A contract is an agreement enforceable by law, formed when two or more parties agree to enter into a legally binding arrangement. It is defined as an agreement enforceable by law under Section 2(h) of the Indian Contract Act, 1872, which also lays down the essential elements required for a valid contract. Understanding these essentials is key to forming a valid, enforceable agreement. Let's explore these essential elements in simple terms, supported by case laws.

advertisement

1. What Are the Essentials of a Valid Legal Contract in Indian Law?

a) Offer (Section 2(a)): There must be a clear and definite offer made by one party to enter in a contract. An offer is considered to be a key element because without it, there can be no contract. This offer must be communicated to the other party. This party is known as Offeror.

b) Acceptance (Section 2(b)): Acceptance means saying "yes" to a deal's conditions. It should be clear and match the conditions of the offer. The person accepting the offer can't change the terms. You can accept an offer by saying or doing something. The party to whom the offer is made is known as Offeree. For there to be a binding contract, the offeree must accept the offer.

For example, Imagine you're at a coffee shop. You say to your friend, "I’ll buy you a coffee if you pay me back later." Here, You’re offering to buy the coffee and your friend replies, "Okay, that sounds good!". This shows acceptance that your friend accepts your offer and keeps the intention to meet the offeror's terms.

advertisement

c) Intention to Create Legal Obligations: For an agreement to be legally binding, both parties need to be totally on board and agree to all the terms. You can't just pick and choose which parts you like. It's like a package deal - you gotta take it all or leave it.

For example, if you sign a contract to buy a house and the seller does not agree to one of the terms, there is no contract and will result the contract being void. Balfour v. Balfour (1918-19) All ER 860 (CA) 11 is considered to be the first case which defined intention of creating legal relationship theory in law

d) Lawful Consideration (Section 2(d)): Consideration refers to something of value exchanged between the parties, which can be in the form of money, goods, services, or a promise. For example, Imagine you’re selling your bike to a neighbour for ₹10,000 and the neighbour agrees to pay you ₹10,000. In this case, both parties are giving something of value, you’re giving up your bike, and your neighbour is giving you money. This exchange of value is what constitutes consideration in a contract.

e) Competent Parties and Certainty(Section 11 & 29): The parties to the contract must be legally capable of entering into a contract. They must be of legal age (18 years or above), of sound mind, and not disqualified by law. Basically, a contract is only good to go if it has all the essential parts. If something is missing, the contract might be kaput or you might not be able to make it happen.

Also, The terms of the contract must be clear and definite. Ambiguousness in the contract may lead to unenforceability. For instance, if the contract is for the sale of goods, but the parties do not agree on what "goods" are, then the contract is too uncertain to be enforced and the court may not enforce such contracts that have uncertain terms.

advertisement

f) Legal Purpose(Section 23): The purpose of the contract must be lawful. Contracts with illegal objectives, like those involving crime or immoral acts, are void. Also, The contract must be capable of being performed(section 56). The contract is void if the act agreed upon is impossible in nature.

g) Free Consent(Section 13): For a contract to be valid, both parties must agree without any pressure, manipulation, lies, false information, or misunderstandings. If someone is forced or tricked into agreeing, the contract is not valid and cannot be enforced.

2. What is the significance of free consent in a legal contract?

Free consent is one of the pillars of a valid contract. Consent is considered free when it is not influenced by factors like coercion, undue influence, fraud, misrepresentation, or mistake. Free consent ensures fairness and protects individuals from being exploited or coerced into entering agreements that may not be in their best interest. In Indian Contract Act, 1872 these are mentioned in several sections.

  • Coercion (Section 15): Consent obtained by the threat of harm or unlawful pressure is not free consent. For example, if the agreement was signed by the employee after he was pressured by their boss, who threatened to withhold his promotion if he did not accept the unfavourable terms- it will not be considered a valid contract.

  • Undue Influence (Section 16): This occurs when one party takes advantage of their dominant position to obtain unfair consent. For example- A friend convinces another friend to sign a contract to sell their bike for much less than it's worth. The friend uses their friendship and talks a lot about how much he needs the money, making the other friend feel guilty. This contract will not be valid because it was signed under undue influence.

