A contract plays an important role in every business operation. Without any legal contract, it becomes difficult to run a business smoothly. A contract is a legal document that legally binds both parties to an agreement wherein the rights, duties, and liabilities of every party are mentioned. A contract can only be valid when the parties have mutual consent to a contract where an offer is made by one party and accepted by the other party.
All the contracts in India are ruled by the Indian Contract Act, 1872. Section 23 of the Indian Contract act, 1872 defines that the consideration or the object of a contract is needed to be lawful and as an essential component of a contract unless it is forbidden by the law. Consideration or the object can be unlawful if it goes against any of the provisions of the law and is immoral in nature or it causes any injury to a person or a property. If it is against public policy then also it is unlawful. The contract is valid if it is lawful.
Section 2(h) of the Indian contract act, 1872, defines the term contract as, “An agreement that is enforceable by law is a contract”. So, a contract at the primary stage is an agreement between two or more parties to do or abstain from doing something.
So, a Contract is made up of two important things i.e. an agreement and another thing is the enforceability of that agreement.
Contract= Agreement + Enforceability
Example: An agreement between A and B that A will construct a house for B and B will pay Rs. 20 lakh to A. This is a valid contract as it is enforceable by law.
For the general contract, we can refer to the case of J.K. Industries Ltd V. Mohan Investment and Properties Pvt. Ltd, where a contract can only come into existence when all the terms and conditions have been confirmed.
For Proposal: Offer and Statement of intention, we can refer to the case of Tarsen Singh v. Sukhinder Singh, where the proposal gives rise to an agreement only when it is accepted.
To form a valid consideration, we can refer to the case of Chidambara v. P.S. Renga. It was held in this case that consideration must have some value in the eyes of law. It must be real, not illusory, whether adequate or not.
What is an Agreement?:
Section 2(e) of the Indian contract Act, 1872 defines an agreement as, “Every promise and every set of promises forming consideration for each other, is an agreement.” The agreement is consist of promise and consideration.
Agreement = Promise + Consideration
In Balfour v. Balfour, it was held that if the agreement is domestic in nature then it will not be enforceable by law.
There can be different classifications of an agreement i.e. Valid Agreement, Voidable Agreement, Void Agreement, Illegal Agreement, Unenforceable Agreement.
Section 10 of the Indian contract act, 1872 defines that “all agreements are contract if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and should not be void.”
Types of contract
On the basis of validity there are five types of contract:
- Valid Contract
- Void Contract or Agreement
- Voidable Contract
- Illegal Contract
- Unenforceable Contract
WHAT IS SEC 20 AND SEC 36 OF THE INDIAN CONTRACT ACT, 1872
Section 20 of Indian Contract Act, 1872: Agreement Void where both the parties are under mistake as to a matter of fact- The agreement is void where both the parties are under a mistake as to a matter of fact indispensible to the agreement.
Explanation: An imprecise view as to the value of the thing which forms the subject matter of the agreement is not to be considered a mistake as to a matter of fact.
- X agrees to sell to Y a specific cargo of goods supposed to be on its way from Britain to India i.e. Bombay. It was seen that before the day of the bargain the ship fetching the cargo had been cast away and the goods lost. Neither party knows about these facts. The agreement is void.
- A accedes to buy a horse from B. It was found that the horse was dead at the time of the negotiation, though neither party was aware of the fact. The agreement is void.
This case generally dealt with section 20 of the Indian contract act, 1872.
- Tarsen Singh enters into a contract for the sale of land with Sukminder Singh who had already partially paid in the form of earnest money for the property.
- Tarsen forgets to execute the deed for which the plaintiff sues for the specific performance.
- High court has passed a decree for refund of the earnest money give but refuses to pass the decree of specific performance.
- There was mentioned in the agreement that earnest money will not be refundable if the purchaser cannot make the balance payment of the money.
- Whether there exists a mistake of facts between the parties?
- What is the effect and result of a mistake of fact on the agreement?
- There must be a bilateral mistake of fact and both the parties must be proved to be suffering from the mistake of fact in order to make an agreement void.
- If the said contract is void then the earnest money or any kind of other deposit cannot be relinquished.
- The relinquishment of earnest money is permissible only when a concluded contract has come into being and not before that.
The court held that there was a mistake of fact concerning the land and since the clause regarding the refund of money was in the agreement that was void hence all clauses in the agreement will be declared as void and therefore sec 74 of the act will not be appropriate as in sec 74 there must be valid agreement and legally binding that was not present in this case. Hence SC upheld the judgment of the lower appellate Court.
Case Referred: Ram Chandra Misra and Others v. Ganesh Chandra Gangopadhyay and others.
What is a contingent contract?
Contingent means when a happening of an event or situation is contingent i.e. it depends on other future events. Let it be, X will pay 50 rupees to Y, if Y passes the exam.
The contingent contract means the applicability of that contract is straightly reliant upon the happening or non-happening of any event or situation. Sec 31 of the Indian Contract Act, 1872 defines a contingent contract as a contract to do or not to do something, if some event collateral to such contract does or does not happen. In this contract, when the condition is met then only the promisor performs the obligation. Some example of the contingent contract is the contract of insurance, indemnity, etc.
Example: A contract to pay Rs. 15,000 to B, if B’s house is burnt. This is a contingent contract. All the contracts of insurance and indemnity are contingent was held in the case of Chandulal Harjivandas v. CIT.
Section 36 of Indian Contract Act, 1872
Agreement contingent on impossible event void- Contingent agreement to do or not to do anything, if an impossible situation happens, are void, whether the impossibility of the situation or an event is known or not known to the parties to the agreement at the time when it is made.
- X agrees to pay Y Rs. 10 if two straight lines enclose a space. This agreement is void.
- Ram agrees to pay Shyam rupees 1000 if Shyam will marry Ram’s daughter Reena. Reena was dead at the time of the agreement. The agreement is void.
DIFFERENCES BETWEEN SECTION 20 AND SECTION 36 OF THE INDIAN CONTRACT ACT, 1872:
- Section 20 of Indian Contract Act, 1872 talks about the mistake of facts where both the parties have mistaken regarding the subject matter of an agreement which makes it void whereas section 36 of Indian contract act, 1872 collateral agreement exist between parties that further depends on the contingency of an impossible event which makes it void.
- Section 20 of Indian Contract Act, 1872 talks about the bilateral mistakes as to the subject matter of an agreement which is a void agreement. In the case of Galloway v. Galloway (1914), both the parties were under a mistake of fact regarding their marriage and they separated through an agreement. Later it was found that the man’s first wife was alive. It was contended that the separation agreement was void as it was entered based on the assumption that the parties were married to each other. Whereas section 36 of the Indian Contract Act, 1872 talks about the collateral agreement which is not a subject matter of an agreement that is a void agreement.
- Under Section 20 of Indian Contract Act, 1872 the failure is due to the mistake of the parties regarding the subject matter of an agreement whereas Under Sec 36 of Indian Contract Act, 1872 the failure is due to a happening or non-happening of a future event.
The contract is essential for any business as stated above. There must be a valid contract. All agreements are not contracted. Only a valid agreement can become a contract but all contracts are an agreement. The validity of the contract can be influenced if the parties are mistaken or depend on happening of any future events which can make it void the agreement. In a contingent contract, the terms of the contract are certain but depend on the happening of any event or not happening of any situation which makes it a void agreement in case of contingency an impossible agreement and void contract in case of contingent contract.