HOW TO UPHOLD THE VALIDITY OF A CONTRACT BY T.S. SNEHA

(This article is written by T.S. Sneha. She is a law undergraduate at NUALS, Kochi.)

The Contract Act of 1872 dealt with the Sale of Indemnity and Guarantee, Law of Bailment, Agency and Partnership. In 1930, a separate Act on the Sale of Goods was passed, and in 1932, the Indian Partnership Act was passed. These Acts define the word “contracts”. It is essentially, an agreement that is legally enforceable and involves the elements of a proposal, promise, willingness, consideration and enforceability. An agreement, with a legal backing that can be enforced by at least one of the parties, but not by the other, becomes a voidable contract and a contract that cannot be imposed by law becomes void and cannot be enforced in a court of law.

UNENFORCEABLE CONTRACTS

There are two types of contracts:

  1. Expressed and;
  2. Implied

Express contracts have the terms of the contract blatantly stated and it can be written or oral. Implied contracts, on the other hand, is deemed to have agreed upon due to the facts and circumstances/ actions. Contracts must be bilateral, otherwise one of the parties must be under a mistake as to the subject matter of the contract. There are other contracts like adhesion, aleatory and so on. There are option contracts where one party can enter into contract with the other at a later point of time.

Contracts can be valid or invalid. Unenforceable contract can be void or voidable. When one of the parties, that is at a disadvantage decides to enforce the contract, the contract is called “voidable” at the option of one of the parties.

An unenforceable contract is not enforceable in a court of law because of the incapacity of parties involved in the agreement to enter into a contract or because of the subject matter. An agreement can also become unenforceable when it is at the disadvantage of one of the parties involved in the contract, or say, at the advantage of one of the parties involved in the contract. A contract becomes unenforceable when it has been entered into by parties not competent to enter into an agreement like minors[i] or people of unsound mind.[ii] The sanctity of a contract also gets corrupted when there is

  • undue influence[iii],
  • coercion,
  • fraud,
  • misrepresentation or
  • a mistake.

People of unsound mind, as per Section 11 of the Indian Contracts Act include:

  • Lunatic
  • Idiot
  • Intoxicated person

Contracts entered into by a person of unsound mind is void.

Specifically, contracts involving coercion[iv], undue influence, misrepresentation and fraud are voidable, and enforceable only at the option of one of the parties to the agreement and this party invariably is the one which was at a disadvantage. Contracts involving mistakes are void since the parties to the contract are under a mistake to the facts of the case, i.e., it can be enforced when the parties come to reinforce the contract by understanding the facts in the same sense under terms and conditions of a new contract. Hence, a contract understood by two parties in different terms and conditions become unenforceable in a court of law. An illegal contract[v], one that involves acts that are against the law or public policy and unwritten contracts for specific contracts that must be in writing can become unenforceable at the option of either of the parties.

CAPACITY OF PARTIES

The Indian Contract Act, 1872 in Section 11 says that “Any person who has attained the age of majority, and not of unsound mind or restricted by law to enter into a contract can enter into contracts.”

  • Majority is attained at the age of 18, and a minor shall enter into a contract for necessities, and such an agreement will be voidable at the option of the minor[vi]. This provision was brought about in their favour and can prove disadvantageous in certain circumstances. In York Glass Co. Ltd v Jubb[vii], it was held that a contract entered into by a person of is invalid only if he was of unsound mind while the contract was entered into.
  • There is no validity for a contract entered into by a minor, hence no ratification; however, joint documents, gift and partnership with a minor are possible at the permission of the guardian.
  • Section 12 of The Indian Contract Act talks about the incompetency to enter into a contract by drunkards, lunatics and idiots, primarily people of unsound mind. However, they are capable of entering into a contract for necessities.[viii]

Under several sections of Code of Civil Procedure[ix] and various other statutes, government permission is required to enter into a contract with sovereigns, corporations[x] and alien enemy and whoever wants to enter into such a contract must have feasible reasons as to why they want the contract to be enforced.[xi] Like for contracts with elements of “Mistake”, illegal contracts should prove their asserted side by reasons.

UNDUE INFLUENCE, FRAUD AND MISREPRESENTATION

A contract vitiated by “undue influence” is the one where one of the parties to the contract abuses the dominant position to suit him. A person is said to be “dominant” if he is in an apparently or fiduciarily dominant position, or where he purposefully makes a contract with someone of unsound mind. It can clearly be seen in such cases that one of the parties wanted to assert their position, and hence such contracts become voidable at the option of the other. In Lakshmi Amma vs T.Narayana Bhatta[xii], the plaintiff executed a deed of settlement by which the entire property was given to one of his grandsons(1st Respondent), and the Supreme Court held that there was prima facie case of undue influence because the plaintiff was in a position where she could be dominated. The existence of a fiduciary relationship does not per se establish undue influence[xiii]. It should be shown further that the position was used to obtain an unfair advantage. Section 16 of the Indian Contracts Act applies even when undue influence is exercised by A over B to make B enter into a transaction with a third party, and A himself has not derived any benefit himself therefrom.[xiv] In the case of Griffith v Brymer[xv], it was held that contracts made on missupossition of facts are void.

