Dear students, welcome to the lecture series on Business Regulatory Frame Work. Today we are going to discuss the Indian Contract Act 1872. Before I start my discussion on the contract, I would like to make you aware that the Indian Contract Act 1872 came enforced on the 1st day of the September 1872. It is applicable to whole of the country except the State Jammu & Kashmir. The course related to the law is designed to impart the knowledge to the student so that they are acquaint with the general principles of the law. As you know in our day to day life we come across number of contracts but we are not aware about them. When we board a bus or when we go to see a movie or we lend away book to our friend or when we are depositing the luggage in the railway clock room, the law comes in the picture without understanding the law we will not be able to understand what are the rights and the obligation granted to the individuals. The objective of this course is to provide a brief idea about the frame work of the Indian Business Law.
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2. Agreement and Contract
Now we will start our discussion on the Indian Contract Act. First of all we should understand what is a contract? Apart from the legal definition if we generally understand the word Contract then we can say that a contract comes into the picture when there is an agreement and when the agreement become enforceable it become a contract. There are two words Agreement and Contract. What is an agreement? Agreement itself comes in the picture when there is an offer and acceptance. Now again if we go into the details of this offer and acceptance then we find that offer is an expression of the desire by one party in front of the other party to do something or not to do something is an offer. Suppose ‘A’ says to the ‘B’ that I would like to sell my car to you in fifty thousand rupees, will you buy? Now here ‘A’ is expressing his desire to the ‘B’ to sell his car so that ‘B’ buy’s it. So offer has to be there and in that offer if there is an acceptance then it becomes an agreement and suppose in the same example ‘B’ says that YES he would like to Page 1 of 9 buy the car of the ‘A’ then it becomes an agreement. Now when there is an offer and acceptance in a contract it becomes an agreement.
So after studying or analysing how agreement comes into the picture we move on to understand what is a contract? Now to reach at the level of the contract we have to add or we have to incorporate enforceability into it, the law says that until and unless an agreement is not enforceable, it cannot become a contract and to make it enforceable we have to add to certain essentials of a valid contract which are explained in the Section-10 of the Indian Contract Act, 1872.
Without enforceability it will simply remain an agreement it cannot become a contract. So in other words we can say to reach at the level of the contract we must have on the one hand agreement and on the other hand we must have enforceability into it and then it will reach at the level of the contract or it will become a contract. If I say all agreements are not contract but all contracts are agreement because all agreement cannot reach at the stage of the contract because if an agreement is not enforceable in spite of having number of the element of enforceability into it. If it is lacking one element of enforceability, it cannot reach the stage of the contract.
Now just to make it a very simple. If I say that you are the student of the B.Com Part-I and if I say that you will become a graduate one day, there is no certainty into it. A student in the part 1 will definitely be a graduate there is no certainty because he may drop the studies in between or he may decide to quit but whomsoever is a graduate or if a student is a B.Com then automatically I will say that he has completed B.Com. Part I. So a student who is B.Com Part I need not to be necessarily be a graduate one day but whomsoever is a graduate was definitely was in B.Com Part I.
Meaning thereby, if I relate, B.Com Part 1, with an agreement and B.Com itself, with a contract. There is a gap between the two like an agreement has to be converted into the contract with enforceability. We had to add the essential elements in a contract and then it will become a contract. Similarly a student has to pass B.Com Part I, he has to pass B.Com Part II and then he has to pass B.Com Part III or the final year examination then he will become a graduate. If somewhere in between if he leaves the studies or quit the studies, he cannot become a graduate. So we can say all contracts are agreement but all agreements are not contract.
3. Definitions of Agreement and Contract
Now I would like to give you the definition of the contract which have been defined in the law. The term contract is defined in section 2(h) of the Indian Contract Act which reads as under:
“An Agreement enforceable by law is a contract”.
Now if we analyse the definition we find that whatever I have explained to you earlier is covered in this definition and if we go by the definition of agreement given in the section 2(e) – “Every promise and every set of promises is forming the consideration for each other is an agreement.”
Now if we analyse this
definition and I have explained it earlier that agreement or the promise consist of two things offer and acceptance. Let us see the some definition given by the thinkers. Definition given by Mr. Polak “Every agreement and promise enforceable at law is a contract” and Sir Salmond has defined “a contract is an agreement creating and defining obligation between the parties. If we analyse the definition given by eminent jurist and the definition given in the Indian Contract Act, we reach on this conclusion that to make an agreement enforceable and then we can enter into a contract. Now the question arises that what are those things which can make an agreement enforceable in the eye of law. Since, we have studied the portion of the agreement very well, that it is made up of two things offer and acceptance. Offer is the expression of the desire by the one party in front of the other party to give an assent and acceptance is the assent given on the offer. 4. Enforceability in an Agreement
Now we will move on to the points which bring the enforceability in the agreement and if the enforceability is added it is included it will constitute along with an agreement it will constitute a contract. The first and foremost point which we had discussed is that there has to be an offer and there has to be an acceptance. As you know very well that without two parties or more than two parties we cannot enter into a contract. So in a contract there has to be more than two parties and one party will make an offer to the other party. The other party will give an acceptance on it. This is the fundamental essential to convert or to bring the enforceability in agreement. The second important essential element is that there has to be a free consent between both the parties. Now this particular word free consent is made up of two words consent and it should be free.
