ESSENTIALS OF A CONTRACT: UNDER THE INDIAN CONTRACT ACT, 1872

Published On: 18th April, 2024

Authored By: Aryan Gupta
Rajiv Gandhi National University of Law, Punjab
  1. INTRODUCTION

1.1 Brief Introduction of the Topic

The project focuses on three core aspects of contractual relationships: “Formation of a Contract,” “Object,” and “Consent and Competency to Contract.” In “Formation of a Contract,” the legal definition of an agreement is discussed, emphasizing mutual promises supported by consideration. The concept of a proposal, constituting an offer that, upon acceptance, forms a legally binding promise, is clarified. “Object” distinguishes between lawful and unlawful objectives of a contract, emphasizing that agreements become void if their object or consideration is unlawful. “Consent and Competency to Contract” outlines criteria for individuals’ capacity to enter enforceable agreements, including age, soundness of mind, and freedom from legal disqualifications. The concept of free consent and conditions impacting it, such as coercion, undue influence, fraud, misrepresentation, and mistake, are also explored, ensuring understanding of contract legality and enforceability.

1.2 Object and Purpose of the Study 

This project aims to provide a comprehensive understanding of key aspects of contract law in India, focusing on “Formation of a Contract,” “Object,” and “Consent and Competency to Contract.” It clarifies concepts such as agreement, consideration, lawful objects, competency criteria, and factors affecting consent validity.

1.3 Research Questions  

The study addresses several key research questions:

  • Differentiating between an “agreement” and a legally enforceable “contract” under the Indian Contract Act, and the implications for contractual relationships.
  • Exploring the role of “consideration” in contract formation and the recognized forms of consideration in Indian contract law.
  • Examining the conditions for lawful contracts under the Indian Contract Act and the impact of unlawful objects or considerations on contract validity.
  • Analyzing the prerequisites for individuals to be considered competent to contract, including age of majority, mental capacity, and legal disqualifications.
  • Investigating issues related to consent, such as free consent, coercion, undue influence, fraud, misrepresentation, and mistakes, and their influence on contract validity, along with available legal remedies and exceptions for voidable contracts due to lack of free consent.
  1. FORMATION OF A CONTRACT

2.1 What is an “Agreement”

The Indian Contract Act, under section 2(e), defines the term “Agreement” as follows: “Every promise and every set of promises, forming the consideration for each other, is an agreement.”[1] This legal framework defines an agreement as mutual promises exchanged for consideration, establishing the basis for contract formation and legality. It emphasizes reciprocity, stipulating that each promise must be supported by consideration—something of value exchanged—to render the agreement valid and enforceable.

Expanding on the concept, it’s essential to recognize that the Indian Contract Act also clarifies the notion of a “proposal” in section 2(b). According to this section, a proposal is described as, “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.[2] In simpler terms, a proposal is essentially an offer made by one party to another, and it takes the form of a promise when the other party agrees to it. This acceptance marks a pivotal moment, as it converts the proposal into a legally binding commitment or promise, which is a critical element in the formation of an agreement.

2.2 What is a “Contract”

In section 2(h) of the Indian Contract Act, the term “Contract” is explicitly defined as “An agreement that can be legally enforced constitutes a contract.” [3]This definition forms the basis for understanding the nature of contracts in the legal context. To elaborate on this, we can create a logical sequence of definitions. A contract is an agreement; an agreement is a promise and a promise is an accepted proposal.[4]

  • An agreement is a contract:-

Within the legal domain, a contract is a particular kind of agreement. A mutual understanding or agreement between two or more parties is generally referred to as an agreement. But not every agreement is a contract. An agreement that satisfies legal requirements and has legal enforceability is called a contract. In contrast to a simple agreement, it denotes a more formal and binding commitment.4

  • An Agreement is a Promise:-

An agreement has a promise contained in its structure. Each party often commits to do or not do specific things in a contractual agreement. These promises, which set forth the parties’ duties and responsibilities, form the basis of the agreement. If these promises are not kept, there may be serious legal repercussions.4

  • A proposal that is accepted is a promise:-

In the framework of a contract a proposal is typically required for a statement to qualify as a promise. In essence, a proposal is an offer given to another party by one. It expresses the desire to sign a legally enforceable contract. This offer turns into a promise if the other side accepts it. This acceptance is crucial because it turns the proposal into a binding contract. In this context, the proposal serves as the starting point for the creation of a promise, which is an essential part of a contract.4  The acceptance has to be absolute and expressed in a reasonable manner, within a reasonable unless the proposal has prescribed the method of acceptance as stated in Section 7 of the ICA. [5]

2.3 What Agreements are Contracts

  • Understanding the distinction between agreements and contracts is vital, as not all agreements possess the legal enforceability of contracts. While contracts are a specific type of agreement, they must meet certain legal criteria outlined in Section 10 of the Indian Contract Act of 1872 to be enforceable in court. Merely expressing consent through offer and acceptance isn’t sufficient for a contract. These prerequisites, essential components under Indian contract law, determine a contract’s enforceability and legality. Recognizing these requirements is crucial to discerning the disparity between an agreement and a legally binding contract within the framework of Indian law. These Include:-
  • There must be at least 2 parties involved.
  • The consent, of both parties, must be free and absolute.
  • The parties should be competent to contract.
  • The consideration and object of the contract need to be lawful.
  • The contract should not be expressly declared void by law.[6]

