Essential elements of a Contract

By Shikha Yadav 22 Minutes Read

Introduction

A contract is a fundamental part of legal agreements in various sectors. To ensure a contract is legally binding and enforceable, it must satisfy several essential elements. Each of these elements is crucial for the formation of a valid contract under the Indian Contract Act, 1872. If these elements are not met with then the contract may become unenforceable.

Validity of a contract under Indian Contract Act, 1872

• Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement that is enforceable by law. To be legally enforceable, an agreement must satisfy the conditions outlined in Section 10 of the Indian Contract Act, 1872. This means that Section 2(h) must be read together with Section 10, which specifies the essentials of a valid contract.
• Section 10 of the Indian Contract Act, 1872 states, “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” 
• Section 10, therefore, highlights the following essential elements of a contract:
  • Free consent of the parties
  • Competency of the parties
  • Lawful consideration
  • Lawful object
  • Agreements not expressly declared void by law
• Apart from this, for an agreement to be legally recognized as a contract, it must exhibit a clear intention by both parties to create legal obligations, with considerations exchanged under terms that comply with legal requirements. 
• Therefore, while every contract is based on an agreement, not all agreements meet the legal standards necessary to be enforceable as contracts under the law. 
• In the case of Balfour v. Balfour[1], a husband promised to pay his wife £30 per month while he worked abroad due to her ill health. When they later separated permanently, the wife sued for the promised allowance. The court held that domestic agreements between spouses, lacking intention to create legal relations, do not constitute contracts. Therefore, the promise made by the husband was not enforceable as a contract.

Essential Elements of a Contract

1. Offer and Acceptance 

A) Offer

• Offer is defined under Section 2(a) of Indian Contract Act, 1872.  
• An offer is a proposal by one party (the offeror) to another (the offeree) indicating a readiness to enter into a contract under specific terms and conditions. 
• It must be clear, definite, and communicated to the offeree, demonstrating the offeror’s intention to create legal relations upon acceptance. 
• The terms of the offer must be sufficiently certain to enable the offeree to understand what is being proposed and to accept it unequivocally. Offers can be one of two types:  

i. Specific: made to one person or group of people. Then only that particular person or group of people can accept.  

ii. General: made to ‘the whole world’ (or people generally), particularly seen in the cases of rewards and other public advertisements.

B) Acceptance 

• As per Section 2(b) when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.
• Acceptance is the second ‘half’ of a contract. 
• For instance, If Bill offers Ben a bag of sweets for 20p, and Ben says ‘I accept’, clearly a contract has been made. Similarly, if Ben offers Bill 20p for his bag of sweets, and Bill says ‘I accept’, that is also a contract. Clearly it does not matter, when dealing one to one in this way, who starts the negotiations. 
• What the law is really saying is that there must be evidence from both sides of genuine agreement between the parties – the old idea of consensus ad idem, or meeting of minds.
• In the case of Carlill v. Carbolic Smoke Ball Co.[2], the court held that the company’s advertisement promising £100 to anyone who contracted influenza after using their product was considered an offer. Mrs. Carlill’s use of the smoke ball and subsequent illness constituted acceptance, forming a binding contract. 

2. Consideration 

• Consideration may be defined as some rights, interest, profit, or benefit accruing to one party, or some forbearance. 
• Section 2(d) defines consideration as something in return for something. 
• In the case of Sonia Bhatia v. State of U.P.[3], the appellant challenged a scheme by the State Government whereby land was given to a cooperative society at a concessional rate. The appellant argued that there was no valid consideration for the State Government’s promise. The Supreme Court held that consideration need not always be monetary. It can be of any benefit or detriment. The promise by the State Government had sufficient consideration as it was aimed at public welfare.
• In the case of Durga Prasad v. Baldeo[4], The plaintiff constructed a market at the request of the Collector of a district. The defendant promised to pay a commission on articles sold through the market. When the plaintiff sued for the commission, the defendant argued that there was no consideration. The court held that since the consideration did not move at the desire of the defendant, but rather at the desire of the Collector, it could not be considered valid consideration for the defendant’s promise.

