Essentials of a Valid Contract – Indian Contract Act,1872
- Indian Contract Act,1872 was enacted on 25 April,1872. It lays down all the provisions relating to contracts and governs all the disputes related contracts in India. This Act is based on the principles of English Common Law. It is applicable throughout India.
- An Agreement is a promise or set of promises forming consideration for each other. When this agreement becomes legally enforceable, it is called a contract.
- Contract is basically an agreement oral or written between two or more parties which defines rights,duties and obligations which each party has to perform.
- Agreement + Enforceable = Contract
Definitions Of Contract
- Sir Fredrik Pollock– ‘’Every agreement and promise enforceable by law is a contract’’.
- Salmond– ‘’A contract is an agreement creating and defining an obligation between two or more persons by which rights are acquired by one or more to acts or forbearances on the part of others’’.
- Anson- ‘’The law of contract is that branch of law which determines the circumstances in which a promise shall be legally binding on the person making it’’.
Illustration: X enters into a contract with Z to sell his house for Rs.2,50,000. Here, X has to sell his house and Z has to pay 2,50,000. This is an example of a valid contract.
Essentials Elements of a Valid Contract
Section 10 of the Indian Contract Act,1872 lays down conditions which makes a contract valid.
Following are some of those conditions :
- Intention to Create Legal Relationship
- Lawful Object and Lawful Consideration
- Consideration should not be forbidden by law
- Capacity to Contract
- Possibility of Performance
- Legal Formalities
- Free consent
- The word offer and proposal are often used interchangeably. Offer is the first step in the formation of a contract or agreement.
- According to section 2 (A) of the Indian Contract Act,1872 “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal’’
- The person who makes an offer is called ‘’Offeror’’ or ‘’Promisor’’ and the person to whom the offer has been made is called Offeree or Promisee.
- Offer must be definite, clear, complete and final. A proposal when accepted becomes a promise or agreement. Offeror must communicate his willingness to enter into a contract. Mere desire or willingness to enter into contract is not enough. Offer and acceptance must be ‘’consensus ad idem’’ which means both the party must agree on the same thing and in the same manner.
- Illustration – Mr. A owns several cars. He enters into an agreement with Mr. B to sell one of his cars. He tell Mr. B, Will you buy my car at Rs. 2,00,000/- This is not a valid offer as Mr.A did not specify the car he is talking about. Here, the offer is ambigious.
According to section 2(b) of Indian Contract Act,1872, when a person to whom an proposal has been made, signifies his assent thereto,
Following are some conditions of a valid Acceptance :
- Acceptance must be absolute and unqualified – Acceptance must be absolute. There should not be any conditions attached to acceptance.
- Example: A offers to sell his laptop to B at Rs. 35000/- B replies that he will buy it for Rs. 30000. This is not a valid acceptance. Here, there is a condition attached to the acceptance.
- Acceptance must be Communicated – Acceptance must be communicated to the offeree in the manner prescribed. A mental acceptance to an offer is not a valid acceptance. Acceptance must come to the knowledge of the offeror.
- Example: A tells B to communicate his acceptance to him by a whatsapp message. But, B sends his acceptance by post. This will be an invalid acceptance unless B informs A that the acceptance is not according to the manner prescribed.
- Acceptance must be communicated within a reasonable time – Acceptance must be communicated within the time prescribed. If no time period is prescribed, then it must be given within reasonable time.
- Illustration: Mr. B makes an offer to C to sell his new car to Mr C and asks him to communicate acceptance by the end of the week. Mr. C communicates the acceptance next week.This acceptance will not be valid because the acceptance had to be communicated within prescribed time.
- Illustration – Mr. A wants to sell his smartphone to Mr. B. He says to Mr B, ‘’Will you buy my smartphone at Rs.15000/-’’? Here Mr A is making an ‘’offer’’ so he is an offeror and Mr.B is an’’ offeree’’. If Mr. B accepts the offer, it will be deemed as acceptance. Mr
Intention to Create Legal Relationship
- The intention of the Parties must be to create a Legal Relationship between them. Agreement of social or domestic nature(agreement between spouses, friends or Children) are not enforceable by law. The parties to the agreement must make it clear while entering into a contract that they want to create a legal relationship. If any party to the contract fails to comply with the terms of the agreement then it will amount to breach of contract and will give rise to legal consequences.
Lawful Object and Lawful Consideration
- Section 2(d) of Indian Contract Act,1872 defines consideration as ‘’When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;’’
- Object and consideration of an agreement must be lawful. It must not be illegal, immoral, forbidden by any law or opposed to public policy. Consideration means something in return.
