WHAT IS A CONTRACT AND WHY DO WE NEED IT?

Although it is typical to believe that contracts are restricted to the business sector, it may
come as a surprise that contracts are an indispensable component of our life. Contracts,
previously a product of the business world, have now permeated our everyday lives. Simple
instances of contracts in our daily lives include hailing a taxi or boarding a train or leaving
our clothes at the dry cleaners. With the help of the above example, it is abundantly evident
that we knowingly or unknowingly enter into a contract into our day-to-day life. Thus,
understanding what a contract is and its significance is crucial for us.

So, what is a contract?

Contracts in India are governed by the Indian Contract Act, 1872, and section 2(h) of the act
defines contracts as, “an agreement enforceable by law is a contract.”

In simple terms, we can say that a contract is a written or an oral agreement between two or
more parties giving rise to mutual obligations which are legally enforceable.

In order to understand the concept of contracts it is first pivotal to differentiate an

“agreement” from a “contract.”

What is the difference between an agreement and a contract?

The Indian Contract Act,1872, section 2(e), defines an agreement as “every promise and
every set of promises, forming the consideration for each other is an agreement.” An
agreement is reached after a meeting of minds on a common objective and includes an offer
and acceptance.

The essential distinction between an agreement and a contract is that contracts, when
breached, can result in legal action. Agreements are not legally enforceable and, as a result,
cannot elicit legal action when breached.

What are the essentials of a valid contract?

Section 10 of the Indian Contract Act states that, “All agreements are contract if they are
made by

a) the free consent of the parties

b) competent to contract
c) for a lawful consideration
d) and with a lawful object
e) which are not hereby expressly declared void

Along with the elements listed in section 10 of the act, an offer, acceptance, and intent to
create legal obligation are required for a valid contract.

Why is a contract needed?

 Contracts serve as a record and establish the duties and obligations of the parties
to the contract.
It demonstrates and acts as evidence that both parties have mutually agreed to the
contract's terms. It precisely outlines the obligations and duties that both parties have
agreed to and specifies how and when such stated obligations must be performed.

 It creates confidentiality.
It also aids in avoids the contract from conferring rights or imposing responsibilities
on a third party and vice versa. It has a non-disclosure agreement (NDA) that
safeguards confidential information. In the event of disclosure, the party violating
such clause will suffer according to legally binding contract conditions.
 Safeguards interests and fortifies rights of both the Parties.
Contracts are legally binding, so any breach on the part of either of the parties might
result in legal ramifications. When a dispute emerges as a result of one party's breach
or non-fulfilment of an obligation, the other party might approach the court to protect
their interests.
 Avoids misunderstandings, reducing the likelihood of future confrontations.
Contracts are extremely significant in the business world. Misunderstandings between
parties can occur for a variety of reasons. To minimise future conflicts, it is
imperative to have a written instrument, such as a contract, that is exact and precise.
Both parties should carefully examine and abide by them, as violating the terms might
be detrimental to the overall business.
References
https://www.mondaq.com/india/contracts-and-commercial-law
https://juro.com/learn/purpose-of-a-contract
https://www.upcounsel.com/why-do-we-need-a-contract
https://legalserviceindia.com/legal/article-6733-contracts-and-their-importance.html
https://www.lawyered.in/legal-disrupt/articles/importance-contracts-business/