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Essentials of a valid contract under the Indian Contract Act,1872: A Comprehensive Analysis

The law of Contract in India is contained in the Indian Contract Act,1872 and it is mainly based on English common law consisting of judicial precedents. The Act ensures that the rights and obligations arising out of the contract are honored and the promises are kept. It provides for the appropriate legal remedies to the aggrieved party in case of breach of the contract.

Proposal (Section 2 (a))
?
“When one person signifies to another his willingness to do or to abstain from doing anything to obtain the assent of that other to such act or abstinence, he is said to make a proposal.”[i]

Agreement (Section 2(e))
?
“Every promise and every set of promises forming consideration for each other is called an agreement ”[ii]

Contract (Section 2(h))
?
An agreement enforceable by Law[iii] 

Offer + Acceptance = Promise
Promise + Consideration = Agreement
Agreement + Enforceability = Contract

Every contract is an agreement, but every agreement is not a contract. An agreement becomes a contract when the essentials mentioned in Section 10 and other sections of the Indian Contract Act,1872 are fulfilled, as then only an agreement becomes enforceable by law and the law will protect the parties to the contract against any breach of the terms and conditions of such contract.

Essentials of a valid contract
Section 10 of the Act lays down the following essentials which are required to make an agreement into a valid contract.
  1. They are made with free consent
  2. Made between two or more competent parties.
  3. Made for lawful consideration.
  4. Made with a lawful object.
  5. Not expressly declared to be void.

Some other essentials of a valid contract are:
  1. Offer and acceptance
  2. Intention to create a legal obligation
  3. The terms contained in an agreement must not be vague or uncertain
  4. The agreement must be capable of performance
  5. Other legal formalities

Explanation of essentials of a valid contract
  1. Offer and Acceptance
    The first essential for creating a contract is an offer. The person making the proposal is called an offeror or promisor and the person accepting the offer is called the offeree or promisee.

    Essentials of a valid offer:
    • An offeror expresses his willingness to do or abstain from doing with a view to obtain the assent of the offeree
    • Intention to create a legal relation.
    • A valid offer could be in expressed form i.e in words either written or spoken or implied form i.e by conduct.
    • The terms of the offer must be certain and not ambiguous.
    • The offer must be clearly communicated to the other party
      When the proposal is accepted by the offeree it results in an agreement. Acceptance is the assent given to the proposal.

      Essentials of a valid acceptance:
      • The acceptance must be communicated to the offeror by the offeree.
        Communication of acceptance by post: Section 4 of the Act lays down that “the communication of the acceptance is complete against the proposer when it is put in the course of transmission to him to be out of the power of the acceptor; as against the acceptor when it comes to the knowledge of the proposer.”[iv]

        Communication of acceptance by telephone ( Instant communication ): Parties can communicate the acceptance through direct communication, the communication is completed when the acceptance is clearly heard and understood. Thus, properly received by the offeror.
         
      • The acceptance must be unconditional and absolute.
        In the case of Bhagwandas Kedia v. Girdharilal & co.[v] Plaintiff made an offer on the telephone from Ahmedabad to the defendants in khamgaon to purchase some goods. The defendant accepted his offer. It was held that the contract was made where the acceptance was communicated i.e Ahmedabad.

        The contract is completed when the offeror had heard the acceptance at his end rather than when the acceptor has spoken the words of acceptance unlike the case when the letter of acceptance is posted and it gets completed the moment is posted.

     
  2. Intention to create legal obligation
    Agreements made by the parties without an intention to create a legal obligation are not enforceable by law. The law presumes that the parties in case of domestic and social agreements do not have an intention to create a legal obligation.

    Illustration: A promised B to come over for lunch at his place but due to some work he couldn’t make it. B cannot sue A, as the agreement between them was not made with the intention to create a legal obligation.

    In the case of Balfour v. Balfour[vi], A husband agreed to pay his wife a certain amount as maintenance every month while he was abroad. Husband failed to pay the promised amount. The wife sued him for the recovery of the amount. As it was a social agreement she cannot recover the amount as the parties did not intend to create any legal obligations.
    The test of the intention of creating legal relations is objective. What matters is not what the parties had in mind, but what a reasonable man would think. If a promisor contends that he had no intention to create a legal obligation then this would not exempt him from liability.

    While in the case of commercial agreements the law presumes that the intention to create legal obligations is present.
     
