This article has been written by Prathiksha T. Udupa pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This  article has been edited and published by Shashwat Kaushik.

Introduction

A contract is an agreement between two or more parties. One party provides service and the other fulfils that service. The contract of law in civil law regulates the performance of contractual obligations between two parties. A valid contract is enforceable by law with consideration. The contract must include an offer, acceptance, and consideration with mutual consent. If a promise is breached, the law provides remedies to the harmed party, often in the form of specific performance of the promise made. 

A licence is permission to do something that is not allowed if the licence is not granted. A license is granted by the licensor to the licensee. The licensee’s rights are restricted to a specified territory or may be exercised worldwide. A licence is for a specified term or period. The rights are often expressed in terms of intellectual property protection. The licence can be granted expressly or impliedly.

Definition of contract  

The Indian Contract Act 1872 defines “contract” under Section 2(h) as “an agreement enforceable by law.“ This definition has two important aspects, such as agreement and promise. In Section 2(e), the Act defines the term agreement as “every promise and every set of promises, forming consideration for each other.“ The Act, in Section 2(b), defines the term “promise” as “when the person to whom the proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A proposal, when accepted, becomes a promise.”

Essentials elements of contract 

All agreements are not contracts, but all contracts are agreements. According to Section 10,” All agreements are contracts if they are made by free consent with competent for lawful consideration, with lawful object and are not expressly declared void.

Offer and acceptance: The offer can be oral or written, and there must be communication with the offeree. An offer can be given as an invitation, and it can be terminated by rejection, expiration of time, a specified event, death, or withdrawal of the offer. The offer can be revoked before its acceptance.

Acceptance means the person, when he gives his consent to the offer, is said to be accepted. Once it is accepted, it becomes a promise, and it creates legal obligations between parties.

Legal purpose: It is an important element of the contract. A person has to have a legal intention to create an obligation.

Lawful consideration: The object of consideration should be accepted by law. The price paid by one party for any service or product QUID- PRO-QUO which means something in return or abstaining from doing something,such as an act, abstinence or promise.

Capacity to contract: Every person who enters into a contract must be competent. And he must attain the age of majority, have a sound mind, and not be disqualified by law. A minor, a lunatic, or an intoxicated person is disqualified from entering into a contract.

Lawful object: The contract must be lawful and must not be against public policy or law.

Consent to consent: All the parties must have agreed upon the subject mutually. If the agreement is under coercion, undue influence, misrepresentation, mistake, or fraud, it is voidable and can not be enforceable by law.

Certainty: Every agreement must be certain; if an agreement is not certain, then it is a void contract.

Possibility of performance: An agreement must be capable of performing its obligations; otherwise, it is said to be a void agreement.

Not expressly declared void: The agreement must not be expressly declared to be void for example, marriage.

Legal formalities like writing, registration, etc.: A contract can be oral or written but in some cases, the agreement must be in writing for registration, like a company contract, sale or purchase of shares, property, etc.

Therefore, for a valid contract, all the above elements must be satisfied; otherwise, it can not be enforceable in a court of law.

Validity of enforceability of a contract

Voidable contract: According to Section 2(i) of the Indian Contract Act 1872, a voidable contract is an agreement that is enforceable by law at the option of one or more parties thereto (i.e., the aggrieved party), but it’s not enforceable by the law at the option of the other or others.

Void contract: According to Section 2(g), a void contract occurs when it ceases to be enforceable by law.

Valid contract: An agreement satisfying all the essentials mentioned above.

Illegal contract: An agreement that is forbidden by law or against the policy of the law is known as an unlawful or illegal contract.

Types of contracts

Contracts are legally binding agreements between two or more parties. There are many different types of contracts, each with its own specific purpose and requirements. Some of the most common types of contracts include:

Written contracts:

• Written contracts are typically more formal than oral contracts and are generally considered to be more binding.
• Written contracts should include the names of the parties involved, the date of the agreement, the terms of the agreement, and the signatures of all parties.
• Written contracts can be used for a variety of purposes, such as buying or selling property, hiring employees, or providing services.

Oral contracts:

• Oral contracts are less formal than written contracts and are not as easily proven in court.
• Oral contracts should be used with caution, as they can be difficult to enforce.
• Oral contracts can be used for a variety of purposes, such as hiring a contractor to perform work or agreeing to buy or sell a used car.

