Essential Elements of Contract (1)

7/31/2019 Essential Elements of Contract (1)

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Essential Elements of Contract

P.S.SwathiAssociate Professor

SSIMSecunderabad


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Introduction The law of contract is described in the

Indian Contract Act, 1872 which deals with:1. the general principles of law governing all

contracts ,and2. covers the special provisions relating to

special contracts like Bailment, Pledge,Indemnity, Guarantee and Agency.

3. Therefore the law of contract is applicablenot only to business but also to all day-to-day personal dealings.


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Standard terms for contracts In the present scenario the are certain standard terms for

contracts used worldwide.

Several Indian public sector companies use the standard terms

for specialized functions like construction, banking andtransportation.

These are called General Conditions of Contract(GCC).

It is called General Conditions because it is attached to every

contract the organization makes. The General Conditions of Contract is supplemented by the

Special Conditions of contract (SCC).


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Contd. The issues specific to the particular contract are entered in this

and even the SCC has now been standardized. Only requiredblanks has to be filled in.

Example: If a manufacturing company puts up its GCC (Goods)which will become the standard conditions for all contracts ofsale. For each individual purchase there will be a SpecialConditions of Contract which will stipulate the specific goodsbeing purchased.

The two documents together will be the terms of contract forthe purchase.

Often business organisations settle on a contract through atender process.


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To settle a contract through tender process one may need tostudy the tender notice, tender document where terms andconditions of bid, award of contract and the GCC and SCC to

understand the rights and conditions of bids. The details range from the scope of the contract to terms of

payment, delivery, bank guarantee, taxation and liquidateddamages.


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Meaning of Contract According to Section 2(h) of the Indian Contract Act, 1872, An

agreement enforceable by law is a contract. Hence, there are two contents in the agreement, a) Agreement

B) enforceable at Law According to Section 2 (e) of the Act An agreement means an

offer by one party and its acceptance by the other. Ex: X offers to sell his car for Rs.1,00,000 to Y. Y accepts this

offer. This offer after acceptance becomes promise and thispromise is treated as an agreement between X and Y.

An agreement is said to be enforceable by law if it creates some

legal obligation. Social Agreements cannot create contracts Hence all contracts are agreements but all agreements are not

contracts. (Social Contracts cannot create contracts)


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Kinds of Contracts Classification on the basis of

communication: Express and Implied

Classification on the basis of numberof persons: Unilateral and Bilateral

Classification on the basis of

performance: Present and Futurecontracts.


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Classification on the basis of validity:1. Valid contracts: One which fulfills all the essentials given under

the law Void contracts: A contract which is initially declared to be valid

at the time of formation but declared to be void at the time ofperformance.

Void agreements: An agreement which is void ab initio, i.e.,void right from the beginning

Voidable contracts: A contract which can be decalred to be voidor valid at the discretion of the party who is effected/suffered

by it. Uneforceable contracts: A contract which is not fulfilling the

legal formalaities and which cannot be enforced. They willbecome valid after the deficiency is rectified.

Illegal contracts: Contracts which are legally prohibited. In thiscase both civil and criminal action is taken against the party

who is responsible for making the contract illegal.


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Essential Elements of Contract1. Agreement supported by Consensus Ad Idem2. Two Parties3. Proper offer and its proper acceptance4. Intention to create legal relationship5. Free consent6. Capacity to contract7. Lawful consideration8. Lawful object9. Agreement not expressly declared void10. Certainty of meaning11. Possibility of performance12. Legal formalities


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Agreement supported by

Consensus Ad idem What is an agreement is already explained

Consensus Ad Idem means meeting of two minds.

Both the parties to the agreement should understandthe terms and conditions in the same manner

If there is any miscommunication ormisunderstanding the agreement is not created

Ex: X has two houses and he wants to sell his house

situated at Delhi to Y and Y is assuming that X isgoing to sell his other house which is situated atMumbai. There is no consensus ad idem and there isno agreement


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Two Parties At least there must be two parties to create a

contract.

Hence, a partner can not enter into a contractwith his firm, but a director of a company canenter into a contract with the company as thecompany has separate legal existence.

Separate legal existence has certain featureslike common seal, perpetual succession, cansue and be sued etc.


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Proper Offer and Its Proper

Acceptance There must be a lawful proposal and a lawful

acceptance of that proposal thus resulting in anagreement.

It means that there must be two parties to anagreement, i.e. one party making the proposal andthe other party accepting.

