“An agreement enforceable by law is a contract” as per section 2(h) of the Indian Contract Act 1872 but “agreements enforceable by law have been defined in section 10”. Discuss the statement. Write essential elements of a valid contract.
In our regular day-to-day life, we make several comments and statements. We say several things to people to whom we talk to. Most of these are not with any intention to create any legal obligation. For example, if we say to someone that we will go to lunch with him, it is not a legal obligation. But some, which are related to business or civil matters, are understood to be in a serious mood and have the potential to be legally enforceable. For example, when we hire an Auto-rickshaw for going from point A to point B, we are legally bound to pay and the driver is legally bound to take us from A to B. Indian Contract Act 1872 defines these activities in precise terms in Section 2.
Definition of Terms
Sec. 2 (a) When a person signifies to the other, to do something or to abstain from doing something, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a Proposal.
Sec. 2 (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. An accepted proposal becomes a promise.
Sec. 2 (c) The person making the promise is called Promisor, while the person accepting the promise is called Promisee.
Sec. 2 (d) When, at the desire of the Promisor, the Pomisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence is called a consideration for the promise.
Sec. 2 (e) Every Promise and every set of Promises forming a consideration for each other, is an Agreement.
Sec. 2 (f) Promises which form the consideration or part of consideration for each other are “Reciprocal Promises”.
Sec. 2 (g) An agreement not enforceable by law is void.
Sec. 2 (h) An agreement enforceable by law is a Contract.
Sec. 2 (i) An agreement that is enforceable by law at the option of one or more of the parties thereto but not at the other or others is a voidable Contract.
Sec. 2 (j) A Contract that ceases to be enforceable by law becomes void when it ceases to be enforceable by law.
From sec 2(e) and 2(h), it is clear that Agreement and Contract are two different things. For an agreement to become a contract, it has to be enforceable by law.
Section 10 states that all agreements that are made by free consent of the people who are competent to contract, for a legal object and legal consideration, and are not hereby expressly declared to by void, are contracts and are thus legally enforceable. Thus, there are five factors that determine whether an agreement can be legally enforced or not. These are discussed below:
1. Competency of the people doing the agreement. (What do you understand by competency to contract? Who are competent to contract? What protections are offered to minors?)
All the parties doing the agreement must be competent to contract. Section 11 determines who are competent to contract. As per this section, person who has attained the age of majority according to the law to which is subject, who is of sound mind, and who is not prohibited/disqualified from contracting by law to which he is subject. Majority is 18 years except when a guardian is appointed by the court in which case it is 21 yrs.
In the case of Mohoribibee vs Dharmodas Ghosh in 1903, a minor had taken a loan and then he sued to avoid the contract. Privy Council council held that any contract with a minor is void ab initio and so the loaner cannot get any money that he gave as advance back. This rule is adopted all over India whether or not it benefits the minor.
In the case of Mir Sarwarjan vs Fakhruddin Mohd. Chaudhary 1912, a contract to purchase a property was done on behalf of minor. It was held that the minor could not sue for getting the possession of property.
However, since in today’s times minors are coming a lot in public life, it is not always possible to consider an agreement with a minor to be always void. Therefore, in the case of Srikakulam Sbhramanyam vs Kurra Sabha Rao 1949, Privy Council held that a sale of inherited property of a minor to pay off inherited debt effected by the guardian was binding on the minor.
Protections offered to minors:
No estoppel against minor – It has now been settled that a minor who enters into a contract by misrepresenting his age can later on tell his correct age and avoid the contract.
No liability in tort or in contract arising out of a contract – If a minor enters into a contract, he can neither be held liable in contract nor in torts. In the case of Jennings vs Rundall 1799, when an infant hired a horse for riding short distance but rode it for long distance resulting in injury to horse, he was not held liable because it was a contractual obligation. In the case of Hari Mohan vs Dulu Mia 1934, Calcutta HC held minor not liable in tort for money lent on bond.
However, in absence of a contract, a minor may be liable in tort. Thus, in the case of Burnard vs Haggis 1863, when a minor “borrowed” a mare only for riding and then lent it to a friend who jumped her and killed her, he was held liable in tort.
Doctrine of restitution – If a minor obtains property or goods by misrepresenting his age, he can be forced to return it but only as long as the goods are traceable in the minor’s possession. This is called doctrine of equitable restitution. If the minor sells or converts the property, the value of the goods cannot be retrieved because that would amount to enforcing a void contract. In the case of Leslie vs Sheill, a minor got 400 pounds from money lenders by misrepresenting his age. The money lenders could not recover it under any of fraud, quasi-contract, or doctrine of restitution. This was followed in the case of Mohoribibee vs Dharmodas Ghosh as well..
