INTRODUCTION:

As we look around every day, we come across many people entering into various contracts. Most of them create contracts without even knowing the very gist of the subject. We enter into contract when we lend our motorbike to our friend, when we rent our house, when we settle disputes through a settlement agreement, when we agree to sell or buy something, etc. Hereby, explaining the legalities of a contract, essential elements of a valid contract and competency to contract.

FORMATION OF CONTRACT:

According to Section 2(h) of the Indian Contract Act, 1872, an agreement which is enforceable by law is a contract and a valid offer/proposal by one party and its valid acceptance by the other party forms a valid agreement. The legislation of contract expressly states that every promise and every set of promises forming consideration for each other is an agreement and indeed in this agreement the promise should be a valid promise to form a valid agreement. The agreements which are void-ab-initio are because of the promises which can never be performed and hence are not valid promises.


VALID PROPOSAL     +          VALID ACCEPTANCE      =        VALID AGREEMENT

VALID AGREEMENT  +   ENFORCEABILITY   BY LAW     =       VALID  CONTRACT


                
The Indian Contract Act, 1872 provides the essential elements under section 10 of the Act.


SECTION 10: What agreements are contracts. -  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 are not hereby expressly declared to be void.


EXPLANATION- This section says that parties must be competent to contract, there are 6 essential elements prescribed under section 10 of the Indian Contract Act, 1872 which are to be fulfilled.

(A) AGREEMENT: Section 2(e) defines agreement as every promise and every set of promises forming the consideration for each other. A valid offer by one party and a valid acceptance by the other party can form an agreement.


Offer+ Acceptance= Agreement.


For instance, ‘A’ offers ‘B’ to sell him a pen. ‘B’ accepts his offer and agrees to sell his pen to ‘A’. Thus, this forms a valid agreement between ‘A’ and ‘B’.

(B) FREE CONSENT: Section 14 defines free consent.

Section 14: “Free consent” defined. – Consent is said to be free when it is not caused by-

I) coercion, as defined in Section 15, or

II) undue influence, as defined in Section 16, or

III) fraud, as defined in Section 17, or

IV) misrepresentation, as defined in Section 18, or

V) mistake, subject to the provisions of Section 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.

Now, we shall discuss all these hindrances to a free consent on an individual basis.

I) COERCION-  According to Section 15 of the Indian Contract Act, 1872; “coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (XLV of 1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

This can be further explained as when any person commits or threatens to commit any act forbidden by Indian Penal Code (or any illegal act) in order to unlawfully detain any property to the prejudice of any person whatever. It can be any act to compel someone to do anything by force or power.

ILLUSTRATION: ‘A’ causes ‘B’ to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code (XLV of 1860)

II) UNDUE INFLUENCE: According to Section 16, (a) A contract is said to be induced by “ undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses the position to obtain an unfair advantage over the other.

In general, “undue influence” can be elaborated as when a person of higher authority obtains an unfair advantage of his position and tends to dominate the will of the lower authority then the consent is not said to be free.

ILLUSTRATION: A father dominates his son to compulsorily marry a certain girl even without son’s will, then this can be said as undue influence.

III) FRAUD: According to Section 17, “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter the contract:

(a)  the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true;

(b) the active concealment of a fact by one having knowledge or belief of the fact;

(c) a promise made without any intention of performing it;

(d) any other act fitted to deceive;

(e) any such act or omission as the law specially declares to be fraudulent.

This can be easily summed up as any act or omission with the intent of deceiving the other party can be called as fraud.

ILUSTRATION: ‘A’ sells a horse to ‘B’ which he knows to be unsound. ‘A’ says to ‘B’ that the horse is sound. This clearly is a fraud.

IV) MISREPRENTATION: According to Section 18, “Misrepresentation” means and includes, -

(a) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

(b) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him;

(c) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.

Thus, in general, misrepresentation can be explained as the positive assertion, any breach of duty or causing a party to an agreement by misleading someone about the nature of something or providing any false information regarding a subject.

ILLUSTRATION: ‘A’ agrees to a contract with ‘B’ with a view that he will receive a gift over $100. After signing the contract, ‘A’ realizes that the gift is not free actually. This can be an example of misrepresentation.

Usually, there are three types of misrepresentation under the contract law,

- Fraudulent Misrepresentation (person who shares the information knows it to be untrue)

- Negligent Misrepresentation (party to a contract does not care enough to check information before signing in to the contract)

- Innocent Misrepresentation (party has no reason to believe that the information he has is untrue)

V) MISTAKE: According to Section 20, where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

According to Section 21, a contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India has the same effect as a mistake of fact.

According to Section 22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

Thus, in simpler terms, “mistake” can be defined as an erroneous belief that certain facts are true. It generally occurs when parties to the contract are unaware of the terms of the agreement and understand the agreement in an incorrect sense.

ILLUSTRATION: ‘A’ agrees to buy a certain horse from ‘B’. It turns out that the horse was dead at the time of agreement and neither of the parties was aware of that. The agreement is said to be void.

