Essentials of a Valid Contract under the Indian Contract Act

I. Introduction – Essentials of a Valid Contract

To form a valid contract, every contract must fulfil the ‘Essentials of a Valid Contract. Section-10 of the Indian Contract Act,1872 specifies some conditions which need to be satisfied in the mandate to create a valid contract.

A contract is defined under Section-2(h)of The Contract Act, 1872 means “any agreement which is enforceable by law[i]”. The word agreement is also defined under Section-2(e) of The Contract Act, 1872 means “Every promise and every set of promise forming consideration for each other is an agreement[ii]“

II. Elements of a Valid Contract

i. Offer and Acceptance

To get started for a contract, there must be an offer from either side of the party, without the offer a contract cannot be formed. There must be an offer from one party and acceptance from the other party. The offer and acceptance must be ‘lawful’ mean it must meet the requirement of the Contract. The word offer is defined under Section- 2(a) of the Indian Contract Act, 1872 whereas Section- 2(b) defines that when an offer is accepted it becomes a promise. Indian Contract act defines an offeror as a “Promisor” and the person who is accepting the offer as a “Promisee”[iii]

When the offer is accepted, and such acceptance has been conveyed, to the offeror, the parties are restricted by their appropriate promises. Much the same as an offer, even an acknowledgement can be renounced before the correspondence of acknowledgement comes to the offeror[iv].

The most significant part of acknowledgement is that performance of an offer, in disregard of the said offer isn’t acceptance. In this way a demonstration is done, adding up to acceptance, yet the acceptor being unmindful of the offer, it’s anything but a substantial acceptance.

Acceptance can either be expressed or implied but it should be in a reasonable manner if acceptance is done by any third party or stranger who is not the party to the contract, such acceptance is not valid.

In the case of Lalman Shukla v. Gauri Dutt[v]it was held that Mere understanding of the contract does not establish acceptance, it must be communicated as well.

Illustration

A offers B 100 pens for Rs. 5 each. To become a Contract, the offer must be accepted by B. If B accepts the offer, it becomes a valid Contract.

• The Intention of creating a Legal Relationship: The parties who are forming an agreement must have an intention to create a Contract. There must involvement of Legal Obligations and both parties must be aware of the Legal Consequences. In those contracts where is, no Legal Obligations involved such contracts are not enforceable by Law, e.g.: – social or domestic agreement with the family, relatives, or friends.

Illustrations

• A and B came into a Contract where A will supply 100 pens to B where B will give Rs. 5 each for a pen. Here, A and B have the Legal Intentions to create a lawful Contract. It’s a valid Contract.
• A friend of B invites B for the dinner. Here, there is no legal intention. It’s not a valid Contract.

ii. Lawful Consideration

Consideration in a layman’s language means something in return for something. To make a valid Contract enforceable by law it should have Lawful Consideration. Consideration means a benefit granted for the fulfilment of a promise. It need not significantly be money; however, it should be something that has been acknowledged by the parties and has some significance.

According to Section 25- of the Indian Contract Act– A contract without consideration is void. However, there are certain considerations that are unlawful and are specified under Section 23– of the Indian Contract Act.

Consideration could be of three types: –

1. Past Consideration- when the promisor has accepted consideration before the date of the performance of the contract by any party. E.g. Advance payment before receiving the parcel.
2. Present Consideration- when consideration is given on the spot while the contract is made or executed. Thus, it is also called “executed consideration.
3. Future Consideration- when consideration is given after the contract is made. For example- cash on delivery of an object.

In the case of Currie v. Misa[vi], the definition of Consideration is defined as “A valuable Consideration in the perception of law may comprise either in certain Rights, Interest, Profit or Benefit accumulating to one gathering or some avoidance disservice, misfortune or duty given, suffered or attempted by the other”.

Illustration:

A and B came into a Contract where A will supply 100 pens to B where B will give Rs. 5 each for a pen. Here, Rs 5 each for a pen is the consideration for the supply of pens. It’s a lawful Consideration.

iii. Parties must be sufficient to contract (Capacity):

Parties must be capable enough to enter into a Contract i.e., competent to contract. Every party is competent to contract if he fulfils the requirement given under Section 11– of the Indian Contract, 1872.

These determinants are:

1. A person should attain the age of majority i.e., 18 years. If the contract is done with the minor then the contract will become void i.e., Void ab Initio it was held in the Mohri Bibi v. Dharmodas Ghose[vii].
2. The party should be of sound mind (sane mind).
3. He/ she is not disqualified from contracting by any Law to which he is subject, want of capacity may thus arise from minority, lunacy, idiocy, drunkenness etc. If any of the parties to a Contract suffers from such disability, the agreement is not enforceable except perhaps in some special cases[viii].

All these requirements must be met concurrently.

If the contract is made for the benefit of the minor, it’s a valid contract. then the doctrine of promissory estoppel will not be applied.

