First-Year Law Notes & Flashcards

Agreement and contract

Contracts have always been an indispensable part of our lives. Knowingly or unknowingly, we enter into a contract hundreds of times in a year. Even when we buy candy, we are entering into an agreement with the shopkeeper. Every time we visit a restaurant or book a cab, we are entering into a contract. Although the law of contract is developing with time, the jurisprudence of contract remains the same. We know what a contract is all about but new situations arise every day and a new question appears in the mind of whether this particular agreement should be regarded as a contract or not.

One of the common perplexities among people is recognizing the difference between a contract and an agreement. They are frequently used interchangeably. For example, when the owner of a house hands over the rent agreement and says, “ Please sign the contract ”, this creates uncertainty whether the document is an agreement or a contract.

We come across ‘ contract killers ’ in movies who charge money to kill people. Have you ever thought, ‘Is a contract of killing someone for money, a valid contract?’ or ‘Can the man giving the contract sue the contract killer in the court of law saying that the other party has committed a breach of contract by not doing the job even after the payment of money?’.

An agreement (Section 2(e))

An Agreement is a promise between two entities creating mutual obligations by law. Section 2(e) of the Indian Contract Act, 1872 defines an agreement as ‘Every promise and every set of promises, forming the consideration for each other, is an agreement’.

To form an agreement, the following ingredients are required:

• Parties: There need to be two or more parties to form an agreement.

• Offer/ Proposal: When a person signifies to another his willingness of doing or omitting to do something with a view to obtain other’s assent. [Section 2(a)]

• Acceptance: When the person to whom the proposal is made signifies his assent for the same thing in the same sense as proposed by the offeror. [Section 2(b)]

• Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]

• Consideration: It is the price for the promise. It is the return one gets for his act or omission. [Section 2(d)]

An agreement is, therefore, a promise or set of promises forming consideration for all the parties. [Section 2(e)]

Agreement = Promise or set of promises (offer + acceptance) + Consideration (for all the parties)

If a 7-year-old boy is buying an ice-cream from an ice-cream vendor and giving Rs. 10 in return, it becomes an agreement. This is because the boy offers to buy ice-cream and the vendor accepts the offer which makes it a promise. The consideration for both was ice-cream and money respectively.

The agreement should not expressly be declared to be void

There are certain kinds of contracts which are expressly declared by The Indian Contract Act, 1872 to be null and void. The following are some of the agreements which are not enforceable in the eyes of law:

• Agreements without consideration except it is written and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law.

• Agreements in restraint of marriage

• Agreements in restraint of trade

• Agreements in restraint of legal proceedings

• Agreements void for uncertainty

• Agreements by way of wager

• Agreements contingent on an impossible event

• Agreements to do impossible act

Those agreements are void which are based on any of the subjects mentioned above. There is no liability for not enforcing the contract and thus, the conditions of the contract are not binding upon any of the parties.

For example, if Devdas asks Paro not to get married for her entire life then he will give her a new dress and shoes in return; it cannot be considered as a valid contract because the agreement is made in restraint of marriage.

Similarly, if the agreement is made to not to work for the entire life in exchange for a new flat, it will not be considered as a valid contract as it is in restraint of trade.

Also, if a father enters into an agreement with his son that the father will get him a new bicycle if the son scores 105% in his board exams. It will be considered a void agreement because it is an agreement to do an impossible act.

The above-mentioned conditions are required to be fulfilled in order to make an agreement legally enforceable. The agreement becomes void if any of the mentioned conditions are left unfulfilled except in the case of free consent where the agreement becomes voidable instead of void and giving the party, whose consent was not free at the time of entering into the contract, the discretion to continue the contract or not.

Contract (Section 2(h))

A contract is a lawful agreement. In other words, an agreement enforceable by law is a contract.

Contract = Agreement + Legal enforceability

Or

Contract = Legally enforceable Agreement

A type of agreement which is enforceable by law is a contract (Section 2(h) of the ICA). Enforceable by law means that, if somebody is aggrieved then he may approach the court for remedies. For example: In case of a Fire Insurance Contract where Titu wants to insure his goods in the warehouse, he pays the insurance premium and promises to avoid insurance fraud whereas the insurance company agrees to compensate losses in case of a fire.

So Mathematically,

Agreement + Enforceable by Law = Contract

When an offer is made with the intention to create a legal obligation it becomes an offer for entering into a contract. Thus an agreement becomes a contract when there is free consent of the parties, capacity of the parties to contract, lawful consideration and lawful object or subject matter (Section 10 of the ICA).

For an agreement to become a contract it must give rise to a legal obligation and if it is incapable of doing so, it is not a contract. In the case of Balfour v Balfour [1919] 2 KB 571, Mr. Balfour promised to pay his wife £30/month as she stayed in England for medical reasons. When he failed to pay, Mrs. Balfour sued him. Her action failed because there was no intention to create a legally binding agreement between Mr. and Mrs. Balfour. A contract cannot be made without proper indication about the legal rights and obligations of the parties to the contract. So, if this were to be a contract then the wife would have had a right to receive payment and the husband would have had the obligation to pay his wife.

This makes an agreement a wider term than a contract. In a Venn diagram, agreements are a bigger circle than contracts which is a smaller circle and a part of it.

