Concept of Contract & Agreement | Law of Contracts - CLAT PG PDF Download

Introduction 

• The Law of Contract is a crucial part of mercantile or commercial law and impacts everyone, especially in trade, commerce, and industry.
• Contracts are considered the foundation of the civilized world. The Indian Contract Act, 1872 governs the law related to contracts.
• The Act aims to define and amend certain aspects of contract law and applies to the whole of India, except for the State of Jammu and Kashmir.

Definition and Essentials of Contract 

A contract is a legally enforceable agreement that is formed when certain essential elements are present. Let's break down the key points:

What is a Contract? 

• A contract is an agreement that is enforceable by law.
• For an agreement to be enforceable, it must be made with the free consent of parties who are competent to contract, have a lawful object, lawful consideration, and not be expressly declared void by law.

Key Components of a Contract 

•  Agreement:  A mutual understanding between parties.
•  Enforceability at Law:  The agreement must be capable of being enforced by legal means.

Differentiating Agreements and Contracts 

• Not all agreements are contracts. A contract is a specific type of agreement that meets the criteria for enforceability.

Example: 

• An agreement to sell a radio set is a contract because it is enforceable by law.
• However, an agreement to go see a movie may not be enforceable and thus is not a contract.

Definition of Agreement 

• According to Section 2(e) of the Indian Contract Act, an agreement is formed when there is a promise from both sides. For example, if A promises to deliver his watch to B and B, in return, promises to pay a certain sum of money to A, there is an agreement between them.  A promise is the result of an offer made by one person and its acceptance by another.  Section 2(b) defines a promise as the acceptance of a proposal by the person to whom it is made. When a proposal is accepted, it becomes a promise.

What Agreements Are Contracts? 

• All agreements become contracts when they involve:
  • Mutual Consent:  The agreement must be between two or more parties who  agree on the same terms  .
  • Free Consent:  Consent is considered free when it is not obtained through  mistake, misrepresentation, undue influence, fraud, or coercion  . If consent is affected by any of these factors, the contract is voidable at the option of the aggrieved party.
  • Competence to Contract:  All parties involved must have the legal capacity to enter into  a valid contract  . This means they must be of the age of majority, of sound mind, and not disqualified by law from contracting.
  • Lawful Consideration and Lawful Object:  The consideration and object of the agreement must be lawful. If either is unlawful, the agreement is void. An object or consideration is unlawful if it is prohibited by law, fraudulent, immoral, or against public policy.
  • Examples of void agreements include: 
  • Wagering agreements
  • Agreements with uncertain terms
  • Agreements with unlawful consideration in part

• An agreement is void if it is illegal or prohibited by law. An illegal agreement is one that is explicitly or implicitly forbidden by law, while a void agreement is one that has no legal effect.

Different Types of Agreements

Void Agreements 

• A void agreement is one that is not enforceable by law. For example, an agreement involving a minor is considered void.
• Sections 24 to 30 of the Indian Contract Act, 1872, specify certain agreements that are void, such as:
  • Agreements without consideration
  • Agreements in restraint of marriage
  • Agreements in restraint of trade

Voidable Contracts 

• A voidable contract is an agreement that is enforceable by law at the option of one or more parties involved.
• For instance, if a party's consent to a contract is obtained through coercion, undue influence, fraud, or misrepresentation, the contract becomes voidable at that party's discretion.

Difference between Void Agreement and Voidable Contract 

•  Voidable Contract:  A contract that one party can choose to enforce or void.
•  Void Agreement:  An agreement that cannot be enforced by any party.
• In a voidable contract, the defect is fixable, while in a void agreement, the defect is permanent.
• A voidable contract remains valid until the party with the option decides to void it, while a void agreement is invalid from the beginning.
• A voidable contract involves a lack of free consent from one party, whereas a void agreement lacks the essential elements of a valid contract.
• In a voidable contract, a party can claim damages for non-performance, but in a void agreement, there is no such claim due to its unenforceability.

Unlawful Agreements 

• Unlawful agreements are those that are prohibited by law, such as agreements to commit a crime or a tort.
• The key distinction between unlawful agreements and void agreements is that in unlawful agreements, the collateral transaction is also void.
•  For example, if A lends money to B to pay a wagering debt, the loan is valid because it is subsidiary to the void wager. 
•  However, if A lends money to B to smuggle goods, both the loan and the smuggling agreement are void due to illegality.

