Essentials of a valid contract

ESSENTIALS OF A VALID CONTRACT

As per Section 10 of Indian Contract Act

“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 not here by expressly declared to be void.”

As per this definition following are he essential elements for a valid contract:

1. PROPOSAL AND ACCEPTANCE

• For the formation of a valid contract it is necessary that one party should make the offer and the other party should accept it, as only after the acceptance contract will come into existence.

• Proposal: As per Section 2 (a) of Indian Contract Act, “ when a person signifies to another his willingness to do or abstain from doing something with a view to obtain the assent of that other to such act or abstinence , he is said to make a proposal.

Essential Elements of Proposal

•There must be two parties•Willingness to do or not to do something•Should be a proposal, not merely an

intention to make proposal

Legal Rules as to Proposal

• The offer must be made to create legal obligation.• The terms of proposal must be certain not vague.• Proposal can be general or specific. (Case: Mrs.

Carliee Vs Carbolic Smoke Ball Company)• Proposal may be expressed or implied.• Proposal must be in the form of a request and not

an order.• The offer must be communicated. • Proposal must be for possible act.

Case: Mrs. Carliee Vs Carbolic Smoke Ball Company

• In this case the Carbolic Smoke Ball Co gave an advertisement in the newspaper, offering influenza after using their smoke ball 3 times daily for 2 weeks.

• Believing on the advertisement Mrs. Carliee used the same, but contracted influenza .

• Mrs. Carliee sued the company and claimed £ 100.

Judgment was in the favor of Mrs. Carliee.

Acceptance

•According to Section 2 (h): “when the person to whom the offer is made signifies his assent thereto, the offer is said to be accepted”.

Essentials for a Valid Acceptance

• Acceptance must be made by the person to whom the offer is made.

• Acceptance must be in the prescribed manner Sec 7(2) For example: If the offerer wants the acceptance by e-mail, then the acceptance must be given via e-mail. Similarly if any limit is fixed by the offerer for acceptance, then the acceptance must be given with in the specified time.

• Rejected offers cannot be accepted until it is renewed: It is a general rule that an offer once rejected cannot be accepted, until not presented again.

2. Intention to Create Legal Obligation

•There must be an intention among the parties to create legal obligation.

•If the intention of the parties is not to create legal obligation, then it will only remain an agreement and cannot be a valid contract.

3. Competency or Contractual Capacity of the Parties

• According to Section 10 of Indian Contract Act: “All those agreements can be enforced by law, which are made by the person having contractual capacity.”

• According to Section 11: “Every person is competent to contract who is of the age of majority according to the law of which he is subjet and who is of sound mind and is not disqualified from contracting by any law to which he is subject.”

• As per above definition, following parties are incompetent to contract:

• Minors• Persons of unsound Mind• Persons disqualified by law to which they are

subject.

MINOR

•Minor is a person who has not attained the age of Majority according to the law of his country.

•According to Section 3 of Indian Majority Act: “A minor is a person who has not completed eighteen years of age.

Rules Regarding Contract with a Minor• An agreement with or by a minor is void and

inoperative ab-initio. • Contract for Necessities of Life: As per Sec 68 of

Indian Contract Act, if a person enters into a contract for necessities of life, then the person supplying such necessities have the right to reimburse the amount from the property of minor. The necessities basically include food, clothing, rent of house, educational expenditure etc.

• Minors’ Contract for his Benefit (can be enforced)

• Contract by parents or guardian of the minor: If a minor’s parents or guardian make a contract on the behalf of the minor and for his benefit, then such contracts are treated as valid. But if they enter into a contract for the employment of a minor, then such a contract will be invalid.

• Minor’s contracts cannot be ratified on his becoming major.

• Minor as an Agent: According to Sec 182 of Indian Contract Act, “An agent is a person employed to do an act for another or represents another in dealing with the third party.

• Minor as a partner: As per Sec 30 of Indian Partnership Act, A minor can be admitted as a partner, but such a partner will only share the profit not the losses, i.e. he cannot be held liable to share the loss.