The two requirements are: The proposal must bedefinite and the acceptance of the proposal must

be absolute and unconditional. Ex: X offered to sell two plots of land to Y at a

certain price. Y accepted the offer for one plot. Itwas held that the acceptance was not validbecause it was not for the whole of the offer.


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Types of Offer General Offer: Offer made in general to all public Specific Offer: Offer made only to a particular person. In that

case others cannot accept the offer and the person to whom theoffer is made alone can accept.

Counter Offer: When the offer is accepted with some newterms and conditions it is known as Counter Offer

Standing Offer: An offer which stands good for a longer periodis known as standing offer. Ex: Supply of raw material for 3years by a party. The terms and conditions can be modifiedfrom time to time

Express offer: Where offer is expressly mentioned eitherverbally or nonverbally.

Implied offer: Offer is understood with the behaviour of theofferor.


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AcceptanceAcceptance must be absolute and

unconditional

It must be made with an intention toperform

It must be made by the person to

whom the offer is madeAcceptance may be express or implied

Silence does not amount to acceptance


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Mode of Communication ofacceptance

According to Section 7(2) of the Indian Contract Act,1872 the acceptance of an offer must be given in themanner prescribed by the offeror otherwise it must

be in a usual and reasonable manner. Ex. X of Agra sends a letter by post to Y of Delhi

offering to sell his car for Rs1,00,000 and also writessend your acceptance by telegram. Y sends hisacceptance by an ordinary post . X can reject theacceptance and the same has to be communicated toY otherwise it will be treated as accepted.


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The acceptance is complete only when it hasbeen communicated to the offerer.

Ex: X offered to supply coal to a RailwayCompany. The manager of the companyaccepted as soon as he received the offer andprepared acceptance letter in a properlyaddressed and stamped letter and put it in

the drawer of his table and forgot all about it.It was held that no contract was madebecause acceptance was not communicated.(Brogdon v. Metropolitan Railway Co.).

Communication: When it iscomplete


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Communication to Whom

Acceptance must be communicated to the offererhimself. It means that if acceptance is communicatedto an unauthorized person, it will not give rise tolegal relations.

Ex: F offered by a letter to buy his nephews horsefor 30 dollars saying If I hear no more about this, Ishall consider the horse mine. The nephew sent noreply at all but told B his auctioneer, not to sell thatparticular horse as he intended to sell that horse to F.

B sold the horse by mistake. It was held that contractwas not created because his nephew had notcommunicated acceptance to him. (Felthouse v.Bindley).


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Lapse and Revocation ofProposal and Acceptance

1. An offer lapses after stipulated or reasonable time2. A proposal lapses by not being accepted in the

mode prescribed

3. A proposal lapses by rejection by the offeree.4. A proposal lapses by the death or insanity of the

proposer or the proposee before acceptance.5. Proposal lapses by revocation by the proposer

before acceptance.6. Revocation by non-fulfillment of a condition

precedent to acceptance.7. A proposal lapses by subsequent illegality or

destruction of subject matter.


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Communication ofProposal,Acceptance and Revocation

1. Communication of a proposal is complete when it comes tothe knowledge of the person to whom it is made.

2. Communication of a revocation is complete as against theperson who makes it when the letter of revocation is posted .

3. Communication of a revocation is complete as against theperson to whom it is made, when the letter of revocation isreceived by him.

4. Time during which an offer or acceptance can be revoked:5. A proposal may be revoked at any time before the

communication of its acceptance is complete as against the

proposer, but not afterwards. An acceptance is complete asagainst the acceptor but not afterwards.


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Intention to create LegalRelations

In commercial and business agreements, an intentionto create legal relations is presumed.

If it is contrary which means that the parties did not

intend to be legally bound the burden of proof lies onthem and they have to prove that there is nointention to create legal relationship.

Moreover agreements of a social or domestic naturedo not contemplate legal relationship. As such theyare not contracts.

Ex: Balfour VS. Balfour


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Free Consent

Free Consent: There must be free consentof the parties to the contract. According toSection 14 consent is said to be free when itis not caused by

1. Coercion

2. Undue Influence

3. Fraud4. Misrepresentation

5. Mistake


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Coercion

Physically or mentally harassing a person toobtain consent is known as Coercion.

Contract created by coercion is voidable. Threatening to commit suicide is coercion.

There should be an act or behaviour which is

prohibited by law.


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Undue influence

Undue influence is something where theperson who is giving consent is undulyinfluenced.

To determine undue influence, it is necessarythat there should be fiduciary relationshipbetween the parties.

A fiduciary relationship is something where

one can dominate the will of the other.(Master and Servant, guardian and ward,guru and discipile, Advocate and Client)

Contract created by undue influence is void.