- For a valid contract, there must always be transfer of consideration from both sides. Both the parties to agreement must receive something of value in return of promise. Consideration is one of the most essential elements of a contract. Consideration must be lawful. There cannot be a contract without consideration.
- Any agreement which has unlawful objects or consideration will be void. According to Section 23 of the Indian Contract Act,1872. lays down certain consideration that would make a consideration and object unlawful.
Consideration should not be forbidden by law
- Consideration should not be of such nature, if permitted, it would defeat the provisions of any law or, is fraudulent.
- If consideration involves or implies injury to the person or property of another. The Court regards it as immoral or opposed to public policy.
- Illustration A promises to sell his car to B at Rs.100000, B promises to pay Rs. 100000 to A. This is an example of valid consideration.
- X enters into an agreement with Z to sell narcotics substances in exchange of Rs. 15000/- This is not a valid agreement because the object of agreement is unlawful.
Capacity to Contract
- The parties to the contract must be competent. An agreement with a person who is a minor will be void ab initio. Section 11 of Indian Contract Act lays the following condition to specify competency of parties to the contract.
- Parties to Contract must have attained the age of majority ie.18 years in normal cases and 21 years if guardian is appointed by the Court.
- Parties must be of sound mind while making a contract. A person who is usually of unsound mind, but occasionally of a sound mind can make a contract when he is of sound mind. However, if a person is usually of a sound mind but, occasionally of unsound mind cannot make a valid contract when he is of unsound mind.
- Parties must not be disqualified from contracting by any law to which he is subject.
- Illustration: A enters into agreement with B who is a minor to sell a bike. This is not a valid contract.
Possibility of Performance
- Agreement must be capable of performance. If agreement is not capable of performance, it is void. In order to make an agreement valid, the terms of the agreement must be clear, certain and capable of performance. An agreement to do an impossible act is void.
- Illustration: A enters into an agreement with B to bring back C to life who is already dead. This agreement is void.
According to Indian Contract Act,1872, a contract can be both in oral or in writing. Contract involving movable property can be made orally but contract involving immovable property must always be in writing. However, it is advisable that the contract must always be in writing because it will be easier to prove in the court if any dispute arises between the parties in future. Contract must be signed and attested by witness and registered if required by the law.
Illustration: X entered into an oral agreement with Y to sell his bike. This is a valid agreement.
Free Consent –
The parties must enter into an agreement with free consent. The parties should enter into an agreement with his own wish and will and not by coercion, undue influence, fraud, mistake or misrepresentation. Consent will be deemed to be free only if it does not constitute the following elements;
- Coercion is defined under section 13 of Indian Contract Act,1872 as “Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code under(45,1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
- Illustration: X threatens Z to kill him if he does not transfer all his money to him. Z transfers all his money to X to save his own life.This agreement is not valid as the money was transferred by coercion.
- According to section 16 of the Indian Contract Act, 1872 , ‘’A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
Section 17 of Indian Contract Act states that, ’’Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
- the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
- the active concealment of a fact by one having knowledge or belief of the fact;
- a promise made without any intention of performing it;
- any other act fitted to deceive;
- any such act or omission as the law specially declares to be fraudulent.
- Illustration: A sells his watch to B, claiming that the watch is original and antique. Later on, B finds out that the watch is not original and antique.
According to section 18 of Indian Contract Act, 1872 misrepresentation means and includes:
- the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
- any breach of duty which, without an intent to deceive, gains an advantage of the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him;
- causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.
- Illustration: A enters into a contract with B to sell his horse. B wants a horse that is ideal for racing as he wants to participate in a horse racing competition. A sells a sick horse to B by misrepresenting it to be an ideal horse for racing. Later on, he finds out that the horse is sick and not capable of running in competition. This amounts to misrepresentation and this contract is void.
- According to section 20 of Indian Contract Act, 1872, Mistake is where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement. Mistakes can be both unilateral (one party is under mistake as to matter of fact) and bilateral (both parties to agreement are under mistake as to matter of fact).
- Illustration: X enters into an agreement with Y to sell German Shefford. At the time of agreement, the dog was already dead. Both X and Y was not aware of it. This contract is void due to mistake of fact.
Types of Contracts under Indian Contract Act, 1872
Indian Contract Act classifies Contracts into various types on the basis of mode of creation, extent of execution, enforcement.
Types of Contracts on the basis of Mode of Creation
- According to Section 9 of Indian Contract Act If any proposal or acceptance of any promise is made in words, the promise is said to be expressed.