Beneficial Contracts – In contract where a minor has already supplied consideration, the minor can enforce the contract. Thus, in the case of Ulfat Rai vs Gauri Shakar 1911, it was held that a minor can sue to take possession of a property for which he has already paid. But where the contract is still executor and consideration has not been given, the principle adopted in Mohoribibee will prevail. Thus, in the case of Raj Rani vs Prem Adib 1949, it was held that the film producer was not bound by a contract with minor’s father to give a role to minor in his movie. This is because minor could not be forced to give consideration and father had not given any consideration. However, a contract of marriage of a minor enter into by the father is not void for want of consideration because it is for the benefit of the minor.
Liabilities for necessities (Section 68) – If a minor is supplied with necessaries that are in accordance with his living standard, the supplier can get paid through the minors property.
Persons of unsound mind
Section 12 says that a person is of sound mind for the purpose of contracting if at the time of contracting, he is capable of understanding the contract and capable of making a rational judgement as to the effects of the contract upon his interests. A person who is usually of sound mind but sometimes of unsound mind may not make a contract when he is of unsound mind, while a person who is usually of unsound mind but sometime of sound mind may make a contract when he is of sound mind. Thus, a person, who is too drunk, or who is temporarily delirious due to sickness such as high fever, may not make a contract at that time. A patient in a lunatic asylum, who is at intervals of sound mind may make a contract when he is of sound mind.
In India, a contract done by a person of unsound mind is absolutely void ab initio. In the case of Indersingh vs Parmeshwardhari Singh Patna HC in 1957 held that a contract to sell property worth 25000 in 7000, was voidable because the mother claimed that her son was of unsound mind and did not understand the implications.
2. Consent and Free Consent
Section 13 defines that two or more people are said to consent when they agree upon the same thing in the same sense. However, many a times, a consent may not reflect the true intentions of a party. For example, one party may give consent because of being financially pressured or criminally threatened. Thus, such a consent should not make the agreement enforceable. Section 14 determines what factors can vitiate a consent and when a consent is considered free of any complication that affects the enforceability of an agreement . It states that a consent that is not obtained through coercion, undue influence, fraud, misrepresentation, or mistake subject to section 20, 21, and 22, is a free consent.
a. Coercion (Sec 15): Coercion is committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain the property, to the prejudice of any other person, with an intention to cause that other person to enter into an agreement. It is immaterial whether IPC is or is not in force where coercion is applied. Thus, an act that is unlawful as per IPC but not as per England law and that has been used to induce the consent, will be considered coercion.
A clear example would be force someone to consent on gun point or by hurting or threatening to hurt. In Chikham Amiraju vs Chikham Seshamma Madras HC 1912 held that threatening to commit suicide is coercion. In the case of Astley vs Reynolds 1771, the plaintiff had pledged his plate for #20 and when he went to claim it back, the defendant asked for #10 more as interest. To redeem his plate, the plaintiff paid the money but later sued to recover #10. The court allowed it.
b. Undue Influence (Sec 16): Undue influence occurs when because of the nature of the relationship that exists between the parties, one party is able to dominate the will of the other and uses this dominance to obtain unfair advantage over the other. A person is in a dominant position when he holds a real or apparent position of authority for example manager employee, or stands in a fiduciary relationship with the other for example money lender and loanee. A person could also be in a dominant position if the mental capacity of other party is temporarily or permanently effected due or illness, age, or distress.
The burden of proof that undue influence has not occurred is on the person who is in the dominant position, if the agreement is unconscionable otherwise it is on the party that alleges undue influence.
Examples:
Father (A) give some money to son (B) when B was a minor. Upon majority, A makes B execute a bond for a much larger amount.
A person (A) who is old and sick is induced into paying an unreasonably large amount of sum to his doctor (B).
A village moneylender (A) lends money to a villager (B), who is already in debt, at a very high interest. It lies on A to prove that he has not used undue influence to induce the contract.
At a time of financial crises, a bank manager gives loan to a person at a substantially higher rate. This is not considered to be undue influence but a simple business transaction.
In Mannu singh vs Umadat Pandey Allahbad HC 1890, a guru induced his devotee into giving all the devotee’s property to himself. This was considered undue influence.
c. Fraud (Sec 17): When a person intentionally tries to cheat another person, it is called as fraud in a general sense. Section 17 defines fraud precisely as such – Fraud means and includes any of the following activities done by a party or by his connivance or by his agent, with an intent to deceive another party or his agent, or as to induce the other party to enter into the contract.
- the suggestion of a fact, of that which is not true, by the one who does not believe it to be true.
- active concealment of a fact by one who knowledge or belief of the fact.
- making a promise without an intention to perform.
- any act fitted to deceive
- any such act or omission that the law declares to be fraudulent.
Mere silence as to facts likely to affect the willingness of a person to enter into the contract is not fraud unless, according to the circumstances of the case, it is the duty of the person keeping silence to speak or unless his silence itself is considered as speech.
Examples:
A sells a horse to B by auction without telling B that horse is unsound. This is not fraud.
B is A’s daughter who has just come off age, then it is A’s duty to tell B about the fact. So this is fraud.
B says to A, “if you do not deny it, I will assume that horse is sound”. Here, silence is considered as speech so this is fraud.
