SYMBIOSIS INTERNATIONAL DEEMED UNIVERSITY

Project Report

ESSENTIAL ELEMENTS OF A VALID CONTRACT

Submitted by
AMAN SINGLA
Division: C:
Roll No.: 21010324011
Class: BBA.LL.B.
Symbiosis Law School, Hyderabad
In
JUNE, 2022
Under the guidance of

MS. SHALINI

(Assistant Professor at Symbiosis Law School, Hyderabad)

TABLE OF CONTENTS
CONTENTS PAGE NO.
Abstract
Introduction
Analysis
Conclusion
Recommendations

ESSENTIAL ELEMENTS OF A CONTRACT

ABSTRACT

Whenever we go to market and buy something whether it is a toothpaste or a luxury car or

recharge our mobile phone every time, we are creating a relationship, a legal relationship
with the person we are dealing with that relation is called ‘Contract’. But what makes
agreement a contract, in order to establish the legal relation, we need to fulfil certain
condition, i.e., essential elements of contract. A contract is a legally binding voluntary
agreement involving more than one people. It is a legally enforceable agreement that requires
at least two parties to do specific responsibilities. It establishes the contracting parties' rights
and obligations. A contract is an agreement involving more than one party that authorizes the
judiciary to make an informed decision. It is a field of law that deals with the establishment
and enforcement of legal binding agreements. A contract is formed when two or more people
or parties agree to be bound by a proposal, acceptance, consideration, clarity, free and fair
consent, capacity, and mutual assent from both the parties entering into the agreement.
Contracts might be written, verbal, or based on conduct. Every contract must include the key
parts for it to be valid. Only when an agreement includes a valid offer from one party and a
legitimate acceptance against the offer from the other party does it become a contract. Those
agreements that contain key characteristics of a legitimate contract are enforceable by law.
This paper will discuss in detail those elements that are essential to make an agreement a
valid contract and will also discuss some cases that are associate with the essential elements
of a valid contract.

Keywords- Agreement, Contract, Essential Elements.

INTRODUCTION

Every day, we enter into contracts. Taking a taxi is the same as signing a contract. A contract
is formed when a coin is inserted into a weighing machine's slot. You have engaged into a
contract when you go to a cafe and order food. In such situations, we are unaware that we are
entering into a contract. Contracts are used by those involved in trade, commerce, and
industry to conduct their business. The Indian Contract Act of 1872 contains the law
governing contracts. Contract law is distinct from other fields of law in a significant way. It
does not contain a long list of specific rights and obligations that the law will defend and
enforce; rather, it contains a set of constraining principles under which the parties can define
their own rights and obligations, which the law will respect. As a result, we might say that the
contracting parties, in a way, create the law for themselves. They can establish any rule they
like in reference to the subject matter of their contract as long as they don't break any legal
prohibitions, and the legislation will give legitimacy to their contract. When an agreement has
solely the legal force only for the parties to it, and a violation of those responsibilities’
grounds in legal proceedings, including contractual repudiation, it is said to be enforceable by
law. Such an example is X enters into a lawful agreement with Y to sell his mansion for Rs.
1.0 million. X must sell the mansion in this situation, while Y must pay Rs. 1.0 million. This
is an example of a legally binding agreement i.e., contract.

Contract can be defined as legally binding agreement that means an agreement that is valid in
the eye of law and any breaches to the terms and conditions of the agreement will lead to
judicial proceedings. Contract define by Salmond as “A contract is an agreement creating and
defining obligation between two or more persons by which rights are acquired by one or
more to acts or forbearance on the part of others”. Sir William Anson define contract as “A
legally binding agreement between two or more persons by which rights are acquired by one
or more to acts or forbearance on the parts of others”, A contract, according to Halsbury, is
“an agreement between two or more persons which is intended to be enforceable at law and is
constituted by the acceptance by one party of an offer made to him by the other party to do or
abstain from doing some act”.

The Act's definition of the term "contract" -section2(h) is based on Halsbury's definition of
the term. The Indian Contract Act defines a contract as follows: “An agreement which is
enforceable by law.”1 This definition has two key components that serve as the foundation for
a contract. Agreement and Legal obligation.

