Download Essential Elements of a Valid Contract: A Comprehensive Guide to Contract Law and more Lecture notes Social Contract Theory in PDF only on Docsity!
Essential Elements of a Valid
Contract
Contract Act
Meaning and Definition of Contract
A contract is an agreement made between two or more parties which the law will enforce. According to Section 2(h) of the Indian Contract Act, 1872, "An agreement enforceable by law is a contract." Salmond defines a contract as "An agreement creating and defining obligations between the parties."
Essential Elements of a Valid Contract
For an agreement to become a valid contract, it must have the following essential elements:
Offer and Acceptance : There must be an offer and an acceptance of that offer. The offer and acceptance should relate to the same thing in the same sense, and there must be two or more persons to an agreement.
Intention to Create Legal Relationship : The parties must have the intention to create a legal relationship among them. Agreements of a social, domestic, or political nature are generally not considered contracts.
Free and Genuine Consent : The consent of the parties to the agreement must be free and genuine. Consent is said to be absent if the agreement is induced by coercion, undue influence, fraud, misrepresentation, or mistake.
Lawful Object : The object of the agreement must be lawful, meaning it must not be illegal, immoral, or opposed to public policy.
Lawful Consideration : An agreement to be enforceable by law must be supported by consideration. Consideration means "an advantage or benefit" moving from one party to the other, or "something in return."
Capacity of Parties : The parties to a contract should be capable of entering into a valid contract, meaning they must be of the age of majority, of sound mind, and not disqualified from contracting by any law.
Agreement Not to be Declared Void : The agreement must not have been expressly declared to be void under Sections 24 to 30 of the Act, such as agreements in restraint of trade, marriage, or legal proceedings.
Certainty : The meaning of the agreement must be certain and not vague or indefinite.
Possibility of Performance : The terms of an agreement should be capable of performance. An agreement to do an act impossible in itself is void and cannot be enforceable.
Necessary Legal Formalities : If the law requires a contract to be in writing, registered, or stamped, then it must comply with these legal formalities for it to be enforceable.
Offer and Acceptance
An offer is defined in Section 2(a) of the Indian Contract Act as "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 essential elements of a valid offer are:
Offer must be capable of creating legal relations. Offer must be certain, definite, and not vague. Offer must be communicated to the person to whom it is made. Offer must be distinguished from an invitation to offer. Offer may be expressed or implied. Offer must be made between two or more parties. Offer may be specific or general. Offer must be made with a view to obtaining the assent of the other party. Offer must not be a mere statement of price. Offer should not contain a term "the non-compliance" of which may be assumed to amount to acceptance.
Communication of Offer and Revocation of Offer
The communication of an offer is complete when it comes to the knowledge of the person to whom it is made. An offer may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
Revocation or Lapse of Offer
An offer may be revoked or lapse under the following circumstances:
By communication of notice: The offeror may revoke the offer by giving a simple notice of revocation, either oral or written. By lapse of reasonable time: An offer will lapse if it is not accepted within the prescribed or reasonable time. By non-fulfillment of some conditions: If the offeror has prescribed some conditions to be fulfilled, and the offeree/acceptor fails to fulfill them, the offer will be revoked.
November 23rd. The court held that the offer had lapsed as the reasonable period for acceptance had elapsed.
Acceptance cannot Precede an Offer :
If the acceptance precedes an offer, it is not a valid acceptance and does not result in a contract.
In other words, "acceptance subject to contract" is not a valid acceptance.
Acceptance must be Given by the Party to Whom the Offer is Made :
An offer can be accepted only by the person or persons to whom it is made. It cannot be accepted by another person without the consent of the offeror.
Example: In Boulton v. Jones (1857), the offer was made to Brocklehurst, and Boulton, who had bought Brocklehurst's business, could not step in and accept the offer.
Acceptance cannot be Implied from Silence :
Silence does not amount to acceptance. If the offeree does not respond to the offer or keeps quiet, the offer will lapse after a reasonable time.
The offeror cannot compel the offeree to respond to the offer or suggest that silence will be equivalent to acceptance.
Acceptance must be Expressed or Implied :
An acceptance may be given either by words (spoken or written) or by conduct. An acceptance expressed by words is called "expressed acceptance." An acceptance inferred by the conduct of the person or by the circumstances of the case is called an "implied or tacit acceptance." Example: In Carlill v. Carbolic Smoke Ball Company (1893), the court held that by using the smoke balls according to the directions, Mrs. Carlill had accepted the offer and could recover the reward.
