Agreement, Contract and Proposal under the Indian Contract Act, 1872

Author: Abhay Saxena, 1st Year, New Law College, Bharti Vidyapeeth Deemed to be University, Pune.

Introduction:

The Contract law is fascinating as most people in the world end up getting into a legally binding agreement or a contract at some point of time in their lives. This leads to the creation of a legal relationship between the parties and this legal relationship, or we can say ‘Contractual relationship’ is governed by different laws in different countries. In India, this relationship is governed by the Indian Contract Act of 1872. This article will take you on a journey where all my readers will be able to learn about contracts, agreements as well as proposals in a very comprehensive manner.

Definition of Contract:

The term ‘Contract’ has been defined under Section 2 (h) of the Indian Contract Act 1872, which states that: “An agreement enforceable by law is a contract”. Thus, for an agreement to become a contract there are two essentials which need to be fulfilled:

  1. There should be an agreement between the parties
  2. The agreement should be enforceable by Law.

Contracts as a civil obligation:

The Contracts are considered as a civil obligation as there exists a relationship between them. The rules of enforceability as defined in Section 10 of the Indian Contract Act 1872 should be obligated to in order to make a contract. If any of these are missing, then the contract will not be valid. Now, according to Scots law, whenever contract obligations are created this must be fulfilled by the parties. These obligations are voluntarily created civil obligations because these arise when the contract is created and these obligations are enforced by law. Thus, it becomes necessary to fulfil these obligations as it is the only between the contract and civil obligation.

Agreement:

Before understanding the term ‘agreement’, we need to understand the term ‘promise’. Section 2 (b) of the Indian Contract Act 1872 states that: “A proposal, when accepted, becomes a promise”. Thus, the proposals when they are accepted by the offeree or the promise become promises. Now, we are thorough with the concept of promise, so moving on to the agreement. An ‘Agreement’ as defined under Section 2 (e) of the Indian Contract Act 1872 is as follows: “Every promise and every set of promises forming the consideration for each other”. Thus, an agreement is the result of a proposal from one side and its acceptance by the other.

When does an agreement become a contract?

An agreement becomes a contract when it is enforceable by law. For the agreement to be enforceable, Section 10 of the Indian Contract Act 1872 defines conditions which are necessary for the enforceability of the contract which is as follows:

  1. There should be some consideration for it (mentioned under Sections 2 (d) and 25)
  2. The Parties are competent to contract (mentioned under Sections 11 and 12)
  3.  The consent should be free (mentioned under Sections 13 to 22)
  4.  The object should be lawful (mentioned under Sections 23 to 30)

Bilateral relation, not unilateral:

The above principle can be understood by the help of a case: In this case, a unilateral right was given by the bank to refer any dispute to arbitration. The consent of the borrower wasn’t taken. The court held that since there is an absence of consensus-ad-idem, such a clause will not be regarded as an arbitration clause. The court also observed that such a unilateral option is not unfair, unreasonable or against public policy.

Proposal:

A proposal, as defined under Section 2 (a) of the Indian Contract Act 1872, states that: “When one person signifies to another his willingness to do or to abstain from doing anything, with the view of obtaining the assent of that other to do such act or abstinence, he is said to make a proposal”. A person making the proposal is known as the “Offeror” and the person to whom the proposal is made is known as the “Offeree”. The terminology of the proposal has been defined under Section 2 (c) of the Indian Contract Act 1872.

Communication of Proposal:

The essential part of a proposal is its communication or as mentioned in Section 2 (a) “To signify to another his willingness”. Thus, the process of communication is completed when it comes to knowledge of the other party. Section 3 of the Indian Contract Act 1872 deals with the communication of the proposal. The communication can be by words of mouth, written or by conduct.

Implied proposals:

A proposal which is expressed by conduct is called an “Implied proposal”. Section 9 of the Indian Contract Act 1872 deals with such proposals. In so far as such a proposal or acceptance is made otherwise than in words, the promise is said to be implied.[1] Communication when complete: Section 4 of the Indian Contract Act 1872 states that: “The communication of the proposal is complete when it comes to the knowledge of the person to whom it is made”. Thus, a proposal cannot be accepted until and unless it comes to the knowledge of the person to whom it is made.

The same can be understood by case law:

Lalman Shukla v. Gauri Dutt[2]: In this case, the nephew of the defendant had absconded from home. The defendant asked his servant to search for him. After the servant had left, the defendant offers to pay Rs 501 to anyone discovering the boy. The servant came to know about the offer when he had already found the missing boy. The defendant refused to pay the money. The servant brought an action against the defendant. The court held that the defendant is not liable to pay money to the servant since there wasn’t any acceptance of the offer as the servant had no knowledge about it.

Intention to Contract:

In the English law, it is regarded as a settled principle that “For the creation of a contract, there should be a common intention of the parties to enter into legal relations” while there is no such provision in Indian Contract Act when requires that an offer or acceptance should be made for entering into legal relations. The same can be illustrated in the following case law:

Balfour v. Balfour[3]

In this case, Mr Balfour and his wife went to England for a vacation, and his wife became ill and needed medical attention. They made an agreement that Mrs Balfour was to remain behind in England when the husband returned to Ceylon (Sri Lanka) and that Mr Balfour would pay her £30 a month until he returned. This understanding was made while their relationship was fine. However, the relationship later soured and the husband stopped making the payments. The wife sought to enforce the agreement. Later the parties separated and were divorced. The wife brought this action for the money her husband had promised to pay to her but had failed to do so. The court held that the agreement was purely social and domestic in nature and characteristic and therefore it was presumed that the parties did not intend to be legally bound by it. Thus, the Balfour case made it very clear that the legal intention to enter into a contract is very necessary. The Balfour case mostly revolves around the concept of legal intention as a basic and for the most necessary to validate a contract.

Conclusion:

Thus, the Indian Contract Act 1872 governs the Contract Law in India, and it provides a legal framework for the contracting parties to resolve disputes and regulate their contractual obligations. The law of contract has been self-regulatory and therefore the courts have also made no consideration of whether the contract is fair or not; if it has been agreed, it has to be enforced.


[1] As per Section 9 of the Indian Contract Act.

[2] (1913) 11 ALJ 489.

[3] (1919) 2 KB 571


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