2.4 Communication of proposals and acceptance

The legal framework emphasizes that communication of proposals, acceptance, and revocation is determined not only by spoken or written words but also by the intentions and actions of the parties involved. Acts or omissions intended to convey such communications hold legal significance, indicating the completion of these processes based on the parties’ intentions. Section 3 of the ICA states, “The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it”[7]

The completion of communication plays a pivotal role in determining the effectiveness of proposals and acceptances. It is specified, under Section 4 of ICA that a proposal is considered fully communicated when the person to whom it is directed becomes aware of it. This ensures that the party receiving the proposal is informed and can make an informed decision. When it comes to the communication of an acceptance, different criteria apply based on the perspective:[8]

  • For the proposer, an acceptance is considered complete when it is dispatched in a manner that is beyond the control of the acceptor. This safeguards the interests of the party making the proposal, as it ensures that once the acceptance is in transit, the acceptor cannot withdraw it. It is stated in the ICA as, “The communication of an acceptance is complete,— as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor” 8
  • For the acceptor, an acceptance is complete when the proposer becomes aware of it. This ensures that the proposer is informed of the acceptance, thereby solidifying the agreement. The ICA states, “The communication of an acceptance is complete,— as against the acceptor, when it comes to the knowledge of the proposer.”8
  1. OBJECT

3.1 Definition and Meaning

Section 2(d) of ICA defines consideration as, “When, at the desire of the promisor, the promisee 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 can take various forms, including:[9]

  • Act or Deed:-

Consideration can involve an act, which means doing something that one is not previously legally obligated to do. For example, if Party A promises to pay Party B a sum of money in exchange for Party B painting a house, the act of painting the house is the consideration.

  • Abstinence:-

Consideration can also involve refraining from doing something that one has the legal right to do. For instance, if Party A promises to pay Party B not to open a competing business in the same area, Party B’s abstention from competition is the consideration.

  • Promise to Act or Abstain:-

In many contracts, consideration takes the form of a promise to do or refrain from doing something in the future. For instance, if Party A promises to pay Party B a monthly fee in exchange for Party B providing cleaning services for a year, the promise of Party B to provide cleaning services constitutes consideration.

  • Mutuality of Consideration:-

One important aspect of consideration is that it must be mutually beneficial; both parties in the contract must provide consideration. This principle is often referred to as the “bargain for exchange.” In other words, one party’s promise or act should induce the other party’s promise or act, and there should be a clear exchange of value.

  • Role in Contract Formation:-

Consideration is a vital element in forming a contract. Without consideration, a promise is generally considered a gratuitous promise and may not be legally enforceable. To create a legally binding contract, there must be an offer, acceptance, and the exchange of consideration between the parties. Section 25 of the act states “Agreement without consideration, void, unless it is in writing and registered,or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law”[10]

The term ‘object ‘means the motive, purpose, or design for which it is entered into. The consideration for a contract may be lawful while its object at the same time may be unlawful. But in either case, whether the consideration is unlawful or the object is unlawful, the agreement is void.[11]

3.2 Unlawful Objects

Section 23 of the Indian Contract Act deals with what objects are lawful and what are not. The consideration or object of an agreement is lawful, unless—

  • It is forbidden by law
  • Is of such a nature that if permitted, it would defeat the provisions of any law
  • Is fraudulent
  • Involves or implies injury to the person or property of another
  • The Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.[12]

  1. CONSENT AND COMPETENCY TO CONTRACT

4.1 Competency to Contract

Section 11 of ICA states, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”[13] This fundamental principle of contract law underscores the essential prerequisites for individuals to enter into binding agreements.

  • Age of Majority:- In India, the Indian Majority Act, 1875, sets the age of majority at 18 years. Individuals who have reached this age are considered adults and are generally competent to enter into contracts. For minors, those under 18 years of age, there are restrictions on their capacity to contract. They can enter into contracts for necessities, but most other contracts with minors are either voidable or unenforceable. Section 3 of the Indian Majority act states, “Every person domiciled in India shall attain the age of majority on his completing the age of eighteen years and not before”[14]
  • Sound Mind:- The Indian Contract Act, 1872, emphasizes that individuals must be of sound mind when entering into contracts. A person is considered of sound mind if they can understand the terms and implications of the contract at the time of making it. Contracts with individuals who lack the capacity to understand the contract due to mental illness or impairment may be voidable. As stated in the Section 12 of ICA, “A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind” [15]
  • Not Disqualified by Law:- Indian contract law recognizes specific situations where a person may be disqualified from contracting. For example, individuals declared insolvent by a court or individuals who are disqualified by law due to certain criminal convictions may face restrictions on their ability to enter into certain types of contracts. Additionally, certain contracts, such as agreements opposed to public policy or illegal contracts, are prohibited under Indian law.

