Basic elements of a contract

Basic elements of a contract

Author: Amit Singh

Introduction-

Contract is the Law of those agreements which create legal obligations and not simply moral or social ones. For this reason, we must be fully aware of the various elements of a valid contract. Section 10 of the Indian Contract Act, 1872 defines and lists the Essentials of a Contract either directly.

Basic elements for a valid contract are:

1. Offers and Acceptance

According to Section 2(a) 2(b) of the contract act that defines the term offer and acceptance. An offer is a promise to act or refrain from acting, which is made in exchange for a return promise to do the same and acceptance by another party. Such an offer and acceptance must be legal which means that they should conform to the rules laid down in the Contract Act regarding the valid offer and valid acceptance. If the party offers and says that “I will give you (consideration) to perform (good or service).” And the other party must accept the offer. The person who makes an offer called “promisor” or the “offeror” and who accept the offer called “acceptor” or “offeree”.

• Harvey v Facey [1]:- In this case The Privy Council defined the difference between an offer and supply of information and held that indication of lowest acceptable price does not constitute an offer to sell. Rather, it is considered an offer to treat.

Communication of Acceptance

Mode of Acceptance

In communication of acceptance, there are two mode of acceptance, so acceptance can be done in to ways –

1. Communication of Acceptance by act or words – In This case communication done by whether via words or oral. In this mode for communication via telephone calls, letters, e-mails, telegraphs, etc. may be used. For example – a written application by the applicant to the post manager in written form is an expressed offer. confirmation of his application with the explanations of terms of employment by the vice president of the company who is authorized to do so by telephone is acceptance of the offer by act 

1. Communication of Acceptance by Conduct: The offeree can also convey his acceptance of the offer through some action of his or by his conduct. For example when we board a train or bus, we are accepting to pay the bus fare via your conduct. When our destination comes, we board down the bus. The bus halts at the stop and by this conduct, he is giving us an offer. By entering the bus we accept the offer. this acceptance shows by our conduct .

Revocation of offer and acceptance

       I.            Revocation of Offer

 In Section 5 of The Indian Contract Act talks about the rules of revocation of an offer. It says that the offer may be revoked any time before the communication of the acceptance is complete against the offeror. Once the acceptance is communicated to the proposer, the revocation of the offer is now not possible.

    II.            Revocation of Acceptance

Section 5 of the contract act also talks about, the acceptance can be revoked until the communication of the acceptance is completed against the offeree. No revocation of acceptance can happen after such date.

• Legal Relationship (Intent of Legal Obligations)

To constitute a valid contract, parties that are subject to a contract must have clear intentions or create a legal relationship between them. It means that those agreements which are not enforceable by the law like social or domestic agreements are not Contract because they are not intended to be binding an agreement to have a cup of coffee at a friend’s house is simply a social agreement not contract. If there is no intention to create a legal relationship then, there is no contract between parties.

• Balfour v Balfour[2]:-  In this case it was held that “to create a contract there must be a common intention of the parties to enter into legal obligations”. And thus its prove that to contract with the parties legal relationships are necessary

• Lawful Consideration

Consideration is taken to be the necessary evidence required by law of the intention of the parties to affect their legal position. Consideration is “Quid Pro Quo” means “something in return”. Consideration is either by the mode of money or alternate method of payment agreed upon by the two parties engaging in a contract and consideration must have value to the parties involved. According to Section 23 of the Act, the unlawful considerations are defined that all those which:

• It is forbidden by law.
• It is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent.
• involves or implies, injury to the person or property of another
• the Court regards it as immoral or opposed to public policy

If these conditions are not full-filled then it’s become illegal agreement.

• White v Bluett [11]:  Bluett, when sued by his father’s executors for an outstanding debt to his father, claimed that his father had promised to discharge him from it in return for him stopping complaining about property distribution. The Court held that the cessation of complaints was of no economic value; thus, Bluett’s father had received no real consideration for the promise, and the debt was enforceable at law.

• Currie v Misa :-[12] In this case Lush J. referred to consideration as consisting of a detriment to the promisee or a benefit to the promisor: some right, interest, profit or benefit accruing to one party,  some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

• Newar Marble Industries Pvt. Ltd. vs. Rajasthan State Electricity [3] –  In this case, court held that “if the consideration or object of such an agreement is opposed to public policy then it’s become unlawful”. So consideration is very important part of the whole body of contract.