Acceptance and Offer
Acceptance May Be Given by Performing a Condition or
Accepting Consideration
Acceptance of an offer can be given by performing a specified condition or by accepting some consideration.
Acceptance Must Be Made Before the Offer Lapses or Is
Withdrawn
Acceptance of an offer must be made before the offer lapses or is withdrawn.
Consensus Ad Idem
The essence of an agreement is the meeting of the minds of the parties in full and final agreement; there must be consensus ad idem. Consensus ad idem means that the parties to the agreement must have agreed about the subject-matter of the agreement in the same sense and at the same time. Without consensus ad idem, there can be no contract. Example: If 'A' sells a horse named Rajhans to 'B', but 'B' thinks he is purchasing a different horse named Hansraj, there is no consensus ad idem, and therefore no contract.
Cross Offers
Cross offers occur when two or more identical offers are exchanged between parties in ignorance of each other's offer. In such cases, the courts construe one offer as the offer and the other as the acceptance, meaning that no contract is concluded. Example: 'A' offers to sell his car to 'B' for Rs.15,000, and at the same time, 'B' offers to buy 'A's car for Rs.15,000. The two letters cross each other in the post, and the courts will not find a concluded contract between 'A' and 'B'.
Void Contracts vs. Voidable Contracts
Void Contracts
A void contract is a contract that ceases to be enforceable by law. A void contract is valid when made but may subsequently become void. A void contract does not provide any legal remedy for the parties.
Voidable Contracts
A voidable contract is an agreement that is enforceable by law at the option of one or more of the parties, but not at the option of the other(s). Contracts caused by coercion, undue influence, fraud, or misrepresentation are voidable. In the case of a mistake, the contract is void. The aggrieved party in a voidable contract has the right to rescind the contract, making it void.
Revocation of Offer and Acceptance
An offer may be revoked at any time before the communication of its acceptance is complete as against the offeror, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Example: 'A' makes a proposal to 'B' to sell his house at a certain price. 'B' accepts the proposal by a letter sent by post. 'A' may revoke his offer at any time before 'B' posts the letter of acceptance, but not afterwards. 'B' may revoke his acceptance at any time before the letter of acceptance reaches 'A', but not afterwards.
Revocation of an Offer
Revocation against the Promisor
When an offer is made, it can be revoked by the promisor at any time before it is accepted by the promisee. Example: 'A' proposes by a letter to sell a house to 'B' at a certain price. The letter is posted on 15th May. 'A' revokes his offer by telegram on 18th May. The revocation is complete against 'A' when the telegram is dispatched (i.e., on 18th May).
Revocation against the Promisee
The revocation is complete against the promisee ('B') when he receives it (i.e., on 20th May).
Consideration
Meaning of Consideration
Consideration is a technical term used in the sense of quid-pro-quo (i.e., something in return). When a party to an agreement promises to do something, he must get something in return. This "something" is defined as consideration.
Definition of Consideration
According to Section 2(d) of the Indian Contract Act, 1872, 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) to abstain from doing, something, such act (or) abstinence (or) promise is called a consideration for the promise".
Example: Abdul Aziz vs. Masum Ali (1914)
Facts: The secretary of a mosque committee filed a suit to enforce a promise which the promisor had made to subscribe Rs.500/- for rebuilding a mosque. Judgment: The promise was not enforceable because there was no consideration in the sense of benefit, as the person who promised gained nothing in return for the promise made, and the secretary of the committee to whom the promise was made, suffered no detriment (liability) as nothing had been done to carry out the repairs. Hence, the suit was dismissed.
Essentials of a Valid Consideration
It may be past, present, or future: Past consideration refers to an act or abstinence that has already been done. Present consideration refers to an act or abstinence that is being done.
Future consideration refers to a promise to do or abstain from doing something.
It must move at the desire of the promisor:
The act or abstinence forming the consideration must be done at the desire or request of the promisor.
If it is done at the instance of a third party or without the desire of the promisor, it will not be a valid consideration.
It must not be illegal, immoral, or opposed to public policy:
The consideration given for an agreement must not be unlawful, illegal, immoral, and not opposed to public policy.
Where it is unlawful, the court will not allow an action on the agreement.
