes arise from the contracts is provided by these rules and regulations. Except for Jammu & Kashmir, the entire nation is covered by the 266 parts of the act.
Geeky Takeaways:
- Indian Contract Act, 1872 states that an agreement can only be formed when there is an offer from one party and an acceptance from the other party.
- As per the provisions of the act, people signing the contract must follow the law.
- The act further lays down provisions mentioning whether there is free consent between two parties.
- This provision mentions every party who enters into a contract, must be competent to understand its implications and consequences, and must agree to follow them.
What is the Indian Contract Act, 1872?
The Indian Contract Act, 1872 is a detailed set of laws that regulates all transactions between businesses in India. In addition to providing remedies for violation of contract, the act establishes the guidelines and standards that must be followed when entering into a contract. Being among the oldest laws in India, it has gone through multiple amendments throughout the years to accommodate shifting financial circumstances. It is relevant to every state in India. It establishes the conditions under which a contract’s parties’ promises are enforceable.
According to Section 2(h) of the Indian Contract Act, 1872 “A contract is an agreement enforceable by law.”
What is a Contract under the Indian Contract Act, 1872?
A contract is an agreement that is legally enforceable. Unless and until it is made legally enforceable, an agreement cannot be referred to as a contract. An agreement that is enforceable by law and acknowledged by both parties is called a contract. It imposes on all the parties concerned certain rights as well as obligations that they must carry out. While all agreements are not contracts, a contract is certainly an agreement.
Essential Elements of a Valid Contract
A contract must meet the requirements outlined in Section 10 of the Indian Contract Act in addition to being legally enforceable:
1. Two Parties: In order for a contract to be enforceable, there must be a minimum of two parties involved. The party making the offer; i.e., the offeror, and the party to whom it has been offered and who must accept it; i.e., the acceptor.
2. Legal Obligation: A contract must be entered into with the goal of creating a legal obligation on the part of the parties. Since social agreements and duties do not impose any legal obligations on either party, they are not regarded as contracts.
3. Free Consent: Any agreement between parties must have the free consent of those parties. This ensures that the parties to the contract must agree on the same thing in the same sense. Free consent implies no influence of coercion, undue influence, fraud, misrepresentation and mistake.
4. Competency: Before entering into a contract, the parties must be able to act lawfully. Section 11 of the Indian Contract Act states that the following individuals are deemed competent to enter into a contract; those who are of sound mind, of the legal age of majority, and not legally prohibited from entering into a contract (this includes alien enemies, foreign nationals, and convicts).
5. Lawful Consideration: According to the “quid pro quo” principle, the contract must include consideration, or something in exchange. A valuable consideration is a requirement for a contract to be deemed legitimate. Consideration implies when both parties agree to do or not to do something.
6. Legal Factor: Anything that is not prohibited by law is considered a legal factor according to Section 23 of the Contract Act. Considering intention, it must be in sync with creating legal relations as it is highly required to accept the legal consequence of entering into an agreement.
7. Specific Terms: The meaning of a legally binding contract must be clear. For example, A consents to pay a fair price to purchase B’s home. The exact price that A plans to pay B to purchase his house must be specified in a legally binding contract.
8. Possibility of Performance: An agreement is only deemed lawful if it excludes the performance of an impractical act. For example, A and B agree on a ten-thousand-rupee contract whereby A will revive B’s father. The contract is invalid because it requires the completion of an impractical act.
The subject of voidable contracts and void agreements is covered in Chapter 2 of the Indian Contract Act, 1872. The following list categorizes contracts into five different categories according to their enforceability or validity:
1. Valid Contracts:
A legally binding and enforceable agreement is referred to as a valid contract, as covered in the “Essentials of a Contract” subject. It has to meet every condition specified in a contract. Valid Contract is defined as a legally binding agreement between two or more parties that meets specific criteria under contract law. To be considered valid, a contract must satisfy four essential elements: offer, acceptance, consideration, and the intention to create legal relations.
For example, Alice offers to sell her 2018 Toyota Camry for ₹15,000. Bob accepts the offer, agreeing to pay ₹15,000 for the car. As a result, this is a valid contract.
2. Void Contract:
A contract that is declared void under Section 2(j) of the act is defined as one that is no longer enforceable under the law. This declares any contracts that cannot be upheld in court void.
For example, A agrees to repay B ₹10,000 after five years in exchange for ₹8,000 loan. A passes away from accidental causes after four years. The contract is null and void since the specified terms are unenforceable.
3. Voidable Contract:
These kinds of contracts are defined under Section 2(i) of the act. A voidable agreement is one that can legally be enforced at the request of one or more of the parties involved, but not at the request of the other or others.
For example, A agrees to offer B ₹10,000 in return for an antique chair. This would be a legitimate agreement, the only problem is that person B is a minor and cannot legally enter into a contract. Therefore, this contract is enforceable from A’s perspective and voidable from B’s perspective. B may accept the terms when he becomes a major or he may not. This makes the contract voidable.
