All Contracts Are Agreements, But All Agreements Are Not Contracts

Introduction

Between 1526 and 1707, the Muslim rule in India judged all contractual matters using the Mohammedan Law of Contract wherein contracts like indemnity (tamin), bailment (kafalat), marriage (nikah) and partnership (shirkat) existed under the law. Provisions under Mohammedan Law of Contract, in the matters of trade, exchange, contractual agreements were applied to Muslim and non-Muslim individuals. The Futuwa Alumgiri approved the non-Muslims to govern over personal questions like caste, inheritance, succession, religion, wedding using their personal laws. Numerous judicial decisions (fatwas) by Mohammedan jurists in front of the Mughal emperor and jurisconsults (Kazis and Moftis) strengthened the Mohammedan law over Hindu law. The Royal Charter of 1726 signed by King George I extended the applicability of the Common Law and the statutes (passed by the parliament of England) over the three Indian presidencies: Calcutta, Bombay and Madras.

The shift from the long-standing Mohammedan law to the incumbent Common law in Fort William, Bengal caused difficulties among the native Indians in settling, working and carrying on business according to the Common law. The then de facto Governor-General of Bengal, Warren Hastings discerned the animosity among the native population and convinced King George III to sign the Declaratory Act, 1781. The Declaratory Act, 1781 limited the jurisdiction of the Supreme Court of Calcutta to Fort William in Bengal while ousting the Common law for the following rules in the matters of property, rent, inheritance, succession, contractual agreements:

  1. If both the contracting parties are Mohammedan, then the laws applicable shall be the Mohammedan law.
  2. If both the contracting parties are Gentu (Hindu), then the laws applicable shall be the Gentu law.
  3. If one party is Mohammedan and the other is Gentu, then the laws applicable shall be in favour of the defendant.

Regulation IV, 1793 of the Bengal Code imbibed the Mohammedan law (for Mohammedans) and the Hindu law (for Hindus) as the general rules of the court to judge suits involving marriage, caste, religious institutions and practices, inheritance, succession. The Regulation VIII, 1795 of the Bengal Code not only extended the provisions of Regulation IV to Benarus and Upper Provinces but also added that if the plaintiff and the defendant are of different faiths and the defendant is of European descent, then the law of the plaintiff shall become the rule of the court.  The statute of 1797 broadened this innovation in the judicial system to the Recorder courts of Bombay and Madras Presidencies.

Following the Sepoy Mutiny of 1857, India needed a uniform criminal and civil code while reforming existing laws. The 3rd Indian Law Commission consisted of six members and was headed by Lord Romilly, who was tasked with the codification of Indian laws and practices (Mohammedan and Hindu) while using the English Common Law as the base. The final draft of the Indian Contract Bill was submitted in 1866 wherein the drafters tried to include the regular norms followed in India in the draft, but the six members failed to do so although in certain instances the commission refused to consider the English Common Law.

The Indian Contract Bill receiving parliamentary assent on 25th April 1872, was enforced on 1st September 1872. Indian Contract Act (ICA) consists of 266 sections, wherein sections 1 to 75 elucidate the general principles of Law of Contract while 76 to 266 provide for speciality contracts (Contract of Indemnity and Guarantee, Contract of Bailment, Contract of Agency, etc). Section 2, Clause H of the ICA says that a contract is an agreement that is enforceable by law. This article examines Section 2, Clause H of the ICA while commenting on the significance of communication in the process of making a contract.

 

Analysis

A contract distinguishes itself from other legal obligations between two parties by basing itself on an agreement. The agreement exists between two or more competent parties. An agreement requires the following five ingredients:

  • Existence of two or more parties.

Every agreement involves two parties; an offeror and an offeree. However, if all the conditions to a contract fulfil then the contract can have more than one offeror or offeree.

  • An offer by one party (offeror) to the other party (offeree) to willingly perform or avoid an act or acts.

