Posted February 1, 2014 by advocateguru in Learning Centre
 
 

Essential elements of valid contract

We have seen above that the two elements of a contract are: (1) an agreement; (2) legal obligation.

Section 10 of the Act provides for some more elements which are essential in order to constitute a valid contract. It reads as follows: “All agreements are contracts if they are made by free consent of parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.”

Thus, the essential elements of a valid contract can be summed up as follows

 

1. Agreement.

2. Intention to create legal relationship.

3. Free and genuine consent.

4. Parties competent to contract.

5. Lawful consideration.

6. Lawful object.

7. Agreements not declared void or illegal.

8. Certainty of meaning.

9. Possibility of performance.

10. Necessary Legal Formalities.

(i) Agreement – In order to constitute a contract, there must be an agreement in first place. An agreement in turn is composed of two elements, offer and acceptance. Thus there must be at least two parties-one making the offer and another accepting it. The terms of offer must be definite and the acceptance must be absolute and unconditional.

For example, A offers to sell his car to B for 50,000. B agrees to it. Here there are 2 parties, A (offeror) and B (acceptor). The offer to sell car for 50,000 is a definite offer. This agreement gives to an obligation on part of A to deliver the car to B and on part of B to pay the price.

Thus, there are essentially to be two parties to an agreement. They both must be thinking of the same thing in the same sense. In other words, there must be consensus-ad-idem.

Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ for Rs. 30,000. ‘B’, an acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only car ‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the same.

There is no contract because the contracting parties have not agreed on the same thing at the same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-ad-idem.

 

(ii) Intention to create legal relationship – The both parties must intend to create a legal relationship. Agreements of social or domestic nature do not contemplate legal relationship, so they are not contracts.

Example; A husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not a contract.  This is so, because parties never intended to create legal relationship and breach of this promise is not enforceable in any court of law.

 

However, even in the case of agreements of purely social or domestic nature, there may be intention of the parties to create legal obligations. In that case, the social agreement is intended to have legal consequences and, therefore, becomes a contract. Whether or not such an agreement is intended to have legal consequences will be determined with reference to the facts of the case. In commercial and business agreements the law will presume that the parties entering into agreement intend those agreements to have legal consequences. However, this presumption may be negatived by express terms to the contrary. Similarly, in the case of agreements of purely domestic and social nature, the presumption is that they do not give rise to legal consequences. However, this presumption is rebuttable by giving evidence to the contrary, i.e., by showing that the intention of the parties was to create legal obligations.

Example-

F There was an agreement between Rose Company and Crompton Company, where of the former were appointed selling agents in North America for the latter. One of the clauses included in the agreement was: “This arrangement is not… a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts”. Held that: This agreement was not a legally binding contract as the parties intended not to have legal consequences.

 (iii) Lawful consideration – The agreement must be supported by a lawful consideration. Consideration means ‘something in return’. ‘Something in return’ may be an act or abstinence. The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and is not enforceable at law.

Moreover, the consideration must be real and lawful.

 

(iv) Capacity of the parties/ Parties Competent to Contract – The parties to an agreement must be capable of entering into a contract. A person is considered competent if he is:-

(a) eighteen years of age

(b) Of sound mind

(c) Not disqualified from contracting by any law to which he is subject to.

 

The parties to a contract should be competent to enter into a contract.

According to Section 11, Every person is competent to contract if he

(i)                 Is of the age of majority,

(ii)               Is of sound mind, and

(iii)             Is not disqualified from contracting by any law to which he is subject.

 

Thus, there may be a flaw in capacity of parties to the contract. The flaw in capacity may be due to minority, lunacy, idiocy, drunkenness or status. If a party to a contract suffers from any of these flaws, the contract is unenforceable except in certain exceptional circumstances.

 

(v)Legality of object – The object of agreement must be lawful. The object will be unlawful if it is forbidden by law, is deceptive, or causes injury to the person or property of another person or is immoral or opposed to public policy.

 

For Example; X promise to help Y in smuggling of goods if Y pays him 5,100. This is not a valid agreement as the object is unlawful as the object is opposed to public policy.

 

The object of the agreement must be lawful and not one which the law disapproves.

 

(vi) Existence of free consent/Free and Genuine Consent – The consent of the parties must be free and genuine i.e. not induced by coercion, undue influence, fraud or misrepresentation. Parties must have entered into the contract out of their own free will. Consent implies agreeing upon the same thing in the same sense and free consent implies which is not vitiated by coercion, undue influence, fraud, mistake or misrepresentation etc.

 

For instance; when X asked Y to sell his car worth 2 lakh to him for 20,000 otherwise he will expose his illicit relationship. Y signed the agreement in favor of X selling his car to him for  20,000. This is not a valid contract as the consent of Y is not free.

 

 

(vii) The agreement not expressly declared void or illegal by law – Enforceability of an agreement also depends upon whether it is expressly declared void by any law in force in the country or not. There are certain agreements which have been expressly declared void under various sections of the Contract Act, like agreement in restraint of marriage, trade or legal proceedings, wagering agreement etc.

Example; A knowing that B has committed Bank robbery obtain a promise from B for transferring his flat worth 5 lakh to A for 2 lakh. This agreement is void and illegal. The agreement is void because of illegality of objects.

 

There are certain agreements which have been expressly declared illegal or void by the law. In such cases, even if the agreement possesses all the elements of a valid agreement, the agreement will not be enforceable at law.

 

(viii) Certainty of terms – The terms of agreement must be certain and capable of performance. The meaning of the agreement must be certain or capable of being made certain otherwise the agreement will not be enforceable by law. For example, D agrees to sell C’ garments. The type, quality, value etc. are not discussed. The agreement cannot be enforced as terms are uncertain. Similarly, if A promises B to bring rainfall through magic. Such agreement cannot be enforced.

 

The meaning of the agreement must be certain or capable of being made certain otherwise the agreement will not be enforceable at law. For instance, A agrees to sell 10 meters of cloth. There is nothing whatever to show what type of cloth was intended. The agreement is not enforceable for want of certainty of meaning. If, on the other hand, the special description of the cloth is expressly stated, say Terrycloth (80: 20), the agreement would be enforceable as there is no uncertainly as to its meaning.

 

(ix) Legal formalities – Where nature of agreement is such that it requires compliance of certain formalities, such requirements should be fulfilled. For example, a contract may require registration in addition of being in writing. However as regards to legal effects, an oral contract has same weight age as a contract in writing. So A contract may be oral or in writing. If, however, a particular type of contract is required by law to be in writing, it must comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not carried out, then the contract is not enforceable at law.

 

x) Possibility of performance – The terms of the agreement should be capable of performance. An agreement to do an act impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by magic. The agreement cannot be enforced.


advocateguru