In the times where globalization has led the world to an advanced stage, the commercial sector has turned multifaceted. The rise in the use of technology & rapid advancements has thrown up various challenges to the corporate world. To tackle this, Contracts and its different forms have played a vital role. Contracts have become the foundation of every corporate relationships & dealing. Contracts have paved the way for the progress of the corporates, commercial hubs, public sector undertakings (PSUs), domestic activities, etc. The term “contract’ has replaced the word “trust” in the private & public sectors in the modern era.
Although the human race has advanced, India derives its law governing contracts from British Colonial Era. India follows the Indian Contract Act of 1872 which deals with contracts, its requirements, essentials of contracts, parties and its conduct in contractual bonds, etc.
Contract v. Agreement:
We often get confused between an Agreement & a Contract. A contract is a binding force between the parties having a contractual relationship. The legal definition of the contract under the Indian Contract act, 1872 states – “an agreement enforceable by law is a contract.” whereas “Agreement” is defined under the same law as “Every promise & every set of promises, forming the consideration for each other, is an agreement.”
Although, for a layman, the word agreement & contract seem to mean the same, In the legal sphere, an agreement & a contract has a vast difference & dimensions.
Requirements of Contract:
Since the topic aforesaid is contracted centric, it is important to understand the essential requirements of the contract. To constitute a contract, it needs to possess all the requirements of the contract.
Offer & Acceptance:
To constitute a contract as valid there needs to be a voluntary offer by one party & voluntary acceptance by the other. Offer & acceptance is the foundation of a contract.
Two or more parties:
A person cannot contract with himself. The contract requires 2 or more parties to facilitate it as a valid one. There is a precondition that 2 or more parties competent to the contract have to be present.
Intention to create legal relation:
The Contracts which create a legal relationship between the contracting parties constitute the true & legal contract. In Balfour v. Balfour the Courts were vocal in their judgment which stated that domestic arrangements between Husband & wife are social agreements & are not enforceable.
Consideration is also called “Quid pro quo” which means something in return or a financial/monetary consideration. The Contract needs to have some monetary value. It should possess some kind of monetary transaction between the parties to the contract. It may be a past, present, or future consideration.
Competency of Parties:
The parties to the contract should be eligible to contract. They should be legally competent to contract. An incompetent person cannot contract with another party. Persons who are incompetent to contract are:
- Minors under the age of 18.
- Persons of unsound mind.
- Persons who are disqualified by the law.
The Contracting parties should have a voluntary action. Parties to a contract should possess free & voluntary consent. They should have a common agreement over the same thing in the same sense. Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation & mistake.
The object of the contract which has been entered into must be legal, lawful, protected by law & not opposed to public policy.
Possibility of Performance:
The contract & its object has to be logical & practical. It cannot be an imaginary or impossible act.
The Certainty of Terms:
The terms of the contract have to be certain & clear in its approach. Vague contracts cannot be enforced by law.
The Contract may be Oral & Written:
Although the oral contract is valid, however, the contract is preferable to be in writing & registered as mandated by that specific law.
The above-mentioned essentials of the contract make the contract between 2 or more parties a valid contract which has the legal evidentiary value & which is enforceable by the law.
Can an unwritten contract be enforced?
Oral contracts are verbal agreements between two parties. We are well aware as per the above essentials of the Contract under the Indian Contract Act, 1872 that to enforce the contract, it has to be registered & preferably be in writing. But that does not invalidate an oral contract. An oral contract also bears an evidentiary value in the eyes of law & can be enforced.
It is important to note that all contracts are valid agreements but not all agreements qualify as valid contracts. Not all contracts in oral or unwritten form can be enforced. In day to day lives, we enter into a slew of contracts in personal or in an official capacity. Contracts such as Leave & license, deed of sale, mortgage deed, etc. require to be in a written/expressed form & also require registration.
An unwritten or an oral contract has the same legal value as that of a written one. The validity of an oral contract cannot be questioned under the provisions of the Indian Contract Act, 1872.
In the case of Nanak Builders and Investors Pvt. Ltd. vs. Vinod Kumar Alag, the Court held that even an oral agreement can be a valid and enforceable contract. Therefore, in the strict sense, a contract need not necessarily be in writing unless specified by law or the parties themselves contemplate the reduction of terms of an agreement to writing.
The same was reiterated by the Supreme Court in the case of Alka Bose vs. Parmatma Devi & Ors, whereby the Court held that even a sale agreement can be oral and have the same binding value and enforceability, as a written agreement. The agreement should be in tandem with the essentials listed in section 10 of the Indian Contract Act, 1872, and thus, will have the equal force of evidentiary value, as a written one.
Furthermore, The Registration Act, 1908, states that all non-testamentary documents duly registered under this Act, and relating to any property, whether movable or immovable, shall take effect against any order, agreement or declaration relating to such property, unless where the agreement or declaration has been accompanied or followed by delivery of possession.
The Indian Evidence Act, 1872, states that when the terms of any such contract, grant or other disposition of property, or any matter required by law to be reduced to the form of a document, have been proved according to the last section, no evidence of any oral agreement or statement shall be admitted, as between the parties to any such instrument or their representatives in interest, for the purpose of contradicting, varying, adding to, or subtracting from, its terms. However, its proviso (2) makes an exception to that if there is any separate oral agreement as to any matter where the document is silent and the terms are inconsistent, then the oral agreement may be proved valid. And proviso (3) further makes an exception that if there is any separate oral agreement which constitutes a condition precedent to the attaching of any obligation under any such contract, then also oral agreement may be proved.
Thus, it is quite evident that an oral agreement and a contract has a legal evidentiary value. It has the same legal status as that of an unwritten one.
Therefore, in the eyes of law, an oral contract can be legally enforceable. But, not all parties may be in a position to enter into an oral agreement or a contract. If there exists a precondition within the parties to enter into a written contract, such parties will not be in a position to enter into an unwritten or an oral contract.
It is a well-founded principle that “An agreement enforceable by law is a contract”. It is also laid that all contracts are valid agreements but not all agreements qualify as valid contracts. Thus, it is evident that the oral contract & written contract weighs equal on the scales of law.
This article is authored by Harshal Mukesh Desai, student of B.A.LL.B at V. M. Salgaocar College of Law, Panaji-Goa
Also Read: Contingent Contracts And Its Scope in India