A and B, being traders, enter into a contract. A has private pricing information that will cause B to not enter the contract. A is not bound to inform this to B. This is not fraud.
Concealing the disease history while obtaining insurance is fraud because it is the duty of the insured to give this information to the insurer.
Derry vs Peek 1889 was not fraud, because the company honestly believed in what they said and there was no intentional misrepresentation, which is the essence of fraud.
Sri Krishan vs. KurukshetraUniv., AIR 1976 SC the student was not found to be fraud. Even though he knew that he was short on attendance, he did not disclose it on examination form. He was let off because ‘mere silence’ is not fraud.
d. Misrepresentation (Sec 18): When a person makes an unwarranted statement, however innocently, which the person believes to be true, and which turns out to be false, it is misrepresentation. Any breach of duty, without an intention to deceive, that gains an advantage to the person committing it or to the person claiming under him, by misleading the other person to his prejudice or to person claiming under him, is also misrepresentation. Further, causing a party to an agreement to make a mistake regarding the subject matter of the agreement, however innocently, is also misrepresentation.
Examples:
A claimed to B that the ship being considered under an agreement was below 2800 tonnage. But in reality it turned out to be more than 3000 tonnage. It was held to be misrepresentation and B was entitled to avoid the contract. Oceanic Steam Navigation vs Soonderdas Dharmasey. Bom HC 1980.
Land was purchased expressly for constructing duplexes. The seller claimed that he saw no permissioning problems. However, later on the permission was denied. This was held to be misrepresentation and even though the claim was innocent, the buyer was allowed to avoid the sale
Where the seller of a car stated the mileage of the car to be 20000, which turned out to be wrong, the buyer of the car was allowed to recover compensation for misrepresentation.
Section 19 declares that a contract induced due to coercion, fraud, or misrepresentation is voidable at the option of the party whose consent was obtained by coercion. An exception is when the consent is obtained by silence fraudulent under sec 17, and when the affected party had the means of discovering the truth with ordinary diligence. In this case, the contract is not voidable. Further, if the fraud or misrepresentation did not cause the party on which they were practiced to give consent, then the contract will not be avoidable.
Section 19A declares that the party whose consent was obtained by undue influence has the option to avoid the contract.
3. and 4. Legal Object and Legal Consideration
When four dacoits enter into an agreement to share the loot equally and if two of them take more share than the other two, there is nothing that the law can do, except arrest them for dacoity. Needless to say, the objects and considerations involved in the agreement have to be legally valid. Section 24 declares that agreements are void if consideration and object are unlawful in part. If any part of a single consideration for one or more objects, or any one or any part of one of several considerations for a single object, is unlawful, the agreement is void.
Thus, if the unlawful part cannot be severed from the object or consideration, the whole agreement becomes void. However, if the unlawful part can be severed, the remaining part can still be enforced. For example, A enters into an agreement with B to get 1 Gram of cocaine with 1 Kg or Rice for 10 Rs for rice and 1000 Rs for cocaine, then a part of the object that is 1 gm of cocaine and 1000Rs is severable from the agreement without affecting the lawful part. In this case, the agreement can be enforced partially. In another example, A man enters into an agreement with married women to clean his house and live with him in adultery, which is unlawful, for a sum per month, the whole agreement is void because it is not possible to divide the sum properly between lawful and unlawful objects.
What objects or considerations are unlawful
Section 23 declares that any object or consideration is lawful, unless – it is forbidden by law, or is of the nature that if permitted, defeats the provisions of any law, or is fraudulent, or implies or involves injury to the person or property of another, or is determined by the court to be immoral or against public policy. Thus, an agreement to rent an apartment for prostitution or gambling is void.
5. Agreements expressly declared to be void by this act
Some other agreements that satisfy all the four conditions given is section 10 can still be void. Such agreements are:
Sec 20 : when both the parties are under mistake as to the matter of fact, the agreement is void.
Sec 24 : agreement in which any part of a single consideration for one or more objects, or any consideration or part of a consideration out one or more considerations for a single object is unlawful, is void.
Sec 25 : agreement without any consideration except if it is registered, or a promise to pay for something already done, or is a promise to pay time barred debt.
Sec 26: agreement in restraint of marriage.
Sec 27 : agreement in restraint of trade.
Sec 28 : agreement against legal proceedings.
Sec 29 : agreement that is uncertain
Sec 30 : agreement by way of wager.
Sec 56 : agreement to do impossible act is void. If an act becomes impossible after the contract it done, the contract becomes void when the act becomes impossible to do.
Legal formalities: Certain agreements such as agreement for the sale of immovable property, or agreement for insurance become a contract only when they are properly registered. For such agreements, the procedure prescribed by law must be followed to make them a contract.
Keywords: Agreement in India, Concept of Agreement, Definition of An agreement under the Indian Contract Act 1872
Click here to read the Indian Contract Act 1872
Section 28 Contract Act – Clause Barring Payment Of Interest Not Hit: Supreme Court
