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Essentials of Valid Contract

Indian Contract Act, 1872 administer law about the contract. Section 2(h) of the Contract Act defines a contract as those agreements which are enforceable by law. Section 2(e) of the Act specifies agreement as every promise or set of promises, forming the consideration for each other. The proposal is said to be accepted when the person to whom such proposal is made gives his consent, then the proposal is said to be accepted and becomes a promise.

An agreement is an accepted promise, and a contract is an agreement enforceable by law. Two parties are involved in the law of contract promisor (a person who promise to do something in return of consideration) and promisee (a person who pay such consideration). Section 10 of the Act states that if parties have given their consent which is free from coercion or undue influence with lawful consideration and lawful object, then all agreements are considered to be contract and such contracts would not be declared void. All contracts are considered to be agreements but all agreements are not contracts.

For example: A and B agree, in which A proposed to buy a car from B for Rs 1,00,000, B accepts the proposal. The agreement is said to be a contract as it is enforceable by law. Concisely, Contract = Agreement (accepted proposal) + Enforceable by law (defined inside the purview of law).

In J.K. Industries Ltd. vs. Mohan Investments and Properties Pvt. Ltd.[1], the court held that if there is a prior condition that there must be a written contract between the parties, in the absence of such written contract it cannot be said that the contract has been executed.

There are seven elements which constitute a valid contract, these are as follows:

Agreement An agreement must be there to constitute a contract. Two elements are essential to constitute agreement i.e. offer and acceptance. Lawful offer or promise must be made by an offeror (offer making party) and lawful acceptance of such offer by promise or acceptor (party for whom such offer is made) constitute an agreement.

Section 2(a) of the Act defines offer as:

when one person will signify to another person his willingness to do or not do something (abstain) to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.

In general, terms offer means when one party express his intention to another party to obtain the consent of another party to do or not to do such act and abstinence. To create a lawful contract it must be communicated, section 4 of the Act states that when the proposal comes in the knowledge of a person for whom it is made then such proposal is said to be communicated.

The social invitation is not considered to be an offer as such an invitation doesn't create legal relation Acceptance of an offer must result in a valid contract and such acceptance shall give rise to legal relation. The offer should be clear and definite. Illustration: A offer B to buy his car, this is an offer.

In Carlill v. Carbolic Smoke Balls Company[2] it was held that Mrs Carlill was entitled to get the reward as the advertisement constitute a general offer of a unilateral contract by performing the conditions stated in the offer she had accepted such offer. In Felthouse v. Bindley[3] offer cannot states silence mode as a mode of acceptance.

In contract, after having offer acceptance should be there by the party to constitute Agreement. Section 2(b) of the Act defines acceptance when the person to whom the proposal is made gives his consent such offer, the offer is said to be accepted.

The offer should be accepted unconditionally by the offeree to whom the offer is made, it will amount to acceptance. When the offer is accepted it becomes a promise and constitutes agreement. There must be consensus-ad-idem (meeting of minds), i.e. the promisor and promise must be thinking of the same thing in the same sense while offering and accepting the proposal.

Acceptance can be in the expressed form or implied form. If the parties are negotiating or discussing the agreement then it is not said to be accepted. Acceptance must be in a reasonable amount of time and must be communicated to offeror, mere silence will not amount to acceptance.

Section 4 of the Act states that when the acceptance is said to be completed. Acceptance is said to be complete when it came into the knowledge of the offeror. Before the communication of acceptance is completed the promise can revoke the acceptance but not after the communication of such acceptance is completed.

Illustration: A wants to sell his house to B for Rs 70 lakhs. B accepts the offer but put forward his condition that he will buy the house for Rs 50 lakhs, it will not amount to acceptance of the offer as this acceptance also have the condition. Acceptance must be free from any type of condition.

In Lalman Shukla v Gauri Dutt, it was held that acceptance must be communicated to offeree mere knowledge of such acceptance doesn't constitute acceptance. After offering the proposal acceptance of such proposal constitutes agreement. It is essential for the contract that it must be an agreement.

Legal relationship

Both the parties must have intention on their part to create a legal relationship. Although Indian Contract Act does not have any specific provision related to intention to create legal relationship while offering and accepting the proposal, however, the English law has a principle that to constitute a contract both the parties must have the intention to create a legal relationship. When a legal relationship is created it gives rise to legal obligations and legal consequences in the agreement. Agreements which are of social and domestic nature do not entertain any legal relationship, hence they do not constitute a contract.

Illustration: A agrees to meet his friend B at 9:00 p.m. It is the moral and social duty of A to meet this agreement and it does not create any legal obligation on B neither there is any legal relationship between A and B.

Hence, such agreement does not constitute a contract. In Jones v Vernon's Pools Ltd[4], there was an agreement which has a clause that the parties involved in this agreement shall not give rise to any legal relationship but the agreement is binding in honor. It was held that the agreement did not create any legal relationship between the parties and the agreement was not a contract. The test of contractual intention is not subjectivity but it is objectivity.

To decide such intention the factor is what a reasonable man would think and what would be their intention in similar circumstances not what the parties had in their mind. In Balfour v Balfour[5], the agreement having domestic nature does not constitute a contract.

Lawful consideration

There must be a consideration from both the side of the agreement has to be enforceable by law. Section 2(d) of the Act states that When the promisee upon the desire of the promisor, do, does or promise to do something or abstained from doing, such act or abstinence or promise is called a consideration for the promise. Consideration must be moved according to the desire of promisor and it can be moved from the end of promisor or any other person i.e. stranger to consideration but such stranger may maintain a suit.

The consideration does not need to be adequate to the promise, it should be real and substantial. One of the main element in consideration is that it should be lawful nature. General rule of law says that agreement is void if it is made without consideration. But there is the certain exception to this rule stated in section 25 of the Act.

