Essential Elements of ContractP.S.SwathiAssociate ProfessorSSIMSecunderabad

IntroductionThe law of contract is described in the Indian Contract Act, 1872 which deals with:the general principles of law governing all contracts ,and covers the special provisions relating to special contracts like Bailment, Pledge, Indemnity, Guarantee and Agency.Therefore the law of contract is applicable not only to business but also to all day-to-day personal dealings.

Standard terms for contractsIn the present scenario the are certain standard terms for contracts used worldwide.Several Indian public sector companies use the standard terms for specialized functions like construction, banking and transportation.These are called General Conditions of Contract (GCC).It is called General Conditions because it is attached to every contract the organization makes.The General Conditions of Contract is supplemented by the Special Conditions of contract (SCC).

Contd.The issues specific to the particular contract are entered in this and even the SCC has now been standardized. Only required blanks has to be filled in.Example: If a manufacturing company puts up its GCC (Goods) which will become the standard conditions for all contracts of sale. For each individual purchase there will be a Special Conditions of Contract which will stipulate the specific goods being purchased.The two documents together will be the terms of contract for the purchase.Often business organisations settle on a contract through a tender process.

To settle a contract through tender process one may need to study the tender notice, tender document where terms and conditions of bid, award of contract and the GCC and SCC to understand the rights and conditions of bids.The details range from the scope of the contract to terms of payment, delivery, bank guarantee, taxation and liquidated damages.

Meaning of ContractAccording 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 LawAccording to Section 2 (e) of the Act An agreement means an offer by one party and its acceptance by the other.Ex: X offers to sell his car for Rs.1,00,000 to Y. Y accepts this offer. This offer after acceptance becomes promise and 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 contractsHence all contracts are agreements but all agreements are not contracts. (Social Contracts cannot create contracts)

Kinds of ContractsClassification on the basis of communication: Express and ImpliedClassification on the basis of number of persons: Unilateral and BilateralClassification on the basis of performance: Present and Future contracts.

Classification on the basis of validity: Valid contracts: One which fulfills all the essentials given under the lawVoid contracts: A contract which is initially declared to be valid at the time of formation but declared to be void at the time of performance. Void agreements: An agreement which is void ab initio, i.e., void right from the beginningVoidable contracts: A contract which can be decalred to be 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 valid 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 the contract illegal.

Essential Elements of ContractAgreement supported by Consensus Ad IdemTwo PartiesProper offer and its proper acceptanceIntention to create legal relationship Free consentCapacity to contractLawful considerationLawful object Agreement not expressly declared voidCertainty of meaning Possibility of performanceLegal formalities

Agreement supported by Consensus Ad idemWhat is an agreement is already explainedConsensus Ad Idem means meeting of two minds.Both the parties to the agreement should understand the terms and conditions in the same mannerIf there is any miscommunication or misunderstanding the agreement is not created Ex: X has two houses and he wants to sell his house situated at Delhi to Y and Y is assuming that X is going to sell his other house which is situated at Mumbai. There is no consensus ad idem and there is no agreement

Two PartiesAt least there must be two parties to create a contract. Hence, a partner can not enter into a contract with his firm, but a director of a company can enter into a contract with the 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.

Proper Offer and Its Proper AcceptanceThere must be a lawful proposal and a lawful acceptance of that proposal thus resulting in an agreement.It means that there must be two parties to an agreement, i.e. one party making the proposal and the other party accepting.The two requirements are: The proposal must be definite and the acceptance of the proposal must be absolute and unconditional.Ex: X offered to sell two plots of land to Y at a certain price. Y accepted the offer for one plot. It was held that the acceptance was not valid because it was not for the whole of the offer.

Types of OfferGeneral Offer: Offer made in general to all publicSpecific Offer: Offer made only to a particular person. In that case others cannot accept the offer and the person to whom the offer is made alone can accept.Counter Offer: When the offer is accepted with some new terms and conditions it is known as Counter OfferStanding Offer: An offer which stands good for a longer period is known as standing offer. Ex: Supply of raw material for 3 years by a party. The terms and conditions can be modified from time to timeExpress offer: Where offer is expressly mentioned either verbally or nonverbally.Implied offer: Offer is understood with the behaviour of the offeror.

AcceptanceAcceptance must be absolute and unconditionalIt must be made with an intention to performIt must be made by the person to whom the offer is madeAcceptance may be express or impliedSilence does not amount to acceptance

Mode of Communication of acceptance According to Section 7(2) of the Indian Contract Act, 1872 the acceptance of an offer must be given in the manner prescribed by the offeror otherwise it must be in a usual and reasonable manner.Ex. X of Agra sends a letter by post to Y of Delhi offering to sell his car for Rs1,00,000 and also writes send your acceptance by telegram. Y sends his acceptance by an ordinary post . X can reject the acceptance and the same has to be communicated to Y otherwise it will be treated as accepted.

