MEANING, NATURE, AND SCOPE OF CONTRACT

This article is written by Bhumi Reddy Vanaja of BA LLB of 4^th of Sri Padmavati Mahila Viswa Vidyalayam, Tirupati, an intern under Legal Vidhiya

ABSTRACT

A contract is simply a legally binding agreement, and an agreement is a collection of promises that serve as additional value for both contracting parties. Contracts are a common element of everyone’s daily lives. Every day, we engage into millions of contracts without even realizing it. All transactions, from booking a cab to purchasing an air conditioner, are contracts.  All agreements that are legally enforceable are considered contracts, as stated in Section 2(h) of the Indian Contract Act, 1972.  The words offer and acceptance are defined in Section 2, and the agreement is defined in the same Section under clause (e) as any promise or combination of promises that are supported by consideration.

This extensive article explores the meaning of contract and its definition. It examines different definitions, key concepts and essential elements  which are related to the contract. In-depth analysis is done on Nature of contract and its scope. The objective of the article is to clarify the concept of “contracts” by investigating all of the fundamental features of contracts that make them valid. This information is necessary to understand the meaning of contract and how it differs from agreement.  Aside from that, this article has explained that a contract is more than simply a piece of paper because many elements must be considered before entering into a contract, as described in this article. It is very important for legal practitioners to understand the meaning, nature and scope of a contract.

In order to understand the meaning of a contract, it is crucial to understand the difference between contract and agreement. This comprehensive article’s conclusion emphasizes the need for a contract and it’s important.

KEYWORDS

contract, offer, acceptance, promise, consideration, agreement, essential elements, valid contracts, enforceability, nature, scope, free consent.

INTRODUCTION

The phrase “contract” is not a modern one, but rather one that dates back to ancient civilizations.  The history of contracts has been heavily impacted by Roman thinking, with Plato being one of the philosophers who paid less attention to the forms of agreement and focused much more work to the basic categories of cancellation of agreements that still exist today. The Roman law has identified discrete categories of contractual transactions, each with its own set of requirements that must be met in order for the promises to be enforced, and the general type, stipulatio, used to require various things in order to generate an obligation, which could have been written down in a contractus litteris. The English judicial system did not exist in large numbers during the Middle Ages either. There was a jury at that time. Following the Industrial Revolution, English courts were increasingly familiar with the concept of contract freedom. Therefore, in the twentieth century, legislation began to change the court’s perspective, resulting in the development of contract law in enforcement.

In 1861, the third law commission of British India, chaired by Sir John Romily, presented a report on contract law for India. The law commission delivered a draft on July 28, 1866.The draft contract legislation was amended and enacted as The Act 9 of 1872 on April 25, 1872. The INDIAN CONTRACT ACT 1872 became effective on September 1, 1872.The Indian Contract Act of 1872 is one of the oldest in the Indian legal system; it was passed by India’s legislature prior to independence and got assent on April 25, 1872. The Act outlines contract formation concepts, including indemnity, guarantee, bailment, pledge, and agency.^[1]

In accordance with Section 2(h) of the Indian Contract Act, 1972^[2], a contract is defined as an agreement that contains legal enforceability. The words offer and acceptance are defined in Section 2^[3], and the agreement is defined in the same Section under clause € as any promise or combination of promises that are supported by consideration. Section 2(a)^[4] defines an offer as a proposition made by one party to another, and Section 2(b)^[5] defines acceptance as the process by which an offer is turned into a promise. It’s critical to understand the distinction between an agreement and a contract. The main section, Section 10^[6], states that all agreements are considered contracts if they are established with the free assent of parties who are legally able to enter into contracts, for a legitimate consideration, and for a legitimate purpose, and if they are not expressly declared void by this section.

MEANING OF CONTRACTS

The term ‘contract’ originates from the Latin word ‘Contractum’, which meaning ‘drawn together’. A contract brings (or draws) the parties together, establishing an legal connection between them. An agreement is the foundation of a contract. An agreement is formed when two or more people agree to do or not do something. A contract refers to an agreement that can be legally enforced.

In layman’s words, a written agreement between two parties that contains promises or obligations that the parties must fulfill is called a contract. The written agreement then becomes legally enforceable. If an agreement is enforceable by law, it means that only the parties to it have legal standing, and breaking any of those rights could result in legal action, including the complete repudiation of the agreement.

According to Section 2(h)^[7] of the Indian Contract Act, 1872, An agreement which is enforceable by law is called as a contract.

