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BUSINESS LAW Essential Elements of Valid Contract Page |1

The Indian Contract Act,1872

ESSENTIAL ELEMENTS OF VALID CONTRACT

Learning Objectives:-
 Basis and Origin of Contracts in India
1
 Different kinds of legal words and definitions
 Practical and theoretical aspects of Contracts

ESSENTIAL ELEMENTS OF VALID CONTRACT

 This act was formed on 25th april,1872 and came into force on
1st Sept. 1872.
 This act was passed by British parliament and later on
implemented by Indian parliament.
 This act applies to whole of India (including the state of
Jammu and Kashmir after removal of Article-370 of the
Indian Constitution)
 This Act does not have any retrospective effect i.e. this Act
applies for the contracts which are entered on or after 1st
September 1872.

Author Note
Retrospective means relating to the past and The Indian Contract Act,1872 has prospective effect.

DEFINITION

OFFER When one person signifies to another person his willingness to do or to abstain
[Sec.2(a)] from doing anything with a view to obtain the assent of another, on such act or
abstinence, then such person is said to
make an offer/proposal.
ACCEPTANCE When the person to whom an offer is made, if signifies his assent thereto (in the
[Sec.2(b)] same manner), then such offer is said to be accepted.
And when such offer is accepted, it becomes a promise.
PROMISOR/ The person who makes an offer to the another person is known as
PROMISEE Promisor/Offeror/Proposer.
[Sec.2(c)] And
The person to whom an offer is made by the offeror, is known as
Promisee/Offeree/Acceptor.
CONSIDERATION When at the desire of the promisor, the promisee or any other person(third
[Sec.2(d)] party),has done or abstained from doing, does or abstain from doing, promise to do
or to abstain from doing something, on such actor abstinence, that something is
known as Consideration.
AGREEMENT Every promise or set of promises forming consideration for each other is known as
[Sec.2(e)] an agreement.
RECIPROCAL Promises which form the consideration or part of the consideration for each-other
PROMISES are called reciprocal promises.

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[Sec.2(f)]
VOID An agreement which is not enforceable by law is known as void Agreement.
AGREEMENT
[Sec.2(g)]
CONTRACT An agreement which is enforceable by law is known as contract.
[Sec.2(h)]
VOIDABLE An agreement which is enforceable by law at the option of one or more of the parties,
CONTRACT but not at the option of other or other’s (aggrieved party), called as Voidable
[Sec.2(i)] contract.
VOID CONTRACT A contract which ceases to be enforceable by law becomes a void contract.
[Sec.2(j)]
PLAINTIFF The person who filed a case (suit) in the court of law against another person for the
[Sec.2(k)] breach of contract, is known as Plaintiff.
DEFENDANT The person against whom a case is filed in the court of law and who has to defend
[Sec.2(l)] himself/herself against such charges, is known as defendant.

SUMMARY OF CONTRACT
Offer/Proposal + Acceptance = Promise

Promise + Consideration = Agreement

Agreement + Enforceable by Law = Contract

BASE DEFINER:-1
Guthi offers to sell his book to ‘Palak’ for Rs. 100. Palak accepts the offer. Such an agreement is contract &
if, Guthi refuses to sell then Palak can sue on Guthi and If Palak refuses to buy then Guthi can sue on Palak.

BASE DEFINER:-2
A agrees with B to sell car for Rs.2 lacs to B. Here A is under an obligation to give car to B and B has the
right to receive the car on payment of Rs. 2 lacs and also B is under an obligation to pay Rs. 2 lacs to A and
A has a right to receive Rs. 2 lacs.

Author Note
Contract Act deals with only such legal obligations which arises due to agreements and does not deal with
those obligations, which do not arise due to agreements like, an obligation to maintain wife and children
because of an order of court.

These are ‘Status Obligations’ and are outside the scope of the Indian Contract Act.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

As per Sec. 10 "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."

Following are the essential elements of a valid contract:

1. Lawful Offer and Acceptance:- There must be a lawful offer and lawful acceptance to make an
agreement a valid contract.

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An offer and acceptance is said to be lawful when it conforms all the rules laid down in the Indian
Contract Act,1872.

BASE DEFINER:-
Suppose Mr. A says to Mr. B’’ I offer you to buy my car for Rs. 50000/-‘’. But Mr. B does not accept the
offer. In this case there will be no contract, as there is the absence of acceptance.