Agreement: - An agreement is the starting of a contract. Sec 2(e) define an agreement as

“every promise and every set of promises forming consideration for each other” When a
proposal is accepted, it becomes a promise. As a result, an agreement is a proposal that has
been accepted. Only when one side makes an offer or proposal to another side and another
side accepts it does an agreement come into being. In a nutshell, an agreement is the outcome
of the combination of the offer and acceptance. The following are the properties of the above-
mentioned definition of agreement:

1
Indian Contract Act, 1872. Section 2.
Two or more person or parties required: To form an agreement there requires two or more
person or parties cause a single person or parties cannot enter into an agreement with their
self.

Consensus ad idem: Consenting thoughts or consensus ad idem, i.e., both the contracting
parties agree on the concept of the contract at the same time and in the same sense, is
required for an agreement.

Every contract is an agreement but every agreement is not a contract.

Legal Obligation: - Despite the fact that every contract is an agreement, there are a variety
of agreements that are not contracts. To become a contract, an agreement must culminate in a
legal obligation. Obligation is a commitment to perform or refrain from performing a specific
action. The commitment must be enforceable under the law. To put it another way, it has to
be a legal requirement, not just a social, moral or religious one. To give an example, P says to
D, "Please come to my place and we will go for a walk together." D arrived at P's house, but
P was unable to depart due to an important appointment. D cannot sue P for damages for
failing to keep the promise since D and P did not intend for the engagement to establish any
legal obligations between them. Within circumstances, there's no contract between P and D in
the eyes of the law. Contracts must not be frivolous pursuits or mere amusements, with no
intention on the part of the sides to have any grave ramifications.

The commitment established between husband and wife is another type of obligation that
would not constitute a contract. Such agreements are solely domestic in nature and are not
meant to establish a legal relationship.

The same was decided in the case Balfour V. Balfour2. The decisions were:

Agreements aren't contracts that don't result in legal obligations.

A domestic agreement involving husband and wife is not a contract.

Different authors and legal scholars have attempted to define "what are contracts" over the
years, but none of the formulations have captured the core of a contract satisfactorily. A
contract, in its most basic form, is a set of rights and obligations that bind parties to each
2
Balfour v Balfour [1919] 2 KB 571
other in return for promises and consideration. Section 504 (1) of the Muluki Civil Code of
2074 (2017) defines, “a contract is an agreement concluded between two or more than two
parties to do or not to do something which is enforceable at law.”3

ANALYSIS
ESSENTIAL ELEMENTS OF A CONTRACT

Generally, people believe that a contract is formed when one side makes an offer and another
accepts it. However, a legitimate contract requires more than that and, and that has no relation
with the formality of the agreement. A contract can be formal or casual, written or spoken.

We know that a contract has two aspects: (1) an agreement and (2) a legal duty. Section 10 of
the Indian Contract Act 1872 specifies some additional characteristics that must be present in
order for a contract to be legitimate. Section 10 read as “All agreements are contracts if they
are made by 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.”4 As a result, the
necessary parts of a valid contract are as follows:

Offer and Acceptance

Contract law and the establishment of a legitimate contract are founded on offer and
acceptance analysis. The offer and acceptance formula, which was developed in the
nineteenth century, specifies the point of formation, or when the parties are of 'one mind.'

Section 2(a) of Indian Contract Act 1872 define offer or proposal 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, he is said to make a proposal” 5
Each contract begins with a proposal. There can be no acceptance, no agreement, and no
contract without an offer. As a result, an offer becomes a contract's most important
component. Requirements of a valid offer:

1. It is necessary to communicate the offer.

2. It is necessary for the offer to be certain.
3. The intention is to have the acceptance.
3
Muluki Civil Code, 2074 (2017). Section 504(1).
4
Indian Contract Act, 1872. Section 10.
5
Indian Contract Act, 1872. Section 2(a).
 4. The objective is to establish a legal relationship.
5. A valid offer must not include any terms that must be met in order for the
offer to be accepted.

