What Is A Valid Agreement?

To begin understanding the concept and validity of an agreement, the baseline requirement is to fully understand the essence of the definition of this term. Agreement is defined as “a negotiated and typically legally binding arrangement between parties as to a course of action” in the Oxford Dictionary. 

Section 2(e) of the Indian Contract Act, 1872, defines agreement as thus: “Every promise and every set of promises, forming the consideration for each other, is an agreement”

According to Black’s Law Dictionary, the term “agreement” has been expounded as the following:

“A concord of understanding and intention, between two or more parties, with respect to the effect upon their relative rights and duties, of certain past or future facts or performances. The act of two or more persons, who unite in expressing a mutual and common purpose, with the view of altering their rights and obligations. A coming together of parties in opinion or determination; the union of two or more minds in a thing done or to be done; a mutual assent to do a thing. Agreements are of the following several descriptions, viz.: Conditional agreements, the operation and effect of which depend upon the existence of a supposed state of facts, or the performance of a condition, or the happening of a contingency. Executed agreements, which have reference to past events, or which are at once closed and where nothing further remains to be done by the parties. Executory agreements are such as are to be performed in the future. They are commonly preliminary to other more formal or important contracts or deeds, and are usually evidenced by memoranda, parol promises, etc. Express agreements are those in which the terms and stipulations are specifically declared and avowed by the parties at the time of making the agreement.”

I am not sure whether all of you read that or skipped it, so here's a summary of what an agreement is:

it is the result of proposal from one side and its acceptance by the other. 

Since a “valid agreement”, that is enforceable by law, is the basis for any contract, it is pertinent to look into the components or the elements that validate an agreement and make it possible to make it a contract enforceable by law. 

Section 10 of the Indian Contract Act, 1872, lays down the key points that make an agreement valid and enforceable as a contract in the eyes of law. The main validating features in an agreement, that can be understood through Section 10 of the Indian Contract Act, 1872, are the following: 

1. free consent of all parties entering into the contract
2. competency of all the parties entering into the contract
3. a valid consideration
4. a valid object
5. consensus ad idem or meeting of minds of all the parties entering into a contract
6. the act not being expressly declared to be void

Any agreement that we make that do not satisfy these criteria cannot be a valid agreement in the eyes of law. And, these are just the most basic and sine qua non of any valid agreement. Sometimes, an agreement that fulfills all of the criteria under Section 10 may need something more to make it valid in the eyes of law. 

For example, any agreement and contract for the transfer of a piece of land, or any other immovable property is to be registered compulsorily. A contract that does so without registration is invalid in the eyes of law even if it fully complies with Section 10.

So, we come back to the question: what is a valid agreement?

A valid agreement is one that

a. complies with Section 10 of the Indian Contract Act
b. complies with all mandatory requirements attached to the nature of the contractual agreement under any Indian Law

Fun question: Doesn't consensus ad idem remind you of 'A Horse and Two Goats' by R K Narayan? Or, is it just me every time I hear it?

Unconscionability In Contracts

Unconscionability can be seen as the use of context, not to interpret the promise, but to decide whether the promise should be enforceable. It is generally considered the buyer's responsibility or the responsibility of the person who carries out the contract to fully understand the terms of the contract (caveat emptor). But, according to Walker-Thomas II (US Case), "When a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that consent was ever given to all the terms."

Unconscionable contracts are structured in such a way as to benefit one party and to place harsh, unfair, unreasonable conditions on the other. The unconscionable contract is one which is so gross and unfair in the light of the time and place, and the market standards that it can not be implemented. The unconscionability doctrine enables the court to interfere in the parties' contractual arrangements and change such agreements.

The 199th Law Commission report talks about two kinds of unconscionability in contracts:

1. Procedural Unconscionability: A contract or a term is procedurally unfair if it has resulted in an unjust advantage or unjust disadvantage to one party on account of the conduct of the other party or the 5 manner in which or the circumstances under which the contract has been entered into or the term thereof has been arrived at by the parties. (Recommendation of Law Commission of India, 199th Report)  

2. Substantive Unconscionability A contract or a term thereof shall be treated as unfair if the contract or terms thereof are by themselves harsh, oppressive or unconscionable. If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (Recommendation of Law Commission of India, 199th Report)

In several cases, where the transactions are absolutely unconscionable, Indian courts have stringently come out with a firm hand to annul such transactions. For example, consider a situation when one party is in an extremely powerful and controlling position, and the other is a very weak party, for a consideration that is manifestly poor and grossly insufficient. If they enter into an arrangement to transfer a land in a way that even a common man would not hesitate for a moment to comment that the weaker party has been fully duped, then the unconscionability rule has been used by the courts to ensure that the strong party is not permitted to push the weaker party to the ground.

Unconscionability is a valuable and necessary defense for smaller groups of businesses/producers, especially when they are entering into contracts with huge companies. I have personally come across a case of a small client overridden by a big company, that I worked on closely in my previous internship, and the unconscionability of their contractual clauses was one of the key pleas that the firm placed on behalf of the client.