  3. Lawful Consideration
    Under section 10 consideration is said to be one of the essentials of a valid contract and it is reiterated in Section 25 of the Act that without consideration the agreement becomes void. According to Salmond “ A promise without consideration is a gift; one made for consideration is a bargain. Consideration must be real and not illusionary though it need not be adequate.

    According to Section 2(d) of the Act consideration is “when at the desire of the promisor, the promise, or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. ”[vii]Thus, consideration is a reasonable and valuable benefit passed on by the promisor to the promisee.

    Section 23 of the Indian Contract Act,1872 lays down that:
    considerations or object of the agreement are lawful unless it is forbidden by law or defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another is immoral or opposed to public policy.”.[viii]
    Blackstone:
    “Consideration is a recompense given by the party contracting to the other”.

    Thus, Consideration is the price of the promise.

    Essentials of consideration:
    • The act of abstinence which is the consideration for the promise should be done at the desire of the Promisor.
    • It should be done by the promisee or other person. In India privity of consideration is not applicable,i.e the consideration can be moved from the promisor, promisee, or by the third party too but not if the third party is a minor.
    • The consideration can be Past consideration, Executed consideration, Executory consideration.

      In the case of Kedar Nath v. Gorie Mohd.[ix] a town hall was being constructed and subscriptions were invited from the public by the Howrah municipality The defendant was a subscriber to this fund. On the faith of the promised subscriptions, the plaintiff entered into a contract with the contractor to build the hall.

      The defendant failed to pay the amount and contended that there was no consideration for the promise. The court held that the defendant is liable as the plaintiff's act to enter into a contract with the contractor was done at the desire of the defendant and thus, it constitutes a lawful consideration.

      Agreements enforceable without Consideration:
      • A written and registered agreement based on natural love and affection between the near relatives.
      • A promise to compensate a person who has already voluntarily not by request done something for the promisor.
      • A promise made to pay a time-barred debt.
         
  4. Lawful Object
    A contract must be made with a lawful object, which means it must not be forbidden by law; or defeat the provisions of any law, or is fraudulent, or involves or implies injury to the person or property of another is immoral or opposed to public policy. A contract made with an unlawful object is void.

    Forbidden by law means an agreement made for the purpose which is forbidden by law. For eg. Selling tobacco without a license.

    Defeat the provisions of law means that the object of the agreement is such that, though not directly forbidden by law, it would, if permitted, defeat the provisions of any law. For eg. an Agreement to sell drugs.

    Fraudulent purpose means an agreement made to defraud others
    Injurious to a person or his property: Agreement made to injure a person or his property has an unlawful object and is thus, void.
    Immoral Agreements are not allowed to be enforced by Law and immorality depends on the standards of morality prevailing at a particular time in the society and is approved by the Courts. For eg. A promise to cast a person in an adult film.

    Opposed to public policy means an agreement that is opposed to the policy of law at a stated time i.e opposed to the public good or public interest.

    According to Section 24, if a part of the consideration or object which is unlawful can be separated from the other lawful part, the Court will enforce only the lawful part. If no such aggregation is possible, the whole of the agreement is void.
     
  5. Free consent
    According to Section 13 “ two or more persons are said to consent when they agree upon the same thing in the same sense”[x].
    According to Section 14, consent is free consent when it is not caused by:
     
    Coercion ?

    Illustration?
    Section 15 defines coercion as, “committing or threatening to commit any act forbidden under the Indian Penal Code or the detaining or threatening to detain any property of a person to cause him a legal injury, to make him enter into an agreement .”[xi]

    A threatens to kidnap B‘s daughter if he does not agree to sell his Ambala property to him at a stated price. B’s consent has been obtained by Coercion.
    Undue Influence ?

    Illustration ?
    Section 16 defines undue influence as, “where the relations between the parties are of such nature that one of them is in the position to dominate the will of the other or holds some authority over the other, and thus, uses that position to obtain an unfair advantage over the other.”[xii]

    A person is regarded to be in a position to dominate the will of the other if he holds a real or apparent authority over the other or is in a fiduciary relationship with him, or contracts with a person whose mental capacity is temporarily or permanently affected because of illness, age, or mental or bodily distress.

    Ama A man having a disease due to old age is induced by B his medical attendant to agree to pay an unreasonable sum for his professional services. B’s consent was tainted by undue influence.
    Fraud ?