3. Capacity to Contract 

• According to Section 11, a person is competent to contract if:
  • He/she is of age of majority
  • He/she is of sound mind
  • He/she is not disqualified from contracting by law
• Minors: Contracts with minors are void ab initio. Minors can benefit from contracts, but they cannot be held liable. However, there are exceptions, such as contracts for necessities (e.g., food, clothing, shelter) that benefit the minor. Example: If a 16-year-old boy tries to sell his bike to a 20-year-old man, the contract is void because the boy is not of the age of majority.
• Persons of Unsound Mind: Contracts made by persons of unsound mind are void. A person is considered of unsound mind if they cannot understand the contract or form a rational judgment about its implications. This includes individuals with mental illnesses or intoxication at the time of entering the contract. Example: If a person with severe mental illness enters into a contract to sell their house, the contract is void because the person is not of sound mind.
• Disqualified Persons: Disqualified persons refer to individuals who, despite meeting the age and mental soundness criteria, are still not allowed to enter into contracts due to specific legal restrictions. For example, individuals declared insolvent or bankrupt by a court cannot enter into contracts regarding their property. Similarly, convicts undergoing imprisonment may be disqualified from contracting.
• In Mohori Bibee v. Dharmodas GhoseDharmodas Ghose[5], a minor, mortgaged his property to Brahmo Dutt, a moneylender, who was aware of his minority. The Privy Council ruled that the contract was void because Dharmodas was a minor and thus incompetent to contract. This landmark case established that any contract entered into by a minor is void ab initio, meaning it has no legal effect from the outset. This protects minors from being legally bound by agreements they are not capable of fully understanding or consenting to.
• In Inder Singh v. Parmeshwardhari Singh[6], the Patna High Court ruled that a contract entered into by a person of unsound mind is void unless it can be proven that the other party was unaware of the mental incapacity at the time of the agreement. This case established that the burden of proof lies on the party alleging unsoundness of mind to demonstrate the incapacity of the person to understand the contract’s nature and consequences. It underscored the requirement that for a contract to be void due to unsoundness of mind, the mental condition must significantly impair the person’s ability to comprehend the transaction.

4. Free Consent 

• According to Section 14, for a contract to be valid, it must be entered into with free consent. 
• This means consent must be given voluntarily, without coercion, undue influence, fraud, misrepresentation, or mistake.
• Contracts lacking free consent are voidable at the aggrieved party’s option, aiming to protect parties from unfair agreements and uphold the integrity of contractual relationships based on genuine consent and mutual understanding of terms.
• Coercion (Section 15): Coercion involves the use of threats to induce someone to enter into a contract against their will. This includes threats of physical harm, confinement, or economic loss. Contracts formed under coercion are voidable, allowing the coerced party to reject or affirm the contract upon removal of coercion. 
• Undue Influence (Section 16): Undue influence refers to situations where one party can dominate the will of another due to a real or perceived authority, trust, or dependency. It can arise from a variety of relationships, such as those between parent and child, doctor and patient, or employer and employee. The dominant party uses this influence to coerce the other into entering a contract that benefits the influencer unfairly. Contracts formed under undue influence are voidable at the option of the influenced party. This provision safeguards against exploitation and ensures contracts are entered into freely and fairly.
• Fraud (Section 17): Fraud refers to the intentional misrepresentation of facts by one party to deceive another into agreeing to a contract. The deceived party must suffer a loss as a result of relying on the false statement. Contracts entered into under fraud are voidable at the option of the defrauded party. This provision aims to protect parties from deceitful practices and uphold the integrity of contractual agreements based on truthful representations. 
• Misrepresentation (Section 18): Misrepresentation refers to the making of an untrue statement by one party to another, with the intention of inducing that party to enter into a contract. According to this section, if a contract is entered into based on a false statement of fact, whether innocent or fraudulent, it constitutes misrepresentation. The misled party may have grounds to rescind the contract or claim damages if they suffered a loss due to relying on the false statement. This provision aims to ensure that contracts are based on accurate information, protecting parties from deceptive practices.
• Mistake (Sections 20-22): A “mistake” refers to an error or misunderstanding concerning a fact or law that influences the formation or terms of a contract. Mistakes can be categorized into several types:
  • Mistake of Fact: This occurs when both parties to a contract are mistaken about a crucial fact essential to the agreement’s subject matter. For example, if both parties believe a painting being sold is an original work of art by a renowned artist, but it is later discovered to be a skilled replica, this mutual mistake of fact can invalidate the contract. 
  • Mistake of Law: This arises when there is ignorance about the legal implications or application of law. In general, mistakes about the law applicable in India do not invalidate contracts (Section 21 of the Indian Contract Act), but ignorance of foreign law that impacts the contract may be considered.
  • Unilateral Mistake: This occurs when one party to a contract makes an error regarding a fact material to the contract. If the mistake is significant and the other party is aware or should have been aware of it, the contract may be voidable at the mistaken party’s option (Section 22 of the Indian Contract Act).
• In Bell v. Lever Brothers Ltd.[7], the case involved a mistake regarding the duration of a lease agreement. Lever Brothers Ltd. leased a property under the mistaken belief that there were 14 years left on the lease, when in fact, only 8 years remained. The House of Lords (HL) ruled that this mutual mistake regarding a fundamental term of the lease rendered the contract void. This landmark decision underscored the principle that contracts can be voided if both parties are mistaken about a critical aspect of the agreement’s subject matter, which significantly affects their obligations and intentions.
• In Smith v. Hughes[8], the case involved the sale of oats where the seller offered new oats, but the buyer expected old oats. Despite the misunderstanding, the court upheld the contract, emphasizing that the seller had delivered oats as specified, even though they did not meet the buyer’s mistaken expectation. This decision highlighted that contractual obligations are based on what was actually agreed upon and performed, rather than each party’s subjective understanding or expectation of the terms, unless the mistake concerns a fundamental aspect that goes to the heart of the agreement. 