It need not be adequate:
Consideration need not be of any particular value.
It need not be approximately equal in value to the promise for which it is exchanged, but it must be something which the law would regard as having some value.
It must be real and not illusory:
Consideration must not be illegal, impossible, or illusory but must be real and of some value in the eyes of the law.
Examples of invalid considerations include physical impossibility, legal impossibility, uncertain consideration, and illusory consideration.
Charitable subscriptions:
Where the promisee, on the strength of a promise, makes commitments (i.e., changes his position to his liability/detriment), the promise becomes enforceable.
Relationship between Agreements and
Contracts
All contracts are agreements, but all agreements are not contracts. A contract is an agreement enforceable by law, while an agreement is a promise and every set of promises forming consideration for each other. For an agreement to become a contract, it must have the essential elements of a valid contract, such as free consent, consideration, and enforceability by law.
Stranger to a Contract
The general rule is that a stranger to a contract cannot sue, as per the doctrine of privity of contract. However, there are exceptions to this rule, where a stranger to a contract can sue: In the case of a trust, where the beneficiary can sue the trustee for the enforcement of the trustee's duties. In the case of marriage settlements, partitions, or other family arrangements, where a provision is made for the benefit of a person who is not a party to the agreement.
Contracts and Agreements
Definition of a Contract
A contract is an agreement made between two or more parties that the law will enforce. According to Section 2(h) of the Indian Contract Act, 1872, "An agreement enforceable by law is a contract." Salmond defines a contract as "An agreement creating and defining obligations between the parties."
Classification of Contracts
Contracts can be classified based on their:
Validity : Valid Contract: A valid contract is an agreement that is binding and enforceable. Voidable Contract: A voidable contract is enforceable at the option of one or more parties, but not at the option of the others. Void Contract: A void contract is an agreement that has no legal effect. Illegal Contracts: Some agreements are illegal in themselves, such as contracts of an immoral nature or those opposed to public policy.
Unenforceable Contract: An unenforceable contract is one that cannot be enforced in a court of law due to a technical defect, such as the absence of writing or the lapse of time.
Formation :
Express Contract: An express contract is one where the terms are stated in words, either spoken or written. Implied Contract: An implied contract is one where the agreement is shown by the acts and conduct of the parties, rather than by words.
Quasi-Contract: A quasi-contract is not a contract at all, but an obligation created by law based on the principles of natural justice, equity, and fair play.
Performance :
Executed Contract: An executed contract is one where both parties have performed their respective obligations. Executory Contract: An executory contract is one where the parties have yet to perform their obligations. Unilateral (One-sided) Contract: In a unilateral contract, one party has already performed their part, and the obligation is outstanding only against the other party. Bilateral (Two-sided) Contract: In a bilateral contract, the obligations on the part of both parties are outstanding at the time of the formation of the contract.
Capacity of Parties
Minors
A minor is a person who has not completed 18 years of age, or 21 years if a guardian has been appointed for the minor's property. Agreements by minors are absolutely void, as they are incompetent to contract under Section 11 of the Indian Contract Act. Minors can be promisees or beneficiaries, but their agreements cannot be ratified upon attaining majority. Minors cannot be ordered to make compensation for benefits obtained under a void agreement. Minors can always plead minority, and the rule of estoppel cannot be applied against them. Specific performance of agreements entered into by minors cannot be enforced, as they are void ab initio. Minors cannot enter into a contract of partnership, but they can be agents. Minors' parents or guardians are not liable for the contracts entered into by the minors. Minors are liable in tort for negligence causing injury or damage to property not belonging to them. Minors' estates are liable for necessaries supplied to them during minority, but the minors are not personally liable.
Unlawful Consideration and Objects
According to Section 23 of the Indian Contract Act, 1872, the consideration and objects are unlawful in the following cases:
1. If it is Forbidden by Law
If the object or the consideration of an agreement is forbidden by law, in such a case the agreement is deemed to be unlawful and void. An act is forbidden by law if: - It is punishable under the criminal law of the country, or - It is prohibited by special legislations and regulations made by competent authority under power derived from the legislature.
Example: 'A' promises to obtain for 'B' an employment in the public service, and 'B' promises to pay Rs.1000/- to 'A'. The agreement is void, as the consideration for it is unlawful.
2. If it Defeats the Provision of any Law
If the object or consideration of an agreement is of such a nature that, though not directly forbidden by law, it would defeat the provisions of the law, in such a case the agreement is deemed to be unlawful and void.
