Karan Modi, A 2nd-Year, BK Mercantile Bank Law College, Student has written this article. It explains all “Essentials of a valid Contract with Case Laws”
Introduction:
In general, the contract may seem like a legal word but it is a layman’s word. What if I say in daily life our day starts with a contract and the day ends with the contract? In normal life, we don’t think about these small details.
Let me give you some examples of daily life where we knowingly or unknowingly enter into contracts, like buying milk, booking a cab or movie tickets, and many daily life transitions. In all these, we are entering into a contract with the shopkeeper.
In a legal sense, a contract refers to “an agreement that is recognized and enforceable by law.”
What is a valid contract?
The interpretation of contract has been done by many scholars like:
“Every agreement and promise enforceable at law is a contract”
Sir Fredrick Pollock
“A contract is an agreement creating and defining obligations between th
-Salmond
The law relating to contracts is governed by the Indian Contract Act, 1972. The Act came into force on the first day of September 1872.
As per Section 2(h) of the Indian Contract Act, 1872. Contract means “an agreement enforceable by law”.
Essentials of a valid contract
Section 10 of the Indian Contract Act, 1872 provides that all agreements are contract 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 expressly declared to be void.
The following are the essentials of a valid contract:-
- An Offer
- Acceptance
- The intention of creating a legal relationship
- Lawful object
- Lawful consideration
- Capacity of parties
- Free consent
An Offer – Essentials of Valid Contract
The formation of a contract begins with an offer and agreement between two parties.
So basically an agreement as per section 2(e) of the Indian Contract Act, 1872 “every promise and every set of promise, forming the consideration with each other is an agreement.”
Let’s come back to the topic of an offer; thus, when the offeror makes a definite proposal to the offeree and the offeree accepts it, there is a meeting of the mind of the parties and a contract comes into existence assuming all the other elements are also present. Another word for an offer is the proposal. Section 2(a) of the Indian Contract Act defines an offer or proposal as “when one person signifies his willingness to do or abstain from doing anything to obtain the assent of that other to such act or abstinence, he said to make an offer or a proposal”.
There are many kinds of an offer such as; Express offers, implied offers, General offers, Specific offers, Cross offers, Counteroffers, and Standing offers.
A valid offer must comply with the following rules:
- An offer must be clear, definite, and complete and it must not be vague.
- An offer must be communicated to the offeree. An offer becomes effective only when it has been communicated to the offeree.
- The communication of an offer may be made by express word or writing or it may be implied by conduct.
- The communication of an offer may be general or specific.
Case: Har bhajan Lal v Har charan Lal (AIR 1925 All. 539)
In this case, the son of Har Charan Lal ran away from home and his father issued a pamphlet offering a reward of ₹ 500 to anybody who would bring the boy home. Plaintiff Har Bhajan Lal discovered him at Bareilly Junction railway station. Wherein he took the boy to the railway police station and informed the defendant that he had found his son through telegram. Father claimed no acceptance, so no entitlement to reward for the offer at the time.
Acceptance – Essentials of Valid Contract
An acceptance is like a stick of matchbox in front of a train full of gunpowder
- Anson
A Contract starts after the acceptance of an offer. Under section 2(b) when a person to whom a proposal is made signifies his assent thereto, the proposal is said to be accepted.
Rules governing Acceptance:-
- Acceptance may be by words, written, express, or implied
- Acceptance must be absolute.
- Acceptance must be communicated to the offeror, where the offeree merely intended to accept but does not communicate his acceptance to the offeror, and then there is no contract.
- Mere silence on the part of the offeree does not amount to acceptance
- Acceptance must be given within a reasonable or stipulated time as per the agreement.
Case: lalman shukla vs gautidatt 1913
Facts: When Gauri Dutt’s nephew went missing, he sent his servants to search for him, including Lalman Shukla who was given money for expenses. Gauri Dutt announced a reward of 499 rupees for whoever found his nephew as Lalman Shukla left the house, but Lalman Shukla was unaware of this. Lalman Shukla found the nephew and returned home, but six months later, Gauri Dutt dismissed him from his job. After being removed from the job The plaintiff claimed that money which was announced by Gauri Dutt, but Gauri Dutt for not giving the said reward.