- Hence, if any offer or acceptance is made in words either orally or in writing, it will be considered as Expressed Contract.
- Illustration: X texts his friend Y and offers him to sell his watch. Y communicates his acceptance to buy the said watch on a phone call. This is an example of expressed contract as the terms of contract are in words (orally).
- According to section 9 of Indian Contract Act when any proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Hence, if any offer or acceptance is made in any manner other than in words like signs, gesture, actions, circumstances or conduct of the parties, it will be considered as Implied Contract.
- Illustration: A person enters a restaurant and orders food for himself or A person orders a TV set from an online shopping website on cash on delivery payment option. These are implied contracts.
- Quasi Contract is a contract which is created by a court or conduct of parties. In a Quasi Contract, there is no formal agreement between parties but their conduct gives rise to a contract. It is basically created to rectify circumstances where one party benefits at the expense of the other party.
- Illustration: Mr B gets some chocolates delivered to Mrs C (his wife). The delivery boy delivers the chocolates to Mrs. D (wrong address).Mrs. D consumes the chocolates assuming it to be a gift. This is a quasi Contract and Mrs. D is liable to either return the chocolates or pay equivalent amounts to Mr.B.
Types of Contract on the basis of extent of execution
- When both the parties to a contract have performed their obligations under the contract, it is said to be an executed contract.
A person goes to a shop to buy vegetables. He buys the vegetables, pays the money to the shopkeeper then and there. Both the parties have performed their duties( the shopkeeper sold the veggies and the person paid the money).This is an example of an executed contract as the act of offer and acceptance are done instantly.
- Executory Contract is a contract that has not been fully performed or fully executed. When one or both the parties to the contract have not fulfilled their obligation, it is an executory contract.
- Illustration: contracts entered with online shopping sites are generally executory as delivery of goods takes some time.
- Unilateral contracts are one- sided contracts. In unilateral contracts, only one party makes a promise. It is a contract in which the offeror promises to perform its obligations after occurrence of a specified act/event.
- Illustration: Fire insurance for houses is an example of partially unilateral contract. Insurance companies will pay the insurance amount only if the house is destroyed by fire.
- Bilateral Contract is a contract in which both the parties to contract promises to perform its obligations.
- Illustration: contract between buyer and seller is an example of bilateral contract.
Types of Contract on the basis of Enforcement
- Valid Contract is a contract which has satisfied all essential elements of a valid contract. Valid Contracts are enforceable in the Court of Law. An agreement which has fulfilled all the essentials elements like free consent, competent parties, lawful consideration and object etc provided under section 10 of Indian Contract Act,1872 is a valid contract.
- Illustration: A and B, both majors entered into a contract to sell a bike for Rs.20,000/- wherein A offers to sell his bike to B and B accepts to buy the bike. This is a valid contract since both the parties are major and the object and consideration of contract is legal.
- According to section 2(i) An agreement is a voidable contract if it is enforceable by Law at the option of one or more of the parties there to (i.e. the aggrieved party), and it is not enforceable by Law at the option of the other or others. Parties to the contract have the option to either affirm or reject it.
- Illustration: X enters into an agreement with Y who is a minor to buy a laptop. Agreement made by A is valid but agreement made by Y is voidable because a contract can be valid only when parties are competent to contract. So,this is a voidable contract.
- According to section 2(j) of Indian Contract Act “A contract becomes void when it ceases to be enforceable by law’’ It does not give rise to any mutual rights and obligation between the parties to contract.
- Illustration: A enters into an agreement with B to traffic children from one kolkata to mumbai. This is a void contract.
- Unenforceable Contracts are contracts which cannot be enforced in a court of law. A contract can become unenforceable for a number of reasons like ambiguous terms in a contract, natural calamities, expiry of limitation period etc.
- Illustration: Mr B entered into a contract with a wholesaler to supply him 100 tins of jam. Jmas were stored in the warehouse at the time of execution of contract. Goods stored in the warehouse got destroyed by fire. This contract will become unenforceable.
- When subject matter of any contract is illegal. Unlawful or Illegal contracts have illegal/unlawful objects and consideration.
- Illustration: A enters into a Contract with B to kill C. This is an unlawful/ illegal Contract.
All Agreement are not Contracts but All Contract are Agreements
- Offer + Acceptance = Promise
- Promise + Consideration = Agreement
- Agreement + Enforceablity = Contract
All Contracts are Agreements because:
An Agreement can become a contract only if it is legally enforceable by law or fulfills the conditions laid down under section 10 of Indian Contract Act,1872. So, all contracts are definitely agreements.