2. Intention to Create Legal Relationship:- Both the parties must have an intention to go to Court, if
the other party does not meet his promise.
Which means there must be an intention to create legal relationship between the parties to make an
agreement a valid contract.

Author Note
Social agreements and contracts does not constitute legal obligations ( right to take legal actions in case of
non-fulfillment of obligations by the other party).

CASE STUDY
Balfour vs. Balfour, 1919
A husband working in Ceylone had agreed to pay house weekly
allowance to his wife living in England but failed to pay the amount.
Wife sued for recovery of the amount. It was held that wife could not
maintain the suit as it was a social agreement and parties did not
intend to create legal relation.

3. Lawful Consideration:-
There must be a lawful Consideration between the parties to make a valid Contract. Here,
Consideration means something in return i.e. both the parties must get something in return for the
promise (in latin language this something in return is known as “Quid-Pro-Quo”)

BASE DEFINER:-
Mr. A agrees with B to sell his watch for Rs. 500. For Mr. B watch is consideration and for A Rs. 500 is
consideration.

4. Capacity to Contract:-
In a contract, both the parties (i.e. offeror and acceptor) must be legally capable of entering into
contract, otherwise such contract cannot become a valid contract.
Sec. 11 clearly lays down that the following parties are capable of entering into contract.
(i) A major i.e. of 18 years of age and 21 years
(ii) A man of sound mind, and
(iii) Every man, who is not disqualified by law to enter into contract.

Author Note
There are two majority age in India, 18 years as per The Indian Majority Act,1875 and 21 years as
per The Wards and Guardian Act,1890.
Those children who do not have parents, they will be major in 21 years of age and in all other
general cases 18 years will be followed.

5. Free Consent Sec (14):- The consent of the parties (Promisor/Promisee) must be free to make an
agreement a valid contract.

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And according to Sec.14 the consent is said to be free when it is not caused by Coercion, Undue
Influence, Fraud, Misrepresentation and Mistake.

Author Note
If by using all these situations contract is formed that contract will become voidable at the
option(request) of the aggrieved party (affected party).

BASE DEFINER:-
Mr. A has 2 cars, one is black and other red. He agrees to sell one of his cars to Mr. B, if A is thinking to sell
Black Car and B is thinking to buy
Red Car, then A and B do not agree on the same thing in the same sense and therefore there is no contract
between them.

6. Lawful Object :-The object/purpose of a contract must be lawful. An Object or purpose is said to be
lawful, when it is not Unlawful, Opposed to public policy, Immoral, Illegal and for fraudulent
purposes.

BASE DEFINER:-
Mr. A agrees to give Rs. 1,00,000/- to Mr. B on the condition if Mr. B murders Mr. C.
In this case, the object of the agreement is unlawful, therefore it will not be enforceable by law and
therefore, there will be no contract.

7. Agreement not expressly declared to be void :- The agreement must not be declared void by the
law in force. There are a large number of agreements, which have expressly been declared void as
these agreements are not in public interest like Wagering agreements, agreements in the
restraint of Personal Freedom, etc.

Author Note
There are many laws in India and if any contract which has been declared as void in these laws, then
the same will be treated as void under the Indian Contract Act also.

8. Possible to Perform:- The agreement must be capable of being performed (fulfilled), otherwise such
agreement should not become a valid contract.

Author Note
As Impossibility of Performance makes an agreement and contract void.

BASE DEFINER:-
Mr. A agrees to give Rs. 1000 to Mr. B provided B flies in the sky like birds. In the case the agreement
between A and B, is void.

9. Legal Formalities :- In some cases, where law specially requires an agreement to be in writing or
registered or attested, then the agreement must be so, otherwise it shall not be enforceable.

BASE DEFINER:-
1. A promise to pay a time barred debt must be in writing.
2. An agreement to buy or sale of immovable goods must be in writing.

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Author Note
An agreement may be made by words, oral or written. But if it is a statutory (legal) requirement of a
contract to be registered, written, duly signed or stamped. Then it must be in the same manner
otherwise such agreement or contract must not become a valid contract.

10. Certain:- The terms and conditions of a contract must be certain not vague or uncertain. As a contract
contains the vague (hidden) terms does not bind the parties into legal actions.

