Essential for Valid Contract

By Tania Maria Joy

Introduction

The contract is when two parties put into writing an agreement that contains certain obligations which are to be performed by the parties. This written agreement becomes enforceable by law and then it becomes a contract. Enforceable by law means when the agreement has acquired the force of law only for those parties to it and the violation of those obligations would attract legal attention and repudiation of the entire contract.

Contract Act defines a Contract as “An agreement which is enforceable by law”. This agreement is a settlement between two parties which contains obligations or promises which both parties need to fulfil. When such an agreement is made binding by law it becomes a contract.

Therefore an agreement consists of reciprocal promises which are to be performed by parties to the contract. Promises are reciprocal when both parties have to perform something for the other. According to definition by Salmond “A contract is an agreement creating and defining obligation between two or more persons by which right  are acquired by one or more to acts or forbearance on the part of others”.

Essentials of valid contract

The essentials of a valid contract are stated in Section 10 of the Indian Contract Act 1872 which are as follows:

• Offer: Firstly, there must be an offer from either party, without an Offer a contract cannot arise. However, in some cases, this principle could not be applied. For instance, Mulla talks about a situation in which offer and acceptance could not be traced, for instance, a commercial agreement reached after multiple rounds of negotiations.

Acceptance of the offer: Secondly, the Offer must be accepted and accepted by the person to whom it was intended. So an offer by A to B has to be accepted by B only.

• Acceptance in ad-idem: Thirdly, though acceptance is important, there must be “Consensus ad-idem”.

Consensus ad-idem means meeting of minds. It means that parties to the contract should accept the terms of the contract in the “same sense”. Thus parties to the contract must have the same understanding of the terms of the contract.

E.g. A contracted with B to purchase rice. Now A wanted a special type of rice, however, B thought of it to be normal rice. In this case, although there is a valid acceptance, there is a lack of meeting of minds between the parties; meeting of minds concerning the type or quality of rice.

Similarly, if A contracted with B to buy stocks. What A meant was stocks in a company, whereas B understood it to be his livestock (farm animals). In this case, the understanding was not in a similar sense.

Parties must be competent to contract, under the laws they are subjected to i.e. they must be legally capable to contract

Consideration, for the performance of promises there must be a consideratione. something given for performance of promise from both parties to the contract.

Further, the objective and consideration of the contract must be lawful.

• Free consent, according to section 10 of contract act” agreements are contracts if they are made by free consent” It means that contract must be entered into out of the parties own volition and without being forced, or deceived into. There must be an intention to enter into a legal relationship. Certainty, Contract must be certain and not ambiguous and vague. (Section 29). A contract must not be expressly declared void. (Section 10 of Contract Act)

The cases that had issues related to the essentials for a valid contract are as follows:

1. Balfour v. Balfour: In this case the landmark judgement on the intention to create a legal relationship is an essential element of contract. The facts of the case was that both parties were married couples and they used to live in Ceylon. They went on a vacation to England and during their stay Mrs. Balfour was diagnosed with ‘Rheumatic Arthritis’.  The doctor advised her to rest. Her health could deteriorate, with the change in weather, therefore she stayed back in England whereas her husband returned back to Ceylon. As Mr. Balfour promised to send her £30 every month until she stayed back. He regularly made the due monthly allowance as promised but subsequently, stopped sending the amount. Mrs. Balfour sued him for the payment of monthly payments.  

The decision made by the  appellate court held that the arrangement between Mrs and Mr Balfour was merely a social agreement and not a contract. a domestic matter and Mr. Balfour had ‘no intention to create a legal obligation’. The court also pointed out that, Though Mr. Balfour made a promise to pay £30 per month and Mrs. Balfour agreed to it but there was no intention to be bound by legal consequences on behalf of Mr. Balfour. The Court also held that such types of agreements can’t be a contract because usually in such agreements between the spouse, either of the parties do not intend to bound themselves by legal consequences. Court also made the argument that if the courts will start to enforce such intimate arrangements made between couples treating them as a legal contract then the courts shall be flooded with matrimonial disputes.

2. Lalman Shukla v. Gauri Dutt was another case. It was about acceptance of the offer being an essential element of a valid contract. The case facts are  Gauri Dutt’s nephew went missing. He therefore sent all his servants in search of the absconding child, to different places. One of his servants, Lalman Shukla was sent to Haridwar from Cawnpore (Kanpur) to search him, his travelling allowances and other expenses were paid by the master Gauri Dutt. When he returned back to Kanpur after getting succeeded in finding his master’s nephew, he was given two sovereigns along with Rs. 20. During the period while everyone was searching master’s nephew and the plaintiff was also searching him, the defendant circulated pamphlets stating that whosoever finds the boy gets a reward of Rs. 501. The plaintiff had no idea about the reward and did not ask for anything further and continued his service for six months. After that, he filed a suit for the recovery of the reward from his master, he claimed for Rs. 499 out of the money that was offered in the handbill. Then, the lower court dismissed the plaintiff’s plea.