Issue: 1) Whether there is a valid offer and acceptance or not
2) Whether Lalman Shukla is entitled to any rewards from Gauri Dutt
Judgment: As per the Indian Contract Act, of 1872 there is a need for acceptance and prior knowledge of the offer before a valid contract between the parties. Here the plaintiff does not know about the offer.
The judge held that the plaintiff was fulfilling his obligations as a servant of tracing the missing boy which was a part of his duty. Therefore, the plaintiff’s suit against the defendant was completely dismissed by the court.
The Intention of creating a legal relationship – Essentials of Valid Contract
There must be an intention among the parties that the agreement should be attached by legal consequences and create a legal obligation.
If there is no intention on the part of the other parties then there is no contract between them.
Case: Balfour vs. Balfour
Facts: Mr. Balfour worked for the Government in Ceylon Mrs. Balfour was living with him. In 1915, they both came back to England during Mr. Balfour’s leave. Mrs. Blafour’s doctor advised her to stay in England because the climate in Ceylon would be detrimental to her health. Mr. Balfour orally promised her £30 a month until she came back to Ceylon. They drifted apart, and Mr. Balfour wrote saying it was better that they remain apart. In March 1918, Mrs. Balfour sued him to keep up with the monthly £30 payments.
Issue: Is Mr. Balfour liable to pay money to Mrs. Balfour?
Judgment: The appeal made by Mr. Balfour succeeded and the court ruled that there was no legal relationship or any legal contract between the wife and husband. If the parties intend to create a legal relationship can be decided by examining the circumstances under which the contract was made and executed. Therefore, Mr. Balfour was not legally bound to pay money to Mrs. Balfour.
Lawful consideration – Essentials of Valid Contract
Consideration is one of the elements of the valid contract
Three is a maxim for the consideration “quid-pro-quo” which means something in return. After the acceptance by the promisee, he needs to consider promiser to complete the transition.
Illustration: If A makes a contract with C to buy his car for ₹ 500000, then A needs to Pay the amount to C if he wants to buy a car from C.
Consideration is an act or forbearance of one party or the promise thereof is a price for which the promise of the other is brought.
- Sir Fredrick Pollock
As per section 2(d) of the Indian contract Act, 1872 “When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promise to do or abstains from doing something, such act or abstinence or promise is called a consideration for the promise”.
The contract is not enforceable if the consideration is not paid and only a promise is made. e.g… If A promises to B give ₹ 1000 and after some time A change his mind, then B cannot succeed against A for breach of promise because B has not given something in return. For fulfillment of the promise, consideration is necessary.
But the consideration must be lawful; if the consideration is unlawful then the contract is void.
The capacity of Parties – Essentials of Valid Contract
The parties entering into a contract should understand the legal implications, both must have a sound mind and be major.
As per the Indian contract Act, 1872 following persons are not competent to contract
- Minors:
According to the Indian Majority Act, of 1875, a minor person, has not completed the age of 18 years.
A contract with a minor is altogether void in law and the minor cannot bind himself to the contract. If any benefit is obtained by a minor, such benefit cannot be asked to repay.
Since the contract with the minor is void ab into, it cannot be ratified by the minor on attaining the age of majority.
Case:Mohiri Bibi vs. Dharamadas Ghose
In this particular case, it is important to note that a minor borrowed ₹ 20000 from a money lender and executed a mortgage in favor of the lender. However, when the lender filed a lawsuit, the court held that the contract made by the minor was void. As a result, the minor cannot be compelled to repay the amount borrowed from the money lender.
It is a leading case that the minor cannot contract and it is void.
Lunatics:
A person with an unsound mind or incapable of understanding cannot enter into a contract therefore such an agreement is void.
