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How promises become legally enforceable contracts?

A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognises as a duty. Any words or conduct by one or both parties that communicate a legally enforceable promise will constitute a contract.1

A buyer in a departmental store who picks out a bottle of hair oil and pays cash for it at the register makes a purchase and the store makes a sale of the hair oil but it would be difficult to find a contract between the store and the customer. Most likely, neither party made any promises so there was no point at which either was bound to some future performance.

Law of contract determines the enforceability of the promises of the parties and is the body of law applicable to the formation, interpretation, and performance of the contracts, as well as for the remedies in the event of the failure of a party to perform the promises made.2

The basic ingredient in this regard is the agreement of the parties. For example, was a promise in fact made, was it sufficiently definite to define the rights and obligations of the parties? Since casual promises do not generally serve as a basis for recognising rights, there is the additional question whether the promisor had the necessary intent. In the language of the law, the question is whether the promisor manifested the intention to the legally bound.3 The essentials in this regard include free consent, competency of parties, lawful object and consideration, agreement must be valid and not void.4

The necessary agreement between the parties is most easily visualised in terms of offer and acceptance, for example: “I will buy your car for Rs 5 lakhs” with the response being “I accept.”5

An agreement will be found to have been made without either party making a specific identifiable offer which the other accepted. Realising that one may not be able to find a specific offer and acceptance in every contract relationship that comes into existence, it is nonetheless easier to approach the concept of contract formation by focusing upon the basic elements involved in the offer and acceptance interchange.6

The most common basis for enforcing promises involves the concept of consideration.7 There is consideration for a promise if that promise was made for something in return as a part of a bargain or deal. The something in return promise to perform an act or refrain from performing an act, or it could be the actual “doing” or “refraining from doing” an act. The underlying principle is that the promise is being enforced because the promisee paid a consideration or price for that promise.

Courts enforce a promise if it is made as a part of a bargained exchange for another promise or for the performance of forbearance of an act. If the consideration was a return promise from the promisee, then the return promise will likewise be enforceable. The promises may be written or oral, resulting in what is sometimes called an express contract, or the promises may be implied from the conduct of one or both of the parties, resulting in an implied-in-fact contract.8

Courts may enforce a promise that induces a foreseeable and detrimental change of position by the promisee.9 The law may provide a remedy for the breach of this promise regardless of whether the promisor was seeking something in return or whether the promise was gratuitous if it was foreseeable that the promisee would incur some economic loss by reasonably and foreseeable changing position in reliance on the promise, and did so under circumstances that justice requires some remedy for breach of the promise.10

Promises that renew or restate a previous promise that was unenforceable when originally made or had become unenforceable for some reason can be enforced by the courts.11 Some jurisdictions still recognise that a signed writing under seal is enforceable without consideration. The validity or invalidity of a sealed writing is subject to statutory limitations of the specific jurisdictions.12

Parties can make promises that they intend to keep but that they do not intend to be legally binding.13 Under the theory of Restitution,14 courts impose an obligation to pay for benefits conferred despite the absence of a promise. This non-consensual obligation imposed by law, is sometimes called an “implied-in-law contract” but it is not a contract. It has nothing to do with any promise, either expressed or implied, and therefore there is no need for there to be a promisor or promisee.15

“There are certain obligations which are not in truth contractual in the sense of resting on agreement, but which the law treats as if they were”, these obligations are known as quasi-contract.16 It is a term that is used to describe a certain type of unjust enrichment or restitution case that being a case involving imposition of a duty to pay for a benefit conferred as a result of the rendition of services or delivery of goods. The terms quasi-contract and implied-in-law contract are generally treated as synonymous.17

“Quasi-contract” is an accepted term today and no particular harm will result from its usage. One needs to remember that the liability is in restitution (with purpose being the avoidance of unjust enrichment of the defendant), not contract. By contrast, the term “implied-in-law contract” almost inevitably leads to confusion. True contracts can be either express or implied. Thus, one form of true contract is properly called an “implied contract” meaning a contract where a person’s promise is implied from that person’s conduct.18

A contract may involve both goods and services in which case a court might focus upon which part is the dominant part of the transaction, the alternative is to focus upon the specific part of the transaction that gave rise to the dispute. A contract of a special machine to be designed and built by the seller and delivered to the buyer is ordinarily a contract for the sale of goods.19 Assuming that the machine would have come into existence and been “movable” when performance was due, it meets the statutory definition of goods. However, it is possible to characterise this as a research and development service contract. Under this approach the answer would depend upon what is found to be the dominant nature of the transactions.20

In construction contracts it is the rendition of a service involved by the contractor. There is ordinarily no sale of goods per se. Boards, nails and other goods delivered to the construction site are the property of the contractor who can remove them to another job and must replace them if they are stolen. When the board is nailed to something fixed to the foundation the board and nail now belong to the owner, but they are no longer moveable items so they cease to be goods. The point at which the owner acquires a property interest is the same point at which the property stops being goods and becomes part of the land. One side effect of this is that the owner does not have to pay sales tax for the price of the boards and nails. There has been no sale of goods to the owner.

In the case of defective materials in a construction project, it may be to the owner’s advantage to find a sale of goods because such a sale would likely produce warranties such as a warranty of merchantability.21

A contract for the sale of minerals or the like or a structure or its materials to be removed from realty is a transaction in goods only if they are to be served by the seller. If they are to be severed by the buyer, the contract should be subject to contract provisions that are applicable to the sale of an interest in realty.

