Law of ContractLegal Environment of Business

Prepared By

Manu Melwin Joy

Assistant ProfessorIlahia School of Management Studies

Kerala, India.

Phone – 9744551114Mail – manu_melwinjoy@yahoo.com

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Contract

The word contract isderived from the Latinword “Contractum”which means “drawntogether”. To the layman,the word “contract”probably means “anagreement’ which can beenforced in the court oflaw.

Definition

Section 2 (h) of the

Indian Contract Act

defines the term

contract as follows: “

An agreement which

is enforceable at law

is contract”.

Definition

• Contract = Agreement + Enforceability at Law

Example

Basil invites Hari to dinner and Hari accepts

the invitation. It is only a social agreement and

not enforceable in a court of law. So it is not a

contract. Basil agrees to sell his house to Hari

for Rs 50,000. This is a contract.

Definition

• According toSection 2 © of thecontract act, theperson making theproposal is calledthe Promisor andthe personaccepting theproposal is calledpromise.

Elements of a contract

The essential elements

of a contract are

contained in the

definition of contract

given in section 10 of

contract Act.

Elements of a contract

1. Agreement.2. Consensus of Idem.3. Capacity of parties.4. Free consent.5. Consideration.6. Lawful Object.7. Not declared to be void.8. Certainty and possibility of

performance.9. An intention to create legal

relationship.

Elements of a contract

• Agreement - Theremust be an agreementbetween the parties ofa contract. Anagreement involves avalid offer by one partyand a valid acceptanceby the other party.

Example

Sanitha sends a proposal to Julie to purchase

her house for Rs 5 Lakhs and Julie accepts the

proposal, then this results into an agreement.

Elements of a contract

• Consensus of Idem –The parties to contractmust agree upon thesubject matter of thecontract if the samemanner and in thesame sense.

Example

Adarsh has two houses, one at Trivandrum

and another at Kochi. Adarsh expresses his

willingness to sell on of his houses to Shanu.

Adarsh had in his mind house at Trivandrum

where Shanu had house at Kochi in mind. So

there is not Consensus Ad Idem.

Elements of a contract

• Capacity of parties – Theremust be at least two partiesto every contract. Theseparties must have legalcapacity to enter into acontract. Every person who isa major and possesses soundmind is competent to enterinto a contract. (Minors,Lunatics, drunken personsnot competent).

Elements of a contract

• Free consent – For theformation of a contract,one person must give hisconsent to another person.The consent thus obtainedmust be a free consent. Aconsent is said to be free ifit is not caused bycoercion, undue influence,fraud, misrepresentationor mistake.

Example

Arun asks Ajas to sign an agreement. Ajas

refuses to do it. So Arun threaten Ajas of

severe consequences if Ajas is not signing the

document. So Ajas finally agrees, fearing

consequences. The consent thus shown by

Ajas is not free.

Elements of a contract

• Consideration –Consideration meanssomething in return. In everycontract, each agreementmust be supported byconsideration, when oneparty agrees to givesomething (or give upsomething) he must bebenefited by the other party.

Example

Amal offers to sell his house to Jasir for Rs 4

Lakhs. Jasir accepts the proposal. Here, the

consideration for the sale of his house is Rs. 4

Lakhs and the consideration of Jasir’s payment

of 4 Lakhs is the house.

Elements of a contract

• Lawful Object – The objectof an agreement must belawful. It must not beillegal or immoral oropposed to public policy.When an object of acontract is not lawful, thecontract is void.

Example

Eldhose promises to pay Aiju Rs 5 Lakhs for

murdering Davood Ibrahim. Here the object of

the contract is to commit murder. It is

unlawful and therefore the contract becomes

void.

Elements of a contract

• Not declared to be void – The agreement mightnot have been expressly declared void by any law inforce in the country. In such cases, the agreementcannot be enforced.

Example

A agrees to supply liquor to B, subsequently

prohibition Act comes into force. Thus all

agreement to supply liquor become void,

thereafter. Therefore B cannot enforce the

agreement which is made before the act comes

into force. The agreement has already become

void from the date of prohibition order come into

effect.

Elements of a contract

• Certainty and possibility ofperformance – The term ofcontract should be certainand precise. They shouldnot be vague and theyshould not create anyconfusion in the minds ofthe parties.

Example

Sanitha agrees to sell one of her houses. She

has four houses. Here the terms of agreement

is uncertain.

A agrees to pay Rs 1 Lakh to B if B brings his

son (who died last year). This is an impossible

act .In both these examples, the agreement

void.

Elements of a contract

• An intention to createlegal relationship – Theagreement should create alegal obligation. Mereinformal promise is not tobe enforced. Socialagreements are not to beenforced as they do notcreate any legal obligation.

Agreement

• All contracts areagreements but allagreements are notcontracts.

• Every promise and everyset of promises formingconsideration for eachother is an agreement.

• Agreement = Offer +Acceptance.

• An agreement notenforceable by law is saidto be void.

• Definition of contract.

• Essential elements of contract.

• Agreement.