What are the essentials of a valid contract?

• ESSENTIALS OF A VALID CONTRACT

According to Section 10, “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 hereby expressly declared to be void.”

The analysis of the provisions of Section 10 shows that a valid contract musthave the following essential elements:

1.        Proper Offer and Acceptance There must be at least two parties­- one making the offer and the other accepting it. Such offer any acceptance must be valid. An offer to be valid must fulfil certain conditions, such as it must intend to create legal relations, its term, must be certain and unambiguous, it must be communicated to the person to whom it is made, etc. An acceptance to be valid must folds certain conditions, such as it must be absolute and unqualified, it must be made in the prescribed manner, it must be communicated by an authorised person before the offer lapses.

2.        Intention to Create Legal Relationship There must be an intention among the parties to create a legal relationship. In case of social or domestic agreements, the usual presumption is that the parties do not intend to create legal relationship but in commercial or business agreements, the usual presumption is that the parties intend to create legal relationship unless otherwise agreed upon.

           Example: X invited Y to a dinner Y accepted the invitation. It is a social agreement. If X fails to serve dinner to Y, Y cannot go to the courts of law for enforcing the agreement. Similarly, if Y fails to attend the dinner, X cannot go to the courts of law for enforcing the agreement.

But even a business agreement may not be enforceable by law where the agreement so provides e.g. in Rose & Frank Co. v. Crompton Bros. (1925) A.C. 445, the agreement entered into stated that it will not be subject to legal jurisdiction in the law courts, the agreement was not enforceable by law as the parties never agreed to create legal obligations despite being a business agreement.

3.        Capacity of Parties The parties to an agreement must be competent to contract. In other words, they must be capable of entering into a contract. According to Section 11 of Indian Contract Act, 1872. “every person is competent to contract who is of the 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.”

           In other words. the person must be major, must be of sound mind and must not be declared disqualified from contracting by any law to which he is subject. If the parties to agreement are not competent to contract, then no valid contract comes into existence.

           Example: X a minor borrowed Rs 8,000 from Y and executed mortgage of his property in favour of the lender. This was not a valid contract because X is not competent to contract. Therefore, the mortgage was not valid and the money advanced to minor could not be recovered.

4.        Lawful Consideration An agreement must be supported by lawful consideration. Consideration means something in return. According to Section 23 of the Indian Contract Act, 1872, “the consideration is considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy.”

           Example : X agrees to sell his car to Y for Rs. 1,00,000. Here Y’s promise to pay Rs. 1,00,000 is the consideration for X’s promise to sell the car and X’s promise to sell the car is the consideration for Y’s promise to pay 1,00,000.    

5.        Free Consent There must be free consent of the parties to the contact. According to Section 14, “Consent is said to be free when it is not caused by (i) coercion, (ii) undue influence, (iii) fraud, (iv) misrepresentation, or (v) mistake”. If the consent of the parties is not free, then no valid contract comes into existence.

           Example: X threatens to kill Y if he does not sell his house to X. Y agrees to sell his house to X. In this case, Y’s consent has been obtained by coercion and therefore, it cannot be regarded as free.

6.        Lawful Object The object of an agreement must be lawful. According to Section 23 of the Indian Contract Act, 1872, “the object is considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy.”

           Example : X, Y and Z enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud. The agreement is void because its object is unlawful.

Example II: X lets a flat on hire to Y a prostitute, knowing that it would be used for immoral purposes. The agreement is void because its object is for immoral purposes.

7.        Agreement not Expressly Declared Void The agreement must not have been expressly declared void under the provisions of Sections 24 to 30 of the Indian Contract Act, 1872. Under these provisions, agreement in restraint of marriage, agreement in restraint of legal proceedings, agreement in restraint of trade and agreement by way of wager have been expressly declared void.

Example : X promised to marry none else except Y and in default pay her Rs 1,00,000. X married to Z and Y sued X for the recovery of Rs 1,00,000. It was held that Y was not entitled to recover anything because this agreement was in restraint of marriage and as such void.

8.        Certainty of Meaning The terms of the agreement must be certain and unambiguous. According to Section 29 of the Indian Contract Act, 1872, “agreements the meaning of which is not certain or capable of being made certain are void.” Example: X a dealer in different types of oils agreed to sell 100 tonnes of oil to Y. This agreement is void on the ground of uncertainty because it is not clear what kind of oil is intended to be sold. If, however, the meaning of the agreement could be made certain from the circumstances of the case, it will be treated as a valid contract. Example: X who is a dealer in mustard oil, agreed to sell 100 tonnes of oil to Y. This agreement is valid because the meaning of the agreement could be easily ascertained from the circumstances of the case.

9.        Possibility of Performance The terms of the agreement must be such as are capable of performance. According to Section 56, “an agreement to do an impossible act is void.”

           Example : X agrees with Y to discover treasure by magic and Y agrees to pay Rs 1,000 to X. This agreement is void because it is an agreement to do an impossible act. Example II: X agrees with Y to enclose some area between two parallel lines and Y agrees to pay Rs 1,000 to X. This agreement is void because it is an agreement to do an impossible act.

10.      Legal Formalities The agreement must comply with the necessary formalities as to writing, registration, stamping etc. if any required in order to make it enforceable by law.

           Example : An oral agreement _‘for arbitration is unenforceable because the law requires that arbitration agreement must e in writing.