  • Fraud (Section 17): Deliberate misrepresentation of facts with the intention of deceiving another party nullifies the free consent. Fraud in contract law occurs when one party lies or misleads another to get them to agree to a contract. This deliberate misrepresentation of facts with the intention of deceiving another party nullifies the free consent. For example- Aman purchased goods of Rs. 5000 from shopkeeper Baman, with the intent of not paying the money to Baman, this type of action amounts to fraud.

  • Misrepresentation (Section 18): Misrepresentation in contract law occurs when one party provides false information that induces another party to enter into the contract. It can be innocent, negligent, or fraudulent. When one party presents false information unknowingly, it still affects free consent. For example- Aman asks Baman to purchase his car which is in a good condition, Baman purchased the car believing in good faith that the car is in a good condition but after a few days, the car did not function properly and Baman had to suffer a loss to repair the car.

    So the act amounts to misrepresentation as Aman believed that the car works properly without any intention to deceive. Misrepresentation is different from fraud because fraud involves intent to deceive, while misrepresentation involves a false statement made without intent to deceive.

  • Mistake (Section 20): If both parties are under a mistake regarding a fundamental fact of the contract, it may be void. For instance, Two people agree to a contract for the sale of a painting. The seller believes they are selling replicas of original art works, while the buyer thinks they are buying original artwork. Both parties are mistaken about the nature of the painting. If this mistake is significant enough, the contract may be deemed void, as neither party intended to agree on the same thing.

advertisement

3. How does consideration play a role in contract formation?

Consideration is a fundamental element of a contract, as it distinguishes a legally enforceable agreement from a mere promise. Under the Indian Contract Act, 1872, consideration refers to something done at the request of the promisor, which may involve the promisee or a third party doing or refraining from doing something. Durga Prasad v. Baldeo and Ors, (1881)( ILR 3 ALL 221) is a landmark judgement deals with consideration under Section 2(d) of Indian Contract Act, 1872 (ICA) and agreements made without consideration under Section 25 of ICA. Consideration can be categorised into three types:

  • Past Consideration: This occurs when the promisee has already performed an act before the agreement. For instance, Ram hires Shyam to work on his farm during the harvest season. He promises to pay Shyam Rs. 5,000 when he plants the new crop in the fields. Shyam's previous work serves as valid justification for the agreement.
  • Present (Executed) Consideration: This type involves an act completed simultaneously with the agreement. For instance, buying fruits from a vendor and paying immediately represents present consideration.
  • Future (Executory) Consideration: This occurs when the parties agree to perform their obligations at a later date. For example, purchasing a car with the promise to pay upon delivery next week is a case of future consideration.

For consideration to be valid, it has some essentials and it must meet certain criteria:

  • At the Promisor's Request: Valid consideration must arise from the promisor's request. Voluntary acts without solicitation do not count. For example, if you help someone find their lost wallet without prior agreement, you cannot demand payment afterward.
  • May come from a Third Party: Consideration does not have to come directly from the promisee. It can be provided by someone else, allowing third parties to enforce contracts.
  • Legality: Consideration must be lawful. Any illegal consideration renders the contract void, such as agreements involving illegal activities or harm to others Also, it must be feasible and not impossible to perform, whether legally or physically. It should also be certain, not ambiguous.

advertisement

Consideration is vital because it ensures that both parties are bound to fulfil their promises. Without it, contracts may lack the necessary obligation for enforcement. As per Section 10 and Section 25 of the Indian Contract Act, 1872, consideration is essential in a valid contract. In simple words, no consideration, no contract.

Hence, you can enforce a contract only if there is a consideration. In summary, while consideration is crucial for a binding contract, exceptions exist that allow for enforceable agreements without it.

4. What are the legal consequences of a breach of contract?

A breach of contract occurs when there is a violation of any of the agreed-upon terms and conditions of a binding contract or when one party fails to fulfil their part of the agreement. For Example, Ram agrees to sell her vintage guitar to Shayam for ₹1,000, with payment due by a specific date.

If Shayam fails to pay by that date, he has breached the contract. Ram could then seek legal remedies, like demanding payment or claiming damage. The person who brings a lawsuit to court claiming that there has been a breach of contract (plaintiff) must first establish that a contract existed between the parties and then prove what requirements of the contract were not met by the contract breacher (defendant).

