Essential Elements Of Valid Contract

Introduction

According to Section 2(h) of the Indian Contract Act, 1872, a contract refers to an agreement enforceable by law. As clear from the usage of the phrase ‘enforceable by law’, such an agreement not backed by the provisions of law is not a contract. For example, an agreement to go cycling on a particular date is not a contract. Enforceable by law also refers to when an agreement has only the force of law for those who are parties to it, and a breach of those obligations would result in legal action, including contract repudiation.  Example: A signs a contract with B to sell his house for Rs. 1,00,00,000. In this case, A must sell his home and B must pay Rs. 1,00,00,000. This is an illustration of a legally valid agreement.

To become a contract, it has to meet the requirements or the essentials specified in Section 10 of the Act, which has been discussed subsequently.

Section 10 states, “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.”

Thus, an agreement refers to an understanding between two competent parties to fulfill reciprocal promises. This understanding is reached through an offer and its unconditional and absolute acceptance. The parties may agree through mutual negotiations to realize a particular objective in exchange for a sum, called ‘consideration’.

The following essentials can be carved out from the definition:

  1. There must be two parties at least
  2. There must be a Proposal or Offer
  3. There must be an intention to create a legal relationship
  4. There must be unconditional Acceptance of the offer
  5. There should be Free Consent
  6. There must be consensus-ad-idem or meeting of mind of the parties
  7. The agreement should be between Parties who are competent to contract
  8. There must be a lawful Consideration involved
  9. The Object in respect of the agreement must be lawful
  10. The agreement must not be ‘impossible’ to perform.
  11. The agreement must not be Expressly declared to be Void

Essential Elements of Valid Contract

Offer and Acceptance

Offer also called ‘proposal’ has been defined under Section 2(a) of the Indian Contract Act, 1872 as: “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” Likewise, Acceptance has been defined under section 2 (b) as: “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.” This can be explained with the illustration: X’s willingness to sell his study table to Y for Rs. 10,000 if Y accepts to buy the same, amounts to an offer by A for the sale of the table. Following are some rules to be observed while making an offer and communicating acceptance to constitute a contract:-

1. There must be two or more parties in an agreement, one making the offer and the other(s) accepting it. The offer may be specific or general; standing, continuing, or open. The acceptance must be made while the offer is still existing.

2. There must be an offer and not merely an invitation to treat. Where items are displayed in a shop, it is not an offer, but an ‘invitation to treat’. In fact, the buyer in such a case is said to be the offeror and the shopkeeper, the offeree[1]. In Harvey Facey[2], it was held that mere ‘quotation of price’ did not constitute an offer.

3. There must be an intention to create a legal relationship. In Balfour Balfour,[3] a husband agreed to pay his wife a specific sum as maintenance every month while he was overseas. However, the promised sum was not paid by the husband. The wife filed a lawsuit against him to get the money back. It was held that he wasn’t bound to pay maintenance since it was a social agreement and the parties did not intend to impose any legal responsibilities.

4. The terms of the contract must be certain and clear.[4]

5. The acceptance must be ‘absolute’ and ‘unqualified’, i.e., it must be accepted wholly and unconditionally.

6. The offer may be expressly communicated orally or in written, or implied. As per section 4 of the Act, such communication is complete once it comes to the knowledge of the offeree. Similarly, the acceptance may be made to the offeror expressly, or impliedly. It must be made in a reasonable manner or as prescribed in the offer and must come to the knowledge of the offeror.

7. A contract does not have to be in writing to be valid under the Contract Act. However, in some circumstances, the Act requires that the agreement is in writing. For example, under the Transfer of Property Act of 1882, an agreement for the sale of immovable property must be in writing and recorded. In this case, the agreement must follow all of the appropriate procedures, such as writing, registration, and so on. If certain legal requirements are not followed, the contract is not legally enforceable.

The offer and acceptance must follow the rules set forth in the Act. The acceptance must likewise follow the required procedure and be informed to the offeror. The agreement is not enforceable unless and until such requirements for the offer and acceptance are met.

The free and genuine consent of the contracting parties is required for a contract to be legitimate. They must not have signed the deal under duress or fear. According to Section 14, consent is said to be free when it is not caused by

1. Coercion[5]: It occurs when a person commits or threatens to conduct an act prohibited by the Indian Penal Code, or unlawfully detains or threatens to detain an object with the aim of forcing a person to enter into a contract.