Example: An agreement between husband and wife to live separately is invalid as being opposed to Hindu law.
3. If it is Fraudulent
An agreement, whose object or consideration is to defraud others, is unlawful and hence it becomes void.
Example: 'A', 'B', 'C' enter into an agreement for division among them of gains acquired or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.
4. If it Involves or Implies Injury to the Person or Property
of Another
If the object or consideration of an agreement is to injure the person or property of another, it is void. In such a case, the object or the consideration is deemed to be unlawful.
Example: Ram Saroop vs Bansi Mandar (1915): 'B' borrowed Rs.100 from 'L' and executed a bond promising to work for 'L' without pay for a period of two years. In case of default, 'B' was to pay interest (at a very exorbitant rate) and the principal amount at once. The contract was void as it involves injury to the person of 'B'.
5. If the Court Regards it as Immoral
An agreement, whose consideration and object is immoral, is deemed to be illegal and void. The word 'immoral' includes sexual immorality. Hence its object or consideration is unlawful.
Example: Pearce vs Brooks (1866): A firm of coach-builders hired out a carriage to a prostitute, knowing that it was to be used by the prostitute to attract men. The coach-builders could not recover the hire as the agreement was unlawful.
6. Where the Court Regards it as Opposed to Public Policy
An agreement whose consideration or object is of such a nature that it is opposed to public policy is void.
Agreements Opposed to Public Policy
An agreement is said to be opposed to public policy when it is harmful to the public welfare. Some of the agreements which are or which have been held to be opposed to public policy and are unlawful are as follows:
1. Agreements of Trading with Enemy
An agreement made with an alien enemy at the time of war is illegal on the ground of public policy. This is based on two reasons: a) A contract made during the continuance of the war, an alien enemy can neither contract with an Indian subject nor can he sue in an Indian court. He can do so only after he receives a license from the central government. b) A contract made before the war may either be suspended or dissolved.
2. Agreement to Commit a Crime
An agreement to commit a crime is opposed to public policy and it is void. The court will not enforce such agreements.
Example: W.H.Smith & Sons vs Clinton (1908): 'A' promises to indemnify (pay) a firm of printers and publishers of a paper against the consequences of any libel (publishing a false statement) which it might publish in its paper. 'A' promise could not be enforced in a law court where the firm was compelled to pay damages for a published libel.
3. Agreements in Restraint of Legal Proceedings
An agreement in restraint of legal proceeding is the one by which any party thereto is restricted absolutely from enforcing his right under a contract through a court. Contracts of this nature are void because their object is to defeat the provision of the Indian Limitation Act.
Agreement Restricting Personal Liberty
Agreements which unduly restrict the personal freedom of the parties are void and against public policy.
Agreement in Restraint of Trade
Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void and opposed to public policy. However, this rule is subject to the following exceptions:
Exceptions:
Sale of goodwill Partner's agreement Trade combinations Service agreements
In the above exceptions, the court will enforce the agreements, as the restrictions imposed are reasonable.
Example: Shaikh Kalu (vs) Ram Saran Bhagat (1909)
Facts: Out of 30 makers of combs in the city of Patna, 29 agreed to supply with 'R' to supply him and also agreed not to supply anyone else all their output. Under the agreement, 'R' was free to reject the goods if he found no market for them. Judgment: The agreement amounted to restraint of trade and thus void.
Marriage Brokerage
As a matter of public policy, marriage should take place with the free choice of the parties and cannot be interfered with by a third party acting as a broker. Agreements for brokerage for arranging marriage are void. Similarly, agreements for dowry cannot be enforced.
Agreement to Defraud Creditors or Revenue
Authorities
An agreement whose object is to defraud the creditors or revenue authorities is not enforceable, being opposed to public policy.
Agreement Interfering with Marital Duties
Any agreement which interferes with the performance of marital duties is void, being opposed to public policy.
Unlawful and Illegal Agreements
An unlawful agreement is one which, like a void agreement, is not enforceable by law. It is destitute (lacking) of legal effects altogether and affects only the immediate parties.
An illegal agreement, on the other hand, is not only void as between the immediate parties but has the further effect that the collateral transactions to it also become tainted (infected) with illegality. Thus, every illegal agreement is unlawful, but every unlawful agreement is not necessarily illegal.
