Introduction

It is a very famous phrase in Contract Act. i.e. “All contracts are agreement but, all agreements are not contract.” It’s very essential to know the meaning of this phrase as this phrase is the base of Contract Act. For eg.

1) My friend made an agreement with me that coming Sunday I should visit his house for lunch. But when I visited his residence, it was locked and no message was left. Now the question is can I file a suit against him.

2) My friend made an agreement with me that Ishouldsell my mobile for a value of Rs 10,000/- to him. I accepted his offer and gave him my mobile but, in return he refused to pay me Rs 10,000/=. Now the question is can I file a suit against him.

Both are agreements but in first example I cannot file a suit because it is merely an agreement of domestic nature. Whereas in second example, I can file a suit for recovery of Rs. 10,000/-. It’s an agreement only but, there are some more elements which makes it enforceable contract.

This means agreements with certain essential elements makes it an enforceable contract. So in equation we can put it as

Contract = Agreement + Essential Elements

Thus to arrive at a contract there must be an agreement first and secondly, an agreement should be enforceable by law.

The Indian Contract Act of 1872 prescribes the framework for entering into a contract. There are certain Essential elements of a valid contract which are to be kept in mind before entering into a valid contract and followed efficiently. 

The main elements of a valid contract are stated below :

1. Minimum two parties
2. Offer and acceptance
3. Lawful consideration
4. Lawful object
5. Agreement not expressly declared to be void
6. Intention to create a legal relationship
7. Free consent
8. The capacity of the parties to contract
9. Certainty of meaning
10. Possibility of performance
11. Legal formalities.

a) Minimum two parties : 

While entering into a valid contract there must be minimum two parties. There may be more than 2 parties but, minimum two parties is must because, a person can not make a contract with himself. One person to make offer and other person to accept the offer.

b) Offer and Acceptance :

Offer :The offer (proposal) and acceptance is the most acknowledged process for making of an agreement, where proposal (offer) is the starting point. Section 2(a) defines ‘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 either to such act or abstinence, he is said to make a proposal.”

Offer may be express or implied.

Further, section 2(c) say, “The person making the proposal is called the ‘promisor’ (also known as offerer), and the person accepting the proposal is called ‘promisee.’ (also known as the offeree). “

So there are two aspects of the above definitions firstly it is the willingness of the promisor either to do something or not to do something and secondly this willingness is to obtain the assent(consent) of the promisee to do that act or not to do that act.

Example : 1) Virat says to Arman “ Will you buy my mobile for Rs. 10,000.” Here Virat has made an offer to Arman. ( Offer to do something.)

2) Dawaghar medical store agrees to buy the goodwill of Healthcare medical store provided Healthcare medical store will not open a new medical store in that city. Here Dawaghar medical store has made an offer to Healthcare medical store ( offer to abstain from doing something.)

Acceptance : Section 2 (b) defines 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.

So here we can say that, acceptace is the assent given to a proposal. And this acceptance is converted from proposal in to promise.

Acceptance also can be of two types express and implied.

In above examples when Arman agrees to buy Virat’s mobile, it is called as aceeptance and this acceptance is converted in to a promise.  Also when Healthcare medical store agrees that he will not open any medical store in that city, he assents to abstain and this acceptance is converted into promise.

c) Lawful consideration :

Section 2(d) defines consideration as, “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 promises to do or to abstain from doing, something, such an act or abstinence or promise is called a consideration for the promise.”

The meaning of the above definition is based on a Latin term “Quid pro quo” means, “something for something” or, “something in return”.

In the words of Pollock, “Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforeceable.

In above examples, Virat offers to sell mobile is consideration to Arman and Arman agrees to pay Rs. 10,000/- is consideration to Virat. In second example Dawaghar medical store offers to buy goodwill is consideration to Healthcare chemist and Healthcare chemist will not open a medical store in that city is the consideration for Dawaghar medical store.

Important point in the definition of consideration is that an act or abstinence which is to be a consideration for the promise must be done or promised at the desire of the promisor.

