Contract: Any agreement or declaration between two or more parties and the agreement must be enforceable by law is called contract. In valid contract, both parties who involve in the contract are legally bound to fulfil his obligations or promises which are within the contract. The basic formula of a contract.
Contract = Agreement + Enforceability
Essentials of Valid Contract:
- At least two or more parties.
- Offer and acceptance.
- Free consent.
- Competency or Capacity of parties.
- Lawful object and consideration.
- Consensus ad idem.
- Possibility and certainty of performance.
- Writing and registration.
- Intention to create Legal relations (Contractual relationship).
- Not expressly declared void by the law.
1. At least two or more parties: There are at least two parties involved in a valid contract. It is not necessary that a contract can only be within two parties, It can also between more than two parties. One is promisor that makes the offer, second is promisee to whom the offer is made and third-party beneficiary may be named. It cannot demand performance (execution) of the contract because he is not an active party to the contract. In some exceptional cases, the third party can demand the performance (execution) of contract, e.g. beneficiary in a trust, assignee of contract etc.
- Mr. Henry offers to sell his black Mercedes to Mr. Robbin for $50,000. Mr. Henry makes an offer to Mr. Robbin. In this example two parties are involved one is promisor (Mr. Henry) and second is promisee (Mr. Robbin).
- The XYZ insurance corporation has made a promise to Mr. Ram being insured that the XYZ insurance corporation will pay the beneficiary. Mr. Ram have a policy and his family is the beneficiary. Mr. Ram die, which results his family receiving proceeds from the policy. In this example, Mr. Ram family is a third party.
2. Offer and Acceptance: An offer is a beginning point for a contract. A valid agreement arises when an offer is made by one party and accepted by the party to whom it is made. An offer itself not create does not create a lawful relationship between parties. A lawful relationship arises only when an offer is accepted. The party who makes the offer is known as offeror. The party is whom the offer is made is known as offeree. The party who accepts the offer is called acceptor.
- Mr. Peter offer to sell his motorcycle to Mr. Michal for $500. It is an offer. If Mr. Michal accepts the offer, there is an acceptance.
- Mr. Ram promises to sell his laptop to Mr. Ajay for $300. Mr. Ram makes an offer to Mr. Ajay. If Mr. Ajay accepts the offer, there is an acceptance.
3. Free Consent: Free consent is one of the most important essential of a valid contract. Simply the consent of both parties who involve in a contract is must be free is called free consent. Only free consent is not enough for a valid contract and enforceability. In the cases of coercion, fraud, mistake, misrepresentation and undue influence consent is not free.
- Mr. Jack compels Mr. Thomas to enter into a contract at gunpoint. It is not a valid contract as the consent of Mr. Thomas is not free.
- Mr. Jacob, with free consent, promises to sell his car to Mr. Harry for $5000. It is a valid contract because the consent of Mr. Jacob is free.
4. Competency or Capacity of parties: An agreement is enforceable if all the parties to a contract must be competent to contract. Every person is capable of the valid contract who is of the age of majority, who is not disqualified by law from contracting and is not unsound mind. This means a person of unsound mind, a minor and a person disqualified by law are not capable of a valid contract. An agreement with an incapable person is not a valid contract.
- X, a person of unsound mind, agree to sell his land to Y for $10,000. It is not a valid contract because X is not competent to contract.
- M, aged 24, promises to sell his Ferrari to N for $70,000. It is a valid contract because M is competent to contract.
- Harry, a minor, borrows $1000 from Oliver and promises to return it within 1 year. It is not a valid contract as Harry is not competent to contract.
5. Lawful object and Consideration: Consideration and lawful object are one of the essentials of a valid contract. In law point of view, consideration means parties receive something in return after the end of the contract, such as benefits, experience, money etc. Lawful object means the object of the contract is legal or recognized by law. This means the object of agreement is not illegal, fraudulent, immoral, opposed to public policy or involves harm to the person or property to another. Every agreement with an unlawful object or consideration is illegal and void by law.
- Olivia promises to pay $2,000 to Maya, if Maya beats Jessica. The agreement is forbidden by law as its object is illegal.
- Mr. Jack agree to sell his car to Mr. Muhammad for $30,000. $30,000 is a consideration for Mr. Jack, and the car is the consideration for Mr. Muhammad.
- Sir George promises to teach Harry without charges. It is not a contract because for Sir George there is no consideration.
- Mr. Ali hires a house to use for gambling. The object of the agreement is unlawful so an agreement is void and illegal.
6. Consensus ad idem: It is a Latin term that simply means, “agreement to the same”. Consensus ad idem in the agreement of mind is used to describe a situation where people fully understand the contract and have accepted the contractual obligations made by each other, respectively.
- Mr. Arjun promises to sell 50 books to Mr. Krishna without specifying their titles. The agreement is not valid because the terms are not clear.
- Mr. Ali offers to sell his black Toyota car to Mr. Peter for $10,000 but Mr. Peter thinks Mr. Ali is talking me his black Mercedes car. The agreement is also void because the terms are not clear.
7. Possibility and certainty of performance: A valid contract must be the ability to being performed. A contract becomes void because of the impossibility of performance. If the agreement is legally, morally or physically impossible to perform, the agreement cannot be enforced by law.
- Mr. Alexander agree with Mr. Leo to put life into Leo’s dead brother. The agreement is unlawful or void as it is impossible to perform.
- Mr. James agree with Mr. Ethan to discover a treasure by magic. The agreement is not enforceable by law.
8. Writing and Registration: A valid contract may be writing or in oral. If the contract is in writing form, it is easy to enforceable by law. Where it is necessary that a particular contract must be in writing, stamped, signed, attested by witnesses, and registered, it must fulfil all the requirements to become valid.
- Mr. Lucas written agreement was made for sale of house but it was not signed by the two parties. The court held that no contract existed.
- Mr. Vivek verbally promises to sell his car to Mr. Sandeep for $3,000. It is a legal, lawful or valid contract because the law does not require it to be in writing.
9. Intention to create Legal relations (Contractual Relationship): The parties to an agreement must create legal obligations. It means that if one party does not fulfil his commitment, he shall be liable for breach of contract. It is presumed in commercial agreements that the parties intend to create legal relations.
- Belfour promised to pay his wife an allowance $100 every month. Later, the parties separated and the Belfour refused to pay. The wife sued. Held, that wife could not obtain the amount as parties did not want to intention to create legal relations.
- David offers to sell his cycle to Adam for $500. Adam agrees to buy. It is a contact as it creates legal relationships.
10. Not expressly declared void by the law: The agreement must not be one of that agreement which have been expressly declared to be void by the law. A void agreement is not enforceable by law. Such void agreement does not give rise to any ethical or legal result and is void ab initio.
- Ali promises to pay Rs.3000 to Amir if India wins the final cricket world cup. The agreement is void being a wagering agreement.
- Mr. Harley promises to close his company if Mr. Taylor pays him $10,000. It is a void agreement because it is in restraint of trade.