The acceptance is complete only when it has been communicated to the offerer.Ex: X offered to supply coal to a Railway Company. The manager of the company accepted as soon as he received the offer and prepared acceptance letter in a properly addressed and stamped letter and put it in the drawer of his table and forgot all about it. It was held that no contract was made because acceptance was not communicated. (Brogdon v. Metropolitan Railway Co.).Communication: When it is complete

Communication to WhomAcceptance must be communicated to the offerer himself. It means that if acceptance is communicated to an unauthorized person, it will not give rise to legal relations.Ex: F offered by a letter to buy his nephews horse for 30 dollars saying If I hear no more about this, I shall consider the horse mine. The nephew sent no reply at all but told B his auctioneer, not to sell that particular horse as he intended to sell that horse to F. B sold the horse by mistake. It was held that contract was not created because his nephew had not communicated acceptance to him. (Felthouse v. Bindley).

Lapse and Revocation of Proposal and AcceptanceAn offer lapses after stipulated or reasonable timeA proposal lapses by not being accepted in the mode prescribedA proposal lapses by rejection by the offeree. A proposal lapses by the death or insanity of the proposer or the proposee before acceptance.Proposal lapses by revocation by the proposer before acceptance.Revocation by non-fulfillment of a condition precedent to acceptance.A proposal lapses by subsequent illegality or destruction of subject matter.

Communication of Proposal, Acceptance and RevocationCommunication of a proposal is complete when it comes to the knowledge of the person to whom it is made.Communication of a revocation is complete as against the person who makes it when the letter of revocation is posted .Communication of a revocation is complete as against the person to whom it is made, when the letter of revocation is received by him.Time during which an offer or acceptance can be revoked: A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance is complete as against the acceptor but not afterwards.

Intention to create Legal RelationsIn commercial and business agreements, an intention to create legal relations is presumed.If it is contrary which means that the parties did not intend to be legally bound the burden of proof lies on them and they have to prove that there is no intention to create legal relationship.Moreover agreements of a social or domestic nature do not contemplate legal relationship. As such they are not contracts. Ex: Balfour VS. Balfour

Free ConsentFree Consent: There must be free consent of the parties to the contract. According to Section 14 consent is said to be free when it is not caused byCoercionUndue Influence Fraud Misrepresentation Mistake

CoercionPhysically or mentally harassing a person to obtain consent is known as Coercion. Contract created by coercion is voidable. Threatening to commit suicide is coercion.There should be an act or behaviour which is prohibited by law.

Undue influenceUndue influence is something where the person who is giving consent is unduly influenced.To determine undue influence, it is necessary that there should be fiduciary relationship between the parties.A fiduciary relationship is something where one can dominate the will of the other. (Master and Servant, guardian and ward, guru and discipile, Advocate and Client)Contract created by undue influence is void.

FraudMaking a promise without an intention to perform is known fraud. Deceiving a person by making false promises intentionally and making him to believe false things as true facts is fraud.Intentional suppression of facts also amounts to fraudContracts created by Fraudulent representations are void and criminal action will be taken against the person who made fradulent representations.

MisrepresentationIf misrepresentation of facts is done innocently it is not considered as fraud but as misrepresentationThe court may direct the party who made misrepresentation to rectify the things and go ahead with the performance of the contract.

MistakeLapse on the party to the contracts is known as 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 supply automobile components X wrote the price as Rs.30 instead of Rs.300 and communicated it to Y. Y cannot ask for the performance of contract for Rs.30 on the ground that mistake of a person should not give undue advantage to someone else.

4. Capacity of PartiesThe parties to an agreement must be competent to contract it means that:The person must be majorThe person must be of sound mindThe person should not be disqualified from contracting by any law to which he is subject.

Minor: A person who has not attained the age of 18 is considered as Minor, and if a Trust is appointed for his/her property a person who has not attained the 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 minor cannot discriminate between what is good and bad for him and as such any contract with a minor is void.

Minor Contd.Under the Indian law Minor is extremely protected by law. Any contract created with a minor is void but following are the exceptions.If the contract is made for the benefit of the minor, it is valid ( Taking minor as a partner)If the contract is made for the supply of necessities to a minor and what are considered to be necessities are decided on the basis of social status and life style of the minor.A minor cannot ratify a contract, which he created when he was minor, after he becomes a major.

People of unsound mindLunatics, idiots and Drunken person cannot create contracts.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 is known as Lucid Interval. Contract created during the lucid interval is valid.Idiot is a person who is always insane and contract created 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 is to be established that at the time of creating contract he was in a drunken state. In the case of lunatics and idiots burden of proof lies with the opposite parties and in the case of drunken persons the burden of proof lies with the party who is claiming it.

Parties who are disqualified by lawFollowing persons are not allowed to create contractsAlien enemiesForeign AmbassadorsConvictsInsolventsAdvocates

Lawful ConsiderationUnder Section 2(d) of the Indian Contract Act, 1872 defines consideration as : when at the desire of the promisor, the promisee of any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something, such act or abstinence or promise is 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 agreeing to pay him Rs.500 more.