A proposal is a declaration of intent to form a contract offered by one party to the other. The
offeror is the individual who makes the offer. The offeree is the individual to whom the offer
is made. Making an offer is the first step toward establishing a legal relation. Because of the
importance of the post, the proposal must be well-intentioned, precise, and openly expressed
to the offeree. If these conditions are met, the offeree has the option to accept or decline the
offer.

Section 2(b) define acceptance as “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.” Acceptance is the second phase in the construction of a legally binding contract.
Acceptance is defined under Section 2(b) of the Indian Contract Act of 1872. The suggestion
is considered to be accepted when the individual to whom the proposal is made indicates his
assent to it. As a result, acceptance is said to be complete after the other party accepts the
proposal and agrees to enter into a contract. When another party understands the offer, they
will accept it provided they understand the restrictions and regulations outlined in the
contract. If the parties are still debating or discussing the offer and have not accepted it, there
would be no contract. The individual or party can accept an offer that has been offered in
writing or orally, which has been made vocally or spoken out. Accepting another party's offer
completes the deal. The party who accepts the offer must do so under the same conditions as
the initial offer. They must ensure that the opposite side is aware of their acceptance.

According to S.W. Anson- "Acceptance of an offer is the expression, by words or conduct of

assent to the terms of the offer in the manner prescribed or indicated by the offeror."
According to Nepalese Muluki Civil Code, 2074 - "Acceptance means in which sense the
terms of proposal is made by the offeror to offeree in the same prescribed manner assent is
given by acceptor.”6

Section 4 specifies that the acceptance communication is complete.

1. When it is put in a route of transmission to him in such a way that it is out of the
acceptor's power, it is against the proposer.
2. When it comes to the proposer's knowledge, he has an advantage over the acceptor.
6
Muluki Civil Code, 2074 (2017). Section 504(3) Sub-Section (2).
Intention to Create Legal Relation

To constitute a contract, an agreement does not have to be fleshed out in minute form. An
agreement, on the other hand, may be incomplete if the parties agreed on vital details but not
on other crucial issues. In the field of contract law, there is also a well-known doctrine. It's
called "consensus ad idem," which means "union of the minds." This adage states that while
making a contract, both parties' minds must be placed on the same platform.

Even in the event of agreements that are merely social or domestic in character, the parties
may intend to impose legal duties. The social agreement then becomes a contract because it is
meant to have legal effects. The facts of the case will be used to assess whether or not such an
agreement is anticipated any legal effects. The law presumes that parties engaging into trade
and industrial agreements intend for those arrangements to have legal effects. However, clear
terms to the contrary may negate this inference. Similarly, agreements of a purely domestic
and social nature are presumed to have no legal consequences. This presumption can be
rebutted by presenting contrary evidence, i.e., demonstrating that the parties' aim was to
establish statutory obligation.

There is no contract if there is not any intention on the side of the parties. Legal interactions
are not contemplated in social or domestic agreements. Balfour vs. Balfour is a case in point
(1919) Mr. Balfour and his wife took a trip to England, where his wife became ill and
required medical attention. They agreed that Mrs. Balfour would stay in England until her
spouse returned to Ceylon (Sri Lanka), and Mr. Balfour would pay her £30 per month until
she returned. This agreement was reached when their relationship was in good standing;
however, their relationship gradually deteriorated. Mr. Balfour appealed the lower court's
decision, which found adequate consideration in Mrs. Balfour's assent and therefore found
the contract valid. Husbands and wives' agreements are not normally contracts because the
partners do not willingness to be bound by legal relationship of contract.

Consideration

The value supplied in exchange for contract performance is referred to as the consideration. It
doesn't have to be in monetary state only. It could be anything that has legal worth and has
been agreed upon by the parties involved. Consideration is something given in exchange for
the fulfilment of a promise or obligation. In another terms, it is founded on the principle of
'quid pro quo,' or ‘something for nothing.' This "something" has to be a monetary
compensation, a reciprocal commitment, or perhaps an act or abstain that the promisee will
perform. Except in rare circumstances, consideration is a necessary component of every
legitimate contract; otherwise, the agreement is null and void. A type of consideration that
has not been specifically declared illegal by law is referred to as 'lawful' consideration. That
is, it must not be illegal, fraudulent, against public policy, or result in bodily harm or property
damage. The 'object,' or the contract's purpose, is the same.

