Essential Elements of Valid Contract /Answer to Chapter-3 BBS Business Law
Essential Elements of Valid Contract
Subsection (1) of Section 504 of the Civil Code has been
defined the term ‘Contract’ as, ‘If an agreement enforceable by law is made
between two or more persons to do or abstain from doing any act, a contract
shall be deemed to be made.’ Similarly, a contract has been defined in Section
2(h) of the Indian Contract Act as, “an agreement enforceable by law.”
To be enforceable
by law, an agreement must possess the essential elements of a valid contract as
contained in different Sections of respective laws. According to Section 10, of
Indian Contract Act all agreements are contract if they are made by the free
consent of the parties, competent to contract, for a lawful consideration, with
a lawful object is not expressly declared by Act to be void, and, where
necessary, satisfy the requirements of any law as to writing or registration. So we can say that “All contracts are
agreements but all agreements are not contracts”.
Only those agreements which are enforceable by law contract. The agreement with the absence of
one or all of the essential elements of a valid contract is not a contract. So the agreement turns into a valid contract
only when the agreement is enforceable by law or an agreement containing all
the essential elements of a valid contract then only it becomes a contract. The essential
elements of a valid contract are as below:
 |
| Essential-Elements-of-Valid-Contract-BBS-Business-law-notes |
A person individually does not make any agreement. To form a contract there must be at least two parties. A promise or a set of promises is exchanged between offerer and offeree for a contract and it is possible only in the situation of a plurality of parties. There cannot be an agreement unless there are two or more parties and no man can be under an obligation to himself. Civil Code, 2074 provides in its definition that, there must be two or more parties to conclude a valid contract.
Offer and
acceptance
To enter into an agreement there must be at least two parties and out of these two parties, one has to express his willingness to another to do or not to do something which is known as an offer and the other the party has to give his consent or acceptance to the terms of the offer. It is the process by which most of the contracts are formed between respected parties. Hence, there must be a lawful offer and a lawful acceptance of the offer, thus resulting in an agreement.
To enter into an agreement there must be at least two parties and out of these two parties, one has to express his willingness to another to do or not to do something which is known as an offer and the other the party has to give his consent or acceptance to the terms of the offer. It is the process by which most of the contracts are formed between respected parties. Hence, there must be a lawful offer and a lawful acceptance of the offer, thus resulting in an agreement.
Intention to create a legal relationship
There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. An agreement of social or domestic nature does not contemplate legal relations, and as such, they do not give rise to a contract. An agreement to dine at a friend’s house is not an agreement intended to create legal relations and therefore is not a contract. An agreement between husband and wife also lacks the intention to create a legal relationship and thus does not result in contracts.
There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. An agreement of social or domestic nature does not contemplate legal relations, and as such, they do not give rise to a contract. An agreement to dine at a friend’s house is not an agreement intended to create legal relations and therefore is not a contract. An agreement between husband and wife also lacks the intention to create a legal relationship and thus does not result in contracts.
In commercial agreements, an intention to create legal
relations is presumed. Thus, an agreement to buy and sell goods intends to
create a legal relationship, hence it is a contract, provided other requisites of a
valid contract are present. But if the parties have expressly declared their
resolve that the agreement is not to create a legal obligation, even a business
agreement does not amount to a contract.
For example, R Company entered into an agreement
with C Company, by means of which the former was appointed as the agent of the latter company. One clause of agreement was as; ‘The agreement is not entered
into as a formal or legal agreement, and shall not be subject to legal
jurisdiction in the law courts’. It was held that there was no intention to
create legal relations on the part of parties to the agreement and hence there
was no contract.
Meeting of minds
For an agreement, the minds of the parties must be met upon the same thing in the same sense. When two or more parties are agreed to do or not to do something in the same sense, there is an agreement between them. If there is no agreement, no contract arises between them, and for an agreement, the minds of the parties must meet upon the same thing in the same sense.
For an agreement, the minds of the parties must be met upon the same thing in the same sense. When two or more parties are agreed to do or not to do something in the same sense, there is an agreement between them. If there is no agreement, no contract arises between them, and for an agreement, the minds of the parties must meet upon the same thing in the same sense.
Lawful consideration
The next essential element of a valid contract is the presence of consideration. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties gives something and gets something. The something given or obtained is the price for the promise and is called consideration. Subject to certain exceptions, gratuitous promises are not enforceable at law.
The next essential element of a valid contract is the presence of consideration. Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties gives something and gets something. The something given or obtained is the price for the promise and is called consideration. Subject to certain exceptions, gratuitous promises are not enforceable at law.
The consideration may be an act or forbearance or a
promise to do or not to do something. It may be the past, present, or future. But only
those considerations are valid which are ‘lawful’. The consideration is lawful unless it is forbidden by law or is such a nature that, if permitted it would
defeat the provisions of any law, or is fraudulent, or involves or implies
injury to the person or property of another, or is immoral, or opposite to
public policy.
The capacity of the parties
The parties to an agreement must be competent to contract; otherwise, it cannot be enforced by a court of law. In order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject.
The parties to an agreement must be competent to contract; otherwise, it cannot be enforced by a court of law. In order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject.
If any
of the parties to the agreement suffers from minority, lunacy, idiocy,
drunkenness, etc, the agreement is not enforceable by law, except in some
special cases, i,e,. In the case of necessaries supplied to a minor or lunatic,
the suppliers of goods are entitled to be reimbursed from their estate. Section
506 (1) of the Civil Code has made the provision relating to the contractual
capacity of the parties.
