Meaning, Nature, and Scope of Contract: A Comprehensive Guide

Introduction

The first thing which comes in mind is that – What is a Contract?

So, firstly let’s know about the meaning of contract-

It is an agreement (either written or spoken/oral) between two or more parties that creates a legal obligation upon them.

The terms and conditions of a contract are enforceable by law, which clearly mentions about the penalties and remedies if the contract is breached.

A contract comes into existence when there is an offer, consideration and acceptance between two or more parties.

A contract must contain six essential elements to make it enforceable by law:

• An offer: It’s a promise made by one party to another that they will or will not perform a specific action in the future against the contract.
• Acceptance of the offer: It’s the expression through words or deeds that both parties agree to the terms and conditions of the contract.
• Awareness: There should be a proof that both the parties clearly understand and agree to the basic substance of the contract.
• Consideration: It means something of value promised in exchange for the actions defined in the offer, the most common of which is payment for goods delivered, it distinguishes a contract from a gift because it removes the voluntary nature of the act/ non – act by requiring something of value in exchange for the promise.
• Capacity to fulfill: The parties in the contract must have the capacity to understand what they are signing and fulfill the terms and condition of the contract.
• Legality of the contract: All contracts which come into force are subject to the laws of the jurisdiction under which they operate.

The Indian contract act of 1872 is the most important enactment which creates a bridge between the parties entering into a contract. The legislation under this act outlines the essential elements of a valid contract, the rights and obligations of the parties involved and the remedies available in each case of a breach. The parties to the contract are referred to as promisor and promisee.

Parties involved in a contract are required to perform their contractual obligations as per the terms and conditions agreed upon the contract and can be only discharged through their performance, mutual agreement impossibility of performance, breach of contract or operation of law.

Theoretical History of the Indian Contact act 1872

Now, let’s discuss about the history of the Indian contract act of 1872-

• The Indian contract act, 1872 was first introduced and enacted on 25^th April 1872 which came into existence on 1^st of September 1872 and it applies to the whole of India.
• The Indian contract act is the main source of law which regulates the contracts in Indian law, followed by the old English formal law, which was subsequently amended due to general principles of codification.
• Earlier to 1872, English common law was in force which led to many difficulties and inconveniences to overcome and regulate the contract between parties so the new statutes were enacted.
• There were religion-based laws i.e. Hindus were governed by Hindu law and Muslims were governed by customary laws and usage.

Evolution of contract law

1. Vedic and Medieval period: during the existence of entire ancient and medieval periods of human history in India, there was no legal code covering contracts. The principles were thus derived from numerous references such as the sources of Hindu law namely the Vedas, the Dharmshatras, smritis, and the shrutis which gave a wide description of the law to the contracts in those times.

• The Roman period: Earlier in Rome, the law of contracts developed with the recognition of a number of categories of promises to be made for enforcing a contract, rather than creation of any general criteria for enforcing promises. Thus, the notion that promise itself may give rise to an enforceable duty was an achievement of Roman law.

• The Islamic period: during the Islamic period i.e. The Muslim rule in India, all the matters relating to contract were governed under the Mohammedan law of contract. In those times the contract required that there should be two parties to it in which one party should make a proposal and the other should accept it, the minds of both must agree i.e. there is declaration from both the parties and the declaration must related to the same matter and the object of the contract must produce a legal result.

• The Hindu period: Aspects of the Hindu law is fundamentally different from that of English laws. Hindu laws are the result of the compilation of numerous customs and work of smritikaras, who interpreted and analyzed Vedas to develop the various aspects of Hindu law

Later it laid down the principle which is also followed in the Indian contract act, which states that if a contract entered by a minor or intoxicated person or an old man or an unsound mind person is not a valid contract.

• The British period: before the commencement of the Indian contract act, the English law was applied in the presidency region of Madras, Bombay and Calcutta under the charter of 1726 which was issued by King George to the East India company.

The Indian contract act which is enforce today was originally drafted by the third Indian Law Commission in the year 1861 in England. The Indian contract bill tried to define laws relating to contracts, sale of movable properties, indemnity, guarantee, agency, partnership and bailment. The bill was not the complete law of contract, but the aim of the bill was to fulfill the need of the country for a considerable period of time and during that time, the judges of the courts were taking the help of English laws in determining the case when they failed to arrive at the judgments by considering the justice.

