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Section 2 of Indian Contract Act, 1872

December 26, 2021
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Introduction

In a developing country like India, where the economy is growing by the day, contract law keeps our economy regularized. Nearly every transaction, every deal, involves a contract. Contract law may be defined as a set of rules and principles that governs transactions among parties, setting the rights and obligations of these parties.  The Indian Contract Act, 1872 (“ICA”) is the statute regulating and controlling contract laws in India. 

A contract is a formal document accepted by both parties, the promisor and the promisee, and is the foundation stone of any business transaction. Although the law of contract is developing with time, the jurisprudence of contract remains the same. Section 2 of the ICA is the Interpretation Clause, which provides the general definition of words and expressions used in the act. These are generally followed unless a contrary intention appears from the context. The essence of the Interpretation Clause is Section 2(h), which defines a contract as “an agreement enforceable by law”. 

Analysis of Section 2

Sir William Anson defines a contract as “a legally enforceable agreement between two persons wherein two or more persons get a legal right and some have to fulfil corresponding legal responsibilities”.  It can be inferred that a contract is an agreement that defines the obligations of the various parties involved in it. Therefore, a contract is an agreement between two or more competent parties, based on mutual promises, to do or to refrain from doing a particular thing that is neither illegal nor impossible. The agreement results in any obligation or duty that can be enforced in a court of law. The agreement resulted in in legally enforceable contracts because the parties agreed mutually satisfactory.

Section 2(h) defines a contract as an “agreement enforceable by law”. This implies that there are two primary ingredients of a contract: an agreement and enforceability. Only a valid contract is enforceable by law, and a contract must fulfil certain conditions to be valid.  If any of these conditions are not fulfilled, that contract is deemed void. ‘Agreement’ has been defined by Section 2(e) of the ICA as “Every promise and every set of promises, forming the consideration for each other, is an agreement”. 

An agreement is an understanding or arrangement reached between two or more parties. In contrast, a contract is a specific type of agreement that is legally binding and enforceable in a court of law by its terms and elements. While every contract is an agreement, every agreement is not a contract. An agreement broadly comprises an offer, its acceptance and consideration, all of which must be bound together by communication within a reasonable period. 

Section 2(A)

The term ‘offer’ is also called a proposal, which has been defined in Section 2(a) as “a person’s willingness to do or to abstain from doing something, to obtain the assent of that other to such act or abstinence”. It is the first step towards the formation of an agreement. For an offer to be valid in the eyes of the law, it must be communicated to the offeree (i.e., the party on the receiving end of the offer). It must be clear and precise to receive the consent of the other party to form an agreement. 

As stated in Section 4 of the ICA, an offer is complete only when it comes to the other party’s knowledge. As was held in the case of Lalman Shukla v Gauri Dutt, an offer can be accepted only if it has been communicated to the offeree. For an agreement to form, an offer has to be communicated. Therefore, it can be said that an agreement is an accepted proposal. 

Section 2(B)

Section 2 (b) of the Indian Contract Act, 1872 defines acceptance as, “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” Valid acceptance must be unconditional and must be communicated. If any specific mode of acceptance has been given (via a letter or telephone call, for example), communication must happen through the prescribed mode. The issue of communication was taken up in the case of Felthouse v Bindley, wherein it was held that communication of acceptance is required, and mere silence cannot amount to acceptance. 

Section 2(D)

Consideration is something in exchange for something, i.e., mutual benefits. It is formally defined as “When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”. Consideration must be something that has value in the eyes of the law. In the case of Abdul Aziz v. Masum Ali, the court held that the quid pro quo aspect of the agreement was absent; there was no valid consideration, and the agreement could not be enforced. 

“Every promise and every set of promises, forming the consideration for each other, is an agreement”. Based on the analysis thus far, it can be said that offer and acceptance are the primary stages of an agreement. 

As discussed earlier, the critical point of difference between an agreement and a contract is enforceability. For an agreement to be enforceable, certain conditions must be fulfilled: the parties must be competent to contract, the objective of the contract must be lawful, there must be an intention to create legal intention, and the parties must give free consent. This implies that a contract cannot stand alone. If seen in isolation, Section 2(h) would not have any practical application in real life, which is why it becomes necessary to read Section 2(h) in context with other relevant sections of the ICA. 

Cross-sectional analysis 

The notion of contract underpins our entire economy, and therefore, every aspect of a contract must be analyzed and understood correctly. A contract cannot be seen in the isolation of Section 2(h), for it would allow loose interpretation, which may lead to the essentials of a contract being overlooked. 

ICA Section 2(h) adds a phrase “enforceable by law” in the word “agreement”, but the magnitude of this phrase is contemplated in 20 sections ranging from sections 10 to 30. Section 10 of the ICA marks which agreements are contracts based on the fulfilment of certain conditions. 

