CONTRACT LAW: FORMATION PERFORMANCE And BREACH

 

CONTRACT LAW: FORMATION PERFORMANCE And BREACH

This Article is written by -Aanya Shukla CMP Degree College , (UoA) BA.LL.B  (Hons.) 1st year

 

Abstract

A Contract is the most important law in Indian Commercial and civil law. It forms the backbone of all commercial relationships and personal dealings , from buying a product to forming multi - million - dollar business deals. The law of Contract ensures that promises made between individuals or organizations are honored and that there are remedies available if they are not . In this article , we will explore three aspects of contract law : Contract, Formation performance and breach of Contract.

 

Introduction

In India, contracts are governed by the Indian Contract Act 1872^[1], which provides the framework for the formation, performance and enforcement of contracts. This act is divided into two parts -:

Part l deals with the general principles relating to the law of contracts.

Part ll deals with special kinds of contracts, such as contract relating to indemnity , guarantee and bailment pledge and agency.

Contracts play an essential role in everyday life. From signing a job offer to buying goods or services , contracts help ensure that promises made between people or companies are kept and that there are legal remedies in case they are broken.

 

Formation of Contract

Contract formation is the process through which two or more parties enter into a legally enforceable agreement. For a contract to be valid under Section -10 of Indian Contract Act 1872 , it must fulfill certain essential elements.^[2]

 

1.1 Essential elements of a valid Contract

 

Offer And Acceptance

 An offer Section( 2 (a) ) is a proposal by one party to do or not do something, and when the other party accepts this offer ( Section 2(b) ) , it becomes an agreement.

Acceptance must be unqualified and absolute.

 

Lawful Consideration

-:As per Section-2(d) Consideration refers to something in return. A contract without consideration is void unless it falls under exceptions provided in Section -25.

Capacity of Parties ^[3]

-:As per  Section- 11  parties must be competent to contract, i.e., they must be of sound mind, not disqualified by law, and above 18 years of age^[4].

 

Free Consent

Section-14 defines free consent which means both parties agree to the same thing in the same way. But for a contract to be valid , this consent must be free- not given under pressure, trick or misunderstanding.^[5]

 Lawful Object

 The object of the contract must be legal and not opposed to public policy (Section -23).

 Intention to Create Legal Relationship

 There must be clear intent by the parties to be legally bound by the agreement.

 1.2 Types Of Contract

Contracts can be classified into three types. These classifications help in understanding how contracts operate in various situations and their legal effects.

Classification based on Validity (Enforceability)

 Valid Contract

-:A contract that satisfies all the essential elements laid down in Section-10 of the India Contract Act.

-:It is legally enforceable.

Example

A written agreement with offer, Acceptance, lawful Consideration and free consent.

 

Void Contract Section 2(g)

-: A contract that is enforceable by law becomes void.

-: void Contract is a Contract that is not legally valid and has no effect from the beginning.

Example

A Contract to export goods that later becomes illegal due to a government ban.

Voidable Contract Section 2(i)

-: A contract that is enforceable by law at the option of one party but not at the option of the others.

-: Caused due to coercion, misrepresentation, fraud or undue -influence.

Example

A signs a Contract with B under pressure (Coercion.)

 

Illegal Contract

-: An illegal Contract is a Contract that is forbidden by law or involves doing something unlawful.

-: it is void Ab -initio ( from the beginning) and can not be enforced.

Example

A Contract for smuggling or betting.

Unenforceable Contract

-: A Contract that cannot be enforced due to some technical defect such as lack of proper stamp duty or being barred by limitation.

-: it is valid in essence but cannot be enforced in court unless corrected.

Classification Based on Formation

 Expressed Contract

-: A Contract where terms are clearly expressed in word ( oral and written).

Example

A lease agreement written and signed by both parties.

Implied Contract

-: An implied Contract is a contract that is not written or spoken directly but is understood by the action or behaviour of the people involved.

Example

Paying fare after using public transport implies a contract.

Quasi Contract

-: Not a real contract, but the law imposes an obligation as if there is a contract ,to avoid unjust enrichment .

Example

A  person mistakenly delivers goods to tje wrong house. The receiver must return them or pay for them.

Based on Performance

 Executed Contract

-: A Contract where both parties have fulfilled their obligations.

Example

A buys a book and pays cash, the transaction is complete.

 Executry Contract

-: A Contract where some or all terms remain to be performance.