Proposal or Offer 

A proposal, as defined in Section 2(a) of the relevant act, refers to the act of one person expressing their willingness to either do or refrain from doing something, with the intention of obtaining the agreement of another party. For example, when A expresses his willingness to sell his radio set to B for Rs. 500, he is making a proposal with the expectation of B's consent. However, if a statement is made without the intention of seeking the other party's agreement, it does not qualify as a proposal.

 Elements of Proposal 

•  Expression of Willingness:  The proposal involves a clear expression of the willingness to do or abstain from doing something.
•  Obtaining Assent:  The proposal is made with the objective of obtaining the consent or agreement of the other party.

Roles in a Proposal 

• The person making the proposal is referred to as the  'proposer,' 'offeror,' or 'promisor.' 
•  The person to whom the proposal is made is called the  'proposee,' 'offeree,' or 'promisee.'

Offers Must Be Communicated 

According to Section 2(a) of the Act, a person makes a proposal when they indicate their willingness to do or not do something to another person. The key point here is that this willingness must be "signified," meaning it needs to be communicated or made known. Therefore, an offer must be communicated to the other party.

Express or Implied Offer 

•  Express Offer:  An offer is considered express when it is communicated explicitly, either in words or writing. For example, if person A offers to sell their bike to person B for Rs. 30,000, it is an express offer.
•  Implied Offer:  An offer is implied when it is communicated through conduct or the circumstances of the case. For instance, placing a bid at an auction constitutes an implied offer.

Completion of Communication 

•  Section 4:  Communication of a proposal is considered complete when it reaches the knowledge of the person to whom it is addressed. An offer cannot be accepted unless it is brought to the attention of the intended recipient.
• For example, person A cannot make an offer to person B unless A informs B about the offer. Acting without knowledge of an offer does not constitute acceptance.
• In the case of  Lalman Shukla v. Gauri Dutt  , the court ruled that the plaintiff was not entitled to a reward because he was unaware of the defendant's offer when he found the missing boy. If a person is aware of the offer and acts according to its terms, it amounts to acceptance, regardless of their intention to claim the reward at that moment.

Intention to Contract 

• For a valid contract to arise from an offer and acceptance, it is essential that the offer is made with the intention to create a legal relationship.
• In social engagements, promises are typically made without the intention to create legal obligations, making such agreements unenforceable in a court of law.
• Examples of social engagements include agreements to go to the movies, take a walk, or play a game together.
• The determination of the parties' intention is both objective and subjective.
• The case of  Balfour v Balfour  illustrates this principle. In this case, Mr. Balfour, working in Ceylon, promised to pay his wife 30 euros per month while she stayed in England for health reasons.
• When he failed to make the payments, his wife sued him, but the court ruled that there was no intention to create a legal relationship, and thus he was not liable.
• The intention of the parties can be inferred from the contract's terms and the surrounding circumstances.
• Generally, in social matters, it is presumed that there is no intention to create a legal relationship, whereas in business matters, such an intention is usually presumed.
• The case of  Jones v. Padavatton  further illustrates this point. In this case, a divorced daughter was persuaded by her mother to leave her job in Washington, study law in England, and eventually return to Trinidad as a practicing lawyer.
• The mother agreed to cover all expenses and purchased a house in England, part of which was rented out and part allocated to her daughter.
• However, after five years of the daughter being unable to complete her law degree and facing personal changes, the mother stopped payments and initiated eviction proceedings.
• The court ruled that there was no intention to create a legal relationship, and the mother was granted possession of the property.

Offer Types: General vs Specific 

• Specific Offer:  When an offer is directed to a specific or identified individual, it is called a specific offer. Only the person to whom the offer is made, or someone authorized by that person, can accept it.
• General Offer:  A general offer is made to the public at large. Anyone can accept this type of offer. For example, if a person advertises a reward for finding their missing child, anyone who finds the child can claim the reward.

Illustration:  In the case of Carlill v. Carbolic Smoke Ball Co., the smoke ball company offered a $100 reward to anyone who used their product and still caught influenza. Mrs. Carlill followed the instructions but still fell ill and sued for the reward. This case illustrates the concept of a general offer.

Acceptance of General Offer:  Acceptance of a general offer does not require communication. By fulfilling the conditions of the offer, the offeree is considered to have accepted it.

Offer vs Invitation to Offer 

• Invitation to Offer:  An invitation to offer, or treat, is different from an offer. It involves inviting others to make offers based on certain information. For instance, displaying goods in a shop window invites customers to make offers to purchase. 
• In the case of Harris v. Nickerson, the defendant advertised an auction sale. When the plaintiff traveled to the auction site only to find it cancelled, he sought to recover his travel expenses. However, since no contract existed between the parties at that point, the defendant was not liable.