We usually hear the word contract because it is a general term often used when there is an agreement between two or more parties, but what we interpret as a contract may be different from what it actually is because not all agreements between two parties are necessarily called contracts.
For any agreement to be called a contract it must first fall within the definition of a contract which is defined by the relevant governing law but there are some common elements that make an agreement a contract such as agreement between two or more parties, free consent, legal consideration, competence of the parties, legal purpose, intention to create legal relations, etc.
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What is a Contract?
The contract is a legal term that represents a legally binding agreement between two or more parties that creates legal boundaries between the contracting parties and defines rights and duties, which are enforced by law. In simple words, the contract means every agreement that is enforceable by law.
| Contract = Agreement + Legally Enforceable |
A contract is formed when an economic activity is carried out legally, and if any party does not perform its duties, then the other party can take legal action against it, and it is valid in the eyes of the law. In India, contracts are governed by the Indian Contract Act, 1872, which contains all the relevant provisions that are necessary for a contract.
The term contract is defined under Section 2(h) of the Indian Contract Act, 1872
“An agreement enforceable by law is a contract.”
A contract is valid in the eyes of the law only if it is made following proper guidelines given under the governing law and has the key elements such as agreement, two or more parties, free consent, legal consideration, competency of the parties, legal purpose, intention to create a legal relationship, etc. If the key elements are missing, then the contract does not become a valid contract as per the law.
Essential Elements of a Valid Contract
The essential elements of a valid contract are defined under section 10 of the Indian Contract Act, 1872:
Section 10 of the Indian Contract Act, 1872 – 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.”
Section 10 is not complete and exhaustive, some other essential elements are also required to form a valid contract. The following are the essential elements to form a valid contract, which are given in section 10, and those that are not given in section 10.
1. Two Parties:
To constitute a contract, at least two parties are required because only one party cannot enter into the contract, as one needs to make an offer and the other needs to accept that offer. Note: A person entering the contract can be artificial or natural. If there is an artificial person, their representative works on their behalf.
2. Agreement:
When the presence of the two parties is completed, an agreement is required to create a contract because there is no possibility of contracting without agreement. In simple language, when the agreement is implemented (enforceable) by law, it becomes a contract. Note: The agreement can be written or oral and can become a contract if all important elements are fulfilled.
Section 2(e) of the Indian Contract Act, 1872 defines the term agreement – “Every promise and every set of promises, forming the consideration for each other, is an agreement.”
3. Consideration:
Consideration means something in return. When the contract is formed without consideration, it will not be called a valid contract because something must be in return to be called a valid contract. For example, I went to a shop and I bought a pen from there and I gave them money in exchange for a pen, it is called consideration.
4. Capacity:
The person who is entering into the agreement must have the capacity to enter into the agreement, because without the capacity, they are not entitled to enter into the agreement, and the agreement entered into by such a person is void. For example, an agreement entered into by a person who is a minor, unsound mind, disqualified by law, etc., is not valid.
Section 11 of the Indian Contract Act, 1872 defines who is competent to enter into a contract – “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”
5. Intention:
While entering into an agreement, there should be an intention to create a legally binding agreement between both parties, because if a person enters into an agreement without the intention to create a legally binding agreement between them, then that agreement will not be enforceable by law and cannot become a contract. For example, a domestic relations agreement is not enforceable by law.
6. Free Consent:
There should be free consent of both parties while entering into an agreement, because an agreement made without free consent is not valid. For example, an agreement made due to coercion, undue influence, fraud, misrepresentation, mistake, etc., is not valid.
7. Lawful Object:
An agreement must be lawful, or there must be a lawful object behind entering into the agreement. If an agreement is unlawful, then that agreement will become void. For an agreement to be valid, there should be free consent, no one should suffer losses, not be immoral, should not be against public policy, etc.
8. Certainty of Meaning:
The agreement must be clear and understandable and must have a valid meaning. For example, what the agreement is for must be clear. In simple terms, the important elements mentioned in the agreement must be understandable and executable.
9. Possibility of Performance:
An agreement should always be executable, and there should not be any facts in the agreement that cannot be executed. If there is an agreement whose execution is not possible, then that agreement will not come under a valid agreement.
10. Fulfilment of Legal Formalities:
An agreement must follow all the necessary procedures that make the agreement legally binding and enforceable. These formalities may include requirements for the contract to be written, oral, signed, registered or verified, depending on its nature and the governing law.
11. Not Expressly Declared to be Void:
The agreement between the two parties should not be such that it violates the law. In simple language, there should not be an agreement of anything that has been prohibited by law. For example, the agreement made to kill someone is a void agreement.
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QNA/FAQ
Q1. What is a Contract?
Ans: The contract is a legal term that represents a legally binding agreement between two or more parties.
Q2. When is consent not free?
Ans: Consent is not free when it is obtained through coercion, undue influence, fraud, misrepresentation, mistake, etc.
Q3. What is the minimum number of persons required to enter into a contract?
Ans: A minimum of two persons are required to enter into a contract.
Q4. Can a contracting party be a natural or artificial person?
Ans: Yes, the contracting party can be a natural or artificial person.
Q5. Write the essential elements of a valid contract.
Ans: Following are the essential elements of a valid contract:
1. There must be at least two parties.
2. There must be an agreement.
3. There must be consideration between the parties.
4. There must be parties capable of entering into a contract.
5. There must be an intention to create a legal obligation.
6. There must be free consent.
7. There must be a legal object.
8. There must be certainty of meaning.
9. There must be the possibility of performance.
10. Legal formalities must be fulfilled.
11. Must not be expressly declared to be void.