Contd. Consideration means an advantage or benefit moving from 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 futureConsideration must be lawful i.e. not forbidden by law

Essentials of a valid ConsiderationConsideration must move at the desire of the promisor.Consideration may move from the promisee or any other person. Consideration may be past, present or future. Consideration must be Something of Value: The consideration need not be adequate to the promise but it must be of some value in the eye of the law. Consideration must be legal Consideration my be doing something or abstain from doing something (positive or negative act ) or a promise to do something.

Consideration must move at the desire of the promisorAn act constituting consideration must have been done at the desire or request of the promisor not from any third party Ex: X spent Rs.1,00,000 on the construction of shops at the request of the collector of the District. In consideration of this Y a shopkeeper promised to pay some money to X. It was held that this agreement was void being without consideration because X had constructed the shops at the request of collector and not at the desire of Y. (Durga Prasad v Baldeo)

Consideration may move from the promisee or any other personConsideration may move from the promisee or any other person. Ex: X by a deed of gift transferred certain property to her daughter Y with a direction that Y with a direction that Y should pay Z an annuity. Y refused to pay to Z as consideration did not move from him held that consideration can be moved from any person.

Consideration may be Past or Present or FuturePast Consideration means the consideration 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 June, Y promises to pay X Rs.1,000 for his past services. Past service amount to past consideration. X can recover Rs 1,000 from Y.

Present ConsiderationPresent Consideration means the consideration which moves simultaneously with the promise, is called present consideration.Ex: In case of cash sale i.e. shopping promise to pay the price and promise to deliver the goods are performed simultaneously.

Future ConsiderationFuture Consideration means the consideration which is to be moved after the formation of agreement is called future consideration.Ex: X promises to deliver certain goods to Y after 10 days and Y promises to pay after 10 days from the date of delivery.

Consideration must be of Some Value The consideration need not be adequate to the promise but it must be of some value in the eye of the law.Ex: X agrees to sell his house which is worth of Rs.20,00,000 for 10,00,000.A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the Court should taken into account in considering whether or not As consent was freely given.

Consideration must be Real and not IllusoryIt must be real and not IllusoryEx: X engages Y for doing a certain wok and promises to pay reasonable remuneration. This promise is not enforceable because the consideration is uncertain.Ex: X promises to put life into Ys dead wife and Y promises to pay Rs.1,00,000.This agreement is void because consideration is physically impossible to perform.

Consideration something other than the Promisors Existing ObligationThe consideration must be something which the promisor is not already bound to do because a promise to do what a promisor is already bound to do adds nothing to the existing obligation.Ex: X had received summons to appear before a court of law as witness on behalf of Y who promised to pay some money for his trouble. It was held that the promises to pay money was void for want of consideration because X was under a legal duty to appear as a witness before court of law.( Collins v. Godefroa).

Lawful ConsiderationThe consideration must neither be unlawful nor opposed to public policyX promises Y to obtain an employment in the public service and Y promises to pay Rs.1,00,000 to X. The agreement is void on the ground of unlawful consideration.

Stranger to a ContractExceptions to stranger to a contract:TrustsFamily SettlementAcknowledgement Ex: Acts of Agent Assignment of a Contract: Ex: the assignee of an insurance policy.

No consideration , No contractExceptions to General Rule No consideration No contract:Agreements made on account of Natural Love and AffectionPromise to compensatePromise to pay time barred debt Completed giftsAgency

Lawful ObjectThe object is considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy

Agreements opposed to public policy.Trading with Alien enemiesAgreements to stifle prosecutionAgreement for the sale of public officesAgreements in restraint of parental rightsAgreements in restraint of movementsAgreements interfering with the course of justice

Agreement must not Expressly Declared VoidAgreement must not have declared void like:Agreement in restraint of marriageAgreement in restraint of tradeAgreement in restraint of legal proceedings.Agreement in restraint of service Agreement by way of wager

Certainty of dealingAgreements the meaning of which is not certain or capable of being made certain are void. However the meaning of the agreement could be made certain from the circumstances of the case, it will be treated as a valid contract.Ex. X who is a dealer in mustard oil, agreed to sell 100 tones of oil to Y. This agreement is valid because the meaning of the agreement could be easily ascertained from the circumstances of the case.

Possibility of Performance and Legal FormalitiesAn agreement to do an impossible act is void.Legal Formalities: The agreement must comply with the necessary formalities as to writing, registration, stamping.

ConclusionContract is an agreement which is enforceable at law.A contract is said to be legally valid if it fulfills the following essentials.AgreementTwo PartiesIntention to create legal relationsOfferAcceptanceConsiderationCapacity to contractFree ConsentLawful ObjectAgreement not to be declared voidCertainty and possibility of performanceLegal formalities.