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Fraud

Making a promise without an intention toperform is known fraud.

Deceiving a person by making false promisesintentionally and making him to believe falsethings as true facts is fraud.

Intentional suppression of facts also amountsto fraud

Contracts created by Fraudulentrepresentations are void and criminal actionwill be taken against the person who madefradulent representations.


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Misrepresentation

If misrepresentation of facts is doneinnocently it is not considered as fraud

but as misrepresentation The court may direct the party who

made misrepresentation to rectify the

things and go ahead with theperformance of the contract.


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Mistake

Lapse on the party to the contracts is known asMistake.

It is of two kinds: Mistake of Fact or Mistake of Law.

Mistake of Fact is excused but mistake of law is notexcused. If mistake cannot be rectified contract is considered

as void. Ex: While making an offer to supply automobile

components X wrote the price as Rs.30 instead ofRs.300 and communicated it to Y. Y cannot ask forthe performance of contract for Rs.30 on the groundthat mistake of a person should not give undueadvantage to someone else.


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4. Capacity of Parties

The parties to an agreement must becompetent to contract it means that:

1. The person must be major

2. The person must be of sound mind

3. The person should not be disqualifiedfrom contracting by any law to whichhe is subject.


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Minor: A person who has not attained theage of 18 is considered as Minor, and if aTrust is appointed for his/her property a

person who has not attained the age of 21 isdecalred as Minor. A contract with a minor is void ab initio

(Mohiribibi Vs. Dharma das Gose)

It is assumed under the law that minorcannot discriminate between what is goodand bad for him and as such any contractwith a minor is void.


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Minor Contd.

Under the Indian law Minor is extremely protectedby law.

Any contract created with a minor is void but

following are the exceptions.1. If the contract is made for the benefit of the minor,

it is valid ( Taking minor as a partner)2. If the contract is made for the supply of necessities

to a minor and what are considered to be

necessities are decided on the basis of social statusand life style of the minor.3. A minor cannot ratify a contract, which he created

when he was minor, after he becomes a major.


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People of unsound mind

Lunatics, idiots and Drunken person cannot create contracts. Consensus ad idem is not present in these cases. Lunatic is a person who is some times sane and some times

insane. The gap between two insane states is known as Lucid

Interval. Contract created during the lucid interval is valid. Idiot is a person who is always insane and contract created with

Idiot is always void. A person who is in a drunken state or who is not with a

conscious mind cannot create a contract. However, it is to beestablished that at the time of creating contract he was in a

drunken state. In the case of lunatics and idiots burden of proof lies with the

opposite parties and in the case of drunken persons the burdenof proof lies with the party who is claiming it.


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Parties who are disqualified bylaw

Following persons are not allowed tocreate contracts

1. Alien enemies

2. Foreign Ambassadors

3. Convicts

4. Insolvents

5. Advocates


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Lawful Consideration

Under Section 2(d) of the Indian Contract Act, 1872defines consideration as : when at the desire of thepromisor, the promisee of any other person has doneor abstained from doing, or does or abstains fromdoing or promises to do or abstain from doingsomething, such act or abstinence or promise iscalled a consideration for the promise.

Ex: X promises to deliver his good to Y and Y promisesto pay Rs.1,000 on delivery.

Ex: X owes Y Rs.10,000. Y promises X not to file a suitagainst him for one year on Xs agreeing to pay himRs.500 more.


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Contd.

Consideration means an advantage or benefit moving from oneparty to the other.

It means something in return. The agreement is legally enforceable only when both the parties

give something and get something in return. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing

something) or promise to do or not do something. It may be past, present or future Consideration must be lawful i.e. not forbidden by law


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Essentials of a validConsideration

1. Consideration must move at the desire of the promisor.2. Consideration may move from the promisee or any other

person.3. Consideration may be past, present or

future.4. Consideration must be Something of Value: The

consideration need not be adequate to the promise but itmust be of some value in the eye of the law.

5. Consideration must be legal6. Consideration my be doing something or abstain from doing

something (positive or negative act ) or a promise to dosomething.


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Consideration must move atthe desire of the promisor

An act constituting consideration must have beendone at the desire or request of the promisor notfrom any third party

Ex: X spent Rs.1,00,000 on the construction of shopsat the request of the collector of the District. Inconsideration of this Y a shopkeeper promised to paysome money to X. It was held that this agreementwas void being without consideration because X had

constructed the shops at the request of collector andnot at the desire of Y. (Durga Prasad v Baldeo)


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Consideration may move fromthe promisee or any other person

1. Consideration may move from the promiseeor any other person.

2. Ex: X by a deed of gift transferred certainproperty to her daughter Y with a directionthat Y with a direction that Y should pay Zan annuity. Y refused to pay to Z as

consideration did not move from him heldthat consideration can be moved from anyperson.


