The Essential Elements of a Valid Contract with Examples

The Essential Elements of a Valid Contract

The Essential Elements of a Valid Contract are important to constitute a valid contract, an agreement becomes a contract if it fulfils all the essentials of a valid contract. Section 10 of the Indian Contract Act, 1872 provides all the elements of contract.

Meaning and Definition of the Contract

The meaning and definition of the contract have been provided under section 2 (h) of the Indian Contract Act, 1872 as "An agreement enforceable by law is a contract."

In other words, a contract means when two parties wrote an agreement that contains legal obligations which are to be performed by themselves, and when such agreement becomes enforceable in the eye of the law and is made binding by law, it becomes a Contract.

Valid Contract Example: A made a contract with B to sell 100 litres of milk of a certain quality for Rs. 5000/- In this contract, It is A's duty to provide B with 100 litres of milk of that quality only which B has contracted and B's duty is to pay Rs. 5000/-. This is a valid contract example.

What are the essential elements of a valid contract?

What are the essential elements of a valid contract? Generally, there are 4 requirements for a valid contract. So here are the essentials of a valid contract. Let's discuss them one by one;

1. Two or More Parties/Persons

Essentials of a valid contract, one of the elements is two parties/persons must be there to constitute a valid contract. One party who makes an offer is called an offeror/promisor and the other who gives his acceptance to that offer is called an offeree/promisee.

Therefore, every contract is legally binding by at least two parties/persons where one is the offeror and the other is the offeree.

2. Offer and Acceptance

The first and basic element of the valid contract is offer and acceptance, without offer and acceptance a contract can not arise.

According to section 2 (a), the offer is defined as ''When one person signifies his willingness with another person to do or to abstain from doing something to obtain the assent of the other to such act or abstinence. He said to make a proposal/offer."

According to section 2 (b), acceptance is defined as "When the person to whom the offer is made, signifies his willingness through his consent and gives acceptance to the offer. He said to make an acceptance to the offer."

And, when the offer is accepted becomes a promise.

Hence, the offer or promise must be made by an offeror or promisor (the party who makes an offer) and the acceptance of that offer must be made by the offeree or promisee or acceptor (the party for whom the offer is made) is essential to constitute an agreement.

3. Competent Parties

The next essential element for a valid contract is the competency of the parties to enter into a contract. According to section 10, the parties entering into a contract must be competent. It is one of the essential elements given in section 10 of the Act.

As per section 11 of the Act, the person competent to contract is a person who is the;

1. Age of Majority (i.e. above 18 years of age)

The age of majority in India is governed by the Indian Majority Act, 1875. As per section 3 of the Indian Majority Act, "Every person who is living in India shall be deemed to have attained the age of majority on his completing the age of eighteen (18) years."

But, the person who is living under the guardian which is appointed by the court, then the age of the majority of that person is twenty-one (21) years

2. Sound Mind Persons

According to section 12 of the Indian Contract Act, 1872, a person is a sound mind who can understand the terms and conditions and who is capable of making a rational decision with the effects of the conditions mentioned in the contract.

3. Expressly Declared Void by Law

Apart from minors and unsound mind persons, the person who is disqualified or barred from entering into a contract by the law of land, Such a person cannot form or enter into a contract. Therefore contract made by or with the person who is disqualified by law from entering into a contract is void.

Thus, a minor, unsound mind person or a person who is disqualified by law to enter into a contract are not competent persons for the contract.

If there is any contract formed with these incompetent persons then the contract is null and void.

4. Free Consent

The parties entering into a contract must give the offer and acceptance at their own will and consent without any external factors or external forces.

Section 13 of the Indian Contract Act, defines the term 'Consent' as "Two or more persons are said to have consented that when they agree upon the same thing in the same sense." This is also stated as the identity of minds or in Latin terms stated as 'consensus-ad-idem'.

Section 14 of the Indian Contract Act, defines the term 'Free Consent' as "The consent is said to be free when it is not caused by';

a) Coercion (Sec.15)

The coercion is defined under section 15 of the Indian Contract Act, 1872 as "The Coercion is the committing, or threatening to commit, or any act which is forbidden by the Indian Penal Code, 1860 or unlawful detaining or threatening to detain any property, to the prejudice of any person to enter into an agreement".

b) Undue Influence (Sec.16)

The undue influence is defined under section 16 of the Indian Contract Act, 1872 as "A contract is said to be induced by the undue influence when 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".

c) Fraud (Sec. 17)

The fraud has been defined under section 17 of the Indian Contract Act, 1872 as the term fraud 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 or his agent or to induce him to enter into the contract;

i) The suggestion, which is not true, by one who does not believe it to be true.

ii) The active concealment of a fact by one having knowledge of the fact or belief of the fact.

iii) A promise made without any intention of performing it.

iv) Any other act or omission fitted to deceive.

v) Any such act or omission as the law specially declares to be fraudulent.

d) Misrepresentation (Sec. 18)

The misrepresentation is defined under section 18 of the Indian Contract Act, 1872 as "The misrepresentation means, one party presenting the false representation of the facts without any wrong intentions or to deceive the other party.