Key Provisions of The Indian Contract Act, 1872

• Total Sections: 266
• Total Chapters: 11
• Came into Effect on: 1 September 1872

Section 2: Definitions

• Sec(2a): Proposal
• Sec(2b): Promise
• Sec(2c): Promiser and Promisee
• Sec(2d): Consideration
• Sec(2e): Agreement
• Sec(2f): Reciprocal promises
• Sec(2g): Void
• Sec(2h): Contracts
• Sec(2i): Voidable
• Sec(2j): Avoidance of contract that becomes void.
• Trick To Remember: PPP CAR VCVA

Section 3: Communication, Acceptance, and Revocation of Proposals

Section 4: Communication of Proposal

• Complete When: It comes to the knowledge of the person to whom it is made.
• Para 2: The communication of an acceptance (Postal rule of communication).
• Para 3: Communication of revocation.

Section 5: Revocation of Proposals and Acceptance

Section 6: How the Revocation of Proposal is Made?

• Sec 6(1): By the communication of notice of the revocation by the proposer to the other party.
• Sec 6(2): By the lapse of time.
• Sec 6(3): By the failure of the acceptor to fulfill a condition precedent to acceptance.
• Sec 6(4): By the death or insanity of the proposer (However, the knowledge of his death or insanity comes to the knowledge of the acceptor before acceptance.)

Section 7: Acceptance Must Be Absolute (Mirror Rule)

• That is absolute and unqualified.

Section 8: Acceptance by Performing Conditions, or Receiving Consideration (General Offer).

Section 9: Promises, Express and Implied

• (It means the promise can be either in words or by conduct or by gestures).
• Enforceability of Contract

Section 10: What Agreements Are Contracts

• Outlines the essentials for a valid contract (offer, acceptance, consideration, lawful purpose, capacity, free consent).

Section 11: Who Are Competent to Contract

• States that minors, people of unsound mind, and those disqualified by law are incompetent to contract.

Section 12: What is Unsound Mind for the Purposes of Contracting?

Section 13 & 14: Free Consent

• Consent is free when it is not caused by coercion (Sec-15), undue influence (Sec-16), fraud, misrepresentation, or mistake.

Section 17 & 18: Fraud and Misrepresentation

• Defines what constitutes fraud and misrepresentation in a contract.

Section 19: Voidability of Agreements Without Free Consent

Section 19A: Voidable Contract Due to Undue Influence.

Section 20-22: Mistake

• Discusses the impact of mistakes of fact (Sec-20, 22) or mistakes of law (Sec-21) on the validity of a contract.
• Mistakes of fact are of two types – Bilateral (Sec 20 – Void) and Unilateral (Sec 22 – Voidable).
• Section 21: Mistake of Law is no excuse. However, if it is of foreign law, then a bilateral mistake is void, and if it is unilateral, then not voidable. Whereas a mistake in Indian law is not voidable at all.

Section 23: Lawful Consideration and Object

• Agreements with unlawful consideration or object are void.

Section 24: Agreements Void, if Considerations and Objects Unlawful in Part (BLUE PENCIL RULE).

Section 25: Agreement Without Consideration, Void

• Unless it is in writing and registered, it is a promise to compensate for past voluntary services or it is a promise to pay a time-barred debt.

Section 26: Agreement in Restraint of Marriage is Void

• Under Indian law, both partial and absolute restraint is void.

Section 27: Agreement in Restraint of Trade, Void.

Section 28: Agreement in Restraint of Legal Proceedings is Void

• However, partial restraint is valid.

Section 29: Agreements Void for Uncertainty

• It means the meaning of an agreement is not certain or capable of being made certain are void.

Section 30: Agreements by Way of Wager, are Void.

Section 31: Contingent Contracts

• It is a contract with enforceability which depends upon a contingency. Contingency is not the subject matter of the contract; it is collateral to the main purpose of the contract.

Section 32: Enforcement of Contract Contingent on an Event Happening.

Section 36: Agreements Continued on Impossible Events are Void.

Section 37: Obligation of Parties to Contracts

• Parties must perform or offer to perform their respective promises unless such performance is dispensed with or excused.

Section 39: Effect of Refusal of the Party to Perform a Promise Wholly

• Treats the contract as voidable at the option of the promisee if the promisor refuses to perform.
• Also known as anticipatory breach of contract.

Section 56

• Para 1: Initial Impossibility.
• Para 2: Frustration of Contract (Subsequent Impossibility).

Sections 59-61: Appropriation

Discharge Of Contract

• It means the termination of a contractual relationship between the parties. A contract may be discharged by:
  1. Section 37: Performance
  2. Section 62, 63: By agreement (Novation)
  3. By supervening impossibility (Frustration)
  4. By breach of contract
  5. By operation of law.