    Illustration ?
    Section 17 defines fraud as concealment of the fact which is not true, and the person so concealing also believes and has the knowledge that it is not true.
    Mere silence of the party as to the facts which could affect the willingness of the person to enter into the contract is not fraud unless it is the duty of the person to speak or his silence is equivalent to speech.

    B says to A “If you do not deny it, I will perceive the Dog to be sane “ A says nothing, here A’s silence is equivalent to his speech.
    Misrepresentation?

    Illustration ?
    Section 18 defines misrepresentation as to a misstatement of a fact material to the contract which the person making it believes to be true but he does not intend to deceive the other party.
    There is no intention to deceive but the circumstances make the party answerable who is misrepresenting and deriving benefit out of the same.

    A is entitled to succeed to an estate at the death of B; B dies: C, having received intelligence of B’s death, prevents the news to reach A, and thus induces A to sell his interest to him. The sale is voidable at the option of A.
    Mistake ?

    Illustration ?
    Two or more people are said to consent when they agree upon the same thing in the same sense. If the mistake prevents the same then there is no meeting of minds and thus there is no contract.

    Section 20 will be applied when both the parties are under a mistake of fact essential to the agreement. Thus, the contract will be Void.

    Section 21 declares that “a contract is not voidable because it is caused by a mistake of law”[xiii]

    Section 22 lays down that “a contract is not voidable due to unilateral mistake”[xiv]
    ,i.e only one party is under the mistake of fact.

    A agrees to buy a car from B, the car engine stopped working at the time of the sale. Both the parties were not aware of this fact. The agreement is void on account of the mistake.

    Sections 10,13 and 14 combined states that in order to constitute a contract both the parties must give consent to it and there must be a meeting of minds(Consensus Ad Idem). Further such consent must be free consent. Thus, in the case of Coercion, undue influence, fraud, misrepresentation the contract is voidable but in the case of bilateral mistake, the contract will be void.

    In the case of Derry, v. peek [xv]the directors of the company mentioned in their prospectus that they got permission to run tramways with steam instead of animal power. Such permission was not yet granted by the board of trade, but the directors honestly believed that such permission was granted. The board refused such permission the company got wound up. The Court held that there was no fraud ad the directors had no intention to deceive.

     
  6. Two or more competent parties
    A contract can be entered between two or more parties only, no one can make a contract with himself. Thus, at least two parties are required to enter into a contract. Further, such parties must be competent to contract. According to Section 11, Every person is competent to contract who is not:
    • A minor (Age of majority is 18, where a guardian is appointed it is 21
      1. Law acts as a protector of children's rights because they are not that mature to make rational judgments about contracts. Thus, an agreement with a minor is void except where the contract is for his benefit
         
      2. Estoppel cannot be applied against a minor. The minor is not estopped against taking the defense of minority even if he acted fraudulently. The procedural rule of estoppel cannot override the plain provision of law laid down in the Contract Act.
         
      3. A minor is liable for a tort but not liable for a tort arising out of contracts.
         
      4. The doctrine of Restitution: If a minor misrepresents his age and obtains property, he can be compelled to restore it, only if it is traceable in his possession. If he sold the goods and converted them, he cannot be made to repay the value of the goods. This doctrine is not applied where the minor has taken cash instead of goods.

        In the case of Mohori Bibi v. Dharmodas Ghose[xvi], a minor executed a mortgage of Rs. 20,000/- and received a certain sum for the mortgage.

        The mortgagee filed a suit for the recovery of his mortgage money and the sale of the property in default. The Court held that an agreement by a minor was absolutely void as it is against him, thus the mortgagee cannot recover the money or sell the minor’s property.
         
    • Of unsound mind: According to Section 12 “a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it he's capable of understanding it and of forming a rational judgment as to its effect upon his interests”[xvii]. It will include a drunken or delirious person also.

      A patient in a mental asylum, who is sane during the intervals can make a contract in those periods when he is sane.

      In the case of Inder Singh v Parmeshwardhari Singh [xviii], property worth Rs. 25,000 was agreed to be sold for just Rs. 7000/-. His mother proved that he was a born idiot incapable of understanding the contract and making a rational judgment about his interests. The court held the contract to be void. Mere lunacy will not make the contract void and that person must be incapable of exercising his judgment.
       
    • Disqualified from contracting under any law he is governed.
      For eg. Alien enemies, Ambassadors, Convicts, Insolvents
       
  7. Terms of the agreement must be certain
    The terms and conditions present in an agreement must be clear and unambiguous. According to Section 29 of the Act lays down that the contracts made with uncertain terms are void.