4. Illegal Agreement:
A court will declare an agreement unlawful if it causes any or all of the parties to disobey the law or fail to abide by social norms. Another illegal contract is one that goes against public policy.
For example, suppose A consents to sell drugs to B. This contract is unlawful even if it satisfies all requirements for being an authorized contract.
5. Unenforceable Contracts:
Unenforceable Contract is defined as a legal agreement that, while it may initially appear valid, cannot be enforced in a court of law due to specific legal deficiencies or violations. This typically occurs when a contract fails to meet certain legal requirements or standards.
For example, A agrees to sell B 100 kg of rice for a total of ₹10,000. However, all of the rice crops were lost in the states due to a massive flood. As of right now, neither party may use this contract as force against the other.
Performance of Contract means fulfilling the legal obligations respectively created under the contract by both the promisor and the promisee. Once the parties have entered into a contract, the next logical thing is to perform the respective parts of the promises that were agreed upon at the time of entering the contract. A contract is an agreement that is enforceable by law, creates a legal obligation on both parties to the contract, and exists until the contract is discharged. When the parties perform their part of the obligation, the contract gets fulfilled and discharged by performance.
Discharge of a Contract
The Discharge of a Contract takes place when none of the parties to the contract is left liable under it, and the objective or responsibilities of the contract have been completed. Discharge of contract can also be called Termination of the Contractual Relationship between the parties to the contract and also the rights and obligations of the parties which are created at the time the contract is made come to an end. There are several ways by which a contract can be terminated; i.e., either positively, via performance, or negatively, through breach
Breach of Contracts
When one party to a legally binding contract neglects to fulfil their end of the bargain, that party has committed a breach of contract. A written contract or an informal contract may both experience a breach of terms. If there has been a breach of contract, the parties may choose to settle the dispute in court or among themselves. Different kinds of contract breaches exist, such as actual or anticipatory violations and minor or material breaches. A violation of a contract hardly ever results in additional financial compensation and is not regarded as a crime or even a violation.
Occasionally, the original contract specifies how a breach of contract is to be handled. For example, a contract might provide that the defaulter will have to pay a $25 late charge in addition to the amount they missed. The parties may resolve the dispute among themselves if the contract does not specify the consequences for a particular violation. This could result in a new contract, an adjudication, or some other kind of resolution.
Remedies for the Breach of Contract
The following are the different remedies available in the event of a contract breach:
1. Recession: In the event that one party breaches a contract, the other party may cancel the agreement and refuse to have the other party fulfil his or her duties. In accordance with Section 65 of the Indian Contract Act, the party who rescinds the agreement is obligated to reimburse the other party for any advantages received. Furthermore, Section 75 stipulates that the party who rescinds the agreement is qualified to get reimbursement for such a recession in damages and/or money.
2. Damages: According to Section 73, the person who has suffered because the other party has broken contracts is entitled to reimbursement for any losses or damages incurred in the regular course of business.
3. Specific Performance: It means that the one who violates the agreement will actually have to fulfil his obligations. The parties may be required by the courts to abide by the agreement under specific circumstances.
4. Injunction: For a negative contract, an injunction functions similarly to a decree for particular performance. A court order prohibiting someone from carrying out a certain act is known as an injunction.
5. Quantum Meruit: The direct translation of quantum meruit is “as much is earned.” One party may be entitled to a quantum meruit if the other party keeps him from completing his performance under the terms of the agreement.
Frequently Asked Questions (FAQs)
1. What is Offer under Indian Contract Act, 1872?
Answer:
An offer is defined as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence,” in accordance with Section 2(a) of the Indian Contract Act 1872.
2. What is the essence of the Indian Contract Act, 1872?
Answer:
The Indian Contract Act, 1872, specifically states in Section 55 that “time as the essence of a contract” applies to contracts where the parties intended for the contract to be voidable and something is promised to be done at a certain time but is not performed at that time.
3. What is the scope of the Indian Contract Act, 1872?
Answer:
The concepts and regulations governing contracts are defined and outlined in the Indian Contract Act of 1872. It covers a number of requirements for a legally binding agreement, including offer and acceptance, consideration, free consent, legitimate object, and contracting parties’ capacity.
4. Who wrote Indian Contract Act, 1872?
Answer:
The third Indian Law Commission in England drafted the original Indian Contract Act in 1861, which is still in effect today. The Indian Contract Bill attempted to establish the laws pertaining to bailment, agency, partnership, indemnity, guarantee, and sales of moveable property.
5. What is the nature and objective of Indian Contract Act, 1872?
Answer:
Members are legally obligated by contracts, which also place legal restrictions on their behaviour. In this way, a person’s relationship with another person becomes more official and legally binding, and anyone who violates the terms of the contract faces legal repercussions for their actions.
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