27 ,July 2024
A contract is one of the most important and crucial documents for business operations. A few instances of crucial contracts are purchase orders, employment contracts, operational agreements, etc. When establishing any kind of agreement, it becomes crucial for a small business owner to be well-versed in contract law in order to prevent unforeseen problems.
To understand contract law, one does not necessarily need to go to law school; yet, selecting the top law schools may help one learn a great deal about the field. Nonetheless, we have covered a number of significant topics related to contract law, such as its definition, what constitutes an agreement, how an agreement differs from a contract, etc.
What is a Contract?
A written agreement comprising commitments and duties that must be met by two or more parties is called a contract. Since only the parties to the written agreement have legal standing and it is enforced by law, violating any of those rights might lead to legal action or even the deal's total repudiation.
In other words, the Contract Act defines a contract as "an agreement enforced by law". A compromise between two parties with obligations or duties that both parties must fulfill is called an agreement. When such an agreement is become legally binding, it is referred to as a contract.
Therefore, reciprocal commitments that the parties to the agreement must uphold make up a contract.
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What is an Agreement?
A mutual understanding between two or more parties is called an agreement. It's important to keep in mind that agreements may not always have to be enforceable, meaning that each party need not fulfill their obligation under the terms of the agreement. Another type of agreement is a gentleman's handshake or verbal agreement. The two most important elements of an agreement are:
- Two or more parties
- Consensus ad-idem
Hence, it can be said as Agreement = Offer + Acceptance
Let’s understand the term agreement with an example -
Two friends named A and B make plans to go camping together the next month. They have discussed the trip's details, such as the destination, the departure date, the type of equipment each of them would bring, etc., and they have verbally agreed to go. In this case, the conversation can be viewed as an agreement.
Difference between Agreement and Contract
| Particular | Agreement | Contract |
|---|---|---|
| Meaning | A consent or shared understanding between two or more people | A formal legal agreement that contains the terms and conditions of the parties |
| Type | Mostly informal | Formal |
| Defined under | Section 2 (e) of the Indian Contract Act, 1872 | Section 2 (h) of the Indian Contract Act, 1872 |
| Usage | Used by people like friends, relatives, etc. | Widely used in commercial settings |
| Legal bindings | No | Yes |
Types of Contracts
Based on the information provided above, we may define a contract as a legally binding agreement that is enforceable orally. The documentary portion is the only thing missing. A contract can be enforced if both parties agree to a performance and a payment.
However, the following are some crucial points to keep in mind:
- It is mandated by state law that partnership agreements and other business contracts have boilerplate information on their pages. If you can obtain this knowledge from internet sources, you can save time and prevent making mistakes.
- Employment agreements should contain information about the role, including a job description and pay range. You may choose to include nondisclosure agreements with the contract or to attach them to it.
- Real estate contracts include things like transfer documents, lease agreements, and sales agreements. It doesn't matter who drafted the original contract; you should have another attorney review them.
Basics to Breach of Contract
How do you determine if there is a breach of contract? A breach of contract happens when one party fails to fulfill its end of the bargain. There are four typical types of breaches that are known to exist:
- If one of the parties does to produce, there has been an actual breach. For instance, if Party A commits to painting Party B's house, Party A will be in serious breach of their agreement if Party A fails to do so.
- An anticipatory breach occurs when one party violates first, knowing that the other will follow suit. Certain corporate procedures allow for anticipatory breaches due to legal grounds.
- When one of the contract's parties makes a tiny mistake, it is considered a minor breach. If Party A committed to finish painting by June 30 but didn't, it would be considered a minor infraction.
- When the failure of the breaching party results in a significant harm, there has been a material breach. In most cases, a significant breach gives rise to legal action from the non-breaching party.
Contract conflicts that lead to violations are a big worry for business owners. You should have no issue getting legal counsel from a competent attorney if you are a small company owner. You only have a short window of time to file a case, and it could be challenging to get the necessary evidence without a lawyer.
Enforcement of a Contract
The enforcement of contracts is governed by public policy and common law. A contract that is "void ab initio" or "void on its face" cannot be enforced. Other types of contracts that lack enforceability include:
- Incapacity: The parties must both ratify the agreement. Some persons cannot legally consent because of their age, mental health conditions, or legal position.
- Misrepresentation: Violations of contracts may result from fraud, coercion, or undue influence.
- Unconscionable: If a contract's terms are obviously unfair or the parties didn't negotiate from an equal position, the court has the power to declare the agreement void.
- Mistake: When parties involved in a contract misunderstand the agreement, a joint error takes place. When one party commits a mistake, it is referred as unilateral error whereas misrepresentation or fraud is said when one party is aware about the inaccuracy and takes undue advantage of it.
A court can address legal matters pertaining to contracts in one of two ways. It is dependent upon the details of the contract and the timing of the mistake.
- Agreements that are null and void from the beginning cannot be enforced. An invalid contract may not be able to be fulfilled legally. If the courts are unable to enforce the contracts, it will be declared void.
- Contracts that can be terminated are voidable by the parties or by the law. For instance, it is against the law for a minor to sign a contract, but if they do, they can subsequently accept its terms upon reaching the age of 18. In the event that it is not, the contract is void.
A written or verbal contract is an essential component of business, particularly when it comes to the sale of goods and services. A contract is an agreement that is enforced by law, and even a small mistake can have serious consequences. If small business owners are not familiar with contract law, they should get legal counsel.
Conclusion
In the end, the Indian Contract Act, 1872 gives the foundational structure to comprehend and execute contracts in India. Contracts are defined as an agreement which is enforced by law, are important to different and all the aspects of a business whether it is purchasing orders, selling goods or employment agreements. Additionally, it is important for small business owners to be aware of the important aspects of the contract law in order to avoid legal difficulties. This understanding revolves around be acquainted with the concept of a valid agreement including its important terms like offers and acceptances. For business owners, understanding contract law effectively enhances the chances of protecting against disputes and breaches.