ESSENTIAL ELEMENTS OF A VALID CONTRACT [Section 10]

According to Section 10, “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”. 

Since section 10 is not complete and exhaustive, so there are certain other sections like section 2(b) which also reveal certain essential elements to constitute a contract. The essential elements of a valid contract are:

1. Two Parties forming Agreement: For any contract there must be at least two parties, one of them making the offer and the other one accepting it. The acceptance must be unconditional and absolute.

2. Consideration: Consideration means "something in return". It is a benefit moving from one party to another. Consideration need not always be in cash or in kind. It may be an act or promise to do or not to do something. It may be past, present or future. Consideration must be real and lawful.

Example: When you get into a restaurant and then order food worth Rs 5000 for your family, you are agreeing that after eating you will fully settle the amount.

 

Pankaj has taken a loan from his friend Rohan. However, he has not repaid the loan yet. Rohan promises not to file a suit against Pankaj if he promises to repay the loan within a week. In this case, abstinence on the part of Rohan is due to the consideration of Pankaj’s promise of repayment of the loan.

3. Intention to create Legal Relationship: The parties entering into the contract must have the intention to create a legal relationship. If there is no such intention the agreement will not result in a contract.

There was an agreement between R Company and C Company by means of which the former was appointed as the agent of the latter. One clause in the agreement was: “This agreement is not entered into .... as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts.” Held, there was no binding contract as there was no intention to create a legal relationship [Rose & Frank Co. vs. Corruption Bros. (1925) A.C. 445]

4. Capacity of the Parties to Contract: The parties to an agreement must have the capacity at law to enter into a valid contract. 

Section 11 states that every person is competent to contract if-

a) he is of the age of majority, 

b) he is of sound mind and

c) he is not disqualified from entering into a contract by any law, to which he is subject.

5. Free Consent: The contract must have been made with the free consent of the parties. The parties must be ‘ad idem’ i.e. they must agree upon the same thing in the same sense at the same time. There is an absence of free consent if the agreement is induced by

 a) Coercion

 b) Undue Influence  

 c) Fraud 

d) Misrepresentation 

e) Mistake.

6. Lawful Object and consideration: The object of the agreement must be lawful i.e. neither fraudulent or forbidden by law, nor opposed to any public policy.

According to Section 23, the consideration or object of an agreement is un lawful, if 

• It is forbidden by law; or 

• it Is of such nature that, if permitted it would defeat the provisions of any law or

 • It is fraudulent; or 

• it Involves or implies, injury to the person or property of another; or 

• The court regards it as immoral or opposed to any public policy.

7. The Agreement not declared Void: The agreements must not have been expressly declared to be void by any law in force in the country. Void agreement is not enforceable by law & they have no legal existence. For example 

a) Agreement in restraint of Trade   

b) Agreement in restraint of Marriage 

c) Agreement in restraint of Legal Proceedings 

d) Agreement of Wager etc.

8. Certainty: The terms of the contract should be very clear. They must not be vague  (not clearly expressed) or ambiguous (having two or more possible meanings).

If the meaning of the agreement can be made certain by the circumstances, it could be treated as a valid contract. For example, if John and Mathew are sole trader of coconut oil, the meaning of the agreement can be made certain by the circumstance and in that case, the agreement can be treated as a valid contract

9. Possibility of Performance: The performance must not be impossible. The contracts must be capable of being performed.

 

Similarly, when you sign a masonry contract with a person with a disability such that he cannot walk without support, it can be considered as void. This is because it is next to an impossibility for a disabled person to do such kind of work. 

Impossible agreements like one claim to run at a speed of 1000km/hour or Jump to a height of 100 feet, would not create a valid agreement.

10. Legal Formalities Writing and Registration: Although the Indian Contract Act does not provide any formality to enter into a contract therefore a contract may be express (oral or written) or even implied (by conduct). However, It is in the interest of the parties that the contract should be in writing. Sometimes it needs to be stamped and registered. 

For example under the provisions of the Immovable Properties Act, a contract of immovable must be written, registered, and duly stamped and unless not enforceable by law.