In misrepresentation, the party who presented the false facts is innocent and has done the act without knowing it and without any intention to deceive the other party.

e) Mistake (Sec. 20-22)

When one of the parties in the contract has given its consent to the contract under some kind of mistake, misunderstanding or misinterpretation, then the consent is said to have been given by mistake.

At this point, the contract is voidable at the option of the party whose consent was obtained by mistake.

Example: Akash wanted to enter into a contract with Suresh but mistakenly enters into a contract with Ramesh believing him to be Suresh.

Under contract law, there are two kinds of mistakes;

1) Mistake of Law

2) Mistake of Fact

Thus, the above example is amounting to a contract without free consent and the contracts which are signed without free consent are voidable contracts.

5. Consideration

The definition of consideration has been provided under section 2(d) of the Indian Contract Act, 1872, the consideration is defined 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 abstain from doing something, such act or abstinence is called a consideration for the promisee".

When the consideration is at the desire of the promisor means at the will of the promisor.

The promisee or other person either does something (in present, past or future) or abstains from doing something (in present, past or future).

Such an act or abstinence is known as consideration.

Example: X makes an offer to sell his bike for Rs. 1,00,000/- and Y accepts it. Here, the bike is the consideration for Y and the price paid for the bike i.e. Rs. 1,00,000/- is the consideration for A.

6. Lawful Consideration and Lawful Object

The consideration and object to the contract must be lawful and do not violate any provision of law. If any consideration or object violates any provision of law then such agreement is not enforceable by law.

As per section 23 of the Indian Contract Act, 1872, the consideration or object of an agreement is lawful, unless;

it is forbidden by the law
is fraudulent
is of such in nature that if it permitted then it would defeat the provisions of any law.
implies or involves injury to the person or property of another.
is immoral or opposed the public policy

Example: X, Y and Z enter into a contract for division among them of gains from the selling of smuggled goods. The contract is a void and unenforceable contract because the selling of smuggled goods is forbidden by law.

According to section 24 of the Indian Contract Act, if the consideration or object is wholly or partly unlawful, the agreement is not enforceable by law.

Example: If A wants to buy B's car for less amount but B won't sell it. Then A kidnaps B's daughter and forces B to sign a contract for buying a car.

This is an unenforceable contract because the object behind the formation of a contract is illegal i.e. kidnapping. Hence the contract is void.

7. Legal Relationship

For a valid contract, both parties must have the intention to create a legal relationship.

Here, the Indian Contract Act does not provide any provision related to the creation of a legal relationship in the formation of a contract.

But, English law has a principle that to constitute a valid contract the parties must have an intention to create a legal relationship.

In the case of Balfour v/s Balfour, Lord Atkin explained the principle of intention to create legal relation to a contract and in this case, it was held that there are agreements between the parties which do not result in the contract because the parties did not intend that they shall be attended by legal consequences.

In the above case, there was no legal relationship between the parties and there is no formation of a contract, the above case is an example of agreements having domestic nature.

The agreements with domestic nature do not amount to a valid contract due to a lack of intention to create legal relations between the parties to an agreement.

8. Agreement Not Expressly Declared as Void

If an agreement is expressly declared void by law. Such agreements are void. Section 26 to 30 of the Indian Contract Act, deals with the types of void agreements that are expressly declared as void by law. These are;

Agreements in restraint of marriage (Sec. 26)
Agreements in restraint of trade (Sec. 27)
Agreements in restraint of proceedings (Sec. 28)
Uncertain agreements are void (Sec. 29)
Agreements for a wager are void (Sec. 30)

Example: The agreement is expressly declared as void if;

where both the parties are in the mistake of fact.
where the consideration and object are unlawful.
where any part of consideration and object is unlawful.
where the performance of the contract defeats any provision of law.
where there is no valid consideration in the agreement.

9. Certainty of Contracts

The terms and conditions of the contract must be certain and should not be imaginary or illusionary. These are the contingent contracts. The conditions of every contract must be certain as the parties are able to perform those terms and conditions.

Example: A makes an agreement with B that A promises to pay money if B stops breathing for 5 hours. This agreement is uncertain and it is void.

10. Performace of Contract

The terms and conditions agreed upon in the agreement must be capable to perform by the parties to the contract.

If there is an agreement to do an impossible work then the agreement is itself void because the parties are not able to perform the act.

Example: A makes an agreement with B that he will get rewarded if he flies in the sky. This is a void agreement because the condition to fly in the sky is impossible to perform.

Conclusion

The essentials of a valid contract are the most important elements to constitute a valid contract. Every contract to be valid must satisfy all the essential elements of a valid contract as we discuss in this article. An agreement becomes a contract if it fulfils conditions given under section 10 of the Indian Contract Act, 1872.

Referred Books:

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The Essential Elements of a Valid Contract with Examples