essential elements of contract

7/28/2019 Essential Elements of Contract

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Introduction The law of contract is described in the

Indian Contract Act, 1872 which dealswith:

1. the general principles of law governingall contracts ,and

2. covers the special provisions relatingto special contracts like Bailment,

Pledge, Indemnity, Guarantee andAgency.3. Therefore the law of contract is

applicable not only to business but

also to all day-to-day personaldealings.


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Meaning of Contract According to Section 2(h) of the Indian Contract Act,

1872, An agreement enforceable by law is a contract. Hence, there are two contents in the agreement, a)

Agreement B) enforceable at Law According to Section 2 (e) of the Act An agreement

means an offer by one party and its acceptance by theother.

Ex: X offers to sell his car for Rs.1,00,000 to Y. Y acceptsthis offer. This offer after acceptance becomes promiseand this promise is treated as an agreement between X

and Y. An agreement is said to be enforceable by law if it

creates some legal obligation. Social Agreements cannot create contracts Hence all contracts are agreements but all agreements

are not contracts. (Social Contracts cannot create

contracts)


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Kinds of Contracts Classification on the basis of

communication: Express and

Implied Classification on the basis of

number of persons: Unilateral

and Bilateral Classification on the basis of

performance: Present and Future

contracts.


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Classification on the basis of validity:1. Valid contracts: One which fulfills all the essentials

given under the law Void contracts: A contract which is initially declared to

be valid at the time of formation but declared to be voidat the time of performance.

Void agreements: An agreement which is void ab initio,i.e., void right from the beginning

Voidable contracts: A contract which can be decalred tobe void or valid at the discretion of the party who is

effected/suffered by it. Uneforceable contracts: A contract which is not fulfilling

the legal formalaities and which cannot be enforced.They will become void after the deficiency is rectified.

Illegal contracts: Contracts which are legally prohibited.In this case both civil and criminal action is taken

against the party who is responsible for making thecontract illegal.


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Essential Elements of

Contract1. Agreement supported by Consensus Ad Idem2. Two Parties3. Proper offer and its proper acceptance4.

Intention to create legal relationship5. Free consent6. Capacity to contract7. Lawful consideration8. Lawful object9. Agreement not expressly declared void10. Certainty of meaning11. Possibility of performance12. Legal formalities


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Agreement supported by

Consensus Ad idem What is an agreement is already explained Consensus Ad Idem means meeting of two

minds. Both the parties to the agreement should

understand the terms and conditions in thesame manner

If there is any miscommunication or

misunderstanding the agreement is notcreated Ex: X has two houses and he wants to sell his

house situated at Delhi to Y and Y is assumingthat X is going to sell his other house which is

situated at Mumbai. There is no consensus ad


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Two Parties At least there must be two parties to

create a contract.

Hence, a partner can not enter into acontract with his firm, but a director of acompany can enter into a contract withthe company as the company has

separate legal existence. Separate legal existence has certain

features like common seal, perpetual

succession, can sue and be sued etc.


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Proper Offer and Its Proper

Acceptance There must be a lawful proposal and a lawful

acceptance of that proposal thus resulting inan agreement.

It means that there must be two parties toan agreement, i.e. one party making theproposal and the other party accepting.

The two requirements are: The proposalmust be definite and the acceptance of the

proposal must be absolute andunconditional. Ex: X offered to sell two plots of land to Y at

a certain price. Y accepted the offer for oneplot. It was held that the acceptance was notvalid because it was not for the whole of theoffer.


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Types of Offer General Offer: Offer made in general to all public Specific Offer: Offer made only to a particular person.

In that case others cannot accept the offer and theperson to whom the offer is made alone can accept.

Counter Offer: When the offer is accepted with somenew terms and conditions it is known as Counter Offer

Standing Offer: An offer which stands good for a longerperiod is known as standing offer. Ex: Supply of rawmaterial for 3 years by a party. The terms andconditions can be modified from time to time

Express offer: Where offer is expressly mentioned eitherverbally or nonverbally.