Illustration A threatens to kill B if B does not agree to sell her property to A at the stated price; Y’s consent, in this case, has been obtained by coercion.

2. Undue influence[6]: It occurs when one party has a position of dominance over the other and abuses that power to gain an unfair advantage over the other party. It usually happens in a fiduciary relation, where the dominated person is affected due to reasons of old age, illness, or mental distress.

IllustrationA, an old, blind, and illiterate tribal woman executed a sale deed of her property in favour of B, on whom she was dependant. There was no consideration given for the same. Moreover, B couldn’t show that her consent wasn’t vitiated by ‘undue influence’. It was held to be ‘undue influence.[7]

3. Fraud[8]: It is defined as deception by one of the parties, active concealment of facts, or when one of the parties makes false assertions on purpose. As a result, if the deception is made with the full awareness that it is false, or recklessly without verifying for the truth, or without any intention to perform the contract, it is considered fraudulent.

Illustration B, having discovered a deposit of iron ore in A’s land, employs measures to conceal the ore’s presence from A, and is successful in doing so; as a result of A’s ignorance, he purchases the estate at a bargain.

The contract is voidable under Section 2(1) of the Act. As a result, A may be able to cancel the contract since B has committed fraud against him. The fraud is of concealing of fact.

4. Misrepresentation[9]: When a party makes a representation that is false, inaccurate, or erroneous, it is called misrepresentation. The difference is that this time the misstatement is unintentional. The person who makes the statement feels it is correct.

Illustration X sells a dog to Y which is unsound but X himself doesn’t know about this fact. He tells Y that the dog is sound. In this case, there is a misrepresentation.

5. Mistake[10]: It refers to misunderstanding or misapprehension between the parties regarding the core material facts of the agreement. It may be unilateral or bilateral.

IllustrationA, being entitled to an estate for the life of B, agrees it to C. B was dead at the time of the agreement, but both parties were unaware of the fact. The agreement is void.[11]

The contract would be voidable at the discretion of the injured party if any of the first four factors were employed to acquire approval.  However, in case of a mistake regarding the material facts of the agreement by the parties, the contract would be void.

Competency of Parties

The parties must be legally capable of entering into contractual obligations. As per Section 11 of the Indian Contract Act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”

From this definition, it is clear that the following categories of persons cannot enter into a contract:

  1. Minor, i.e., a person below the age of 18;
  2. Persons of Unsound Mind, or those who are incapable of understanding the nature of the contract and forming a judgment as to its consequence; and
  3. Persons disqualified from contracting by law.

In exceptional circumstances, such persons may enter into contractual arrangements, such as for the supply of necessaries, or as a beneficiary. A lunatic may enter into a contract during his or her lucid intervals.

Lawful Consideration and Object

Consideration refers to something given in return for a promise or obligation performed. In other words, it is based on the maxim, ‘quid pro quo’ or ‘something for something. This ‘something’ must be a monetary payment, or a reciprocal promise, or an act or abstinence to be undertaken by the promisee. Except in certain cases, consideration is an essential component of every valid contract, without which, an agreement is void. ‘Lawful’ consideration denotes a form of consideration which has not been expressly declared by law to be illegal. That is to say, it must not be forbidden by law, fraudulent, against the public policy, or involve injury to a person or property[12]. The same applies to ‘object’ or the purpose of the contract.

Section 2 (d) of the Indian Contract Act, 1872 describes ‘consideration’ as follows:

“When, at the desire of the promisor, the promise or any other person has done or abstained from doing something, or promises to do or to abstain from doing something, such an act or abstinence or promise is called a consideration for the promise.”

From the definition, some rules regarding consideration can be derived as follows:

  1. It must be given at the desire of the promisor.
  2. It must be given by the promise or any other third person.
  3. It may be passed, present (executed), or future (executory).

