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Saturday 1 August 2015

ESSENTIAL ELEMENTS OF A VALID CONTRACT


ESSENTIAL ELEMENTS OF A VALID CONTRACT
Section 10 of the Indian Contract Act, 1872 provides that "all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are nothereby expressly declared to be void".
The essential elements of a valid contract are:
(i)   An offer or proposal by one party and acceptance of that offer by another party resulting in an agreement-consensus-ad-idem.
(ii)   An intention to create legal relations or an intent to have legal consequences.
    (iii)  The agreement is supported by lawful consideration.
(iv)  The parties to contract are legally capable of contracting.
(v)   Genuine consent between !he parties.
(vi)  The object and consideration of the contract is legal and is not opposed to
       public policy.
(vii) The terms of the contract are certain.
(viii) The agreement is capable of being performed Ie., it is not impossible of being
performed.


        Therefore, to form a valid contract there must be (1) an agreement, (2) based on the genuine consent of the parties, (3) supported by consideration, (4) made for a lawful object, and (iv) between the competent parties.
(a) Offer or Proposal and Acceptance
One of the early steps in the formation of a contract lies in arriving at an agreement between the contracting parties by means of an offer and acceptance. Thus, when one party (the offeror) makes a definite proposal to another party (the offeree) and/ the offeree accepts it in its entirety and without any qualification, there is a meeting of the minds of the parties, and a contract comes into being, assuming that all other elements are also present.
What is an Offer or a Proposal?
An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual obligation in- return for a promise, act or forbearance. Section 2(a) defines proposal or offer as "when one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal."
            Rules Governing Offers
A valid offer must comply with the following rules:
(a) An offer must be clear, definite, complete and final. It must not be vague. For example, a promise to pay an increased .price for a horse if it proves lucky to promiser, is too vague and is not binding.
(b) An offer must be communicated to the offeree. An offer becomes effective only when it has been communicated to the offeree so as to give him an opportunity to accept or reject the same.
(c) The communication of an offer may be made by express words-oral or written-or it may be implied by conduct. A offers his car to B for Rs. 10,000. It is an expre~s offer. A bus plying on a definite route goes along the street.
This is an implied offer on the part of the owners of the bus to carry passengers at the scheduled fares for the various stages.
(d) The communication of the offer may be general or specific. Where an offer is made to a specific person it is called specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals Le. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer. The leading case on the subject is Carlill v. Carbolic Smoke Ball Co. The company offered by advertisement, a reward of £ 100 to anyone who contacted influenza after using their smoke ball in the specified manner. Mrs. Carlill did use smoke ball in the specified manner, but was attacked by influenza. She claimed the reward and it was held that she could recover the reward as general offer can be accepted by anybody. Since this offer is of a continuing nature, more than one person can accept it and can even claim the reward. But if the offer of reward is for seeking some information or seeking the restoration of missing thing, then the offer can be accepted by one individual who does it fi rst of all. The condition is that the claimant must have prior knowledge of the reward before doing that act or providing that information.
Example: A advertise in the newspapers that he will pay rupees one thousand to anyone who restores to him his lost son. B without knowing of this reward"finds A's
 ost son and restore him to A. In this case since B did not know of the reward, he
~
cannot claim it from A even though he finds A's lost son and restores him to A.
In India also, in the case of Harbhajan Lal v. Harcharan Lal (AlA 1925 All. 539), the same rule was applied. In this case, a young boy ran away from his father's home. The father issued a pamphlet offering a reward of As. 500 to anybody who would bring the boy home. The plaintiff saw the boy at a railway station and sent a telegram to the boy's father. It was held that the handbill was an offer open to the world at large and was capable to acceptance by any person who fulfilled the conditions contained in the offer. The plaintiff substantially performed the conditions and was entitled to the. reward offered.
An Offer must be Distinguished from
(a) An invitation to treat or an invitation to make an offer: e.g., an auctioneer's request for bids (which are offered by the bidders), the display of goods in a shop window with prices marked upon them, or the display of priced goods in a self-service store or a shopke.eper's catalogue of prices are invitations to an offer.

(b) A mere statement of intention: e.g., an announcement of a coming auction sale. Thus a person who attended the advertised place of auction could not sue for breach of contact if the auction was cancelled (Harris v. Nickerson (1873) L.A. 8 QB 286).
(c) A mere communication of information in the course of negotiation: e.g., a statement of the price at which one is prepared to conside( negotiating the sale of piece of land (Harvey v. Facey (1893) A.C. 552).
An offer that has been communicated,properly continues as such until it lapses, or until it is revoked by the offeror, or rejected or accepted by the offeree.
Lapse of Offer
                   Section 6 deals with various modes of lapse of an offer. It states that an offer
lapses if­
(a)      it is not accepted within the specified time (if any) or after a reasonable
time, if none is specified.
(b)      it is not accepted in the mode prescribed or if no mode is prescribed in 
some usual and reasonable manner, e.g., by sending a letter by mail       when early reply was requested
(c)      the offeree rejects it by distinct refusal to accept it;
(d)     either the offerer or the offeree dies before acceptance;
(e)     the acceptor fails to fulfill a condition precedent to a acceptance.    
(f)       the offeree makes a counter offer, it amounts to rejection of the  offer and an offer by the offeree may be accepted or rejected by the offeror.
Revocation of Offer by the Offeror
An offer may be revoked by the offeror at any time before acceptance.
Like any offer, revocation must be communicated to the offeree, as it does not take effect until it is actually communicated to the offeree. Before its actual communication, the offeree, may accept the offer and create a binding contract. The revocation must reach the offeree before he sends out the acceptance.
An offer to keep open for a specified time(option) is not binding unless it is supported by consideration.
Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an offer. Under Section 2(b) of the Contract Act uwhen a 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.".
Rules Governing Acceptance
(a)      Acceptance may be express Le. by words spoken or written or implied
  from the conduct of the parties.
(b)      If a particular method of acceptance is prescribed~-Ae. offer must be accepted in the prescribed manner.        "
(c)      Acceptance must be unqualified and absolute and must correspond with all the terms of the offer.
(d)     A counter offer or conditional acceptance operates as a rejection of the offer and causes it to lapse, e.g., where a horse is offered for Rs. 1,000 and the offeree counter-offers Rs. 990, the offer lapses by rejection.
(e)      Acceptance must be communicated to the offeror, for acceptance is complete the moment it is communicated. Where the offeree merely intended to accept but does not communicate his intention to th.e offeror, there is no contract. Mere mental acceptance is not enough.
(f)      Mere silence on the part of the offeree does not amount to acceptance. Ordinarily, the offeror cannot frame his offer in such a way as to make the silence or inaction of the offeree as an acceptance. In other words, the offeror can prescribed the mode of acceptance but not the mode of rejection.  In Felthouse v. Bindley (1865), F offered by letter to buy his nephew's horse for £ 30 saying: "If I hear no more about him I shall consider the horse is mine at £ 30". The nephew did not reply, but he told an auctioneer who was selling his horses not to sell that particular horse because it was sold to his uncle. The auctioneer inadvertently sold the horse. Held: F had no claim against the auctioneer because the horse had not been sold to him, his offer of £ 30 not having been accepted.
(g)      If the offer is one which is to be accepted by being acted upon, no communication of acceptance to the offeror is necessary, unless communication is stipulated for in the offer itself.
Thus, if a reward is offered for finding a lost dog, the offer. is accepted by finding the dog after reading about the offer, .and it is unnecessary before beginning to search for the dog to give notice of acceptance to the offeror.
(h)     Acceptance must be given within a reasonable time and before the offer lapses or is revoked. An offer becomes irrevocable by acceptance.
An acceptance never precedes an offer. There can be no acceptance of an offer which is not communicated. Similarly, performance of conditions of an offer without the knowledge of the specific offer, is no acceptance. Thus in Lalman Shukla v. Gauri Duff (1913) where a servant brought the boy without knowing of the reward, he was held not entitled to reward because he did not know about the offer.
Standing Offers
Where a person offers to another to supply specific goods, up to a stated quantity or in any quantity which may be required, at a certain rate, during a fixed period, he makes a standing offer. Thus, a tenderto supply goods as and when required, amounts to a standing offer.
A standing offer or a tender is of the nature of a continuing offer.  An acceptance of such an offer merely amounts to an intimation that the offer will  be considered to remain open during the period specified and that it will be accepted from time to time by placing order during the period specified quantities.  Each successive order given, while the offer remains in force, is an acceptance of the standing offer as to the quantity ordered, and creates a seperate contract.  it does not bind either party unless and until such orders are given.
Where P tendered to supply goods to L upto a certain amount and over a certain period, L's order did not come up to the amount expected and P sued for breach of contract Held: Each order made was a separate contract and P was bound to fulfill orders made, but th~re was no obligation on L to make any order to all (Percival Ltd. v. L.C.C. (1918).
Tickets
Tickets purchased for entrpnce into places of amusement, or tickets issued by railways or bus companies, clock-room tickets, and many other contracts set out in printed documents contain numerous terms, of many of which the partly receiving the ticket or document is ignorant. If a passenger on a railway train receives a ticket on the face of which is printed Hthis ticket is issued subject to the notices, regulations and conditions contained, in the current time-tables of the railway", the regulations and conditions referred to are deemed to be communicated to him and he is bound by them whether or not he has read them. He is bound even if he is illiterate and unable to read them. But it is important that the notice of the conditions i,s contemporaneous with the making of the contract and not after the contract has been made.
Contracts by Post
Contracts by post are subject to the same rules as others, but because of their importance, these are stated below separately:
(a)      An offer by post may be accepted by post, unless the offero(indicates anything
to the contrary.
(b)      An offer is made only when it actually reaches the offeree and not .before, i.e., when the letter containing the offer is delivered to the offeree.
(c)      An accepta.nce is made as far as the offeror is concerned, as soon as the
letter containing the acceptance is posted, to offeror's correct address; it binds the offeror, but not the acceptor.
An acceptance binds the acceptor only when the letter containing the
acceptance reaches the offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.
(d)     An offer may be revoked before the letter containing the acceptance is posted.  An acceptance can be revoked before it reaches the offeror.
   Contracts over the Telephone
Contracts over the telephone are regarded the same in principle as those negotiated by the parties in the actual presence of each other. In both cases an oral offer is made and an oral acceptance is expected. It is important that the acceptance must be audible, heard and understood by the offeror. If during the conversation the telephone lines go, "dead" so that the offeror does not hear the offeree's word of acceptance, there is no contract at the moment. If the whole conversation is repeated and the offeror hears and understands the words of acceptance, the contract is complete (KanhaiyalaJv. Dineshwarchandra (1959) AIR, M.P. 234).

b) Intention to Create Legal Relations
The second essential element of a valid contract is that there must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship. As such they are not contracts.
A proposal or an offer is made with a view to obtain the assent to the other party and when that other party expresses his willir19ness to the act or abstinence proposed, he accepts the offer and a contract is made between the two. But both offer and acceptance must be made with the intention of creating legal relations between the parties. The test of intention is objective. The Courts seek to give effect to the presumed intention of the parties. Where necessary, the Court would look into the conduct of the parties, for much can be inferred from the ~onduct. The Court is not concerned with the mental intention of the parties, but rather with what a reasonable man would say, was the intention of the parties, having regard to all the circumstances of the case.
For example, if two persons agree to assist each other by rendering advice, in the pursuit of virtue, science or art, it cannot be regarded as a contract. In commercial and business agreements, the presumption is usually that the parties intended to create legal relations. But this presumption is rebuttable which means that it must be shown that the parties did not intend to be legally bound.
c)    Consideration
Need for Consideration
Consideration is one of the essential elements of a valid contract. The requirement
of considera,tion stems from the policy of extending the arm of the law to the enforcement of mutual promises of parties. A mere promise is not enforceable at law. For example, if A promises to make a gift of Rs. 500 to B, and subsequently changes his mind, B cannot succeed against A for breach of promise, as B has not. given anything in return. It is only when a promise is made for something in return from the promisee, that such promise can be enforced by law against the promisor. This something in return is the consideration for the promise.

Definition of Consideration
    Sir Fredrick Pollock has defined consideration "as an act or forbearance of one party, or the promise thereof is the price for which the promise of the other is bought."
It is "some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other" (Currie v. Misa (1875) L.R. 10 Ex. 153).
Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: "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 oing, something, such act or abstinence or promise is called a consideration for the promise" .
The fundamental principle that consideration is essential in every contract, is laid down by both the definitions but there are some important points of difference in respect of the nature and extent of consideration and parties to it under the two systems of law:
(a) Consideration at the desire of the promisor: Section 2(d) of the Act begins with the statement that consideration must move at the desire or request of the promisor. This means that whatever is done must have been done at the desire of the promisor and not voluntarily or not at the desire of a third party. If A rushes to B's help whose house is on fire, there is no consideration but a voluntary act. But if A goes to B's help at B's request, there is good consideration as B did not wish to do the act gratuitously.
(b) Consideration may move from the promisee or any other person: In English law, consideration must move from the promisee, so that a stranger to the consideration cannot sue on the contract. A person seeking to enforce a simple contract must prove in court that he himself has given the consideration in return for the promise he is seeking to enforce.
In Indian law, however, consideration may move from the promisee or any other person, so that a stranger to the consideration may maintain a suit. In Chinnaya v.Ra,maya (1882) 4 Mad. 137, a lady by a deed of gift made over certain property to her daughter directing her to pay an annuity to the donor's brother as had been done by the donor herself before she gifted the property. On the same day, her daughter executed in writing in favour of the donor's brother agreeing to pay the ~nnuity. Afterwards the donee (the daughter) declined to fulfil her promise to pay her uncle saying that no consideration had moved from him. The Court, however, held that the uncle could sue even though no part of the consideration received by his niece moved from him. The consideration from her mother was sufficient consideration.

Privity of Contract
A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract. The following illustration explains this point.
In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd. (1915) A.C. 847. D supplied tyres to a wholesaler, X, on condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below D's list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price. Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for S's promise tc X nor was he party to the contract between D and X.
Thus, a person who is not a party to a contract cannot sue upon it even though the contract is for his bC~Gfit. A, who is indebted to B, sells his property to C, and C

he purchaser of the property, promises to payoff the debt to B. In case C fails to pay B, B has no right to sue C for there is no privity of contract between B and C.
The leading English case on the point is Tweddle v. Atkinson (1861) 1 Band Section 393. In this case, the father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his father-in-law upon the agreement between his father-in-law and his father. Held: the suit was not maintainable as the boy was not a party to the contract.
Exception to the doctrine of privity of contract: Both the Indian law and the English law recognize certain exceptions to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a person who is not a party to a contract can enforce the contract:
(a)   A beneficiary under an agreement to create a trust can sue upon the agreement,  
though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit. In Khawaja Muhammad v. Hussaini Begum, (1910) 32 All. 410, it was held that where a Mohammedan lady sued her father-in-law to recover arrears of allowance payable to her by him under an agreement between him and her own father in consideration of her marriage, she could enforce the promise in her favour insofar as she was a benefi~iary under the agreement to make a settlement in her favour, and she was claiming as beneficiary under such settlement.
(ii)      An' assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, tittle and interest. But a mere nominee (Le., the person for whose benefit another has insured his own life) cannot sue on the policy because the nominee is not an assignee.
(iii)  In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which place them in the position of beneficiaries under the contract, and can therefore, sue.
(iv)    In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and admits to C the receipt of that amount, then A constitutes himself as the agent of C.
(v)      Whenever the promisor is by his own conduct estopped from denying his liability to perform the promise, the person who is not a party to the contract can sue upon it to make the promisor liable.
(vi)    In cases where a person makes a promise to an individual for the benefit of third party and creates a charge on certain immovable propertyforthe purpose, the third party can enforce the promise "though, he is stranger to the contract.

Kinds of Consideration
Consideration may be:
(a)      Executory or ,future which means that it makes the form of promise to be performed in the future, e.g., an engagement to marry someone; or
(b)     Executed or present in which it is an act or forbearance made or suffered for a promise. In other words, the act constituting consideration is wholly or completely performed, e.g., if A pays today Rs. 100 to a shopkeeper for goods which are promised to be supplied the next day, A has executed his consideration but the shopkeeper is giving executory consideration - a promise to be executed the following day. If the price is paid by the buyer and the goods are delivered by the seller at the same time, consideration is executed by both the parties.
(c)      Past which means a past act or forbearance, that is to say, an act constituting consideration which took place and is complete (wholly executed) before the promise is made.
According to English law, a consideration may be executory or executed but never past. The English law is that past consideration is no consideration. The Indian law recognizes all the above three kinds of consideration.
Rules Governing Consideration
(a)      Every simple contact must be supported by valuable consideration otherwise it is formally void subject to some exceptions.
(b)      Consideration may be an act of abstinence or promise.
(c)      There must be mutuality Le., each party must do or agree to do something. A gratuitous promise as in the case of subscription for charity, is not enforceable. For example, where A promises to subscribe Rs. 5,000 for the repair of a temple, and then refuses to pay, no action can be taken against him.
(d)     Consideration must be real, and not vague, indefinite, or illusory, e;g., a son's promise to "stop being a nuisance" to his father, being vague, is no consideration.
(e)      Although consideration must have some value, it need not be adequate Le., a full return for the promise. Section 25 (Exp. II) clearly provides that "an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate." It is upon the parties to fix their own prices. For example, where A voluntarily agreed to sell his motor car for Rs. 500 to S, it became a valid contract despite the inadequancy of the consideration.
(f)       Consideration must be lawful, e.g., it must not be some illegal act such as paying someone to commit a crime. If the consideration is unlawful, the agreement is void.
(g)      Consideration must be something more than the promisee is already bound to do for the promisor. Thus, an agreement to perform an existing obligation
made with the person to whom the obligation is already owed, is not made for consideration. For example, if a seaman deserts his ship so breaking his contract of service and is induced to return to his duty by the promise for extra wages, he cannot later sue for the extra wages since he has only done what he had already contracted for: Stilk v. Myrick (1809).
When Consideration' not Necessary
The general rule is that an agreement made without consideration is void. But Section 25 of the Indian Contract Act lays down certain exceptions which make a promise without consideration valid and binding. Thus, an agreement without consideration is valid:
1.    If it is expressed in writing and registered and is made out of natural love and
affection between parties standing in a near relation to each other; or
2.    If it is made to compensate a person who has already done something
voluntarily for the promisor, or done something which the promisor was legally
compellable to do; or
3.    If it is a promise in writing and signed by the person to be charged therewith,
or by his agent, to pay a debt barred by the law of limitation.
4.    Besides, according to Section 185 of the Indian Contract Act, consideration
is not required to create an agency.
5.    In the case of gift actually made, no consideration is necessary. There neednot be nearness of relation and even if it is, there need not be any natural love and affection between them.      .
The requirements in the above exceptions are noteworthy. The first one requires written and registered promise. The second may be oral or in writing and the third must be in writing.
Illustrations
             A, for natural love and affection, promises to give his son B Rs. 10,000. A put his
promise to 8 into writing and registered it. This is a contract.
A registered agreement between a husband and his wife to pay his eamings to her is a valid contract, as it is in writing, is registered, is between parties standing in near relation, and is for love and affection (Poonoo Bibi v. Fyaz Buksh, (1874) 15 80m LA. 57).
But where a husband by a registered document, after referring to quarrels and disagreement between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence, it was held that the promise was unenforceable, as it was not made for love and affection (Rajluckhy Deb v. Bhootnath (1900) 4 C.W.N. 488).  .
Whether Gratuitous Promise can be Enforced
       A gratuitous promise to subscribe to a charitable cause cannot be enforced, but if the promises is put to some detriment as a result of his acting on the faith of the promisee and the promisor knew the purpose and also knew that on the faith of the subscription an obligation might be incurred, the promisor would be bound by promise (Kedar Nath v. Gorie Mohan 64).
It may be noted that it is not necessary that the promisor should benefit by the consideration, it is sufficient if the promisee does some act from which a third person is benefited and he would not have done that act but for the promise of the promisor.
For example, Y requests X for loan, who agrees to give loan to Y if S gives guarantee of repayment of the loan. S gives such a guarantee of repayment by Y. Thereupon X gives loan to Y. Here S will be promisor and X the promisee, but from X's action, benefit is derived by Y and not by S. X would not have given the loan to Y had S not given the guarantee of repayment of loan. Thus the benefit conferred on Y by X at the request of S is a sufficient consideration on the part of X as against the promise of S to replay the loan. Alternatively, it may be said that the detriment which X suffered by giving loan to Y at the request of S is sufficient consideration on the part of X in respect of the promise of S to repay the loan.
Consideration therefore, is some detriment to the promisee or some benefit to the promisor. Detriment to one person and benefit to the other are the same things looked from two angles. Ordinarily a promisor is not bound by his promise, unless some consideration is offered by the promisee.
Terms Must be Certain
It follows from what has been explained in relation to offer, acceptance and consideration that to be binding, an agreement must result in a contract. That is to say, the parties must agree on the terms of their contract. They must make their intentions clear in their contract. The Court will not enforce a contract the terms of which are uncertain. Thus, an agreement to agree in the future (a contract to make a contract) will not constitute a binding contract e.g., a promise to pay an actress a salary to be "mutually agreed between us" is not a contract since the salary is not yet agreed: Loftus v. Roberts (1902).
Similarly, where the terms of a final agreement are too vague, the contract will fail for uncertainty. Hence, the terms must be definite or capable of being made definite without further agreement of the parties.
The legal maxim, therefore, is "a contract to contract is not a contract". If you agree "subject to contract" or "subject to agreement", the contract does not come into existence, for there is no definite or unqualified acceptance.
Resume
Thus a contract is always based upon:
(i)        Agreement (consensus ad item) an unqualified acceptance of a definite offer;
(ii)      An intent to create legal obligations; and

(iii)     Consiideration.

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