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Consideration may be Past orPresent or Future

Past Consideration means the considerationwhich has already moved before the

formation of agreement. Ex. X renders some service to Y at Ys request

in the month of May. In June, Y promises topay X Rs.1,000 for his past services. Past

service amount to past consideration. X canrecover Rs 1,000 from Y.


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Present Consideration

Present Consideration means theconsideration which moves

simultaneously with the promise, iscalled present consideration.

Ex: In case of cash sale i.e. shopping

promise to pay the price and promise todeliver the goods are performedsimultaneously.


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Future Consideration

Future Consideration means theconsideration which is to be moved

after the formation of agreement iscalled future consideration.

Ex: X promises to deliver certain goods

to Y after 10 days and Y promises topay after 10 days from the date ofdelivery.


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Consideration must be ofSome Value

The consideration need not be adequate tothe promise but it must be of some value inthe eye of the law.

Ex: X agrees to sell his house which is worthof Rs.20,00,000 for 10,00,000.A denies thathis consent to the agreement was freelygiven. The inadequacy of the consideration isa fact which the Court should taken intoaccount in considering whether or not Asconsent was freely given.


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Consideration must be Realand not Illusory

It must be real and not Illusory

Ex: X engages Y for doing a certain wok and

promises to pay reasonable remuneration.This promise is not enforceable because theconsideration is uncertain.

Ex: X promises to put life into Ys dead wife

and Y promises to pay Rs.1,00,000.Thisagreement is void because consideration isphysically impossible to perform.


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Consideration something other thanthe Promisors Existing Obligation

The consideration must be something which thepromisor is not already bound to do because apromise to do what a promisor is already bound to do

adds nothing to the existing obligation. Ex: X had received summons to appear before a

court of law as witness on behalf of Y who promisedto pay some money for his trouble. It was held thatthe promises to pay money was void for want of

consideration because X was under a legal duty toappear as a witness before court of law.( Collins v.Godefroa).


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Lawful Consideration

The consideration must neither beunlawful nor opposed to public policy

X promises Y to obtain an employmentin the public service and Y promises topay Rs.1,00,000 to X. The agreement is

void on the ground of unlawfulconsideration.


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Stranger to a Contract

Exceptions to stranger to a contract:

1. Trusts

2. Family Settlement

3. Acknowledgement Ex: Acts of Agent

4. Assignment of a Contract: Ex: theassignee of an insurance policy.


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No consideration , No contract

Exceptions to General Rule Noconsideration No contract:

1. Agreements made on account ofNatural Love and Affection

2. Promise to compensate

3. Promise to pay time barred debt4. Completed gifts

5. Agency


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Lawful Object

The object is considered lawful unless itis forbidden by law or is fraudulent or

involves or implies injury to the personor property of another or is immoral oris opposed to public policy


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Agreements opposed to publicpolicy.

Trading with Alien enemies

Agreements to stifle prosecution

Agreement for the sale of public offices Agreements in restraint of parental rights

Agreements in restraint of movements

Agreements interfering with the course of

justice


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Agreement must not ExpresslyDeclared Void

Agreement must not have declaredvoid like:

1. Agreement in restraint of marriage2. Agreement in restraint of trade

3. Agreement in restraint of legal

proceedings.4. Agreement in restraint of service

5. Agreement by way of wager


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Certainty of dealing

Agreements the meaning of which is notcertain or capable of being made certain arevoid.

However the meaning of the agreement couldbe made certain from the circumstances ofthe case, it will be treated as a valid contract.

Ex. X who is a dealer in mustard oil, agreed

to sell 100 tones of oil to Y. This agreement isvalid because the meaning of the agreementcould be easily ascertained from thecircumstances of the case.


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Possibility of Performance andLegal Formalities

An agreement to do an impossible act isvoid.

Legal Formalities: The agreement mustcomply with the necessary formalitiesas to writing, registration, stamping.


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Conclusion

Contract is an agreement which is enforceable at law. A contract is said to be legally valid if it fulfills the following

essentials.1. Agreement2.

Two Parties3. Intention to create legal relations4. Offer5. Acceptance6. Consideration7. Capacity to contract

8. Free Consent9. Lawful Object10. Agreement not to be declared void11. Certainty and possibility of performance12. Legal formalities.


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Essential Elements of Contract (1)

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