What is a contract?

What is a contract?

A business contract is a legally binding agreement between two or more parties to do or not to do certain things. For example, a business contract could be for the sale of goods or supply of services at a certain price.

There are many different types of contracts including:

the sale and purchase of a business agreement;

partnership agreements;

leases of business premises;

leases of plant and equipment; and

employment agreements.

The process for creating a contract generally includes information exchange, discussion, negotiation and employment agreements.

A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing, though contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific performance of the contract or an injunction. Both of these remedies award the party at loss the "benefit of the bargain" or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract.^[1], although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.

Formation

In addition to the elements of a contract:

• a party must have capacity to contract;
• the purpose of the contract must be lawful;
• the form of the contract must be legal;
• the parties must intend to create a legal relationship; and
• the parties must consent.

As a result, there are a variety of affirmative defenses that a party may assert to avoid his obligation.

Contract Law

The Law of Contracts is the basis of business law because the bulk of transactions of the people engaged in trade, commerce and industry is based on contracts. In India, the Law of Contracts is contained in the Indian Contract Act,1872. The Act lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts like, Indemnity and Guarantee; Bailment and Pledge, and Agency. The Partnership Act; the Sale of Goods Act; the Negotiable Instruments Act; the Companies Act, though technically belonging to the Law of Contracts, have been covered by separate enactments. However, the general principles of the Contract Law are the basis for all such contracts as well.

The principal features of the Law of Contract are:-

• The parties to the contract make the law for themselves.

• The Act is not exhaustive since it does not take into its purview all the relevant legislations.

• It does not override customs or usages.

• The Law of Contracts is not the whole law of agreements.

As per the Indian Contract Act,1872, a "contract" is an agreement enforceable by law. The agreements not enforceable by law are not contracts. An "agreement" means 'a promise or a set of promises' forming consideration for each other. And a promise arises when a proposal is accepted. By implication, an agreement is an accepted proposal. In other words, an agreement consists of an 'offer' and its 'acceptance'.

An "offer" is the starting point in the process of making an agreement. Every agreement begins with one party making an offer to sell something or to provide a service, etc. When one person who desires to create a legal obligation, communicates to another his willingness to do or not to do a thing, with a view to obtaining the consent of that other person towards such an act or abstinence, the person is said to be making a proposal or offer.

An agreement emerges from the acceptance of the offer. "Acceptance" is thus, the second stage of completing a contract. An acceptance is the act of manifestation by the offeree of his assent to the terms of the offer. It signifies the offeree's willingness to be bound by the terms of the proposal communicated to him. To be valid an acceptance must correspond exactly with the terms of the offer, it must be unconditional and absolute and it must be communicated to the offeror.

An "agreement" is a contract if 'it is made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and is not expressly declared to be void'. The contract must be definite and its purpose should be to create a legal relationship. The parties to a contract must have the legal capacity to make it. According to the Contract Act, " Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of a sound mind, and is not disqualified from contracting by any law to which he is subject". Thus, minors; persons of unsound mind and Persons disqualified from contracting by any law are incompetent to contract.

Classification of Contracts

Express Contract:-A contract wherein both the offer and acceptance are made in words, spoken or written.

Implied Contract:- A contract which is inferred from the conduct of parties or course of dealings between them.

Quasi Contract:- It is a contract which does not arise by virtue of an agreement, express or implied, but the law recognises the contract under certain special circumstances. These contracts are based on the principle of equity, justice and good conscience. The Act describes the obligations arising under these contracts as 'certain relations resembling those created by contracts'. Some of the transactions that will be considered as 'quasi-contract' under the law are:-

• When a person who is interested in the payment of money which another person is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other person

• When a person finds goods belonging to another person, it is his duty to restore them to the rightful owner;

• A person to whom money is paid or anything delivered, by mistake or under coercion, is liable to repay or return it

• Where necessaries are supplied to a person, who is incompetent to contract such as minors or to someone whom he is legally bound to support, the supplier is entitled to recover the price of the property of the incompetent person,etc.

Valid Contract:- A valid contract is a 'contract which satisfies all the requirements of the Act'. Such a contract creates rights in personam and is legally enforceable.

Void Agreement:- It is an agreement not enforceable by law. It is void ab initio because it lacks one or more of the essentials of a valid contract. Such an agreement does not create any legal relations. However, it is different from unlawful agreements which are forbidden by the law. An illegal agreement must necessarily be void but a void agreement need not be illegal.The following agreements that have been declared void by the Contract Act:-

• Agreements by incompetent persons

• Agreements wherein consideration and objects are unlawful

• Agreements in restraint of marriage

• Agreements in restraint of trade

• Agreements in restraint of legal proceedings

• Agreements the meaning of which are uncertain,etc.

Void Contract:- A contract which ceases to be enforceable by law becomes void. In other words, an agreement may be enforceable initially and due to certain circumstances may become void subsequently. Thus a contract is not void from its inception.Some of such circumstances which makes a contract void are:-

• An agreement without lawful consideration becomes void

• A contingent contract to do or not to do something on the happening of an event becomes void when the event becomes impossible

• When the party, whose consent is not free, repudiates the contract,etc.

Voidable Contract:- A voidable contract is 'an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others'. In such a contract, the consent of one of the parties is not free and the law regards it as an aggrieved party. The aggrieved party has the option to either affirm or rescind the contract within a reasonable time.The other party does not have any such right. However,the aggrieved party is entitled to recover from the other party the damages which it may have suffered but it must restore the benefits received by it.