And in order to validate a pledge, the pledge must act in ‘good faith’ which means honesty in fact in the conduct or transaction concerned. There is no objective standard of reasonableness. However, in the case of a merchant who is involved in a transaction in goods. The standard for merchants requires “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.22

Where there are contracts for international sale of goods, the UN Convention23 commonly referred to as the CISG governs the subject. Where a party has more than one place of business, for legal recognition the place of business which has the closest relationship to the contract will be considered his place of business for its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract.

Because of the possible pervasive application of the CISG, care should be taken at the drafting stage to ensure that the law intended to apply to the transaction is effectively chosen. And, if the contract has already been formed, one of the first terms to be looked at in the event of a possible dispute should be the choice of law terms.24

(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)

1. See section 2(h) of the Contract Act, 1872 defines contract as an agreement enforceable by law, under section 10 all agreements are contracts if made by free consent and by a competent person. “Promise” in itself could be equivalent of an agreement whereas agreement enforceable by law, was a contract. Rule laid down in S. 9 of the Contract Act, 1872 signifies that a proposal or acceptance of any promise need not be in words, and would remain applicable to acceptance of proposals covered by S.25(3) of the Act. Such acceptance could be otherwise than in words and need not be in writing at all.

2. See the provisions of the Contract Act, 1872 contained in chapter IV (section 37-67) read with section 58 of the Sales of Goods Act, 1930 and the provisions of Specific Relief Act, 1877.

3. For creating a legally enforceable contract, there should be an agreement upon the same thing in the same sense, see section 13 of the Contract Act, 1872.

4. Example: A enters into a hotel and eats some food. It is the liability of A to pay the consideration for food. It is an implied contract. The contract is implied in fact. It is a true contract.

5. See section 3 of the Contract Act, 1872.

6. Id.

7. See section 2(d) and 10 of the Contract Act, 1872, a lawful consideration is a necessary ingredient for contractual agreements.

8. See section 9 of the Contract Act, 1872. An express promise may be proved by the written or spoken words or by both if it consist party of written and party of spoken words. A tacit promise may be implied from a continuing course of conduct as well as from particular acts. Thus an agreement between partners to vary the terms of the partnership contract may “either be expressed or be implied from a uniform course of dealing”. Again, when a customer of a bank has not objected to a charge of compound interest in accordance with the usual course of business, there is an implied promise.

9. Regarding performance of contract see sections 39-69 of the Contract Act, 1872.

10. Remedies generally include specific performance of enforcement of obligations, compensation and damages.

11. Examples include: (a) A new promise to pay pre-existing obligations would have been enforceable as a contract supported by consideration but that was unenforceable when made because the promisor lacked legal capacity. (b) A promise to pay pre-existing obligations that were valid at one time but became unenforceable because the time permitted by law for bringing suit has expired or because the debt has been discharged by bankruptcy.

12. Subject to the fact where contract is not void.

13. For example, Ram invites Kirshan to dinner at Ram’s home on Tuesday and it is agreed that Kirshan will bring a chicken dish. Both parties have made a promise that each intends to keep and the formality of consideration can possibly be found. However, it is most unlikely that either party intended to have legal consequences attached to his commitment. If Kirshan fails to show up or shows up but fails to bring the chicken dish, it may lead to embarrassment or even hard feelings, but it should not create in Ram a cause of action for the value of one dish of chicken.

14. An equitable remedy under which a person is restored to his or her original position prior to loss and injury.

15. Rule laid down in section 9 of the Contract Act, 1872 signifies that a proposal or acceptance of any promise need not be in words, and would remain applicable to acceptance of proposal covered by section 25(3) of the Contract Act, 1872.

16. Patrick John Fitzgerald, Salmond on Jurisprudence, 12th Edition, Sweet & Maxwell, (1966).

17. Philosophy of law states, “unjust enrichment” ie; enrichment of one person at the cost of another should be prevented by the state. “It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, ie to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep. Such remedies in contract or tort, and are now recognised to fall within a third category of the common law which has been termed as quasi-contract or restitution”.

18. One classic quasi-contract fact pattern involves an unconscious auto accident victim and the ambulance company called to the scene by the police, as well as the hospital and the various medical providers at the hospital. An unconscious patient is not going to be signing agreements or orally promising to pay for medical services, nor is it reasonable to conclude that the failure of the unconscious patient to object to the emergency medical treatment is conduct implying a promise to pay for the services. There is no consensual undertaking on the part of the unconscious patient to pay and therefore there is no true contract, express or implied. The providers of the care are not doing so in return for a promise or in reliance upon a promise from the patient in their care. However, the law will hold the patient responsible for the reasonable value of the services provided. The basis for this is not contract. It is restitution.

19. See sub-section (3) of section 4 of the Sale of Good Act, 1930.

20. For example, a contract for the sale of a new piano which the seller is to deliver and tune after if is moved is a transaction in goods because the service of delivery and tuning are incidental to the sale of the goods. Whereas a contract in which an artist is to paint a portrait of the family matriarch is probably a service contract.

21. And in many cases, such contract becomes void, see section 7 of the Sale of Goods Act, 1930 with regard to warranties see the provisions of section 13 of the Sale of Good Act, 1930.

22. See Section 178 and 178A of the Contract Act, 1872.

23. The United Nations Convention on Contracts for the International Sale of Goods Final Act, 1980, UN Doc. A/C of. 97/18 (1980), reprinted in S. reprinted in S. Treaty Doc. No 98-9 (1980), and in 19 Int’l Legal Materials 668 (1980).

24. Part four of the Convention covers how and when the Convention comes into force, the reservations and declarations that are permitted, and the application of the Convention to international sales when both states concerned have the same or similar law on the subject.

Zafar Azeem, "How promises become legally enforceable contracts?," Business recorder. 2013-03-21.