Illustration

Mr. Dinesh offers his golden watch for sale to Mr. Venkat for 50,000/- rupees, which he accepts. In this scenario, we can see that it is an agreement between Dinesh and Venkat that includes consideration and mutual duty to each other, and once it is legally binding, it becomes a contract.

Definition

• Pollock: Pollock defines a contract as any legally enforceable agreement or promise.
• Salmond: Based on Salmond, a contract is an agreement between two or more people that creates and defines obligations and grants one or more rights to act or forbear on the part of others.
• Anson: Anson defines contract law as the field of law that governs the situations under which a promise is legally binding on the person who makes it.
• According to the Cambridge Dictionary, a contract is a legal document that expresses and describes a formal agreement between two or more persons or groups, or the actual agreement.

After reviewing the definitions of contract, we can say that:

• Contract = Agreement + Enforceability

Agreement:  According to Section 2(e)^[8] of the Act, “every promise and every set of promises, forming consideration for each other” constitutes an agreement.

STAGES OF CONTRACT

The actions that both parties must conduct in order for a contract to be considered valid are listed below.

Proposal ➡️ acceptance ➡️ promise ➡️ consideration ➡️ agreement ➡️ enforceability by law = Contract.

PROPOSAL/ OFFER

Section 2(a)^[9] of The Indian Contract Act states that  When someone expresses to another that he is willing to do something or not do anything at all in order to get that other’s consent, that is considered a proposal. Put simply, a proposal is a means of starting the process of entering into a contract. According to the definition, this occurs when one person expresses to another his or her readiness to do or not do something in order to get that person’s consent.

An invitation to offer, such as those found in an auction poster, prospectus, or catalogue, is not considered an offer. Because they are not offers, but rather invitations to offer, sometimes known as “invitations to treat.” An invitation to offer is just the circulation of an offer. It is created with the goal of negotiating additional bids.

Illustration

1. Person “A” wishes to sell Person “B” his car for five lakh rupees. Here, “A” demonstrates his readiness to sell “B” his car. The offer needs to be precise and unambiguous. For instance, “A” wishes to sell “B” his remote-control automobile for the sum of 600 rupees. “B” says yes to the offer.
2. When hiring, find out from the candidate what kind of pay they expect. Put simply, it’s an effort to make an offer before making a firm or transparent offer.

Case law: Harris vs. Nickerson (1872)^[10]

In this specific case, the offender advertised an auction for a certain time or location. The advertisement states that the plaintiff traveled and arrived at the address given, but the defendant had already canceled the auction by the time the plaintiff got there. The plaintiff sues the defendant for breach of contract as well as for financial loss incurred as a result of his extravagant travel expenses.

In this instance, the Court determined that the advertisement was an invitation to make an offer rather than a formal offer; as a result, no agreement was reached between the parties that would hold the defendant accountable for the plaintiff’s damages.

ACCEPTANCE

Accepting the offer is the second step toward drafting a contract. An essential component of creating a contract is acceptance. A contract between two parties cannot exist unless it is accepted.  It is necessary to express acceptance of the offer; approval cannot be implied by silence.

Case law: Felthouse vs. Bindley (1862)^[11]

In this instance, Felthouse sought to purchase a horse from his nephew. He requested in writing that his nephew sell the horse to no one else and wanted to buy the horse for thirty-five pounds. “If I hear no more about it, I shall consider the horse mine,” Felthouse states unequivocally. Although his nephew never replied to that offer, he still plans to sell Felthouse his horse in the future. He had an auctioneer named Bindley who sold his horse by mistake. As it was essentially his horse, Felthouse filed a lawsuit against Bindley.

In this particular case, the Court determined that the contract was void because the nephew failed to notify Felthouse of his acceptance. Bindley was also not accountable for Felthouse’s failure. Acceptance does not mean silence or the absence of rejection.

PROMISE

The Indian Contract Act states in Section 2(b)^[12] that “a proposal when accepted becomes a promise.” Therefore, any proposal or offer that is accepted becomes a promise, which is an assurance or commitment made by one party to the other. Both parties then owe it to one another to keep their promises.

Illustration

Mayuri’s Uber cab fee is Rs. 400. She offers to pay the driver Rs. 400. The “cab driver” agrees to drop her off at her final destination.

CONSIDERATION

As per the Indian Contract Act, 1872, Section 2(d),^[13] “A consideration occurs when the promisee or any other individual, at the request of the promisor, has performed or refrained from performing an act, or makes a promise to perform or refrain from performing an act, abstinence, or promise.” Being considerate is similar to receiving something in return. A contract is created by a valid consideration. Anything can be taken into account, including the security deposit and tangible or intangible assets. However, it must be legitimate as per Section 23^[14] of the Indian Contract Act.

