ESSENTIALS ELEMENTS OF A CONTRACT UNDER INDIAN CONTRACT ACT 1872

 

ESSENTIALS ELEMENTS OF A CONTRACT UNDER INDIAN CONTRACT ACT 1872:

 

1. MEANING OF CONTRACT:

 

A contract means an agreement when two people reduce into writing which contains certain obligations or promises which are to be performed by such parties, and it becomes a contract when it will be enforceable by law. Enforceable by law means when the agreement has acquired the force of law for the parties who made it and a violation of those obligations would attract legal action, including repudiation of the entire contract.

 

Contract Act defines a Contract as an agreement which is enforceable by Law. An Agreement is a settlement between two parties, which contains obligations or promises which both parties need to fulfil. When such an agreement is made binding by Law it becomes a Contract.

 

Therefore, an agreement consists of reciprocal Promises which are to be performed by parties to the contract. Promises are reciprocal when both parties have to perform something for the other.

 

 

According to Pollock- Every agreement and promise enforceable by law is a contract.

 

According to Salmond- A contract is an agreement creating and defining obligation between two or more persons by which rights are acquired by one or more to acts or forbearance on the part of others.

 

 

Thus, Contract = Agreement + Enforceable by law

 

Illustration: X contracted with C for purchase of 10 bags of cement of a certain quality, for Rs 2, 00,000. In this case, B’s promise is to provide X with 10 bags of cement of that quality only for which X has contracted and X’s promise is to duly pay C Rs.2, 00,000. In this case, both have to perform something for the other, thus it is a case of reciprocal promise.

 

The concept of Charity is not a case of reciprocal promise, because a person doing charity, does not expect anything in return.

 

In India, all Contracts are primarily governed by Indian Contract Act, 1872. It contains basic elements of a contract and several general or special rules which apply to contracts. It does not impose any positive duty on the parties rather, it states various formalities regarding contracts.

 

 

2. ESSENTIALS OF A VALID CONTRACT:

 

 Section 10 of the Act provides that, 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.

 

 Offer: To begin with, both parties must make an offer; otherwise, a contract cannot be formed. In some circumstances, this principle could not be used, though. For instance, an agreement in business was reached after several rounds of discussion.

 

Acceptance: The Offer must also be accepted by the recipient for whom it was meant. Therefore, only B can accept an offer made by A to B.

 

Thirdly, while acceptance is critical, there must also be consensus in ad-idem.

 

A meeting of consent is defined as consensus ad idem. It implies that all parties to the contract must agree to its terms in this sense. Therefore, it is necessary for all parties to a contract to understand its terms in the same way.

 

For example, X contracted with Y to purchase rice. Now X wanted a special type of rice, thus, Y thought of it to be normal rice. In this case, although there is a valid acceptance, there is a lack of meeting of minds between the parties, meeting of minds regarding the type or quality of rice.

 

Further, if X made a contract with Y to buy stocks. What X meant was stocks in a company, whereas Y understood it to be his livestock. In this case, the understanding was not in the same sense.

 

●    Parties must be competent to enter into a contract, i.e., they must be legally capable to contract

●  Consideration, for the performance of promises there must be a consideration. something given for performance of promise from both parties to the contract.

 

Moreover, the objective and consideration of the contract must be lawful.

 

●    Free consent, according to section 10 of Contract Act, agreements are contracts if they are made by free consent. It means that a contract must be entered into out of party’s own choice and without being forced, or deceived by someone.

●    There is need of an intention to enter into a legal relationship.

●    Contract must be certain and not ambiguous and vague. (As per section 29)

●    A contract must not be expressly declared void. (As per section 10 of Contract Act)

 

 

A. OFFER AND ACCEPTANCE:

 

Offer and Acceptance form the core of a contract. There can be no contract unless there is an offer and then the offer must be accepted. An Offer once accepted becomes a Promise.

 

Offer and Proposal are used at a time. The concept of Offer is used in British law, whereas view of Proposal is used in Indian law.

 

Offer:

 

An offer is the initial step for the formation of a contract. A person making an offer is called an offeror or proposer and a person to whom the offer is made is called an Offeree.

