Definition of Contract, Essentials of Valid Contract, Offer and Acceptance, Consideration, Contractual capacity, Free consent

Contract is defined in Section 2(h) of the Indian Contract Act, 1872, as “an agreement enforceable by law.” This definition underscores two fundamental aspects that constitute a contract under the Act: an agreement and its enforceability by law.

• Agreement (Section 2(e)):

An agreement itself is defined as “every promise and every set of promises, forming the consideration for each other.” Essentially, an agreement is formed when one party makes a proposal or offer to another party, and that other party signifies their assent to that proposal. Thus, at its core, an agreement is composed of at least two elements – an offer (or proposal) and an acceptance of that offer.

• Enforceability by Law:

For an agreement to transform into a contract, it must be enforceable by law. This enforceability vests an agreement with legal obligations, implying that if one party fails to honor their part of the agreement, the other party has the right to seek redress or enforcement through the court system. Not all agreements are contracts because not all of them are recognized by law as having legal enforceability. For instance, social or domestic agreements (like a promise to give a gift) usually do not constitute enforceable contracts because the law does not generally intend to govern such private agreements.

Essentials of Valid Contract:

The Indian Contract Act, 1872, outlines several essential elements that must be present for an agreement to be considered a valid contract enforceable by law. These essentials ensure that the contract is formed on a lawful basis and the interests of both parties are protected under legal provisions.

1. Offer and Acceptance

A contract initiates with a clear and definite offer by one party (offeror) and an unambiguous acceptance of that offer by the other party (offeree). The acceptance must match the terms of the offer exactly, leading to the mutual consent of both parties to enter into the contract.

2. Lawful Consideration

Consideration refers to something of value that is exchanged between the parties involved in the contract. It can be an act, abstinence, or promise and must be lawful. A contract without consideration is void unless specified exceptions apply.

3. Capacity to Contract

The parties entering into a contract must have the legal capacity to do so. According to the Act, the parties must be of legal age (majority), of sound mind, and not disqualified from contracting by any law to which they are subject.

4. Free Consent

For a contract to be valid, the consent of the parties involved must be free and not obtained through coercion, undue influence, fraud, misrepresentation, or mistake. If consent is obtained through any of these means, the contract may become voidable at the option of the party whose consent was not free.

5. Lawful Object and Agreement

The object of the agreement and the agreement itself must be lawful. This means that it should not be forbidden by law, should not defeat the provisions of any law, should not be fraudulent, should not involve or imply injury to the person or property of another, and should not be considered immoral or opposed to public policy.

6. Certainty and Possibility of Performance

The terms of the agreement must be clear and certain, or capable of being made certain. Additionally, the agreement must not be for an act impossible in itself. Agreements to do an impossible act are void from the beginning.

7. Legal Formalities

Although a contract can be oral or written, certain types of contracts must comply with specific legal formalities such as being in writing, registered, or made under a seal to be enforceable. For example, contracts related to the sale of immovable property must adhere to the formalities required by law.

8. Intention to Create Legal Relationships

The parties must intend for their agreement to result in a legal relationship. Generally, social or domestic agreements are not considered contracts because there is usually no intention to create legal relations.

Offer (or Proposal)

An offer or proposal is defined in Section 2(a) of the Indian Contract Act, 1872, as when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence. The person making the offer is known as the “offeror,” and the person to whom the offer is made is known as the “offeree.”

• Communicated:

The offer must be communicated to the offeree, enabling the offeree to decide whether to accept or reject it.

• Definite:

It must be clear and certain, leaving no room for ambiguity in terms.

• Intention:

It should indicate a clear intention to enter into a contract on the offeror’s part, subject to acceptance by the offeree.

Offers can be express (stated verbally or in writing) or implied (inferred from conduct or circumstances).

Acceptance

Acceptance is defined in Section 2(b) of the Act as the act of assent to an offer. It signifies the offeree’s agreement to the terms of the offer and results in a contract provided other conditions of contract formation are met.

• Absolute and Unconditional:

Acceptance must be absolute and unqualified, exactly matching the terms of the offer (the “mirror image rule”).

• Communicated:

It must be communicated to the offeror in a prescribed manner, or if no manner is prescribed, in some usual and reasonable manner.

• Within Time:

If the offer specifies a time for acceptance, it must be accepted within that time frame; otherwise, the acceptance must be within a reasonable time.

Revocation

Both an offer and acceptance can be revoked, but revocation must occur before a contract is constituted:

• Revocation of Offer:

According to Section 5 of the Act, an offer can be revoked at any time before the communication of acceptance is complete as against the offeror, but not afterwards.

• Revocation of Acceptance:

Similar to the offer, acceptance can also be revoked, but the revocation must reach the offeror before or at the time when the acceptance becomes effective.

Consideration:

Consideration is a core concept in contract law, serving as one of the essential elements for forming a valid contract. Under the Indian Contract Act, 1872, consideration is detailed in Section 2(d), which defines it as follows:

“When, at the desire of the promisor, the promisee 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.”

1. Something in Return:

Consideration involves something of value that is exchanged between the parties to a contract. It is what one party receives, or expects to receive, in return for fulfilling the contract. This “something” can be an act, abstinence from an act, or a promise to do or not do something.

