Law of Contract basically relates to the essential elements of a valid contract, the rules for performance and discharge of a contract and the remedies available to the aggrieved party in cases of the breach of the contract.
There are two basic essential elements of a contract
- An agreement
- Its enforceability by law
These two components together constitute the basis for a contract and are explained as follows:
Section 2(e) defines agreement as “every promise or every set of promises forming the consideration for each other“. Further, Section 2 (b) defines promise as, “a proposal when accepted become a promise.”
In other words, an agreement consists of a proposal or an offer by one party and its acceptance by the other party. It also implies that the parties have a common intention about the subject-matter of their agreement. Two parties must be thinking of the same thing in the same sense. Thus agreement is the outcome of two consenting minds i.e. ‘consensus ad idem‘.
2. Enforceability of Agreement by law
Agreements based on its enforceability by law are of two types-
- Unenforceable agreement
- Enforceable agreement
All agreements to become a contract must be enforceable by law . In other words, the parties to an agreement must be bound to perform their promises and in case of default by either of them, must intend to sue and be sued. On the other hand, all those agreements are said to be unenforceable in which an aggrieved party cannot go to a law court and that is left at the mercy of the parties only. It is also a gentleman’s promise which may or may not be fulfilled by the promisor.
All these agreement remain only an agreement between the parties and they never become a contract in the eyes of law, because they are merely social, domestic or moral arrangements, which lack a basic intention to create legal relations. All those agreements are said to be enforceable in which the aggrieved party has a right to approach a law court to get the agreement enforced and the other party is held liable either to perform the agreement or to face the consequence for breach of that agreement. Usually it is a legal presumption that all commercial agreements do have a basic intention to create a legal relationship and therefore they are enforceable at law. All these agreement which are enforceable at law are contracts.
This also implies that unenforceable agreements remain agreements only and cannot be converted into a valid contract and only enforceable agreements are converted into a valid contract. Therefore we can conclude that: “All contracts are agreements but all agreements are not contracts.” An agreement, to be enforceable by law, must possess the essential elements of a valid contract as contained in Section 10 of the Indian Contract
The essential elements of a valid contract as contained in Section 10 of the Indian Contract Act are .
According to Section 10, “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 are not expressly declared to be void.”
Simplifying the same, all agreements are contracts, if they are made–
- By free consent of the parties,
- competent to contract,
- for a lawful consideration
- with a lawful object, and
- not hereby expressly declared to be void
Along with the elements mentioned under Section 10 there are certain other essential elements of a valid contract which may be mentioned as follows –
1. Proper Offer and Acceptance:
There must be at least two parties- one making the offer and the other accepting it. Such offer and acceptance must be valid. An offer to be valid must fulfill certain conditions, such as it must intend to create legal relations, its terms must be certain and unambiguous, it must be communicated to the person to whom it is made, etc. An acceptance to be valid must fulfill certain conditions, such as it must be absolute and unqualified, it must be made in the prescribed manner and it must be communicated by an authorized person before the offer lapses.
2. Intention to Create Legal Relationship:
The requirement of intention to create legal relations in contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts. For example you may have an agreed to take a friend for a movie or for dinner. You may have a moral duty to honour that agreement but not a legal duty to do so. This is because in general the parties to such agreements do not intend to be legally bound and the law seeks to mirror the party’s wishes.
In order to determine which agreements are legally binding and have an intention to create legal relations, the law draws a distinction between social, moral, domestic and religious agreements and agreements made in a commercial context. There must be an intention among the parties to create a legal relationship. In case of social or domestic agreements, the usual presumption is that the parties do not intend to create legal relationship but in commercial or business agreements, the usual presumption is that the parties intend to create legal relationship unless otherwise agreed upon.
Example: X invited Y to a dinner Y accepted the invitation. It is a social agreement. If X fails to serve dinner to Y, Y cannot go to the courts of law for enforcing the agreement. Similarly, if Y fails to attend the dinner, X cannot go to the courts of law for enforcing the agreement.
RELEVANT CASES ON THIS POINT:
- Rose & Frank Co. v. Crompton Bros. (1925)
- Balfour v. Balfour (1919)
3. Capacity of Parties:
As per the requirement of Sec. 10, the parties to an agreement must be competent to contract. In other words, they must be capable or competent to enter into a contract. If either of the parties does not have the capacity to contract then the contract is not valid. According to Section 11 of Indian Contract Act, 1872, “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.” Therefore, other way round, following persons are incompetent to contract-
- Persons of unsound mind, and
- Persons disqualified by law to which they are subject.