Any person disqualified from contracting by any law to which they are subject:
A person declared by law like an alien enemy, insolvent person, or any foreign sovereign.
Free consent – Essentials of Valid Contract
For valid contract consent is necessary but the consent must be free. Consent is not free when it is caused by coercion, undue influence, misrepresentation, fraud, or mistake. If of any these elements are present in the contract then the contract may be void or voidable.
Where there is no free consent, there can be no contract and when there is consent, it is not free. Hence, the contract is voidable at the option of the party whose consent is not free.
Coercion – Essentials of Valid Contract
Coercion is defined in section 15 of the Indian Contract Act, 1872. Which means “committing or threatening to commit any act forbidden by the Indian Penal Code or unlawful detaining or threatening to detain, any property to the prejudice of any person whatever the intention of causing any person to agree”.
Illustration: Where X compels Y to sign an agreement or X will hurt Y’s son, if Y signs the agreement it would amount to coercion.
Undue influence – Essentials of Valid Contract
As per section 16 of the Indian Contract Act, a contract is said to create by undue influence “where the relations 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.”
The elements of undue influence are:-
- a dominant position
- the use of it to obtain an unfair advantage
Sub-section (2) of section 16 provides that the following relationship between a person is deemed to be in a position to dominate the will of another:-
E.g. minor and guardian, trustee and beneficiary, solicitor and client, or doctor and patient
Misrepresent – Essentials of Valid Contract
Section 18 of the Indian Contract Act, 1872 says, it is a form of a statement made proceeding to the contract being completed or misleading the party of the contract.
Illustration: X promises Y to sell high-quality wheat, believing that X has a stock of it in his godown. Y transfers the money and then x realizes that there is no stock of high wheat, this is called misrepresentation.
Fraud – Essentials of Valid Contract
It is defined in section 17 of the Indian Contract Act, 1872, it is an untrue statement made knowingly or without belief in its truth or carelessly whether it be true or false with intent to deceive.
Illustration: A is selling a car and knows that there is a problem with it advertise that car is in perfect condition and sold it to B, this amount to fraud.
Mistake – Essentials of Valid Contract
A mistake like a miscalculation or error of judgment by one or both parties does not affect the validity of the contract.
If both parties make mistake it is called a mutual mistake and when one of the parties make mistake it is called a unilateral mistake.
Case: Cundy vs. Lindsay [(1878) 3 A.C.459]
The given scenario involves a legal dispute between Lindsay Company, Blenkarn, and Cundy over the ownership of some goods. It appears that Blenkarn, who identified himself as reputed trader Blankiron, had placed an order with Lindsay Company for the said goods. However, Blenkarn sold the goods to Cundy without paying Lindsay Company. In response, Lindsay Company sued Cundy to recover the value of the goods. However, the court ruled that there was no contractual agreement between Lindsay Company and Blenkarn, and therefore, Cundy had no right or title to the goods in question.
- Mistake of facts
- Mistake of law
Lawful object – Essentials of Valid Contract
One of the elements of a valid contract is that the object of the contract should be lawful. As per section 10 of the Indian Contract Act, 1872 “All agreement contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with the lawful object… ”
Section 23 of the Indian Contract Act, of 1872 provides that object or consideration of an agreement is lawful unless it is;
- Forbidden by the law
- Of such nature that if permitted it would defeat the provisions of law
- Is fraudulent
- Involve or implies injury to the person or property
- The court regarded it as immoral or opposed to public policy
Each of these objects or considerations of an agreement is unlawful. Every agreement of which the object or consideration is unlawful is void.
Illustration = If X promises to obtain Y employment in the government service and Y promise to pay ₹ 50000 to X. The agreement is void as consideration for it is unlawful.
Conclusion
As we saw in the article the contract comes into use in our daily life and most importantly in trade, commerce, and industry. Sometimes it will benefit us if we know what a valid contract is and we can avoid any fraud. Hence it is important to know the elements of a valid contract.
Reference
Indian Contract Act, 1872
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