This piece is part of the series intended for business leaders, providing them working knowledge of various business laws. By its very nature, it is neither comprehensive nor is it supposed to replace the guidance of a law expert. Read more about this series.
Material progress of any civilization is dependent to a large extent on upholding of sanctity of a contract and right to hold property/wealth. In fact, even the social order can continue only until people honour the tacit Social Contract which brought the society and State in existence.
In view of the above, all governments in the world have enacted laws dealing with contracts and agreements. While the basic principles of Law of Contracts in all the countries of the modern world are similar in substance, they do some times differ in the matter of implementation mechanisms.
I propose to deal with only Indian Law of Contract, which is mainly contained in Indian Contract Act, 1872. There are quite a few independent legislations which deal with specialized types of contract – e.g. Sale of Goods Act 1930, Indian Partnership Act 1932, Securities Contract Regulation Act , 1956, the Insurance Act, 1938 etc. Even in those specialized legislations, the basic spirit of Indian Contract Act, 1861 remains. Only in certain exceptions, the legislature has opted to achieve some other objective like protecting disadvantaged party to the contract or achieving some other socio-economic objective, or providing mechanisms to regulate and monitor such special contracts.
The first and most important concept is that of Contract itself.
- An Agreement which is enforceable by law is a Contract.
- Therefore, while every contract is an Agreement, every agreement is not a Contract;
- An agreement which is not enforceable by law is Void ;
- If any one or more parties has the option to prevent the enforcement of a contract, it is Voidable Contract.
- In order to be an enforceable agreement, it should be –
- Between Parties competent to contract;
- There should be consent of the parties;
- Such consent should be free consent;
- There should be a valuable consideration;
- Such consideration and the object of the agreement should be lawful;
- The agreement should not have been expressly declared to be void in law
- Therefore, while every contract is an Agreement, every agreement is not a Contract;
- Then, what is an Agreement?
- A promise or a set of promises which form Consideration to the other Party is an Agreement.
- So, what is Consideration?
- When a person (Promisor) at the desire of the other Person (Promisee)
- has done or avoided doing, or
- does or avoids to do, or
- promises to do or avoid doing something
- When a person (Promisor) at the desire of the other Person (Promisee)
Such doing or avoidance (abstinence) or promise is called a Consideration.
- Note that Consideration could be in the past, present or future. It is essentially doing or not doing, at the desire of the Promisee.
- Consideration has to be legal consideration. Consideration should be a valuable consideration.
- A valuable consideration may consist either in some right, interest, profit or benefit accruing to one Party. It could also be a forbearance, detriment, loss or responsibility suffered or undertaken by the promisor.
- For example
- A promise to murder X in consideration of some money from B is not legal consideration and hence such an agreement will not be a contract as it cannot be enforced by law.
- If A expresses his desire to gift Rs. 1,00,000/- to B because A has love and affection for B, it will not be an enforceable agreement as there is no valuable consideration coming from B.
- If A agrees with B to give Rs. 10 lakhs to B, if B marries A, it will not be an enforceable contract because it will amount to dowry which is prohibited by law.
- If A agrees to give B an amount of Rs. 10 lakhs if B agrees to not marry at all, such an agreement will be void as it is a prohibited consideration under law.
Simply put, Consideration should be legal and should have some value/monetary worth. There are other attributes and finer point also which we shall see as we proceed on the subject.
- The act or abstinence constituting Consideration should be at the desire or request of the other party. This indicates the return element of the consideration. A promise in exchange of a past act/abstinence (which was voluntary at that time) would also be enforceable in law.
- What is a Promise?
- When a person signifies to the other person, his willingness to do or to abstain from doing, and
- That he does with an intention to obtain the consent of the other to whom he has signified his such willingness – it is called a Proposal
- When the other person to whom Proposal is made, signifies his consent/assent, the Proposal so accepted becomes a Promise;
- Two things must be noted specifically. First, the Proposal should be with an intention to obtain assent of the other person. Second, it is extremely important that the Proposal should have been Accepted. The communication of the acceptance has to be clear and unconditional.
- Any conditional acceptance only becomes a fresh Proposal and will need to be accepted by the other Party.
- The Time and Place of acceptance is quite important and has very significant bearing on the life cycle of a Contract. At times these have financial implications as well. (More on this later)
- Who is Competent to contract ?
- Every Person is competent to contract
- Who is major (according to the law which is applicable to him / her)
- An Agreement by a minor is not enforceable in law and is bad in law. There are no exceptions.
- But, an agreement on behalf of the minor, by a person who in authorized to act on behalf of the minor, is a valid contract and enforceable in law.
- Who is of sound mind. An idiot cannot enter into contract. A lunatic can enter into contract during his/her lucid intervals. There is a legal/medical difference between an idiot and a lunatic.
- Who is not prohibited from contracting by law applicable to him
- For example – An undischarged insolvent is prohibited from entering into certain types of contracts. Similarly, some people may be prohibited by some court order or order of some authority from entering into certain specific types of contracts.
- Who is major (according to the law which is applicable to him / her)
- When a contract is entered into by a natural person on behalf of so called legal entity, it should be duly authorized by such entity, and in most cases this authorization must be evidenced by a written document.
- When a contract is entered on behalf of some business entity which is not a recognized entity in law, or that entity is prohibited from entering into such an agreement, the person who is executing the agreement may be held liable for all the consequences as if he did it on his own behalf.
- In India, the following entities are recognized –
- an Individual (by himself or his authorized person/attorney); he/she could use a business name but only on disclosing it appropriately.
- a Partnership Firm/Limited Liability Partnership firm (through authorized partner);
- A Company (limited liability or unlimited liability), through its Managing Director/CEO or authorized Director/Company Secretary/any other authorized signatory.
- An HUF (Hindu Undivided Family), through its Karta or any major member of the family, duly authorized in this regard;
- A Trust, through its Managing Trustee or Authorized Trustee;
- A Society or Body Corporate, through its Secretary or any specifically authorized office bearer;
- An Association of Persons, through its duly authorized member;
- Any local body, like Municipal corporation , Town Area Committee etc, through its CEO, Secretary or any other functionary specifically acting on behalf of the local body.
- Every Person is competent to contract
It is often founda that people execute written agreements for or on behalf of some “business name”, without indicating the structure or legal nature of the business organisation, or the beneficial owner(s) of the “business”. Agreement(s) with such “entities“, especially when large amounts are involved or the contract is to last for a long period, should be avoided. These entail many legal risks.