Doctrine of Privity of Contract

In the Indian Contract Act. 1872, the doctrine of Privity of a contract is a common law principle where a stranger (third-party) to consideration is different from a stranger to a contract. Their rights and liabilities & no stranger is allowed to confer obligations upon any person who is not a party to contract even though contract the contract have been entered into for his benefit. This right is available only to a person who is a party to the contract and is called Doctrine of Privity of Contract.

There are following essentials of Privity of contact

• There must be two parties to entered in the contract: – most important essential is that there has been a contract between 2 or more parties to enter in the contract
• Competency of parties and should be valid consideration: – the parties should be competent for contact and the existence of consideration are pre-requisites for application of this doctrine.
• Breach of contract by one party: – there has been a Breach of contract by one Party is the essential requirement for the application of the doctrine of Privity of contract.
• Only that parties to contract can sue each other:- after the breach, only that Parties to a contract are entitled to sue against each other for non-performance Of contract.

Exceptions to the Doctrine of Privity of Contract

In the exception of this doctrine, a stranger or a person who is not a party to a contract can sue on a contract in the below cases like:

1. Trust
2. Family Settlement
3. Assignment of a Contract
4. Acknowledgement / Estoppel
5. A covenant running with the land
6. Contract through an agent

Capacity of Parties (Competency)

According to Section 11 of the Indian Contract Act, 1872 is parties must be competent to Contract who is (1) of the age of majority according to the law to which he is subject, and who is (2) of sound mind and the person should be not disqualified from contracting by any law to which he is subject.

Let us see these requirements in detail:

• The person must be at least 18 years old or more.
• The party or the person should be able to fully understand the terms or promises of the contract at the time of the formulation of the contract, which means the person should be sound mind.
• The party should not be disqualified by any other legal ramifications. For example, if the person is a convict, a foreign sovereign, or an alien enemy.

When a party does not understand the nature and consequences of an agreement that he or she has entered, the law treats that party as lacking the mental capacity to form a binding contract.

• Mohori Bibee V/S Dharmodas Ghose [4] – In this case courts opinion that any person who is below 18 yrs. of age or who has not completed the age of 18 yrs. of age, a minor cannot intend to create a contract or make major decisions. This case has basically provided us with the knowledge that since minors are legally incompetent to give their assent so they need to deserve or be provided with the protection in their dealings with the other major persons.

• Free Consent

Consent is a very important factor for an agreement and for a valid contract, People must enter into contracts of their choosing. You cannot force someone’s hand; there has to be genuine consent. Two or more parties are said to consent when they agree upon the same sense.

However, for a valid contract, we must have free consent which means that the two parties must have reached consent without either of them being influenced, coerced, misrepresented or tricked into it. If you are found to have forced someone into a contract or agreement, that agreement likely will not hold up in court.

Mannu Singh v. Umadat Pandey [5]

In this case, where a guru influenced his disciple to take his property in gift by promising to secure benefits to him in the next world. The court set the gift aside as it was not formed with free consent.  And Without free consent contract becomes voidable at the option of the aggrieved party

Coercion

Section 15 of the Act says Coercion means threatening to commit, any act forbidden by the Indian Penal Code under the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, to cause any person to enter into an agreement.  Section 15 describes coercion as

• committing or threatening to commit any act forbidden by the law in the IPC
• unlawfully detaining or threatening to detain any property with the intention of causing any person to enter into a contract

Ranganayakamma and another v. Alwar Setti [6] :-

 The widow was forced to adopt a child by the relatives of the adopted boy. If she didn’t do so the relatives did not allow the dead body of the widow’s husband to be taken out of home until the adoption was made. This amounted to coercion.                

Undue influence

According to Section 16 that a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it, or on the evidence, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other.

Section 15 describe that –

• When a person holds real or even apparent authority over the other person. Or if he is in a fiduciary relationship with the other person
• He makes a contract with a person whose mental capacity is affected by age, illness or distress. The unsoundness of mind can be temporary or permanent

Fraud

 Fraud means and includes any act or concealment of a material fact or misrepresentation made knowingly by a party to a contract, So the misrepresentation is done with full knowledge that it is not true, or recklessly without checking for the trueness, this is said to be fraudulent. It impairs free consent. Section 17 says that fraud is when a party convinces another to enter into an agreement by making statements that are

• suggesting a fact that is not true, and he does not believe it to be true
• the active concealment of facts
• a promise made without any intention of performing it
• any other such act fitted to deceive
• Peek vs. Gurney [7]:- The prospectus of a company did not refer to the existence of a document disclosing liabilities. This gave the impression that the company was prosperous.  If the existence of the liability had been disclosed, the impression would have been quite different. Court held, that non-disclosure amounted to fraud and anyone who purchased shares on the faith of the prospectus could avoid the contract.  It may be defined as a wrong belief about something.

