contract of sale
Image Source: http://irisbh.com.br/wp-content/uploads/2016/05/electronic-contract.jpg

In this article, Shivani Pahuja does an analysis of Section 10 of the Indian Contract Act, 1872.

In our day to day lives we enter into different agreements like selling and buying of property, becoming an employee, settling disputes and much more. It is seen that often individuals enter into agreements without even considering the essential provisions of a valid contract, and therefore end up entering into an invalid contract and thereby suffering from loss. A contract is difficult to be enforced unless it’s terms can be admitted by the parties. A signed written contract reduces the risk and saves the parties from entering into a contract which they cannot later enforce. This article is meant to highlight the nuts and bolts of an enforceable contract.  

Section 10 of the act mentions about what agreements are contracts. It states that all the agreements are contracts if they are made

  • by a free consent of parties (i.e. their free will) who are competent to contract,
  • for a lawful consideration and
  • for a lawful object, and
  • are not expressly declared to be void.

The section also mentions that nothing which is contained shall effect any law which is in force in India, and is not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

As per Section 2(e) of the Contract Act, every promise or a set of promises which forms the consideration for each other is an agreement. Thus a promise can be said to be an agreement.

https://lawsikho.com/course/diploma-advanced-contract-drafting-negotiation-dispute-resolution

Click Here

  • agreement= offer+acceptance

Section 2(h) of the act defines contract as an agreement which is enforceable by law. A contract can also be said to be an agreement, the object of which is to create a legal obligation i.e. a duty enforceable by law.

  • contract= agreement+enforceability by law

Agreement is a wider term than contract wherein all contracts are agreements but all agreements are not contracts. The agreements which satisfy the conditions mentioned in Section 10 of the Indian Contract Act, 1872 become contracts.

Agreements are classified into two categories:

Agreements not enforceable by law– the agreements which do not satisfy the essentials of a valid contract are not enforced by law, hence cannot be considered as contracts. According to section 2(g) of the act such agreements are said to be void. For instance, an agreement entered into by a minor is held to be void. Section 24-30 of the act mentions about the agreements that are considered void.  

  • Section 24- agreements are considered as void if considerations and objects are unlawful.  
  • Section 25- agreement without consideration is held as void unless the agreement is in writing and registered or is a promise to compensate for something done or is a promise to pay debt  which is barred by limitation law.
  • Section 26- agreement which is made in restraint of marriage is held as void.
  • Section 27- agreements which are in restraint of trade are held as void.
  • Section 28- agreement which is in restraint of legal proceedings is void.
  • Section 29- uncertain agreements are held as void.
  • Section 30- agreement by way of wager is held as void.

Agreements enforceable by law– the agreements that satisfy the essentials of a valid contracts are enforceable by law.

Thus, Sections 2(h) and 10 of the Act state about the essential elements of a valid contract. If any one of those elements is not satisfied or is present in an agreement, it will affect the validity and will not form a valid contract.

If we enter into a contract containing prescribed terms and conditions, which is a must under the statute then that contract becomes a statutory contract. If a contract incorporates certain terms and conditions in it, which are statutory then, the said contract to that extent is statutory.

In order to constitute a contract, the parties must consent to the agreement.

Essential elements of a valid contract

  1. Offer and acceptance
   2. Consensus ad idem
   3. Legal relationship
   4. Competency of parties
   5. Free consent
   6. Lawful Consideration
   7. Lawful Object
   8. Not declared to be void
   9. Certainty and Possibility of Performance
   10. Legal Formalities

Offer and acceptance

A contract can be evolved in the presence at least two parties one of them making the offer and the other accepting it. Therefore there must be an offer by one party and its acceptance by the other party. The offer when is accepted becomes an agreement. The party which makes the offer is known as offeror and the party to whom the offer is made is known as offeree.

Consensus ad idem

The parties that are entering in the contract must have mutual consent i.e. they should be agreeing upon the same thing in the same sense as it is. It means that there must exist consensus ad idem (i.e. meeting of minds).

Legal relationship

Parties entering into a contract must intend to constitute a legal relationship. It arises only when the parties know that if any one of them fails to fulfil his part of the promise, he would be liable for the failure of the contract.

If there exists no intention to create a legal relationship, there is no contract between parties. Agreements of a social or domestic nature are not considered as contracts as they do not contemplate or give rise to a legal relationship.

Competency of parties

According to section 11 of the contract act The parties entering into a contract would be considered competent if he

  1. Has attained the age of majority,
  2. Is of sound mind,
  3. Is not disqualified to make a contract under a law to which he is subject.

However, the following persons are considered incompetent to contract, or only capable of contracting to a particular extent. The persons who disqualified from entering into a contract due to certain reasons may arise from their legal status, political status or corporate status.

