Introduction:
Present work will emphasize on what is contract, its essentials and who are competent to contract. Contract is the foundation of every business , it is the record of commitments of both the parties who sign it. The Indian contract Act 1872, herein after mentioned as Act, envisage the requisites of valid contract, which agreement will be enforceable and be considered as contract, who are competent to contract, in what circumstances agreement is void or void-ab-initio as all agreements are not contracts. It is pertinent to delve into essentials of contract and who are competent to contract to establish the rights and liabilities of the parties.
What is contract?
Section 2 (h)
An agreement enforceable by law is contract.
The Act does not give any conceptual definition, nonetheless a contract is an agreement wherein parties sign a document to perform or not to perform certain obligations. An agreement is result of offer, acceptance, consideration and promise to do or not to do something. When such agreement is enforceable under law it is inferred as contract.
It is pertinent to note that the simply offer and acceptance does not constitute a valid agreement and for the enforcement of the agreement as a contract. There are certain requisites to be administered to materialize agreement into contract. All agreements are not contract though all contracts are agreement. An agreement become enforceable when the condition stipulated under section 10, as further mentioned, are fulfilled.
When an agreement is contract?
Section 10 :
All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witness, or any law relating to the registration of documents.
What is an Agreement?
section 2(e)
every promise or every set of promises forming the part of consideration is agreement.
Agreement shows the willingness of the parties to do or not to do/ abstain form doing something. If one party is showing such willingness in order to seek assent of the other party that is an offer/proposal as stated under section 2(a). One party communicates the offer and other party communicate assent to said offer which is acceptance of the said offer as in section 2(b). Communication of such offer and acceptance will from the promise and when such promise clubbed with consideration it becomes agreement.
- Offer + Acceptance => when Communication is complete= Promise
- Promise + consideration= Agreement
- Agreement enforceable = contract
Essentials of Contract: Based on the section 10 following are the essentials of contract:
- Free consent of parties,
- Parties Competent to contract,
- Lawful consideration,
- Lawful object,
- Not declare void
1. Consent:
It means willingness of both the parties to agree with terms of an agreement, agree to fulfill obligations as established by the agreement. Promiser/Proposer shows consent via willingness assimilated in proposal to do or abstain to do something. Promisee signifies the consent by act as stated in the section 8 of the Act or by communication of acceptance by other mode as in section 3 of Act. Communication of the such offer and acceptance should be with free consent as envisaged under section 13 and 14 of the Act.
What is Free Consent?
Section 13:
Two or more persons are said to consent when they agree upon the same thing in the same sense.
Section 14:
Consent is said to be free when it is not caused by—
Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.
- coercion, as defined in section 15, or
- undue influence, as defined in section 16, or
- fraud, as defined in section 17, or
- misrepresentation, as defined in section 18, or
- mistake, subject to the provisions of sections 20, 21 and 22.
Consensus-ad-idem
“It is a Latin phrase which means meeting of minds” or “agree upon same thing” at the time of formation of contract. It is sin-qua-non for valid agreement, thereby both the parties need to agree on the same terms and obligations, and if there is no consensus or mutual assent there will be no agreement. The Act further contemplates under section 15 to 22 that consent of party is not said to be free when it is obtained by coercion, fraud, misrepresentation, undue influence, mistake.
Lack of certainty in terms of contract will also be examined that agreement is short of free consent and this often accrues when contract lack precision. Any defense concerning the lack of free consent should be pleaded clearly and has to be substantiated and established based on the facts of case and terms of agreement.
2. Who are competent to contract?
Section 11:
Every person is competent to contract who is of age of majority according to the law to which he is subject, and who is of sound mind and not disqualified from contracting by any law to which he is subject.
Who is minor?
A minor is defined under section 3 of Indian Majority Act, 1875, a person below 18 years of age is a minor.
Case: Mohiri Bibi vs. Dharmodas Ghosh: wherein the privy council acknowledged that a minor can not enter into an agreement and if he does so said agreement will be considered as null and void-ab-initio.
