Lecture 2

Business Law & Legal Issues in

Tourism
THM- 215
THE ESSENTIAL ELEMENTS
OF CONTRACT
 Introduction
The Law of Contract deals with agreements which can be enforced through
courts of law.
The Law of Contract is the most important part of commercial law because every
commercial transaction starts from an agreement between two or more persons.
According to Salmond I a contract is "an agreement creating and defining
obligations between the parties.“
According to Sir William Anson, "A contract is an agreement enforceable at law
made between two or more persons, by which rights are acquired by one or more to
acts or forbearances on the part of the other or others."
 Example of law of contract
X enters into a contract to deliver 10 tons of coal of Y on a certain date.
Since such a' contract is enforceable by the courts, Y can pllin his
activities on the basis of getting the coal on the fixed date. If the
contract is broken, Y will get damages from the court and will not suffer
any loss.
 Definition of Contract
Section 2(h) of the Indian Contract Act provides that, "An Agreement
enforceable by law is a Contract". Therefore in a contract there must be (I) an
agreement and (2) the agreement must be enforceable by law.
An agreement comes into existence whenever one or more persons
promise to one or others, to do or not to do something, "Every promise and
every set of promises, forming the consideration for each other, is an
agreement-Sec. 2( e). Some agreements cannot be -enforced through the
courts of law, e.g., an agreement to play cards or go to a cinema.
An agreement, which can be enforced through the courts of law, is called
a contract.
 The Essential Elements of a Contract
I.Offer and Acceptance: There must be a lawful offer by one party' and a lawful
acceptance of the offer by the other party or parties.
2. Intention to create Legal Relationship: 'There must be an intention (among the
parties) that the agreement shall result in or create legal relations. An
agreement to dine at a friend's house is not an agreement intended to create
legal relations and is not a contract. But an agreement to buy and sell goods or
an agreement to marry, are agreements intended to create some legal
relationship and are therefore contracts, provided the other essential elements
are present.
The Essential Elements of a Contract
3. Lawful Consideration: Subject to certain exceptions, an agreement is legally
enforceable only when each of the parties to it gives something and gets
something. An agreement to do something for nothing is usually not enforceable
by law. The something given or obtained is called consideration.
4. Capacity of Parties: The parties to an agreement must be legally capable of
entering into an agreement, otherwise it cannot be enforced by a court of law.
Want of capacity arises from minority, lunacy, idiocy, drunkenness, and similar
other factors.
5. Free Consent: In order to be, enforceable, an agreement must be based on the
free consent of all the parties. There is absence of genuine consent if the
agreement is induced by coercion, undue influence, mistake, misrepresentation,
and fraud. A person guilty of coercion, undue influence etc. cannot enforce the
agreement.
The Essential Elements of a Contract
6. Legality of the Object: The object for which the agreement has been. entered
into. must not be illegal, or immoral or opposed to public policy.
7. Certainty: The agreement must not be vague. It must be possible to ascertain
the meaning of the agreement, for otherwise it cannot be enforced.
8. Possibility of Performance: The agreement must be capable of being
performed. A promise to do an impossible thing cannot be enforced.
The Essential Elements of a Contract
9. Void Agreements: An agreement so made must not have been expressly
declared to be void .. Under' Indian Contract Act there are five categories of
agreements which are expressly declared to be void. These are;
I. Agreement in restraint to marriage. (Sec. 26)
2. Agreement in restraint of trade. (Sec. 27)
3. Agreement in restraint of proceedings. (Sec. 28)
4. Agreements having uncertain meaning. (Sec. 29)-
5, Wagering agreement. (Sec. 30)
The Essential Elements of a Contract
10. Writing, Registration and Legal Formalities: An oral contract is a perfectly
good contract, except. in those cases where writing and/or registration is
required by some statute.
In India writing is required in cases of lease, gift, sale and mortgage of
immovable property: negotiable instruments; memorandum and articles of
association of a company.
Registration is compulsory in cases of documents com in/,o within the
purview of Section 17 of the Registration Act, e.g. mortgage-deeds covering
immovable property.