Express contracts:

• Express contracts are contracts in which the terms of the agreement are explicitly stated by the parties involved.
• Express contracts can be either written or oral.
• Express contracts are the most common type of contract.

Implied contracts:

• Implied contracts are contracts in which the terms of the agreement are not explicitly stated by the parties involved, but are instead inferred from their conduct.
• Implied contracts can be either written or oral.
• Implied contracts are often used in situations where there is no written agreement, but the parties have acted in a way that suggests that a contract exists.

Bilateral contracts:

• Bilateral contracts are contracts in which both parties make promises to each other.
• Bilateral contracts are the most common type of contract.
• Bilateral contracts can be used for a variety of purposes, such as buying or selling property, hiring employees, or providing services.

Unilateral contracts:

• Unilateral contracts are contracts in which only one party makes a promise to the other party.
• Unilateral contracts are less common than bilateral contracts.
• Unilateral contracts can be used for a variety of purposes, such as offering a reward for information or promising to pay a debt.

Void contracts:

• Void contracts are contracts that are not legally binding because they lack one or more of the essential elements of a contract.
• Void contracts may be void from the beginning (void ab initio) or voidable.
• Void contracts cannot be enforced by either party.

Voidable contracts:

• Voidable contracts are contracts that are legally binding but can be cancelled by one or more of the parties involved.
• Voidable contracts may be voidable for a variety of reasons, such as fraud, duress, or mistake.
• Voidable contracts can be canceled by the injured party.

Does society need Contract Law

Yes, because we engage in contracts daily, whether explicit or implicit. The contract is an enforceable promise. The purpose is to create a binding agreement between the parties. And without a contract of law, modern business would be impossible and it makes everything easier. Contracts are the basis for commercial and personal undertakings, in which each party performs a service or pays money or other compensation to others. Contract law makes these agreements enforceable, which usually means it gives the party the power to compensate and obtain money damages caused by the other party due to a breach of contract. For example, A promises to sell his car to B, and B pays a consideration amount without a contract. After that, A refuses to hand over possession; if the contract is not there, then B can not recover his money. Apart from all of the legal niceties, we need contract law to avoid chaos. Therefore, the law of contracts ensures stability and fairness every day.

Case laws

Mohori Bibee vs. Dharmodas Ghose (1903)

The case of Mohori Bibee vs. Dharmodas Ghose was a landmark case in India. Dharmodasdone, a minor, had mortgaged his property to Brahmo Dutta. This court discussed whether the respondent was liable to payback the loan to the defendant or not and whether the mortgage contract was avoidable or not .When he later sought to void the contract, the court held in his favour, declaring the agreement with minors void ab initio or void from the outset.

Powell vs. Lee (1908)

Powell applied for the job of  headmaster , and the school managers accepted his application and decided to appoint him. One of the school’s managers, without authority, informed Powell that the management had selected him to be headmaster. The school’s managers later changed their minds and hired someone else. Powell claimed there was a breach of contract. The court held that the school was not liable for breach of contract because the acceptance came from a party without authority to communicate the acceptance of the management board, the confirmation of acceptance Powell received was not effective,  and that there was no binding contract between Powell and the school.

Definition of licence

Section 52 of the Easement Act 1882 states that “where one person grants to another, or to a definite number of other persons, a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such a right does not amount to an easement or an interest in the property, the right is called the licence.”

Essential features of the licence

In order to grant a licence, one has to be authorised to do so, and there has to be a grant to authorise; it must be useful. It confers rights on licencees, and such a licence is not transferable or revocable. It is a personal right and it does not create an interest in the property, There is no obligation upon people to make grants and it can not give rights to people.

Difference between a licence and lease 

A lease is defined in Section  105 of the Transfer of Property Act and a licence is defined under Section 52 of the easement act. A lease is a transfer of the right to immovable property to another person for a certain period of time.

Licence	Lease
There is no passing of interest in the property.	Creation of interest in the property.
The licence confers no such right on the licencee.	The lease gives the tenants a right to exclusive possession.
The licence is non-transferable and non-revocable.	The lease is transferable and revocable.

Different forms of licensing agreements in intellectual property

A licencing agreement is the solution to protecting intellectual property. It allows the owner of the intellectual property to approve a third party to use, resell, and modify the property.