The doctrine of Promissory Estoppel

Promissory estoppel is a doctrine that prevents an individual from backpedalling on a promise regardless of whether a lawful agreement doesn’t exist. It expresses that an aggrieved party can recover damages from a promisor if the damages caused were the consequence of a promise made by the promisor, which the receiver of the promise depended on to his resulting inconvenience.

Illustrations:

1. X came into a contract with B for selling 100 pens for Rs. 5 each. Here, B is a minor i.e., 16 years old. Hence, it’s not a valid contract.
2. X came into a contract with B for selling 100 pens for Rs. 5 each. Here, X is of unsound mind i.e., He is a lunatic. Hence, it’s not a valid contract.
3. X came into contract B who is 21 years old and is of sound mind for selling 100 pens for Rs. 5 each. Hence, it’s a valid contract.

IV. Free consent by the parties

This means parties that are entering into a contract should do it with their will without the external factors or forces. Section-14 of the Indian Contract Act, 1872 defines a contract entered with free consent as a valid contract and if affected by some other factors then, would believe a contract invalid. These factors are defined by the Indian Contract, 1872: –

1. Coercion: It is defined under Section 15– of the Indian Contract Act, 1872 which means Committing any act which is forbidden by law defined under the Indian Penal Code or unlawful to confine of property, or frightening to commit such acts. The act should be harmful to the other party and some legal action may arise out of it. e.g.: – A husband forces her wife that if she will not sign the property papers, he will throw acid on her. This is amounting to coercion and a contract signed under coercion amounts to an invalid contract.

2. Undue influence: It is defined under Section 16–of the Indian Contract Act, 1872 which means one party uses its dominant position over the party and tries to obtain an advantage out of it by influencing. Such examples are the relationship of employer-employee and principle-agent relationship.

Furthermore, it says that the person who is in the position to dominate the will of the other party present has to prove that the contract entered by the parties was not by undue influence. Hence, it defines upon whom the burden of proof will fall. e.g.: – A doctor is in the dominant position in the relation to the patient, here, the doctor influences the patient to sign papers for the operation.

3. Fraud: It is defined under Section 17 of the Indian Contract Act, 1872 which means when the terms which are presented by one party in front of the other party are to cause damage, with the ill- will and to gain advantage out of it. Presenting a false statement, hiding any fact, fake promises made without the intention to perform such act, act done to deceive the other party- such acts will constitute fraud if done with the intention to doing it so. E.g.: – A is selling his refrigerator to B presenting the fake facts that its freezer is working well and have sufficient gas but which was all wrong. Hence, here it’s an invalid contract because A is gaining an advantage by the method of fraud.

4. Misrepresentation: It is defined under Section 18 of the Indian Contract Act, 1872 which means presenting the False representation of facts without the wrong intentions or to deceive the other party. In misrepresentation, the party is innocent and has done the act without knowing it. E.g.: – A asked B if he had faced any issues with the water pipeline system in the basement, and he said that he has never faced any issues regarding the same, absolutely not. A bought the house after considering the fact, and within the moving in of A, the basement was flooded with water due to the rainy season and A suffered a lot of damage.

5. Mistake: Mistake of Fact or Mistake of Law is defined under Section 20 and 21 of the Indian Contract Act, 1872 If any mistake (fact or law) done by either or both the parties will lead to an invalid contract. E.g.: – when X wants to enter into a contract with A for selling the car but mistakenly enters into a contract with D believing him to be A and sells him the car. Hence, it’s become an invalid contract.

v. Lawful object

The object must be lawful in other words we can say that it should not be illegal, immoral, or against the policy of the law. Every agreement which contains unlawful objects results in the formation of a void contract.

vi. The certainty of terms

The terms and conditions of the contract must be certain and should not be vague or illusory. There can never be a contract to contract in the future.

vii. Possibility of performance

The agreement must have the capability to be performed. An agreement to do an act impossible in itself is void, i.e., if A promises to give Rs. 1000 to B, if B can prove that two parallel lines can meet each other such an agreement is void.

viii. Void Agreements

The agreement must not contain certain elements that result in making the contract void. Certain agreements are declared void under the Indian Contract Act, 1872 which are given below: –

1. Agreement in restraint to marriage (Section 26).
2. Agreement in restraint of trade (Section 27).
3. Agreement in restraint of legal proceedings (Section 28).
4. Agreement having uncertain meaning (Section 29).
5. Wagering Agreement (Section 30).

III. Conclusion

These are the most essential and basic elements (standard) for the formation of Contracts, which are to be satisfied to make a contract a valid contract.

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[i] Section 2(h) Indian Contract Act, 1872

[ii] Section 2(e) Indian Contract Act, 1872

[iii] Section2(c) Indian Contract Act, 1872

[iv] Section 5, Indian Contract Act, 1872

[v] (1913) 11 ALJ 489

[vi] (1874) LR 10 Ex 153

[vii]Mohori Bibee v. Dharmodas Ghose (1903) 30 I.A. 114 (P.C)

[viii] Section 11, Indian Contract Act, 1872

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