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Essential elements of Contracts

 Essentials of a contract

Contract may seem like an intimidating word to many, who picture in mind, complex formal agreements executed by big companies when they hear it. However, contracts have been existing since the ancient of times through trade and barter systems. They form an integral part of a common man's day-to-day activities. We enter into contracts every day, knowingly or unknowingly when we buy tickets to the movies or groceries from the mart.

Contracts are nothing but agreements between parties in which one party gets a benefit and the other party receives consideration for it. They can be oral, written or implied. E.g., While buying tickets to the movie, we get ticket as a benefit and pay the theatre a consideration (price) for it. Parties entering into a contract may include common people, companies, nonprofit or government agencies.


What are contracts?

The whole process of entering into a contract starts with an offer by one party, an acceptance by another party, and an exchange of consideration (something of value).

However, mere exchange of something for something does not give birth to contracts. One of the most important elements of contracts is the intention to get into a legal obligation.



E.g.: If I don't pay money as consideration for buying clothes from a store, the owner may bring an action against me in a competent court of law. But in another situation, if I promise my brother to buy ice-cream for him, he cannot sue me for noncompliance to the promise as there was no such intention of entering into a legal relationship.

Salmond defines contract as:
"An agreement creating and defining an obligation between two or more persons by which rights are acquired by one or more, to acts or forbearance on the part of others".

On the other hand, Sir William Anson in his Book, The Law of Contracts, says ''The law of contract is that branch of law which determines the circumstances in which a promise shall be legally binding on the person making it".

The law governing contractual agreements in India, is a pre-constitutional legislation, formed in the year 1872 - The Indian Contract Act. Section 2 (h) of the Act tells us that agreements enforceable by law are contracts. The substances, which make an agreement a legally enforceable contract, are referred to as the Essential Elements of a Contract.

Section 10 in Chapter II of the Indian Contract Act mentions the essential elements in agreements which result into contracts.
"All agreements are contracts if they're made with free consent of the parties able to get into contractual relationship, with a lawful object and consideration."


Essential Elements of a contract:

  1. Offer And Acceptance

A Contract always involves two or more parties where one proposes and other accepts.

Offer
The first step towards formation of a contract is a proposal/offer - it is when someone offers to do or not to do something.

E.g., A proposes to buy B's house. The Indian contract act defines proposal in its interpretation clause - section 2 (a).
Section 2 (a), Indian Contract Act - When a person expresses his desire to do or not to do something, with a view of getting their approval for the same, is said to be making a proposal.

An offer should be definite, clear and not ambiguous. It should be communicated duly to the other party. It should be lawful. An offer to kill a human cannot give rise to a valid contract.

In Ghaziabad Development Authority vs. UoI, 2003, Hon'ble Supreme Court observed that when development authority announces a scheme for allotting plots, it is an invitation to offer. Public made applications to avail the benefits. Those applications by members of public are valid offers.


Communication of an offer is complete when it comes to the knowledge of the person to whom it is made - Section 4, ICA.
E.g., Person A writes via email to Person B, "Will you sell me your Parker pen for Rs. 500?" When the email reaches B, communication is complete.


Acceptance

The second step is acceptance of that proposal, defined in section 2 (b) of the Act. E.g., B accepts A's offer of buying the house.
Section 2 (b), Indian Contract Act - When that person to whom the proposal was communicated to, gives assent for it is said to have accepted the proposal.
Just like an offer, an acceptance of an offer should also be definite and clear, not ambiguous and should be duly communicated to the proposer.

What is a definite acceptance?
Leading Case: Harvey v/s. Facey, 1893

Facts: Plaintiff, Harvey telegraphed the defendant, Facey offering to buy a Jamaican property referred to as "Bumper Hall Pen". Defendant replied, "The lowest price is 900 pounds." Plaintiff agreed to buy it and communicated the same to plaintiff immediately. Defendant did not sell him the property. Harvey sued Facey for contractual breach.

Question:
Was there a concluded contract between the two and was Harvey entitled to "Bumper Hall Pen"?

Decision:
It was observed by House of Lords that the there was there was no acceptance by defendants to plaintiff's proposal.
Only the lowest price was communicated and not their desire to sell.
Hence, it was held that there was no enforceable contract between the plaintiff and defendant.

Communication of acceptance is complete when (Section 4, ICA):
Against proposer:
when it is put in a course of transmission to him, out of acceptor's power.
Against acceptor:
when it comes to the knowledge of the proposer.

E.g., Aman proposes to buy Raghav's sports bike. Raghav accepts Aman's proposal and writes him a letter of acceptance. The acceptance is complete against Aman when letter is posted by Raghav, out of his power to take it back and it is complete against Raghav when Aman receives the letter.

Proposal + Acceptance = Promise.

A promise involves promisor (person who makes a proposal) and promisee (person who accepts the proposal).
 