If the agreement is expressed in writing and registered under the law, made on account of natural love and affection between the parties who are in near relation to each other then consideration is not essential. Consideration is not required in case of bailment, agency or gift. Section 63 of the Act also states that consideration is not required or the promisor wholly or in part may remit the consideration or performance.

In Currie v Misa[6] court defines consideration as a valuable in sense of the law it may consist either some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other part. If the proposal is not supported with any money such proposal will be nudum pactum (a bare promise) and is not enforceable by law.

Competent parties

Parties to the agreement must be competent to enter into contact. According to section 10 of the Act parties to the agreement must be competent, it is one of the essential elements contracts. Section 11 of the Act defines who are competent to the contract and states every person who is not minor according to the law to which he subject, who is not disqualified from contracting, and who is of sound mind can enter into a contract. Section 3 of the Indian majority Act defines minority as the person who is below eighteen years of age.

Therefore, a person who has not completed eighteen years of age cannot enter into a contract. Section 12 of the Indian Contract Act provides a definition of sound mind who all are eligible to enter into a contract. The soundness of mind can be determined by two factors. First, is the ability of a person to understand the terms and condition of contract and second is the ability of a person to make a rational judgement to act upon it. Idiot, lunatic etc are those who have an unsound mind and are not competent to enter into a contract.

In Mohori Bibee v. Damodar Ghose[7], In this case, Damodar Ghose the defendant was a minor and the sole owner of his property. His legally appointed guardian was his mother. a moneylender Mr Brahmo Dutt, through his agent Kedar Nath, lent the defendant at 12% interest per year a sum of Rs 20,000. By way of mortgaging the property, the loan was taken by the defendant. On the day on which the deal was made, Damodar Ghose's mother notified the appellant that Damodar was a minor, and anyone who enters an agreement with him would do so at his own risk. Kedar Nath claimed that Damodar Ghose had lied about minority on the date of the execution of the deed.

Therefore, Brahmo Dutt's appeal was dismissed and his request for the return of Rs 10,500 advanced towards him was also rejected as Damodar Ghose's mother notified the appellant about his minority. It was held that an agreement entered by a minor is void ab initio.

Free consent

For the creation of a contract, both parties must agree to the same thing in the same manner. Both the party must give their consent in the same thing in the same sense to constitute a valid contract. It is essential for the contract that parties must consent to the contract and they must give consent freely.

Section 14 of the Act defines free consent as a consent which is free from coercion, undue influence, misrepresentation fraud and mistake. Section 15 of the Act define coercion as commit or threat to commit any act forbidden by the Indian Penal Code, unlawful detaining, of any property or threat to commit such act, to the force any person with the intention that such person agrees. undue influence is defined under Section 16 of the Act which says that when one person uses his position and misuse his power to dominate the other person.

Chickam Amiraju v. Chickam Sheshamma
[8] In case, the Husband gives a threat that he will commit suicide if they did not execute a release deed in favour of his brother to his wife and son. The wife and son executed the release deed under the threat given by the husband. It was held that threat to commit suicide amounts to coercion under section 16 of the Act. Section 17 of the Act lays down the list of Act which amounts to fraud. There is the slightest difference between fraud and misrepresentation, in the first case the person making the statement does not believe that such statement is true and in later one, the person making such statement belives that such statement is true.

In Janakiamma v Raveendra Menon[9], in this case, the plaintiff was aware of every subject matter of the Will of her father, on the death of the father, there was the partition of property. It was held that the mother was liable for fraud on the ground that she did not disclose the contents of the Will, and no fresh partition was ordered. Provision related to a mistake has been mentioned from section 20 -22 of the Act. there are two types of mistake one is the mistake of facts and the other one is a mistake of law. The mistake of law is prohibited and in case of mistake of facts, the court generally declares the contract void.

Lawful object

The object of the agreement must be lawful and must not violate the law. If an object or the consideration of an agreement is unlawful then such agreement will not be enforceable. Section 23 of the Act states that what consideration and object amount to lawful. The consideration or object of an agreement is considered as lawful unless it is forbidden by any law, is of such a nature that if permitted it would violate the provisions of any law, is fraudulent, involves or implies injury to another person or property or the Court considered it as immoral, or opposed to public policy.

According to Section. 24 of the Act, if any part of one or more part of a single consideration or objects or for several considerations of a single object, is unlawful, the agreement is said to be void. Illustration: if A forces B to sign a contract for buying a car from C by kidnapping C's daughter. This is not a lawful object. Hence, the contract will be void.

Not expressly declared void

An agreement must not be one of those agreements, which have been expressly declared to be void. Indian Contract Act specifically declares certain agreements void.

Some of those:
Agreement void, where both there is a mistake of fact essential to the agreement (S. 20). Every agreement which has an object or consideration unlawful is void (S. 23). Agreements void, if any part of considerations or objects unlawful (S.24). Agreements without consideration are void (S. 25)

Conclusion
In the day-to-day life of every person, Contracts play a very important role. Contracts or agreements between various parties are governed by the Indian Contract Act. above-given conditions must be fulfilled by the parties for the formation of a contract. herefore it is important to have the all essential elements which are mentioned above in a contract. Only if there are all the main elements in an agreement then it would legally constitute a valid contract.

End-Notes:

  1. AIR 1992 Del 305
  2. EWCA Civ 1, 1 QB 256
  3. (1862) 11 Cb (NS) 869,
  4. (1938) 2 All ER 626
  5. 2 KB 571
  6. (1875) LR 10 Ex. 162
  7. Ilr (1903) 30 Cal 539 (Pc)
  8. 34 Ind Cas 578, (1917) 32 MLJ 494
  9. AIR 1981 Ker 205

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