What is a Contract? Explain its Essential Elements.

Contract:

Section 2 (h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law. In other words, an agreement which can be enforced in a court of law is known as a contract. According to Salmond, a contract is an agreement creating and defining obligations between the parties.

William Anson defines a contract as a legally binding agreement made between two or more persons by which rights are acquired by one or more to acts or forbearance’s on the part of the other or others. Hence, a contract is an agreement between two or more persons which is intended to have legal consequences.It is clear from the above definition of the contract that there are two elements of a contract:

  1. An agreement, and
  2. Legal obligation.

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Essential Elements Contract.

Agreement: According to Section 2(e) every promise and set of promises forming the consideration for each other is agreement. This means that in an agreement there can be one or more than one promises given in return for each other. Promise is defined in Section 2 (b) in these words.

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. Therefore every agreement, is composed of a proposal from one side and its acceptance from the other. To sum up: Agreement = Offer or Proposal+ Acceptance of Offer

The agreement must give rise to legal obligation: i.e., it should be enforceable by law: An agreement to become a contract must be coupled with obligation. An obligation is the legal duty to do or abstain from doing something. Here a distinction needs to be made between legal and social obligations. Agreements creating social or moral obligations do not make a contract. Thus an agreement to have lunch together or to go to a movie is not legally binding.

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In such agreements no legal duty is imposed on any party. Such agreements are social agreements which do not give rise to legal consequences. To make a contract, an agreement must be enforceable by law.

This means that the agreement must give rise to legal obligation. It is clear from the above discussion that. All contracts are agreements but all agreements are not contracts. All agreements are not contracts. An agreement may or may not create a legal obligation. If no legal binding is intended, a contract does not arise.

Agreements of moral or social nature do not make contracts because parties never intend to create binding legal obligation. In such cases no one can sue the other party in case of default. On the other hand, all contracts are necessarily composed of agreements because for making a contract there must be an agreement first and then it should be enforceable by law.

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Example

  1. X agrees to sell his car to Y for Rs. 80,000. It is an agreement which is legally enforceable, and in case of any breach of promise, the other party will be at liberty to file a suit to recover, the damages.
  2. X agrees to come to the house of Y for a tea party at Y’s request, there is an agreement, but it cannot be termed as a contract but it does not attract any legal enforce ability.

Thus, all contracts are agreements but all agreements are not contracts. Only that agreement which is enforceable by law is a contract, and that which is not enforceable by law cannot be a contract.

Essential Elements of a Valid Contract: An agreement becomes legally enforceable when it fulfills the conditions laid down in Section 10 of the Contract Act which 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 not hereby expressly declared to be void. In order to become a contract, an agreement must have the following essential elements:

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Offer and Acceptance : In order to create a valid contract, there must be an agreement between two parties. An offer from one party to do or abstain from doing a particular act and its acceptance by the other party are two basic elements of an agreement.

Therefore, the offer is the starting point of a contract. Unless there is an offer from one party and it is accepted by other, no agreement can arise. Not only this the offer must be certain and must be communicated to the, Similarly, acceptance must be absolute and unconditional, it must be given in the mode prescribed and should be communicated.

Intention to create Legal Relationship: There should be an intention on the part of the parties to the agreement to create a legal relationship. A contract is a valid agreement which is enforceable by law Agreement should not be social, otherwise it will not create a legal obligation and will not become a contract.

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Lawful consideration: The agreement must be supported by a lawful consideration on both sides. Consideration means something in return. Section 25 provides that an agreement without consideration is not enforceable barring certain exceptions. Each party to an agreement must give and receive something in return.

This something in return for the promise is the consideration for the promise. Consideration May consist of some act or abstinence or a promise to do or abstain from doing something. It need not be adequate but must have some value in the eyes of law.

Not only this it should be lawful also, i.e., it should not be forbidden bylaw, should not be fraudulent, or immoral or opposed to any public policy. It may be past, present or future.

Parties competent to contract: The parties to a contract must be capable of entering into a valid contract. According to Section 11, every person is competent to contract if he

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  • is the age of majority,
  • is of sound mind, and
  • is not disqualified from contracting by any law to which he is subject.

Contracts entered into by a minor are void initiation.

Free consent: The contract must have been made with the free consent of the parties. Consent implies agreeing upon the same thing in the same sense and consent is said to be free if it is not induced by coercion, undue influence, fraud, misrepresentation or mistake.

If the consent is obtained by any of the above four factors except mistake, the agreement is voidable at the option of the party whose consent is not free. The party can either reject the contract or accept it. If the agreement is induced by mutual mistake, the agreement is void.

Lawful object: The object of the agreement should be lawful and not one of which the law disapproves. The object would be unlawful if it is forbidden by law, is fraudulent, or causes injury to the person or property of another, or is immoral or opposed to any public policy.

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Not expressly declared void agreement: The agreements must not have been expressly declared to be void by any law. There are certain agreements which have been expressly declared void by the Indian Contract Act like agreements in restraint of marriage, trade or legal proceedings, and agreements with uncertain meaning. In such cases even if the agreement possesses all the elements of a valid agreement, it will not be enforceable by law.

Certainty of meaning and possibility of performance: The meaning of the agreement must be certain, otherwise the agreement will not be enforceable bylaw. For example if X agrees to sell to Y 500 liters of [email protected] Rs.50 per liter, the agreement is not enforceable as there is nothing to show the type of oil being sold. Not only this the act contemplated in the agreement should be capable of performance. An agreement to do an act impossible in itself cannot be enforced.

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Necessary legal formalities: The prescribed legal formalities of writing, registration etc., must be observed, wherever required. A contract may be oral or in writing. Where it is to be in writing, it must comply with the necessary legal formalities as to writing, stamping, registration and attestation.

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