So, the person to be competent to contract must be major, must be of sound mind and must not be declared disqualified from contracting by any law to which he is subject. If the parties to agreement are not competent to contract, then no valid contract comes into existence.
RELEVANT CASE: Mohiri Bibi v. Dharmodas Ghosh (Landmark case on minor’s contract. Minor’s contract has been held as void ab initio.)
4. Lawful Consideration:
An agreement must be supported by lawful consideration. Consideration means something in return. In the words of Pollock, “Consideration is the price for which the promise of another is bought.” Consideration is known as quid pro-quo i.e. something in return. Contract Act not only requires a consideration rather it prescribes for a lawful consideration. Now, what constitutes a lawful consideration has been explained under Section 23 of the Indian Contract Act, 1872, according to which, “The consideration is considered lawful unless it is forbidden by law or is of such a nature that if permitted would defeat the provisions of any law, or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy.”
Example: A agrees to sell his car to B for Rs.1,00,000. Here B’s promise to pay Rs.1,00,000 is the consideration for A’s promise to sell the car and A’s promise to sell the car is the consideration for B’s promise to pay Rs.1,00,000.
5. Lawful Object:
The object of an agreement must be lawful. According to Section 23 of the Indian Contract Act, 1872, “the object is considered lawful unless-
- it is forbidden by law;
- of such nature that if permitted it would defeat the provision of any law;
- it is fraudulent;
- involves an injury to the person or property of any other;
- the court regards it as immoral or opposed to public policy.”
Example: X, Y and Z enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud. The agreement is void because its object is unlawful.
6. Free Consent:
There must be free consent of the parties to the contact. Free consent of all the parties to a contract is also one of the essential elements of a valid contract as per requirement of Section 10. The parties to a contract should have identity of minds. This is called consensus ad idem in English Law. Consent has been defined under Sec. 13 of the Contract Act as follows-
“Two or more person are said to consent when they agree upon the same thing in the same sense” (consensus ad idem). It means that there is no contract if the parties have not agreed upon the same thing in the same sense.
Further, Contract Act requires not only consent but a free consent. According to Section 14, consent is said to be free when it is not caused by-
- Coercion, or
- Undue influence, or
- Fraud, or
- Misrepresentation, or
A contract which is valid in all other respects may still fail because there is no real consent to it by one or both of the parties.
7. Agreement not expressly declared void:
The agreement must not have been expressly declared void under the provisions of Sections 24 to 30 of the Indian Contract Act, 1872. (For example- Agreements in restraint of trade, also marriage, legal proceedings and agreement by way of wager have been expressly declared as void under the Act itself.
Example: X promised to marry none else except Y and in default pay her Rs.1,00,000. X married Z and Y sued X for the recovery of Rs.1,00,000. It was held that Y was not entitled to recover anything because this agreement was in restraint of marriage and as such void.
8. Certainty of meaning:
The terms of the agreement must be certain and also unambiguous. According to Section 29 of the Indian Contract Act, 1872, “Agreements the meaning of which is not certain or capable of being made certain are void.”
9. Possibility of Performance:
The terms of the agreement must be such as are capable of performance. If the act is impossible in itself, physically or legally, it cannot be enforced at law. According to Section 56, “An agreement to do an impossible act is void.”
Example: X agrees with Y to discover treasure by magic and Y agrees to pay Rs 1,000 to X. This agreement is void because it is an agreement to do an impossible act. Example II: X agrees with Y to enclose some area between two parallel lines and Y agrees to pay Rs 1,000 to X. This agreement is void because it is an agreement to do an impossible act.
10. Legal Formalities must be complete:
The agreement must comply with the necessary formalities as to writing, registration, stamping etc., if any required in order to make it enforceable by law. An oral contract is a perfectly valid contract, but not in those cases where writing, registration etc. is required by some statute. But, in India, writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments, memorandum and articles of association of a company, etc. Registration is required in cases of documents falling within the scope of Section 17 of the Registration Act.
Example: An oral agreement for arbitration is unenforceable because the law requires that arbitration agreement must be in writing.
Therefore the essential elements of a valid contract can be divided in three parts as follow-
- Two Basic essential elements 1) agreement 2) Its enforceability by law
- Essential element of a valid contract given under section 10 of Indian contract act
- And other essential elements that are important for a valid contract (described above in one heading as, (Along with the elements mentioned under Section 10 there are certain other essential elements of a valid contract which may be mentioned as follows)
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