Implied offer: Offer is understood with the behaviour ofthe offeror.


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Acceptance Acceptance must be absolute and

unconditional

It must be made with an intentionto perform

It must be made by the person to

whom the offer is made Acceptance may be express or

implied Silence does not amount to

acceptance


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Mode of Communication of

acceptance According to Section 7(2) of the Indian

Contract Act, 1872 the acceptance of an offermust be given in the manner prescribed by the

offeror otherwise it must be in a usual andreasonable manner.

Ex. X of Agra sends a letter by post to Y ofDelhi offering to sell his car for Rs1,00,000 andalso writes send your acceptance bytelegram. Y sends his acceptance by anordinary post . X can reject the acceptanceand the same has to be communicated to Yotherwise it will be treated as accepted.


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The acceptance is complete only whenit has been communicated to theofferer.

Ex: X offered to supply coal to a RailwayCompany. The manager of the companyaccepted as soon as he received theoffer and prepared acceptance letter in

a properly addressed and stampedletter and put it in the drawer of histable and forgot all about it. It was heldthat no contract was made becauseacceptance was not communicated.

(Brogdon v. Metropolitan Railway Co.).

Communication: When it is

complete


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Communication to Whom Acceptance must be communicated to the

offerer himself. It means that if acceptance iscommunicated to an unauthorized person, itwill not give rise to legal relations.

Ex: F offered by a letter to buy his nephewshorse for 30 dollars saying If I hear no moreabout this, I shall consider the horse mine.

The nephew sent no reply at all but told B hisauctioneer, not to sell that particular horse ashe intended to sell that horse to F. B sold thehorse by mistake. It was held that contractwas not created because his nephew had notcommunicated acceptance to him. (Felthousev. Bindley).


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Lapse and Revocation of

Proposal and Acceptance1. An offer lapses after stipulated or reasonable

time

2. A proposal lapses by not being accepted in

the mode prescribed3. A proposal lapses by rejection by the offeree.4. A proposal lapses by the death or insanity of

the proposer or the proposee beforeacceptance.

5. Proposal lapses by revocation by theproposer before acceptance.

6. Revocation by non-fulfillment of a conditionprecedent to acceptance.

7. A proposal lapses by subsequent illegality or

destruction of subject matter.


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Intention to create LegalRelations

In commercial and business agreements, anintention to create legal relations is presumed.

If it is contrary which means that the parties

did not intend to be legally bound the burdenof proof lies on them and they have to provethat there is no intention to create legalrelationship.

Moreover agreements of a social or domesticnature do not contemplate legal relationship.As such they are not contracts.

Ex: Balfour VS. Balfour


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Free Consent

Free Consent: There must be freeconsent of the parties to the contract.According to Section 14 consent issaid to be free when it is not causedby

1. Coercion

2. Undue Influence3. Fraud

4. Misrepresentation

5. Mistake


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Coercion

Physically or mentally harassing aperson to obtain consent is known as

Coercion. Contract created by coercion is

voidable.

Threatening to commit suicide iscoercion.

There should be an act or behaviourwhich is prohibited by law.


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Undue influence

Undue influence is something where theperson who is giving consent is undulyinfluenced.

To determine undue influence, it isnecessary that there should be fiduciaryrelationship between the parties.

A fiduciary relationship is something

where one can dominate the will of theother. (Master and Servant, guardianand ward, guru and discipile, Advocateand Client)

Contract created by undue influence isvoid.


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Fraud

Making a promise without an intentionto perform is known fraud.

Deceiving a person by making falsepromises intentionally and making himto believe false things as true facts isfraud.

Intentional suppression of facts also

amounts to fraud Contracts created by Fraudulent

representations are void and criminalaction will be taken against the personwho made fradulent representations.


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Mistake

Lapse on the party to the contracts is knownas Mistake.

It is of two kinds: Mistake of Fact or Mistake of

Law. Mistake of Fact is excused but mistake of law

is not excused. If mistake cannot be rectified contract is

considered as void.

