This article is written by Aakanksha Pandey, I.P.E.M Law Academy, CCS University, LL.B. 3rd year during her internship at LeDroit India
Scope of Article
This article will explore the relationships between agreements and contracts based on Sections 2(e) and 2(h) under the Indian Contract Act, 1872 using a doctrinal approach (analysis). The specific topics addressed in this article include:
• History of the Indian Contract Act, 1872 and purpose of Indian Contract Act, 1872
• Definition and legal relevance of agreements under Section 2(e)
• Definition & characteristics of contracts under Section 2(h)
• Elements necessary to make a valid contract
• Agreements –vs- Contracts
• Judicial examination via case law examples
• How do these sections apply in today’s marketplace?
Abstract
The concept of agreements and contracts is an important aspect of contract law. The basis for contract law is an established set of principles within the Indian Contracts Act of 1872. Within the Act, certain criteria have been established in order to determine whether an agreement is legally enforceable or remains as just an agreement. Sections 2(e) and 2(h) of the Act contain significant terms that form a foundation for identifying the rights and obligations of parties to contract formation and to the enforcement of these rights and obligations.
The present analysis is a doctrinal analysis of Sections 2(e) and 2(h) of the Indian Contracts Act of 1872 to evaluate the differences between agreements and contracts, the relationship between agreements and contracts, and the changing way in which courts interpret and apply legal concepts in the development of contemporary legal practice in India. The present analysis will also explore the historical context of the legal concepts, significant characteristics of the legal concepts, and how applicable case law affects the application of legal concepts (i.e., agreements and contracts) in the Indian legal system.
Keywords: Contract Law, Agreement, Enforceability, Indian Contract Act 1872, Contract Formation
Overview of the Indian Contract Act, 1872
Historical Background
In 1872 the enactment of The Indian Contract Act established a comprehensive legal framework for governing all businesses and transactions in India. In 1872, The Indian Contract Act was enacted during British colonialism and was based on principles of English common law regarding contracts. Prior to the enactment of The Indian Contract Act, various laws and categories of rules governed contract disputes. Various types of law produced inconsistent and uncertain results in contract disputes. The Indian Contract Act provided consistency and predictability for resolving contract disputes in India.
The purpose of The Indian Contract Act was to establish a uniform body of law to regulate all contracts in India. The Indian Contract Act created the components that make up a contract, including an offer, acceptance of the offer, consideration for the agreement, performance of the agreement, breaches of contract by one party and damages for the breach.
The Indian Contract Act has served as the foundation for India’s commercial law and has provided certainty and clarity to the contractual parties doing business with each other, thereby creating certainty and clarity throughout the Indian commercial environment.
Objectives of the Indian Contract Act, 1872
The main intention of the Indian Contract Act of 1872 was to clearly define the principle laws governing contracts with a level of fairness and predictability which would be enforceable by a court. This includes indicating when and how to enter into legally enforceable contracts and under what conditions an arrangement could be made void or voidable.
The other main goal of the Act was to provide for the fair and reasonable treatment of individuals who have entered into contracts with each other. To achieve these goals, the Act sets out the basic legal requirements that must be satisfied for a contract to be considered valid, such as the actual value of any consideration exchanged and the legality of the contract’s content, as well as providing guidelines on the parties’ ability to freely consent to the terms of the agreement. The Act is intended to prevent coercion, fraud, undue influence, and other forms of abuse against the parties to a contract.
The Act also provides for enforcement when there is a breach of contract by providing a means for a party to secure relief by way of an award or remedy for the default by another party under the contract. Therefore, there are provisions in place to provide for remedying and/or compensating parties who have failed to fulfil the terms of their contract as required by the provisions of the Indian Contract Act.
Definition and Importance of Agreements in Contract Law
Understanding ‘Agreement’ in Legal Terms
The beginning of any contract is said to be an agreement, and in India, an agreement has been defined as “every promise and every set of promises which form the consideration for one another”, under Section 2 (e) of the Indian Contract Act, 1872.
Thus, when there is a single offer to one party who accepts that offer, there is an agreement. The exchange of promises creates a mutual understanding of rights and obligations between the parties.
However, the law defines different types of agreements according to whether they create legally binding obligations or not. An example may be an agreement which is simply a social or domestic agreement, and therefore will not give rise to any legally enforceable right.
The Role of Agreements in the Circles of Law
Agreements form the basis of how legal relationships between parties are structured. Agreements form the basis upon which contracts are created. By stating the intentions and expectations of each party, agreements work to prevent misunderstandings and disputes from occurring between the parties.
In commercial transactions, the use of agreements makes business transactions easier to carry out, by clearly stating how much will be paid for goods or services, how much will be delivered, and who is responsible for what (if there are two or more parties involved). Agreements provide proof of the intent of all parties and also serve as an important reference point for a court if there is a dispute over the validity of any of the parties’ actions. Accordingly, agreements can act as the first step towards establishing legally binding contracts.
Legal Characteristics of Contracts: Fundamental Elements
Criteria of a Contract that is Valid
The four key criteria that must be met for an agreement to form a contract are identified in Section 10 of the Indian Contract Act, 1872.
All four (4) criteria are as follows:
Offer and Acceptance
An offer in law must be made followed by acceptance for there to be a valid contract. The acceptance must be a reflection of the terms contained in the offer.
Consideration
Consideration is something of value that is exchanged between both parties. Consideration can take the form of action, promise or a forbearance to act. Consideration ensures that there are no losses incurred and that each party receives either something of value or incurs an obligation.
