ESSENTIALS OF A VALID CONTRACT UNDER THE INDIAN CONTRACT ACT
Author: Aakriti Pandey
The contract is a very important part of business basically, it’s a written document that outlines the full understanding of business relationships and scope. Through contract, any misconceptions can be prevented. In legal terms, the term “Contract” defines under section 2 (h) as “An agreement enforceable by law” under the Indian contract act 1872. In simple terms contract is an accepted proposal that is fully understood by law and is enforceable by law. Contract law is based on the principle pacta sunt servanda, which means agreements must be kept. It was drafted originally from the third Indian Law commission in the year 1861 by England. The act came into effect in 1872 but later after the amendments in the act which repealed section 76 to section 123 dealing with the sale of goods act and separate legislation were enacted naming the Sales of Good Act 1930 and section 239 to section 266 called Indian Partnership Act 1872 dealing with the partnership. Let us understand the contract with the given examples:
- A bought ticket of a bus which forms a contract of service as a ticket bought by A consists of terms and conditions on the back of ticket by bus conductor. This contract will be implied rather than express.
- Z an employee has a contract of employment with his employer.
- Purchase of goods and service
- Insurance policies
Essential elements of a valid contract
Offer and Acceptance;
Offer; this is the initial stage of the contract which starts with one party and acceptance by the other part. Before agreement acceptance of proposal or offer should be a must. It is defined under section 2(a) 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.”
There are certain essential elements required for a valid offer;
- Involvement of 2 parties
- Proposal or offer must be clear and certain
- Offer or proposal should be communicated
- It can be a General offer; an Offer made to the public in general at large is known as a general offer. Such type of offer can be accepted by anyone but a contract will be made only by the party who performs the condition of the given proposal
Illustration; Anil advertises in a newspaper that whosoever find his missing cat will be rewarded with 1000/-. Mohit reads this and found his missing cat and calls Anil for the information. Now Ail is entitled to pay reward money only to Mohit.
Carlill V. Carbolic Smoke Ball Company (1893); In this case the defendant company offered by advertisement to pay £100 to anyone who contracts the increasing epidemic of influenza, cold, or any other disease caused after having used the Carbolic ball according to the printed directions. It was further advertised that £100 is deposited with the Alliance Bank showing its sincerity in the matter. In an action by the plaintiff to recover the promised reward after having contracted influenza despite using the ball as per the directions, it was contended that the offer was not made to anyone in person and the plaintiff had not communicated her intention to accept. It was held that an advertisement containing certain terms to get a reward constituted a binding unilateral offer that could be accepted by anyone who performed its terms.
- Specific offer; An offer made to a definite party or parties is known as a specific offer.
For example, Priya sells pens to Reet for 20/-. Here, Priya only offers to Reet Therefore, it is a specific offer.
In the case of Manish Khaitan V. Ideal Real Estates Pvt. Ltd that Respondent communicate his specific offer to the complainant within weeks from receipt of this order and thereafter file written response covering the outcome of such offer.
- Cross Offer; When two parties make the same offer at the same time to each other is known as a cross offer. For example, A and B both at the same time send letters to each other about selling farmhouses.
- Counteroffer; It’s an offer where the original offer has been refused or rejected and replaced by another offer. For example, f ‘A’offers B’ to sell his plot for 7 Lakhs and ‘B’ agrees to buy it for 4 Lakhs only, to which ‘A’ agrees. Here, the old offer is rejected and a new offer is placed.
It is an inference that indicates an offer has been accepted, resulting in the form of a legally enforceable contract. When a party accepts an offer, they are committing to abide by the terms of the offer. In legal terms, acceptance can be defined as involvement agreeing to the terms of the offer. Some examples of acceptance are as follows;
- When a party agrees to make a purchase of a product from the seller even if the product of goods are not was initially agreed upon. The acceptance has been provided if they do not reject the goods or do anything to negate the seller’s ownership of them.
- When an insurer agrees to accept a person’s application for insurance and issues them a policy to cover specific risks or perils.
Valid acceptance is only when the person making the offer is aware of the offer and expresses their intent to accept it. It can be accepted in a variety of ways like;
- Phone message or written
- person to person
- through gesture like a handshake
- By way of formality
- By acquiring the item at a regular rate
Section 2(b) of the Indian Contract Act 1872 defines “When the person to whom the proposal is made signifies his assent thereto, the offer is said to be accepted. Thus the proposal when accepted becomes a promise. “As a result, when the offeror proposal is accepted it became a promise. Before an offer is accepted it can be revoked. Understanding this with the given illustration; A offers to buy B bike for rupees 20 lacs. B accepts the offer which now turned out to be a promise.
