This article is written by Sahaja from NALSAR University of Law, Hyderabad. This article evaluates the essentials of a contract and the significance of forming a valid contract.
The term contract is defined in Section 2(h) of the Indian Contract Act. It is defined as an agreement enforceable by law. What happens herein is that one party puts forth a proposal before the other party. When the proposal is accepted by the other party, it becomes a promise. This promise, backed by a consideration (in cash or kind), is an agreement. An enforceable agreement, that is, an agreement to which the parties want legal backing and rules according to which it must comply, is a contract.
The necessities associated with the formation of a contract
An enforceable agreement is a contract only if the contract is valid. A contract that is invalid, vitiated or irregular will either be void, voidable or unenforceable. Therefore, a contract must be formed keeping in mind certain conditions and terms that have to be met with before and during the formation of the contract. The Indian Contract Act, 1872, prescribes the law relating to contracts in India.
The key ingredients in a contract and their respective provisions
The requirements of a contract are as follows:
- There must be offer and acceptance – Section 2(d)
- There must be a consideration – Section 25
- Parties must be competent to contract – Section 11 and 12
- There must be free consent of the parties – Section 13 and 22
- The object of the contract must be lawful – Section 23 and 30
When these requirements are not met, the contract will be invalid and could be rendered void.
Offer and acceptance
There needs to be a proposal (offer) and the acceptance of this proposal to form a contract. The communication of the proposal and the acceptance need to be complete. A proposal needs to be communicated to the promisee or the offeree who is willing to accept it. This proposal or acceptance can be express or implied:
- A proposal or offer is implied when the party expresses his or her desire to do something or to get something done by their actions.
- An express proposal or acceptance is when the offer or acceptance is expressed in some form, written, oral, or by words. Implied acceptances and offers are valid.
The communication of a proposal is said to be completed when it is brought to the knowledge of the person to whom the proposal is made. An acceptance can be made only if the offeree knows that an offer has been made to him/her, that is, when the communication of the offer is complete.
Upton-on-Severn RDC v. Powell (1942)
In this case, a person who received services from a fire brigade under the impression that the area was entitled to free service, had to pay the fire brigade when he found out that the area did not service charge free. He had made an implied promise to pay for the service while availing of benefits.
Lalman Shukla v. Gauri Datt (1913)
In this case, the servant (petitioner) could not claim the reward for finding the defendant’s nephew. The communication of an offer that a reward would be granted for finding the nephew came to the knowledge of the servant after he had found the nephew.
The communication of acceptance under the Contract Act has different rules for different modes used to communicate the acceptance.
For the postal mode of acceptance, the acceptance of the offer is complete when the letter of acceptance has been put into transmission by the offeree. This acceptance is complete against the offeror and the offeree and the contract will be created. This has been reiterated in the case of Adams v. Lindsell (1817). The court’s reasoning in this judgment was that if one party is given an option of knowledge/ information the other party must also be given the option to receive an acknowledgment. If this is given it will go on ad infinitum. To stop this chain at the first instance, the contract is concluded when the letter of acceptance has been put into the transmission.
For an instantaneous mode of communicating acceptance, the Indian courts have accepted the principle followed in the case of Entores Ltd v. Miles Far East Corporation (1955), where it was held that the communication of acceptance is completed when the acceptance reaches the offeror. Therefore, for an instantaneous mode of communication, the acceptance is complete when it reaches the party to whom the acceptance is conveyed.
The acceptance of a contract must be absolute and unqualified as given in Section 7 of the Act. An acceptance that has a variation or is a partial acceptance is not treated as an acceptance. It is rather a counter-proposal/offer. This when accepted by the original offeror gives rise to a new contract and the previous offer becomes non-existent. Thus, an acceptance needs to be absolute and unqualified to give rise to a valid contract.
Consideration is another major essential for a contract to be valid. Section 25 of the Contract Act states that a contract without consideration is void. Consideration is defined under Section 2(d) of the Act. Fundamentally, consideration is the price for which the promise of the other party is bought, and this promise which has been given for value is enforceable.
An act done at the request of another, express or implied, is sufficient consideration to support a promise.
A promise to pay a subscription becomes enforceable as soon as any definite steps have been taken in furtherance of the object and on the faith of the promised subscription.
Doraswami Iyer v. Arunachala Ayyar (1935)
In this case, the defendant promised to pay some amount for renovation. he promised while the renovation was going on, but later refused to pay. Since the renovation was going on when he made the promise, it cannot be said that it was done at the desire of the promisor. Therefore, there was no consideration and he was not liable to pay the amount.