Section 2, Clause A, talks about the ingredient of offer or proposal. The communication of the proposalis complete when the proposal comes to the knowledge of the offeree. The proposal must be made by the offeror to receive assent from the other party. The proposal must be definite and devoid of any ambiguous, vague and uncertain wordings. Any ambiguity in proposal deems the agreement void or invalid. Additionally, a proposal should be made by the offeror to the offeree to create a legal obligation; the ICA, 1872, however, has no provision that addresses the intention of legal relations proposing, it is the English Common Law, which heavily influences the ICA that mentions the clause regarding legal intent. However, a difficulty in interpreting the proposal is not considered as a vague proposal; the rationale is that only if the meaning of the proposal cannot be discerned with reasonable clearness.

It has been observed by English jurists that domestic commitments and social relations (moral, religious, matrimonial, friendly, etc) do not amount to any legal obligation; and any proposal between domestic inhabitants (ex: husband and wife) is not a valid proposal. Section 9 of the ICA, 1872 discriminates between an express proposal and an implied proposal. It is largely held that a proposal must be either expressed in words, written or spoken (Express Proposal), or expressed in conduct by the offeror (Implied Proposal). The Court of Appeal’s Lord Greene in the case of Upton-on-Severn Rural District Council v. Powell (1942) 1 All ER 220, observed that after Powell requested the services of the Upton Fire Department, the latter rendered the services on an implied promise that Powell will pay for the services (of extinguishing the fire in his house in the Pershore district.

An extra detail of a proposal is that an offeror cannot compel the offeree to accept the proposal. In Taylor v. Laird (1856) 25 LJ Ex 329, the court held that a proposal to perform or omit an act should be communicated to the offeree, and the proposal is valid only after the proposal comes to the knowledge of the offeree (the plaintiff did not communicate his proposal to work as an ordinary crew member during the return journey of the ship to the defendant, and the defendant was not entitled to pay the plaintiff because the proposal of the plaintiff is not valid and does not create room for a contractual agreement between the plaintiff and the defendant).

  • An acceptance/ assent by the offeree to perform or avoid the act or series of acts.

Section 2, Clause B talks about acceptance against the offeree or promisor. Indian courts observe that the acceptance to a proposal must be expressly communicated to the offeror, either by written manifestation or an external manifestation (oral); and only wm hen the acceptance comes to the knowledge of the offeror, the acceptance is considered as valid. In case of Felthouse v. Bindley (1862) EWHC CP J35, Justice Willes J sided with the defendant with the statement that without any explicit acceptance from the defendant (offeree), the proposal to buy the defendant’s horse by the plaintiff does not become a legal agreement.

The acceptance of a proposal can be implied by the conduct of the promisor; in such cases, the silence of the promisor that is reinforced by the conduct of the offeree forms a valid assent or acceptance to the proposal. Justice Hillyer J in the case of HBF Dalgety Ltd v. Morton (1987) 1 NZLR 411, observed that though the prima facie conduct of the plaintiff (cashing the cheque) can be considered as the acceptance to the incomplete payment by the defendant, the subsequent letter where the plaintiff asked for the payment of the balance amount is an express rejection of the proposal and hence, the revocation of the proposal is valid. Agreement Sub Silentio is when performance or omission of the act or series of acts by the offeree forms a valid acceptance to a proposal and the silence is upheld as a valid ingredient to the agreement. Lastly, the communication of an acceptance must be from the offeree or any other person, who is authorized by the offeree to the offeror or any other person, who is authorized by the offeror; any communication between unauthorized personnel is not considered as a valid acceptance.

Section 7 of the ICA, 1872 states that the acceptance against the offeree must be unqualified and absolute. English law dictates that the acceptance must be a mirror-image of the proposal (Mirror Rule). Any attempt by the offeree to modify or eliminate the material provisions of the proposal implies that the offeree does not accept the provisions of the original proposal and puts forth a counter-proposal; any counter-proposal nullifies the original proposal and any subsequent acceptance of the original proposal by the offeree is an invalid acceptance. Acceptance against the offeree must be given to all the provisions of the proposal (in-toto) and any incomplete acceptance is considered as a counter-proposal (no valid acceptance).

In Ramanbhai M. Nilkanth v. Ghashiram Ladliprasad (1918) 20 BOMLR 692, Justice Beaman J. held that the defendant had given the plaintiff 100 shares of the company without offering the job of a cashier to the plaintiff, and hence, the agreement is void because the defendant had not accepted the provisions of the proposal in-toto.