So, an agreement is a contract when:

1. Free consent of the parties: When there is absence of Coercion (Section 15), Undue Influence (Section 16), Fraud (Section 17), Misrepresentation (Section 18) and Mistake (Section 20, 21, 22), the consent is said to be free.
2. Capacity of the parties to contract: Section 11 and 12 lay down that the competent parties are persons who have attained majority {Exception for this was laid down in Mohori Bibee v. Dharmodas Ghose ILR (1903) 30 Cal 539 (Pc)}, persons who are of sound mind and persons who are not disqualified by law.
3. Lawful consideration and Lawful object: Section 23 lays down that the consideration and object is lawful unless it is forbidden by law or it defeats provisions of any law or is fraudulent or involves injury to person or property or is violative of public health, morality, peace and order.

Let us look at some examples where agreements are not contracts:

1. Gabbar asked Samba to kill Jay and Veeru and Samba agreed. This is an agreement but the object of the agreement makes it an illegal one. Therefore, it cannot be enforced and so it is not a contract.
2. Rajesh promises his wife Chitra that he will bring for her the stars and the moon and Sonam agrees. Here, the object of the agreement is impossible to perform and so it is not enforceable and cannot be termed as a contract.
3. A mother promises her crying child that she will buy a Barbie doll for her but she does not buy it. Here, the promise was not made with the intention to fulfil it and so it is not enforceable and cannot be termed as a contract.
4. I offer my pen to Neelam and she accepts it, here an agreement is made but such agreement is made out of friendship and has no consideration. An agreement without consideration is not a contract (an exception to this is Section 25 of the ICA which states that near relation and natural love and affection can be said to be consideration).

Types of contract

There are various types of contracts that are formed voluntarily via civil obligations. They are as follows:

(I) Adhesion Contracts – These types of contracts are those which are formed by the stronger party. It is a sort of, “Opt for it or do not” contract. The stronger party or the one that has the bargaining power leaves the other party with a choice whether to accept or reject the contract.

(II) Aleatory Contracts – This type of contract involves a mutual agreement that comes into being after an unexpected occurrence, accident, or a natural calamity. In this type of contract both the parties have an element of risk. Fire or Car insurances are this type of contract.

(III) Bilateral and Unilateral Contracts – Bilateral contracts involve two parties. Both parties are obliged to one another for performing or abstaining to perform any act. It is also called a two-sided contract as it involves two way promises. Meanwhile, unilateral contracts are those in which the promise is made by only one party. They consist of an offeror and offeree. The offeror makes a promise to perform an action and is bound by the law to do so. The offeree is not bound to the court even if he fails to execute the requested action because he does not promise anything at all.

(IV) Express Contracts – These contracts are those wherein the terms of the contracts are expressed clearly whether in written documents or orally.

(V) Implied Contracts – There are no oral or written terms in this type of contract. The contracts are assumed owing to the facts of the parties. If an individual visits a medical professional, he expects to be diagnosed for a disease or illness and be advised a cure. This is an implied contract and a patient is capable of suing a medical practitioner for malpractice.

(VI) Void and Voidable Contracts – Void contracts are illegal from the very beginning and hold no validity under law. They are thereby un-enforceable. Voidable contracts are unlike void contracts in the sense that one party is bound by the contract and the unbound party is capable of terminating the contract as they are unbound to it.

A quasi-contract is unlike a real contract. Salmond defines quasi contracts as “there are certain obligations which are not in truth contractual in the sense of resting on agreement, but which the law treats as if they were”. It is important to remember that even though it is imposed by law, it is not created by the operation of the contract.

What are the key differences between agreements and contracts?

Offer and acceptance

Offer/proposal (Section 2(a))

• The entire process of entering into a contract begins with the proposal or an offer made by one party to another. The proposal must be accepted to enter into an agreement.

• According to the Indian Contract Act 1872, proposal is defined in Section 2(a) as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.”

Features of a valid offer

The person making the offer/proposal is referred to as the “promiser” or the “offeror”. And the person who accepts an offer is referred to as “promisee” or the “acceptor”.

• The offeror must express his willingness to do or abstain from doing an act. Only willingness is not adequate. Or just an urge to do something or not to do anything will not be an offer.

• An offer can either be positive or negative. It can be a promise to do some act, and can also be a promise to abstain from doing any act/service. Both are valid offers.

The element of a valid offer

Here are some essentials which make the offer valid:

There must be two parties

There have to be at least two parties: a person making the proposal and the other person agreeing to it. All the persons are included i.e, Legal persons as well as artificial persons.

Every proposal must be communicated

Communication of the proposal is mandatory. An offer is valid if it is conveyed to the offeree. The communication can either be expressed or implied. It can be communicated by terms such as word of mouth, messenger, telegram, etc. Section 4 of the Indian Contract Act says that the communication of a proposal is complete when it comes to the awareness of the person to whom it is made.

Example

‘A’ proposes to sell a car to ‘B’ at a certain price. Once ‘B’ receives the letter, the proposal communication is complete.

It must create legal relations

An offer must be such that when accepted it will result in a valid contract. A mere social invitation cannot be regarded as an offer, because if such an invitation is accepted it will not give rise to any legal relationship.

Example

‘A’ invited ‘B’ to dinner and ‘B’ accepted the invitation. It is a mere social invitation. And ‘A’ will not be liable if he fails to provide dinner to B.

It must be certain and definite

The terms of the offer must be certain and clear in order to create a valid contract, it must not be ambiguous.

It may be specific or general

The specific offer is an offer that is accepted by any specific or particular person or by any group to whom it is made. Whereas, The general offers are accepted by any person.

Classification of offer

An offer can be of many types, ranging across the spectrum. There are basically 7 kinds of offers:

• Express offer

• Implied offer

• General offer

• Specific Offer

• Cross Offer

• Counter Offer

• Standing Offer

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