(C) COMPETENCY TO CONTRACT: Section 11 of the Indian Contract Act defines competency to contract. According to this section, every person is competent to contract who is:

- Of age of majority according to the law to which he is subject.

- Of sound mind.

- Not disqualified from contracting by any law to which he is subject.

And, there are some more categories which are incompetent to contract. They are mentioned below:

- Alien enemy.

- Foreign Sovereign and Ambassadors.

- Convict who is undergoing imprisonment.

- Insolvents.

- Company or Statutory bodies.

Sir Lord North stated that looking at Section 11, their Lordship are satisfied that the act makes it essential that all contracting parties should be competent to contract within the meaning of the Act.

Section 10 requires that the parties to a contract must be competent and Section 11 says that a minor is not competent. Section is not clear whether if a minor enters into an agreement, it would be voidable at his option or altogether void. The controversy was resolved in 1903 in “MOHRI BIBEE V. DHARMODAS GHOSH”.

In England, Infant Relief Act (1874), following categories of a minor’s agreement to be absolutely void:

1. Contract for repayment of money, lend or to be lend.

2. Contract for goods supplied or to be supplied (other than necessity).

3. Contract for accounts stated.

(D) LAWFUL CONSIDERATION: According to Section 2(d) of the contract law, when at the desire of the promisor, the promise or any other person has done or abstained from doing, or does, or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a “consideration” for the promise.

 Section 25 provides that an agreement without consideration is void. All agreements made without consideration are void unless they are covered under the exceptions.

There are 3 exceptions under Section 25:

- In case of natural love and affection between the parties standing in a real/near relative to each other.

- In respect of a promise to compensate for something done voluntarily.

- Regarding a promise to pay a debt barred by Limitation Act.

 

Besides these exceptions, Section 185 provides that no consideration is necessary to create an agency.

CASE: KEDARNATH V. GAURI MOHAMMAD (1887):

In this case, townhall has to be built in Hawada. Gauri Mohammad and some other person promised to pay as donation for the construction of townhall. The construction of townhall was started on faith of Gauri and other promises. And the plaintiff entered into a contract with constructor for purpose of construction of townhall. Thereforth, Gauri Mohammad refused to pay the set amount. So, a suit was filed against him for money. He pleaded that his promise to pay Rs.100 was not supported by the consideration and therefore not binding.

        The court held that the promise was binding because entering into contract with the contractor for the townhall was good consideration for the promise of Gauri Mohammad. So, defendant is liable to pay Rs.100 to plaintiff.

 

Thus, essential elements of consideration from the definition of Section 2(d) are as follows:

- Consideration must be given at the desire of the promisor.

- Consideration may be given by promise or any other person.

- Consideration may be in the form of act or abstinence or promise to do or abstain from doing something.

The other important points that are to be kept in mind about consideration are:

  1. Consideration can be of past, present and future.
  2. Consideration need not to be money necessarily.
  3. Without consideration, the promise will be nudum pactum (a bare promise).

(E) LEGAL OBJECT: According to Section 23 of the Indian Contract Act, the consideration or object of an agreement is lawful, unless—

It is forbidden by law; or

Is of such a nature that, if permitted, it would defeat the provisions of any law; or

Is fraudulent; or

Involves or implies, injury to the person or property of another; or

The court regards it as immoral, opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

In general, legal object can be defined as a goal which in not immoral, not forbidden by law, would not defeat any provisions of law, is not fraudulent, does not imply injury to the person or property, or is not opposed to any public policy.

ILLUSTRATION: ‘A’ enters into contract with ‘B’ to rent to prostitute. This act is clearly an immoral one and the object is also not legal.

EXAMPLES OF UNLAWFUL OBJECTS: Beat someone to get something done, printing copyrighted material, not informing about murder, sell bogus plots of land, buy smuggled goods and many more.

(F) NOT EXPRESSLY DECLARED TO BE VOID: The last essential for the contract to be competent is that it is not expressly declared to be void. The list of contracts which are expressly declared to be void are as follows:

  • SECTION 29- Agreements void for uncertainty, - Agreements, the meaning of which is not certain, or capable of being made certain, are void.
  • SECTION 36- Agreements contingent on impossible event, void. – Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.
  • SECTION 56- Agreements to do impossible act. – An agreement to do an act impossible in itself is void.
  • SECTION 26- Agreement in restraint of marriage, void. – Every agreement in restraint of the marriage of any person, other than a minor, is void.
  • SECTION 27- Agreement in restraint of trade, void. – Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
  • SECTION 28- Agreements in restraint of legal proceedings, void.
  • SECTION 30- Agreements by way of wager, void. – Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager or, entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.

 

CONCLUSION:

Black’s law dictionary considers an agreement as “a mutual understanding between parties about their relative rights and responsibilities”. Therefore, a mutual understanding between two parties to enter into an agreement which is lawful forms the basic essence of contract. In the above article, six essentials of a valid contract are well explained. For the parties to be competent to contract; there must be a valid agreement, free consent of the parties, competency of the parties, should be supported by consideration from both sides, a legal object or not one which the law discards and it should not be expressly declared to be void.