This article has been written by Riya Sharma pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution at LawSikho, and has been edited by Shashwat Kaushik. It gives a brief overview of a contract being a lawful agreement, alongside the important pointers about the same.
It has been published by Rachit Garg.
Table of Contents
A contract is nothing but a lawful agreement, and an agreement is a set of promises that further form consideration for both parties to a contract. Contracts are a very common part of everyone’s day-to-day life. We enter into millions of contracts on a daily basis, and we aren’t aware of it. All transactions, ranging from booking a cab to purchasing an air conditioner, are contracts.
This article aims to shed light on the concept of “contracts as lawful agreements” and exploring all the basic elements of contracts that make them valid. Apart from this, it has been explained in this article that a contract is more than just a piece of paper because, when we enter into a contract, many things have to be kept in mind, which are specified in this article.
What is a contract
In simple terms, contracts are agreements that are enforceable by law. When an agreement satisfies all the essentials of a valid contract, then it becomes a contract. If an agreement lacks any one essential element, it can never become a valid contract. According to Section 2(h) of The Indian Contract Act, 1872, “an agreement enforceable by law is a contract.”
Mr. Ram offers his golden watch for sale at 50,000/- rupees to Mr. Krishna, which he accepts. In this illustration, we see that it is an agreement between both Ram and Krishna that has consideration and mutual duty towards each other, and once it is enforceable by law, it becomes a contract.
Stages of a contract
Following are the stages and steps taken by both parties to make a valid contract.
Proposal ➡️ acceptance ➡️ promise ➡️ consideration ➡️ agreement ➡️ enforceability by law = Contract
According to Section 2(a) of the Indian Contract Act, “when one person signifies to another his willingness to do or to abstain from doing anything, with the view to obtaining the assent of that other, he is said to make a proposal.” In simple terms, a proposal is a way to initiate the first step towards a contract. As the definition says, when one person signifies to another his willingness to do or not do something for the purpose of obtaining his assent.
The word “signifies” means that there must be a communication of a proposal, which is defined under Section 3 of the Indian Contract Act, 1872. The term offer is a synonym for the term proposal, with the basic difference between them being that “offer” is used in English law and “proposal” is used in Indian law.
Person “A” wants to sell his car to person “B” for 5 lakh rupees. Here, “A” shows his willingness to sell his car to “B.” The offer must be clear and definite. For example, ‘A’ wants to sell his remote control car to ‘B’ for 600/- rupees. ‘B’ accepts the offer
An invitation to offer is not considered an offer, for example, in an auction advertisement, prospectus, or catalogue. Because they are not an offer but an invitation to offer, which is also known as an “invitation to treat.” An invitation to offer is nothing but the circulation of an offer. It is made with the intention of negotiating more offers.
For example- Asking an employee what salary he/she is expecting while recruiting. In simple terms, it is an attempt to call an offer before a definite or clear offer.
Harris vs. Nickerson (1872)
Facts of the case
In this case, the defendant advertised an auction on a specific date or place. According to the advertisement, the plaintiff travelled and reached the place mentioned in the advertisement, but by the time the plaintiff reached there, the defendant had cancelled the auction.
The plaintiff files suit against the defendant for breach of contract and also for his loss because he spends his money on travel.
Judgement of the Court
In this case, the Court held that it was an advertisement, which is an invitation to offer and not an actual offer; hence, there is no contract made between both parties, which makes the defendant liable for the plaintiff’s loss.
This is the second step to creating a contract, which is to accept the offer. Acceptance is a very important part of making a contract. Without acceptance, the contract between two parties cannot come into existence.
The acceptance of the offer must be communicated because mere silence cannot be considered acceptance.
Felthouse vs. Bindley (1862)
Facts of the case
In this case, Felthouse wanted to buy a horse from his nephew and he wrote a letter to his nephew saying that he want to buy his horse for 35 pounds, and he asked his nephew not to sell the horse to anyone else Felthouse clearly mention that “if i hear no more about it i shall consider the horse mine”.
Now, his nephew never responded to that offer, but he intends to sell his horse to Felthouse one day. His horse was mistakenly sold by his auctioneer, whose name is Bindley. Felthouse sued Bindley because it was, in a sense, his horse.
Judgement of the Court
“The Court held in this case that since the nephew had not communicated his acceptance to Felthouse, it is not considered a valid contract. And Binley was not liable for Feelhouse’s loss.”