Communication in ICA, 1872 stands on three legs: communication of proposal by the offeror, communication of acceptance by the offeree and communication oddities like silence. The 3rd Indian Law Commission foresaw that the Indian Contract Act, 1872 might not survive the changing times if the act is made rigid, hence, the drafters decided to make the ICA, 1872 more flexible; deficiencies in the act can be addressed by adding more chapters to the act.

The post is a valid mode of communication if the offeror and the offeree live at a distance unless explicitly mentioned otherwise. Under normal circumstances of ICA, 1872, the communication of an acceptance is complete against the offeree, when the acceptance comes to the knowledge of the offeror and against the offeror when the acceptance is put in the course of transmission by the offeree. Similarly, under Postal mode of communication (non-instantaneous mode of communication), the acceptance is complete and binding on the offeror when the post or telegram is put in the course of transmission (post-office) by the offeree, while the place of the contract is the place from where the letter of acceptance is posted by to the offeree.

One of the first times that the ‘Postal Rule’ was applied in a judgement was in the case of Adams v. Lindsell (1818) 1 B&Ald 681, wherein the validity of the acceptance of the proposal by the plaintiff was upheld as absolute and unqualified because the plaintiff fulfilled the condition of the defendant by posting the acceptance on 7th September itself and the acceptance was binding on the defendant from 7th September itself and not when the contents of the post came to the knowledge of the defendant on 9th September (which the defendant declines since the acceptance was received after the deadline of 7th September). Additionally, the time and date of the contract is the time when the letter of acceptance is posted by the offeree. Post as a mode of communication can be displaced at the virtue of the offeror. Alexander Graham Bell’s telephone impaired the barrier of distance and gave rise to the ‘Instantaneous’ mode of communication, which is named so because of its instantaneous nature. In 1955, Denning L.J. opined that the guidelines of the Postal mode of communication cannot be applied to the Instantaneous mode of communication because the telephone was prone to operational defects.

The communication of a proposal via a telephone is complete when the offeree hears the provisions of the proposal from the offeror; and contrary to the Postal mode of communication, the communication of acceptance is complete when the offeror hears the message of acceptance of the offeree. Further, the place where the offeree calls the offeror and conveys the message of acceptance is the place of the agreement, wherein the court of that place has original jurisdiction over the agreement. The advancements of the 21st century (fax, email) has not only questioned section 4 of the ICA, 1872 but also created a new mode of communication: Intermediate, wherein the edicts of the Postal mode of communication is mirrored in the Intermediate mode of communication. Emails act as both an Instantaneous and a non-Instantaneous mode of communication, whether the offeree replies instantly or non-instantly to the offeror’s email.

The bewilderment surrounding the status of emails in ICA, 1872 stems from the fact that section 4 of the ICA, 1872 does not contain any information about modern communication tools like email. In Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas (1966) AIR SC 543, Justice Hidayatullah upheld the court’s rationale in Entores Ltd. v. Miles Far East Corporation (1955) 2 QB 327, of restricting section 4 of the ICA, 1872 to a non-Instantaneous mode of communication. The inherent nature of email transmission, i.e., splitting of an email into fragments and sending it from the sender to the receiver in a multi-stage process, makes it quite different from the Instantaneous mode of communication and unlike the Instantaneous mode, the offeree is oblivious if the email has reached the offeror and the contents of the email are read by the offeror, and thus, email belongs to the realm of the non-Instantaneous mode of communication.

An interesting element of ICA, 1872 is section 5, which deals with the revocation of a proposal. Section 4 of the ICA, 1872 binds the offeror and offeree differently in the face of communication of the acceptance and similarly, in the face of when a proposal may be revoked. A proposal may be revoked anytime before the communication of acceptance is complete against the offeror, when acceptance is put in the course of transmission; and offeree, when the acceptance comes to the knowledge of the offeror. Revocation by the offeror within a period of acceptance, if any, is valid. If a promise is made by the offeree to the offeror to pay instalments of a consideration (irrespective of how small each instalment is) within a fixed period, then the offeror cannot revoke the proposal before the period expires. The communication of revocation, if any, should be from the offeror or a duly authorized personnel (chosen by the offeror) and  communication of revocation from any other person shall have no legal standing. In Postal mode of communication, a proposal may be revoked at any time before the communication of acceptance against the offeror. Also, the communication of revocation is binding on the offeree when the revocation is put in the course of transmission to the offeror. In Adams v. Lindsell, 1818, the court decided that the provisions of the Postal mode of communication must always benefit the offeree and hence, an acceptance can be retracted by the offeree after posting the letter of acceptance to the offeror, but the revocation holds merit only before the letter of acceptance comes to the knowledge of the offeror and the offeror is yet to begin fulfilling the provisions of the proposal.

