In our day to day life, we entered a wide range of contracts ranging from buying chocolate from a confectionery shop to indulging in a high stake transactional matter. These contracts are a part and parcel of our daily life. But, the question that emerges in front of us is whether each and every such contract is valid in the eyes of law?
To answer this, it is imperative to understand the meaning of the term “agreement”. It is defined as a mutual promise between two parties in return for some consideration. When an offer is accepted by the other party for consideration, it forms an agreement. However, the acceptance should be free and absolute and consideration should be valid in the eyes of law. The consideration could be of rupee 1 or 1 lakh, it need not be appropriate, it should be valid only.
All the contracts are agreements but all agreements are not contracts. There are certain elements that are necessary to convert an agreement into a contract. If any of a single element is not satisfied, it will not be considered legally binding.
In this article, we will explore the various essentials of a valid contract.
Definition of contracts
All the contracts in India are governed by the provision of the Indian Contract Act, 1872. As per Section 10 of the aforesaid act,
“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.”
In layman terms, a contract is an agreement in which the two parties put into writing an agreement that contains certain rights and obligations for each other. When this agreement is enforceable by law, it becomes a contract. The term enforcement means that it has acquired legal recognition and the violation would attract punishment prescribed by the law.
The relationship between contract and agreement can be summarised through the following equation.
Agreement + enforcement = Contract
Essential Elements of a Valid Contract
The essentials of a valid contract are given under Section 10 of the Contract Act, 1872. Now, let’s discuss the essential elements of a valid contract one by one.
The first requirement of a legally enforceable contract is that there must be an offer. Sec 2(a) of the Contract act, 1872 defines proposal, in simple words, it conveys that when a person tries to know the willingness of others with a view to obtaining the assent of that other, it is called a proposal. It means when party A proposes an idea to act or abstinence, that party wants party B to be in contact with it. The idea is proposed to understand if party B is interested in it or not.
In an offer, there must be a willingness to do a particular thing (a positive act) or abstain from doing something (a negative action). It is very essential to note that the offer must be made with the objective of getting a favourable response from the other party. In other words, if the offer is not made with the intention of entering into a legal relationship, it will not be deemed as a valid offer.
The person making the offer is known as the “offeror” whereas the person to whom the offer is made is known as the “offeree”.
Essential Elements of an offer
- The offer must be communicated to the other contracting party. The mode of communication can be anything i.e., oral, writing, or post.
- The offer must relate to doing a legal act.
- The offer can be expressed or implied. In an expressed offer, the parties spelt out the clear intention, but in the case of an implied offer, it is derived from the conduct of the parties.
- The offer can be revoked or cancelled any time before it is accepted by the offeree.
For example, A proposes to sell a house to B at a certain price. A makes an offer here.
Offer an Invitation to offer
There is a difference between an “offer” and an “invitation to offer”. The invitation to offer implies a situation in which a person performs such acts with the intention that the other person makes an offer to him.
For example, in a garment shop, there are various dummy dresses that are put up to attract customers. Putting these dresses will be considered as an “invitation to offer” and not an actual offer.
Similarly, the tenders invited by the government are also an invitation to offer as they are merely intended to invite the interested party to make an economical offer to the government.
The second step in the formation of a valid contract is acceptance. Sec 2(b) of the Indian Contract act of 1872 defines acceptance. It says when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Hence, after the proposal when the other party agrees to enter into a contract, acceptance is said to be completed.
The most important thing in this regard is that the acceptance must be done in response to an offer. If the person is not aware of the offer, it will not be deemed as a valid acceptance.
In the case of Lalman Shukla v Gauri Dutt (1913), a boy went missing and the father of the boy made an announcement that whoever will find his boy, will be rewarded by him. The plaintiff found the boy but he was not aware of the offer. The court held that he is not entitled to get the reward as he was not aware of the offer.
Essential elements of Acceptance
- The acceptance must be absolute and unconditional. If any condition is attached to an acceptance, it will not be considered a valid one.
- The acceptance may be expressed or implied
- The acceptance must be communicated within a reasonable time to the offeror. The mode of communication shall be suitable for this purpose.
- If the acceptance is done through post, it will be presumed that it is accepted when the letter of acceptance is posted.
- If acceptance or communication of acceptance is made by or to any third person, it will not be considered a valid one.
Acceptance under the Indian Contract Act
The consideration refers to the value given in response to the performance of a contract. It may not necessarily be in monetary form. It may be anything that has value in the eyes of the law and is agreed upon between the respective parties.
Section 2(d) of the Indian contract act 1872 defines consideration. The consideration here is of three kinds, past consideration, present consideration, and future consideration.
Past consideration is available in two circumstances in India. One being, past voluntary service, and the other is past service at the request. In the case of past voluntary services, service has been rendered to one party and that party promises to pay for the past acts. In the case of past service at request, one party requests other parties to help by rendering services. In this scenario, the help is given with the assumption that they will be paid back. Hence, this is also enforceable.
Present consideration, here, a person is asked to perform a task in return for something of value in the eyes of law. The acts of both parties are done at present. Hence it is enforceable. The major difference between past and present consideration is that, in past consideration, the promise is made after an act is done and in present consideration, the act is done on the basis of the promise made.