Trademark licencing

In trademark licencing, a trademark owner grants permission to use that trademark on mutually agreed terms and conditions. In this case, control and ownership are with the licensor, which is the trademark owner and the trademark owner can grant his trademark to as many people as he wishes for his revenue. Trademark owners can grant their trademarks in different countries to different companies to gain customers for themselves. The trademark can be expanded in different countries. Trademark licencing can create an origin, quality, and unique image in customers, give economic value to its position in its brand and help to explore new markets either at the domestic or international level. Trademark licencing must include parties, subject matter of the licence, scope like geographical area, products or services, usages, and duration of usage of the trademark. 

Patent licensing

A patent licence is a contract between the patent owner and licencee, and the licencee may use, sell, or use a patented innovation. This owner gives a single licencee all the rights to sell and use the invention, called an exclusive patent licence. A nonexclusive patent licence means the owner transfers rights but it also allows the licensor to negotiate and sign with others and a sole licence means it allows the licensor and licencee to use the invention. The most important aspect of a patent licence is royalties. How royalties will be paid, whether they should request a minimum or guaranteed payment, and how they must be calculated. The durability or term of the licence makes a difference in royalties. The licencee must pay the patent owner annually to retain his licence. The disputes can be resolved either through litigation or arbitration. 

Copyright licensing

It allows a person or entity to hold the copyright and assign it to another. It gives a collection of rights to hold copyright and make copies of that right by the owner in exchange for payment. Copyright licences may be exclusive or nonexclusive for a certain period of time. For example, a song composer obtains a copyright for his composition and he can sell that copyright to others for a certain amount as a payment. The copyright owner can protect his rights by licencing it and preventing others from infringement. A copyright licence agreement includes parties’ identities, names and descriptions of copyright work, type of licence, title of owner, payment, and termination of the agreement.

Importance of a licence agreement in today’s  world

In digital commerce, intellectual property and digital products and services licence agreements play an important role.

• Licence agreements protect the rights and responsibilities of both the licensor and licensee and provide legal protection for both parties to avoid misunderstandings and disputes.
• Licence agreements help to prevent unauthorised authorization, and misuse of intellectual property rights and help in understanding usage, modification, etc.,.
• In the modern commercial world, it helps companies draft their transactions of products, services, and property for the usage of trademarks, patents, and copyrights with detailed rules and rights.
• One of the important roles in protecting software and technology is how it can be used, installed, and transferred with respect to privacy, policy, and security.
• On a global level, it helps and provides transactions between domestic and international companies with the help of detailed agreements with usage, modification, and transfer of its product, services, and intellectual property while avoiding the risk of infringement and damages.

Advantages and disadvantages of licencing agreements

Advantages of a licencing agreement:

1. Access to expertise and technology:
   Licencing agreements provide access to the expertise, technology, and know-how of the licensor, which can be invaluable for businesses looking to expand their product offerings or enter new markets.
2. Reduced investment costs:
   Licencing agreements often involve lower upfront investment costs compared to developing new products or technologies in-house, making them a cost-effective option for businesses.
3. Faster time to market:
   By utilising pre-existing technology or products through licencing agreements, businesses can accelerate their time to market, gaining a competitive advantage and responding swiftly to market demands.
4. Enhanced product quality:
   Licensing agreements can ensure access to high-quality products or technologies that have been rigorously tested and developed by the licensor, reducing the risk of product failures or defects.
5. Brand recognition and reputation:
   Partnering with a well-established licensor can leverage their brand recognition and reputation, enhancing the credibility and perceived value of the licenced products or services.
6. Risk sharing:
   Licencing agreements involve shared risks between the licensor and licensee, reducing the financial burden on either party in case of market fluctuations or unforeseen challenges.
7. Flexibility and adaptability:
   Licencing agreements offer flexibility in terms of product modifications or adaptations, allowing businesses to customise the licenced products or technologies to suit their specific needs and target markets.
8. Legal protection:
   Licencing agreements provide legal protection for both parties, ensuring compliance with intellectual property rights and safeguarding against unauthorised use of the licenced assets.
9. Potential for ongoing support:
   Many licencing agreements include ongoing support from the licensor, such as technical assistance, training, or marketing materials, contributing to the success and sustainability of the licenced products or services.
10. Income generation:
    For licensors, licencing agreements represent a source of income and royalties, providing a steady stream of revenue.