Example

Amit agrees to deliver a laptop to Rahul next week, and Rahul agrees to pay Rs. 40,000 when he gets the leptop.

Unilateral Contract

-: A one sided promise : only one party is obliged to act after the other party to fulfill a condition.

Example

A offers Rs. 1,000 to anyone who finds and returns his lost wallet. Only A is bound once someone returns it.

Bilateral Contract

-: A Contract where both parties make mutual promises.

-: Most Commercial Contracts are Bilateral.

Example

Ravi promises to pay Rs. 500 to Sita , if she paints his fence. She agrees to paint the fence.

 

Based On Mode Of Creation

 Written Contract

-: The terms are documented in writting.

-: Useful for clarity and legal proof.

Example

Sale deed of Property.

Oral Contract

-: Made through spoken words.

-: Legally valid but harder to prove tje court.

Example

A promise made verbally to deliver milk daily.

 Electronic Contract

-: Formed via e-mail, signature , clickwrap or online forms.

-: Recognised under the Information Technology in 2000.

Example

Accepting terms and conditions while shopping online.

 

PERFORMANCE OF CONTRACT

Performance of contract refers means fulfilling the obligations or promises made by the parties in a legally binding agreement.

 

2.1 Who Must Performance

 Under Section 37 to 39 of the Act.

 The Promisor is bound to perform the promise personally unless the contract allows someone else.

In case of death, the legal representative of the deceased Promisor is liable to perform,unless it involves personal skills.

 

2.2 Time and Place of Performance

 Section 46 to 50 Provide rules regarding the time and manner of performance.

If the time is mentioned , the contract must be performed on or within that time.

 

2.3 Performance by joint promissor

Section -42 -: deals with joint promises made by two or more persons. It explains who is responsible for performing the promise when one or more joint promisors die.

Section -43 The Promisee may compel any one or more of the joint Promisor to Performance.

 

2.3 Types Of Performance

 -: Actual Performance

 When the Promisor performs as agreed.

 -: Attempted Performance (Tender)

When someone is ready and willing to perform their promise , but the other party does not accept it.

 

Discharge of Contract

Discharging of contract refers to the the termination of the contractual relationship between parties .

 3.1 Modes of Discharge

 BY PERFORMANCE

 Completion of terms (Section 37- 39.).

-: When all parties involved in a contract have performed their duties and responsibilities as per the agreement , resulting in the discharge of contract.

Example

 A delivers the car on an agreed date and B pays Rs. 2,00,000 as promised.

Both parties have completed the terms of the contract.

 BY MUTUAL AGREEMENT (SECTION -62)

A contract can be discharged if all parties agree to cancel or change the terms. This can be done in the following ways -

  NOVATION

Replacing an old contract with a new one involving the same or different parties.

Example

A owes B Rs. 10,000. They agree that C will pay B instead. The old Contract is discharged and new one is formed.

 ALTERATION

Changing one or more terms of the contract by mutual consent.

Example

Changing the delivery date or payment amount.

 RESCISSION

Canceling the contract by agreement between parties.

-: REMISSION( SECTION 63)

Acceptance of a lesser amount or promise than what was originally agreed.

 

 BY IMPOSSIBILITY OF PERFORMANCE (SECTION -56)

 Also known as Doctrine of Frustration. When something happens that makes it impossible to carry out the contract , the law says the contract automatically ends.

Example

Destruction of subject matter.

Changes in law.

Death or incapacities in personal service contracts.

CASE -: Satyabrata Ghose v. Mugneeram Bangur & Co. AIR 1954 SC 44 - The Supreme Court discussed the Doctrine of Frustration.

 DISCHARGE BY LAPSE OF TIME

 Under the Limitation Act 1963, if the contract is not performed within a specified time and no legal action is taken, the contract becomes unenforceable.

Example

A loan not repaid for 3 years without any legal action becomes time barred.

 

DISCHARGE BY OPERATION OF LAW

 Certain events under the law automatically discharge the Contract.

Example

A is declared is insolvent by the court.

His contract with B is automatically declared.

Merger of inferior and Superior rights.

 

DISCHARGE BY BREACH OF CONTRACT

When one party fails to perform or refuses to perform their obligation, it amounts to a breach which gives the other party the right to terminate the contract.

 

TYPES:-

ACTUAL BREACH

At the time of performance.

 ANTICIPATORY BREACH

Before the time of performance , a party shows intent not to perform.

Example

A singer is hired to perform at a concert on 15th August. On the event day, the singer does not show up.