Illustrations:

  1. X offers to sell her watch. Y approves to pay the agreed amount of ₹5000. The same is an example of lawful consideration.
  2. X promises Y to drop a prosecution which he has instituted against Y for robbery, and Y promises to restore the value of the things taken. The agreement is void, as its object is unlawful.[13]

Must not be expressly declared to be void

Some agreements have been declared void under the act and under no circumstances, such agreements can be enforced. These have been mentioned in various sections, ranging from s. 23 to 56. Some of these agreements are as follows:

  1. Agreement of which the consideration or the object is not lawful (ss. 23 and 24)
  2. Agreement without Consideration (s. 25)
  3. Agreement in restraint of marriage (s. 26)
  4. Agreement in restraint of trade (s. 27)
  5. Agreement in restraint of legal proceedings (s. 28)
  6. The agreement which is ambiguous and uncertain (s. 29)
  7. Agreement by way of the wager (s. 30)
  8. Agreement to do an impossible act (s. 56)

Conclusion

Contracts play a vital role in everyone’s dealings in life. The parties must meet the conditions listed above in order to enter a contract. In a nutshell, having all of the above mentioned essential elements of a valid contract is critical. Only if all of the major elements are included in a contract will it be considered legally binding.

Frequently Asked Questions (FAQs) On Essential Elements of Valid Contract

1. Can a minor enter into a contract?

Yes, a minor can enter into a contract for necessaries, such as food, clothing, lodging etc. The minor would be liable to reimburse the person supplying necessaries from his or her property.

2. Can an agreement made by a minor be enforceable if it is ratified upon attaining majority?

No, a minor’s agreement is void-ab-initio and not capable of subsequent ratified upon attaining majority. It is like a dead letter and cannot be revived.

3. What is the difference between void and voidable agreements?

A void agreement is void-ab-initio, or void and unenforceable from its inception, whereas a voidable agreement is enforceable at the option of one party, for instance, the party whose consent has been vitiated by fraud, misrepresentation, coercion, or undue influence.

4. What is the difference between illegal and void agreements?

A void agreement is one that has lost its legal standing, whereas an unlawful agreement is one that is not permitted by law. A void agreement is not punishable by law; however, an illegal agreement is, and the parties to it are subject to penalties under the Indian Penal Code (IPC).

5. Are contracts made orally legally valid?

An oral agreement is just as legitimate as a written agreement. An oral agreement’s validity cannot be questioned provided it complies with the conditions set out in section 10 of the Indian Contract Act, 1872. In the event of a disagreement, however, proving the existence or specific terms of the agreement is always challenging.

References

1. R.K. Bangia, Contract-I (Allahabad Law Agency, Haryana, 7thedn., 2017).

2. Essential elements of a Valid Contract, available at:https://blog.ipleaders.in/essentials-of-a-valid-contract/ (last visited on September 9, 2021).

3. Essential elements of a valid contract under the Indian Contract Act,1872: A Comprehensive Analysis, available at: https://www.legalserviceindia.com/legal/article-5512-essentials-of-a-valid-contract-under-the-indian-contract-act-1872-a-comprehensive-analysis.html (last visited on September 9, 2021).

[1]See Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd. (1952) 2 Q.B. 795

[2](1893) A.C. 552

[3](1919) 2K.B. 571

[4]The Indian Contract Act, 1872, s. 29

[5]The Indian Contract Act, 1872, s. 15

[6]Id., s. 16

[7]Sethani v. Bhanna A.I.R. 1993 S.C. 956

[8]Id., s. 17

[9]Id., s. 18

[10]Id., ss. 20,21 and 22.

[11]Illustration (c) to s. 20

[12]The Indian Contract Act, 1872, s. 23

[13]Illustration (h) to s. 23.

Note – The information contained in this post is for general information purposes only. We try our level best to avoid any misinformation or abusive content. If you found any of such content on this website, please report us at info@lawcorner.in

Interested to publish your article on our website? Click Here to submit your article.

Tazeen Ahmed

Tazeen Ahmed is a first-year law student at Jamia Millia Islamia, New Delhi, inquisitive about Constitutional Law, Family Law, Corporate Law, Human Rights Law, and Criminal Law. She is a proficient writer, skilled in conducting legal research and organizing her articulations on social-legal and political issues. She holds a sound academic record, having scored 93.80 % in AISSE and 95% in both Political Science and English Language in AISSCE. She has held prestigious positions in the Student Council and been adjudged the ‘Student of the Year 2016, Gurgaon’ by UnivQuest. She has formerly served as a legal intern at ubadvocate, where her performance was marked “outstanding” by the team and is an Editor at The Wall of Justice blog. She is also an avid reader, a poet, and a political enthusiast. Above all, she is a dedicated and dynamic soul, ever-prepared to undertake challenging roles in the legal battlefield, and treats constructive criticisms as stepping stones towards progress.

Leave a Comment