Ex: While making an offer to supplyautomobile components X wrote the price asRs.30 instead of Rs.300 and communicated itto Y. Y cannot ask for the performance ofcontract for Rs.30 on the ground that mistakeof a person should not give undueadvantage to someone else.


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4. Capacity of Parties

The parties to an agreementmust be competent to contract it

means that:1. The person must be major

2. The person must be of sound

mind

3. The person should not bedisqualified from contracting by

any law to which he is subject.


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Minor: A person who has not attainedthe age of 18 is considered as Minor,and if a Trust is appointed for his/her

property a person who has not attainedthe age of 21 is decalred as Minor. A contract with a minor is void ab initio

(Mohiribibi Vs. Dharma das Gose)

It is assumed under the law that minorcannot discriminate between what isgood and bad for him and as such anycontract with a minor is void.


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Minor Contd.

Under the Indian law Minor is extremelyprotected by law.

Any contract created with a minor is void but

following are the exceptions.1. If the contract is made for the benefit of the

minor, it is valid ( Taking minor as a partner)

2. If the contract is made for the supply ofnecessities to a minor and what are

considered to be necessities are decided onthe basis of social status and life style of theminor.

3. A minor cannot ratify a contract, which hecreated when he was minor, after hebecomes a major.


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People of unsound mind

Lunatics, idiots and Drunken person cannot createcontracts.

Consensus ad idem is not present in these cases. Lunatic is a person who is some times sane and some

times insane. The gap between two insane states isknown as Lucid Interval. Contract created during thelucid interval is valid.

Idiot is a person who is always insane and contractcreated with Idiot is always void.

A person who is in a drunken state or who is not with a

conscious mind cannot create a contract. However, it isto be established that at the time of creating contracthe was in a drunken state.

In the case of lunatics and idiots burden of proof lieswith the opposite parties and in the case of drunkenpersons the burden of proof lies with the party who is

claiming it.


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Parties who aredisqualified by law

Following persons are not allowedto create contracts

1. Alien enemies

2. Foreign Ambassadors

3. Convicts

4. Insolvents

5. Advocates


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Lawful Consideration

Under Section 2(d) of the Indian Contract Act,1872 defines consideration as : when at thedesire of the promisor, the promisee of anyother person has done or abstained fromdoing, or does or abstains from doing orpromises to do or abstain from doingsomething, such act or abstinence or promiseis called a consideration for the promise.

Ex: X promises to deliver his good to Y and Y

promises to pay Rs.1,000 on delivery.Ex: X owes Y Rs.10,000. Y promises X not to file

a suit against him for one year on Xs agreeingto pay him Rs.500 more.


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Contd.

Consideration means an advantage or benefit movingfrom one party to the other.

It means something in return. The agreement is legally enforceable only when both

the parties give something and get something in return. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing

something) or promise to do or not do something. It may be past, present or future

Consideration must be lawful i.e. not forbidden by law


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at the desire of thepromisor

An act constituting consideration must havebeen done at the desire or request of thepromisor not from any third party

Ex: X spent Rs.1,00,000 on the construction ofshops at the request of the collector of theDistrict. In consideration of this Y a shopkeeperpromised to pay some money to X. It was heldthat this agreement was void being without

consideration because X had constructed theshops at the request of collector and not at thedesire of Y. (Durga Prasad v Baldeo)

ons era on may move


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ons era on may movefrom the promisee or anyother person

1. Consideration may move from thepromisee or any other person.

2. Ex: X by a deed of gift transferredcertain property to her daughter Ywith a direction that Y with a directionthat Y should pay Z an annuity. Y

refused to pay to Z as considerationdid not move from him held thatconsideration can be moved from anyperson.


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Consideration may be Pastor Present or Future

Past Consideration means theconsideration which has already moved

before the formation of agreement. Ex. X renders some service to Y at Ys

request in the month of May. In Jne, Ypromises to pay X Rs.1,000 for his past

services. Past service amout to pastconsideration.X can recover Rs 1,000from Y.


