This Nature of Contract – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Nature of Contract – CA Foundation Business Law Study Material
All contracts are agreements but all agreements are not contracts. Comment.
As per section 2(h) of the Indian Contract Act, 1872, an agreement enforceable by law is a contract. Thus an agreement backed by enforceability by law i.e. the intention to create legal relations is regarded as a contract. An agreement is a prerequisite for the creation of a contract.
Every promise & every set of promises forming consideration for each other is an agreement. Thus when an offer made by a person is accepted by another, an agreement is said to be created. However, an agreement is a wider term in comparison to contracting. It includes even those agreements which are not enforceable since they were not created with an intention of forming legal relations, such as domestic, political or social agreements.
Thus agreement is the genus of which contract is the species & only those agreements grow into contracts that create legal relations.
Explain briefly the essentials of a valid contract.
Section 10 provides “all agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”.
Offer and acceptance:
There must be a “lawful offer” and a “lawful acceptance” of the offer, thus resulting in an agreement.
Intention to create legal relations:
There must be an intention among the parties that the agreements should be attended by legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate a contract.
Consideration means “something in return”. An agreement is enforceable when each of the parties to it gives something and gets something in return. The payment of money is a common form of consideration. But it may also consist of an act, forbearance, and a promise to do or not to do something. Consideration must be real, valuable and lawful.
The capacity of parties:
The parties to an agreement must be competent to contract; otherwise, it cannot be enforced by a court of law. Every person who is competent to contract who is (a) of the age of majority, (b) of sound mind and (c) is not disqualified from contracting by any law.
The consent of the parties must be free ie. the parties should enter into a contract voluntarily and of free will. Section 14 lays down that consent is not free if it is caused by (a) coercion, (b) undue influence, (c) fraud, (d) misrepresentation or (e) mistake.
The object of the agreement should be lawful. It should be authorised or sanctioned by law. The object of an agreement is unlawful if it is forbidden by law or is fraudulent or is immoral or opposed to public policy.
Agreement not expressly declared void:
The Indian Contract Act, 1872, has expressly declared certain agreements to be not enforceable at law, e.g. agreements in restraint of marriage, agreements in restraint of trade, wagering agreements etc. The parties to the agreement should ensure that their agreement does not fall in the category of these void agreements.
The terms of the contract should be certain and definite and not vague. Section 29 says “Agreements, the meaning of which is not certain or capable of being made certain are void.”
Possibility of performance:
Yet another essential feature of a valid contract is that it must be capable of performing. Section 56 lays down that “An agreement to do an act impossible in itself is void.” If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.
Writing and registration:
According to the Indian Contract Act, a contract may be oral or in writing. An oral contract is as much enforceable as a written contract. However, if there is a provision in any law prescribing that contracts should be in writing/ registered then, this formality of writing and registration should be followed.
“The law of contracts is not the whole law of agreements nor is it the whole law of obligations.” – Comment.
Obligations may arise from different sources. The law of contract deals only with such legal obligations which arise from agreements. Obligations that are not contractual in nature are outside the purview of the law of contract. For example, the obligation to observe traffic rules does not fall within the scope of the Contract Act.
The other sources of obligations are obligations under the trust law or the law of tort or the fundamental duties under the Constitution etc. They are outside the purview of the Contract law since they are not voluntarily created through an agreement. Salmond has rightly observed: “The law of contracts is not the whole law of agreements, nor is the whole law of obligation. It is the law of those agreements which create obligations and those obligations, which have their source in agreements”.
(a) Void agreements & Void Contracts
(b) Voidable & Void Contracts
(c) Void Agreements & Illegal Agreements
|An agreement not enforceable by law is said to be void.
||A contract that ceases to be enforceable by law becomes void when it ceases to be enforceable.
|It is void right from the beginning i.e., ab initio since one or more of the essentials of a valid contract are missing.
||it becomes void subsequently. On account of change is law, change in circumstances or on an account of the subsequent impossibility of performance.
|No restitution of benefits is allowed.
||Restitution may be granted when the contract is discovered to be void or becomes void.
|A contract that ceases to be enforceable by law becomes void when it ceases to be enforceable.
||A contract which is enforceable by law at the option of one or inure of the Parties hereto, but not at the option of the other or others. Thus it is enforceable at the option of the aggrieved part’.
|It ¡s valid at the time of Formation & remains valid till an event takes place which results in the contract ceasing to be enforceable.
||It may be voidable right from the beginning or voidable subsequently. It remains valid if the aggrieved par1 does not elect to avoid it within a reasonable time.
|A contract becomes void due to change in circumstances, change in law or subsequent impossibility of performance etc.
||A contract is avoidable right from the beginning if consent is caused by coercion, undue influence, fraud or misrepresentation. A contract becomes voidable subsequently on account of breach of contract or failure to perform the contract at the time fixed if the time is of the essence of the contract.
|Compensation is not payable.
||The aggrieved party can claim damages for loss sustained by him if any.
