“All agreements are contracts if they are made by free consent of parties”. Discuss
Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law. Section 2(e) defines agreement as “every promise and every set of promises forming consideration for each other.” Section 2(b) defines promise in these words: “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.”
From the above definition of promise, it is obvious that an agreement is an accepted proposal. The two elements of an agreement are:
(i) Offer or a proposal; and
(ii) An acceptance of that offer or proposal.
All agreements are not studied under the Indian Contract Act, as some of them are not contracts. Only those agreements which are enforceable at law are contracts. The Contract Act is the law of those agreements which create obligations, and in case of a breach of a promise by one party to the agreement, the other has a legal remedy.
Thus, a contract consists of two elements:
(i) an agreement; and
(ii) legal obligation, i.e., it should be enforceable at law.
However, there are some agreements which are not enforceable in a law court. Such agreements do not give rise to contractual obligations and are not contracts.
(1) A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, B goes to the restaurant. To his utter surprise A is not there. Or A is there but refuses to entertain B. B has no remedy against A. In case A is present in the restaurant but B fails to turn-up, then A has no remedy against B.
(2) A gives a promise to his son to give him a pocket allowance of Rupees one hundred
every month. In case A fails or refuses to give his son the promised amount, his
son has no remedy against A.
In the above examples promises are not enforceable at law as there was no intention to create legal obligations. Such agreements are social agreements which do not give rise to legal consequences. This shows that an agreement is a broader term than a contract. And, therefore, a contract is an agreement but an agreement is not necessarily a contract. What obligations are contractual in nature? We have seen above that the law of contracts is not the whole law of agreements. Similarly, all legal obligations are not contractual in nature. A legal obligation having its source in an agreement only will give rise to a contract.
A agrees to sell his motor bicycle to B for Rs. 5,000. The agreement gives rise to a legal obligation on the part of A to deliver the motor bicycle to B and on the part of B to pay Rs. 5,000 to A. The agreement is a contract. If A does not deliver the motor bicycle, then B can go to a court of law and file a suit against A for non-performance of the promise on the part of A On the other hand, if A has already given the delivery of the motor bicycle and B refuses to make the payment of price, A can go to the court of law and file a suit against B for non-performance of promise.
Similarly, agreements to do an unlawful, immoral or illegal act, for example, smuggling or murdering a person cannot be enforceable at law. Besides, certain agreements have been specifically declared void or unenforceable under the Indian Contract Act. For instance, an agreement to bet (Wagering agreement) (S. 30), an agreement in restraint of trade (S. 27),
an agreement to do an impossible act (S. 56).
An obligation which does not have its origin in an agreement does not give rise to a contract. Some of such obligations are
1. Torts or civil wrongs;
3. Judgments of courts, i.e., Contracts of Records;
4. Relationship between husband and wife, trustee and beneficiary, i.e., status obligations.
These obligations are not contractual in nature, but are enforceable in a court of law. Thus, Salmond has rightly observed: “The law of Contracts is not the whole law of agreements nor is it the whole law of obligations. It is the law of those agreements which create obligations, and those obligations which have their source in agreements.” Law of Contracts creates rights in personam as distinguished from rights in rem. Rights in rem are generally in regard to some property as for instance to recover land in an action of abetment. Such rights are available against the whole world. Rights in personam are against or in respect of a specific person and not against the world at large.
(1) A owns a plot of land. He has a right to have quiet possession and enjoyment of the same. In other words every member of the public is under obligation not to disturb his quiet possession and enjoyment. This right of A against the whole world is known as right in rem.
(2) A is indebted to B for Rs. 100. It is the right of B to recover the amount from A. This right of B against A is known as right in personam. It may be noted that noone else (except B) has a right to recover the amount from A. The law of contracts is concerned with rights in personam only and not with rights in rem.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
We have seen above that the two elements of a contract are: (1) an agreement; (2) legal obligation. Section 10 of the Act provides for some more elements which are essential in order to constitute a valid contract. It reads as follows:
“All agreements are contracts if they are made by free consent of parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.”
Thus, the essential elements of a valid contract can be summed up as follows.
As already mentioned, to constitute a contract there must be an agreement. An agreement is composed of two elements—offer and acceptance. The party making the offer is known as the offeror, the party to whom the offer is made is known as the offeree. Thus, there are essentially to be two parties to an agreement. They both must be thinking of the same thing in the same sense. In other words, there must be consensus-ad-idem.
Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ for Rs. 30,000. ‘B’, an acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only car ‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the same.
There is no contract because the contracting parties have not agreed on the same thing at the same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-ad-idem.
2. Intention to create legal relationship
As already mentioned there should be an intention on the part of the parties to the agreement to create a legal relationship. An agreement of a purely social or domestic nature is not a contract.
A husband agreed to pay £30 to his wife every month while he was abroad. As he failed
to pay the promised amount, his wife sued him for the recovery of the amount.
Held: She could not recover as it was a social agreement and the parties did not intend
to create any legal relations [Balfour v. Balfour (1919)2 K.B.571].
However, even in the case of agreements of purely social or domestic nature, there may be intention of the parties to create legal obligations. In that case, the social agreement is intended to have legal consequences and, therefore, becomes a contract. Whether or not such an agreement is intended to have legal consequences will be determined with reference to the facts of the case. In commercial and business agreements the law will presume that the parties entering into agreement intend those agreements to have legal consequences. However, this presumption may be negative by express terms to the contrary. Similarly, in the case of agreements of purely domestic and social nature, the presumption is that they do not give rise to legal consequences. However, this presumption is rebuttable by giving evidence to the contrary, i.e., by showing that the intention of the parties was to create legal obligations.
(1) There was an agreement between Rose Company and Crompton Company, where of the former were appointed selling agents in North America for the latter. One of the clauses included in the agreement was: “This arrangement is not… a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts”.
Held that: This agreement was not a legally binding contract as the parties intended
not to have legal consequences [Rose and Frank Co. v. J.R. Crompton and Bros.
Ltd. (1925) A.C. 445].
(2) An agreement contained a clause that it “shall not give rise to any legal relationships, or be legally enforceable, but binding in honour only”.
Held: The agreement did not give rise to legal relations and, therefore, was not a contract. [Jones v. Vernon’s Pools Ltd. (1938) 2 All E.R. 626].
(3) An aged couple (C and his wife) held out a promise by correspondence to their niece and her husband (Mrs. and Mr. P.) that C would leave them a portion of his estate in his will, if Mrs. and Mr. P would sell their cottage and come to live with the aged couple and to share the household and other expenses. The young couple sold their cottage and started living with the aged couple. But the two couples subsequently quaralled and the aged couple repudiated the agreement by requiring the young couple to stay somewhere else. The young couple filed a suit against the aged couple for the breach of promise.
Held: That there was intention to create legal relations and the young couple could recover damages [Parker v. Clark (1960) 1 W.L.R. 286].
3. Free and genuine consent
The consent of the parties to the agreement must be free and genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. If the consent is obtained by any of these flaws, then the contract is not valid.
4. Parties competent to contract
The parties to a contract should be competent to enter into a contract. According to Section 11, every person is competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and (iii) is not disqualified from contracting by any law to which he is subject. Thus, there may be a flaw in capacity of parties to the contract. The flaw in capacity may be due to minority, lunacy, idiocy, drunkenness or status. If a party to a contract suffers from any of these flaws, the contract is unenforceable except in certain exceptional circumstances.
5. Lawful mutual consideration
The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and is not enforceable at law. Moreover, the consideration must be real and lawful.
6. Lawful object
The object of the agreement must be lawful and not one which the law disapproves.
7. Agreements not declared illegal or void
There are certain agreements which have been expressly declared illegal or void by the law. In such cases, even if the agreement possesses all the elements of a valid agreement, the agreement will not be enforceable at law.
8. Certainty of meaning
The meaning of the agreement must be certain or capable of being made certain otherwise the agreement will not be enforceable at law. For instance, A agrees to sell 10 metres of cloth. There is nothing whatever to show what type of cloth was intended. The agreement is not enforceable for want of certainty of meaning. If, on the other hand, the special description of the cloth is expressly stated, say Terrycot (80 : 20), the agreement would be enforceable as there is no uncertainly as to its meaning. However, an agreement to agree is not a concluded contract
[Punit Beriwala v. Suva Sanyal AIR 1998 Cal. 44].
9. Possibility of performance
The terms of the agreement should be capable of performance. An agreement to do an act impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by magic. The agreement cannot be enforced.
10. Necessary legal formalities
A contract may be oral or in writing. If, however, a particular type of contract is required by law to be in writing, it must comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not carried out, then the contract is not enforceable at law.