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Present Consideration

Present Consideration means theconsideration which moves

simultaneously with the promise, iscalled present consideration.

Ex: In case of cash sale i.e.

shopping promise to pay the priceand promise to deliver the goodsare performed simultaneously.


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Future Consideration

Future Consideration means theconsideration which is to be moved

after the formation of agreement iscalled future consideration.

Ex: X promises to deliver certain

goods to Y after 10 days and Ypromises to pay after 10 days fromthe date of delivery.


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Consideration must be ofSome Value

The consideration need not be adequateto the promise but it must be of somevalue in the eye of the law.

Ex: X agrees to sell his house which isworth of Rs.20,00,000 for 10,00,000.Adenies that his consent to theagreement was freely given. Theinadequacy of the consideration is afact which the Court should taken intoaccount in considering whether or notAs consent was freely given.


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Consideration must beReal and not Illusory

It must be real and not Illusory

Ex: X engages Y for doing a certain wok

and promises to pay reasonableremuneration. This promise is notenforceable because the considerationis uncertain.

Ex: X promises to put life into Ys deadwife and Y promises to payRs.1,00,000.This agreement is void

because consideration is physicallyim ossible to erform.

Consideration something other


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Consideration something otherthan the Promisors ExistingObligation

The consideration must be something whichthe promisor is not already bound to dobecause a promise to do what a promisor is

already bound to do adds nothing to theexisting obligation. Ex: X had received summons to appear before

a court of law as witness on behalf of Y whopromised to pay some money for his trouble. It

was held that the promises to pay money wasvoid for want of consideration because X wasunder a legal duty to appear as a witnessbefore court of law. Collins v. Godefroa).


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Lawful Consideration

The consideration must neither beunlawful nor opposed to public

policy X promises Y to obtain an

employment in the public service

and Y promises to pay Rs.1,00,000to X. The agreement is void on theground of unlawful consideration.


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Stranger to a Contract

Exceptions to stranger to acontract:

1. Trusts

2. Family Settlement

3. Acknowledgement Ex: Acts ofAgent

4. Assignment of a Contract: Ex: theassignee of an insurance policy.


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No consideration , Nocontract

Exceptions to General Rule Noconsideration No contract:

1. Agreements made on account ofNatural Love and Affection

2. Promise to compensate

3. Promise to pay time barred debt4. Completed gifts

5. Agency


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Lawful Object

The object is considered lawfulunless it is forbidden by law or is

fraudulent or involves or impliesinjury to the person or property ofanother or is immoral or is

opposed to public policy


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Agreements opposed topublic policy.

Trading with Alien enemies Agreements to stifle prosecution

Contract in the nature of Champertyand maintenance Agreement for the sale of public offices Agreements in restraint of parental

rights Agreements in restraint of movements Agreements interfering with the course

of justice


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Agreement must notExpressly Declared Void

Agreement must not havedeclared void like:

1. Agreement in restraint ofmarriage

2. Agreement in restraint of trade

3. Agreement in restraint of legalproceedings.

4. Agreement in restraint of service

5.

Agreement by way of wager


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Certainty of dealing

Agreements the meaning of which is notcertain or capable of being madecertain are void.

However the meaning of the agreementcould be made certain from thecircumstances of the case, it will betreated as a valid contract.

Ex. X who is a dealer in mustard oil,agreed to sell 100 tones of oil to Y. Thisagreement is valid because themeaning of the agreement could beeasily ascertained from the

circumstances of the case.


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Possibility of Performanceand Legal Formalities

An agreement to do an impossibleact is void.

Legal Formalities: The agreementmust comply with the necessaryformalities as to writing,

registration, stamping.


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Conclusion Contract is an agreement which is enforceable at law. A contract is said to be legally valid if it fulfills the following

essentials.1. Agreement

2. Two Parties3. Intention to create legal relations4. Offer5. Acceptance6. Consideration7. Capacity to contract

8. Free Consent9. Lawful Object10. Agreement not to be declared void11. Certainty and possibility of performance12. Legal formalities.


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essential elements of contract

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