Supreme Court on General Principles of Contract

Sir William Anson, a noted British jurist, defines a contract as a “legally binding agreement made between two or more persons, by which rights are acquired by one or more to acts or forbearance on the part of other or others”. In India, the contracts are governed by the Indian Contract Act, 1872, most of which has been derived from the British Common Law of Contract or from principles of equity, justice and good conscience accepted in all civilised societies. The first part (sections 1-75) of Indian Contract Act, 1872 (the Act), deals with general principles of contracts and is applicable to all the contracts so formed under the Act.
Despite the fact that the law has been in existence for over 140 years, time and again it comes before the courts for interpretation even on basic ingredients of validity of contract due to the fact, as laid down by M. Hidyatullah, J. in Bhagwandas Goverdhandas Kedia v. M/s Girdharilal Parshottamdas & Co. [AIR 1966 SC 543], that the law was made in time where modern means of formation, execution and discharge of contract were neither available nor anticipated.

Attempt has been made to address the following issues in light of recent Supreme Court judgements:

• Whether a written agreement can be considered valid even if not signed by the parties to agreement?
• How is a consideration different from condition for performance of contract?
• Whether a time-bound contract can be enforced after the expiration of the stipulated time?

To start with, an agreement becomes a valid contract when the conditions as mentioned under section 10 of the Act are duly fulfilled.

• Section 10 of the Act (What agreements are contracts): All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
  Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

Interpretation: On the basis of above, the essentials of a valid contract include:
1. Valid offer and acceptance
2. Intention to create legal relations
3. Competence to contract
4. Lawful consideration
5. Free consent
6. Lawful object
7. Not expressly declared void
It is also to be noted that the Act is not exhaustive for the provisions of law pertaining to contracts. Other Acts such as Specific Relief Act, 1963, Registration Act, 1908, Transfer of Property Act, 1882 or any other Act which contains such provisions as regards a contract can also be relied upon unless the Act expressly repeals provisions of any Statute, Act or Regulation.

Question of law: Whether a written agreement can be considered valid even if not signed by the parties to agreement?

• Section 2(h) of the Act: An agreement enforceable by law is a contract.
• Section 2(e) of the Act: Every promise and every set of promises, forming the consideration for each other, is an agreement.
• Section 2(a) of the Act: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.

Interpretation: Based on the abovementioned sections, an agreement requires at least two persons: One who makes the proposal and other who accepts the proposal and both parties must be consensus ad idem (agreeing upon the same thing in the same sense).

Since the Act is silent on the type of documentation of the agreement, it may be oral, written or implied, depending upon the conduct of the parties, unless it is expressly so required by any other law, statute or regulation.

The above mentioned issue was recently adjudged by the Supreme Court of India which held that signature on an agreement is not a formal requirement according to any statute or law. The Supreme Court, in Govind Rubber Ltd. v. Louids Dreyfus Commodities Asia (P) Ltd. [(2015) 13 SCC 477], stated that there may not be any dispute with regard to the settled proposition of law that an agreement even if not signed by the parties can be spelt out from correspondence exchanged between the parties. However, it is the duty of the court to construe correspondence with a view to arrive at the conclusion whether there was any meeting of mind (consensus ad idem) between the parties which could create a binding contract between them. It is necessary for the Court to find out from the correspondence as to whether the parties were ad idem to the terms of contract.

Question of law: How is a consideration different from condition for performance of contract?

• Section 2(d) of the Act: When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

Interpretation: The consideration therefore, must flow at the desire of the promisor, to promise or any other person. It can be a past, present or future consideration and should bear some value.

In the recently decided case of Commissioner of Central Excise v. Indorama Synthetics (I) Ltd. [2015 10 SCC 793], the Supreme Court of India laid down the difference between consideration and condition in a contract. The Court held that distinction between a consideration and condition would depend upon whether a reasonable man would or would not understand that the performance of the condition was requested as the price or exchange for the promise.

Question of law: Whether a time-bound contract can be enforced after the expiration of the stipulated time?

• Section 56 of the Act: Agreement to do impossible act: An agreement to do an act impossible in itself is void.
  Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
  Compensation for loss through non-performance of act known to be impossible or unlawful: Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

In the recently decided case of State of MP v. M/S Ruchi Printers [2016 SCC Online SC 436], the court held that when time is an essence of the contract, the contract must be honoured within the stipulated time and no payment of any consideration of any kind is to be made in case of non-fulfilment of the contractual liabilities. In the present case, booklets were to be supplied to the State within a stipulated time which was further extended to 31st March, 2008. There was a specific condition in the contract that no booklet were to be received after the stipulated time. The apex court was of the opinion that the printers were very well aware that booklets were required urgently and time was the essence of contract and ample time was given to the printers to supply the booklets. Thus, the order for printing books stood cancelled on failure to supply within the stipulated period, because of which the contract came to an end and therefore no right of payment accrued from such contract.

On the basis of facts of the case, it was then held that the booklets which were printed after the stipulated time were without any work order in existence and no payment for such supply of booklets was necessary. However, payment for booklets which were supplied till the stipulated time ought to be made by the State.


SOURCES:

The Practical Lawyer [June, 2016 and February 2016 edition]
Case Material on Principles of Contract (General Principles), Faculty of Law, University of Delhi
Chartered Secretary [June 2016 edition]
www.scconline.com
www.sci.nic.in
www.indiankanoon.com