Misrepresentation

According to Section 18 causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. Misrepresentation is also when a party makes a representation that is false, inaccurate, incorrect, etc. The difference here is the misrepresentation is innocent.

• Wajid Khan vs. Raja Ewaz Ali Khan [8] – In this case, where the old and illiterate woman conferred a great monetary benefit into her manager without any valuable consideration, it was held by the Privy Council that, the undue influence was exercised. The onus was on the manager to prove bonafide of the transaction and that no undue influence was used to him.

Mistake

When the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. A party cannot be allowed to get any relief on the ground that he had done some particular act in ignorance of the law. Mistake maybe a bilateral mistake where both parties to an agreement are under mistake as to the matter of fact. A mistake is an erroneous belief that is innocent in nature. It leads to a misunderstanding between the two parties .the law identifies two types of mistakes, namely

• A Mistake of Law
• A Mistake of Fact
•  Lawful Objects

It is also necessary that the consent of the parties must be made for lawful. In other words. It must not be

• Legal
• Immoral
• against policy.

Every agreement of which the object is unlawful is void

• Writing and Registration (Written documentation)

This is a physical document stating all that you’ve agreed upon and is optional. The written document is more popular in commercial dealings. According to the Contract Act, a contract may be oral or in writing. Although in practice, it is always in the interest of the parties that the contract should be made in writing so that it may be convenient to prove in the court

It should be understood that verbal agreements and agreements sent over text message or email can be legally binding contracts should there be proof that both parties agreed to an offer.

• Certainty of Meaning (Meeting of mind)

The terms of the Agreement must be definite and certain, where both parties are considered to have agreed to the contract at hand. Contracts can be voided if it is found that one party did not properly consent, or that they consented under duress. Carlill vs. Carbolic Smoke Ball Company [9]

In contract law, this step is also referred to as:

• Mutual agreement
• Genuine agreement
• Mutual consent
• Consensus ad idem
• Possibility of Performance

When two people decide to get into an agreement where a person ‘’A’’ agrees to bring back the person ‘’B’’s dead relative back to life. Even when all the parties agree and all other conditions of a contract are satisfied, this is not valid because bringing someone back from the dead is an impossible task.

Thus the agreement is not possible to be enforced and the contract is not valid.

•  Not Expressly Declared Void

In the eyes of law, the contract must be valid, the agreement must not be expressly declared void by any law in the country.

Nutan Kumar And Others vs Iind Additional DistrictJudge [10]:- In this case court held that all agreements are contracts, if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void by the Act.

According to the section of the Indian Contract Act, 1872, the following agreements have been said to be expressly declared void:-

• Agreements made with the parties having no contractual capacity (Section 11)
  • Agreement made under a mutual mistake of fact (Section 20)
  • Agreements with unlawful consideration or object (Section 23)
  • Agreements whose consideration or object is unlawful in part (Section 24)
  • Agreements having no consideration (Section 25)
  • Agreements in restraint of marriage (Section 26)
  • Agreements in restraint of trade (Section 27)
  • Agreements in restraint of legal proceedings (Section 28)
  • Agreements, the meaning of which is uncertain (Section 29)
  • Agreements by way of wager (Section 30)
  • Agreements to do impossible acts (Section 56)

Footnotes :-

1. [1893] AC 552
2. (1919) 2 KB 571 (CA)
3. 1993 CriLJ 1191, 1992 (3) WLC 126
4. Ilr (1903) 30 Cal 539 (Pc)
5. (1890) ILR 12 All 523.
6. (1890)ILR 13 MAD 214
7. (1873) LR 6 HL 377
8. (1891) L.R. 18 IA 144
9. [1893] 1 QB 256
10. [1994] All 298
11. [1853) 23 LJ Ex 36; 24 Eng Law & Eq 434
12. (1875-76) LR 1 App Cas 554
13. Law of Contract by Dr. S.K. Kapoor
14. https://en.wikipedia.org/
15. https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-i/essentials-of-a-contract/
16. https://www.lawjugaad.com/what-are-the-essentials-of-a-valid-contract-under-indian-contract-act-1872/
17. https://www.lawyersclubindia.com/articles/Essentials-of-a-valid-contract-9250.asp
18. http://newhorizonindia.edu/nhc_kasturinagar/wp-content/uploads/2018/05/CHAPTER-2-Contract-Laws-Indian-Contract-Act1872.pdf
19. https://learn.g2.com/elements-of-a-contract
20. https://contracts.uslegal.com/elements-of-a-contract/