1. Introduction

Contracts are the lifeline of contemporary business exercises. They form the framework around which the rights and liabilities of both parties are identified. An agreement must achieve a number of major elements to have a legal attribute. There are various statutory provisions applicable to an agreement in India, such as the Indian Contract Act, 1872, the Sale of Goods Act, 1930, and the Specific Relief Act, 1963. This article enumerates the key elements that an agreement must undertake supported by an analysis of relevant statutory provisions, case laws and other relevant sources.

2. Acceptance of Offer and Consensus Ad Idem

A valid contract begins with a making clear offer and a clear acceptance of it that must mutually pertain to the same subject matter—a meeting of the minds or consensus ad idem. An agreement for sale of car would be void if A meant to sell an Audi car, but B meant to purchase a Mazda, due to lack of consensus ad idem or ‘meeting of minds’ on the same subject matter. According to Section 2 (a) Indian Contract Act, 1872, an offer is “the willingness to do or abstain from doing something and shows that there is the intention of the party about making such an offer to enter into a contract.”. Acceptance must be given under Section 2(b), either expressly or by implication, and when made an offer is accepted. The offer becomes a promise.

There is an exception to the requirement of communication of acceptance: general offers. The judgment in Carlill v. Carbolic Smoke Ball Co. (1893) is based on the principle that a general offer, when accepted by performing the agreed condition, forms a valid contract. In that case, a company named Carbolic Smoke Ball advertised that using its product would prevent a certain medical condition from happening, and they promised compensation to any purchaser for whom the product did not work. A woman bought and used the product but got afflicted regardless. The court made the company pay the promised compensation even though she had not communicated a specific acceptance of the offer to the company. Therefore, it is not necessary that a specific message of acceptance must be given to the person who makes the general offer, and even following the conditions for fulfilment of a contract would suffice. This ratio has been upheld in India also by the case of Lalman Shukla v. Gauri Dutt (1913), which however additionally held that in order to form a valid agreement, the person fulfilling the conditions must also have the knowledge of the existence of such a general offer to take benefits from it.

3. Intention to Create Legal Relations

A contract has to be entered upon with an intention that it would be a legally binding agreement. In social or domestic agreements, there is a presumption that the parties do not intend to enter into legal relations and such is so unless the contrary is proved. In the case of business contracts, the intention of creating legal relations is presumptively carried and unless specifically excluded. For example, a promise made by a father to his son that he will purchase a bicycle for him if he comes first in his class is not a valid contract due to lack of intention of entering into legal relations. It is, at best, a social agreement.

This principle of intent is not explicitly stipulated in the Indian Contract Act. The element of intent has been derived by the courts through the general interpretation of a contract’s provisions. The intention to create legal relations can be inferred from the formality and nature of agreement made by the parties and the agreed consequences of not abiding by such agreements.

In Balfour v. Balfour, (1919) it has been held that normally, marriage agreements are entered without the intention to create a legal relationship unless evidence for it is provided. Other cases similar cases include Dunton v Dunton, McGregor v McGregor, and Jones v Padavatton. Even in the Indian context, these cases have been cited multiple times by the courts which emphasise the importance of intention to create legal relations as a component of a valid contract.

4. Legal Consideration: The Quid Pro Quo

Consideration forms one of the essential elements of a valid contract, as every party must receive something in return or suffer some loss. According to the Indian Contract Act, “consideration” is defined by Section 2(d) as something given, promised, or agreed to be given in return for the promise made. It must be lawful. Section 23 states that it ought not to be illegal, immoral, or opposed to public policy.

In the English case of Currie v. Misa (1875), it was defined that consideration consists in some right, interest, profit or benefit given, promised or offered to the promisor or some forbearance, loss or detriment sustained or undertaken by the promise, which must have some value in the eyes of the law. In Indian context as well, consideration must be not only be lawful but also real and not illusory.

But in India, there are certain differences. For instance, whereas in the UK case laws the courts have historically held that consideration must move from the promisee to the promisor, in India it is not necessary that the promisee himself must render consideration, i.e., it can also move from a third party to the promisor. Contracts of indemnity, guarantee, etc. are some further explanations to the concept of consideration. In the case of Chinnaya v Ramayya (1882) the court has also held that a third non-contracting party can claim relief if the contract itself confers benefits on it. Furthermore, the Indian position on the principle of promissory estoppel is also different from that in the UK. Cases such as Central London Property trust Ltd V High Trees House Ltd and Combe v Combe have held that promissory estoppel as a doctrine can be invoked only when there is an underlying contract with previous consideration. But in India, no consideration from the side of the promisee is mandatory and mere reliance on the promise makes the agreement binding.

Therefore, we can see that although consideration is an important component of a valid contract, it might not be mandatory in all cases all the time.

5. Capacity to Contract: Legal Competence of the Parties

Parties entering into a contract must be capable of doing so. Section 11 of the Indian Contract Act refers to the list of persons who are incapable of contracting. They include minors, persons of unsound mind, and other persons disqualified by law, insolvents being one such group.