Free consent
Free consent of the contracting parties is a must to create a contract. Consent may not be free if it is obtained on the ground of coercion, undue influence, fraud, misrepresentation, and mistake of law. When the parties of the contract are agreed upon the same thing in the same sense, we can say they are consented to enter into an agreement, thus the consent links the offer and acceptance or minds of the parties and creates an agreement between them.
Free consent of the contracting parties is a must to create a contract. Consent may not be free if it is obtained on the ground of coercion, undue influence, fraud, misrepresentation, and mistake of law. When the parties of the contract are agreed upon the same thing in the same sense, we can say they are consented to enter into an agreement, thus the consent links the offer and acceptance or minds of the parties and creates an agreement between them.
If the agreement is vitiated
by any of the first four factors, the contract would be voidable and cannot be
enforced by the party guilty of coercion, undue influence, etc. the other party
can either reject the contract or accept it, subject to the rules laid down in
the laws.
Lawful object/Legality
of object
For the formation of a valid contract, it is necessary that the parties to the agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or property of another. If the object is unlawful for one or the other of the reasons mentioned above the agreement is void.
For the formation of a valid contract, it is necessary that the parties to the agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or property of another. If the object is unlawful for one or the other of the reasons mentioned above the agreement is void.
Thus, when a
landlord knowingly lets a house to a prostitute to carry on prostitution, he
cannot recover the rent through the court of law. Section 517 of the Civil Code
is relating to the void contract. The object of the contract is made contrary
to this provision regarded as unlawful object and such a contract cannot take
place.
Not declared to
be void
The agreement must not be expressly declared void by any existing law. Section 517 of the Civil Code, 2074 declares that those types of a contract will be void which is clearly prescribed in the Act e.g. agreements in restraint of trade, marriage, public facilities, legal proceedings against public policy, impossible agreement, uncertain contracts, contracts made by unlawful purposes and objects.
The agreement must not be expressly declared void by any existing law. Section 517 of the Civil Code, 2074 declares that those types of a contract will be void which is clearly prescribed in the Act e.g. agreements in restraint of trade, marriage, public facilities, legal proceedings against public policy, impossible agreement, uncertain contracts, contracts made by unlawful purposes and objects.
Possibility of
perform
The objective or terms of the agreement must be possible to perform. If the parties of the contract agreed to do anything which cannot be performed by the parties, the agreement cannot be contract and enforceable. It is based on the Latin phrase lex non-cogitad impossibilia which means ‘law does not compel to do what is not possible’.
The objective or terms of the agreement must be possible to perform. If the parties of the contract agreed to do anything which cannot be performed by the parties, the agreement cannot be contract and enforceable. It is based on the Latin phrase lex non-cogitad impossibilia which means ‘law does not compel to do what is not possible’.
So any act,
which cannot be done or is not performable, does not create legal obligations
to the contracting parties. Section 517 (h) of the Civil Code has mentioned
that a contract the performance of which is impossible at the time of its
conclusion is void. For example, the contract to change the color of milk is
impossible to perform or it is initially impossible to perform, so, it is void
ab initio.
Certainty and
clarity
Agreements, the meaning of which is not clear or certain or capable of being made certain, are void. In order to give rise to a valid contract, the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, otherwise, it cannot be enforced. By observing the language and words of the agreement everybody must know that what the agreement is and what the right and duties are fixed by the parties. Thus, the agreement should give something definite meaning which is certain and not vague.
Agreements, the meaning of which is not clear or certain or capable of being made certain, are void. In order to give rise to a valid contract, the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, otherwise, it cannot be enforced. By observing the language and words of the agreement everybody must know that what the agreement is and what the right and duties are fixed by the parties. Thus, the agreement should give something definite meaning which is certain and not vague.
Fulfillment of
legal formalities
The legal formalities for entering into a formal agreement are determined by or fixed by the current law. The agreement must fulfill the necessary legal formalities to form a valid contract. An implied and oral contract has no deed to fulfill legal formalities but a written contract has to fulfill it duly.
The legal formalities for entering into a formal agreement are determined by or fixed by the current law. The agreement must fulfill the necessary legal formalities to form a valid contract. An implied and oral contract has no deed to fulfill legal formalities but a written contract has to fulfill it duly.
According to section 575(2) of the
Civil Code, 2074, the written contract must be made to bail the goods valued more
than five thousand.
Similarly, section 519(2)(b) of the Code has preferred to
perform the necessary legal formalities as prescribed by the current laws. Under
the Nepalese law, if the loan is provided by an agreement without a written document,
such contracts cannot be enforced by law.
Similarly, a contract of sale of
land, contract of partition between co-heirs, contract of agency, and
partnership etc. must be in written form, stamped, and registered in the
concerned government office. Otherwise, these are not considered a contract and
enforceable by law.
Therefore we can say that all the agreements are not contracted. Only those agreements which are enforceable by law are the contract. The
parties to a contract must intend to have legal relations and legal consequences
and in case of default of either party, the aggrieved one has legal remedies. The
scope of the agreement is wider than that of the contract because a contract must
fulfill some essential elements. It has a limited scope that exists within the limitations of legality. Thus, all agreements are not contracts but all the
contracts are agreements.
