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Essentials of a Valid Contract – CA Foundation Business Law

The Indian Contract Act 1872

Unit-1 Nature of contract

Sec 2(h) of the Indian Contract Act, 1872, defines a contract as, “an agreement enforceable by law.” This means every agreement must have enforceability to become a contract. This term enforceability makes any contract legally binding on the parties by law. (Essentials of a Valid Contract – CA Foundation Business Law)

How an agreement becomes enforceable? What are the things that make any contract valid and legal? These are the essentials of the contract. Yes, Essentials are those elements that make a contract legally binding and valid.

So what these essentials are, let’s understand.

There are 6 essentials provided by section 10 of the Indian Contract Act, 1872. But there are further 5 elements also, which are necessary to make a contract valid. So let’s understand these all one by one.

Elements not provided by Section 10

  • Two Parties

An agreement cannot be done by a person with himself. There must be two parties in the agreement. First who makes an offer (called Offeror) and to whom the offer is made (called offeree). Further, an offer can be made with a natural person (Ex. Human) or with artificial person recognized by law (Ex. Company, Deity, etc.)

  • Intention to create legal relationship

An agreement can only become a contract and further become valid when the parties of the contract have the intention to create legal relationship or can say have the intention to make the contract binding on the parties by Law.

Social and domestic agreements lack this element, hence cannot become a contract.

  • Fulfillment of legal formalities

Generally, all contract needs to fulfill all requirements of the Contract Act. But some special contracts like contracts related to immovable property etc. require to comply formalities prescribed by other laws also. Without complying these further for formalities, a contract will not be valid.

  • Certainty of meaning

Certainty if contract means we should be clear that what contract we are making. In other words, the essence, conditions, etc. i.e. all points related to the contract must be specific not vague.

For Ex. Ram made a contract with Shyam for something. Here this something word is vague. It creating confusion for what thing contract has been created.

  • Possibility of performance

This is another important point to notice that the performance of the contract must be possible. If a contract is impossible to perform, such a contract will become void.

For Example, Ram made a contract with Shyam to resurrect the brother of Shyam who died six months ago.

Provided by Section 10

  • Agreement

An agreement is just like a foundation stone to contract. No contract can be in existence without an agreement. Further, an agreement is an accepted proposal creating consideration for both parties.

  • Free consent

A proposal when accepted becomes an agreement. But this consent or acceptance is just not only sufficient, but it must be free also. Free consent means where both parties agree on the same thing in the same sense and consent is not influenced by coercion, undue influence, fraud, misrepresentation, or mistake.

  • Competency of the parties

Competency refers to the ability of the party to make a contract. This has been explained on three basis

  • Age – When a person has the age of 18 years or more, called competent to make a contract.
  • Sound mind – The person will be called competent when he has of sound mind. A sound mind means the person has a sense or he can understand the terms and legal implications while making a contract.  A lunatic, drunken, etc. cannot be considered as a person in sense, hence not competent to contract.
  • Not Disqualified by law– There are some persons who are specifically disqualified by law to make a contract. For example convicts, a person of the enemy county, etc.
  • Lawful consideration

In simple words, Consideration refers to the benefit derived by each party through the contract. The consideration can be in the form of cash, any asset or even this could a responsibility, forbearance. But every consideration must also be lawful. Lawful means it must not harm any person, his property or against public policy, etc.

For example, Ram made a contract with Shyam to buy his property in return for which Shyam will kidnap Mohan, this contract is not valid as the consideration is not lawful.

  • Legal object

Same as consideration, the object or the purpose of making a contract, must be lawful i.e. not harmful to any person or his asset or not against public policy, etc. An agreement without a lawful object is void.

  • Not expressly declared to be void

The agreement must not be that are declared expressly void or illegal by law. A void agreement means an agreement not enforceable by law. For example, restraining trade contracts. Further, illegal agreements are the agreements prohibited by law.

For example smuggling of Drugs. These are also void.

So we have seen, contracts need all the above elements to make itself legally valid. Lack of any of the above will make a contract void (voidable in some cases).

Essentials of a Valid Contract – CA Foundation Business Law

Read More: Meaning of Free Consent

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