Essential Elements of a Contract

Introduction

According to Section 2(h) of the Indian Contract Act of 1872, “an agreement enforceable by law is a contract”. A contract is an agreement among parties that is within the scope of the law. But how do we know what is enforceable by law and what is not?

If person A comes in a contract with person B; where person A sells drugs to person B in exchange for money, it is a contract. But it is not a ‘valid’ contract. This contract will not be enforceable by law. This is because the Indian Contract Act defines some essential elements. These tell us what constitutes a contract as a valid contract. These include:

• Two or more parties
• Offer
• Consideration
• Acceptance
• Free Consent
• Capacity
• Performance
• Legal Object

Two Or More Parties

The most basic requirement for a contract to be valid is that there should be two or more than two parties involved in the contract. Say, person A tries to get in a contract with themselves, will it be legal? The answer is no, it is not considerably a valid contract. There should be at least two different parties, a buyer and a seller, who are two different legal identities.

Offer

A contract comes into existence when one party makes a proposal to another party to do, or not do an act. According to Section 2(a) of the Indian Contract Act, “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, he is said to make a proposal”. We also call a proposal as an ‘offer’. Once we make an offer, the person making an offer turns in to the ‘offeror’; and the person to whom we make the offer turns in to the ‘offeree’. For example, when person A makes a proposal to person B to sell 500 grams of rice for Rs. 100, the proposal becomes an offer where person A becomes an ‘offeror’, and person B becomes an ‘offeree’. 

There are some essential elements for an offer to be considered a valid offer like:

1. The offer made must have a legal object and a legal consequence. For example, a person inviting another person to a party cannot be considered a valid offe,r for it has no legal motive.
2. The offer made may be conditional in nature but shouldn’t have negative connotations. For example, if A makes an offer to B but expects a response by a certain time and date; which, if not complied with, will make the offer considered approved, is incorrect. The non-compliance of terms of an offer cannot be considered the basis of approval of the offer. Yet, if the offer only stands valid for a certain period of time, it can be considered valid. Any conditions deemed necessary by the offeror can be made in the offer as long as it doesn’t make the acceptance of an offer conditional.
3. The communication of the offer by the offeror to the offeree is necessary. The offeror must be aware of the communication of the offer; and the terms and conditions of the offer should not be vague. For example, an offer person A makes to person B to sell ‘some’ goods is not a valid offer; for the offer made is not clear.

Once all the conditions fulfill, the offer is considerably a valid offer.

Consideration

To make an agreement, equal consideration of exchange from all parties privy to the contract, is considerably necessary. This means, consideration is basically if one party abstains from or promises to abstain from doing something or does something or promises to do something in exchange for the other party doing something or abstaining from doing something or promising to do or abstain from doing something. The technical term for this would be ‘Quid-Pro-Quo’ i.e., something in return. The promise of a consideration, when met with acceptance, turns into an agreement. Thus, for an offer to be considered an agreement, the presence of adequate consideration is a must. As is present in Section 2(e) of the Indian Contract Act, “every promise and every set of promises, forming the consideration for each other, is an agreement;”.

Acceptance

Once a party makes a valid offer, it is either agreed upon, rejected, or met with a counteroffer. If the offer is agreed upon by both parties then the offer turns into a ‘promise’. The offeror turns to ‘promisor’ while the offeree turns to ‘promisee’ and this agreement is the acceptance of the offer. According to Section 2(b) of the Indian Contract Act, “when the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise”. For example, person A proposes to person B to sell his horse in exchange for Rs.1000; and person B agrees to the terms and conditions of this offer, the offer becomes a promise; and this agreement becomes the acceptance of the offer. Here, the exchange of a horse for money is the consideration for the promise.

Free Consent

For an agreement to turn into a contract, the consent of all parties involved should be given freely. Consent here refers to the acceptance of terms and conditions of the agreement by all involved parties. Free consent thus refers to the consent given by all parties involved without the following:

1. Coercion: To take the consent of a person via threats to or commitment of an act forbidden according to the Indian Penal Code or threatening to or detaining the property unlawfully of the person, it is coercion. For example, a person threatening to commit suicide to get the consent of another person will come under coercion. Since, the threat to, or to commit suicide is illegal, according to Section 309 of Indian Penal Code.
2. Undue Influence: When one party is in a position to dominate over the choices of the other party, undue influence is applicable. This is when the person can use his/her influence over the other party for an unfair advantage to bind the other party’s will according to their own. This is also applicable in the case where the other party’s mental capacity is in a state of compromise.
3. Fraud: When there is an active concealment of facts at the hands of one party from the other party, or there is an intentional misrepresentation of facts via one party or the agent of the party; where the first party contains full knowledge of the facts present as not true/ false, there is a fraud at case. The use of deceit or other means specially defined as fraudulent via law is considerably fraud. The use of silence is not fraud; unless it is the duty of the party to speak or when silence is itself considered equivalent to speech.
4. Misrepresentation: When one party presents facts which, in their knowledge are true, to the other party, wherein the facts are actually not true, and this unintentionally makes one party gain an advantage over the other, misrepresentation is said to have taken place. The mere assertion of facts as to be true according to one party causing the other party to make a mistake about the subject of the agreement, misrepresentation takes place.
5. Mistake: The act of making a mistake about the subject of the agreement at the hands of all parties privy to the contract; where the mistake made is a mistake of fact and not a mistake of Indian law, is a mistake about the violation of free consent in terms of Indian Contract Act.

Capacity

The next essential element required for an agreement to be termed as a contract, the capacity of the parties in question should be within the scope of the law. This simply means that the parties coming into the contract should be capable of entering the contract. According to Section 11 of the Indian Contract Act of 1872, the capability of the party to enter into a contract is applicable under three conditions. These three conditions are as follows:

• The parties should be of the age of majority; i.e., they should come under minor age according to the law they are subject to.
• The parties should be of sound mind. A sound mental capacity where the soundness of the mind is as defined under the law the person is subject to. They should be fully aware of the terms and conditions of the contract; and should be fully able to comprehend these terms and conditions, at the time of the formulation of the contract.
• Lastly, the parties should not be in violation of any law which forbids them to enter into a contract about the law which they are subject to. For example, they should not be a foreign enemy or a convicted felon.

Thus, a person who is considerably capable of coming into a contract according to the above-given conditions has the capacity to enter a contract. For example, person A, who is 16 years of age, comes into a contract with person B. It is considerably a violation of the essential elements of a contract, more specifically of the capacity to contract, and thus the agreement is void ab-initio or void from the beginning.

Performance

Performance of a contract refers to the possibility of the completion of the contract. For example, person A entering into a contract with person B to perform a task that is impossible would violate the performance of the contract; for even if all the other conditions meet, the performance of the contract will never reach. Person A entering into a contract with person B with the promise of bringing person B the moon is considerably violating the performance of the contract. Thus, the performance of a contract should be within human capability.

Legal Object

The last essential element is the legal object of the contract. It refers to the objective of the contract as being within the scope of the law. The contract shouldn’t have an objective to sell drugs for example; contracts should have motives that are within the scope of the law and these motives should be defined clearly.

Conclusion

Thus, with these essential elements completed, one is ready to get into a contract. Once we meet all the above mentioned essential elements , an agreement turns into a contract.