As I mentioned that each element will be dealt by me later on in great detail therefore I am providing you the brief introduction of these elements. The consent is the meeting of the mind and both the parties agree upon the same thing in a same sense it is said that there is a consent. But it will be free provided it is not caused by or provided the consent is not obtained by cohesion, undue influence, fraud and misrepresentation. In very simple line I will explain coercion meaning thereby if one party forcibly compelling the other party to enter into the contract it is said that coercion has been applied on the other party. For example A by threatening to kill him enters into a contract with him it is said that A has entered into a contract with the B by coercion.
Undue influence, whenever there is undue influence, one party is always in a stronger position and other party is always at a weaker position. The stronger party morally pressurised the weaker party to enter into the contract and weaker party enters into the contract without the free will. It is said the undue influence has been exercised. What is the fraud? The fraud means when one party intentionally or deliberately or with the intention to cheat the other party, to deceive the other party, enters into the contract it is said that fraud has been exercised by the party and misrepresentation meaning thereby, a statement which is not true but the party making it believe it to be true it is said that misrepresentation have taken place so if we have got the four element if the consent is called by these four element it is said that it is not a free consent and contract enter into by the party without free consent even not having enforceability remember we are now dealing with those point which will bring the enforceability with the agreement so that it become a contract.
We are here studying the point which will take the agreement to the contract. These points I am discussing, again I am repeating in very very brief manner. The another point which is very important to bring the enforceability is the parties should be competent to enter into the contract. Without going into the details if we say all parties are competent to enter into the contract except the three parties, if we exclude these three parties from the agreement there will be enforceability so that agreement will become a contract and these parties are if the contract is enter into by the minors and minor is a person who is not having age of 18 if the contract has been enter into by the person of unsound mind it is said that it is not enforceable he is not competent to enter into the contract and if the people debar by law if they enter into the contract since they do not have capacity to enter into the contract it cannot become a contract and they don’t have capacity to enter into the contract. Therefore if we say, if these three people are present in any agreement that agreement cannot become a contract and except these three people if any person enter into the contract that agreement will have enforceability.
5. Lawful Object and Consideration
Now I move on to another point that is known as the object of the agreement should be lawful and the consideration which is given should also be lawful. There are two things, object of the contract should be lawful as well as the consideration given to achieve the object should also be lawful. First of all I will take up what do we mean by consideration. Consideration the law says is that something in exchange like if you go to the market to buy 1 kg sugar you give 35 rupees to the shopkeeper and the shopkeeper gives you 1kg sugar.
For the shopkeeper, 35 rupees is a consideration and for you, sugar is a consideration. So there is an exchange between the two parties therefore there has to be a consideration but the consideration should be lawful and object of the contract should also be lawful. Now law says what is lawful object? and what is lawful consideration? In the Law has not defined in a positive manner, law have defined that what is unlawful. If the law says if any object and consideration does not fall within these lines then it is automatically lawful object and lawful consideration.
Meaning thereby, we go negatively to explain what is the lawful object? And what is the lawful consideration? Now suppose, ‘A’ says to the ‘B’ that if you will kill the ‘C’ I will give fifty thousand rupees. Now in this example when ‘A’ says to the ‘B’ to kill the ‘C’, the object is not lawful as well as the consideration which is decided to kill the ‘C’ is also not lawful. Therefore the object of the contract should be lawful but I will mention certain points which are declared by the law that they are treated as unlawful therefore they are not applicable or they don’t have any validity in the eye of law. Number one is If it is fraudulent the object of the contract is to do some fraud then it will be treated as the object of the contract is not lawful. For example if ‘A’, ‘B’ and ‘C’ together decide and cheat the ‘D’ they make a plan to cheat ‘D’ or to play a fraud with the ‘D’ it is unlawful and object of the ‘A’, ‘B’ and ‘C’ of the plan is unlawful.
6. Objects Forbidden by Law
If the object of the contract is forbidden by law, when we say it is forbidden by law meaning thereby the law does not permit that if the object of the contract is forbidden by law then it will not be treated as a point of enforceability in an agreement. For example if ‘A’ having a living married wife enters into a contract to marry another lady. Now here in this example the object of the contract is forbidden by law and if we dwell upon we will find that it is written in the Hindu law that a person if he is having a married wife living with him cannot marry the another lady. So if the object is forbidden by either by the law or by the state legislation or by the Central Government if they have enacted any law and if it is forbidden and if we try to enters into a contract which is forbidden by law that will be treated as unlawful object.
