Law of Contracts: Meaning, Nature and Important Definitions | Business Law - B Com PDF Download

Contract under Indian Contract Act

• According to Section 2(h) of the Indian Contract Act, 1872, a contract is defined as: "An agreement which is enforceable by law is a contract."
• A contract is formed when two or more parties agree to do something or refrain from doing something.
• As defined by Anson, "the law of contract is that branch of law which determines the circumstances in which a promise shall be legally binding on the person making it."

Key Components of a Contract

• For a valid contract, there are two essential elements: Agreement and Enforceability.
• Example: If X agrees to construct a house for Y, and Y agrees to pay Rs. 10 Lakhs to X, this is a contract because it is enforceable by law.

Agreement under Indian Contract Act

Agreement

• Section 2(e) defines an agreement as: "Every promise and every set of promises, forming the consideration for each other, is an agreement."
• Two important elements for formation of an agreement: Promise and Consideration.

Important Case: Balfour vs. Balfour

• In this case, Mr. and Mrs. Balfour were a married couple who had an agreement while Mr. Balfour was in England to send his wife £30 per month while she stayed back for health reasons.
• As the couple drifted apart, it was held that Mr. Balfour's promise did not constitute a contract due to lack of intention to create a legal relationship.

Classification of Agreements

• Valid Agreements: Enforceable by law.
• Voidable Agreements: Enforceable at the option of one party.
• Void Agreements: Not enforceable by law.
• Illegal Agreements: Not enforceable as they contravene the law.
• Unenforceable Agreements: Cannot be enforced due to technical defects.

Promise under Indian Contract Act

Promise

• As per Section 2(b), when an offer is accepted, it transforms into a promise.
• Acceptance occurs when the offeree signifies assent to the offer.

Types of Promises

• Express Promise (S.9): Made in words (written or spoken).
• Implied Promise (S.9): Made through conduct, not words.
• Reciprocal Promise (S.2(f)): Promises that serve as consideration for each other.
• Alternative Promise (S.58): Offers a choice between two options.

Consideration under Indian Contract Act

Section 2(d) defines consideration as:

• When one party does something at the desire of the promisor, it constitutes valid consideration.

Important Case: Kedarnath Bhattacharji vs. Gorie Mahomed

• The case involved a Town Hall construction where a subscription was made. The defendant refused to pay his promised amount after costs rose.
• The court ruled that he was liable for his promise, reaffirming that any act done at the will of the promisor counts as consideration.

Types of Contracts

Contracts can be classified based on their nature:

• Adhesion Contracts: Formed by the stronger party, offering a "take it or leave it" scenario.
• Aleatory Contracts: Involves an element of risk, often seen in insurance contracts.
• Bilateral and Unilateral Contracts: Bilateral contracts require mutual obligations, while unilateral contracts bind only one party upon acceptance.
• Express Contracts: Terms are clearly stated, either orally or in writing.
• Implied Contracts: Terms are not explicitly stated but are understood from the parties' actions.
• Void and Voidable Contracts: Void contracts hold no legal validity from the outset, while voidable contracts can be enforced at one party's discretion.
• Quasi-contracts: Obligations imposed by law despite not being formal agreements.

Proposal under Indian Contract Act

• Defined in Section 2(a) as when one person indicates willingness to another to do or abstain from an act to obtain assent.
• The person making the proposal is the promisor and the person accepting is the promisee.

General Offer

• A general offer is made to the public at large, allowing anyone who understands the offer to accept it.

Important Case: Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd.

• In this case, it was determined that displaying goods with price tags in a shop is an invitation to treat, not an offer. The customer makes an offer to buy when they approach the cashier.

Offer Leading to Contract

Case: Carlill Vs Carbolic Smoke Balls Company

• The company advertised their product, carbolic smoke balls, claiming that anyone who used them correctly, taking them three times a day for two weeks, would not get influenza.
• If someone still caught the flu, the company promised to pay them £100 right away.
• To prove they were serious about this promise, the company put £1000 in a public bank.
• A woman named Carlill bought the smoke balls and used them as instructed in the advertisement.
• Despite following the instructions, she still caught the flu.
• Carlill decided to sue the company to get the £100 they promised in the ad.
• The company refused to pay, arguing that there was no contract between them and Carlill.
• The court ruled that a contract was formed as soon as Carlill bought the smoke balls and used them as directed.

Important Case: (1887) ILR 14 Cal 64

• Important Case (1887) ILR 14 Cal 64: In this case, when it was discovered that the contract between the parties was based on a mutual mistake regarding a matter of fact, it was held that the earnest money could not be forfeited, as the contract was considered void from the very beginning (ab initio).