Effects of Illegality
The collateral transactions to an illegal agreement become tainted with illegality and treated as illegal, even though they would have been lawful by themselves. No action can be taken: a. For the recovery of money paid or property transferred under an illegal agreement. b. For the breach of an illegal agreement. In cases of equal guilt on an illegal agreement, the position of the defendant is better than that of the plaintiff. However, the innocent party may sue to recover money paid or property transferred under the following circumstances: a. Where they are not equally guilty (in pari delicto) with the defendant, such as where they have been induced to enter into the agreement by fraud, undue influence, or coercion. b. Where they do not have to rely on the illegal transaction.
Agreement in Restraint of Trade
An agreement which interferes with the liberty of a person to engage themselves in any lawful profession, trade, or business of any kind is called an "Agreement in Restraint of Trade."
Exceptions
The general principle of law is that all restraints of trade are void. However, in India, they are valid if they fall within any of the statutory exceptions:
Sale of goodwill Partner's agreement Trade combinations Service agreements
In the above exceptions, the court will enforce the agreements, as the restrictions imposed are reasonable.
Essentials of a Wagering Agreement
Promise to pay money (or) money's worth : The wagering agreement must involve a promise to pay money (or) money's worth between the parties.
Uncertain event : The promise made between the parties must be conditional and dependent on an uncertain event (i.e., the happening or non-happening of the event).
Each party must stand to win (or) lose : Each party should stand to win (or) lose upon the determination of the uncertain event. An agreement is not a wager if either of the parties may win but cannot lose (or) may lose but cannot win.
No control over the event : The wagering agreement is a game of chance. Therefore, no party should have control over the happening (or) non-happening of the event. If one of the parties has control over the event, then the transaction lacks an essential ingredient of a wager.
No other interest in the event : The parties should have no other interest in the subject matter of the agreement except winning (or) losing the amount of the wager.
There must be two parties : The agreement must involve two parties.
The agreement must be void under Section 30 : The wagering agreement must be void under Section 30 of the Indian Contract Act.
Exceptions to Wagering Agreements
The following transactions are not considered as wagering agreements:
a) Share market transactions : In case of share market transactions where delivery of stocks and shares is intended to be given and taken, they are not considered as wagering agreements.
b) Crossword competition : A crossword competition involving a good measure of skill for its successful solution is not a wagering agreement. However, if the prizes of a crossword competition depend upon the correspondence of the competitors' solution with a previously prepared solution kept with the editor of a newspaper, it is treated as a lottery and a wagering transaction.
c) Contract of insurance : A contract of insurance is not a wagering agreement, even though the payment of money by the insurer may depend upon a future uncertain event.
d) Horse racing : An agreement to contribute a prize of the value of above Rs.500/- to be awarded to the winner of a horse race is also an exception to the wagering agreement.
e) Games of skill : Agreements related to games of skill, such as picture puzzles and athletic competitions, are not considered as wagering agreements.
Void Agreements
Definition of a Void Agreement
According to Section 2(g) of the Indian Contract Act, 1872, 'A void agreement is one which is not enforceable by law'. A void agreement does not create any legal right or obligation. It is void ab initio, meaning void from the very beginning.
Types of Void Agreements
The following agreements have been expressly declared to be void by the Contract Act:
Agreements by incompetent parties (Section 11) Agreements made under mutual mistake of facts (Section 20) Agreements where the consideration or object is unlawful (Section 23) Agreements where the consideration or object is unlawful in part (Section 24) Agreements made without consideration (Section 25) Agreements in restraint of marriage (Section 26) Agreements in restraint of trade (Section 27) Agreements in restraint of legal proceedings (Section 28) Agreements where the meaning is uncertain (Section 29) Agreements by way of wager (Section 30) Agreements contingent on impossible events (Section 36) Agreements to do impossible acts (Section 56) Agreements with a second set of reciprocal promises that are illegal.
Restitution
Meaning of Restitution
When a contract becomes void, the party who has received any benefit under it must restore it to the other party or must compensate the other party by the value of the benefit. This restoration of the benefit is called 'restitution'.
Principle of Restitution
The principle of restitution is that a person who has been unjustly enriched at the expense of another is required to make restitution to that other. Restitution is not based on the loss to the plaintiff but on the benefit which is enjoyed by the defendant at the cost of the plaintiff, which is unjust for the defendant to retain.