Remedies for a breach of contract include-

i) Damages- Damages in contract law refer to monetary compensation awarded to a party for losses resulting from a breach of contract. The aim is to put the injured party in the position they would have been in had the contract been fulfilled. For instance, Mayank hires a contractor to renovate his kitchen for ₹1,00,000. The contractor does a poor job, requiring Mayank to hire another contractor to fix the issues at a cost of ₹30,000. Alex can claim ₹30,000 in compensatory damages.

ii) Specific Performance- Specific performance requires the breaching party to perform under the terms of the contract. The court may order specific performance if the breach cannot be compensated in terms of money.

iii) Injunction- An injunction is a court order that requires and restricts a party from doing something. In contract law, it is often used to prevent a party from breaching a contract or to maintain the status quo (circumstances existing condition) until a legal dispute is resolved.

advertisement

iv) Rescission or Restitution: Rescission cancels a contract and returns both parties to their pre-contractual positions. Whereas, Restitution restores a party to their original position before the contract by compensating them for benefits conferred.

Understanding the essentials of a valid legal contract is crucial for creating agreements that can be enforced and for preventing disputes. Key elements like offer and acceptance, lawful consideration, competent parties, free consent, and a lawful object help ensure that contracts are fair and balanced for everyone involved.

Moreover, knowing about remedies for breach and the differences between void and voidable contracts provides important protections in case something goes wrong. By keeping these essentials in mind, individuals and businesses can craft strong, enforceable contracts that align with Indian law, fostering trust and clarity in their dealings.

Here are some frequently asked questions (FAQs) regarding the essentials of a valid legal contract from an Indian law perspective:

FAQs: Essentials of a Valid Legal Contract (Indian Law)

  1. What are the basic essentials of a valid contract under Indian law?

    • A valid contract under the Indian Contract Act, 1872, must include offer and acceptance, lawful consideration, free consent, capacity to contract, lawful object, and not expressly declared void.

  2. Can a minor enter into a valid contract?

    • No, under Section 11 of the Indian Contract Act, a minor (below 18 years of age) is not competent to enter into a contract.

  3. What constitutes ‘free consent’ in a contract?

    • Free consent means that the consent of the parties must not be influenced by coercion, undue influence, fraud, misrepresentation, or mistake.

  4. Is oral agreement legally binding in India?

    • Yes, oral agreements can be valid and legally binding, provided they meet all the essentials of a valid contract under the Indian Contract Act.

  5. What is ‘lawful consideration’ in a contract?

    • Lawful consideration refers to something of value given by each party in exchange for the promise of the other party, and it must not be illegal, immoral, or opposed to public policy.

advertisement

  1. When can a contract be considered void?

    • A contract may be void if it involves an illegal object, is against public policy, or is expressly declared void by the Indian Contract Act, such as agreements in restraint of trade or marriage.

  2. Can an agreement made without consideration be valid?

    • Generally, an agreement without consideration is void, but there are exceptions like a promise made out of natural love and affection, or a promise to compensate for a past voluntary service.

  3. What is meant by 'capacity to contract'?

    • Capacity to contract means that parties entering into a contract must be of legal age, of sound mind, and not disqualified from contracting by any law.

  4. How does coercion affect the validity of a contract?

    • A contract entered into under coercion, meaning force or threats, is voidable at the option of the party whose consent was not freely given.

  5. Can contracts be terminated?

    • Yes, contracts can be terminated by mutual consent, breach, frustration of the contract, or if the performance becomes impossible or unlawful.

  6. What is the difference between a void and voidable contract?

    • A void contract is not enforceable by law from the beginning, while a voidable contract can be rescinded or enforced at the discretion of the aggrieved party.

  7. How can a contract be enforced in India?

    • A contract can be enforced through a civil suit in a court of law, provided it meets all the necessary legal requirements and essentials under the Indian Contract Act, 1872.

References-

Bhaumik Pratap Singh's profile

Written by Bhaumik Pratap Singh

LinkedIn

Bhaumik Pratap Singh is pursuing a BA LLB (Hons) in Law from Maharashtra National Law University, Nagpur, with an expected graduation date in 2029. He is actively involved in extracurricular activities, including participation in the Music Club (Swaravali) and engagement in communication and sports activities.

advertisement

advertisement

Join the Vaquill community to simplify legal knowledge