Mere silence or no rejection is not acceptance.
Chris Achter’s case
This is a very curious case coming from a Canadian court – A thumbs-up emoji as acceptance. The thumbs-up emoji proves a valid confirmation or acceptance of an offer. It was held by a Canadian Court recently in the case of a farmer that the thumbs-up emoji amounts to a valid acceptance because a thumbs-up emoji is an “implied acceptance,” which is obviously an acceptance by act or conduct.
Facts of the case
Farmer Chris Achter was a defendant here, and Mickleborough was a plaintiff in this case. Mickleborough signed a contract for grain and texted “please confirm the flax contract” to the farmer.
According to the Canadian Court, the farmer replied with a thumbs-up emoji, and later he did not send the flax to Mickleborough. Mickleborough filed a suit against the farmer for breach of contract as he did not receive grain, and he thought that Achter’s thumbs-up emoji was an acceptance of that contract.
Judgement of the Court
Judge T.J. Keene of the Courts of King’s Bench in Swift Current, Saskatchewan, Canada, agreed that the thumbs-up emoji can be a confirmation of any offer and that there is a breach of contract by the farmer with respect to the facts of this case. The judge had ordered the farmer to pay Mickleborough $82,200 in Canadian dollars.
According to Section 2(b) of the Indian Contract Act, “a proposal when accepted becomes a promise.” Thus, when any proposal or offer is accepted, it becomes a promise, which is like an assurance or commitment made by one party to another, and both parties have obligatory duties towards each other to fulfil that promise.
‘Neetu’ books an Uber cab with a cab fare of Rs. 400/- and promises to give Rs. 400/- to the cab driver, and ‘cab driver’ promises to drop her off at her destination.
According to Section 2(d) of the Indian Contract Act, 1872, “When at the desire of the promisor, the promisee or any other person has done or abstained, from doing or does or abstain from doing, or promises to does or abstain from doing something such act or abstinence or promise is called consideration”. Consideration is like getting something in return. A valid consideration creates a valid contract. Consideration can be of anything, such as security amount,movable or immovable property, etc. But it should be lawful in accordance with Section 23 of the ICA.
Swati offers her dress for Rs. 1500/- to Nisha, and Nisha accepts the offer. In this illustration, a valid and lawful consideration exists. For Swati, her consideration is Rs. 1500/- and for Nisha, her consideration is that dress.
This is the last stage for creating a valid contract. According to Section 2(g), “An agreement which is not enforced by law is void”. When an agreement is enforceable by law, it is said to be a contract. Enforceability is an essential aspect of a valid contract. When the parties enter into a contract, they must have met the criteria for it to be enforceable by law. And if the necessary conditions are not fulfilled, neither party can seek remedies or damages for their loss, and the contract is said to be void.
‘X’ Threatens to harm ‘Y’ if he does not sell his house for 10 lakhs. ‘Y’ sells his house at a stated price. This contract is not considered legitimate because Y’s consent was obtained by coercion without free consent. It cannot become a valid contract as it is not enforceable by law.
Essentials of Valid Consideration
According to this Section 10 of the ICA, “All agreements are contracts if they are made by the free consent of parties, competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” An agreement has to fulfil the essential conditions to become a contract, such as:-
- Free consent;
- Competent parties;
- Lawful consideration;
- Lawful object; and
- Must not be declared void by law.
We often use the word agreement, and sometimes we use it interchangeably with the word contract. We enter into numerous agreements daily; they aren’t necessarily in writing. They range from buying vegetables from street vendors to purchasing a new house. Agreements occupy an important place in our day-to-day lives. Therefore, it becomes important to understand the meaning of agreement. According to Section 2(e) of The Indian Contract Act, 1872, “every promise and every set of promises, forming consideration for each other,is an agreement.”
An agreement, in other words, is an accepted proposal; it is the result of a proposal from one side and its acceptance by another. To make the above explanation more comprehensible, an illustration can be taken from our day-to-day lives: For example, Khushi offers Harsh to sell her scooter at Rs. 50,000/-. Harsh accepts the terms and agrees to pay the amount mentioned. Khushi and Harsh entered into an agreement. However, there are some accepted proposals that cannot become contacts. For example, Annie agrees to pay Joseph Rs. 1000/- if he gets her stars from the sky, the task is impossible to perform and hence void.