Illustration

Bhumi gives Nisha her dress for Rs. 1500/-, and she accepts the deal. In this example, a valid and legal consideration exists. Bhumi’s consideration is Rs. 1500/-, while Nisha’s consideration is the clothing.

AGREEMENT

We frequently use the term “agreement,” and sometimes we even use it synonymously with “contract.” Every day, we make a lot of agreements, some of which are not always documented in writing. They might be anything from purchasing a new home to purchasing vegetables from street sellers. Contracts play a significant role in our daily lives. It becomes crucial to comprehend what is meant by agreement. “According to Section 2e of The Indian Contract Act, 1872, “every promise and every set of promises, forming an incentive to each other, is an agreement.”

In other words, an agreement is a proposal that has been accepted; it is the outcome of a proposal made by one party and approved by another. We can use an example from our daily lives to help make the reasoning above more understandable: For instance, Khushi offers Harsh Rs. 50,000 for the sale of her scooter. Harsh consents to the conditions and agrees to pay the specified sum. Harsh and Khushi came to an understanding. Certain accepted offers, meanwhile, are not able to develop into contacts. For instance, Annie consents to provide Joseph Rs. 1000 if he can retrieve her stars from the sky; else, the work is null and void.

ENFORCEABILITY

This completes the process of drafting a legally binding contract. “An agreement which is not enforced by law is void,” states Section 2(g)^[15]. An agreement is considered to constitute a contract when it is legally binding. One requirement for a contract to be deemed valid is enforceability. To be legally enforceable, a contract between two parties must satisfy certain requirements. Furthermore, the contract is deemed void if the prerequisites are not met, and neither party may pursue remedies or damages for their losses.

Illustration

Xthreatens to hurt Y if he doesn’t receive 10 lakhs for the sale of his house. “Y” sets a price for the sale of his home. This contract is deemed invalid as Y’s consent was acquired through compulsion rather than freely giving it. Because it is not legally enforceable, it cannot turn into a valid contract.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

According to of Indian Contract Act, the valid contract must fulfill the following conditions:

• Offer and Acceptance: A “legitimate offer” made by one party and a “legitimate acceptance” of it by the other are necessary for the creation of a legally binding agreement.

Case law: Lalman Shukla v Gauri Dutt (1913)^[16]

In Lalman Shukla v. Gauri Dutt, the respondent’s boy went missing, so the plaintiff, who was also the boy’s servant, was ordered to look for him. Meanwhile, the defendant posted a missing poster, stating that the person who found the youngster would receive a set amount of money. Despite not knowing about the offer, the servant managed to locate the youngster. When he learned of this offer, he requested consideration, but he was turned down. The court determined that the plaintiff was not aware of the offer and, as a result, the fulfillment of the promise does not constitute acceptance, ruling in the defendant’s favor.

• Intention to create legal relationship: To establish a legal connection, the parties must intend to do so. When it comes to social (or) domestic agreements, it is typically assumed that the parties have no intention of forming a legal connection. However, unless otherwise agreed upon, the standard assumption in a commercial (or business) agreement is that the parties want to create a legal relationship.

Case law: Balfour vs Balfour^[17](1919)

Mr. Balfour worked for a company in Ceylon. Due to her health, Mrs. Balfour was unable to travel with him to Ceylon and was forced to remain in England. While he was away, Mr. Balfour committed to sending thirty dollars a month. However, Mr. Balfour does not pay that sum. Thus, Mrs. Balfour sued her husband in an attempt to get the money back. The husband’s pledge in this instance was not meant to be a binding contract, the court ruled, ruling that it was only a domestic agreement.

• Lawful consideration: An agreement ought to be backed by legitimate consideration. To be considerate is to give something in return. The consideration needs to be legitimate.

Example: “A” promises to get “B” a job in the public sector, and “B” agrees to give “A” Rs. 50,000. Because the consideration for the agreement is illegal, it is not enforceable.

• Capacity of Parties: When parties enter into a contract, they should be able to do it lawfully. When a person reaches majority age, is mentally sound, and is not prohibited from entering into contracts by any laws, they are considered legally competent to enter into contracts.

If two people who are incapable of entering into contracts make an agreement, such agreement cannot be enforceable in court and hence cannot be considered a legal contract.

Example: Contracts entered into with minors or anyone who are not of sound mind are void.