  1. Lawful Consideration

After proposal and acceptance, the third step towards formation of a contract is a consideration. Consideration is something to be given in return of a promise. The legal maxim, "quid pro quo" i.e., something for something explains it. E.g., A has to pay a price of Rs. 1 crore to B to buy his house.

Consideration has been defined u/s 2 (c) of the Indian Contract Act.
Section 2 (c), Indian Contract Act - When at the will of promisor, the promisee (or any other person with interest in the agreement) does or abstains from doing something, in present or in future, he gives consideration for that proposal.

However, the phrase "does or abstains from doing" does not imply unlawful activities or restraints. Section 24 of the Act says that agreements with unlawful considerations are void.
E.g., A promises a seat in government medical college to B who does not have a good rank, for consideration of Rs. 1 crore. The contract is void since the promise and consideration, both are unlawful.

Section 25 of the Act mentions that agreements without considerations are void and hence there can be no contract without consideration.
It need not to be of a perfect value but anything given in return. If A contracts with B to sell his phone only for Rs. 250 when the actual value is Rs. 10,000, the contract is still valid because both parties have agreed to it.

Promise + Consideration = Agreement.
 

  1. Intention Of Giving Rise To Legal Obligations

An Agreement has all characters of a valid contract except for one thing - A legal obligation or enforcement.
Section 2 (h), India Contract Act - Agreements enforceable by law are contracts.

Agreement + Legal Obligation = Contracts.

Hence, agreement becomes a wider term than contract giving rise to a popular saying that "All Contracts are agreements but not all agreements are Contracts".

Leading case: Balfour v/s. Balfour, 1919
Facts: Mr. and Mrs. Balfour, a Ceylon-based couple, go to England for vacations, wherein Mrs. Balfour falls sick and is advised to stay back while Mr. Balfour returns back home. Before returning, the couple signed an agreement where husband had to pay 30 pounds/month as maintenance to wife for her expenses. After returning to Ceylon, Mr. Balfour's relations with his wife, gets strained and he refuses to send any more maintenance money. Mrs. Balfour files a suit against him.

Issue: Was there any contract between the parties and was Mr. Balfour therefore under any legal obligation to pay maintenance due?

Decision (Lord Atkin)
There are many agreements entered into by a husband or a wife or between members of a family with no intention of forming a legal obligation.
If all such agreements are allowed to be enforced by a court of law, the courts would be overburdened with trifles and the law does not take account of trifles.
Agreements of this nature are outside the realm of contracts altogether.

The agreement was purely domestic in nature with no intention of getting into a legal relationship. Hence, Mr. Balfour is not liable under breach of contract.
The above landmark case shows that only where there is an intention to get into a legal relationship, can there be a contract between the parties. E.g., between retailer and purchaser, companies, consumers etc.
 

  1. Capacity

The laws do not prohibit people from contracting. However, they declare certain classes of persons as incapable of entering into contracts. Hence, it is important for people to know if they are contracting with the right person or not, to avoid bad consequences. Incapacity is a state which defeats the whole purpose of a contract and the liability arising out of it.

The Indian Contract Act of 1872 precisely mentions who are capable of entering into contracts.

Who are parties competent to contract?
Section 11 says - Every person is capable of contracting if:

  • He/she has age of majority

Who is a major?
As per Section 3 of Indian Majority Act - Every Indian who is 18 years of age and above.

Why can minors not contract?
They are not in an age where they can fully understand everything about a contractual agreement they are getting into. If allowed to contract, they can be tricked into unprofitable agreements by persons with a malicious intention.

Has a sound mind
Person should be free from any mental ailment. Persons with periodically unsound minds can contract when they are sound and are able to understand the clauses of the agreement.

Not disqualified by law from contracting
These include aliens (people outside India, people of enemy countries), Convicts and insolvent persons until he is discharged from his insolvency by a competent court of law.

Leading case: Mohori Bibi v/s. Dharmodas Ghose, 1903

Facts: Dharmodas Ghose, the defendant-minor had entered into an agreement to mortgage his property in return of money, to a money-lender, Bramho Dutt. Bramho Dutt's attorney comes to know about his age and still proceeds with the agreement. Dharmodas Ghose refuses to return the money and files a suit for recovery of his land. The lower courts grant it in his favour. When post Bramho Dutt's death, his heirs appeal to upper courts, Ghose pleads for non-enforcement of contract as he was a minor when the agreement was entered into.

Issues: Could the agreement between parties be enforced?

Decision:
Plaintiff's attorney knew that the defendant was a minor, yet proceeded with the agreement at his own risk
As per provisions of s. 11, ICA, nature of a minor's agreement is void ab initio.
No relief could be granted to the plaintiffs.
 



Free Consent

All Agreements are supposed to be bilateral which means both parties should gain something and both should be liable to each other. This forms one of the most important pillars of contract - Consensus ad idem - Prior meeting of minds.