As we enter into numerous agreements daily that we are not aware of, not every agreement is enforced by law. And there must be an intention to create legal relations, because an agreement cannot become a valid contract if there is no intention to create legal relations. The parties must have the intention and mindset to enter into a contract.
In a leading case, Balfour vs. Balfour (1919), the validity of an agreement between a husband and wife was in question.
Facts of the case
Mr. Balfour was a civil engineer who served as the Director of Irrigation for the Government of Ceylon (now Sri Lanka). Mrs. Balfour was living with him. The husband and wife went on leave to England, and the wife fell ill in England. The doctor who treated the wife advised her to take full bed rest and stay in England. Mr. Baflour verbally agreed to pay her £30 until she returned to Ceylon. However, when their relationship worsened over time, Mr. Balfour stopped paying Mrs. Balfour the required amount of maintenance. Mrs. Balfour filed a suit against Mr. Balfour for failing to pay the maintenance amount.
Judgement of the Court
The Court dismissed the case on the grounds that the agreement entered into between the husband and wife was not a contract. Because the parties do not intend to enter into a legal obligation. The agreements that create a legal obligation are contracts, and those agreements that do not intend to create a legal relationship are not contracts.
Free consent is the second basic element of a valid contract; there must be the free consent of the parties while entering into a contract. If there is no free consent, then the contract is declared void. Consent is defined under Section 13 of the Indian Contract Act, 1872, as “two or more persons are said to consent when they agree upon the same thing in the same sense.” Which means consent is said to be free when parties give their consent voluntarily and by their own will without any fraud, coercion, misrepresentation, mistake, or undue influence.
According to Section 14 of the Indian Contract Act, 1872, consent is said to be free when it is not caused by:
- Coercion (Section 15),
- Undue influence (Section 16),
- Fraud (Section 17),
- Misrepresentation (Section 18)
- Mistake (Section 20, 21, 22).
According to Section 11 of the Indian Contract Act, 1872, “every person is competent to contract who is of the age of majority, of sound mind and is not disqualified from contracting by any law to which he is subject.”
Basically, every person is competent to contract but as per the law, these categories cannot have the capacity to make a contract
- A minor,
- unsound mind, or
- people disqualified by law.
Thus, a person who is of the age of majority is of sound mind, and is not disqualified by law is a competent party to enter into a contract.
A minor is a person who has not attained the age of majority, which is above 18 years in India, and any agreement with a minor (below 18) of age is void ab initio which is null and void from the beginning.
According to Section 12 of the Indian Contract Act, 1872, a person who does not have a sense of right and wrong and is incapable of taking rational action is said to have an unsound mind. A person can have a permanent or temporary unsound mind, and these types of people cannot enter into any contract because a contract with an unsound mind is said to be void. A person who is typically of sound mind but occasionally becomes unsound-minded, however, can contract while in the state of sound mind. A person who is disqualified by law cannot make a contract as they are not competent parties to enter into contracts. Further, a prisoner cannot enter into any contract because that person is disqualified by law; similarly, an enemy or an alien is disqualified by law. Also, an insolvent person cannot indulge themselves in a contract because they are also disqualified by law.
Mohori Bibee vs. Dharmodas Ghose (1903)
Facts of the case
Dharmodas Ghose was the plaintiff in this case. He was the legal owner of his immovable property. Dharmodas decided to mortgage his immovable property, and he completed all the formalities with the defendant, Brahmo Dutta. He was the moneylender in this case, and he has an attorney for management whose name is Kedarnath. Dharmodas secured his mortgage deed for Rs. 20,000/- at a 12% interest rate. Later on, Dharmodas’s mother sent a notice to Bramho Dutta, informing and reminding him that Dharmodas is still a minor and you are entering into a contract with him at his own risk.
Dharmodas and his mother filed a suit against Bramho Dutta, saying that the mortgage was not valid as Dharmodas was a minor or infant when he entered into this contract. In this process of the case proceeding, the defendant had died, and his pleadings were further litigated by his wife, ‘Mohori Bibiee’.
Judgement of the Court
The Court gave the judgement in favour of Dharmodas Ghose because he was a minor when he entered into this contract and he was not a competent party to sign a contract. Hence, this contract is void ab-initio.
According to Sections 2(d) and 25 of the Indian Contract Act, 1872, an agreement without consideration is void, and consideration must be lawful to make an agreement a valid contract. Any consideration that is unlawful and prohibited by law cannot be considered a valid or lawful consideration.
