Law of ContractLegal Environment of Business
Prepared By
Manu Melwin Joy
Assistant ProfessorIlahia School of Management Studies
Kerala, India.
Phone – 9744551114Mail – [email protected]
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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.