Section 13 of the Contract Act defines consent which is the foremost requirement of a contract. It says that two or more people can be said to have consented for a thing if they agree upon the same thing in the same manner.

E.g., A and B enter into an agreement for delivery of Kashmiri apples. While delivering, B mistakenly thinks A asked for Shimla apples. There can be no contract because parties had different objects in mind.

Sometimes contracts are entered into, not by free consent of parties but my a few vitiating elements. Such contracts cannot be truly enforceable because there is no consensus ad idem.

Section 14 of the Act lists down the vitiating elements in a contract. They are:

  • Coercion (section 15):
    Doing or threatening to do any Act which is an offence under the Indian Penal Code, in order to get them entered in an agreement

  • Undue Influence (section 16):
    Using position of power to obtain advantage by dominating a person's will to enter in agreement

  • Fraud (section 17):
    knowing that a fact is not true and still telling the other party it is true or actively concealing something or having no intent of doing an act and still entering into an agreement

  • Misrepresentation (section 18):
    misleading the other party to make a mistake or making them believe something to be true.
    Salmond says that when consent to contract is obtained by any of the vitiating elements like coercion, undue influence, fraud or misrepresentation, it is called 'Error in Causa'.

These vitiating factors render a contract VOIDABLE at the choice of party who has suffered. If party wants non-enforceability, he can get the contract declared void by competent court of law. However, if party proceeds to go ahead with the agreement without raising any objection, the contract is implicitly enforced.

Mistake, (sections 20, 21 and 22):
When both parties are in a factual mistake, the agreement is VOID because the whole object and purpose of that agreement is lost.

  1. Lawful Object

What is enforced by law can never be unlawful. Since contracts are agreements which are enforced by law, the object creating contracts can never be unlawful/ illegal objects.
E.g., Contract killing is not a valid contract because the object of such a contract is unlawful from the beginning.

A gets into an agreement to sell his children to child trafficking rackets. That agreement is void ab initio and A is liable to face serious criminal charges.

Section 23 of the Act tells us which considerations are lawful and unlawful. All objects or considerations would be unlawful if they are:

  • Forbidden by law of the land

  • Contradictory to present law

  • Hint at injury to one person (physical, mental, reputation or legal injury)

  • Court takes it as an immoral or unjust cause
     

  1. Agreements Not Expressly Declared Void

Agreements cannot be enforced if they are declared void from the very beginning.
E.g., Restraint in marriage, restraint in a person's legal right, uncertain agreements or wagers etc., are agreements void from the start and parties cannot approach the court to seek remedy for it.

Wagering agreement is one where money (or any consideration) is payable only after happening of a future, uncertain condition. E.g., Suresh and Ramesh get into an agreement that Suresh will pay a sum of Rs. 5000 to Suresh if their city gets heavy rains with thunderstorms and if not, then Ramesh will pay the same amount to Suresh. This is a wager and hence a void contract.

Section 29 of the Act mentions that agreements which don't have any certainty or are not capable of being certain even in future, are void.
E.g., A fruit seller enters into an agreement to sell 20 kg fruits to a purchaser without specifying which fruit is to be sold. This agreement is not certain and is hence void for uncertainty.

However, had the fruit seller been only selling apples, if purchaser and seller enter into an agreement of sale-purchase of fruit, it is implied that they mean apples. Hence, the agreement can be enforceable.
 

  1. Possibility Of Performance

How can a contract be valid if it cannot be performed?
Section 56 of the Act says that Agreements with impossibility of performance are not valid contracts.
E.g., A promises to B to get him flowers from the garden of heaven. This agreement is not possible to be performed and hence not valid.
A singer who had a contract with a theatre falls extremely sick on the day of his performance. The agreement cannot be enforced on account of impossibility of performance.

Impossibility also arises when the object of the contract is completely lost. E.g., Ram contracted to temporarily stay in Shyam's premises to see the Republic Day parade in Delhi. On account of emergency, the parade, had to be cancelled. There is no contract between Ram and Shyam because the object of the contract was completely lost.


Conclusion
In everyday life, rural or urban, contracts are increasingly becoming common and important, even in today's marriages as pre-nuptial agreements. Hence it is important not just for lawyers but even the general public to know the basic elements of a contractual agreement and their nature, in order to avoid pecuniary losses or unprofitable deals and to protect one's economic interests free from attacks of the bad elements of the society.

In Punj Sons Pvt. Ltd vs UOI, the petitioners Punj Sons had contracted to deliver containers coated with dip tin to the government. Tin ingots were needed for the coating but were not available without government's licence. Government did not issue the ingots, and contract could not be performed. Government sued plaintiffs for contractual breach. Court held that it was impossible to perform the contract without ingots. Hence, the contract was cancelled in plaintiff's favour.


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