A promises to obtain an employment position for B in judicial services and B promises to pay Rs. 5 lakh for that. The agreement between both was declared void because A was taking a bribe, which is not a valid consideration and is considered an unlawful consideration.According to Section 24 of the Indian Contract Act 1872, “if any part of a single consideration for one or several objects or any one or more part of consideration for a single object is unlawful, the agreement is void.”
A lawful object is another essential element of a valid contract. An agreement must have a lawful object to make a contract valid. As the consideration should be lawful, just as the object of the contract must be lawful, this essential element of a valid contract needs to be fulfilled. Any part of several considerations for a single object and any part of several objects for a single consideration is unlawful; the agreement is declared void.
What objects and considerations are lawful
According to Section 23 of the Indian Contract Act, 1872, the consideration or object of an agreement is lawful unless:
- It is forbidden by law.
- Permitted by law.
- A fraudulent act.
- It involves or implies injury to the person or property of another.
- It defeats the provisions of law.
In such a case, as mentioned above, the object and consideration are declared void.
A offers his AK 47 gun to B, and B gives him 1 lakh rupees for that gun. In this illustration, the object of this agreement between A and B is unlawful and forbidden by law, which makes this agreement void. And it cannot become a contract.
Not declared void by law
Last but not least, it is essential to a valid contract that an agreement not be declared void by law. Any agreement that is void in the eyes of the law is considered void. According to Section 29 of the Indian Contract Act, “agreements, the meaning of which is not certain or capable of being made certain, are void.”
According to Section 56 of the Indian Contract Act, “agreements to do impossible acts are void.”
Such agreements are also declared void, which is impossible to do and cannot become a contract due to failure to fulfil the essential condition.
A and B contract to marry each other. But unfortunately, B died before the fixed time for marriage. This contract becomes void.
All contracts are agreements, but not all agreements are contracts
“All contracts are agreements, but not all agreements are contracts”
There is no doubt that this statement is true. This statement has been stated by Anson, who emphasizes that there is no contract without an agreement. Not every agreement is enforceable by law. For example, an agreement to bring a gift on a friend’s birthday is not enforceable by law if the friend fails to get a gift.
In short, we can consider a contract as a wider term that deals with all types of agreements, and an agreement is a narrow term that becomes a contract only when it fulfils all the necessary conditions of a valid contract. All agreements can be considered contracts, but not every single contract is considered as a valid agreement because a void or voidable agreement or an agreement which is not enforceable by law cannot become a contract.
Void agreements are those agreements that are not enforceable by law and cannot fulfil the criteria to become valid contracts because of their lack of enforceability, and neither party can claim compensation nor damages.
A voidable agreement is different from a voidable contract. In the initial phase, voidable agreements are enforceable by law and have the capacity to become valid contracts, but due to some circumstances, they cannot come into effect and are declared voidable.
For example, Mr. Henry sold his dog to Mrs. Marie knowing that the dog was physically challenged. But Marie was not aware of it initially, and both parties signed this contract. Later, she knew that this dog was fraudulently sold to her, hence, the contract is said to be voidable.
What agreements are contract
An agreement becomes a contract when it fulfils all the necessary conditions of a valid contract, such as:
- Parties must be competent.
- There must be a lawful object and consideration.
- There must be an intention to create a legal relationship.
- There must be free consent.
- The agreement must not be declared void by law.
What agreements are not contracts
There are some agreements that are unable to become contracts due to discrepancies and failure to fulfil the essential conditions of a contract.
Mr. X offers drugs for smuggling to Mr. B, and for this, Mr. X offers Rs. 1 lakh to Mr. B, who accepts the offer. This agreement cannot be enforced by law as the object of the contract is unlawful, which is “drug smuggling.” Hence, it is said to be void
It is evident that “contract as a lawful agreement” plays a significant role in our day-to-day lives, and we gain valuable insight through a deeper dive into the world of contracts and agreements.
As we move forward, we come to know that all contracts are agreements, but not every agreement is a contract. Because some agreements cannot fulfil the criteria of a valid contract. Apart from this, there are some essential conditions to make a contract valid and enforceable by law, such as- there must be an intention to create a legal relationship; there must be free consent, parties must have competency; etc.
We can’t neglect contracts in our daily lives because they are a crucial part of them. Even if we are buying candy, we are entering into a contract with that shopkeeper. As we reflect on the significance of contracts and agreements in this article.
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