Hudson Re. (2011)
In this case, it was held that if there is no consideration to pay a particular sum towards a charity, a person cannot be held for non-payment.
Past consideration is an act done without any promise. In Indian Law, a promise to compensate for a past act that is voluntarily done is enforceable. An act done by one party at the request of another is also enforceable.
Lampleigh v. Brathwait (1615)
In this case, an imprisoned person asked an acquaintance to get him out of the prison. When this request was made, he had not promised to give the acquaintance anything in return. His friend got him out, after which he promised to pay him a certain amount, but he didn’t pay. Therefore, the friend filed a case. The court held that the person is liable to pay since the act was done at his request.
Therefore, the consideration in a contract must be valid without which the contract will be void and unenforceable.
Competency to contract
Section 10 of the Contract Act states the parties must be competent to contract. Competency is defined in Section 11. Minors, persons of unsound mind, and persons disqualified by law to which they are subject are incompetent to contract. A contract entered into by a minor is void.
A minor’s guardian can enter into a valid contract on behalf of the minor. Such contracts can also be enforced by the minor.
There cannot be reliance-based estoppel. The minor cannot be estopped from the original agreement. The defence of infancy acts in the minor’s favour.
The doctrine of restitution- a minor obtains property of goods by misrepresenting the age. The property can be restored from the minor if it is in their possession.
Srikakulam Subramanyam v. Kurra Subba Rao (1948)
In this case, there was a minor and the minor’s mother, who sold a piece of land to discharge a debt of the minor’s father. This property was mortgaged. Subsequently, the minor had second thoughts and claimed that the contract was void. The privy council found that the contract was within the competence of the guardian. The contract was thus enforceable since the mother contracted on behalf of the minor. The contract had also been made for the benefit of the minor. Thus, it was not a void contract.
Leslie (R) Ltd. v. Sheill (1914)
In this case, a minor deceived a moneylender with respect to age and secured some amount. The moneylender sued the minor for the restitution of money. The money could not be traced therefore, this doctrine does not apply to money. The minor was not liable.
The agreement of a person who is of unsound mind is void similar to a minor’s agreement in India. A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
Inder Singh v. Parmeshwardhari Singh (1957)
In this case, an individual sold a property worth a lot more for a smaller amount. The mother of this person showed that the person was of unsound mind. The court found that the person was of unsound mind when the contract was made and thus it was void.
Free consent of the parties
Section 10 specifies that free consent is an essential requirement of a contract. Section 14 of the Contract Act defines free consent. Both the parties entering a contract must enter the contract by their own will and must give free consent to the contract. There must be a meeting of the minds of the parties on the same subject, to form a valid contract.
When consent to an agreement is given by coercion, undue influence, fraud, or misrepresentation, the contract is voidable at the option of the party whose consent was so caused. According to Section 2(i), a voidable contract has been classified as a contract that is enforceable by law at the option of one or more of the parties thereto but not at the option of the other or others.
If consent is caused by mistake the agreement is void and cannot be enforced by either of the parties.
Allcard v. Skinner (1887)
Religious influence is very dangerous and powerful. The court, in this case, stated that she cannot recover the amount due to the law of limitation. She had claimed to recover the amount after 6 years which is a delay and limits her from claiming the share. The court did recognize that it is a case of undue influence.
Section 23 of the Contract Act states what considerations in a contract are lawful and unlawful. An object that is forbidden by law defeats the purpose of any law, is fraudulent, or opposed to public policy is unlawful. Contracts in which the consideration is unlawful are void.
Mohinder Singh v. State of Punjab (1963)
In this case, a person, who was elected as a sarpanch for a period of five years, made an agreement with another member that the latter would be given two -year term and the elected one, the remaining three years. The agreement was held to be void as it would have defeated the purpose and provisions of the Punjab Panchayat Raj Act, 1994.
The consequences associated with not forming an appropriate contract
When a contract is formed without complying with the section of the Contract Act, it will lead to the contract being void or voidable due to which the parties intending to contract might face losses or would fail to acquire services or goods from the other party. A void party is not enforceable, due to which, except in rare cases, the parties cannot be compensated. A voidable contract can be deemed as void at the choice of one of the parties to the contract. Therefore, to avoid such situations, it is of utmost significance to form contracts that are in complete compliance with the Indian Contract Act.
In conclusion, the essential requirements to form a valid contract are that there needs to be an offer and an acceptance to the same offer, considerations from both the parties must exist, the parties entering into the contract must be competent to contract, these parties must give their free consent and lastly, the object must be lawful.
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