Understanding Basics of A Contract

The law of contract is good example of private law, the kind which governs the relationship between individuals rather than concerning their relationships with society (for example crimes).

What are contracts?

In a society we are unable to take care of each of our needs. To grow our own grain, to stitch our own clothes and to lead self-sufficient lives is nearly impossible by anyone of us functioning singly. As a result we are dependent on our neighbours for various goods and articles as they are dependent on us for the services or goods we choose to manufacture. In order to promote this exchange and ensure that the goods and services are compensated on such terms and conditions as agreed between the parties are contracts necessary. Thus the agreements entered between us which are enforceable or protected by law are contracts.  

Why are they important?

Contracts as we discussed above are important to ensure exchange of services. This in turns promotes specialisation of labour and permits us to maximise our efficiency in production or specialisation of labour at the same time permitting us a basket of goods and services which we are unable to specialise in. For example, the law of contracts ensures that as a consumer of grains I, a student of law, pay ultimately to the farmer some compensation for the produce. It also ensures that i am entitled to the grain promised to me. As a result I can happily study law ( and occasionally write articles on several topics) and the farmer be guaranteed a price for the grains both of us knowing that there is a law which ensures dues is payable to us. Contracts therefore also not only ensures that there is a specialisation of labour, but also promotes investment in a society and maintain law and order as people don't lynch each other for debts. Rather they file suit in respect of contacts.

What is an agreement?

When two or more parties agree to do something or agree not to do something by mutual consent and understanding is an agreement formed. Thus an agreement is born between parties when a person makes a proposal and the other person after understanding the proposal accepts it and both parties agree to be bound by it. Remember the root of the agreement lies in the word “agree”, therefore both parties must say yes to an arrangement before it becomes an agreement.

For an agreement to form it is necessary that there be more than one person. Remember the purpose of contracts is to facilitate exchange between two or more persons. It could be two or more than two, but two is minimum. Thus an agreement made to myself in a form of New Year resolution to start exercising is no agreement for the purpose of a contract.   

Are all agreements contracts?

All agreements are not contacts. Only those agreements as protected by law are contract. For an agreement to be protected by law it must meet certain conditions which are required by the Indian Contract Act, 1872. For a contract, there must be a valid agreement formed between two or more parties who have the capacity to enter into such an agreement for valuable consideration and for a legal purpose. If the agreement satisfies such conditions, the agreement qualifies as a contract.

In our daily lives we make hundreds of promises and agreements with each other, but not all agreements are intended to be contracts. Thus, agreements entered with each other in our social capacity or those entered between husband and wife in the matrimony or in the context of domestic arrangement do not constitute agreements for the purpose of contracts. The leading case on the subject is that of Balfour v. Balfour where a husband promised his wife to give up her residence in England to live with him in the tropics on the promise that he shall compensate her by the way of valuable necklace. As with all husbands he pretended ignorance when asked for necklace at their return to England, the wife filed a suit against the husband. The court said that the agreement was a domestic one, and it was never the intention of the parties to enter into an agreement which could be enforceable by law.