BUSINESS REGULATION LAWS IN INDIA – INDIAN CONTRACT ACT, 1872: (Article written for content for IndiaFilings.com Learning Center section)

Many business laws in India precede the country’s independence in 1947. For example, the Indian Contract Act of 1872 is still in force, although specific contracts such as partnerships and the sale of goods are now covered by newer laws. The law relating to contracts in India is contained in INDIAN CONTRACT ACT, 1872. The Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir. It determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting parties. Hence this legislation, Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India.

WHAT IS A VALID CONTRACT?

The essential conditions of a valid contract under Indian Contract Act, 1872 are as follows:

 Under Section 2 (h) of the Indian Contract Act, 1872, the term ‘contract’ is defined as ‘an agreement enforceable by law’.

           The ‘agreement’ is defined under Section 2 (e) of the Act as “every promise and every set of promises forming consideration for each other is an agreement”. On the other hand, a ‘promise’ is defined as “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise [Section 2 (b)]. According to Salmond, “A contract is an agreement creating and defining obligations between the parties.”

            According to Sir William Anson, “A contract is an agreement enforceable by law made between two or more persons by whom rights are acquired by one or more to acts or forebearences on the part of the other or others. So, the two main elements of a contract are:

i) Agreement and,
ii) Its enforceability by law.

That is why, all contracts are agreements, but all agreements are not necessarily contracts.

WHO CAN ENTER INTO CONTRACT?

1.   A person who is of the age of majority according to the law to which he is subject 2.   A person is of sound mind- A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. 3.   A person is not disqualified from contracting by any law to which he is subject The following persons are incompetent to contract    1. Minors    2. Persons of unsound mind    3. Persons disqualified by law to which they are subject

TYPES OF CONTRACT:

1) Valid Contract: A contract which satisfies all the essentials of a valid contract is known as a valid contract. If one or more essential elements are absent, the contract becomes void, or voidable or illegal.

2) Void Contract: A void contract is that contract which is not enforceable by either of the parties to it. A void contract has no legal effect. A contract may be void from the very beginning or may be valid originally when it was formed but has subsequently became void due to change in circumstances.

3) Voidable Contract:  A voidable contract is that contract in which free consent of one of the parties to it is not secured. For example, contracts caused by Frauds, Coercion, Mistake, Undue Influence, Misrepresentation, etc. Such contracts are valid till it is avoided by the injured party.

4) Unenforceable Contract: An unenforceable contract is that contract which cannot be enforced in  courts due to some technical defect, such as absence of writing, payment of inadequate stamp duty etc.

5) Illegal Contract: An illegal agreement is one the object of which is-

a) Fraudulent b) against the provisions of any law c) causes an injury or damage to any person or his property d) immoral or opposed to public policy.

6) Express Contract: In express contracts, the terms are stated in writing expressly.

7) Implied Contract: An implied contract is one which is the result of the conduct of the parties. For example when a person boards a public bus or drinks a cup of tea in a restaurant there is an implied contract and he has to pay the charges for it.

8) Executed Contract: An executed contract is that contract in which both the parties to the contract have performed their respective promises.

9) Executory Contract: An executory contract is that contract in which both the parties to it have yet to perform their promises.

10) Unilateral Contract: A unilateral contract is that contract in which only one party is required to perform his obligation.

11) Bilateral Contract: A bilateral contract is one in which both the parties are required to perform their obligations.

INTERPRETATIONS OF THE INDIAN CONTRACT ACT, 1872:

1.   When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal;

2.   When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise;

3.   The person making the proposal is called the "promisor", and the person accepting the proposal is called the "promisee";

4.   When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;

5.   Every promise and every set of promises, forming the consideration for each other, is an agreement;

6.   Promises, which form the consideration or part, of the consideration for each other are called reciprocal promises;

7.   An agreement not enforceable by law is said to be void;

8.   An agreement enforceable by law is a contract;

9.   An agreement which is enforceable by law at the option of one or more of the parties - thereto, but not at the option of the other or others, is a voidable contract;

10.               A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

Indian Contract Act embodied the simple and elementary rules relating to Sale of goods and Partnership. The developments of modern business world found the provisions contained in the Indian Contract Act inadequate to deal with the new regulations or give effect to the new principles. Subsequently the provisions relating to the Sale of Goods and Partnership contained in the Indian Contract Act were repealed respectively in the year 1930 and 1932 and new enactments namely Sale of Goods and Movables Act 1930 and Indian Partnership act 1932 were re-enacted.