  • Promise

When the proposal is accepted by the offeree and the acceptance comes to the knowledge of the offeror, the provisions of the proposal becomes binding on the offeree and the offeror. At this point, the offeror becomes the promisor and the offeree becomes the promisee while the proposal becomes a promise.

  • Consideration of the contract.

An inducement to an agreement or a consideration is the motive or price which induces the contracting party (offeree) to agree. Section 2, Clause D deals with consideration, wherein the act or group of acts that the promisee or the contracting party promises to perform or to abstain from performing is called as the consideration to the promise. Consideration is at the desire of the offeror. Consideration is the price paid by one party for the promise of the other party (quid-pro-quo).

Section 2, Clause E enjoins that a promise with a lawful consideration (not illegal, fraudulent, against any law or statute, injurious to person or property, immoral) becomes an agreement. Section 2, Clause H writes that for an agreement to become a contract, it needs to be legally enforceable. ‘Enforceable by law’ allows the offeror to take the offeree to court if the latter fails to fulfil the promise and to compel the offeree to fulfil the provisions of the promise. The iuris terram of the contract is as follows:

Valid Agreement: An agreement having all five ingredients as mentioned above is a valid agreement. An agreement which is not valid cannot have legal standing.An agreement may possess all the five ingredients of a valid agreement, but it may still stand void if any of the following conditions hold:

  • No Consideration (Section 25).
  • Agreement in restraint of marriage of the contracting party (Section 26).
  • Agreement in restraint of trade of the contracting party (Section 27).
  • Agreement by wager (Section 30).
  • Agreement in restraint to legal proceedings (Section 28).
  • Uncertain agreement.
  • An impossible promise or object (Section 36).

Competent Parties: Section 10 of the ICA, 1872 bars non-competent parties from forming an agreement while section 11 and 12 elucidates that any person, who is a minor (below 18 years of age), of unsound mind (inability to understand the provisions of the proposal and inability to make a rational judgement) or a person, who is disqualified by law is not a competent party.An agreement with an incompetent party is not legally enforceable and such agreements are invalid.

Consent: In Chikkam Ammiraju v. Chikkam Seshamma (1917) 32 MLJ 494, the court observed that the contract between the man’s wife and his brother under a threat of the man’s suicide is void because Coercion nullifies the requirement of free consent in section 15 of the ICA, 1872. Undue Influence (section 16), Fraud (section 17) and Misrepresentation (section 18) are other examples of forced consent and any agreement, wherein the acceptance of the proposal against the offeree is not freely consented by the latter is an invalid contract.

Lawful Object and Consideration: Hence, Section 2, Clause J supports the proposition that ‘Not all Agreements are Contracts.’ A contract is an agreement which is legally enforceable while any invalid agreement may not become a contract. Thus, an agreement may have valid ingredients, but may still be void in the eyes of the law. However, a contract is not only valid but also legally non-voidable.

 

Conclusion

The crux of the problem is the disparity between a ‘contract’ and an ‘agreement’ in the vain of the Indian Contract Act, 1872. Though the act is more than 150 years old, it held merit then and still holds merit now; several amendments have been made to the original act (latest being the 2017 amendment bill in the Rajya Sabha); however, sections 1 through 30 have remained relatively untouched. The 3rd Indian Law Commission must be credited not only for drafting the act with the foresight of the future but also for making the provisions of the act precise and unambiguous and flexible. A contract is a legal binding agreement on the offeree and the offeror while the agreement is just a promise with a consideration and without any legal footing. Similar to the legal maxim: ex turpi causa non-oritur, a party cannot claim a legal remedy to a breach in a contract if the contract itself is pernicious to the law or any legal statute. Hence, a contract is an agreement which has a necessary sto legalis.

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