In a general sense, the word ‘Contract’ is derived from the Latin word Contractum which means to meet together or to bring together. Therefore, we can say that bringing two or more people together to make an agreement is called a contract, where two or more people have to agree on the same thing in the same sense. In this law note, we will learn about the definition of a contract and after that we will focus on the essential elements of a valid contract. Let us start.
Definition of Contract
A contract is defined as an agreement enforceable by law, according to section 2(h) of the Indian Contract Act, 1872. Certain conditions need to be fulfilled for an agreement to be called a valid contract under law. According to Anson, the law of contract is the field of law that establishes the conditions under which a promise is legally binding on the person who makes it.
Elements of Contract
The two elements of a valid contract are agreement and enforceability. Let us learn about both.
It is defined under section 2(e) of the Indian Contract Act, 1872, which says, “Every promise and every set of promises, forming the consideration for each other, is an agreement.” A proposal or offer, when accepted, becomes a promise. There must be at least two parties to form an agreement.
Offer + Acceptance = Agreement
Illustration: A gave a proposal to B to buy his property for Rs. 10 lakh. B accepts the offer. This now becomes an agreement.
2. Enforceable by Law
If an agreement creates any legal obligation on the parties, then the agreement is said to be enforceable by law. Moral, social and religious obligations do not form agreements because they do not create any legal duties.
Illustration: A sell his bike to B for Rs. 70,000, but then B denied to make the payment. A can sue B in the court of law for breach of contract.
Illustration: Rajat calls Aman to his house and promises to take him to a movie in the nearby cinema hall. Aman went to Rajat’s house, but Rajat could not go to a movie due to some urgent work. Here, Aman cannot sue Rajat even if he has suffered any damages as Rajat was under social obligation and neither Rajat nor Aman had any intention to create a legal relationship.
Essentials of a Valid Contract
Section 10 of the Indian Contract Act mentions that all agreements are contracts if they are made by:-
- Free consent of parties,
- Parties competent to contract,
- For a lawful consideration and with a lawful object, and
- Not expressly declared void.
Expanding the above points, we can say that the essential elements or necessary conditions of an agreement to become a valid contract are as follows:-
Let us learn about all these 9 essential elements of a valid contract in detail.
1. More than one party.
To create a valid contract, there must be two parties, and both the parties must be major, of sound mind, and not disqualified by law. A single person cannot constitute a contract.
Agreement is necessary to constitute a contract. Offer and acceptance together make a contract. Any agreement made by two parties will be legally enforced unless it is declared void by law.
3. Intention to create a legal relationship.
A contract must be made with the intention to create a legal relationship. It means that if one of the parties fails to perform his promise, then that person will be answerable under the law.
Case Law: Balfour vs Balfour
Mr and Mrs Balfour lived in Ceylon, but during holidays they went to England. Mrs Balfour had developed rheumatic arthritis, and doctors recommended her to remain in England because the environment in Ceylon is unsuitable for her health. Therefore, while leaving, Mr Balfour promised her wife to pay $30 per month till she comes back to Ceylon. After some time, Mr Balfour denied paying the money, and Mrs Balfour filed a suit against him for breach of contract. The court held that Mrs Balfour was not entitled to any money as there was no intention to create a legal relationship between the parties, and hence there was no contract.
4. Lawful consideration.
Consideration means a reasonably equivalent or corresponding benefit passed on by the promisor to the promisee. It is something that has value in the eyes of the law.
Consideration must be lawful, i.e., it must not be forbidden by law, or not be fraudulent or must not involve or imply injury to the person or property of another. Moreover, it must not be immoral or opposed to public policy.
Illustration: A promises to obtain employment for B in a government organisation, for which B promises to pay Rs. 100000 to A. Here consideration is unlawful as it amounts to a bribe which is forbidden by law.
5. Capacity of parties to contract.
Section 11 of the Indian Contract Act states that a minor, lunatic, idiot and a drunken person cannot enter into a valid contract.
6. Free consent.
According to section 14 of the Indian Contract Act, consent is said to be free when it is not caused by:-
A. Coercion (Section 15) – When a person commits or threatens another person to commit an act that is forbidden by law. The agreements made under coercion are voidable, which can be declared void by an option of any of the parties to the contract.
B. Undue Influence (Section 16) – When a contract is made because of the dominant position of one party and due to this dominant position, the other person cannot deny that contract.
C. Fraud (Section 17) – According to Section 17 of the Indian Contract Act, when a party contracts with the other party with the intention to deceive, it amounts to fraud by misleading the facts.
D. Misrepresentation (Section 18) – It is called misrepresentation when a contract is made by false representation of facts or when a party misleads the other by showing false things and making them look genuine
E. Mistake (Section 20 to 22)
(i) Mistake of fact by both the parties (Section 20) – An agreement will be considered void if both the parties to an agreement are under a mistake of fact.
(ii) Mistake of fact by one party (Section 22) – An agreement will not be considered void if there will be a mistake of fact by only one party.
(iii) Mistake of law (Section 21) – Mistake of law will not be considered avoidable if a mistake is caused against any law force in India. But a mistake as to a law not in force in India will have the same effect as a mistake of fact.
Related Law Note: What Is Free Consent in Contract
7. Lawful object.
Section 23 of the Indian Contract Act states that the object of contract will not be lawful if it is:-
- Defeats the provisions of law.
- Immoral or opposed to public policy.
- Causes harm to a person or property.
Illustration: A hires a house from B to use it as a gambling place. Gambling being an illegal act, the contract of hiring is void.
8. Certainty of meaning.
9. Agreements not expressly declared void.
The agreements which are not enforceable by the court of law will be declared void. They include:-
- Agreement with unlawful consideration and object.
- Agreement having no consideration.
- Agreement in restraint of trade, marriage, legal proceedings.
- Agreement without certain meaning.
- Wagering agreements.
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