Sections 13-18

All parties involved in the formation of a contract must freely consent to, they are to agree upon the same thing in the same sense. Free consent has been expounded in Section 14, and particular definitions of what does not comprise as free consent have been given in the following sections. Consent will not be seen as free consent by a court of law if either of these five factors vitiates it: coercion (S. 15), undue influence (S. 16), fraud (S. 17), misrepresentation (S. 18) and mistake (S. 20-22). 

In the case of Chikkam Seshamma v Chikkam Ammiraju, it was held that the threat of suicide amounted to coercion. The contract was declared void as the consent given was not free. However, in the case of Askari Mirza v. Bibi Jai Kishori, it was held that criminal prosecution is not a threat but the right of the aggrieved party in case of a wrong committed against them, and thus the contract between the parties was valid. 

Lawful object 

It is necessary that the objective that a contract is legal. A court will not enforce a contract that is illegal or contrary to public policy. Illegal contracts are prohibited either by statute or by common law. For instance, if two people enter into a contract for active euthanasia, the contract would be declared void by a court of law. 

In the case of Udhoo Dass vs Prem Prakash, the Allahabad High Court observed that every consideration or object is lawful unless it is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law. 

Section 11

An agreement is said to be a valid contract when parties entering into that agreement are competent to contract, which means that a person must be above the age of majority, of sound mind and must not be disqualified by law. For instance, if a minor enters into a contract regarding the sale of land, it will be declared void ab initio- a principle established in the case of Mohori Bibee v. Dharmodas Ghose. 

Legal relations 

The doctrine of intention to create legal relations was established in the landmark case of Balfour v Balfour, wherein it was held that a contract could not be enforceable if it were not agreed upon with such an intention. An agreement may have all essentials required for enforceability, but it will not become a contract without this intention. The lack of intention is why domestic, social and religious agreements have been kept out of the domain of the courts when it comes to enforceability. 

Consideration 

While consideration comes under Section 2(d), the details of valid consideration are discussed in Sections 23-25, which clarify the conditions that must be fulfilled for consideration to be lawful. 

Per Section 23, an unlawful consideration is: 

  1. Forbidden by law; or
  2. of Such nature that defeats any provision of any law; or
  3. Fraudulent; or
  4. involved or implied the injury to the person or property of another; or
  5. regarded immoral by the court or opposed to public policy.

In each of these cases, owing to unlawful consideration, the contract would be declared void. 

Observations

The ICA is a fine piece of legislation, but just like everything else, it needs to change with time to stay relevant and useful. Its importance has grown manifold in the current business environment with a significant increase in contracts between various parties and resulting disputes. With the expansion of businesses across the globe access to technology, the importance of this act is only increasing. With more people entering into new kinds of contracts and the change in the business environment, the need for amendments has been sought to get it in accord, to protect the interest of the parties entering into contractual relationships.

Electronic/online contracts 

Electronic contracts are born out of the need for speed, ease, and productivity. Although e-contracts are legal in the Information Technology Act, there is some insecurity while dealing with and executing contracts online. While giving more clarity to rules regarding the formation of e-contracts, the amendment needs to address questions around jurisdiction in e-contracts, rights and liabilities of parties, and cases of unilateral mistakes by one party. 

Liability of a minor 

The current position of the Indian Law towards minors (as interpreted from Section 33 of the Specific Relief Act, 1963) gives rise to loopholes that minors can exercise to escape liability and the ICA in itself does not contain any specific provisions relating to this.

In the case of Mohiri Bibee v. Dharmodas Ghose, the application of Article 65 of the Indian Contract Act, 1872 was challenged. The Privy Court held that this contention could hold only if the parties were legally competent to contract. However, in its 13th report, the Law Commission said that they believe an incorrect interpretation had been passed by the Privy Council and recommended that an explanation be added where a minor enters into an agreement on the false representation that he is a major. 

Regulate unfair terms of a contract

It is necessary to evolve the principles regulating unfairness in contracts. This will have broad ramifications in various contracts, including lending agreements, builder-developer agreements, debt instruments, landlord-tenancy agreements, government contracts, and arbitration agreements. 

Most developed systems have evolved ways to deal with unfairness in contracts and recognize the possibility of procedural and substantive unfairness. Legal experts have a consensus over the belief that Courts must be equipped to deal with the issue of unfairness even if the parties have not raised such a plea. In its 103rd report, the Law Commission had addressed the matter of unfair terms, a decision on which is pending. 

Conclusion 

Modern society is unthinkable without the possibility to conclude binding contracts. Contracts not only allow businesses to trade goods and offer services, but citizens also make use of contracts to pursue the things in daily life– even if they do not always realize it. Contract law is a part of present society that it is almost impossible to imagine a society without it. When seen together in a holistic perspective, one understands that fulfilling the essential conditions allows a contract to be formed entirely consensually and legally, disallowing its breach or non-performance, except in exceptional circumstances. This understanding comes only after thoroughly analyzing the Interpretation Clause of the ICA in the context of other sections of the ICA. 

References 


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