4.2 Consent and Free Consent Defined

In Section 13 of ICA consent is defined as, “Two or more persons are said to consent when they agree upon the same thing in the same sense.”[16] Consent in a contract requires mutual agreement and understanding of its terms and obligations. Parties must share a common understanding to ensure awareness and acceptance of the contract’s implications. Clear, precise language is crucial to prevent confusion or misunderstanding, ensuring consent is freely given without coercion, undue influence, or deception. A consent is considered free when it doesn’t consist of:-[17]

  • Coercion:- As defined in Section 15, ““Coercion” is the 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.”[18]
  • Undue Influence:- As defined in Section 16
  • A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. [19]
  • In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another—

(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or

 (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. [20]

  • Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.”[21]
  • Fraud:- As defined in Section 17 “—“Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent , with intent to deceive another party thereto of his agent, or to induce him to enter into the contract:—
  • The suggestion, as a fact, of that which is not true, by one who does not believe it to be true
  • The active concealment of a fact by one having knowledge or belief of the fact
  • A promise made without any intention of performing it
  • Any other act fitted to deceive
  • Any such act or omission as the law specially declares to be fraudulent.”[22]
  • Misrepresentation:- As defined in Section 18 ““Misrepresentation” means and includes—
  • 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
  • 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 anyone claiming under him.”
  • Causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement. [23]
  • Mistake:- Subject to the provisions of Section 20 which declares the agreements where both parties are under a mistake of fact as void, it states, “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void”,[24] Section 21 which tells the effects of mistake of law in an agreement, it states that, “A contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India has the same effect as a mistake of fact”[25] and Section 22 which tells the effects of a contract caused by mistake of fact of one party of the contract, it states, “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact”[26]

Section 19 of the ICA renders the contracts without free consent voidable, it states, When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.27       

Exception.—If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.27   

Explanation.—A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable.”[27]

As per the Act, consent obtained under coercion, fraud, or misrepresentation results in a “voidable contract,” offering protection to individuals from entering into agreements not reflective of their true intentions. In cases of fraud or misrepresentation, the affected party can choose to uphold the contract or seek restoration to their original position. This empowers them to demand specific performance or seek damages to rectify losses incurred due to deceptive information. However, an exception exists if the injured party could have reasonably uncovered the truth, emphasizing the importance of due diligence. The Act specifies that for a contract to be voidable, it must be the deceived party seeking to void it, ensuring fairness and accountability in contractual dealings.

  1. CONCLUSION

In conclusion, this project offers a comprehensive examination of the foundational principles of Indian contract law, delving into the intricacies of contract formation, subject matter limitations, contractual capacity, and the significance of consent. By elucidating the requirements for agreements to evolve into legally binding contracts and elucidating the boundaries of permissible contract content, the project equips individuals and businesses with essential knowledge to navigate contractual relationships in India. Understanding these rules fosters the creation, adherence to, and enforcement of fair and lawful contracts, fostering trust and fairness in contractual dealings. Ultimately, a robust grasp of Indian contract law promotes the establishment of equitable and mutually beneficial agreements, ensuring the integrity of contractual engagements across various sectors of society.

  1. REFERENCES

 

[1] Indian Contract Act, 1872. sec. 2(e)

[2] Indian Contract Act, 1872. sec. 2(b)

[3] Indian Contract Act, 1872. sec. 2(h)

[4] Avtar Singh, Contract and Specific Relief, Eastern Book Company, Lucknow, 2021, p 3

[5] Indian Contract Act, 1872. sec. 7

[6] Indian Contract Act, 1872. sec. 10

[7] Indian Contract Act, 1872. sec. 3

[8] Indian Contract Act, 1872. sec. 4

[9] Indian Contract Act, 1872. sec. 4

[10] Indian Contract Act, 1872. sec. 25

[11] Monad University, “Lawful Consideration and Object”

< https://monad.edu.in/img/media/uploads/lawful%20consideration.pdf> (accessed 10th October 2023)

[12] Indian Contract Act, 1872. sec. 23

[13] Indian Contract Act, 1872. sec. 11

[14] Indian Majority Act, 1875. Sec. 3 (1)

[15] Indian Contract Act, 1872. sec. 12

[16] Indian Contract Act, 1872. sec. 13

[17] Indian Contract Act, 1872. sec. 14

[18] Indian Contract Act, 1872. sec. 15

[19] Indian Contract Act, 1872. sec. 16 (1)

[20] Indian Contract Act, 1872. sec. 16 (2)

[21] Indian Contract Act, 1872. sec. 16 (3)

[22] Indian Contract Act, 1872. sec. 17

[23] Indian Contract Act, 1872. sec. 18

[24] Indian Contract Act, 1872. sec. 20

[25] Indian Contract Act, 1872. sec. 21

[26] Indian Contract Act, 1872. sec. 22

[27] Indian Contract Act, 1872. sec. 19

 

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