Sale agreement with minor:
Case: KRISHNAVENI VERSUS M.A. SHAGUL HAMEED & ANR., CIVIL APPEAL NO. 002591 / 2024: In the said case apex court observed that the parties must be competent to contract and contract is not enforceable wherein party is minor at the time of entering into contract though the contract in favor of minor who is represented by a natural guardian is often misconceived.
Who is sound mind person?
Section 12: what is sound mind:
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….
Test of unsoundness of mind:
Case: Mohd Yakub vs. Abdul Kuddus AIR 1923 Pat 187: The test of unsoundness of mind is that a person is incapable of understanding the business and formation of rational judgment as to its effect on his interest. Unless a person is proved to be unsound mind there is always a presumption of sanity. A person who alleges unsoundness of mind has to prove it sufficiently. Mere weakness of mind is not sufficient to prove unsoundness.
3. Lawful consideration & Lawful object:
What is consideration?
Section 2(d):
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 is significant element of contract without which contract will not be enforceable. In general terms consideration means when one party give something to the other party in return of the promise fulfilled by the said party. Every promise must be backed by the consideration to make it a valid contract otherwise if there is no consideration for promise there will be no agreement and section 25 of Act articulates that an agreement without consideration is void. When parties to the contract exchange something of value it is consideration, but the said consideration should not be unlawful else it will be construed as a void agreement.
The object or the subject matter of the agreement should also be lawful, if it is forbidden by law or against the public policy of India or if it comes under any aspect mentioned under section 23 of Act the agreement will be reckoned void.
Section 23:
What considerations and objects are lawful, and what not:
The consideration or object of an agreement 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; or
is fraudulent; or
involves or implies, injury to the person or property of another; or
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.
Section 25:
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….
It can be inferred from the section 23 of Act that agreement with unlawful consideration and unlawful object is not contracts and therefore not enforceable. However, the Act do not define the lawful and unlawful, section 23 of the Act stipulates that consideration and object is unlawful when it is “forbidden by law” or defeat the provision of law. Again, the term law has not been defined under Act.
Case: G.T. Girish vs. Y. Subba Raju: (2022) 12 SCC 321: The apex court in the said judgment concluded that term law under section 23 of the Contract Act, includes statutory laws, rules, regulations, orders. Everything that is “Law” within the meaning of Article 13 of the Constitution of India would be law under section 23 of Contract Act.
What agreements are forbidden by law?
Section 26 to 30 of the contract Act, is pertaining to the agreement forbidden by the law.
- Section 26: Agreement in restraint of marriage, void.
- Section 27: Agreement in restraint of trade, void.
- Section 28: Agreements in restraint of legal proceeding void.
- Section 29: Agreements in restraint of legal proceeding void.
- Section 30: Agreements by way of wager, void.
What is public policy?
The law does not define anywhere what is public policy, the concept of the public policy differs from nation to nation and what may be against the public policy of India may not be against the public policy of other nation.
Case: P. Rathinam vs. Union of India (1994) 3 SCC 394 wherein the supreme court observed that the concept of public policy is illusive, varying and uncertain. The term public policy is capable of modification and expansion.
Case: ONGC vs. Saw Pipes (2003) 5 SCC 705: In the said case court gave finding that the award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal…. (read more)
4. Not expressly declared void:
What is void agreement?
Section 2(g): An agreement not enforceable by law is said to be void.
Expressly declared void: section 26 to 30 as aforementioned are expressly declared void agreements.
An agreement can void, void-ab-initio, and voidable contract. Void is that which is not enforceable by law as in section 2(g), void ab initio means void from the beginning, and Voidable contract refers to an agreement which is valid and enforceable at the option of the one party but not the option of other. The later one can approach the court for the voidable contract to be declared as void agreement.
Contract void even without express prohibition:
Case: Asha John Divianathan vs. Vikram Malhotra (2021) 19 SCC 629: 3 Judges bench of the Hon’ble supreme court observed that in every agreement where the subject matter is such that any statute inflicts penalty for doing such act, though the act is not prohibited expressly such agreement is void. "It is well established that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition.”