• Liability for Minor for Torts: If a minor gets indulge in a crime such as murder, then he/she can be held liable just like adults.

• Minor cannot be adjudged Insolvent: A minor cannot be adjudged insolvent because due to his incompetency, he cannot be declared insolvent

Persons of Unsound Mind

•According to Sec 11, “A person of unsound mind is incompetent to contract”

•According to Section 12’ “ A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable of understanding it and forming a rational judgment as to its effects upon his interests”

4. LAWFUL CONSIDERATION•Consideration means “Something for

Something”•Consideration is the price for which the

promise of other is bought and a promise given for a lawful value is enforceable.

•As per Section 25 of Indian Contract Act, “An agreement without consideration is void”.

Essential Elements of Consideration

•Consideration must move at the desire of the promisor: one of the most important elements of consideration is that any promise to do something must be according to the desire of the promisor.

If any act is done voluntarily by the promisee such act will not be taken as consideration.

•Consideration may be a promise to do or to abstain from doing something. (Positive nad negative consideration)

•Consideration must be legal: According to Sec 23, For the validity of a contract it is necessary that the consideration must be legal.

Contracts based on illegal consideration are considered void.

The consideration is not considered valid or it is considered as unlawful if:

It is forbidden by lawIt involves any injury to a personIt is against public policy

5. LAWFUL OBJECT• An agreement can be enforceable by law only

when its objective is lawful.• If the agreement is having unlawful object, then

no legal contract arises between the parties.• According to Section 23, “If the object is

unlawful for the reasons mentioned under then the agreement shall be void:

The object of a contract is forbidden by law.If it involves injury to the person or property of

another.If the court regard it as immoral or opposed to

public policy.

6. POSSIBILITY OF PERFORMANCE•An essential of a valid contract is that it

must be capable of performance.•According to Section 56 of Indian

Contract Act, “An agreement to do an impossible act is void ab-initio.”

•There may be two situations, one in which the act is completely impossible and other situation may be in which the parties are not aware of that the act is impossible.

7. COMMUNICATION OF THE CONTRACT

•Both the parties as per Sec 4 of Indian Contract Act, must communicate to each other about the offer and acceptance, only then it will be considered as a valid contract.

8. FREE CONSENT OF PARTIES• As per Sec 10 of Indian Contract Act, it is

important that the consent of the parties of a contract must be free.

• According to Section 13 of Indian contract Act, “Two or more persons are said to consent when they agree upon the same thing in the same sense.”

• From the analysis of this definition it is clear that ‘consent’ is said between two parties, when:

Two or more persons in a contract agree upon a thing in a contract.

They agree upon the same thing in the same sense.

•This is also called identity of mind. In English law it is called consensus-ad-idem.

•If the parties to be contracted do not agree upon the same thing then no contract arises at all.

•According to Section 14 of Indian Contract Act, consent is said to be free when it is not caused by:

Coercion (Sec 15)Undue Influence (Sec 16)Fraud ( Sec 17)Misrepresentation (Sec 18)Mistakes (Sec 20 to 22)

9. Agreements Expressly Declared As Void

•Some agreements are expressly declared as Void from the side of law, such agreements are void-ab-initio, such as:

Agreements made by Incompetent Parties.Agreements made under Mutual Mistake of

Facts.Agreements with Unlawful Consideration and

ObjectAgreements without ConsiderationAgreements in Restraint of Marriage

Agreements in Restraint of TradeExceptions:Sale of GoodwillRestraint on PartnerIn case of Separation from partnership On sale of Goodwill of the firm Trade combinationsAgreements of Service Agreements in Restraint of Legal

Proceedings Agreements by way of wager or wagering

Agreements.Agreements to do Impossible Acts.

10. Legal Formalities- Written and Registered

•Contracts related to negotiable Instruments.

•Contracts of lease, mortgage etc.•MOA, AOA•Insurance etc