Types of acceptance;
- Expressed acceptance; acceptance which is in form of oral or written is known as expressed acceptance.
A offers to sells his clothes to B over a text. B responds to a text saying he offers to accept that offer to buy.
- Implied acceptance; when a person’s approval is demonstrated by their action is it known as implied acceptance.
A enters a restaurant and orders food. Contract to receive a food service and payment is been made. A verbal contract is legally enforceable in the same way that a written contract is.
- Conditional acceptance; occurs when a person to whom an offer has been made informs the offer that he/she is inclined to acknowledge the offer if a certain adjustment is done to the circumstances of the offer. It is also known as eligible acceptance. It operates as a counteroffer.
Intention to create legal relationships
One of the most fundamental aspects of the law is the intent to form legal relationships. It is described as the purpose to establish a legal relationship agreement or contract; it implies that parties recognize and acknowledge; edge legal consequences in the event of contract breach.
- It will be obvious to contracting parties to enter into a serious contract; When two parties decide to enter into a contract, their minds will comprehend the contents of the contract. This is due to their ‘intention’ to be of the consenting mind, on which both parties must agree. If neither party agrees, the contract may be declared null and void. As a result, both contracting parties will be able to take the contract seriously.
- When there’s no purpose to establish legal relations, the contract is not enforceable, legal, or binding; One of the essential elements of a contract is the intent to create a legal relationship. As a result, if there is no intention to create a legal relationship, the contract is presumed to be invalid a result, the contract may not be enforceable because there is no intention to create legal relations at the outset, preventing contracting parties from being legally bound.
- The parties cannot sue each other if they do not intend to form legal relations; Without the intent to create legal relations, the contracting parties may not be legally bound, and this circumstance may cause the contract to be enforceable. As a result, if the contract is enforceable, the contracting parties cannot sue each other, which will exacerbate their business crisis. This will make it difficult for the contracting parties to seek justice.
- Without intention to create legal relations, the contract may become a mere promise; furthermore, because there is no intention of establishing legal relations, any contract will be reduced to a mere promise. When there is no intention to create legal relations, simple promises, such as a simple promise, arise. According to the case studies, the situation of mere promises can be seen when Nathan, the Comfortable Furniture Sdn Bhd salesman, has no intention of establishing legal relations. To follow company policy, he did not accept Mr. John’s cash deposit. Because there is no legal contract between Nathan and Mr. John, the salesman can still sell the dining set to other people if the mere promise occurs.
- If there is no intention to establish legal relations, the contract may lack binding effect; Furthermore, if there is no intention to establish legal relations, the contract or agreement will be less powerful because one or both parties do not have a consenting mind. As a result, if the contract lacks a binding effect, the parties involved will face difficulties in the future.
Domestic and social agreements of intent to form legal relations can be divided into three categories:
- commercial or business relations,
- social friend relations, and
- Family or domestic relations.
In the famous case of Balfour V. Balfour 1919, the husband brought his wife from Sri Lanka to England. The husband had to return home, but the wife remained for medical purposes. He agreed to pay her £30 per month until he returned. When he failed to pay, the wife filed a lawsuit against him. The wife’s function is impaired because no consideration was moved from her and no intention to create a legally binding agreement was discovered. In married couple cases, that the burden of proof is on the plaintiff to demonstrate intent to create a legally binding agreement.
One of the most important aspects of a contract is a consideration. Consideration can be defined in a variety of ways. To begin, consideration can be defined as something of worth and value, such as a product or service. Following that, when the work is completed, the contract’s consideration is carried out. Moreover, past consideration refers to being in the past before making a promise. Consideration is only considered past consideration if it was activating to the return promise, such as before the contract was formed. Consideration occurs when the requirements to enable the party to enforce are met.
Certain Rules of Consideration;
- Consideration can be retrospective, executory, or executed;
- Consideration must deviate from the promisor.;
- Consideration must be economically valuable.
- The past cannot be considered.
- Consideration must be sufficient rather than adequate.
- Payment of a lesser sum does not constitute satisfaction of the full sum.
Consideration can be
- Past consideration
- Present consideration
- Future Consideration
According to Section 2(d), when at the desire of the promisor, the promisee or any other person does something or abstains from doing something…” Thus, unlike in English law, Indian law does not require privity of consideration. In Twiddle v Atkinson [ix], it was held that consideration must move from the promisee, even if it’s for the advantage of the Plaintiff. The principle of privity of consideration is recognized in English law.