Section 2(d) of Indian Contract Act 1872 defines ‘Consideration’ as “When, at the desire of
the promisor, the promise or any other person has done or abstained from doing something,
or promises to do or to abstain from doing something, such an act or abstinence or promise is
called a consideration for the promise.”7

Free Consent

A contract must have the freely and authentic assent of the parties to the contract in order to
be valid. They couldn't have signed the contract out of fear or duress.

Section 14 states that assent is said to be genuine if it is not obtained by following:

I. Coercion: - When a person does or threatens to commit an act unlawful as per

the Indian Penal Code, or illegally incarcerates or intends to detain an object
with the intent of trying to force the person to enter into a contract, it is known
as blackmail.
II. Undue influence: - Coercion occurs when a person commits or threatens to
conduct an illegal act under the Indian Penal Code, or unlawfully imprisons or
wants to detain an object with the goal of forcing the individual to sign a
contract.
III. Fraud: - It is characterised as one party's dishonesty, active hiding of
information, or when one party intentionally makes false representations. As a
result, it is regarded fraudulent if the deceit is made with full knowledge that it

7
Indian Contract Act, 1872. Section 2(d).
 is untrue, or carelessly without confirming the facts, or without any purpose to
complete the contract.
IV. Misrepresentation: - Misrepresentation occurs when one party makes an
untrue, faulty, or misleading representation. The difference this time is that the
error was accidental. The individual making the statement believes it is
accurate.
V. Mistake: - It refers to a miscommunication or misunderstanding between the
parties on the agreement's basic material facts. It could be one-sided or two-
sided.

Competency of Parties

The participants have to be lawfully capable of penetrating into binding contracts. The Indian
Contract Act, Section 11, states that, “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.”

As a result of this definition, it is evident that the following individuals are unable to engage
into a contract:

1. A minor, someone under the age of 18;

2. Persons of Unsound Mind, or individuals who are unable to comprehend the nature of
a contract and make an informed decision about its consequences; and
3. Persons who are prohibited by law from contracting.

Such individuals may enter into legal agreements, including for the fulfilment of necessities
or as a beneficiary, in extraordinary circumstances. During his or her conscious intervals, a
lunatic may engage into a contract.

Lawful Object

An agreement's goal must be legal. Consideration has nothing to do with the object. It refers
to the contract's goal or design. When someone hires a house to use as a betting house, the
contract specifies that the house will be run as a gambling house. An object is said to be
unlawful if: (a) it is prohibited by law; (b) it is of such kind that if allowed, it would
contradict the purpose of any law; (c) it is dishonest; (d) it causes harm to another's person or
property; (e) the court considers it immoral or contrary to public policy. Alternatively, any
arrangement to split robbery proceeds.

Possibility of Performance

A contract's condition should be capable of being fulfilled. If the act is practically or legally
impossible, it cannot be enforced in court. For example, if A and B agree that if B includes a
space with two straight lines, A will give him Rs. 1000 and if B fails to do so, B will be
obliged to pay A Rs. 500. Consequence: This is an impossibly difficult task. Because two
straight lines cannot completely enclose a space, the contract is void.

CONCLUSION
It is therefore essential to fulfil the mentioned principles in a particular contract, failing which
the concerned contract would be declared as void. It is imperative that parties venturing into
any contract ensure that the terms stipulated under such a contract are in agreement with the
respective parties. These are the most crucial and elementary principles with regard to the
elements of a particular contract, which if witnessed to be fulfilled, may however be subject
to various conditions that are usually laid down by any particular law, or by taking into
regard, the specific types of a contract.