Future consideration is the exchange of a promise for a promise, both acts are to be done in the future, and as soon as the promises are exchanged the contract is executed.
Essentials of a valid consideration
- The consideration must emerge at the desire of the promisor.
- The consideration must not be void or illegal
- The consideration may be inadequate. The consideration of 1 rupee and the consideration of 1,00,000 rupees both are adequate in the eyes of the law.
- The consideration must be real and not imaginary. For example – A person offers another person to pay him 5,000 rupees and he will bring a moon for him. It is an imaginary thing and will not be deemed as a valid consideration.
The provisions for the lawful object are the same as that of lawful consideration.
All the components are essential elements of a valid contract. An agreement turns into a convert major because of lawful consideration and a lawful object. Consent and competency are the other two important issues. Hence, in order to enter into a valid contract, an offer that is accepted on the basis of consideration that is lawful with a lawful object is to be executed. And in this process, the parties should be competent and enter with free consent.
The next step towards a valid contract is a requirement of lawful consideration. All the contracts or agreements are deemed to be valid until and,
- It is forbidden by law, or
- If allowed to exist it would make things illegal or
- Is done with the dishonest intention for any ulterior motive, or
- It injures a person or property, or
- The court declares it immoral or opposed to public policy.
A contract will be forbidden by law if it is against the substantiveness of the procedural aspect of the law For example selling liquor without a license is forbidden in law. Further, if the intention of the party is to commit fraud or to deceive any party, it will also be considered unlawful.
Intention to create a legal relationship
For a successful Contact, it is very essential to have an intention to create a legal relationship. It means that the parties must be aware of their legal status and ready for the consequences if they failed to perform their obligations enshrined in the contract.
There is also a doctrine that is very popular in the context of contract law. It is “consensus ad idem” or meeting of the mind. This maxim states that the contract the minds of both parties shall be put on a similar platform while entering into a contract.
For example – A has two cars (Black and white). B offered to sell his car (black) to him. But, A thinks that he is making an offer for his white car and agrees to the same. Now, it is not a valid contact as there is no meeting of mind of both the parties.
Parties competent to contract
There are three main components in order to declare a person competent to contract. Every person is said to be competent when he attains the age of majority. This age as per the constitution is declared to be 18 years or more. The contract with the minors, i.e. below the age of 18 is considered to be void from the beginning.
A contract entered during the minority cannot be ratified after attaining the majority. It is believed that the contract which is void from the beginning can’t be revived later on and every contract needs separate consideration. However, a contract for the benefit of a minor can be a valid one. Further, the rule of promissory estoppel doesn’t apply to the minor.
The next component is that a person should be of sound mind. As per Section 12 of the Contract Act, a person will be considered of sound mind if he is able to understand the consequences of his actions or his contract at the time of making a contract by agreeing on all the provisions. The person who is intermittent with the unsound mind can make a contract when he is of sound mind as at that time he is in the right bent of mind while agreeing to any contract. The person shouldn’t be a lunatic or from such a mental disease that made him incapable to understand the consequences of his actions.
The last component is that he should not be disqualified from the contract by any law to which he is subject. It means that the person should not have committed any offence which has disbarred him from making a contract with anyone.
Consent is said to be established when two or more persons agree upon the same thing in the same sense, there should be a meeting of the minds. There are scenarios where people talk but they are not communicating as they both are referring to different things while doing so, if in any case, this type of conversation takes place between two parties to contract. Their agreement will be invalid and will never convert into a contract. There always should be free consent. Read more about Free Consent under Indian Contract Act, 1872.
If any one of these points is applicable the contract is automatically deemed void.
Not expressly declared void
In addition to section 10, the Contract Act enumerates certain classes of the contract explicitly void, which are as follows-
- Agreements restricting a marriage (section 26)
As per Section 26 of the Act, if an agreement is made which puts a restriction on the solemnization of the marriage, it will be declared void. Both the partial and the absolute restrictions will make the contract void.
However, there is an exception that is related to the marriage of minors. Since minor marriage is not recognised in the eyes of law, any agreement relating to their restriction will not attract the provision of section 26.
- Agreements restricting trade (section 27)
As per Article 19 of the constitution, each and every person is entitled to perform the trade as per his pleasure. To give effect to the same, Section 27 makes all those contracts void which aims to restrict the trade, profession or any kind of business. It is immaterial whether the restraint is reasonable or not for the purpose of this section.
Agreements in restraint of proceedings (Section 28)
As per this section, if a party is restricted from approaching the court or exercising the legal remedy, it will be declared void in the eyes of the law. So, If any clause restricts any party to institute any suit, that clause would be void to that extent.
A contract is the basis of our present life. As per section 10, for entering into a valid contract, certain essential elements need to be fulfilled. It includes an offer, acceptance, valid consideration, competency of parties, lawful objective and free consent.
These are the basic conditions and there may be some other conditions as per some specific law. For example, if there is a franchise agreement, it must comply with the intellectual property laws also.