The case Chappell V. Nestle 1960 demonstrates how a contract’s consideration can be almost non-existent while still being sufficient to uphold the agreement. Customers who sent a certain number of chocolate bar wrappers received a record from Nestle. Even though the wrappers were simply discarded, it was sufficient consideration to support the agreement. The case was about whether Nestle should pay Chappell royalties on records distributed in exchange for chocolate bar wrappers (plus money for postage and packing).
Privity of Consideration; In the case of Ward V. Bhaym 1956, A mother had a legal obligation to care for her child. The ex-husband promised to pay her £1 per week if she guaranteed the child’s well-being and happiness. It was held that, despite the statutory duty imposed on the mother, she could impose the promise because the act of killing the child “happy” provides more consideration.
Section 14 in Indian Contract Act Consent is said to be free when it is not accused by – Consent is said to be free when it is not caused by-
- Coercion as defined in section 15; Section 15 states that actions of coercion must be done to the detriment of the opposing party. It means that the act of compulsion must cause harm to the other person and that some legal harm must result for a person to be considered bias.
- Undue influence as defined in section 16; It is undue influence if permission is gained by a person who is in a dominant position compared to the other person, according to section 16. As a result, one person must be able to control the will of the other to exert undue influence. An employer-employee relationship, for example, or a doctor-patient relationship,
- 16(2) clarifies that a dominating position includes situations in which a person has real or apparent power, that is, the authority that is not declared but can be easily inferred by a reasonable person.
- 16(3) states that if a contract is formed between two parties and one of them has power over the other’s will and uses that power to engage in the contract, the deal is unconscionable.
- Fraud as defined in section 17; Even if there was undue influence or coercion, etc., if it did not appear that it was instrumental in convincing the promisor to perform the act in question, the existence of coercion, etc., would be ineffective. This means that there must be a direct and immediate link between coercion and non-free consent. If a specific effect is said to be caused by a specific factor, then that impact must be a direct result of that particular cause.
Misrepresentation as defined in section 18;
The first kind is while a declaration is made by using someone, about a fact which is not genuine, even though he believes it to be real.
Second is the type while there may be a breach of responsibility by means of a person who’s making the fake assertion and he profits a few form of advantage even though it wasn’t his goal to mislead the opposite birthday celebration.
The third is the sort in which if one birthday celebration acting innocently, reasons the alternative party to make any mistake almost about the difficulty rely of the settlement.
Mistake as subject to the provisions section 20, 21 and 22
Mistake of Law
When the party has any misunderstanding almost about the felony provisions, it’s far known as Mistake of Law. Now, the birthday celebration can be stressed concerning the regulation of the Homeland or law of a overseas land. If it is a mistake regarding the regulation of the native land, the agreement cannot be averted. The birthday celebration can’t take the plea of having no knowledge of laws of his place of origin. But if it’s far a mistake concerning the law of a overseas country, he may be excused.
Mistake of Fact
When the parties have any false impression regarding the subject rely or phrases of the settlement, it is said to be a Mistake of truth. The false impression may be on the part of one birthday party or each of them.
Bilateral Mistake – When both the events are beneath any false impression/mistake regarding a be counted of truth essential to the settlement, the settlement turns into void.
Unilateral Mistake – When the false impression/mistake is on the a part of one party to the settlement, the settlement remains valid. Only whilst the birthday party is fallacious about the events to settlement or nature of the transaction, the settlement becomes void.
According to Section 10 of the Contract Act, an agreement is a contract if it is made, among other things, by the free consent of contracting parties. People who have reached the age of majority (i.e., over the age of 18) and are of sound mind, and who are not barred from contracting by any law to which they are subject, are applicable to contract. Thus, a minor or a person of unsound mind is not competent to contract, nor is such a person barred from contracting by the laws to which he is subject. In such a case, the contract is null and void.
- Attaining the age of 18; An agreement is made up with a minor business is void ab -initio which means from the beginning.
- Unsound Mind; Section 12 says that a person is of sound mind if, at the time of making the contract, he can understand it (understanding its terms) and is capable of forming a rational opinion about its impacts on his interests (i.e. capable of understanding its consequences).
- Disqualified to contract; means a person who is not legally permitted to enter into a contract. For example, an alien enemy, a criminally convicted person, or a bankrupt individual.
- The doctrine of Estoppel; Estoppel is a principle in law, which prevents a person from taking a different stance, from what he had when he had entered into a contract. the Supreme Court’s decision in MP Sugar Mills Co. Ltd. v. State of Uttar Pradesh. It was stated that where one person (promisor) promised anything in clear and unequivocal conduct or words that are either intended to create legal relations or may create legal relations in the future, as well as the other party acted on that promise.