5. Lawful Object 

• According to Section 23, every agreement must have a lawful object and consideration.
• The term “object” refers to the purpose or goal of the contract. The object must not involve any activity that is illegal, immoral, or against public policy, such as, contracts to commit a crime or engage in fraudulent acts, agreements that promote unethical conduct or harm societal values etc.
• Any agreement that involves or implies an unlawful object is void ab initio, meaning it is void from the beginning. This renders the contract unenforceable in a court of law.
• Examples: Contracts to smuggle goods, agreements for bribery, or contracts that promote illegal activities are examples where Section 23 would render the agreement void.
• In Tata Engineering and Locomotive Co. Ltd. v. State of Bihar[9], the case involved an agreement to supply goods which required foreign exchange that was prohibited under the Foreign Exchange Regulation Act (FERA). The State of Bihar sought to enforce penalties against Tata Engineering for violating FERA regulation. The Supreme Court held that the contract was void under Section 23 of the Indian Contract Act, 1872, because it involved an illegal object. The court emphasized that contracts which contravene statutory provisions or public policy, such as those violating FERA regulations, cannot be enforced. This case reinforced the principle that agreements must comply with legal requirements and cannot involve objectives contrary to law or public policy to be enforceable under Indian contract law.

6. Certainty and Possibility of Performance 

I. Certainty

• Section 29 mandates that agreements must be clear and definite to be enforceable. It requires contracts to specify essential terms such as parties, subject matter, consideration, and terms of performance clearly and unambiguously. Contracts lacking specificity, such as vague descriptions of goods or unclear terms of performance, are void for uncertainty.
• In Orient Paper Mills Ltd. v. State of Orissa[10], the Supreme Court ruled that a contract for the supply of raw materials was void for uncertainty under Section 29 of the Indian Contract Act, 1872. The contract lacked essential terms, specifically the quantity of raw materials to be supplied, rendering it unenforceable. This decision underscored the requirement that contracts must clearly define essential terms to be enforceable, ensuring parties understand their obligations without ambiguity. The case highlighted the importance of certainty in contracts to avoid misunderstandings and uphold legal enforceability under Indian contract law.

II. Possibility of Performance

• Section 56 covers agreements to do an act impossible in itself and states that such agreements are void. The section establishes the doctrine of frustration, whereby a contract becomes void if its performance is rendered impossible or unlawful due to an unforeseen event. 
• This provision applies when circumstances beyond the control of parties fundamentally alter the contract’s nature, making it impracticable to fulfill its original purpose. Parties are discharged from further obligations, and any benefits received must be returned, adjusted for expenses incurred. 
• In the case of Satyabrata Ghose v. Mugneeram Bangur & Co.[11], the Supreme Court ruled that a lease contract for a cinema hall was frustrated under Section 56 of the Indian Contract Act, 1872, due to government requisition during World War II. The court held that the unforeseen government action made performance of the contract impossible, thereby releasing both parties from their contractual obligations. This case established the doctrine of frustration in Indian contract law, allowing contracts to be voided when rendered impossible by external events beyond the control of the parties, ensuring fairness and equity in contractual relationships.

Conclusion

In conclusion, the essentials of a contract, as defined under the Indian Contract Act, 1872, provide a comprehensive framework ensuring that agreements are legally binding and enforceable. Understanding these essential elements—such as offer and acceptance, consideration, capacity to contract, free consent, lawful object, certainty, and possibility of performance—is crucial for parties engaging in contractual relationships. Each element upholds the integrity and validity of contracts, protecting parties from unfair practices and ensuring that agreements reflect genuine consent and lawful intentions.

[1] [1919] 2 KB 571.

[2] [1893] 1 QB 256.

[3] AIR 1981 SC 1274.

[4] (1881) ILR 3 ALL 221.

[5] [1903] UKPC 12.

[6] AIR 1957 PAT 491.

[7] [1931] All ER 1.

[8] (1871) LR 6 QB 597.

[9] AIR 1965 SC 40.

[10] AIR 1961 SC 1438.

[11]AIR 1954 SC 44.

Shikha Yadav