Case law: Mohori Bibee vs. Dharmodas Ghose (1903)^[18]

In the current case, the plaintiff was Dharmodas Ghose. Regarding his real estate, he was the lawful owner. Dharmodas made the decision to mortgage his real estate, and he finished all the necessary procedures with Brahmo Dutta, the defendant. He was the moneylender in this instance, and Kedarnath is his management attorney. Dharmodas obtained a 12% interest rate mortgage deed for the sum of Rs. 20,000/-. Later, Dharmodas’ mother reminded Bramho Dutta that he was signing a contract with Dharmodas at his own risk and that Dharmodas was still a minor. Dharmodas and his mother sued Bramho Dutta, claiming that the mortgage was void since Dharmodas was not yet legal adult when he signed it. The defendant had passed away during this legal hearing, and his widow, “Mohori Bibee,” continued to fight his pleas.

Due to the fact that Dharmodas Ghose was underage when he entered into this contract and lacked the legal capacity to sign contracts, the court ruled in his favor. This contract is therefore null and void from the beginning.

• Free Consent: The parties to the agreement must give their free and informed consent. When a consent is obtained without coercion, undue influence, fraud, misrepresentation, or error, it is considered free consent. A legitimate contract cannot be created if the parties’ permission is not given freely.
• Example: Two automobiles, one owned by “A” (a Maruthi and the other an Indica), are offered to be sold by “B,” who accepts the offer believing it to be the Indica because there is no free assent and no contract.

NATURE OF CONTRACT

Contract law is distinct from other legal fields in that it defines the terms and circumstances under which promises made by contracting parties are enforceable against one another. It does not outline the obligations and duties that the law will enforce, but it does contain a number of limiting principles that the parties may use to create rights and obligations for themselves that the law will upload.^[19]

1. Contract law is largely judge-made law: Since practically all contract law is judge-created, it can be primarily found in the body of court decisions that have been made over time. Because of this, the author’s interpretation and justification of those choices make up the majority of works on the topic. But the organization and coherence of court rulings has also been greatly aided by scholarly publications. In the nineteenth century, early writers like Chitty, Pollock, and Anson were crucial in creating a cohesive body of contract law. This was particularly true with them. The concepts they established during that time are, in fact, still essential to contemporary contract law.
2. Contractual obligations are largely self-imposed: Contractual duties are mostly self-imposed, in contrast to most other areas of the law. Contract law just offers a framework; in contrast to other legal frameworks that force responsibilities on people regardless of their agreement, such as the criminal law or the law of torts, which allows people to define their own rights and obligations if and only if they so choose. According to the nature of contract law, people are typically free to choose whether or not to enter into a contract at all.
3. The law of contract, not contracts: In contrast to several other legal systems, Anglo-Australian common law acknowledges the existence of a general law of contracts that applies to all kinds of agreements; in other words, a law of contracts exists, not a law of contracts. Nonetheless, mostly due to legislation, certain categories of contracts now fall within the purview of special regulations, such as those pertaining to consumer finance, building and construction, insurance, sales of products, and carriage of goods. These legislations usually concentrate on the terms of the contract, leaving the formation and remedies for breaches to the common law. On the other hand, in some situations these issues are also addressed, and in others the general law’s application is nearly completely removed.
4. Relationship with other branches of law: There is no conflict between contract law and other legal disciplines. As a result, one event may give rise to duties or rights under multiple regimes. Customers who purchase goods or services that turn out to be defective, for instance, have the legal right to sue the supplier for breach of contract, resulting in any losses they incur, as well as a statutory right to compensation. In addition to a contractual claim against the seller, they will also have a claim for the tort of negligence and a statutory claim against the manufacturer if the goods result in physical harm or damage to other property.

SCOPE OF CONTRACT

A contract’s scope is established by its terms and conditions. It can be used to govern a wide range of transactions, including the sale of products or services, employment contracts, lease agreements, and so on. All parties involved must agree on the terms of the contract, and any breach may result in legal action. A contract’s reach is restricted by the terms and conditions of the agreement, and it cannot be used to impose illegal or immoral action.^[20]

Some of the major areas of contract law include

• Formation of contracts: This includes the proposal, approval, consideration, and willingness to establish legal relations as well as the process of drafting a legally binding agreement.
• Terms of the contract: This includes all of the agreement’s terms and conditions, such as the cost, terms of payment, dates of delivery, warranties, and other crucial information that is required for both parties to comprehend their respective roles and duties.
• Breach of contract: This includes instances in which one party breaches the terms of the agreement by failing to make payments, deliver goods, or carry out services as agreed.
• Remedies for breach of contract: This addresses the several legal options that are open to parties in the event of a contract violation, such as rescission, damages, specific performance, and injunctions.
• Interpretation of contracts: This addresses how to interpret the contract’s terms and conditions, taking into account any ambiguities or uncertainties.
• Discharge of contracts: This covers the different methods that a contract can be fulfilled or ended, including fulfillment, agreement, frustration, and violation.