Very important point is that, consideration has to be lawful. Lawful consideration helps to abstain from unlawful activities in a contract. Agreements which have unlawful consideration are void (not enforceable)

Example X promises to pay Rs. 10,000/- to Y if he beats Z. This is unlawful consideration.

To summarise, we can say that

                    Contract       =    Agreement + Enforceability

                    Agreement   =    Promise + Consideration

                    Promise        =    Offer + Acceptance

d) Lawful Object :

The contract  formed between the parties must be for a lawful object. Without a lawful object, a contract is not valid at all (void-ab-initio).

Section 23 of the Indian Contract Act 1872  defines the acts which are lawful or unlawful. 

Section 23 states : What consideration and objects are lawful, and what not

The consideration or object of an agreement is lawful, unless (except when) –

It is forbidden by law;or is of such nature that, if permitted it would defeat the provision of any law or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

Example : If A lets his house to B for therent of Rs. 50,000/- for the purpose of gambling which is declared illegal by law. Here the object of contract is unlawful so the contract is void-ab-initio.

e) Agreement not expressly declared to be void :

As discussed above in section 23, any agreement which is declared unlawful or void by law are void. Example, If in a particular state, there is a liquor prohibition and two parties entered into a contract for supply of liquor then this agreement is void.

f) Intention to create a legal relationship :

When different parties enter the contract, a legal relationship is created among them which is enforceable. Section 2(h) of the Indian Contract Act 1872 defines that agreements enforceable by law are valid contracts. Agreements between family members like husband and wife and father, mother and son do not create a legal relationship unless the intention of legal relationship is specifically expressed. When the agreement creates a legal obligation of performance, it becomes a contract. Example, suppose if husband makes an agreement with his wife and promises for a foreign trip after two months, it is an agreement of domestic nature and does not create a legal obligation. So it is not a contract and not enforceable.

g) Free Consent :

Parties entering into a contract must enter into a contract with their free will. There must be a consent for entering into a contract and this consent should be a free consent. Section 13 & 14 of The Indian Contract Act are related to consent and free consent.

Section 13 defines consent as “Two or more persons are said to consent when they agree upon the same thing in the same sense.” In the context of this definition we can say that, for a contract to be legally binding, meeting of the minds of both the parties is necessary. This is based on a Latin term, Consensus ad idem, that means “agreement to the same thing” or “meeting of the minds”.

Section 14 defines “Free consent” as, “Consent is said to be free when it is not caused by- (1) coercion, as defined in section 15, or (2) undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in section 18, or (5) mistake, subject to the provisions of sections 20, 21, and 22.  Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake.

Meaning of this section is that, if parties enter into a contract because of coercion, orundue influence, or  fraud, or misreperesentation, or mistake then it is not a free consent and in the absence of these, the contract would not have been entered.

h) The capacity of the parties to contract :

 The Indian Contract Act 1872 does not prohibit anyone from entering into a contract. But this act defines certain persons as incapable of entering into a contract. The Indian Contract Act specifically mentions who is capable of entering into a contract, and who are incapable which has been discussed below.

Section 11 states, who are competent to 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.”

So we can conclude that persons who are of age of majority, who are of sound mind and who are not prohibited by law to enter into contract (eg convicts or insolvent) are the persons capable to enter into a contract.

i) Certainty of meaning :

All the parties to a contract must agree on the same thing in the same sense (consensus ad idem), this we already discussed above. Further, there should not be any confusion in subject, terms & conditions of contract. Any miscommunication is not valid. For example if Mr. ‘A’ offers to sell Mr. “B” his mobile for Rs 10,000/- or rs. 12500/-. There is no certainty in the contract so it is not valid.

j) Possibility of performance :

While entering into a contract, it is very necessary that, there should be possibility of performance. Section 56 of The Indian Contract Act states that, “An agreement to do an act impossible in itself is void.”

For example, A agrees with B to discover treasure by magic. The agreement is void.

k) Legal formalities :

After entering into a contract, it is very necessary to complete legal formalities, as prescribed by law for that particular type of contract. Without completing legal formalities, the contract is not enforceable.

For example there are certain contracts which are necessary to be signed in presence of witness or, they must be registered, or the must have certain stamp duty, etc. These legal formalities are mandatory to be completed.