The Indian Contract Act 1872, defines the ‘contract’ under Section 2(h). It defines a contract as “Any agreement enforceable by law is a contract.” Thus, for the formation of a contract, there must be i) agreement and ii) agreement enforceable by law. Contracts are the backbone of modern society by establishing promises and minimizing the risks involved between the parties. Contracts are not only confined to financial matters but may also include certain acts to be or not to be carried out within a contractual obligation. The concept of contract as a whole is not as simple as it appears. Certain essential conditions are required to be fulfilled to enter into a contract, be it a verbal or written contract. Any failure to observe such conditions would lead to a breach of contract.
An agreement starts with a proposal. An agreement that is enforceable by law is called a contract. The following essential conditions are required to be fulfilled to make a valid contract according to the terms of the Indian Contract Act 1872.
Offer and Acceptance
An offer or a proposal and its acceptance play a significant role in the process of making a contract. An offer is the willingness to do any act or not to do any act, with the intention to obtain the assent to the proposed act or abstinence, of the other party. When a proposal is accepted by the other party, it becomes a promise. The process of offer and acceptance is completed by the act of communication and acceptance of the offer, in the same sense, by both parties. The proposal can be either be in an expressed or implied manner.
Lalman Shukla vs Gauri Dutt is a notable case in this regard. The plaintiff (Lalman Shukla) was a servant of the defendant (Gauri Dutt). The defendant’s nephew went missing. When the plaintiff went in search of the nephew, the defendant issued a reward of a certain amount to whoever would find his nephew. However, the plaintiff was unaware of this reward when he found and brought back the nephew. The court decided that the plaintiff could not claim the reward as he was not aware of the reward when he found the defendant’s nephew.
Lawful Consideration
The lawful consideration is another essential element to be present to make an agreement. Consideration is the price of the promise. In the words of Pollock, “Consideration is the price for which the promise of the other is bought and the promise is thus given for value is enforceable”. The definition of Consideration in Section 2(d) requires that the consideration for a certain act or abstinence should be done by the promisee at the desire of the promisor (promissory estoppel) and the act should have been executed or in a state of executory.
The case of Durga Prasad vs Baldeo shows the application of the promissory estoppel. The plaintiff’s action to recover the commission was rejected because the act was not at the desire of the defendants.
Intention to create legal relation
The requirement of the intention to create legal relations constitutes one of the most significant conditions of a valid contract. The English Law specifically requires the existence of the intention to create legal relations for a legally binding contract. It is necessary to distinguish between the contracts entered into by family members and the contract entered into for business purposes. The breach of all kinds of contracts could not result in compensation. It is considered that domestic contracts lack legal intention.
The essentiality of the intention to create legal relations was seen in the case of Balfour vs Balfour. The Court decided that it was merely a domestic agreement, where there was no intention to create legal relations and the plaintiff’s appeal was dismissed on this ground.
Legality of object
The legality of the object also plays an important role in making a contract valid. Section 23 states that the consideration of any object is lawful unless it is forbidden by law; it is of such a nature that defeats any provision of law; is fraudulent in nature; implies injury to any person or property of another, or the court considers it to be immoral or opposes the public policy. Where the object of an agreement is illegal, the contract is void. Sometimes the object or the consideration to an agreement does not violate the law directly but if it is permitted, then it would defeat any of the provisions of law. Such agreements also result in void contracts. An agreement between two parties to injure any other person or property of any other person is unlawful. Any agreement is unlawful if it causes injury to the rights of the citizens.
Capacity
A contract can also become void on the grounds of incapacity of the persons entered into the agreement. Section 11 of the Indian Contract Act 1872 states that every person is competent to enter into an agreement unless the person is a minor, of unsound mind, or disqualified by law to which they are subjected. The age of the majority is eighteen. Any agreement entered into with a minor is void ab initio (void from beginning). In cases where the minor represents his age and induces another party to enter into a contract, there will be no estoppel against the minor. No minor is estopped to take the defense of his minor age. Any agreement entered into with a person of unsound mind or a person disqualified under any law, leads to void agreement. Section 12 defines any person who is capable of understanding and of forming a rational judgment while entering into the contract as a person of sound mind. Any person of sound mind may not enter into the agreement when he is occasionally of sound mind and any person who is of unsound mind can enter into an agreement when he is of sound mind.
In the Mohiri Bibi vs Dhurmodas Ghose case, the plaintiff, who was a minor, entered into a contract by representing his age. The Court decided that it would be a void contract (ab initio) as the contract was entered into with a minor party.
Free Consent
Section 13 defines that when two persons agree on the same thing in the same sense, they are said to be in agreement with each other. Agreements entered into without the element of free consent, lead to voidable agreements at the option of the party whose consent was so caused. The contract is considered to be void under the following circumstances: coercion (Section 15) is defined as committing or threatening to commit any act which is forbidden by the Indian Penal Code or unlawful detaining or threatening to detain any property or any person with an intention to enter into an agreement; undue influence (Section 16) is caused only under such circumstances where one person is in a position to dominate and influence the other person to obtain an unfair advantage over the other and the onus probandi or the burden of proving, lies on the person who was in a position to dominate the will of the other party; fraud (Section 17) means the acts done with the intention to deceive another party or to induce him to enter into the contract. Any agreements entered into by the misrepresentation of facts and circumstances (Section 18) or a contract where both the parties are under a mistake of fact (Section 20,21,22), leads to a void contract.
Position of dominance is necessary for the presumption of coercion. The Raghunath Prasad Sahu vs Sarju Prasad Sahu is a notable case where the Court decided that in such circumstances of the case, there could be no presumption of undue influence.
Lawful object
It is stated in Section 24 of the Indian Contract Act that if any part of a single consideration for one or more objects or any part of lawful considerations is void, then it is a void agreement. Thus, to make a valid contract, there should be a lawful object.
Certainty
Section 29 of the Indian Contract Act specifies that agreements, the meaning of which is uncertain, are void. The terms and conditions in the contract should be specific and not vague.
Possibility of Performance
Section 56 of the Indian Contract Act 1872, mentions that an agreement to do an impossible act is itself a void agreement. Any contract made to do an act that becomes impossible after it has been entered into the contract, the contract becomes void.
Therefore, failure to observe any of the above-mentioned essential conditions would lead to a void contract.
Books referred:
- The Indian Contract Act 1872
- Contract and Specific Relief by Avtar Singh (Twelfth edition).