CONCLUSION

A legislation that regulates agreements and contracts was passed by the British in India and is known as the Indian Contract Act 1872. It was designed to give guidance for when one party breaches the contract and to shield both parties from unjust provisions that they might not have been aware of when they agreed. This statute, which is still in effect today, gives people who make agreements with other people in India legal rights. Contracts are important because they help people in any organized context have healthy relationships with each other. They assist in formalizing ties and in settling contentious matters and disagreements. Contracts are one type of agreement that apply not only to business but also to daily life. The foundation of every transaction that takes place in daily life is a contract. A contract’s entire construction is predicated on rights and obligations that are freely assumed rather than imposed, and the liability inherent in a given contract is predicated on the voluntary commitments that each party undertakes to fulfill. Based on the ideas of equality and freedom, the parties are entirely free to create and enter into any kind of contract.

In summary, it is crucial to comprehend the meaning and notion of contracts in order for the entire idea to make sense. Furthermore, since the nature of a contract varies greatly, it is crucial to remember that these areas should be thoroughly investigated. The Indian Contract Act, 1972 has been followed in classifying the many contract types that are offered, making them the primary categories. The contract’s scope is expanding and differs significantly depending on the specifics. 

REFERENCES

1. 12 Avtar Singh, Contract & Specific Relief 591-669 (EBC Publishing 2020)
2. Indian Contract Act, 1872, No.9, Acts of Parliament 1872, (India).
3. Blog ipleaders, https://blog.ipleaders.in/contract-as-a-lawful-agreement-an-insight/  visited on 27-04-2024.
4. Legal service,  https://www.legalserviceindia.com/legal/article-4749-law-of-contract.html Visited on 27-04-2024.
5. Law aimers, https://lawaimers.com/meaning-nature-and-scope-of-contract/  visited on 27-04-2024.
6. Felthouse vs Bindley, [1862] EWHC CP J35; 142 ER 1037.
7. Balfour v Balfour [1919] 2 KB 571.
8. Mohori Bibee V/S Dharmodas Ghose – ILR (1903) 30 Cal 539 (Pc).
9. Lalman Shukla v. Gauri Dutt (1913) XL ALJR 489 (All.)
10. Harris v Nickerson (1873) LR 8 QB 286.

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[1] Legal Service, https://www.legalserviceindia.com/legal/article-7749-historical-background-of-indian-contract-act-1872.html#google_vignette  visited on 27-04-2024.

[2] Indian Contract Act 1872, § 2(h), No. 9, Acts of Parliament, 1872 (India).

[3] Indian Contract Act 1872, § 2, No. 9, Acts of Parliament, 1872 ( India).

[4] Indian Contract Act 1872, § 2(a), No. 9, Acts of Parliament, 1872( India).

[5] Indian Contract Act 1872, § 2(b), No.9, Acts of Parliament, 1872  (India).

[6]  Indian Contract Act 1872, § 10, No.9, Acts of Parliament, 1872 (India).

[7]  Indian Contract Act 1872, § 2(h), No.9, Acts of Parliament1872, (India).

[8] Indian Contract Act 1872, § 2(e) , No.9 , acts of parliament1872, (India).

[9]  Indian Contract Act 1872, § 2(a), No.9, acts of parliament1872, ( India).

[10] In Harris v Nickerson (1873) LR 8 QB 286,

[11] Felthouse vs Bindley, [1862] EWHC CP J35; 142 ER 1037,

[12]  Indian Contract Act 1872,§ 2(b), No.9, acts of parliament1872, (India).

[13]  Indian Contract Act 1872, § 2(d), No.9, acts of parliament1872, ( India).

[14] Indian Contract Act 1872, § 23, No.9, acts of Parliament1872, (India).

[15] Indian Contract Act 1872, § 2(g), No.9, acts of parliament1872, (India).

[16] Lalman Shukla v Gauri Dutt(1913)XL, ALJR 489 All.

[17] Balfour v Balfour [1919] 2 KB 571

[18] Mohori Bibee V/S Dharmodas Ghose, ILR (1903) 30 Cal 539 (Pc)

[19]  Unacademy, https://unacademy.com/content/ca-foundation/study-material/business-laws/nature-of-contracts/#:~:text=The%20nature%20of%20contract%20refers,responsibilities%20enforced%20by%20the%20law. Visited on 27-04-2024.

[20] UpCounsel, https://www.upcounsel.com/scope-of-a-contract visited on 27-04-2024.

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