Difference between Void & Illegal agreements:
a. Scope: An illegal agreement is narrower in scope than a void agreement. All illegal agreements are void but all void agreements are not necessarily illegal. For E.g. an agreement with a minor is void, but not illegal.
b. Collateral Transactions: When an agreement is illegal, other agreements which are incidental or collateral to it are also tainted with illegality, hence void. However, agreements collateral to avoid agreement are not necessarily void.
c. Restitution: In the case of an illegal agreement, no right/remedy is available to either party. Hence money paid under an illegal agreement cannot be recovered. Under sec. 65 if an agreement is discovered to be void any person who has received advantage/benefit must restore it or make compensation for it.
d. Punishment: In case of an illegal agreement the parties may be punished under the criminal law, in case of a void agreement (which is not illegal) there is no such punishment.
Write Short Notes on:
(a) Unenforceable Contracts
(b) Quasi Contracts
(c) Unilateral Contracts
(a) Unenforceable contract. An unenforceable contract is one, which suffers from some technical defect. It is valid in itself but is not capable of being enforced in a court of law because of non-observance of some technical formalities such as insufficiency of the stamp, want of registration, attestation etc. In some cases such contracts can be enforced if their technical defects are removed, for example, the defect of under stamping can be removed by affixing the right value of stamps.
(b) Quasi-Contract. Quasi-contract is a contract in which there is no intention on the part of either party to make a contract but the law imposes a contract upon parties. These are not actual contracts but they resemble a contract that is created by law under certain circumstances. Here, the law creates legal rights and obligations when there is no real contract. For example; obligation of Under of lost goods to return them or liability of person whom money is paid by mistake to repay it back.
(c) In the case of a unilateral contract, only one party has to perform his obligation and the other party has performed his obligation at the time of formation of the contract or before. If A buys a railway ticket for his journey from Nagpur to Bombay. A has performed his duty under the contract by paying the fare but the railways are yet to perform their promise i.e. of carrying him from Nagpur to Bombay. Such contracts are also called contracts with executed consideration or one-sided contracts.
Lekhpal promises today ? 5 lakhs to his son if the son passes the CA exams. On passing the exams, the son claims the money. Can the son file a suit against the father?
No. Because it is a domestic agreement [no intention to create legal relations]
X, a coolie in uniform carried Y’s luggage from the railway platform to taxi without being asked by Y to do so. Y does not make any attempt to stop X from carrying the luggage. Is Y bound to make payment to X?
Yes [implied contract: implied offer & implied acceptance (silence as a manifestation of acceptance)]
Arun has two cars – one of white colour and another of red colour. He offers to sell one of the cars to Basu thinking that he is selling the car which has white in colour. Basu agrees to buy the car thinking that Arun is selling the car which has red in colour. Will this agreement becomes a valid contract?
No. [Hint – since consensus idem is missing]
Point out with reason whether the following agreements are valid or void:
- Riya promised Samarth to lend Rs. 500,000 in lieu of consideration that Samarth gets Riya’s marriage dissolved and he himself marries her.
- Aryan agrees with Mathew to sell his black horse. Unknown to both the parties, the horse was dead at the time of agreement.
- Ravi sells the goodwill of his shop to Shyam for Rs. 4,00,000 and promises not to carry on such business forever and anywhere in India.
- In an agreement between Prakash and Girish, there is a condition that they will not institute legal proceedings against each other without consent.
1. Void Agreement – As per Section 23 of the Indian Contract Act, 1872, an agreement is void if the object or consideration is against public policy. The agreement in the given case is of the nature which interferes with marital rights & duties of a person and is therefore opposed to public policy, illegal and void ab initio.
2. Void Agreement – As per Section 20 of the Indian Contract Act, 1872, an agreement made on the grounds of a Bilateral Mistake of fact is regarded as void. The mistake of fact is with respect to the existence of subject matter at the time of formation of the contract.
3. Void Agreement – As per Section 27 of the Indian Contract Act, 1872, an agreement that is in restraint of trade is treated as void. However, a buyer of goodwill can exceptionally impose certain restrictions on the seller of goodwill, not to carry on the same business provided such restrictions are reasonable regarding the duration & place of business. The restrictions imposed in the given case are unreasonable and therefore the agreement is in restraint of trade & void.
4. Void Agreement – As per Section 28 of the Indian Contract Act, 1872, an agreement that is in restraint of legal proceedings is void. The agreement in the given case imposes an absolute restriction on the rights of the parties to institute legal proceedings & is therefore regarded as void.
Mr W boards a bus at a bus stop. He travels for some distance and on arrival at his destination, he makes a move to get off the bus. The conductor stops him and asks for the fare. He denies his duty to pay to say they did not form any contract comment.
Hint: Implied contract – a contract that can be understood from the conduct of the parties – Mr W is bound to pay the fare for availing the transportation services.
State whether a contract is created in the following cases:-
- Mr. R promises to supply 4 teakwood chairs to Mr. S for a price which shall be fixed by Mr. F.
- Mr. P promises to pay Rs. 10 Lacs to Mr. T, if he brings back to life Mr. P’s dead wife.
- A mother promises to give Rs. 500 to her son, if he accompanies her for shopping.
- Mr. P promises to pay Rs. 10 Crores to Mr. N if he resigns from his party and joins Mr. P’s political party.
- A valid contract is created – the terms of the contract should be certain or capable of being made certain.
- No contract is created – the impossibility of performance – void ab initio.
- No contract is created – domestic agreements are mere agreements and not contracts.
- No contract is created – political agreements are mere agreements and not enforceable.