    Illustration:
    A agrees to sell B hundred tons of oil, it is not clearly intended which oil. Thus, the agreement is void. Here, A should have specified clearly the kind of oil he agreed to sell.
     
  8. Agreements must be capable of performance
    According to Section 56 of the Contract Act, any agreement made to do an impossible or unlawful act is itself a void agreement.

    When a contract is made and afterward, it becomes impossible or unlawful to perform due to some reason which the promisor could not prevent, the contract becomes void. Here, the section provides for the subsequent or supervening impossibility which made the performance of the contract impossible. This is also known as the Doctrine of frustration.
    In the famous case of Taylor v. Caldwell[xix], a contract was entered into for the use of a music hall for a concert, but a day before the concert the hall was destroyed by fire. The Court held that the performance becomes impossible.

    In the case of Krell v. Henry[xx], a flat was rented only for viewing a coronation procession, but the coronation got canceled due to the king’s illness. It was held that the main object or the foundation of the contract was the viewing of the coronation ceremony and thus the object of the contract was frustrated by the non-happening of the coronation.
    Frustration of the contract only terminates the contractual liability, it does not extinguish the contract and the arbitration clause survives.

    Further, According to section 65 of the Act, if a contract is frustrated and one of the parties received a benefit out of it must restore them to the other party. Eg. Any money paid in advance must be restored.

    Specific grounds of frustration
    1. If the subject matter of the contact gets destroyed
    2. If the event which is contemplated does not occur
    3. If the party died or became incapable of performing the contract.
    4. Any Government or legislative intervention transforms the contemplated conditions.
    5. If there is any change in the circumstances.
    6. In case of war or warlike situations.

      Situations which does not attract Doctrine of frustration:
      1. Act of the third Person
      2. Commercial hardships
      3. Failure of one of the objects
      4. Self-induced
      5. In case of completed transfers or contracts.
         
  9. Not Expressly declared to be void
    According to Section 2 (g), all those agreements which are not enforceable by law are void. Certain agreements are expressly declared void by the Contract Act such as:
    1. Agreements by way of the wager (Section 30
    2. Agreements to do impossible acts (Section 560
    3. Uncertain and ambiguous agreements (Section 29)
    4. Agreements without consideration (Section 25)
    5. Agreement having unlawful consideration or object 9Section 23 and Section 24 )
    6. Agreements in which the consent is based on a mistake (Section 20)
    7. Agreements in restraint of marriage (Section 26), trade (section 27), and Legal proceedings (section 28)
       
  10. Other legal formalities
    A contract can be in written form or can be entered orally. In certain cases, it is given under the Act that the contract must be in writing, registered or there must be witnesses, etc. All these legal formalities also decide the validity of a contract.
Conclusion
The aforementioned essentials of a contract are the basics of any valid contract, and any contract devoid of any of these essentials is not a valid contract and thus, not enforceable by Law. This means that the courts will not protect the rights and obligations of the aggrieved party forming out of a void contract. There are various special laws or Acts under which other conditions to a contract are laid down and thus the general law of the Indian contract Act will not override them and the special Act will prevail.

End-Note:
  1. Section 2(a) Indian Contract Act, 1872
  2. Section 2(e) Indian Contract Act, 1872
  3. Section 2(h) Indian Contract Act, 1872
  4. Section 4 Indian Contract Act, 1872
  5. AIR 1966 SC 543
  6. (1919) 2K.B. 571
  7. Section 2(d) Indian Contract Act, 1872
  8. Section 23 Indian Contract Act, 1872
  9. 1886 ILR 14 Cal 64
  10. Section 13 Indian Contract Act, 1872
  11. Section 15 Indian Contract Act, 1872
  12. Section 16 Indian Contract Act, 1872
  13. Section 21 Indian Contract Act, 1872
  14. Section 22 Indian Contract Act, 1872
  15. (1889) 14 App Cas 337
  16. (1903) 30 Cal 539
  17. Section 12 Indian Contract Act, 1872
  18. AIR 1957 Pat 491
  19. QB (1863) 3 B & S 826
  20. (1903) 2 KB 740

    Award Winning Article Is Written By: Ms.Apoorva Goel
    Awarded certificate of Excellence
    Authentication No: MA34000024623-12-0521

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