Disadvantages of a licencing agreement:

1. Restrictions and limitations:
   Licencing agreements often come with restrictions and limitations regarding the use, modification, or distribution of the licenced assets, which can hinder a business’s ability to fully exploit the licenced technology or products.
2. Potential for legal disputes:
   Licencing agreements involve complex legal frameworks, and disputes can arise regarding interpretation, infringement, or termination of the agreement, leading to costly and time-consuming legal battles.
3. Limited control over pricing and distribution:
   The licensor may have control over pricing and distribution strategies, limiting the licensee’s ability to set competitive prices or expand into desired markets.
4. Risk of obsolescence:
   Licenced technology or products may become obsolete over time, leaving the licensee with outdated assets that no longer meet market demands.
5. Reliance on licensor’s financial stability:
   The financial stability of the licensor can impact the licensee’s access to ongoing support, updates, and the overall viability of the licenced products or services.
6. Potential for conflict of interest:
   In certain cases, conflicts of interest may arise if the licensor is also a competitor in the same market, leading to potential competitive disadvantages for the licensee.
7. Difficulty in terminating the agreement:
   Licencing agreements typically involve long-term commitments, and terminating the agreement before its expiration may result in penalties, fees, or legal complications.
8. Potential for exploitation:
   Unfair licencing terms or excessive royalties could lead to exploitation of the licensee by the licensor, negatively impacting the licensee’s profitability and sustainability.
9. Complexities in cross-border agreements:
   Licencing agreements involving parties from different countries or jurisdictions can introduce additional complexities related to legal frameworks, tax implications, and cross-border regulations.

Case laws

Khalil Ahmed Bashir Ahmed vs. Tufelhussein Samasbhai Sarangpurwala (1987)

Facts of the case:

• The appellant, Khalil Ahmed Bashir Ahmed, was a tenant in a building owned by the respondent, Tufelhussein Samasbhai Sarangpurwala.
• The appellant had been paying rent regularly for many years.
• In 1985, the respondent filed a suit for eviction against the appellant, claiming that the appellant had not paid rent for the past two years.
• The trial court found in favor of the respondent and ordered the appellant to vacate the premises.
• The appellant appealed to the High Court, which upheld the trial court’s decision.

Issue:

• Whether the appellant was liable to be evicted from the premises for non-payment of rent.

Appellant’s arguments:

• The appellant argued that he had paid rent regularly for many years and that the respondent had not produced any evidence to show that he had not paid rent for the past two years.
• The appellant also argued that the respondent had not given him any notice to pay the rent or to vacate the premises.

Respondent’s arguments:

• The respondent argued that the appellant had not paid rent for the past two years and that he had produced evidence to prove this.
• The respondent also argued that he had given the appellant notice to pay the rent or to vacate the premises.

Judgement:

• The Supreme Court allowed the appeal and set aside the orders of the trial court and the High Court.
• The Supreme Court held that the respondent had not produced any evidence to show that the appellant had not paid rent for the past two years.
• The Supreme Court also held that the respondent had not given the appellant any notice to pay the rent or to vacate the premises.

Significance:

• The Supreme Court’s decision in this case is significant because it protects the rights of tenants from being evicted from their homes without due process of law.
• The Supreme Court’s decision also clarifies the law on the issue of notice to pay rent or to vacate premises.

C.M. Beena and Anr. vs P.N. Ramachandra Rao (2004)

In this case, the Supreme Court discussed the difference between a lease and a licence by finding the intention of the parties. The court held that the conduct of the parties before and after the creation of a relationship is relevant for finding out their intention.

Conclusion

In summary, contract law and licence are legal acts and contract law is the basis for legal agreements, providing clarity and enforceability in transactions, whereas licence is a process to safeguard intellectual property rights. Contract law gives importance to the rights and obligations of parties. Licence agreements protect against violations of intellectual rights. In the modern world, both are necessary and both will make day-to-day life easier by protecting rights and obligations and reducing risk, damages, etc.

References

• https://pressbooks.uiowa.edu/introtolaw/chapter/introduction-to-contract-law/
• https://blog.ipleaders.in/license-section-52-indian-easement-act/
• https://blog.ipleaders.in/essential-clauses-of-a-license-agreement-non-transferable-and-non-exclusive-license/
• https://indiankanoon.org/doc/838254/
• https://indiankanoon.org/doc/1102621/
• https://www.law.cornell.edu/wex/contract