 

According to section 2 (a) of the Contract act, an offer/proposal is:

 

When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.

 

An offer simply means willingness, to do something basically a positive act or not to do something basically a negative act. Thus, if an offer is not made, to get the acceptance of the other party, then it cannot be construed as an offer under the Contract Act.

 

Intimation on Offer

 

1.   Offer must be communicated to the offeree. Mode of communication could be of anything but should be reasonable. An offer must be clear, specific and capable of being understood and should not be vague.

2.   An offer should be lawful and not to do something forbidden by law.

3.   Offer can be either expressed or implied. An express offer is one which is made in words, and an implied offer is deduced from the conduct of the offeror. In implied offer what concern is whether the offeror had any intention to make an offer or not.

4.   An offer can be revoked at any time before it comes to the knowledge of the acceptor or being accepted by the acceptor.

5.   An offer must be communicated with the intention of accept the offer.

 

A promise consists of an offer and acceptance. Once these two conditions are fulfilled there is a promise and when both parties are to perform their respective promises, it becomes a situation of reciprocal promise.

 

Contract act defines an offeror as Promisor and the person who is accepting the offer as Promisee.

 

 

Offer and invitation to offer:

 

There is distinguish between an offer and an invitation for others to make an offer. An invitation for others to make an offer is not an offer within the meaning of 'Offer' under the Contract Act.

 

On a few occasions, a person may not make an offer to sell something but makes a statement or conducts in a different event, which makes other persons to make an offer to him. This is an invitation to offer.

 

Such events generally include advertisements, tenders, goods on display, Expression of Interest etc. In case of an auction, when the auctioneer starts the bid by quoting a price, it is basically for others to make him an offer with the amount in addition to the minimum price, which the auctioneer had announced.

 

Acceptance:

 

As mentioned earlier, the second step in the formation of a contract is the acceptance of the offer made.

 

Acceptance means when the person to whom the offer was made, has given his assent to such offer as per Section 2(b) of Contract Act.

 

Once the offer is accepted and such acceptance has been communicated, to the offeror, the parties are bound by their promises to perform. like as offer, even an acceptance can be revoked at any time before the communication of acceptance reaches the offeror.

 

An acceptance would not be a valid acceptance if the acceptor is being unaware of the offer.

 

In, Lalman Shukla v Gauri Dutt (1913), the defendant’s boy was missing, accordingly, his servant-Plaintiff went to search for the boy, and a missing poster was released by the defendant, promising to pay a certain sum, to the person who finds the boy. Subsequently, a servant, unaware of such an offer succeeded to find the boy. Once he discovered that such an offer existed, he asked for the consideration, but the same was denied. The court ruled in favor of the Defendant, by holding that Plaintiff was ignorant of offer and thus the performance of the promise does not amount to acceptance.

 

Intimation on acceptance:

 

1.   Acceptance should be absolute and unconditional and must be made while the offer exists.

2.   Acceptance to offer can be either expressed or implied i.e., performing in a manner which implies acceptance.

3.   Acceptance must be in a reasonable manner, or, if needed must be communicated through a reasonable medium, like telephone, mail, WhatsApp message, automatic reply to emails, if there are no exceptions

 

Acceptance used to be communicated via letters or posts in the past. If a letter of acceptance is used to make an acceptance, it will be deemed accepted once it is posted and out of the acceptor's reach.

 

However, with the emergence of instant communication like mobile phones, an offer is accepted, when the offeror hears the acceptance on his part.

 

Acceptance can be either in express words or can be implied i.e., by conducting in a reasonable manner which signifies acceptance. For example, X offered B to sell his watch for Rs.2,000 and lends it for his satisfaction. B, in turn, pledges it or further sells it. The act of B is conduct amounting to a valid acceptance.

 

B. CONSIDERATION:

 

A Contract is formed when a person makes an offer to another person, and subsequently, when such Offer is accepted by the other person, it becomes an agreement and when the agreement is Enforceable by law it will be called contract.

 

Consideration means value given for the performance of a promise. It need not necessarily be money; thus, it should be something which has been agreed by the parties and has some value.

