In this article, Dileep Krishnan N, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on obligations of parties to contract

Introduction

‘Contract’ is a word having very wide connotations. We are all aware of the Rousseau’s hypothetical social contract theory. One is a part of that contract by just being born as a human being. This social contract helps the society to develop. This is the edifice on which some of the rights are built. Social contract tells how to enjoy without even entering into a contract. A perfect example is your human right. That is a right you enjoy inherently as you are born. A complete person is somebody who can enjoy his rights and fulfil his duties.

Generally, in agreements, the rights and liabilities are chosen by the parties themselves. When the rights and liabilities are chosen by the parties themselves, the law doesn’t have a say there. But if you want your agreement to be enforceable, then you must enter into an agreement which is enforceable under law. So, in other words, contract law enables you to enter into agreements which are enforceable. There are certain criteria that the agreement has to fulfil so that it becomes enforceable under law. Thus an agreement is regarded as a contract when it is enforceable by law.

Definition of a contract

The word Contract comes from a Latin word ‘contractus’ meaning to collect, combine or make an agreement. In its most basic form, a contract will have two parties, coming together, wanting to enter into a relationship where they want to create rights, liabilities and obligations. The law of contracts confines itself to the enforcement of voluntarily created civil obligations. It does not cover the whole range of civil obligations. There are many obligations of civil nature whose infringement may be actionable under other branches of law like the law of torts or of trust or some other statutes. But they are outside the purview of the law of contracts. The fundamental pre-requisite to have obligations (enforceable) in a contract is that the contract must be valid and enforceable. Thus the obligation of the parties to a contract comes predominantly from the terms of the contract itself.

Formation Of Contracts

Proposal and Acceptance

According to H.L.A Hart, contracts are ‘created by the deliberate choice of the individual’. Agreements that are acceptable or rather enforceable alone will be treated as contracts. Every contract is an agreement, but every agreement is not a contract. All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared as void. The proposal and its acceptance is the universally acknowledged process for making an agreement. A proposal is the starting point. When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. So these are the norms which one needs to look into in order to determine whether there exists a valid contract or not. And further, it can be noted that the obligations of the parties to a contract derive from implicit or explicit promises. To be more specific, it is rooted on two factors, that is, actual choice and actual and voluntary acceptance.

Contractual Obligations

In its cardinal level, the term contractual obligations are those duties which the parties to a contract are responsible through the terms of the contract. So, pre-dominantly the nature of obligations of parties to contract is dependent on the terms of the contract. Every contract is accompanied with the exchange of a valid consideration which can be almost anything ranging from products, services, money etc. Each party to the contract will have various obligations in connection with this exchange of consideration. If any of the parties to the contract fails to carry out their contractual obligations in accordance with the contractual terms, usually the end result will be the breach of the contract.

Thus, the contractual obligations mostly depend upon the specific subject matter of the contract. It may be different for different types of contracts. However, some of the most basic forms of contractual obligations which can be traced in almost all the contracts include payment (for which the contact can again specify obligations regarding amounts, deadlines etc), delivery (for which the contract can specify obligations as to the time, place and mode of delivery), quality of goods (which can again be described in the contract) etc. These types of specific obligations can be varied or modified according to the pertinent details of the contracts at hand. Apart from these, the parties may also be bound by certain general principles and obligations while forming a contract. For example, every party to a contract is obligated to deal fairly and truthfully with other parties and is also obligated to refrain from the use of force or coercion in obtaining the consent to the agreement.

When it comes to the Indian Contract Act, 1872, Section 37 of the Act deals with the obligations of parties to contracts. Thus, according to section 37, each party is bound to perform his obligation under the contract, unless the performance is dispensed with or excused under the provisions of the Contract Act, or of any other law. For example, a performance under section 37 may be dispensed by agreement under section 62 or it may be excused under section 56 by supervening impossibility of performance.

A very important case law in this regard is the case of Syndicate bank v. R. Veeranna, where the court held that the bank had the right under the agreement to vary the interest upwards up to a certain percentage. The exercise of this power did not require that the borrower should have been put on notice.

Theories of Contractual Obligations

There are certain theories which help in assessing the nature of contractual obligations. Out of which the five most commonly used theories are will, reliance, efficiency, fairness and bargain theories. These theories are generally used to explain which commitments warrant enforcement and which do not. These theories of contractual obligation actually exemplify three types of contract theories. Will and reliance theories are party-based. Efficiency and fairness theories are standards-based. The bargain theory is process-based.

However, there are existing lacunae for each of these theories. The party based theories are known for supporting one particular party to a transaction too much. The will theory gives too much protection to promissory whereas the reliance theory is known for its too much protection to promise. This undue emphasis which these theories place on one single party to the transaction is identified as its main drawback and it undoubtedly creates insoluble problems.

Standards-based theories are those which evaluate the substance of a contractual transaction to see if it conforms to a standard of evaluation that the theory specifies as primary. Economic efficiency and substantive fairness are two such standards that have received wide attention. All the standard based theories usually suffer from a fundamental problem. This fundamental problem is identifying and defending the appropriate standard by which enforceable commitments can be distinguished from those that should be unenforceable.

Process-based theories shift the focus of the inquiry from the contract parties and from the substance of the parties’ agreement to the manner in which the parties reached their agreement. Such theories posit appropriate procedures for establishing enforceable obligations and then assess any given transaction to see if these procedures were followed. The single biggest problem associated with the process based theories is that they place insurmountable obstacles in the way of minimizing difficulties for enforcement.

Conclusion

A contractual obligation on the parties which arose from an agreement between the parties can thus be enforced either specifically or by giving the obligee the damages which is again stipulated more or less by the contract itself. The cause of action arises only when the agreement and its breach is proved. The obligation to perform the terms of the contract is the primary and antecedent obligation. The obligation to pay the damages is only secondary and a remedial obligation.

The obligation of parties to a contract is acquired by the signing on for those particular obligations. It must be a voluntary acceptance of a cluster of rights and duties. Thus it is plain to say that the validity of a contractual obligation lies on the very fact that the formation of a contract involves the parties to take up voluntarily, a morally binding promise. Since the contract is legally recognized and enforceable, the contractual duty gives a legal effect and validity to the moral duty.