Calabresi's 2-by-2 Box: On Property and Liability

Damages in contracts, and how it is calculated, can be interestingly explained by Calabresi's 2-by-2 box. His 2-by-2 chart is based on the property, liability and inalienability. 

Initial Entitlement	Injunction / Property Rule	Damages / Liability Rule
Resident	Rule 1: Court issues an injunction against Polluter	Rule 2: Court finds a nuisance but permits pollution to continue if the Polluter chooses to pay damages
Polluter	Rule 3: Court finds the pollution not to be a nuisance and permits the Polluter to continue without paying damages	Rule 4: Court permits Polluter to continue unless Resident chooses to pay Polluter damages in order to enjoin further pollution

In the Common Law of Contract, there are 3 ways to calculate damages.

1. Expectation Damages meaning that the damages will be equal to that value "as good as if contract has been performed".

2. Reliance Damages meaning that the damages will be equal to that value "as good as if no contract was made". 

3. Restitution Damages meaning that the damages will be equal to that value where "breach party would be as good as if no contract was made".

How do we say that these three rules derive and fit under Calabresi's 2-by-2 box? Let's redraw the box with the titles specific to contractual damages.

Initial Entitlement	Injunction / Property Rule	Damages / Liability Rule
Plaintiff	Court issues an injunction against Defendant. This means that the damages will be equal to that value "as good as if contract has been performed". Expectation Damages.	Court finds a nuisance but permits it to continue if the Defendant chooses to pay damages. Here, the damages will be equal to that value "as good as if no contract was made". Reliance Damages.
Defendant	Court finds the it not to be a nuisance and permits the defendant to continue without paying damages. This is not possible. Court will not allow the Defendant to get away, and therefore this box is empty with respect to contractual damages.	Court permits Defendant to continue unless Plaintiff chooses to pay Defendant damages in order to enjoin further nuisance. Here, the damages will be equal to that value where "breach party would be as good as if no contract was made". Restitution Damages.

Contract Law is one of the most basic, and most interesting subject! Hope you had some fun with the 2-by-2 rule. And, I think, this rule and logic can be fit in a lot more situations apart from law!  Where the claimant/plaintiff needs the property back, it would be futile to claim reliance damages, and expectation damages may be better. Therefore, understanding the rule and logic behind the types of damages can be useful while claiming for them. Not every type fits the needs of the claimant.

The Next Sci-fi Plot?

Image from Clipart

I have a habit of sitting in class, and connecting the laws I learn to weave a story, a fantastic legal thriller. Perry Mason and John Grisham have fed in too much imagination. I remember sitting in the Contracts class in my second semester in law school listening to the lecture. Our subject of discussion that day was s. 10 of the Indian Contract Act which talks about the validity of a contract or an agreement. Our professor casually threw at us a statement- what if in the future intelligent computers make contracts? Will the same validity criteria hold good then, too?

Of all that he said that day, my mind took fancy to this single statement. A simple, amusing thought: fast forward into the future and see through the lens, to observe two computers placed royally in a five-star meeting hall negotiating and entering into a contract for their respective parties. Good plot for a sci-fi novel, with a villain and a few twists and turns?

Jargon like AI, Machine Learning, Deep Learning, and over-exaggerated threats of an army of computers taking control and wreaking havoc on humans, are all very popular. But how many of us actually know what they mean? I did not, though I was well aware of all the jargon in use. To further explore and understand if this is even possible, I did a small introductory course on AI.

AI can be broken into two parts Artificial Narrow Intelligence (ANI) and Artificial General Intelligence (AGI). While there has been tons of progress in ANI, with all the self-driving cars, speech recognition, visual inspection devices, spam filtering applications, etc., there has been next to no progress in AGI.

So, here’s an imperfect rule I learnt during my most basic quest to understand these terms: anything, any job that we do under a second of thought, is automated or will soon be automated. So, where there is a series of tasks one after another which takes an hour to complete, where each task only requires a second of our thought, it can be automated to be efficient in time, resources and produce an almost-error free result. For example, in speech recognition, though translation of a 15 minute podcast may take us sometime, every word we hear takes us less than a fraction of a second to be understood and written. So, it has been successfully automated considering other factors such as language, accent, etc.

Now, connecting these aspects to law, we need to ponder on two important things.

- What can technology do and what can’t it do in the legal field?
- What proportion of the lawyer’s roles does it take over?

Most clerical jobs such as calculation of stamp duties, searching of case laws, etc. has already been automated and there are a numerous menial tasks through the day of a lawyer that can be further automated.

But can two computers make a contract? The general clauses that exist in a format in every deed of a particular type may be automated, but the negotiation of clauses cannot be done under a second of human thought. Also, there are several unknown extraneous situations that come up between the two parties. And, since there is no progress in AGI, it may be next to impossible for computers to gauge such aspects as of now or in the near future.

But, in a hypothetical situation, if the computers were able to make contracts in representation of their human parties, what would be the criteria of a valid contract? Seems like a question that I’ve thought real less about, as I set around understanding if that is even possible. I can at least say that I do know what the terms mean and their most basic logic. But some good food for thought, isn’t it?

Endnote: I think it would be an interesting sci-fi plot. Should I unleash the imaginative writer in me and give the world its next bestseller?