The rule that an agreement by a minor is void ab initio was soldified in the case of Mohori Bibie v. Dharmodas Ghose (1903). This case has been a landmark case in Indian contract law and it holds that a contract with a minor cannot be sustained; however, even if the mis-states his age, the granted sum can be retrieved from the minor if it is traceable to him. This principle was applied in Khangul v Lakha, but at the same time it was emphasised by the court that this remedy lies in equity and not in law, and under no circumstance this means that the contract becomes enforceable against the minor; the application of this principle is only limited to recovering money from the minor if he is still in possession of it.

When it comes to soundness of mind, an unsound person is not competent to enter a valid contract. A person who is usually of sound mind and occasionally of unsound mind can enter into a contract in the period he is of sound mind and vice versa. The burden of proving unsoundness or soundness of mind lies on the party who wants to make a claim to the contrary.

6. Free Consent: Absence of Coercion, Undue Influence, Fraud, and Misrepresentation

A contract is voidable at the option of the party whose consent thereto is so vitiated. It is an essential requirement for a contract. According to Section 13 of the Indian Contract Act, “two or more persons are said to consent when they agree upon the same thing in the same sense”. But Section 14 provides that such consent must be free, in the sense that it may be vitiated by coercion, undue influence, fraud, misrepresentation or mistake as provided under Section 15, 16, 17, 18, and 20-22, respectively.

Raghunath Prasad v. Sarju Prasad (1923) was of the view that undue influence arises where one party is under a dominating influence by another. It was held that both the conditions – dominating position and misuse of such position to vitiate consent – are essential to invalidate a contract by the aggrieved party.

Derry v. Peek (1889) was of the view that fraudulent misrepresentation comes into existence when a false statement is made with knowledge or without belief in its truthfulness. Indian courts reiterated it in have reiterated this principle in the context of the Indian Contracts Act as well.

7. Lawful Object: Purpose of the Contract

The object or purpose of the contract must be lawful. Section 23 of the Indian Contract Act states that a contract will be void, if its object be unlawful within the meaning of Section 23 including acts forbidden by law, being fraudulent or falls under immoral or is injurious to public policy.

In Gherulal Parakh v. Mahadeodas Maiya (1959), the Supreme Court of India has held that an agreement which is contrary to public policy is void. This judgment further expanded the doctrine of illegality by incorporating contracts which damage public welfare.

Public policy has not been defined under any statute as such. But the governing principles sometimes underscore public morality broadly. For example, A contracting with a man B already married to a woman C that he will give him one lakh rupees if he marries a woman D is void, even though possibility exists that C might die in future and B can then marry D. This is because anticipating death of one’s spouse to marry someone else goes against public policy.

8. Certainty and Possibility of Performance

A contract should not be vague in terms, and the performance of obligations should be possible. It is declared by Section 29 of the Indian Contract Act that an agreement can be held to be void due to reasons of vagueness and uncertainty. Also, under the law of impossibility, or frustration, as embodied in Section 56, a contract is considered to have become void, if its performance becomes impossible, due to certain events not foreseen at the time of entering into the contract.

In the case of Satyabrata Ghose v. Mugneeram Bangur & Co. (1954), the Supreme Court of India adopted the doctrine of frustration, where impossibility of performance discharged the contract.

9. Agreements Explicitly Declared Void

Sections 26 to 30 of the Indian Contract Act describe those agreements which are declared to be void ab initio. These include those which restrain marriage (Section 26), those that restrain trade (Section 27), and wagering agreements (Section 30). Consequently, businesses need to avoid them as they have no legal effect.

In Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995), the Supreme Court clarified the restraint of trade provision under Section 27. It ruled that reasonable restrictions aimed at protecting trade secrets do not make an agreement void if such restrictions do not curtail the right of trade of the concerned person unjustly.

10. Contracts-Acceptance, Performance, and Breach of Contracts and Contracts of Sale of Goods

We have discussed almost all the essentials of a valid contractual agreement. Once a contract has validly come into existence, its performance is governed further by a wide range of provisions of the Indian Contract Act. The subject of performance of contracts is governed by Sections 37 to 67 which includes conditions of the parties’ obligations, time and place of performance, and consequences of non-performance. The Specific Relief Act, 1963, elaborates on the remedies for breach available in cases of specific performance, injunctions, and damages.

The Sale of Goods Act, 1930, contains some further requirements in the case of a contract of sale that entails goods. Section 4 of the Act provides the definition of a contract of sale of goods, which further incorporates provisions relating to the transfer of property, warranties, and remedies in the case of breach-all are supplementary to the Indian Contract Act.

11. Conclusion

In business it is extremely important for them to know and be aware of the basic elements that should constitute a valid contract, so that they may avoid falling into the legal pitfalls and the contract might be enforced. It adheres to statutory provisions, free consent considerations, and commercially specific regard – towards which it is directed by the Sale of Goods Act and Specific Relief Act. Businesses therefore can take care of their rights under contract while preventing disputes. Being familiar with landmark case laws further supports complete practical knowledge regarding the intricacies of contractual relationships.

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