Introduction: Contract | Law of Contracts - CLAT PG PDF Download

Special Types of Contracts

The Act as enacted originally had 266 Sections, it had wide scope and

•  General Principles of Law of Contract  — Sections 01 to 75
•  Contract relating to Sale of Goods  — Sections 76 to 123
•  Special Contracts  - Indemnity, Guarantee, Bailment & Pledge and Agency — Sections 124 to 238
•  Contracts relating to Partnership  — Sections 239 to 266

Previously, the Indian Contract Act, 1872 contained provisions relating to Sale of Goods (Movable Property) and Partnership. But now these two provisions have been removed from the Act and are placed in two separate Acts known as the Sale of Goods Act, 1930 and the Indian Partnership Act, 1932. So, at present, the Indian Contract Act includes the General Principles of Contract and Special Contracts only.

The Indian Contract Act brings within its ambit the contractual rights that have been granted to the citizens of India. It endows rights, duties and obligations on the contracting parties to help them to successfully conclude business- from everyday life transactions to evidencing the businesses of multi-national companies. The Indian Contract Act, 1872 was enacted on 25th April, 1872 [Act 9 of 18721 and subsequently came into force on the first day of September 1872. The essence of the India Contract Act has been modelled on that of the English Common Law. The extent of modifications made in the Act as per the Indian conditions and its adaptability to the Indian economy is an important area of research. In this regard it is pertinent to note that since the enactment of the Act there have been no amendments and thus the Law that was made in 1872 still stands good.

 Historical Context of Contracts in India 

During the entire ancient and medieval periods of human history in India, there was no general code covering contracts. Principles were thus derived from numerous references- the sources of Hindu law, namely the Vedas, the Dhramshatras, Smritis, and the Shrutis give a vivid description of the law similar to contracts in those times. The rules governing contracts form a part of the law called Vyavaharmayukha. During the Muslim rule in India, all matters relating to contract were governed under the Mohammedan Law of Contract.

 Impact of English Law 

• The English common law and statute law in force at that time came into India by the Charters of the eighteenth century which established the Courts of justice in the three presidency towns of Calcutta, Madras and Bombay, so far it was applicable to Indian circumstances.
• The English law of contract, it has been, was evolved and developed within the framework of assumption.
• By the Charter of 1661 and 1726, the English law has deep impact on the Indian legal system.
• Prior to the enactment of the Indian Contract Act, 1872, The English Law is applied into the Presidency towns of Madras, Bombay and Calcutta by the Charter granted in 1726 by King George I to the East India Company.

It is a matter of controversy whether English law was introduced by the Charter of 1726 by which the statutes up to that date would be enforced in India with the same amount of force as in England, or subsequently by the Charters of 1753-74 so as to embrace statutes up to 1774. Anyways, since there was an indiscriminate application of English law to Hindus and Mahommedans within the jurisdiction of the Supreme Court it led to many inconveniences. To obviate this, the Statute of 1781 empowered the Supreme Court at Calcutta and the Statute of 1797 empowered the Courts of Madras and Bombay (recorders courts), to determine all actions and suits of contractual nature against the natives of the said towns in the case of Mahommedans by the laws and the usages of the Mahommedans and in the case of Hindus (called 'Code of Gentoo Laws' in the Statutes) by the laws and usages of the Hindus, and where only one of the parties was Mahommedan or Hindus, by the laws and the usages of the defendant.

 Act of Settlement 

• In 1781, The Act of Settlement was passed by the British government which says that in the matters of inheritance and succession, contracts dealing with parties in the case of Mohammedans and Hindus, their respective laws were considered.
• In cases where only one of the parties is a Mohammedan or Hindu, the laws and usages of the defendant are considered.
• This rule was applied in the Presidency Towns.
• In places outside the presidency towns, judgment was decided according to the justice, equity and good conscience and this continued until the enactment of the Indian contract Act.

Scope of the Act 

•  Act Not Retrospective:  The provisions of this Act do not apply to contracts made before the Act came into force.
•  Principles of Construction of Contracts:  A person is entitled to enforce contractual rights only in a reasonable manner. Courts will not support attempts to enforce these rights unreasonably.
• In commercial transactions, courts should avoid undermining the effectiveness of documents parties have acted upon by rigidly applying construction rules like the 'subject to contract rule.' These rules should serve as guides, not strict mandates.
• Strict adherence to such rules should not lead to artificial or unrealistic outcomes in specific cases.