The next point in the unlawful object and consideration is that if the object is permitted it will defeat the provisions of the some other law and if we take the example we find that suppose in a company it is mentioned that a person if he comes to attend a meeting he will be given 125 rupees for example as a remuneration to attend the meeting and 25 rupees as a allowance. Now if we are giving the allowance with an intention to evade the income tax then it will be treated that object of giving the 25 rupees with an intention of evading the income tax then we can say here also the object of the contract is not lawful and if it is injurious to the other party.
If two parties enter into the contract to injure somebody that object is also unlawful and if the object of the contract is immoral. Now the definition of the morality will depend upon the standard of the society but yet if we are promoting the prostitution, that is considered as to be an immoral and if the two parties enters into the contract which promotes the prostitution, that object of the contract is also unlawful but last but not the least heading in the unlawful object and consideration is that it should not be against the public policy. Now public policy is a very wide term. Public policy has been defined by different is always a situational. eminent jurist in different manner it
Whatever is suitable according to the standard of the society can be included in the heading of the public policy. We sometime call it that public policy is unruly horse. We can include any heading in the public policy. Like, for example recently the Supreme Court has given a judgement in which they have specifically mentioned that no construction activity will take place in Bombay and other parts of the country after 10 O’clock in the night. Now this decision has been given in the interest of the public policy. If you recall there is a judgement that during the Navratras the dandiyas are not allowed after 10 o’clock in certain states except Gujarat because the Gharba is the festival of the Gujarat. Dandiya is played during that particular period with the great enthusiasm in the Gujarat because it has got an origin in the Gujarat. It originated from the Gujarat.
So except Gujarat the Dandiyas will not be played in other part of the country after 10 o’clock. This decision is given in the interest of the public policy. So public policy is a very wider term. Yet we have decided certain heads which are included in the public policy. First is trading with enemy, second is trafficking in the public offices, third is interference with administration of justice, fourth is marriage brokerage contracts, fifth is agreement tending to create interest oppose to duty, sixth agreement in restrain of parental right, seventh agreement restricting personal liberty and the last but not the least is the agreement to commit a crime. So the object of the contract should be lawful and in this point we had studied that what is lawful and it has not been explained but what is unlawful it has been explained.
7. Agreement should not be Declared Void
Now we move on to another element which bring the enforceability in an agreement.
The heading of that element is that an agreement should not be specifically declared void. In the law of contract there are certain agreements which are declared by law that they are the void and they cannot be at any rate be converted into the contract and as we know void agreements are the void from the very beginning. They cannot be converted into the contract, they are not enforceable they have no value in the eyes of law. Now for your convenience I will mention the headings of the void agreements. The first and the foremost is agreements by person who are not competent to contract (Section-11), agreement under a mutual mistake of fact material to agreement (Section-20), agreement with unlawful consideration or object (Section-23), agreement, the consideration or object of which is unlawful in part (Section-24), agreements without consideration (Section-25), agreement in restrain of marriage (Section-26), agreements in restraint of trade (Section-27), agreements in restrain of legal proceedings (Section-28), agreement, the meaning of which is uncertain (Section29), wagering agreement (Section-30) and agreement to do impossible act (Section-56). If we look at the list we find that any agreement which is falling under these categories or under any of these categories will be known as the void agreement it cannot be converted into the contract.
If I move on to another
element of the enforceability and that is the agreement must be certain. When we say the agreement must be certain meaning thereby when offer is made to another party it should have the element of certainty. It should not be weigh. The acceptor or the promisee should not derive the different meaning out of it or it should not be confusing also. For example if ‘A’ says to the ‘B’ that he would like to sell the fifty tins of the oil. Now this offer by ‘A’ to the ‘B’ is uncertain. It is not giving meaning, which oil he would like to sell to ‘B’. Is he would like to sell the coconut oil or he would like to sell the mustard oil. He has not mentioned it, therefore, in agreement which is expressed or agreement which is given to the other party should be certain and the last point to bring the enforceability is known as that performance of the agreement should not be impossible. For a very simple example if a girl says to a boy that you bring the stars from the sky and then I will marry you.
It is impossible act.
It can not be converted into the contract it is lacking the enforceability because we know we can not bring the stars from the sky. If ‘A’ says to the ‘B’ that I will give you 1 lakh rupees if you join the two parallel lines, we know two parallel lines do not meet.
Another example is if ‘A’ says to ‘B’ that he will show the ‘B’ the hidden treasure by magic then it is also an impossible act because by magic we cannot show the hidden treasure. Therefore, these are the elements which has been explained to you if they are available in toto, if they are available as it is in an agreement then it will become a contract. If one single essential element of this is absent or one essential element of the valid contract is absent or missing then it cannot become a contract that agreement will simply remain an agreement because it is lacking one of the essential element of enforceability. Therefore to reach at the level of the contract we have to fulfil all these requirements.
Therefore we say all contracts are agreement but all agreements are not contract because to travel at the stage of the contract, to reach at the stage of the contract we had to have these elements.