Essential Elements of a Valid Contract PDF

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Notes Regarding Essential Elements of Contract by Professor Ravnish at Sanpada....

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Essential Elements of a Valid Contract An agreement to be enforceable at law must satisfy the essentials of a valid contract According to Section 10 of the Act. “All agreements are contracts, if they are made by the free consent of parties, competent to contract, for a lawful consideration and with a lawful object, and not hereby expressly declared to be void.”Thus, the following are the essential elements of a valid contract(i)

Agreement, i.e., Proposal and Acceptance.

(ii)

Intention to create legal relationship

(iii) Lawful Consideration (iv) Competent Parties (v)

Free Consent

(vi) Not expressly declared void by law. (vii) Certainty and possibility of performance (viii) Compliance with legal formalities.

(i)

Agreement: An offer or proposal by one party and an acceptance of that offer by another party is called an agreement. An agreement has been defined by the Act as “every

promise

or

every

set

of

promises

forming

considerations for each other.” The acceptance of the offer

must be according to the mode prescribed and must be communicated to the proposer. Further, the intention of the agreement must be to create legal relationship between the parties. Agreement must be capable of performance with terms which are clear and certain. It should not be suffering from either a fundamental mistake or impossibility of performance. (ii)

Intention to create legal relationship: Whenever parties make an agreement, their must be an intention to create a legal relationship between them. If such intention is not present, there is no contract between the parties. In case of social or domestic agreements, parties do not contemplate legal relationship, as such these are not contracts [Balfour Vs. Balfour (1919)2 K.B. 571]But in case of business agreements or commercial agreements, the usual presumption is that the parties have intention to create legal relationship. But this presumption is rebuttable with the help of evidence.[Rose and Frank co. Vs. Crompton Bros. (1925) A.C. 445] [Jones Vs. Vernon’s Pools. Ltd. (1938) 2 AII.R. 626]

(iii) Free Consent: Two or more persons are said to have consented when they agree upon the same thing in the same sense. Thus, if two persons enter into an apparent contract concerning a particular person or thing and it turns out that each of them was misled, by a similarity of name and actually each had a different person or thing in mind, no contract would exist between them. For example, A has two cars, one blue and the

other red. He wants to sell his blue car. B, who knows of only A’s red car, offer to purchase A’s car for Rs.20.000. A accepts the offer thinking that it ;s for his blue car. There is no consent because both the parties are not understanding the same thing in the same sense. Besides, to make a contract valid not only consent is necessary but the consent must also be free. According to Sec. 14, consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. A clear distinction must be made between ‘no consent’ and ‘no free consent’. In the case or ‘no consent,’ there is no identity of mind and therefore, in the absence of consent the agreement is void abinitio—from the very beginning. In the later case of ‘no free consent’, consent is there but it is not free, the agreement is voidable at the option of the party whose consent is not free. A thief who deprives a person of his goods without his consent cannot claim any title whatsoever in the goods. But a dacoit who obtains goods from the other person by obtaining his consent at the point of pistol (coercion) can retain the goods until the real owner claims them back. The possession of the thief is void for want of consent but the possession of the dacoit is oidable at the option of the real owner, i.e., valid unless challenged by the real owner because it has been obtained with the consent of the real owner though the consent had not been free.

(iv)

Competent Parties: At least two parties are essential for every valid contract. A person cannot enter into a contract with himself except in a different capacity, e.g., a partner may purchase goods from his own firm. In order that an arrangement may be a binding contract, the parties must have the legal capacity of entering into the contract. According to Sec. 11 of the Act “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.” Thus, a contract entered into by a minor or by a lunatic is void. In India, a person who has not completed his 18th year of age is considered to be a minor. However, a lunatic can enter into binding contracts during his lucid intervals. The legal presumption is that every party to a contract has the capacity to contract unless contrary is proved and the presumption is rebutted.

(v)

Lawful Consideration: Consideration is an essential element of a valid contract. An agreement without consideration is a bare promise and is not binding on the parties. Contracts result only when a promise is made in-exchange for in something in return. This something in return is termed as “consideration”. Consideration is the price paid by the promisee for the obligation of the promisor. Consideration need not be a benefit to the promisor. If the promisee has suffered some loss or

detriment, it will be taken as a sufficient consideration for the promisor to fulfill his promise. Example: A agrees to sell his car to B for a sum of Rs. 10,000. For A’ a promise the consideration is a sum of 10,000 while for B’s promise consideration is the car. Consideration is also the necessary evidence required by law about the intention of the parties to establish legal relationship. Consideration must be real, and not illusory or illegal. Consideration may be past, present or future. It may move from the promisee or any other person but it should always be furnished at the desire of the promisor. Consideration must be valuable in the eyes of law, i.e., it must result in some gain to one party and detriment to the other.(vi) Legal object: The agreement must not relate to a thing which is contrary to the provisions of any law or has expressly been forbidden by any law or which is opposed to public policy or immoral. All agreements which are not lawful cannot be enforced by law. This is because courts will not allow polluted hands to touch the pure fountains of justice. No agreement can be allowed to defeat the provisions of any law or to cause injury to the person or property of any person or to achieve fraudulent objects. Example: A agrees to sell certain goods to B. A knows that the goods are to be smuggled out of the

country. The contract is

unlawful and not enforceable. A person who knowingly lets out his house for Prostitution cannot recover the rent thereof because the purpose of the agreement has been immoral.(vii) Not expressly declared void: The agreement must have not been expressly declared

void by any law in force in the country. In India agreements in restraint of trade, inrestraint of marriage, or to do things which are impossible or are in the nature of illegal or immoral agreements, etc. are expressly declared void by the Indian Contract Act.Example: A and B are competitors in o business. B agreed to pay A a sum of money if he would close his business. A did so but B refused to pay him the money. Held, the agreement was void because it was in the nature of restraint of trade and therefore, money could not be recovered. (viii) Certainty and possibility of performance. The agreement between the parties must be certain. It should not be vague or indefinite. If it is vague and the determination of its meaning is not possible, it is hot a contract and can not be enforced. In addition to this, the terms of the contract must be such which can be performed. An agreement to do an impossible act can not be enforced. For example, agrees with B to put life into B’s dead child, the agreement is void as it is impossible of performance. [Sec 56 (1)(ix) Compliance with Legal Formalities: If any legal formalities of writing, registration, etc. are necessary by law, these must be satisfied. In the absence of these legal formalities, agreements will not be enforceable in courts of law. Contracts which must be registered (i) A promise made without consideration on account of natural love and affection between parties standing in near relation to eachother. (ii) Documents of which registration is compulsory under Sec. 17 of the Registration Act, 1908.

(iii) Contracts relating to the transfer of immovable properties under the Transfer of Property Act 1882. (iv) Memorandum and Articles of Association, debentures, mortgages and charges under the Companies Act, 1956...