A contract is the foundation of a civilised world. The law relating to contracts in India is contained in Indian Contract Act, 1872. A Contract is simply an agreement between two or more persons to do something. Each contract creates a binding duty on the contracting parties. The Indian Contract Act deals with the enforcement of these rights and duties upon the parties in India.
Definition of Contract:
A contract is an agreement which creates an obligation between the parties. The Indian Contract Act, 1872 defines the term contract as “an agreement enforceable by law”. Thus,
Contract = Agreement + Enforceability
Essential Elements of a Valid Contract
According to the Act, “All agreements are contracts if they are made by 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 definition reveals that an agreement must have certain essential elements to constitute a contract. The essential elements of a valid contract are:
- Two Parties: To constitute a contract there must be at least two parties, i.e. one party making an offer (offeror/proposer) and the other party accepting the offer (offeree/proposee). The terms of the offer must be definite. Offer means when a person reveals to another his willingness to do or to decline from doing something. Acceptance means when the person to whom the acceptance is made signifies his assent to it.
- Agreement: A contract is initially an agreement when the person to whom the offer has been given signifies his acceptance on it. There arises an agreement which is the foundation of a contract.
- Consent: The parties must agree to the same thing in the same sense and at the same time. An agreement without consent is not legally binding.
- Intention to create a legal relationship: There must be an intention by both parties to create a legal relationship and to legally bind themselves as a result of such an agreement. Thus, agreements of social or household nature are not contracts, because the parties do not intend to create a legal relationship. E.g. – where two parties agree to take a walk together would not amount to a legal contract.
- Contractual Capacity: The parties to the agreement must be capable of entering into a valid contract. According to the Act, every person is competent to contract if he or she,
- is of the age of majority;
- is of sound mind; and
- is not disqualified from contracting by any law.
- Consideration: An agreement by an incompetent person is not valid. A valid contract must be supported by consideration. Consideration means “something in return”. It can be cash, kind or an act. It can be past, present or future. Consideration must be real and lawful.
Illustration – A, for natural love and affection, promises to give B Rs.10,000/-. A puts the promise to B in writing and registered it. This is a contract.
- Free Consent: The parties are said to be in consent when they agree upon the same thing in the same sense, in addition to it, to constitute a valid contract there must be a free and genuine consent of the parties to the contract, i.e. not to be obtained by misrepresentation, fraud, undue influence or mistake. If the consent is not free the contract becomes revocable.
- Unlawful Consideration: According to the Act, the consideration of an agreement is said to be unlawful, if
- it is forbidden by law,
- it is of such nature that, if permitted it would defeat the provisions of any law,
- it is fraudulent,
- it involves or implies, injury to the person/property of another, and
- the court regards it as immoral.
Illustration – X, Y, and Z enter into an agreement for the division of gains acquired by them through fraud. The agreement is void as its object is forbidden by law.
- Certainty: Terms of the agreement must be certain and not vague.
- Possibility to Perform: The promises made under a valid contract must be executable. An agreement to do some impossible act is cancelled from the beginning and never converted into the contract.
- Legal formalities: Although Indian Contract Act does not provide any formality to enter into a contract, therefore, a contract may be express (oral or written) or even implied (by conduct). However, where the law requires, it must comply with all legal formalities such as in writing, registration, and attestation. For example, under the provisions of Immovable Properties Act, a contract of immovable must be written, registered and duly stamped unless not enforceable by law.
Therefore, to form a valid contract there must be
(1) an agreement,
(2) based on the genuine consent of the parties,
(3) supported by a lawful consideration,
(4) made for a lawful object, and
(5) between the competent parties.
To conclude, it can be said that, a contract is an agreement which is enforceable at law. An agreement becomes enforceable when it fulfills certain conditions. These conditions may be called ‘essentials of a valid contract’. If any of the essentials are missing the contract is invalid, voidable, illegal or unenforceable in the eyes of law.