BASE DEFINER:-
1. Guthi agrees to sell his car to Kapil for whatever amount he wants to
2. to pay. – Price is uncertain and hence contract becomes void.
3. Guthi agrees to sell something to Kapil for Rs. 1 lakh. – Object is Uncertain and hence contract
becomes void.
4. 3. Guthi agrees to sell something to Kapil for some Rupees – Price and object both are missing and
hence Contract becomes void.

Author Note
Price and Object in a contract are also known as the meaning or terms of the contract.

TYPES OF CONTRACTS
Different types of contracts may be classified as follows:

ON THE BASIS OF ON THE BASIS OF ON THE BASIS OF

VALIDITY FORMATION PERFORMANCE

 Valid Contract  Express  Executed

n  Void Contract Contract Contract
 Voidable  Implied Contract  Executory
Contract 1. Tacit Contract
 Illegal Contract 2. Quasi  Unilateral
 Unenforceable  E-Contract Contract
Contract  Bilateral
Contract

I. ON THE BASIS OF VALIDITY

1. Valid Contract: A Contract which fulfills all the essential conditions laid down in the Indian Contract
Act,1872 for Valid Contract.

BASE DEFINER:-
A agrees to sell his watch to B for a consideration of Rs. 2000, which is accepted by B.

2. Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable by law.

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BASE DEFINER:-
A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the supply is
effected, the fire caught in the factory and everything was destroyed. Here the contract becomes void.

Author Note
The Contract ceases (stop) to be enforceable in case of Death, Destruction of subject matter,
Insolvency, Change in law or any other case which makes the contract impossible to perform.

Void Agreement Void Contract

(i) The agreement which is without any legal effect, The contract which ceases to be enforceable by
like An agreement with minor. law.
(ii) It is void-ab-initio i.e. void from beginning. It is not void-ab-initio but subsequently
becomes void.

3. Voidable Contract: An agreement which is enforceable by law at the option of one or more the
parties but not at the option of the other or others is a voidable contract.
A contract is voidable when the consent of party is obtained by :
 Coercion
 Undue influence
 Fraud
 Misrepresentation.
 Mistake

BASE DEFINER:-
A agreed to sell his house to B for Rs. 10000 and the consent of A was obtained forcefully hence contract
is voidable at the option of ‘A’.

Author Note
In case of mistake, the contract can be void and valid but can be voidable, only when held by the
court.
And A voidable contract becomes void when it is rescinded by the aggrieved party otherwise it
remains valid.

Difference between Void Contract & Voidable Contract

Void Contract Voidable Contract
(i) A contract which cases to be enforceable A contract which is enforceable at the option of the
by law. aggrieved party.
(ii) Contract becomes void because of sudden Contract becomes voidable when it is caused by
& unexpected events or changes in law coercion, undue influence, fraud &
before the performance due misrepresentation
(iii) Does not provide any legal remedy for the Only aggrieved party gets a right to rescind the
parties to the contract. contract and to declare it void otherwise remains
valid.

4. Illegal Contract: It is a Contract which is forbidden by law and also punishable under the Indian
Penal Code (IPC). And such contracts are declared as void, even the collateral part of such agreements
or contracts are also void.

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BASE DEFINER:-
1. C contracts with H, a local criminal to beat his business competitor, such contract is treated as Illegal
Contract.
2. R agrees with S, to purchase brown sugar is an illegal agreement, here the agreement between R and
S is illegal in nature.

Author Note
All illegal contracts are void but all void contracts are not said to be illegal.

Difference between void contract and Illegal contract

Void Contract Illegal Contract
(i) It is not necessarily illegal. An illegal contract is always void.
An agreement with minor is void but not A contract to commit crime is illegal as well
illegal. as void.
(ii) Not forbidden by law Forbidden by law.
(iii) Not Punishable Punishable i.e. parties are liable for punishment.
(iv) Collateral agreements and connected Collateral agreements are always void.
agreement are not necessarily void.
(v) Not void-ab-initio but subsequently Void-ab-initio i.e. void from beginning.
becomes void.

5. Unenforceable contract: A Contract which is good in substance but due to some technical defect
cannot be enforceable by law, like not in writing, based by limitation etc. (in this contract parties
cannot sue on each other)

BASE DEFINER:-
As per the Limitation Act, a debt for movable goods can not to taken back (Expired), if it is not recovered
within a period of 3 years.

Author Note
In unenforceable contract, the term “Good in Substance” also known as Subject matter or essential
elements of a valid Contract.

