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This article has been written by Shalini Shrivastav, by pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. 

Introduction

A contract is an essential part of every business operation. Without a contract, a business cannot run smoothly. A contract is nothing but a document that legally binds two or parties to an agreement where the rights and duties of every party to the agreement are mentioned. It can be a promise by the parties to a contract to do something or to refrain from doing something. A contract, in order to be valid, requires the mutual consent of both the parties to a contract where one party makes the offer to the other party and the other party accepts the offer made by the first party.

All the contracts in India are governed by the Indian Contract Act, 1872. Section 23 of the Indian Contract Act, 1872 states that the consideration or the object of a contract is deemed to be lawful unless it is forbidden by the law. It can be unlawful if it goes against any of the provisions of law or is fraudulent and immoral in nature or it causes any injury to a person or a property it is also unlawful if it goes against the public policy of India.

Essentials of a valid consideration

A contract in order to be valid must fulfill certain conditions. If any of these conditions are not fulfilled by a contract then that contract is deemed to be void or voidable. Section 10 of the Indian Contract Act, 1872 lists down all the conditions that a contract needs to fulfill in order to be a valid contract. All these conditions are:

  • Offer – In order for a contract to be valid, one of the contracting parties must make an offer to the other party to the contract. A contract cannot be made without an offer. So, on offer is the most essential part of a contract.
  • Acceptance – A contract in order to be made needs two parties, one who makes an offer and the other party who accepts that offer. So, an acceptance of the offer is equally important as an offer. Without an offer and the acceptance of it a contact cannot come into existence. 
  • Lawful consideration – Section 25 of the Indian Contract Act, 1872 states that any contract sans consideration is void. A party must always get something in return for the work done by him or in other words fulfilling his part of the contract. Consideration can be of three types – past consideration, present consideration, and future consideration.
  • Capacity to contract – The parties to a contract must be competent enough to get into a contract. If any of the contracting parties are not competent enough to contract then the contract is void or voidable. 
  • Free Consent – The consent of the parties to a contract must be free and out of their own will. Consent taken by coercion, under undue influence, fraud, misrepresentation, or mistake is not valid. It is deemed to be unlawful. Section 15, Section 16, Section 17, Section 18, and Section 20 of the Indian Contract Act, 1872 talk about coercion, undue influence, fraud, misrepresentation, and mistake.
  • Lawful object – The object or the purpose of a contract must always be lawful or legal, it should never be unlawful, immoral, or against any provision of any law. A contract that has some unlawful object is deemed to be void ab initio or in other words, void from the very beginning.
  • Terms and tenure – Every contract in order to be valid must have clearly listed and fixed terms and conditions. Any contract with vague terms and conditions cannot be valid. Apart from this, the term of the contract should also be clearly mentioned in the contract, it must not be vague.
  • Performance – Every valid or legally binding contract must be capable of being performed. It should not have any condition or act which is impossible to perform by any party to a contract. If a contract has terms or conditions or acts which are impossible to perform then the contract is void in nature.
  • Void agreement – Any contract must not have components or elements in it which in turn makes the contract void ab initio or void from the start. Some of the elements which make a contract void are: 

Breach of a contract

A breach of contract is nothing but the violations committed by the parties to the contract of any or all of the previously agreed-upon terms of the contract. The breach of a contract can range from late payment to non-payment of the consideration to failure to do any act or to refrain from doing so or failing to deliver a promised asset to the other party of the contract. A breach can either be partial in nature or complete in nature. 

Kinds of breach of a contract

The breach of contract is classified into three different categories ranging from the degree of a breach. They are:

  • Material breach – This kind of breach of a contract occurs when any of the main components of a contract is not fulfilled by either of the parties of the contract as promised by them in the contract. A breach like this defeats the objective of the contract and the aggrieved party is not left with any other choice but to knock the doors of the court for the redressal of this issue.
  • Minor breach – This kind of breach of contract is also called partial breach or immaterial breach of the contract. This kind of breach occurs when any minor or immaterial part of the obligation of either of the parties to the contract is not fulfilled by them as promised by them in the contract. In such a situation, the aggrieved party can go for legal remedy if they have suffered some material loss like financial loss by the breach committed by the other party to the contract.
  • Anticipatory breach – This kind of breach of the contract occurs when either of the parties to the contract informs the other party to the contract via some medium like a letter, email, etc about their incapability to perform any or all of their obligations in the agreed-upon time as listed down in the contract by them.

Remedies of breach of a contract

Whenever two parties decide to get into a contract, there is always a possibility of a dispute arising between them with regard to the contract. And in order to deal with such a situation, Section 73 of the Indian Contract Act, 1872 comes into play. It states that whenever any party to the contract suffers damage because of the action or inaction of the other party to the contract then the aggrieved party is entitled to receive compensation from the other party for such damages. It also states that the aggrieved party can only claim compensation if he has suffered a loss due to the breach of contract by the other party. The compensation cannot be claimed by the aggrieved party if the loss suffered by him is not direct or remote in nature. 

An aggrieved party usually files a lawsuit against the other party to the contract when the attempt of resolving the breach or dispute fails by informal methods. The aggrieved party goes for filing a lawsuit in the Hon’ble District Court if the sum at issue is below Rs. 20,00,000/- and if it is above Rs. 20,00,000/- then the aggrieved party goes for filing a lawsuit in the Hon’ble High Court of the state where the contract was executed or as per mutual agreed by the parties in the contract they signed.  When a breach in the contract occurs, the parties to the contract may choose to hire an arbitrator and may choose to review the contractual argument or differences and resolve it through arbitration, mediation, or conciliation. 

Conclusion

Whenever there is a promise between parties to refrain from doing something, it is always advisable to get a legally binding and valid contract to be drafted by their choice of lawyer. This helps in the smooth running of the contractual relationship between the parties and it also helps to settle any dispute or an issue that arises out of that contract to be settled in a simpler and easier manner. 

Other than this, it is equally important for the parties to a contract to examine properly whether the contract that they wish to execute has all the elements of a legal contract or not. If any of the essential elements of a contract is missing from the contract document or agreement then the contract is either voidable or void ab initio or void from the very beginning and such contract cannot be legally enforced by the court of law. 

References


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