An ‘agreement’ is nothing but an understanding between parties getting together to do something. The premise of an agreement rests upon the ideals of fairness, equity, trust and reciprocity. The lack of these principles in an agreement may result in an agreement being deemed unenforceable. In India, the Indian Contract Act, 1872 (the “Contract Act”) embodies the principles/ pre-requisites of contracting and it is important to think through these legal aspects while entering into any agreement.
Basis the terms and conditions that are laid down in an agreement, the agreement may be treated as – enforceable, avoidable or unenforceable -by the Indian Contract Act. First type of an agreement is that which the law recognizes and is enforceable by law; it is called a contract. Second type of an agreement is an avoidable agreement which is enforceable by law at the option of one party only (and not the other party). Lawyers also refer to an avoidable agreement as a voidable contract. The third type of an agreement is one that is not enforceable by law at all. Lawyers refer to them as void agreements.
So, before entering into an agreement, you must go through an agreement line by line and consider if any of the terms and conditions will render the agreement void or voidable, i.e. unenforceable, or avoidable at the option of the opposite party. In order to determine this, you must keep in mind the essentials of a valid contract i.e. an enforceable agreement, which are discussed below:
Enforceable Agreement a.k.a Valid Contract – Essential ingredients
The four essential ingredients of a valid agreement are: “free consent” of parties that are “competent to contract” (think adult/ sound mind) for a “lawful consideration” with a “lawful object”. Consent is said to be “free” when it is not caused due to coercion, undue influence, fraud, misrepresentation or a mistake. The consequence of entering into an agreement which does not satisfy all the essential ingredients is that it could either be treated as void or voidable.
The essentials of a valid agreement are discussed in some detail below:
Unenforceable Agreements a.k.a. Void agreements
Lawfulness of consideration and objects
An agreement where the consideration or object is unlawful is not enforceable i.e. it is void. The consideration or object of an agreement is unlawful if it is forbidden by law; or if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.
Are agreements without consideration – unenforceable?
Principally speaking, an agreement without consideration is not enforceable. However, there are certain exceptions to this rule which are discussed below:
A court may enforce an agreement made without consideration in the following circumstances:
* if it is made on account of natural love and affection between parties standing in a near relation to each other and is expressed in writing and registered; or
* it is a promise to compensate a person who has already voluntarily done something for the promisor; or
* it is a written promise to pay a debt barred by the law of limitation.
Why is adequacy of consideration important?
An agreement to which the consent of the promisor is freely given is not unenforceable merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.
Agreements entered into due to a mistake of fact or law
Mistake as to a matter of fact essential to the agreement
Where parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is not enforceable. On a related note you may keep in mind that an agreement is not avoidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.
A mistake as to a law not in force in India
Also, a mistake as to a law not in force in India, has the same effect as a mistake of fact. Therefore, where parties to an agreement are under a mistake as to a law not in force in India, the agreement may not be enforceable.
It is also important to keep in mind that an agreement is not voidable because it was caused by a mistake as to any law in India.
Agreements in restraint of trade
Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. There are certain exceptions to this basic principle which we will discuss in a separate post.
Agreements in restrain of legal proceedings
An agreement that restricts a party from enforcing its rights under the agreement before a court or tribunal is void to that extent. However, this rule does not render an arbitration clause which is basically an agreement to arbitrate, illegal. On a related note, arbitration clauses in agreements do not make life easier and we will explain why in a subsequent post.
Why is it important for agreements to be clear, simple and precise?
It is because an agreement, the meaning of which is not certain, or capable of being made certain, is not enforceable in law. Please be vary of legalese, cut-copy-paste jobs and vagueness. What we have realized is that if you don’t understand something in the first reading remove it. It is not meant to be there.
The law discourages people from engaging in a game of chance! The why’s around this issue are highly debatable and we could discuss this in another post but for now you should be aware that agreements that relate to gambling are not enforceable. Therefore, you will not be able to sue a person for recovering anything alleged to be won in a game of chance or entrusted to a person to abide the result of any game or other uncertain event on which any gamble is made. Such agreements are also known as agreements by way of wager and are unenforceable.
Avoidable agreements a.k.a. Voidable Agreements
When consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, the agreement is voidable at the option of the party whose consent was so caused. Details of the elements basis which a party can avoid an agreement are discussed below.
Coercion is, among other things, the committing or threatening to commit, any act forbidden by the Indian Penal Code with the intention of causing any person to enter into an agreement.
An agreement is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. In an agreement where a transaction appears unconscionable, on the face of it or through some evidence; the burden of proving that such an agreement was not induced by undue influence will be upon the person in a position to dominate the will of the other. Think e-commerce companies, telecom network operators: could online agreements with them be treated as voidable because of undue-influence? Arguable indeed. Although there are case laws that would guide the finding of undue influence. A large company must ensure that its agreements are fair, or be exposed to the risk of the agreement being considered as one arrived at through undue influence. The consequences of such a finding would lead to the agreement becoming voidable.
In cases where a party, whose consent has been caused by undue influence, seeks to avoid the agreement, any such agreement maybe set aside either absolutely; or if certain benefits have been received under it then the agreement may be avoided on terms and conditions deemed right by the court.
A party to an agreement is said to have acted fraudulently if it suggests a fact that it does not believe to be true itself, or conceals a fact that it is aware of, or makes a promise without the intent of performing it; with the intent to deceive another party or his agent in order to induce the other party to enter into the agreement. Fraud would also include other acts fitted to deceive the other party or any act or omission as the law specifically declares fraudulent.
In order to avoid a claim of fraud you must not keep silent about crucial facts. The facts that you would have wanted to know if you were in the other party’s position.
A party to an agreement is said to have made a misrepresentation where it makes an unwarranted positive assertion of something that is not true, though believed by such a party to be true. A breach of duty which will help a party to the agreement gain an advantage by misleading another to his prejudice will also be construed as misrepresentation. So, when entering into an agreement measure all your duties against this principle. Also, causing a party to an agreement to make a mistake as to the substance of the subject of the agreement will also be considered as misrepresentation, even if done innocently.
Why is it important to be diligent while contracting?
If a party’s consent has been caused by misrepresentation, silence or fraud, the agreement will not be voidable at the option of such a party, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Also, a fraud or misrepresentation which was not the reason for the consent being given by the party to whom such a misrepresentation was made or against whom fraud was practiced, will not render the agreement voidable.
By Pritika Kumar with inputs from Ishita Bisht
This post is a part of a series that we at Cornellia Chambers are writing together to help you understand some of the basics of contracting. In the subsequent posts in this series we will be talking about some of the critical clauses involved in a commercial as well as an investment transaction. If your current circumstances do not allow you to hire a lawyer, we hope that these posts will help you navigate a negotiation/ revision when you need to. Although there are several nuances to every legal principle. These layers have developed (and keep evolving) through case laws. So when and where possible you should consult a lawyer who loves thinking for you.
Next up in this series will be posts that discuss the basic legal principles around a jurisdiction and governing law clause; an arbitration clause; indemnification clause and limitation of liability clause etc. For those of you looking at raising funds, we will also take some glamour away from the ROFRs, ROFOs, TAGs, DRAGs and general investment transaction structures.
Stay tuned for more.
Now don’t forget to “celebrate one agreement; with the adding of chocolate to milk #HomerSimpson ”