The Rights Available Under the Indian Contract Act 

 Right in Personam 

• The Indian Contract Act, 1872 grants  Right in Personam  to parties bound by promises in a contract.
• This type of right allows parties to enforce their contractual rights only against each other, not against the whole world.

 Example of Right in Personam 

• Consider a scenario where  X and Y  enter into a contract for Y to deliver ten books to X on a specified date.
• If Y fails to deliver the books to X, X can only sue Y for the breach of contract.
• In this case, X cannot sue anyone else in the world; only Y is held accountable.
• The contract between X and Y is a private agreement that concerns only them.

Classification of Contract 

A contract can be either oral or written. However, if the law mandates a specific form for a particular contract, it must adhere to all legal formalities regarding writing, registration, and attestation. Generally, contracts are classified based on the following criteria:

 1. Enforceability 

•  Valid Contracts:  Contracts that are legally enforceable and meet all the necessary criteria.
•  Voidable Contracts:  Contracts that are valid at the option of one or more parties. For example, a contract entered into under duress can be voided by the aggrieved party.
•  Void Contracts or Agreements:  Contracts that are not enforceable by law from the beginning. For instance, a contract to perform an illegal act is void.
•  Illegal Agreements or Contracts:  Contracts that involve illegal activities and are therefore unenforceable. For example, a contract for drug trafficking is illegal.
•  Unenforceable Agreements:  Contracts that cannot be enforced due to certain legal reasons, even though they may be valid in other respects.

 2. Mode of Formation 

•  Express Contract:  A contract where the terms are explicitly stated, either orally or in writing. For example, a written agreement to sell a car.
•  Implied Contract:  A contract where the terms are inferred from the actions or conduct of the parties. For instance, ordering food at a restaurant implies a contract to pay for the meal.
•  Quasi-Contracts:  Contracts that are imposed by law to prevent unjust enrichment, even in the absence of an agreement. For example, a doctor providing emergency medical care to an unconscious person is entitled to payment.

 3. Performance 

•  Executed:  Contracts that have been fully performed by all parties involved. For example, a contract for the sale of goods where payment and delivery have been completed.
•  Executory:  Contracts that are yet to be fully performed by one or more parties. For instance, a lease agreement where the tenant is yet to occupy the premises.
•  Unilateral:  Contracts where one party makes a promise in exchange for an act by another party. For example, a reward offer for finding a lost pet.
•  Bilateral:  Contracts where both parties make mutual promises to each other. For example, a sales contract where the seller agrees to deliver goods and the buyer agrees to pay for them.

Definition of a Contract 

• According to Section 2(h) of the Indian Contract Act, a contract is defined as "an agreement enforceable by law."
• This means that a contract consists of an agreement that is backed by legal enforceability.
• Law, in this context, refers to a set of rules that govern behavior and relationships in a civilized society.
• In an uncivilized society, the concept of law may not be necessary. It is important to be aware of the law that applies to you because "ignorance of the law is no excuse."

 Key Perspectives on Contracts 

• Sir Frederick Pollock describes a contract as "a promise or set of promises which the law will enforce."
• According to Halsbury, "A Contract is an agreement between two or more persons intended to be enforceable at law, formed by the acceptance of an offer by one party to do or abstain from doing some act."
• Salmond defines a contract as "an agreement creating and defining obligations between the parties."

 Importance of the Law of Contract 

• The Law of Contract is a crucial branch of Mercantile or Commercial Law and serves as the foundation for modern business.
• It impacts everyone, particularly in trade, commerce, and industry, and is considered the bedrock of the civilized world.

 Overview of the Indian Contract Act 

• The Indian Contract Act is divided into two main parts:
•  General Principles (Sections 1-75):  This section covers the general principles of contract law applicable to all contracts, regardless of their nature.
•  Special Kinds of Contracts (Sections 124-238):  This section deals with specific types of contracts, including contracts of Indemnity and Guarantee, Bailment, Pledge, and Agency.

Specific Contracts