Essentials of Valid Contract- Part I

In India, the contracts are governed by Indian Contract Act, 1872. This Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir.
CS Shruti Patwardhan

In India, the contracts are governed by Indian Contract Act, 1872. This Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir.

As per Indian Contract Act, 1872, for a Valid Contract there should be presence of all the following essential elements:

Let’s analyse the basic connotation of the essential elements of “Valid Contract”.

a) Offer and acceptance:

The term offer is defined under Section 2(a) of Indian Contract Act, 1872. When a person makes an offer to another it signifies his willingness to do or abstain from doing anything. An offer has to be made to create legal contractual relationship. One who makes an offer is called as “offerer” and one who accepts the offer is called as “offeree”. There must be at least two parties­ i.e. one making the offer and the other accepting it.

When the proposal/offer is assented/consented by another contracting party it is called as “Acceptance”. Offeree must unequivocally accept offer. Offer must be definite and communicated to the person for whom it is made. Invitation to offer, statement of price, and expression of opinion are not considered as “Offer”.

Bhagwandas Goverdhandas Kedia vs M/S. Girdharilal Parshottamdas (1965)

i. Facts:

M/s. Girdharilal Parshottamdas & Co. ( “plaintiffs”) commenced an action in the City Civil Court at Ahmedabad against the Kedia Ginning Factory Oil Mills of Khamgaon (“the defendants” ) on the ground that the defendants had failed to supply cotton seed cake which it agreed to supply by conversation on long distance telephone (oral contract). The plaintiffs submitted that the cause of action for the suit arose at Ahmedabad, because the defendants had offered to sell cotton seed cake which offer was accepted by the plaintiffs at Ahmedabad, and also because the defendants were under the contract bound to supply the goods at Ahmedabad, and the defendants were to receive payment for the goods through a Bank at Ahmedabad. The defendants contended that the plaintiffs had by a message communicated by telephone offered to purchase cotton seed cake. The defendants had accepted the offer at Khamgaon, that under the contract delivery of the goods contracted for was to be made at Khamgaon. Price was also to be paid at Khamgaon and that no part of the cause of action for the suit had arisen within the territorial jurisdiction of the City Civil Court Ahemedabad.

ii. Held:

It was held that the Contract Act does not expressly deal with the place where a contract is made. The conversation over telephone is analogous to the conversation when the parties are in presence of each other, wherein, the negotiations are concluded by instantaneous speech and therefore communication of the acceptance becomes a necessary part of the contract and the exception to the rule on grounds of commercial inexpediency is inapplicable. The contract was therefore made at Khamgaon and not Ahmedabad. In view of the opinion of the majority the appeal was dismissed with costs.

b) Intention to create legal obligation:

The offer has to be made to create legal relationship between at least two different contracting parties. The offer cannot be made to oneself.  An obligation imposes a duty to perform and simultaneously creates a corresponding right to demand performance to whom performance is to be tendered. In case of social or domestic agreements, the usual presumption is that the parties do not intend to create legal relationship.

Example: A jokingly asks B to sell his car at Rs.5000 to C. In this case the offer was not made to create any legal obligation as the intention of A was not to form any legal obligation.

X invites Y for lunch and Y accepts the invitation. In this case if X fails to serve lunch to Y then Y cannot sue X as the offer was accepted to create social agreement/ obligation and not legal obligation.

Balfour v Balfour (1919)

i. Facts :

Mr. Balfour was a civil engineer, and worked for the Government as the Director of Irrigation in Ceylon. Mrs. Balfour was living with him. In 1915, they both came back to England during Mr. Balfour’s leave. But Mrs. Balfour got rheumatic arthritis. Her doctor advised her to stay, because a jungle climate was not conducive to her health. As Mr. Balfour’s boat was about to set sail, he promised her £30 a month until she came back to Ceylon. They drifted apart, and Mr. Balfour wrote saying it was better that they remain apart. In March 1918, Mrs. Balfour sued him to keep up with the monthly £30 payments. In July she got a decree and in December she obtained an order for alimony.

ii. Held:

It was unanimously held by court that there was no enforceable agreement, although the depth of their reasoning differed. There was no intention to create a legally enforceable agreement when the agreement was domestic in nature.

c) Free consent of parties:

The parties to the contract have to willingly execute the obligations under the Contract. In other words the consent of the contracting parties has to be free and not caused due to coercion, undue influence, fraud or misrepresentation.

Example: A offers B to buy his car at Rs.10,00,000/- by putting B’s daughter on the gun-point to permit the transaction. In this case B’s consent obtained by coercion cannot be treated as free consent.

Mannu Singh vs Umadat Pandey (1890)

i. Facts:

In this case the spiritual guru induced his devotee (Plaintiff) to gift his all property to guru.

ii. Held:

It was held by Allahabad High Court that it was not valid contract as it was done due to undue influence of spiritual guru.

Chikham Amiraju vs Chikham Seshamma (1912)

i. Facts:

In this case the husband threatened to commit suicide unless his wife and son gave release deed in respect of their reversionary rights in certain property to his brother.

ii. Held:

It was held by Madras High Court that the transfer of property was not a valid contract as it was executed due to coercion. Thus the transaction was set aside on the grounds of coercion.

d) Competent Parties:

According to Section 11 of Indian Contract Act, 1872 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 contacting by any law to which he is subject. Thus the contracting parties must have legal capacity to bind each other. A minor, lunatic or insolvent cannot enter into an agreement. Agreement with minor is treated as void ab initio i.e. invalid from the beginning.

Example: X a minor borrowed Rs 8,000/- from Y and executed mortgage of his property in favour of the lender. This was not a valid contract because X is not competent to contract. Therefore, the mortgage was not valid and the money advanced to minor could not be recovered.

Mohori Bibee vs. Dharmodas Ghose (1903)

i. Facts :

Dharmodas Ghose (plaintiff), while he was a minor, mortgaged his property in favor of the Brahmo Dutt, who was a money lender to secure a loan of Rs.20,000. At the time of transaction, the attorney of the defendant was fully aware that the plaintiff was incompetent to contract. Dharmodas paid only Rs. 8000 and refused to return rest of the money. With his mother as next friend, Dharmodas commenced an action against Brahmo Dutt, stating that at the time of contract he was a minor, so the contract is void and he is not bound to return the money. The Court granted relief to the plaintiff. An Appeal was filed but the same was dismissed by the Appellate Court. After this appeal Brahmo Dutt died. An appeal was filed in the Calcutta High Court by his executors.

ii. Held:

It was held by court that unless the parties are competent to contract, no agreement is contract and hence, is not enforceable by law and is void. Since minor is not competent to contract, every such agreement entered into by a minor is void ab initio. The plaintiff was a minor at the time of making the agreement was known to the defendant’s attorney, therefore, the law of estoppel as stated in Section 115 of the Indian Evidence Act, was not applicable to the case, where the statement (about age) was made to a person who knew the real facts and was not misled by the untrue statement. It was further observed that Section 64 was applicable to the case of a voidable contract. Minor’s agreement being void, Section 64 was not applicable to the case and therefore the minor could not be asked to pay back the loan amount.

In this article we have analysed four essential elements of Valid Contract. We will analyse other elements of “Valid Contract” shortly.

to be continued….

(In case of any inconsistency or clarification/ suggestions, Author can be contacted for further details at csshruti2007@gmail.com)

Disclaimer: The views and opinions expressed in this article are those of the author. The legal information is not advice and should not be treated as such.

Categories: Corporate Law

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