Business Law

Essentials Of A Valid Contract In Business Law With Example

Essentials of a Valid Contract – The essential features or elements of a valid contract are discussed in the following sections. Even if one of these elements is missing in an agreement, the agreement will not be enforceable by law and as such would not constitute a valid contract.

Essentials Of A Valid Contract

(1) Agreement – Proposal and Acceptance – A valid contract essentially involves two or parties because an individual cannot enter into an agreement with himself. Section 2(e) of the Act stipulates that “every promise and every set of promises forming the consideration for each othe agreement.” To reach an agreement, it is implied that one party makes a proposal and the othor accepts the proposal. According to Section 2(b): When the person to whom the proposal is made signifies his assent thereto, the proposal is accepted. A proposal, when accepted, becomes a promise. Untill the proposal is accepted, there is no promise and, as such, there cannot be an agreement.

(2) Competency or Contractual Capacity of Parties – The second essential feature of a valid contract is that the parties concerned are legally competent to enter into it. According to Section 11 of the Act, every person is competent to contract if he:

  1. is of the age of majority,
  2. is of sound mind. and
  3. is not disqualified from contracting by any law to which he is subject.

(3) Free Consent of Parties – The third element of a valid contract is that there must be a free and genuine consent of the parties to the agreement. According to Section 13, the consent of the parties is said to be free when they are of the same mind on the material terms of the contract. The parties are said to be of the same mind when they agree about the subject matter of the contract in the and at the same time. The identity of views is the pre-requisite. If such identity is not there no agreement is possible.

(4) Lawful Consideration and Legal Object – The consideration or the object of the contract is another essential feature. Except for special cases listed in Section 25 a valid contract has to have an object. As per Section 2(d), “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promisee to do or to abstains from doing an act, such act or abstinence or promise is called a consideration for the promise.” For a valid contract, the consideration need not necessarily be in terms of a price-the consideration can even be in the past, present or future-but the consideration needs to be real.

(5) Agreements not Expressly Declared Void – For a contract to be valid, it is essential that the agreement has not been declared void under the Indian Contract Act, 1872. Specifically void agree- ments include agreements related to interference or sabotage in marriage ceremony (except in the case of a minor), agreements that interrupt or sabotage a legal activity, that are related to gambling or promise to do impossible things.

(6) Writing and Registering Agreements – A contract may be by word of mouth or in writing. As per law, there is no difference between a contract in writing and a contract made by word. It is, however in the interest of the parties that the contract is in writing. Some other formalities also need to be complied with to make the contract legally enforceable. In some cases, the document in which the contract is made is to be stamped and registered (like under the Transfer of Property Act), In some other cases there is a statutory requirement that the contract be made in writing or in the presence of witnesses or registered. In such cases the statutory formalities must be complied with.

(7) Capable of Performance – A valid contract must be reasonable and practical to be performed. It must not promise the impossible – like injecting new life in a dead body or finding treasure by magic. A valid contract must be certain and definite -not vague and indefinite. The law does not recognize, an impractical, indefinite or vague agreement and, as such, does not help enforce it. If an agreement does not meet the above criteria, then it cannot be a contract. It will remain an agreement.

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