II. ON THE BASIS OF FORMATION OF CONTRACT

1. Express Contract: A contract which is made by the use of words is called as express contract &
Words can be written or oral.
Note: A contract which is not in writing but contains all the elements of a valid contract is
considered a valid contract.

BASE DEFINER:-
1. A tells B on telephone that he offers to sell his house for Rs.2 lacs and B in reply informs A that he
accepts the offer, this is an express contract.
2. A appoints B as his agent, by way of a written agreement

2. Implied Contract: A Contract which is not expressed, but inferred by the conduct of parties and
imposed by law is known as implied Contract.

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Implied Contract is of two types:

(a) Tacit Contract:- A Contract which is not expressed, but entered by the conduct of parties is
known as Tacit Contract.

BASE DEFINER:-
Obtaining cash through ATM, Sales by fall of hammer at an auction sale.

(b) Quasi Contract:- A Contract which is not expressed and tacit, but imposed by law, because such
contracts are based on a basic principle of equality “That no person can enrich (Benefit)
himself/herself at the expense of other”. These are not real contracts because law creates
rights and obligations of parties.

BASE DEFINER:-
1. A delivers by mistake goods at B’s warehouse instead of at C’s place. Here there is an obligation on
the part of B to return the goods to A, though they never intended to enter into a contract.
2. Obligation of finder of lost goods to return them to the true owner or liability of person to whom
money is paid under mistake to repay it back cannot be said to arise out of a contract even in its
remotest sense, as there is neither offer and acceptance nor consent.

Tacit Quasi
1. These contract are intentionally made but These contracts are not intentionally made.
not by words.
2. It can be seen through conduct of parties It arises due to implication of law.

3. E-Contract:- A Contract in which parties are entered through information highway (INTERNET) is
known as E-Contract.

BASE DEFINER:-
A person while ordering a pair of shoes from Amazon.in , is said to be called E-Contract..

III. ON THE BASIS OF THE PERFORMANCE OF THE CONTRACT

1. Executed contract: When both the parties have discharged their obligations or when both the
parties have executed consideration for the promise then such contract is said to be an executed
contract.

BASE DEFINER:-
A Contract to buy a car from B by paying cash. B instantly delivers his car. It is Executed Contract.

2. Executory Contract: When both the parties have to perform their promises or obligations in future
then such contract is said to be an Executory contract.

BASE DEFINER:-
Where A teacher agrees to take the tuition of a student from the next month and the student also
promises to pay Rs. 1000 per month to teacher from next month this contract is said to be an executory
contract because both the parties has to perform their obligations and promises in future.

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3. Unilateral contract: When one party has performed his promise or obligations and another partly
has to perform his promise or obligation then such contract is said to be an unilateral contract.
Unilateral contract is also called one-sided contract.
BASE DEFINER:-
A contracted with B to supply him some goods for Rs. 10000 after 30 days but B paid Rs. 10000 to A in
advance at the time of contract. Such contract is said to be an unilateral contract.

4. Bilateral Contract: When both the parties have yet to perform their promises or obligations in
future or where obligation or promise is outstanding on the part of both the parties then such
contract is said to be Bilateral contract.

BASE DEFINER:-
S agrees to sell his DVD player to R promising to deliver it on the date of payment. R promises to pay the
amount, one month hence.

Author Note
Bilateral Contracts and Executory are similar to each other and the basic difference between these two is
the time period.
In case of Executory Contract, no time period is fixed for the performance of the obligations, but in
case of Bilateral Contract, there is always be a fixed time period like a month, a week or a specific
date.

IV. ON THE BASIS OF ENGLISH LAW

1. Contract of Record:
(a) It is either a Judgment of a Court or a Recognizance.
(b) A Judgement is an obligation imposed by a Court upon one or more persons in favour of
another or others. In real sense, it is not a Contract, as it is not based upon any agreement
between two parties.
(c) Recognizance is a Bond by which a person undertakes before a Court or Magistrate to
observe some condition e.g. to appear on summons.
(d) Contracts of Record derive their binding force from the authority of the Court.

2. Contract under Seal:

(a) A Contract under Seal is one which derives its binding force from its form alone.
(b) It is in writing and signed, sealed and delivered by the parties.
(c) It is also called a Deed or a Specialty Contract like Partnership Deed, Corporation Contract,
Gift Deed.

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