  1. Alien Enemy: An agreement with an Alien Enemy is held to be void.
  2. Foreign Sovereign and Ambassadors: Foreign sovereigns and their representatives enjoy certain amount of privileges and immunities in every country. They cannot enter into a contract except through their agents residing in India.
  3. Convicts: A convict while he is undergoing imprisonment, cannot enter into a contract.
  4. Insolvents: An insolvent person is a person who is said to be unable to discharge or get off his liabilities and therefore, has applied for being adjudged insolvent or if such proceedings have been initiated by any one of his creditors.
  5. Company or Statutory bodies: A contract entered into by a corporate body or statutory body will be valid only to the extent it is within its Memorandum of Association

In the case of Mohori bibee v. Dharmodas Ghose, wherein Dharmodas Ghose being a minor mortgaged his property in favour of the defendant Brahmo Dutt, who was a money lender to secure a loan. At the time of transaction the money lender, had the knowledge that the plaintiff was a minor. The court held that the defendant’s contentions were rejected. Minor’s agreement was held void, and it was held that the minor’s agreement was held void, and it was held that the minor could not be asked to repay the loan taken by him.

Free consent

According to section 13 of the act two or more persons are said to consent to a common thing when they agree upon the same thing in the same sense. A consent is regarded as the most fundamental component of a contract. The next section talks about free consent which is essential for a valid contract. A consent is said to be free and valid when it is not caused by:

  1. Coercion
  2. Undue influence
  3. Fraud
  4. Misrepresentation
  5. Mistake

When consent is caused due to any of such factor, the agreement is voidable at the option of the party whose consent was so caused. if however the consent is done by mistake, the agreement is considered to be void.

A consent of a person is affected by a number of factors, of which coercion is the most noticeable one.   

Coercion is defined under Section 15 of the act as committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. —Coercion means the committing, or threatening to commit, any act which is  forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property with the intention of causing any person to enter into an agreement.”

In the case of Ranganayakamma v. Alwar Setti the issue involved was that a widow was not allowed to proceed with the cremation of her husband’s dead body until she adopted the boy. The court held the adoption as invalid because her consent for adopting was obtained by coercion.

Threat to commit suicide

The act of commiting suicide is prohibited under IPC, and therefore a threat to commit suicide leads to coercion. The Madras High Court, in the case of Ammiraju v. Seshamma, where Amiraju threatened to commit suicide to his wife and son if they did not release some properties in favour of his brother. His wife and son executed the deed but later took the plea of coercion in the court. The judges took the view that as threat to commit suicide is an offence punishable under Indian Penal Code, it commits to coercion.

Effect of coercion in a contract

In cases where a contract is exercised under force by one party, the party which receives any benefit due to it, must restore it back.  If the aggrieved party suffers from any loss, he can recover it from the other party of the contract.

Section 16 of the act mentions about undue influence wherein a contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the party stands in a by which he can dominate the will of the other party and uses that position to obtain an unfair advantage over the other.

Presumption of undue influence in Unconscionable Bargains

In the cases of unconscionable bargain in between the parties on an unequal footing, the law raises a presumption of undue influence.  When a person is found to be in a position by which he can dominate the will of the other, or the transaction appears to be affected due to dominance, the burden of proof that no undue influence was exercised in the transaction lies on the party who is in a position to dominate the will of the other.  

In such cases, it is for the dominant party to rebut the presumption of undue influence exercised by the law.  If a party has got any gain at the cost of the other party, he is required to prove that this advantage had not been gained by undue influence.

In the case of Diala Ram v. Sarga(1927) the defendant was already indebted to the plaintiff, who was a village money lender. He again took a fresh loan from the plaintiff and then executed a bond, wherein he agreed to pay some interest. The court held that the contract was unconscionable and, therefore, the burden of proof was on the plaintiff to show that there was no undue influence in this case.

Contracts with Pardanashin Woman

A pardanashin woman is one who observes complete seclusion i.e., who does not come in contact with people other than her family members. Law provides a special protection to pardanashin woman on the ground of their being ignorant so far as the worldly knowledge goes. A contract done with a pardanashin woman is usually presumed to have been induced by undue influence. The burden of proving that no undue influence was used lies on the other party. The other party will have to prove that

(i) the terms of the contract were fully explained to her,

(ii) she understood the implications,

(iii) free independent advice was available to her, and

(iv) she freely consented to the contract. This protection is available only to a woman who observes complete parda. Some degree of parda or seclusion is not sufficient to entitle her to get special protection.

Section 17 mentions fraud as any act which is done by a party to a contract  with the intention of deceiving another party or to induce him to enter into a contract. It is considered as a deception in order to gain by another’s loss.

Misrepresentation under section 18 includes:-

(1) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true

(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him;

(3) Causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is subject of the agreement.

Consent of partners in a partnership firm

The formation of a partnership requires few basic formalities, such as a written agreement or registration with an agency. All parties that are considered partners must consent to be such. The consent given by a partner may be express, such as signing a written partnership agreement or it can be implied by the conduct of the parties. Parties do not specifically need to agree to form a ‘partnership’, rather their agreement or conduct must be in such a way that they agree to run a business for profit. Even if the parties agree that their business will not be labeled a partnership, the business may be found to be one if it meets the condition of a partnership firm.