The decision made by the court was that, none of the essential ingredients required for an agreement to be enforceable were not fulfilled in the situation. The primary need for an agreement to be enforceable is the ‘knowledge and assent of the particular offer. Here, he was not aware about the offer and had no assent about the act. Thus, it can be concluded that acceptance is the essence to contract and the plaintiff was just fulfilling his obligation by searching for the missing boy.  Also, this is a leading case wherein the important principle of General Offer was laid down. In such a case, a contract could be made only with the person who has the knowledge about the offer and accepts it by acting accordingly to fulfil the conditions mentioned in the offer.

3. Harvey v. Facey is another case that talked about invitation to an offer is not an offer. The facts of the case are that Mr. Facey was a real estate owner who was interested in selling his property which was in Jamaica. Harvey, who was interested in buying that property sent a telegraph asking he would sell his property to Harvey on lowest cash price to be paid. Replying to his telegraph Facey replied to his second question only. Facey’s telegraph read, lowest price for Bumper Hall Pen is £900. To which Harvey later replied, he agreed to buy Bumper Hall Pen which was asked for and he also asked Facey to send him property deed so that he could get early possession. Facey refused to sell his property to Harvey at that price. Later, Harvey filed a case in the court of appeal, Harvey won the case. Facey, who was unhappy, appealed against the decision and the case went to the Privy Council which upheld the trial court’s decision. 

The decision of the court was that  it would be a contract only if Facey had replied to Harvey’s third telegraph. Harvey took Facey’s response to his question as an offer to sell at the named price by him. There was no commitment to sell the property because the offer which was made by Harvey by replying to the invitation of an offer was not accepted. Thus, there was no contract between the two. 

4. Mohori Bibee v. Dharmodas Ghose was a case about competence or capacity of the parties to contract or minor’s contract.  The facts of the case are that Plaintiff, Dharmodas Ghose was in need of money therefore, he pledged his property and asked for a loan of Rs. 20,000 from the moneylender Brahmo Dutt. The debt amount given was less than Rs. 20,000. Brahmo Dutt who was acting as attorney at that time on the behalf of the moneylender, knew that Dharmodas Ghose was a minor. Plaintiff filed a suit against Brahmo Dutt stating that the mortgage deed should be null and void because he was a minor at the time of contract and hence, it should be cancelled. Later, Brahmo Dutt passed away and the appeal was prosecuted by his executors. And it was contended by the defendant that the plaintiff should not be excused as he misrepresented his age to him. Even if the deed is void, the debt that was advanced to him i.e.Rs. 10,500 should be repaid.

The decision of the case was as follows: The Privy Council held that the; person who mortgaged the property was infant at the time of execution. So, the contract or mortgage deed which was made between the plaintiff and the defendant was not merely voidable but it was void. It also held that any contract with a minor or an infant is ‘void ab-initio’. Since minors are incompetent to contract hence, such contracts are void and invalid in the eyes of law. The minor is not obliged to pay back the amount that was advanced to him as he was not bound by the promise that was executed in contract.

According to section 10, consideration and object of the contract should be lawful and is an essential element of a contract.

Accordingly, Section 23 defines unlawful consideration. Unlawful consideration and object is one which is either,

forbidden by law;

or is of such a nature, that if permitted, then it would defeat the provisions of law;

or the purpose of the contract is fraudulent;

or involves or implies giving injury or damage to someone or to someone’s property; or

or the court considers it as immoral or against public policy.

If a contract shows any of these elements then it is unlawful and void u/s 23.

A contract is forbidden by law if it is either against any law, both substantive and procedural. E.g. An agreement to sell liquor without a licence, despite the law mandating to have a licence. In a particular case, the Plaintiff owner of a bar and having the licence to sell liquor transferred the management of the bar and liquor sale to the defendant who had no such licence. The court held that transferring business and sale of liquor to a person without the license, was prohibited by law and thus cannot be enforced.

If a contract circumvents a provision of any law or defeats the purpose of the law (i.e it makes the provision irrelevant), it shall be deemed to defeat the provision of that law.

If the consideration or object of the contract is to commit fraud, the contract is void. Thus if the object of agreement is to deceive another person, the same is void. Even if a part of a single consideration is unlawful, the agreement is void.

These are the most basic and elementary principles of a contract, which are to be fulfilled, however there may be other conditions which may be laid down by a special law, or for specific types of contract. Eg. a contract dealing with IPR has to abide by rules laid down by the laws dealing with IPR.