“Fraud” is another element of a contract that makes it voidable at the option of one of the parties and “fraud” is said to take place when one of the parties to the contract knowingly deceives the other to make him enter into the contract. In Peak vs Gurney, the prospectus of a company deliberately avoided reference to a particular document which would have disclosed certain liabilities, and it amounted to fraud. Silence does not amount to a representation and hence cannot amount to fraud. Misrepresentation is said to occur when one of the parties to a contract unintentionally deceives the other to enter into a contract, and the party at a disadvantaged position has the remedy, that is, the contract is voidable at his option and only enforceable by him. In Redgrave v. Hurd, an English contract law case, it was held that, “A contract can be rescinded for innocent misrepresentation, even where the representee also had the chance to verify the false statement.[xvi]” A person induced to enter into a contract by misrepresentation, whether innocent or fraudulent, can rescind the contract. In Bannerman vs White, Bannerman offered hops for sale and induced White to enter into the contract on a representation that sulphur had not been used in raising the crop, but the defendant would not have purchased the hops if he had known that sulphur had been used. Here, misrepresentation as to sulphur is not willfully false. In English law, consent procured by duress renders a contract voidable. Duress produces a fear of bodily harm. “Coercion” under Indian law is often compared with “Duress” under English law. There are two types of “Mistakes” as to the facts of the contract, the first one being a unilateral mistake, the remedy for which is rescission or reformation and the second one is a bilateral mistake, which renders the contract void.  Duress is said to have taken place if there is an element of:

  • A threat;
  • Coercion; or
  • Improper persuasion.
ILLEGAL CONTRACTS

Unconscionality of a contract is a situation where the terms of contract are unfair and favours one of the parties, hence there is a breach of contract. In such case, the court will give the opportunity to the party at the disadvantage to decide if he would like to enforce the contract.

  • A void agreement may not be allowed by law, but an illegal agreement is stringently prohibited by law.
  • Every illegal agreement[xvii] is void, but all void agreements are not illegal. Best examples of illegal contracts are contracts including drugs, prostitution and gambling. Indian scenario has two types of agreements, oral and written.
  • Any agreement between two parties that goes against the interest and public policy of the State or tries enforcing terms that are prohibited by the State can be termed as illegal.
  • In addition to the above, alien enemies, convicts and insolvents are also restricted from entering into a contract.

An illegal contract is void and unenforceable generally. It can become enforceable as long as the party seeking its enforcement is less guilty than the other, and the agreement does not violate any moral or public policy[xviii]. Sometimes, what is illegal might not be morally wrong and what is wrong need not necessarily be illegal, and the law does not account for all that is illegal, and all illegal agreements may not be punished for. In the case of Holman v. Johnson[xix], the general principle of legality was established. It was held that an illegal contract is generally not enforceable unless the circumstances provide otherwise. An illegal contract is essentially not enforceable because

Written agreements are limited to writing in a particular format, and such agreements cannot be enforced unless they are written and sealed in that specific format. Oral agreements involve elements of words, actions or symbols, and that’s how they’re distinguished from normal contracts. Valid oral contracts are legally enforceable in the court of law. Section 48 of The Societies Registration Act, 1948 and Section 92 of The Indian Evidence Act, 1872 talks about the enforceability of verbal agreements. In Gomi Bai And Ors. Vs Uma Rastogi And Anr[xx]., it was held that oral agreement in that particular case was lawful since it had legal backing.

CONCLUSION

Some contracts are void from the beginning; others are voidable at the option of either of the parties. In conclusion, an agreement without a legal backing would become unenforceable in the eyes of the law. All necessary conditions are to be followed and satisfied as per The Contracts Act to make sure that a contract could be enforced in a court of law. Legal professionals suggest remedies for unenforceable contracts. When one party fulfils the contract and the other doesn’t, legal remedies like specific performance and compensation are available to the bereaved party. The aggrieved party can chose to avail compensation as per the loss suffered from the non-performance of the contract.

 

Footnotes:

G.C.V SUBBA RAO, LAW OF CONTRACTS I & II(1978).

[i]Popat Namdeo Sodanvor vs Jagu Pandu Govekar, AIR 1969 Bom 140.

[ii]The Indian Contract Act, Act no. 09 of 1872.

[iii]Williams v Bailey (1866) LR 1 HL 200.

[iv]Ladli Prasad Jaiswal vs Karnal Distillery Co., Ltd., & Ors, 1964 SCR (1) 270.

[v]Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd on 17 April, 2003, Appeal (civil) 7419 2001 of 518.

[vi]Mohori Bibi vs. Dharmodas Ghosh(1903) 30 Cal 539.

[vii]York Glass Co. Ltd v Jubb [1925] All ER 285.

[viii]The Indian Contracts Act (Act no.9 of 1872).

[ix]The Civil Procedure Code(Act no. 5 of 1908).

[x]The Companies Act 2013, s.21.

[xi]G.C.V. SUBBA RAO, LAW OF CONTRACTS I&II(1978).

[xii]Lakshmi Amma vs. T.Narayana Bhatta, AIR 1970 SC 1367.

[xiii]In Tata v. Williamson, 1866 LR 2 Ch. App. 55, 61.

[xiv]Chinnamma v. Devangha Sangha, AIR 19773 Mys. 338.

[xv]Griffith v Brymer (1903) 19 TLR 434.

[xvi]Redgrave v Hurd 20 Ch D 1.

[xvii]Rose and Frank Co v JR Crompton [1925] AC 445.

[xviii]McIntosh v. Mills, 121 Cal.App.4th 333, 347 (2004).

[xix]Holman v Johnson, (1775) 1 Cowp 341.

[xx]Gomi Bai And Ors. vs Uma Rastogi And Anr., 2005 (2) ALD 631.

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Katcheri.in.

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