The Indian Act came into effect on 1st September 1872 and is one of the oldest mercantile laws of the country. This law provides guidelines that help in the formation and compliance of contracts in a regulated and organized manner. These rules and regulations provide the framework for the course of action to be followed in case of any disputes arising from the contracts. The act has 266 sections and is applicable to the entire country except for Jammu and Kashmir.
Let’s understand the key elements of this act and the definitions of its important features.
The Indian Contract Act, 1872 provides the guidelines for forming a valid contract. It plays an important role wherever there is an agreement or a contract. The Contract Act defines the term ‘Contract’ under its section 2 (h) as ‘An agreement enforceable by law’.
This definition has two key elements: agreement and enforceable by law.
Agreement- An agreement is every promise or the set of promises that form the consideration for each other.
Enforceable by law- When these promises are held valid in the court of law and the parties of the contract can be held liable to complete their promises, the contract is enforceable by law.
Promise- Section 2(b) of the Indian Contract Act, 1872 defines a promise as: ‘when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal when accepted, becomes a promise’. A promise to do or abstain from doing something becomes an agreement when it is accepted by all the parties involved in the agreement.
Essentials of Forming an Agreement:
The proposal must be made by one party to the other
The person(s) to whom the proposal has been made must clearly understand all the aspects and terms of the proposal
The offeree or the person to whom the offer has been made, must accept the proposal and give his assent to all its terms
When the proposal is accepted it becomes an accepted proposal or a promise. A proposal is not synonymous to a promise but becomes one only after its acceptance
To Sum it Up:
Offer + Acceptance= Agreement
Agreement / Accepted Promise +Enforeceable by Law= Contract
A contract is an agreement that is accepted by both parties and is enforceable by law. It gives certain rights to all the parties involved and also bestows on them certain obligations that they must fulfill.
Essentials of a Valid Contract
For a contract to be valid, it must be enforceable by law and must include the following essentials given under Section 10 of the Indian Contract Act.
Two Parties- A valid contract must include a minimum of two parties; one that makes the offer and the other to whom the offer has been made and who must accept the proposal for it to become enforceable.
Legal Obligation- The parties entering into a contract must have the intention of entering into a legal obligation. Social agreements and obligations are not considered a contract as they do not create any legal obligations on any party.
Certain Terms- A legal contract must have certainty of meaning.
Example- A agrees to buy B’s house for a reasonable amount. A valid contract must define the exact amount that A intends to pay B for buying his house.
Possibility of Performance- A contract is considered valid only when it does not involve the performance of an impossible act.
Example- A enters into a contract with B to bring back to life B’s father for ten thousand rupees. Since the contract involves the performance of an impossible act, it is not a valid contract
Free Consent- The parties entering into a contract must give their free consent to the contract.
Competency- The parties must be legally competent to enter into a contract. According to Section 11 of the Indian Contract Act, people who are considered competent to enter into a contract include: a person who is of the age of majority as per law, of sound mind, and not disqualified by law from entering into a contract (this includes convicts, alien enemy, foreign national, etc)
Consideration- The contract must involve consideration as per the principle of ‘quid pro quo’ or something in return. A valid contract must include a consideration that must be something of value.
Legal Consideration- Section 23 of the Contract Act defines a legal consideration as something not forbidden by law.
Solved Questions on the Indian Contract Act, 1872
Q1. A Agrees to Buy B’s House for a Sum of Fifty Lakh Rupees. Is this a Valid Contract?
Ans. It will be a valid contract only if:
B has been made a party to this contract
Since the statement says that A ‘agrees’ to buy the house, it denotes that an offer has been made to A and if he accepts the offer he must communicate his acceptance to B.
Q2. James Puts an Advertisement Outside His House for Selling it for One Lakh Rupees. Jack Sees the Advertisement and Agrees to Buy the House but James Refuses to Sell the House to Him. Can Jack Sue James for Breach of Contract?
Ans. The advertisement was only an invitation to offer and not an offer by itself. Since James had not accepted Jack’s offer or bid of purchase there was no contract between them. Acceptance is an integral part of a valid contract. Hence Jack cannot sue James for a breach of contract.
Q1. What are the Main Differences Between an Agreement and a Contract?
Ans. Let’s look at some of the main differences between an agreement and a contract according to the guidelines under the Contract Act.
An enforceable agreement forms a contract while a promise that is accepted by all the parties involved forms an agreement
A contract is enforceable by law but an agreement is only a socially acceptable promise that may or may not be enforceable by law
A contract creates a legal obligation while an agreement does not create any legal obligation
All contracts are agreements that are enforceable by law but not all agreements are contracts.
Q2. What is a Legal Consideration?
Ans. Legal consideration is something that is not forbidden by law. It must not defeat the provisions of law, or cause any injury or harm to person or property, and must not be immoral or against public policy.
Example: Joseph promises to pay 5000 rupees to Max if he causes injury to Sam. Max cannot sue Joseph for the money after he hurts Sam since the consideration was against the law.
Q3. What is Free Consent?
Ans. The consent given must be done willingly. A consent received through misrepresentation, influence, coercion, force, or fraud renders the contract void.
Example: A threatens B to sell him his house for 2 lakh rupees. This is not a valid contract as the consent given by B was under the effect of coercion.