Contract is an agreement between two or more than two party to do or not to do something
which is enforceable at law. A contract is legally binding agreement between the parties. It
creates rights and obligations to parties of the contract. The forms of contract may be in
written (express), oral (implied) and by conduct. All agreement is not a contract, because
there is a principle of contract law "all contracts are agreements but all agreements are not a
contract." Only these agreements which are enforceable by law are contract. Those agreement
which has included an essential element of a valid contract is legally enforceable. The Muluki
Civil Code has defined clearly to the concept of contract. It has tried to address precisely to
both theoretical and practical aspects of the contract law. Regarding to an essential elements
of valid contract Muluki Civil Code has clearly mentioned and described to it. The definition
of an offer and acceptance, contractual capacity, free consent, specific performance, remedy
to breach of contract, void and voidable contract is clearly incorporated in the Muluki Civil
Code. In the same way, the absence of a coercion, undue influence, fraud, misrepresentation
and mistake is essential to the free consent to be a valid contract. Muluki Civil Code has
ignored define to the absence of mistake in the free consent. The consideration is also an
essential element of valid contract but Muluki Civil Code has not incorporated to
consideration as essential element of valid contract. So, our law is silent on it. The contract
law has importance in every business activity. The law of contract is an important part of
business law because the act of transaction is performed between two or more parties and
relationship between them is regulated by the contract. Every agreement must possess the
essential 14 elements for valid contract. The legal relationship, lawful consideration, capacity
of parties, free consent, lawful objects, writing and registration, certainty, possibility of
performance and not expressly declared void are essential elements of a valid contract. The
agreement which involves an essential element of a valid contract is enforceable at law.

RECOMMENDATIONS

The Contracts which are enforceable in a court of law are called Valid Contracts. If one party
to the contract has the option of enforcing a contract by law, but not at the option of the other
or others, it is a voidable contract. Void contract, an agreement may be enforceable at the
time when it was entered into but later on due to certain reasons, for example impossibility or
illegality of the contract, it may become void and unenforceable. If the contract has unlawful
object, it is called Illegal Contract. A contract which has not properly fulfilled legal
formalities is called unenforceable contract. That means unenforceable contract suffers from
some technical defect like insufficient stamp etc. After rectification of that technical defect, it
becomes enforceable or valid contract. All illegal Contracts are void, but all void contracts
are not illegal.

Express contract, where the offer or acceptance of any promise is made in words, the promise
is said to be express. For example: A has offered to sell his house and B has given
acceptance. It is Express Contract. An implied contract is one which is inferred from the acts
of the parties or course of dealings between them. Sitting in a Bus can be taken as example to
implied contract between passenger and owner of the bus. In case of Quasi Contract there
will be no offer and acceptance so, actually there will be no Contractual relations between the
partners. Such a Contract which is created by Virtue of law is called Quasi Contract Executed
contract, in a contract where both the parties have performed their obligation. Unilateral
contract, in a contract one party has performed his obligation and other person is yet to
perform. Bilateral contract, it is a contract where both the parties are yet to perform their
obligation. Bilateral & Executory are same and inter-changeable

Bilateral Mistake – When both the parties are under any misunderstanding/mistake relating to
a matter of fact essential to the agreement, the agreement becomes void. Unilateral Mistake –
When the misunderstanding/mistake is on the part of one party to the contract, the agreement
remains valid. Only when the party is mistaken about the parties to agreement or nature of the
transaction, the agreement becomes void. Free consent is absolutely essential to make an
agreement a valid contract. The importance of free consent cannot be stressed enough.
Consent of the parties to the contract must be free and voluntarily. Consent to the contract has
to be given without any kind of pressure or delusions. It is important that the consent given
by the parties is free as this can affect the validity of the contract. If the consent to the
agreement was obtained or induced by coercion, undue influence, fraud, misrepresentation or
mistake, then it has the potential to make the agreement void. Clearly, free consent means the
absence of any kind of coercion, undue influence, fraud, misrepresentation and mistake.
When the consent which is given is affected by these elements it calls into question whether
the consent given was free and voluntary. The objective of this principle is to ensure that
judgment of the parties while entering into the contract wasn’t clouded. Therefore, consent
given under coercion, undue influence, fraud, misrepresentation and mistake has the potential
to invalidate the contract.