 

Basically, a contract without consideration is void, however, exceptions to this rule are specified in Section 25 of the Indian Contract Act. 1872

 

Consideration need not be adequate; however, it must have some value. Consideration for a promise includes either performance of an act or non-performance (abstinence) of a certain act. Performance of an act also includes the act of paying money.

 

Intimation On Valid Consideration:

 

It has to be at the wish of the promisor, which means that it should originate from the promisor out of his own accord and not at the wish of a third party. Accordingly, the performance of a legal duty is thus not a consideration.

Consideration could be:

 

1.   Past Consideration, when the promisor has received consideration before the date of the performance of the contract by any of the party. For example: Advance money is paid.

2.   Present Consideration, when consideration is provided immediately at the instance when the contract is made or executed. Thus, it is also called executed consideration.

3.   Future Consideration, when consideration is paid post contract. It must not be illegal or void or impossible to perform.

4.   Consideration is not void just because it is inadequate, provided it was at the intention of the promisor.

5.   It must be real, not illusionary. Consideration can be tangible or intangible. For example: Performance of service like teaching, labor.

 

C. FREE CONSENT:

 

According to section 10 of the Indian Contract Act, a contract is valid if it was entered into by free consent of the parties.

 

Section 14 of the contract act defined free consent as consent not given under coercion, undue influence, fraud, misrepresentation and mistake.

 

If the consent for the engaged into a contract is obtained not by a free consent the contract is not maintainable and it will be voidable contract.

 

i. Coercion: Section-15 of the Act defines coercion as committing any act forbidden by The Indian Penal Code 1860 or unlawful detaining of property, or threatening to commit these acts. Coercion includes all such acts which are forbidden by the Indian Penal Code. It also includes threatening to commit any act forbidden by the code.

 

 

Mere threat of bringing a criminal charge does not amount to coercion, as it is not per se forbidden by the Indian Penal Code. But the threat of bringing a false charge with the object of making another do a thing is coercion, because false charge is punishable under Indian Penal Code.

 

 

ii. Undue influence: In accordance with Section 16 of the Indian Contract Act, undue influence occurs when consent is obtained by a person who is in a dominant position relative to the other person. In order to exert undue influence, one person must be able to control the other person's will. An employer-employee relationship or a doctor-patient relationship are two examples.

 

Clause 2 of Section-16 makes it clear that dominant position includes situations where a person holds real authority or apparent authority i.e., authority which is not expressly stated but can be easily inferred by a reasonable man.

 

Clause 3 of Section -16 of Contract Act, further says that if a contract is entered into between 2 parties and one of them is in a position to dominate the will of the other, and if he uses it to enter into the contract, then the contract will be unconscionable.

 

Furthermore, it states that the party who has the power to sway the other party's decision must demonstrate that the contract was not negotiated under the influence of a dominant position. Thus, it discusses who will bear the burden of proof.

 

Unfair influence is defined in the first subsection as when one party to a contract takes advantage of his dominant position to gain an unfair advantage over the other party. The different circumstances in which one party to a contract may be said to dominate the will of another are discussed in Sub-section 2.

 

iii. Fraud: It refers to any action taken to deceive another person, whether it's done with the intention of harming that person or out of hatred for them.

 

According to section 17, Fraud can be committed either by one contracting party or by a third person with the connivance of any contracting party or by the agent of any contracting party.

 

Clause 1 of Section 17 states that fraud means any false factual statement and the person making it knows it is false. Thus, deliberately making a false statement.

 

Section 17(2) defined as "the concealment of any fact by the party knowing of such fact." When an effort is made to ensure that the other party is not able to learn the truth, active concealment differs from simple silence.

 

Section 17(3) - A promise made without the intention to perform it. Thus, making false or empty promises.

 

Section 17(4) and (5) - any other act done to deceive the other party and which the law specifically categorizes as fraudulent.

 

If the aforementioned actions are done on purpose, they constitute fraud. Misrepresentation would result if the intention were absent.

 

iv. Misrepresentation: When false statements are made without the intention to deceive, then it amounts to misrepresentation. In misrepresentation, the person making the statement is innocent and has no intention to deceive the other party.