Consent of parties in an antenuptial agreement

An antenuptial agreement, also called a prenuptial contract is a contract entered into by the parties prior to marriage, civil union, or by the people intending to marry or contract with each other. The content of a prenuptial agreement varies widely, but commonly it includes provisions for division of property and spousal support in the event of divorce or dissolution of marriage.It may also include terms relating to the forfeiture of assets as a result of divorce on the grounds of adultery. In India, prenuptial agreements are neither legal nor valid under the marriage laws because they do not consider marriage as a contract but in Goa it is legally enforceable under Portuguese Civil Code, 1867. A marriage in India is treated as a religious bond between both the husband and the wife and prenuptial agreements finds no social acceptance in the country. However, these agreements are governed by the Indian Contract Act and have as much sanctity as any other contract, either oral or written.  

In cases involving the enforcement of a prenuptial contract at divorce, usually it is found that a husband presents a written prenuptial contract before his wife-to-be for the first time a few days before the wedding or sometimes even on the day of the wedding and gives her an ultimatum to sign the contract or else he won’t marry her. At the time of divorce, the wife’s attorney portrays the husband’s ultimatum as coercion. But if seen technically, it is not coercion as the husband is not legally bound to marry and the husband did not create the wife’s need to marry to him. The ultimatum can simply be considered as a condition precedent to the marriage.      

Lawful consideration and lawful object

According to section 23 of the Indian Contract Act, the following considerations and objects are not considered as lawful:

  1. If it is forbidden by law,
  2. If it is against the provisions of other law,
  3. If it is fraudulent,
  4. If it damages somebody’s person or property,
  5. If it is in the opinion of court, immoral or against public policy.

Thus any contract which incorporates such unlawful provisions are not considered as a valid contract.

Certainty and possibility of performance

The terms of the contract should be certain and not vague. If by any way it is not possible to ascertain the meaning of the agreement, it cannot be enforceable by law. An agreements to do any impossible act can never be enforced. For example, agreement to bring stars from the sky cannot be considered as a valid contract as it is an impossible act.

Enforceability of oral agreements

If an oral agreement contains the condition of a valid agreement, it will be considered as a contract. In the case of Sheela Gehlot v. Sonu Kochar & Ors Delhi High Court observed that oral agreements are valid and enforceable and there could be no dispute about it, unless there is anything which needs to be written. Further as in a contract, there has to be some proposal and acceptance necessarily. The validity of an oral agreement cannot be questioned. A written agreement is considered important because an oral agreement cannot be produced as an evidence before the court. The burden of proving the oral agreement lies upon the party who claims to consider such agreement in existence.

In the famous case of Food Corporation of India v. Vikas Majdoor Kamdar Sahkari Mandli ltd, the Apex court said that if an oral agreement is pleaded before the court but is not proved, the person will be entitled to compensation under Section 70 of the act as Principle of quantum meruit. This principle means when the work is done beyond the contract and the benefit of the work has been availed of by the defendant.

Conclusion

A contract is considered as a legally binding agreement or a relationship that exists between two or more persons to do or abstain from doing an act, which the law will enforce. If a contract needs to be formed an offer must be backed by acceptance of which there must be some consideration. Both parties to a contract must intend to create some legal relation upon each other of which the party if fails to fulfill the conditions of the contract can be punished under law. Social contracts or agreements between families do not enforce the agreements and do not intend to create any legal relation, therefore cannot be considered as a valid contract. An agreement is a form of cross reference between different parties which may be oral, written and lies upon the honor of the parties for its fulfillment rather than being in any way enforceable. All contracts are agreements because there essentially should be a mutual understanding between the parties for a contract to be formed. The parties should agree and adhere to the offer of the agreement. In the cases of an invitation to an offer a contract is formed only when the offer is accepted by the other party and the party giving the offer has knowledge of the acceptance, wherein all the terms of the offer is accepted. The most essential part of a valid contract is a lawful agreement, as illegal contracts have no valid status i.e. they are considered as void in the eyes of law. Therefore it can be said that all agreements are not contracts, the agreements which are framed under the law of the contract, can be treated as valid contracts. Mostly the terms ‘contract’ and ‘agreements’ are used interchangeably, but they are not precisely the same thing. Black’s law dictionary considers an agreement as “a mutual understanding between parties about their relative rights and responsibilities.” It defines a contract as “An agreement between parties creating obligation that are enforceable by the law.” Therefore coming in a mutual agreement with someone, put it in writing, but if it doesn’t satisfy the requirements of an enforceable contract, it cannot be enforced by law. The agreement must be supported by consideration from both sides. Each party entering into the agreement must give or promise to give something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, this price need not necessarily be in terms of money. In cases where promise is not supported by consideration, the promise will by nudum pactum (a bare promise), which is not enforceable at law. The object of the agreement must be lawful and not one which the law disapproves.

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY