On analysing this definition of contract, we can say that a contract essentially consists of two elements: (i) an agreement, (ii) its enforceability by law.
Section 2(e) of the Contract Act defines agreement as every promise and every set of promises forming the consideration for each other. Hence we can say that agreement consists of an offer by one party and its acceptance by the other.
Thus Agreement = Offer + Acceptance.
There must be at least two parties to an agreement, one making an offer and the other accepting it. No person can enter into agreement with himself. There is another important aspect relating to an agreement i.e., the parties to an agreement must have an identity of minds in respect of the subject matter. They must agree on the same thing in the same sense. This is also called consensus-ad-idem.
For an agreement to become a contract there is a need of legal obligation i.e. it must be enforceable by law. Any obligation (duty) which is not enforceable by law is not regarded as a contract. Social, moral or religious agreements do not create any legal obligation hence any agreement made which is social, religious or moral in nature will not form a contract. On the contrary it is assumed that when two parties enter into a business agreement they have an intention to create legal obligations on each other. However if they decide not to create any legal obligation on each other while entering into agreement this will mount to an agreement and not to a contract.
In the famous case of Balfour Vs Balfour, Mr. Balfour had promised to pay 30? per month to his wife living in England when she could not accompany him to Ceylon where he was employed. Mr. Balfour failed to pay the promised amount. Mrs. Balfour filed a suit against her husband for breach of this agreement. It was held that she could not recover the amount as it was a social agreement and the parties never intended to create any legal relations.
ESSENTIAL OF A VALID CONTRACT
Contract has been defined as “an agreement enforceable by law is a contract”, so for a contract to be valid it must have essentials of a valid contract which have been mentioned in Section 10, 29, 56.
Proper offer and proper acceptance
In order to create a valid contract it is necessary that there must be at least two parties, one making the offer and the other accepting it. The law has prescribed certain rules for making the offer and its acceptance and these rules must be satisfied while entering into a contract.
Intention to create legal relationship
There must be an intention among the parties to create a legal relationship, if an agreement is not capable of creating a legal obligation it is not a contract. In case of social or domestic agreements, generally there is no intention to create legal relationship. This point can well be illustrated by the famous case of Balfour Vs. Balfour.
In commercial or business transactions the usual presumption is that the parties intend to create legal relations. If parties entering in commercial or business contract resolve that agreement is not to create legal relation then even a business agreement does not mount to be contract.
An agreement must be supported by lawful consideration. It is defined as the price paid by one party to buy the promise of the other. For a contract to be valid, the consideration should be lawful. The consideration is considered lawful unless it is forbidden by law, or is fraudulent, or involves or implies injury to the person or property of another, or is immoral, or is opposed to public policy.
Capacity of parties
The parties to an agreement must be competent to contract i.e., they must be capable of entering into a contract. If any party to the contract is not competent to contract, the contract is not valid. In order to be competent to enter into a, contract, the person should be a major (adult), should be of sound mind and he must not be declared disqualified from contracting by any law to which he is subject. Thus, the flaw in capacity may be due to minority, lunacy, idiocy, etc. If a party to a contract suffers from any of these flaws, the agreement, with a few exceptions, is not enforceable at law.
For a contract to be valid, it is essential that there must be free and genuine consent of the parties to the contract. Consent is said to be free when it is not caused by
(ii) undue influence,
(iv) misrepresentation, or
In case the consent is obtained by any of the first four factors, the contract would be voidable at the option of the aggrieved party. But if the agreement is induced by mutual mistake which is material to the agreement, it would be void.
The object of an agreement must be lawful. An agreement made for any act which is prohibited by law will not be valid.
Writing and Registering
A contract may be in written or oral; however certain contracts like Transfer of property, arbitration agreement, need to be in written only.
Contract Act provides that Agreements, the meaning of which is not certain or capable of being made certain, are void. Thus to make a valid contract it is absolutely essential that its terms must be clear and not uncertain.
Possibility of performance
The terms of the agreement must also be such as are capable of performance. An agreement to do an act impossible in itself is void. If the act is impossible of performance, physically or legally, the agreement cannot be enforced by law.
Not Expressly Declared Void
The agreement must not have been expressly declared void under Contract Act. Sections 24 to 30 specify certain types of agreements which have been expressly declared void. They are
(i) agreement in restraint of marriage,
(ii) agreement in restraint of trade
(iii) agreement by way of' wager.