Contracts
Contracts
Contracts
The term contract is defined under section 2(h) of the Indian Contract Act,
1872 as- “an agreement enforceable by law”.
The contract consists of two essential elements:
i) an agreement and
ii) its enforceability by law.
Contract = Accepted proposal/Agreement + Enforceability by law
Offer: An offer is a proposal by one party to another, indicating a willingness to
enter into a contract under specific terms. It must be communicated to the offeree
and demonstrate an intention to be bound by those terms upon acceptance.
Acceptance: Acceptance is the unconditional agreement to the terms of the offer.
It must be communicated to the offeror in the manner specified (or implied) by
the offer and must mirror the terms of the offer.
Legal Relationship: A contract creates a legal relationship between the parties
involved. This means that the parties intend to be legally bound by the terms of
the contract and can enforce those terms through legal action if necessary.
Capacity: Capacity refers to the legal ability of parties to enter into a contract.
This includes being of legal age, mentally competent, and not under the influence
of drugs or alcohol. Minors, mentally incapacitated individuals, and those under
duress typically lack capacity.
Free Consent: Consent must be freely given without coercion, undue influence,
fraud, or mistake. Both parties must enter into the contract voluntarily and with a
clear understanding of its terms and consequences.
Object: The object of the contract refers to the subject matter or purpose of the
agreement. It must be lawful, possible, and not against public policy. Contracts
with illegal or impossible objectives are void.
Lawful Consideration: Consideration is something of value exchanged between
the parties, such as money, goods, services, or promises. It must be lawful and
sufficient but need not be of equal value. Consideration distinguishes a contract
from a gift.
Not Void: The contract must not be expressly declared void by law. Void
contracts are those that have no legal effect from the beginning and cannot be
enforced by either party. Examples include contracts involving illegal activities
or those entered into under duress.
Capable of Performance: The terms of the contract must be capable of being
performed. If a contract is impossible to perform or becomes impossible after
formation due to unforeseen circumstances, it may be discharged.
Legal Formalities: Some contracts require certain formalities to be valid and
enforceable. These may include written documentation, signatures, or specific
language dictated by law. Failure to meet these formalities may render the
contract unenforceable.
5. Mistake (Section 20, 21, 22): - Mistake refers to an erroneous belief held by
both parties regarding a fundamental aspect of the contract. - Mistakes can be of
two types: mutual mistake, where both parties are mistaken about the same thing,
or unilateral mistake, where only one party is mistaken.
Contracts affected by mutual mistake are voidable, while those affected by
unilateral mistake may be voidable if certain conditions are met. These provisions
aim to ensure that consent in a contract is obtained freely and without any undue
influence or deception. They protect the interests of parties entering into
agreements and uphold the principles of fairness and justice in contractual
relationships.
Capacity
Capacity in the context of business law, refers to the legal ability of parties to
enter into a contract. It involves understanding whether the parties involved have
the mental competence and legal authority to make a binding agreement. Here's
a detailed explanation of capacity in business law:
1. Legal Age: - One aspect of capacity is the legal age requirement. In most
jurisdictions, individuals must reach a certain age to be considered legally capable
of entering into contracts. This age varies depending on the jurisdiction but is
typically 18 years or older. - Minors, those who have not reached the age of legal
majority, are generally not considered to have the capacity to contract. However,
there are exceptions, such as contracts for necessities like food, clothing, and
shelter.
2. Mental Capacity: - Capacity also includes mental competence. This means
that parties must be of sound mind at the time of entering into a contract. A person
who lacks mental capacity, such as due to mental illness or impairment, may not
have the ability to understand the nature and consequences of the contract. -
Contracts entered into by individuals who lack mental capacity may be voidable
at the option of the incapacitated party.
3. Intoxication: - Intoxication, whether by alcohol or drugs, can impair a person's
judgment and understanding. Contracts entered into while under the influence of
intoxicants may be voidable if the intoxication was severe enough to prevent the
individual from comprehending the terms of the contract. - The degree of
intoxication and its impact on the individual's ability to understand the contract
are crucial factors in determining capacity.
4. Legal Authority: - Capacity also extends to legal entities such as corporations,
partnerships, and other business entities. These entities must have the legal
authority to enter into contracts. - This authority is typically outlined in the
entity's governing documents, such as articles of incorporation or partnership
agreements. Contracts entered into beyond the scope of the entity's authority may
be void or voidable.
5. Capacity to Contract: - Capacity to contract ensures that parties have the
requisite understanding and freedom to enter into a legally binding agreement. It
protects vulnerable individuals from exploitation and ensures that contracts are
entered into voluntarily and with full comprehension of their implications. -
Contracts entered into by parties lacking capacity may be voidable, meaning they
can be rescinded by the incapacitated party.