Capacity of the Parties to Contract
The parties to a contract must be competent to contract. Persons who are minors, unsound of mind or are legally disqualified cannot be parties to a valid contract.
Free Consent.
Consent must be freely given and not obtained through coercion, fraud, undue influence, misrepresentation or mistake.
Lawful Object.
The object of the contract must be lawful and not against public policy or prohibited by a law.
Distinction Between Agreements and Contracts
The most significant distinction between an agreement and a contract lies in the fact that an agreement is simply a mutual understanding between parties based on promises that they will perform certain acts; while a contract is simply an agreement that is enforceable through the courts.
Although every contract originates as an agreement; not every agreement meets the criteria that make it enforceable as a contract. If an agreement does not have valid consideration, has no lawful purpose or is not entered into with competent parties, it cannot be enforced in court.
The difference between agreements and contracts enables the courts to distinguish between informal arrangements made between parties and those that create legally binding obligations.
Understanding Section 2(e)
Section 2(e) of the Indian Contract Act, 1872 defines an agreement as any “promise or set of promises that form the consideration for each other.” This statement reinforces the idea that an agreement consists of reciprocal promises made by two or more parties and establishes the legal principles of mutuality that underpin contracting relationships.
In a doctrinal context, this definition indicates that Agreements are created as a result of two parties making offers and accepting them. When one party makes an offer that is accepted; then they have created reciprocal promises forming an agreement.
Additionally, the definition contains language which establishes the principle of mutuality, which is fundamental to all contracts.
Criteria for Valid Agreements
An agreement must meet certain requirements to have legal significance. Two or more parties must be capable of entering into legal relations (be competent). The parties must have made promises that are definite and certain.
The agreement must also contain a lawful consideration and cannot include Illegal or immoral objects. An agreement that violates statutory provisions or public policy will not be enforceable and will be null and void.
It is equally important that an agreement is made with a free will and choice (voluntary). An agreement that is made by coercion, fraud, or undue influence can be challenged in the courts and set aside.
Detailed Examination of Section 2(h): Definition of ‘Contract’
Section 2(h) of the Indian Contract Act, 1872 states, “an agreement enforceable by law is a contract”. This definition makes it clear that the enforceability of an agreement is what determines whether or not it is a contract.
The provision establishes the legal threshold that must be satisfied to refer to an agreement as a contract. An agreement is only considered a contract when the law will recognize and enforce the obligations created by the agreement.
Essential Features of a Contract
The key characteristics that distinguish contracts from ordinary agreements include:‐
(1) The enforceability of contracts (i.e., if one party does not carry out its obligations, the other party may seek legal remedies through the courts);
(2) The requirement of certainty of terms (i.e., parties must have a clear understanding of the rights and duties of the other party);
(3) The requirement that the parties have an appropriate motive for entering into the contract (i.e., without lawful consideration and an objective which is lawful);
(4) The requirement by law that parties demonstrate the intention to create legal relations by means of the agreement.
The Nature of the Relationship Between Agreements and Contracts
While closely related, agreements and contracts are not synonymous. Agreements are a broader categorization of promises made between parties; whereas contracts are a subset of agreements that meet certain legal requirements such that they are enforceable.
An agreement becomes a contract upon satisfying each of the conditions necessary for legal validity, specifically, lawful consideration; free consent; competency; and an objective which is lawful.
Legal Implications of this Relationship
Understanding the distinctions and relationships between agreements/contracts is important for determining whether a particular arrangement/contract creates legally enforceable obligations. The distinction permits courts to not enter into or hear disputes related to only social or domestic arrangements while at the same time providing that commercial transactions will be validly created and enforced by legal measures.
Case Law Illustrations and Judicial Interpretations
Examples of Judicial Precedents in Relation to Section 2(e) and 2(h)
Judicial precedent has been significant in differentiating between an agreement and a contract.
For example, in Carlill v Carbolic Smoke Ball Co (1893), the court found that the advertisement constituted a valid offer that could be accepted by performing the acts mentioned in the advertisement.
In Balfour v Balfour (1919), it was ruled that there is no enforceability of domestically based agreements which do not create an intention to create a legal relationship.
In Lalman Shukla v Gauri Dutt (1913), it was found that an individual who performs an act without knowledge of an offer cannot be entitled to the reward.
Judicial Trends Affecting Interpretation
In many cases before the Indian Courts, contracts are interpreted using a purposive method where the courts are guided by both the parties’ intentions, as well as the context of the agreement, when determining whether the contract is enforceable.
These interpretations will assist the court in being responsive to change in the nature of commercial practices and/or commercial realities.
Conclusion
The analysis of the provisions of Section 2 (e) and Section 2 (h) of the Indian Contract Act 1872 indicates that there is an essential distinction between a standard contractual agreement and/or contract which is underpinned by the legal enforceability of it. An ‘Agreement’ simply represents the mutual agreements between parties while a ‘Contract’ represents an Agreement which has been entered into in a way that meets the necessary contractual criteria conditions so as to make it enforceable by law.
Judicial interpretation within India’s higher courts of both Agreements and Contracts has provided considerable clarity and assistance with respect to whether or not an Agreement will be legally binding or enforceable. As new commercial practices arise as a result of technological advancements; in addition new forms of business transactions facilitated through the Internet and other technological advancements, the applicability of Indian contract principles to original contracts may require re-examination of their continuing relevance to this specific context. Thus the Original Principles of the Contract Act, 1872 continue to apply to all types of Contracts and provide stability and certainty with respect to the legal and commercial relationship between the parties.