 DISCHARGED BY MATERIAL ALTERATION

When such an unauthorized change is made , the original contract becomes void and the parties are discharged from their obligations.

 

 REMEDIES FOR BREACH

 The India Contract ACT ( SECTION 73-75) provides remedies.

 

DAMAGES (SECTION 73)

 -: Compensation is awarded for the loss or damage naturally arising from the breach.

-: Hadley vs. Baxendale is a leading case setting the principle of reasonable foreseeability.

 SPECIFIC PERFORMANCE

 Under the Specific Relief Act, 1963 courts may direct the breaching contract party to perform the contract, especially where damages are inadequate.

 INJUNCTION

Courts may issue and order restraining a party from doing something in breach.

 

Quantum Meriut Section -73

 Payment for part - performance when full contract could not be completed due to breach or impossibility.

 

CASE LAW ON CONTRACT LAW

 Carlill vs. Carbolic Smoke Ball Company (1893)^[6]

 PRINCIPLE-: Offer And Acceptance - Unilateral Contract

Facts -: The Company Advertised thay it would pay £ 100 to anyone who used their smoke ball and still caught influenza . Mrs. Carlill did so and fell ill. The company refused to pay.

 Held -: There is a valid and binding contract between Mrs. Carlill accepted the  offer by performing the condition She was entitled to the reward.

 Importance -: Established the concept of Unilateral contracts and intention to create legal relations.

 Balfour vs. Balfour (1919)^[7]

 PRINCIPLE -: intention to create legal relationship.

Facts -: A husband and his wife monthly payments while he was abroad. Later, he stopped the payments and the wife sued.

 Held -: There were no legal intentions as it was a domestic agreement between husband and wife.

 Importance -:  Domestic arrangements are not legally enforceable unless there is intent to create legal obligation.

 

Mohari Bibee v. Dharmodas Ghose (1903)^[8]

 PRINCIPLE -: Minor’s Capacity to Contract.

 Facts-: A minor executed a mortgage for a loan. The lender sued to recover the money when the minor defaulted.

Held -: A contract entered into by a minor is absolutely void and not enforceable in law.

 Importance -: Minor's cannot enter into a valid Contract under section -11 of the Indian Contract Act.

 

 State of West Bengal vs. B.k Mondal and Sons (AIR 1962 SC 779)^[9]

 PRINCIPLE -: Quasi Contract ( Section -70)

 Facts -: The Contractor constructed building at the request of the government , but no formal comtract existed.

 Held -: The government benefited and Under Section -70 , they were liable to pay reasonable compensation.

 Importance -: Explained

Quasi Contractual liability -: When no formal contract exist but enrichment is unjust.

 

Conclusion

 The laws of contracts plays a fundamental role in regulating relationships in both personal and Commercial spheres . Understading the formation, Perfomance and Breach of Contracts is crucial for ensuring that parties uphold their promises and for resolving disputes when things go wrong. The Indian Contract Act, 1872 provides a comprehensive legal structure for this supported by case laws and judicial interpretations. A well- drafted contract not only minimizes risks but also serves as a strong legal instrument for justice and fairness in dealings.

 

BIBLIOGRAPHY

(1)The Indian Contract Act 1872

(2) http:// blog.ipleaders.in/doctrine-of- frustration/.

(3)https.//www.mondaq.com/india/contracts -and commerical -law1441750/law of digital -signature -in-india/.

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^[1] The Indian Contract Act 1872 Section 2(h) defining contract as an agreement enforceable by law.

^[2] Section -10 of Indian Contract Act states that all agreement are contracts if they are made by the free consent of parites competent to contract , for a lawful consideration and lawful object and are not expressly declared to be void.

^[3] Section -25 of the India Contract Act ,1872 which deals agreement without consideration.

^[4] Section 11 of Indian Contract Act defines who is competent to contract .

^[5] Section 14 define the term free consent which is vital requirement for the validity of contract under section 10.

^[6] Carlill vs. Carbolic Smoke Ball Company (1893) 1 QB (256) England - lamdmark case on unilateral Contracts.

 

^[7] Balfour vs. Balfour (1919) 2 KB  571 - on intention to create legal relations.

^[8] Mohari Bibi vs. Dharmodas Ghose , (1903) 30 IA 114 a- on  contract with minor being void.

^[9] State of West Bengal vs. B.k Mondal and Sons  AIR 1962 SC 779

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