All Agreements are not Contracts because:
All Agreements are not Contracts because only those agreements which fulfill the conditions laid down under section 10 of Indian Contract Act,1872 become contracts. It is not necessary that all the agreements will satisfy the conditions laid down under section 10 of Indian Contract Act,1872.
Landmark Judgements of Law of Contracts
Balfour vs Balfour
Mr and Mrs Balfour were enjoying vacation in England. When they were about to leave, Mrs became ill and was advised to stay back. Mr.Balfour promised to pay her allowance every month for maintenance. After sometime, differences arose between them and Mr. Balfour stopped paying allowance. Mrs. Balfour brought action against Mr. Balfour. The court held that agreement between husband and wife was purely social and domestic in nature, There was no international to create legal relationship. Hence, the contract was not enforceable.
Lalman Shukla vs Gauri Datt
Lalman Shukla (plaintiff) was Gauri Datt’s servant (defendant).Gauri Datt’s nephew went missing and the plaintiff was sent out in search of the child. After the plaintiff leaves in search of the child, Defendant offers to give a reward of Rs 501/- to anyone who finds his nephew. The plaintiff finds the boy and brings him back home. Lalman Shukla discovers the reward and claims the reward. Lalman Shulka filed a case to claim the reward amount.
The court held that Llaman Shukla was entitled to the reward amount as there was no contract between them and it was his duty as a servant to find the missing child. Lalman Shukla had no knowledge of the offer or contract. There cannot be an acceptance or contract without knowledge of an offer or contract.
Carlill vs Carbolic Smoke Ball
The Carbolic Smoke Ball Co. made a product called ‘’Smoke Ball’’and claimed it to cure influenza and a number of other diseases. The company published an advertisement claiming that it would pay 100 pounds to anyone who got sick with influenza after having its product according to the instructions provided in it. Mrs.Carlill caught influenza even after taking smoke balls according to the instructions.
Mrs. Carlill filed a case to claim the reward amount. The court held that when a person fulfills the conditions of an offer, it will amount to acceptance and there is no need to communicate the acceptance in contract of general nature. The acceptance of the general offer is given by conduct.Hence, the court held that Carlill accepted the offer by consuming the smoke ball as prescribed and so she was entitled to receive the reward.
Felthouse vs Bindley
In this case, Mr. Felthouse offered to buy a horse. He wrote a letter to Bindley stating that he wants to buy his horse at certain price and that if he does not reply, he will assume that Mr. Felthousehas accepted the offer. Benley could not reply to the letter because he was busy. Later on, Mr. Bindley refused to sell the horse. Mr. Felthouse filed a case to claim the horse. The court held that silence cannot be considered as acceptance. Acceptance has to be expressed or implied.
Harvey vs Facey
In this case, Harvey communicated with the defendant about a Hall Pen through Telegram.
He said, ‘’Will you sell us Bumper Hall Pen? Telegraph lowest price’’Fasey responded to this telegraph stating that the price of the Pen to be 900 pounds. Harvey replied to this, stating that they are willing to buy the Pen at the said amount. The defendant refuses to sell the Pen.He contended that he never said ‘’Yes’’ to selling. He just quoted the price. This will amount to an invitation to offer.
Boulton vs Jones
Jones (defendant) sent a written order for goods to a shop owned by Brocklehurst. The same day Broklehurst sold his shop to Boulton. Boulton delivered the goods to Jones without informing him that he had bought the shop. Defendant refused to make payment of the goods.
The court held that the defendant is not liable to make payment because there was no contract between them. The offer was between Jones and Brocklehurst. It was held that an offer can be accepted only by the person to whom it was made.
Chinnaya vs Ramayya
In this case, a lady transfers a certain portion of land to her sister. After sometime the lady gives her land as a gift to her daughter on the condition that she will pay Rs. 653/- as an annuity to her sister.
The daughter receives the gift and accepts to give her sister an annuity of Rs. 650/- Later on,she refuses to give the annuity. The sister files a case to claim the amount. The court held that the estate received as a gift and the agreement to pay annuity is a simultaneous agreement and will be considered as one transaction.Hence, the sister was entitled to receive the consideration.
Pharmaceutical Society of Great Britain vs. Boots Cash Chemists Ltd.
In this case, the court held that goods displayed along with a price tag is an invitation to offer. If the buyer is willing to purchase the goods, he can make an offer to buy the goods. The seller is not under liability to sell it. He has the right to accept or reject the offer.
Author: Shreya Rathor,
Bharati Vidyapeeth University,Pune 5th Year