Law of Contracts: Meaning, Nature and Important Definitions | Law Optional Notes for UPSC PDF Download

Contract under Indian Contract Act

• Definition of Contract: An agreement enforceable by law is termed as a contract.
• Key Points for Contract Formation: A contract comprises an agreement and enforceability.
• Illustration: An example includes an agreement where X agrees to build a house for Y in exchange for Rs. 10 Lakhs, highlighting the enforceability aspect.

Understanding Agreement under the Indian Contract Act

• Definition of Agreement: According to Section 2(e) of the Indian Contract Act, an agreement is described as "Every promise and every set of promises, forming the consideration for each other, is an agreement."
• Essential Elements: For the formation of an agreement, two key elements are necessary: Promise and Consideration.
• Key Case Study - Balfour Vs Balfour[1919] 2 KB 571: In this particular case, Mr. and Mrs. Balfour, a married couple residing in Sri Lanka, encountered a situation where Mrs. Balfour's health deteriorated due to rheumatic arthritis while they were vacationing in England. The doctor recommended that she stay in England for health reasons. Before Mr. Balfour returned to Sri Lanka, he promised to send her £30 per month to support her. However, as time passed, the couple grew apart and eventually separated. The court ruled that Mr. Balfour's promise did not constitute a legally binding contract because there was no intention to create a legal relationship from either party's side.

Types of Agreements

• Valid Agreements: These are agreements that can be enforced by law, meaning they hold legal validity and are binding on the parties involved.
• Voidable Agreements: This type of agreement is enforceable by law, but one of the parties has the option to void or enforce it. For example, if one party was coerced into the agreement, they have the choice to uphold or negate it.
• Void Agreements: These agreements are not enforceable by law at all. They lack any legal effect from the outset, such as an agreement to commit an illegal act.
• Illegal Agreements: Such agreements are against the law and therefore are not enforceable by legal means. For instance, a contract to conduct illegal activities would fall under this category.
• Unenforceable Agreements: An unenforceable agreement is one that cannot be upheld in court due to technical issues, such as a lack of written documentation or required stamps. Despite being valid in essence, these agreements cannot be enforced legally due to formalities.

Promise under Indian Contract Act

• Express Promise: When an offer or acceptance is made in words, it is an express promise.
• Implied Promise: When a promise is made other than in words, it is an implied promise.
• Reciprocal Promise: Promises that are the consideration for each other are known as reciprocal promises.
• Alternative Promise: An alternative promise gives the choice of one of two things.

Consideration under Indian Contract Act

According to the Indian Contract Act, consideration is essential for a valid contract. It can be defined as something of value given by one party to the other in return for the promise.
Here are some key points:

• Consideration is necessary for the validity of a contract.
• It can be in the form of a promise to do something or to refrain from doing something.
• Consideration must be real and lawful.
• It should move at the desire of the promisor.
• Consideration can be past, present, or future.

Definition of Consideration under Section 2(d) of the Act

• Consideration is defined as an act done at the desire of the promisor.
• When the promisee or any other person acts upon the desire of the promisor, it constitutes valid consideration.

Case Example: Kedarnath Bhattacharji Vs Gorie Mahomed (1887) ILR 14 Cal 64

• In this case, a Town Hall construction project in Howrah faced a cost increase from Rs. 20,000 to Rs. 40,000.
• The defendant promised to contribute Rs. 100 towards the construction but later refused to pay.
• The Plaintiff sued for the amount, and the Court ruled that the defendant was bound by his promise regardless of personal benefit.
• It emphasized that any act done at the promisor's request fulfills consideration in a contract.

Types of Contracts

• Adhesion Contracts: These contracts are created by the stronger party, giving the other party a take-it-or-leave-it choice. For instance, agreements often seen in software installations where users must accept the terms to proceed.
• Aleatory Contracts: These contracts are based on an unforeseen event, like insurance policies covering accidents or natural disasters. Both parties share risk, such as in fire or car insurance.
• Bilateral and Unilateral Contracts:
  • Bilateral Contracts: Involve two parties mutually obligated to perform or abstain from actions. This is like a two-way promise where both parties have responsibilities.
  • Unilateral Contracts: Involves a promise from one party only. For example, rewards for finding lost items where only the finder is bound by the promise.
• Express Contracts: These contracts have clear terms either in writing or verbally, leaving no room for ambiguity.
• Implied Contracts: These contracts are assumed based on the circumstances, like expectations during a visit to a healthcare professional for diagnosis and treatment.
• Void and Voidable Contracts:
  • Void Contracts: Are illegal from the start and hold no legal standing. They are unenforceable due to their illegality.
  • Voidable Contracts: One party is bound, while the other has the option to void the contract. An example could be a contract signed under duress.
• Quasi-Contracts: Unlike real contracts, quasi-contracts are obligations imposed by law to prevent unjust enrichment. For instance, situations where services are rendered without an explicit agreement, yet payment is expected.

Proposal under Indian Contract Act

• Definition of Proposal:
  • A proposal, as per Section 2(a) of the Indian Contract Act, 1872, refers to the expression of willingness by one person to another to either do or not do something, aiming to receive the consent of the other party for such an action or inaction.
• Parties Involved:
  • The individual making the offer or proposal is termed the "promisor" or the "offeror."
  • The individual who can accept the offer becomes the "promisee" or the "acceptor."
• General Offer:
  • A general offer is an offer extended not to a specific person but to the public at large or anyone capable of understanding and accepting the offer.
• Case Example - Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd.:
  • In this case, the display of goods with price tags was considered an invitation to treat, not an offer.
  • When a buyer expresses willingness to purchase goods at a price listed on a tag, they make the offer to buy, giving the shopkeeper the right to accept or refuse the offer.
  • The contract is formed only upon acceptance of the offer by the shopkeeper.

Can an Offer Lead to a Contract?

• Case Overview: Carlill v. Carbolic Smoke Ball Company
  • In the famous case of Carlill v. Carbolic Smoke Ball Company, the company advertised that their product, carbolic smoke balls, would prevent influenza if used as directed.
  • The advertisement promised to pay £100 to anyone who used the smoke balls as prescribed and still caught the flu. To demonstrate their commitment, the company deposited £1000 in a public bank.
  • Mrs. Carlill purchased and used the smoke balls according to the advertisement but still fell ill. She sued the company for the promised £100.
  • The company argued that there was no valid contract between them and Mrs. Carlill. However, the court ruled that a contract was formed when Mrs. Carlill accepted the offer by purchasing and using the smoke balls as directed.
• Key Legal Principle
  • When parties enter into a contract under a mutual mistake of fact, the earnest money cannot be forfeited, and the contract is considered void from the beginning.
• Case Reference
  • The significant case of Carlill v. Carbolic Smoke Ball Company was decided in 1887 and is reported in ILR 14 Cal 64.