As a result, Section 23 defines the term “illegal consideration.” An unlawful consideration and object are either,
- forbidden by law; When the object of a contract or the consideration of a contract is forbidden by law, the consideration or object is no longer lawful. They are then considered illegal. As a result, such a contract is no longer valid.
- For example; The Forest Department granted A permission to cut the grass in a specific region. The department’s officials informed him that he could not pass on such interest to another person. However, there is no such provision under the Forest Act. As a result, A sold his shares to B, and the contract was upheld.
- it would defeat the provisions of law; This means if the contract is trying to defeat the intention of the law. If the courts find that the real intention of the parties to the agreement is to defeat the provisions of the law, they will put aside the said contract.
For example; When A is the debtor, and B is the creditor, they agree that B will not plead limitation. This is done, however, to circumvent the intent of the Limitation Act and allow the courts to declare the contract unenforceable due to the unlawful object.
- or the purpose of the contract is fraudulent; A lawful consideration or object can never be deceptive. Agreements entered into with an unlawful fraudulent consideration or object are null and void by definition.
As an illustration, A decides to sneak things out of the nation by selling them to B. As a result, this transaction is null and invalid. If A fails to deliver on his promise, B will be unable to reclaim the funds under the law.
- or involves or implies causing injury; An injury in legal terms refers to a criminal and dangerous injustice committed to another person.
- or damage to someone or someone’s property; If the contract’s object or consideration causes harm to other people or property, this is considered unlawful consideration.
- or the court considers it immoral or a crime; If the court considers the object or consideration to be immoral, then the object and consideration are immoral.
For example; a Contract to publish a book that infringes on someone else’s copyright would be null and void. This is because the consideration is illegal and infringes on another person’s property, namely his copyright.
For example; Anay lent money to Shree to obtain a divorce from Priya. It was agreed once Shree obtains the divorce Anay would marry her. But the court passed the judgment that A cannot recover money from Shree since the contract is void on account of unlawful consideration
The consideration or aim of an agreement is legitimate unless it is forbidden by law; or is of such a type that, if granted, would undermine the requirements of any law; or is fraudulent, or involves or suggests injury to the person or property of another, or the Court deems it as immoral.
Agreements did not expressly declare void
A void contract is been defined under section 10 of the Indian Contract Act which states that agreements that are not enforceable by law are known as void agreements. For a formation of a contract, it should not be void.
- Section 26; a marital restraint agreement is null and void.— Every arrangement prohibiting a person other than a minor from marrying is null and void.
In the case of Shrawan Kumar V. Nirmala, the plaintiff claimed that the defendant had promised to marry her but the defendant later married someone else. But the agreements turned out to be void and the case goes against the plaintiff.
- Section 27: Every agreement that prevents anybody from engaging in a lawful profession, trade, or business of any type is void to that extent. Every agreement that prevents anybody from engaging in a lawful profession, trade, or business of any type is void to that extent.”
In the case of Harper’s Garage Ltd. vs. Esso Petroleum Co Ltd. Their Lordships threw down an exclusive trade agreement in this case because it was irrational to continue it for 21 years. A five-year time frame would have been considered reasonable. They claimed that the idea only applied if a guy agreed to surrender some present liberty.
- Section 28; — 17 Agreements in restraint of judicial actions are null and void. [Every agreement,—
(a) by which any party to the agreement is barred from enforcing his rights under or in respect of any contract through ordinary legal proceedings in ordinary tribunals, or which limits the time within which he may do so;
(b) which, on the expiration of a specific period, extinguishes or discharges any party’s rights under or in respect of any contract, or releases any party from any liability, is void to that degree.]
- Section 29; Agreements void for lack of certainty.—Agreements whose meaning is not certain or capable of being determined are null and invalid. — Agreements whose meaning is uncertain or incapable of being determined are void.
Illustration; A agrees to sells B 200tons of milk but without being satisfied with the quality of the milk this agreement is turned out to be void and uncertain.
- Section 30; Agreement of wager are void Wagering agreements are void and no suit may be brought to recover anything won through wager according to section 30 of Indian Contract Act. Furthermore, no suit can be brought to compel a person to accept an outcome of the match or any other uncertain event if the given event is the subject of a bat.
The essential of a valid contract is the very vital and fundamental values of a contract which must be accomplished, but there may be additional requirements imposed by a special law or from a particular type of contract. For example, a contract dealing with arbitration law has to follow the rules establishes by the law dealing with arbitration.