The terms of an oral contract are sometimes difficult to prove.
 contracts can be classified
Four broad divisions of contracts , namely,
(I) the method of formation of a contract,
(2) the time of its performance,
(3) its parties, and
(4) its legality or validity.
 contracts can be classified
I. Method of Formation
(I) Express Contract
Express Contract is one which is expressed in words spoken or written.
When such a contract is formed, there is no difficulty in understanding
the rights and obligations of the parties.
Example: As an example, if I offer to sell you my automobile for
$10,000, that's an example of an express offer. The parties are clear,
the consideration is clear and the obligations are clear.
 contracts can be classified
I. Method of Formation
(2) Implied Contract
The conditions of an implied contract is to be understood from the acts,
the conduct of the parties and/or the course of dealing between them.
Example: If a customer enters a restaurant and orders food, for
example, an implied contract is created. The restaurant owner is
obligated to serve the food, and the customer is obligated to pay the
prices listed on the menu for it. An implied-in-fact contract may also be
created by the past conduct of the people involved.
 contracts can be classified
I. Method of Formation
(3) Quasi Contract
There are certain dealings which are not contracts strictly, though the parties act as if there
is a contract. The Contract Act specifies the various situations which come within what is
called Quasi Contract.
Example: Let's say you pay for a pizza to be delivered. If that pizza is delivered to another
house, and someone else enjoys your three-topping special, a quasi contract could be
initiated. Now, the pizzeria could be court ordered to reimburse you for the amount you
paid for that pie.
Another example: a school district hires a roofing company to complete a specific task. As
that task is being completed, the roofing company uncovers a leak that needs to be fixed.
The roofing company fixes that leak and, when it comes time for payment, the school
district only pays the roofing company for that initial, specific task, and not the work
surrounding the leak in the roof. In this instance, the roofing company may have a case for
a quasi contract, in order to seek restitution for the added work to fix the leak.
 contracts can be classified
II. The Time of Performance
(1) Executed Contract
There are contracts where the parties perform their obligations immediately, i.e., as
soon as the contract is formed.
Example: Alex goes to the local coffee shop and buys a cup of coffee. The barista
sells her the coffee in exchange for the cash payment.
(2) Executory Contract
In this contract the obligations of the parties are to be performed at a later time.
An example of an executory contract would be an apartment lease. When you
enter into a lease agreement, you are promising to pay the rent for a period of time.
Until the term expires, the contract promises have not been fulfilled.
 contracts can be classified
III. The Parties Of the Contract
(I) Bilateral Contracts
There must be at least two parties to the contract. Therefore all contracts are
bilateral or multilateral.
Example: Any sales agreement is an example of a bilateral contract. A car buyer
may agree to pay the seller a certain amount of money in exchange for the title to
the car. The seller agrees to deliver the car title in exchange for the specified sale
amount. ... Business contracts are almost always bilateral.
 contracts can be classified
III. The Parties Of the Contract
(2) Unilateral Contract
In certain !contracts one party has to fulfill his obligations whereas the. other party
has. already performed his obligations. Such a contract is called unilateral contract.
Example: An example of a unilateral contract is an insurance policy contract, which
is usually partially unilateral. In a unilateral contract, the offeror is the only party
with a contractual obligation.
 contracts can be classified
IV. Legality or Validity of the Contract
Contracts can be classified into the following ;
(I) valid : For example, you sign to buy a blue house, and the house is blue; thus
the contract is valid.
(2) void: For example, a contract between an illegal drug supplier and a drug
dealer is unenforceable from the onset due to the illegal nature of the agreed-
upon activity.
(3) voidable: An example of a voidable contract is one involving a minor. ... There
are other parties who cannot enter into a legally binding contract either, including
someone who lacks the mental capacity or is intoxicated or on drugs at the time the
contract was drafted.
 contracts can be classified
IV. Legality or Validity of the Contract
(4) illegal: A contract is illegal if it involves doing something that is a criminal act or a
civil wrong, or against the public good. For example, it is an offence to sell a firearm
to a person not licensed to hold one, so a contract to sell a firearm in these
circumstances is illegal.
(5) unenforceable: For example, if an employer forces an employee to sign a
contract that prevents him or her from taking sick leave, it would be considered
unenforceable.