2. At the Desire of the Promisor:

The act or abstinence forming the consideration must be done at the request or with the consent of the promisor. If it is done at the instance of a third party or without the promisor’s request, it does not constitute valid consideration.

3. Can Move from the Promisee or Any Other Person:

According to Indian law, consideration does not necessarily have to move from the promisee to the promisor. It can be provided by some other person, which differentiates Indian contract law from other jurisdictions where consideration must move from the promisee.

4. Must Be Real and Not illusory:

Consideration must have some value in the eyes of the law, though it need not be adequate. The sufficiency of the consideration is for the parties to decide at the time of agreement and not for the court to determine. However, consideration must be real and not vague or illusory.

5. Legal Object:

The consideration or the object for which the consideration is given must be lawful. It should not be something that is illegal, immoral, or opposed to public policy.

Exceptions to the Rule of Consideration

The Indian Contract Act specifies certain situations where an agreement is enforceable even without consideration. These exceptions are covered under sections 25 and 185 of the Act:

• Natural Love and Affection:

Agreements made out of natural love and affection between parties standing in a near relation to each other, which are expressed in writing and registered under the law.

• Compensation for Past Voluntary Services:

A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor.

• Promise to Pay a Time-Barred Debt:

A promise in writing to pay a debt barred by the limitation law.

Contractual capacity:

Contractual capacity refers to the legal ability of a party to enter into a contract. Under the Indian Contract Act, 1872, not all individuals or entities have the capacity to contract. The Act specifies certain criteria that determine whether individuals possess the necessary legal capacity to be bound by contractual obligations. The sections of the Act dealing with the capacity to contract highlight that for a contract to be valid, the parties involved must be competent to enter into a contract.

Criteria for Competency

According to Section 11 of the Indian Contract Act, 1872, a person is competent to contract if they meet the following criteria:

• Age of Majority:

The person must have attained the age of majority, which is 18 years in India, according to the Majority Act, 1875. However, if a guardian is appointed for a minor, or if the minor is under the care of a court of wards, the age of majority is extended to 21 years.

• Sound Mind:

The person must be of sound mind at the time of making the contract. A person is considered to be of sound mind if they are capable of understanding the contract and forming a rational judgment as to its effect upon their interests. A person who is usually of unsound mind but occasionally of sound mind can make a contract when they are of sound mind. Conversely, a person who is usually of sound mind but occasionally of unsound mind cannot make a contract when they are of unsound mind.

• Not Disqualified by Law:

The person must not be disqualified from contracting by any law to which they are subject. Certain individuals and entities, such as insolvents, foreign sovereigns, and diplomats, may have restrictions or immunities that affect their capacity to enter into contracts.

Implications of Incapacity

• Contracts with Minors:

Contracts entered into with minors (persons under the age of 18, or 21 in certain cases) are void ab initio, which means they are considered void from the outset. However, a minor can be a beneficiary of a contract, and certain provisions protect minors’ rights in contracts for necessities.

• Contracts with Persons of Unsound Mind:

Similar to contracts with minors, contracts made by persons of unsound mind are void. However, if it can be shown that they were of sound mind at the time of contracting and understood the implications of their actions, the contract may be valid.

• Necessaries:

The law protects contracts for the supply of necessaries to individuals incapable of contracting. According to Section 68 of the Act, if a person incapable of entering into a contract, or anyone whom they are legally bound to support, is supplied with necessaries suited to their condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of the incapable person.

Free Consent:

Free consent is a fundamental concept in contract law, ensuring that parties enter into agreements voluntarily and with a clear understanding of their terms. Under the Indian Contract Act, 1872, free consent is crucial for the validity of a contract. Section 14 of the Act defines free consent as consent that is not caused by coercion, undue influence, fraud, misrepresentation, or mistake. If the agreement is entered into under any of these conditions, it may not be considered a contract entered into with free consent.

1. Coercion (Section 15)

Coercion involves committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person, with the intention of causing any person to enter into an agreement. It is equivalent to duress in common law. A contract entered into under coercion is voidable at the option of the party subjected to it.

2. Undue Influence (Section 16)

Undue influence occurs when the relations between the two parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. In cases of undue influence, the contract is voidable at the option of the influenced party. The law presumes undue influence in certain relationships, such as between parent and child, trustee and beneficiary, etc.

3. Fraud (Section 17)

Fraud involves making a representation that is known to be false, or without belief in its truth, or recklessly, careless about whether it is true or false, with the intent to deceive another party. The deceived party, upon discovering the fraud, may choose to treat the contract as voidable.

4. Misrepresentation (Section 18)

Misrepresentation is a false statement of fact made innocently, which induces the other party to enter into the contract. Unlike fraud, misrepresentation does not involve intentional deceit. A contract made under misrepresentation is voidable at the option of the party misled by the misrepresentation.

5. Mistake (Sections 20, 21, and 22)

Mistakes can be of two types: mistake of fact and mistake of law. A mistake of fact occurs when both parties to an agreement are under an illusion about a fact essential to the agreement. 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. A mutual mistake of fact renders the agreement void.