Section 68-73: Quasi Contracts

Section 70: Quantum Meruit

• It means as much as one deserves, i.e., reasonable claim.

Breach of Contract

Section 73: Compensation for Loss or Damage Caused by Breach of Contract

• Lays out the rules for compensation for any loss or damage arising from a breach.

Section 74: Liquidated Damages.

Section 75: States that a Party Who Rightfully Rescinds a Contract

• Is entitled to compensation for any damage sustained through the non-fulfillment of the contract.

Case Laws

Harvey vs. Facey

Fact of the Case

In this case of Harvey vs. Facey, the defendant, who was the owner of the plot named Bumper Hall Pen, wanted to sell his plot, and on the other hand, the plaintiff wanted to purchase the land.

In order to purchase land, the plaintiff sent a telegram and asked, ‘Will you sell the plot or land to us’? If yes, then please send the lowest cash price of the land.

Then the defendant, while replying to the plaintiff, sent the lowest price of the bumper hall pen plot, which is £900.

Then, in reply, the plaintiff sent a telegram and agreed to the fact by saying we are ready to buy a plot in £900
which is asked by you to please send us a title deed.

Now the plaintiff disagreed with the fact and refused to sell the plot/land, but again the plaintiff sent a telegram and said when you replied on my second telegram, you gave me the offer, and I accepted it, and the contract is complete.

Courts decision

The judicial committee came to a conclusion after observing all the facts that there is miscommunication between the plaintiff and defendant because of the quotation of the price.

The issue of the case was that the first telegram asked two questions; the first was willingness to sell, and the second was lowest cash price of land. In response, the defendant only gave the answer to the question of the plaintiff, not an offer.

So, when no offer has been made by the defendant, then there is no acceptance also. That’s why no binding of contract happened between the two.

Conclusion

The Indian Contract Act, 1872 aims to protect the parties to a contract and prevent unfair practices in its formation. Though this is one of the oldest laws in India concerning how contracts are made, followed, and enforced, it discusses the validity of a contract by including elements such as offer and acceptance, consideration, capacity to contract, and free consent.

It also stipulates how contracts should be made and the remedies for breach of contract. Whether for business dealings, real estate, employment relations, or day-to-day issues, the Indian Contract Act is vital. In such relationships, rights, duties, risks, charges, and benefits between the parties are put in writing under a bundle of rules from the Indian Contract Act, 1872.

Points to Remember

The following are a few key points that provide an overview of the Indian Contract Act, 1872:

1. Essentials of a Valid Contract – Section 10: The Act states the essential elements and conditions necessary for a contract to be valid, such as offer and acceptance, capacity of parties, lawful consideration, free consent, and the intention to create a legal relationship.
2. Offer and Acceptance – Section 3 to 9: An offer is a proposal made by one party, and acceptance is the approval of the offer and its conditions. The acceptance must be absolute.
3. Consideration – Section 23 to 25: Consideration is something of value given by both parties but should not be illegal. It can be an act or a promise. A contract is not enforceable without a real, lawful consideration.
4. Capacity to Contract – Section 10 to 12: Parties entering into a valid contract must be competent, i.e., of the age of majority (18 years), of sound mind, and not disqualified by law.
5. Free Consent – Section 13 to 21: The Act makes a contract valid only when it is formed with free consent by both parties, without any undue influence, coercion, fraud, misrepresentation, or mistakes.
6. Void, Voidable, and Valid Contracts:
   • Void contracts are not legally enforceable when the subject matter is illegal or the parties are incompetent.
   • Voidable contracts are valid and can be enforced, but either party can avoid their contractual obligation for certain reasons.
   • Valid contracts are legally binding and enforceable by law.
7. Contingent Contracts – Section 31: These contracts include certain terms and conditions that may apply in specified scenarios. These contracts are enforceable when the specified scenarios occur.
8. Performance of Contracts – Section 37: The contract comes to an end when the parties perform their obligations or promises that they have mutually agreed upon in the contract.
9. Breach of Contract and Remedies – Section 73 to 75: Breach of contract occurs when one party fails to fulfill or perform their obligation or promise. The affected party can recover damages, force the party to fulfill the contract, sue the party, or cancel the contract.
10. Discharge of Contracts: A contractual relationship between the parties comes to an end by mutual consent, performance, impossibility, breach of contract, or operation of law.
11. Quasi-Contracts – Section 68 to 72: These are contracts created without a formal agreement, but they impose a legal obligation enforced by the court to prevent one party from unjustly benefiting from the expenses of another party.