 

Even if there was coercion, undue influence, etc., it would be useless if it did not appear that it was a factor in getting the promisor to perform the questioned act. This implies that there must be an immediate and close link between non-free consent and coercion, etc. If a certain effect is attributed to a certain factor, then that effect must be a result of that specific cause.

 

D. INTENTION TO CREATE LEGAL OBLIGATION:

 

When two people enter into an agreement then intention must be to create legal relationship between them.

 

One of the most fundamental principles of an agreement is the intent to establish a legal relationship. It is defined as having the intent to enter into a legally binding agreement or contract; this suggests that the parties are aware of and agree to the potential legal repercussions of a contract breach. The willingness of a party to accept the legal repercussions of entering into an agreement constitutes the intention to establish legal relations.

 

E. CAPACITY TO ENTER INTO A CONTRACT:

 

As per, section 10 of the contract act, for a valid contract the parties to the contract must have the capacity to enter into a contract.

 

Minor agreement: From Section 11 of the Act, it becomes clear that a person who will be competent to contract if he has attained the age of majority. According to Section-3 of the Indian Majority Act a person shall be deemed to have attained his majority when he completes the age of 18 years.

 

From section-10&11 of the Act, it is clear that the parties to the contract must be competent to contract and a person who, by reason of infancy, is incompetent to contract and cannot make a contract within the meaning of Indian Contract Act. Consequently, a minors agreement is void ab initio and cannot be enforced by either party to the contract.

 

A voidable contract pre-supposes the existence of a contract within the meaning of this Act and in case of minor’s contract is not voidable but void.

 

 

Unsound Mind: Section-11 of Act provides that every person is competent to contract who is of age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject. It is thus, clear that only a person of sound mind is competent to contract. A person of unsound mind is not competent to contract. The meaning of a person of sound mind is found in section 12 of the Indian Contract Act. According to section 12 a person is said to be of sound for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interest. This section also provides that a person who is usually of unsound mind but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind but occasionally of unsound mind, may not a contract when he is of sound mind.

 

To be a valid contract both parties should be of sound mind.

 

Estoppel: Estoppel is a legal doctrine that forbids a person from acting inconsistently with his position in the contract, made at the time he entered into a contract. Thus, Promissory estoppel means when a party made a promise to another party that he will purchase potatoes grown on his farm and another party accordingly grows potatoes on the belief that party will purchase them. Now promissory estoppel prevents party from denying that he did not promise any such thing, or in other words it prevents him from going back on his promise and not purchasing the potatoes.

 

Therefore, in the case of a minor, estoppel, which typically prevents a promisor from breaking a promise, will not apply and he cannot be forced to fulfill the promise he made while he was still a minor. This is so because a minor who cannot enter into a contract is unable to owe any debts.

 

F. LAWFUL OBJECT:

 

According to section 10, consideration and object of the contract should be lawful and is an essential element of a contract. The object of the agreement must be lawful. That means the object must not be illegal, immoral, or opposed to public policy.

 

Accordingly, Section 23 defines unlawful consideration. Unlawful consideration and object are one which is either,

 

•     i.           forbidden by law.
•  ii.        or is of such a nature, that if permitted, then it would defeat the provisions of law.
•  iii.            or the purpose of the contract is fraudulent.
•   iv.    or involves or implies giving injury or damage to someone or to someone’s property; or
•    v.              or the court considers it as immoral or against public policy.

 

If a contract shows any of these elements, then it is unlawful and void under section-23 of the Indian Contract Act, 1872.

 

 G. NOT EXPRESSLY DECLARED VOID:

 

To be a valid contract, the agreement must not have been expressly declared void by law under which agreement has formed i.e., agreements those are not enforceable by law.

3. CONCLUSION:

 

The main object of the law of contract is to determine the circumstances in which promises made by the parties to a contract shall be legally binding on them. The law of contract is of special importance to those people who are engaged with trade, commerce and industry, as the transaction are based on law of contract. It provides the ingredients for maintain a fruitful contractual environment. In this article it has mentioned the various essentials for a valid contract as the Indian Contract Act,1972.