A contract is basically an agreement between two parties creating a legal obligation for both of them to perform specific acts. Each party is legally bound to perform the specified duties such as rendering a payment or delivering goods. In order for the contract to be enforceable, each party must exchange something of value known as consideration. A contract may be used for various transactions, including the sale of land or goods, or the provision of services. They may be either oral or written, though courts prefer that agreements be put in agreement.
The definition of Contract is given under Section 2(h) of the Indian Contract Act, 1872 which provides “a contract is an agreement enforceable by law.” Thus, a contract is an agreement made between two or more parties which the law will enforce.
From the above definition it could be seen that the definition of contract consists two elements-
An agreement is defined u/s 2(e) as “every promise and every set of promises, forming consideration for each other.” When a proposal is accepted it becomes a promise. Thus, an agreement is an accepted proposal. Therefore, in order to form an agreement, there must be a proposal or an offer by one party and its acceptance by other party.
Proposal + Acceptance = Agreement
The second part of the definition deals with enforceability by law. An agreement is enforceable u/s 10 if it is made by competent parties, out of their free consent and for lawful object and consideration. Therefore, a Contract = Agreement + Enforceability. Thus, all contracts are agreements but all agreements are not necessarily contracts.
Elements of a valid contract
The Indian Contract Act, 1872 itself defines and lists the Essentials of a Contract either directly or through interpretation through various judgments of the Indian judiciary. Section 10 of the contract enumerates certain points that are essential for valid contracts like Free consent, Competency Of the parties, Lawful consideration, etc.
- Two parties: A person cannot enter into a contract with oneself. A valid contract must involve at least two parties identified by the contract. One of these parties will make the proposal and the other is the party that shall eventually accept it. Both the parties must have either what is known as a legal existence e.g. companies, schools, organisations, etc. or must be natural persons. In the case State of Gujarat vs Ramanlal S & Co. – A business partnership was dissolved and assets were distributed among the partners as per the settlement. However, all transactions that fall under a contract are liable for taxation by the office of the State Sales Tax Officer. However, the court held that this transaction was not a sale because the parties involved were business partners and thus joint owners. For a sale, we need a buyer (party one) and a seller (party two) which must be different people.
- Offer: An offer or a promise or an agreement needs to be in contract because if there is no offer than there will be no contract. It is one of the elements to make sure that the contract is legally valid or acceptable. In a contract, it is very important that a party would make an offer. There is a difference of offer between an advertisement and an option. To make an offer, there should be at least two parties or even more so that it would be legally capable of entering into a contract. If the offer is accepted than it would constitute to a legally valid contract. When an offer is being made, the other person or party would know what is being offer and what the person or party who made the offer expect to have in return.
- Acceptance: after having an offer in the contract, there should be acceptance. For a contract to be made there should be acceptance from the other party or person. When the other party is clear with the offer, they would make an acceptance once they are clear with the rules and regulations being offer in the contract. There will be no contract if the parties are still negotiating or discussing and have not accepted the offer. The person or party can accept the offer being made in writing or orally.
- Consensus-ad-idem: The parties to an agreement must have the mutual consent i.e. they must agree upon the same thing and in the same sense. This means that there must be consensus ad idem (i.e. meeting of minds)
- Intent of Legal Obligations: The parties that are subject to a contract must have clear intentions of creating a legal relationship between them. What this means is those agreements that are not enforceable by the law e.g. social or domestic agreements between relatives or neighbours are not enforceable in a court of law and thus any such agreement can’t become a valid contract.
- Case specific contracts: Some contracts have special conditions that if not observed would render them invalid or void. For example, the Contract of Insurance is not a valid contract unless it is in the written form. Similarly, in the case of contracts like contracts for immovable properties, registration of contract is necessary under the law for these to be valid.
- Certainty of meaning: Consider the statement “A agrees to pay Mr. X a desirable amount for his house at so and so location.” Is this a valid contract even if all the parties agree to this term? Of course, it can’t be as desirable amount is not well defined and has no certainty of meaning. Thus, it is said that a valid contract must have certainty of meaning.
- Possibility of Performance of an Agreement: Suppose 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.
- Free consent: Consent is crucial for an agreement and thus for a valid contract. If two people reach a similar agreement in the same sense, they are said to consent to the promise. 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. In other words, it is said that if the consent of either of the parties is vitiated knowingly or by mistake, the contract between the parties is no longer valid.
- Competency of the Parties: Section 11 of the Indian Contract Act, 1872 is:
“who are competent to contract – every person is 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 is (3) not disqualified from contracting by any law to which he is subject.”
Thus, according to section 11, every person with the exception of the following is competent to enter into a contract-
- A minor
- A person of unsound mind
- A person expressly declared disqualifies to enter into a contract under any law
- Consideration: Quid Pro Quo means “something in return” which means that the parties must accrue in the form of some profit, rights, interests, etc. or seem to have some form of valuable “consideration.” Consideration need not be in cash or in kind. A contract without consideration is a ‘wagering contract’ or ‘betting’. Besides, the consideration must be lawful.
- Lawful object: In section 23 of the Act, the unlawful considerations are defined as all those which:
- it is forbidden by law
- 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
- Agreement not expressly declared void: An agreement to become a contract should not be an agreement which has been expressly declared void by any law in the country, as it would not be enforceable at law. Under different sections of the Contract Act, 1872, the following agreements have been said to be expressly void, viz:
- Agreements made with the parties having no contractual capacity, e.g. minor and person of unsound mind (sec 11)
- Agreements made under a mutual mistake of fact (sec 20)
- Agreements with unlawful consideration or object (sec 23)
- Agreements, whose consideration or object is unlawful in part (sec 24)
- Agreements having no consideration (sec 25)
- Agreements in restraint of marriage (sec 26)
- Agreements in restraint of trade (sec 27)
- Agreements in restraint of legal proceedings (sec 28)
- Agreements, the meaning of which is uncertain (sec 29)
- Agreements by way of wager (sec 30)
- Agreements to do impossible acts (sec 56)
- Legal formalities: The agreement may be oral or in writing. When the agreement is in writing, it must comply with all legal formalities as to attestation, registration. If the agreement does not comply with the necessary legal formalities, it cannot be enforced by law.
Therefore, it is important to have the main elements in a contract. Only if there are all the main elements in a contract then it would be legally valid to make a contract. People should take precaution in making a contract to make sure that the parties would be in agreement with the terms made in a contract.
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