The world today enters into more contracts than it has ever before and no trend shows that it will ever be decreasing in the future. Contracts have become a much more integral part of our lives be it admitting someone into a hospital, buying a car, renting a room in a hotel, leasing a land, flying on an aeroplane, opening an account in a bank, taking admission in a school or college or using insurance products while purchasing goods of value. In order to make anything the most fundamental requirement is to understand the essentials of making it. The situation with regards to making a contract is no different at all. A contract is required to have these essentials as per the law that governs India with regards to contract formations and its performances, the Indian Contract Act, 1872.
Offer and its Acceptance
The word ‘offer’ is not expressly mentioned in the act. Section 2(a) of the act mentions what a ‘proposal’ is. A proposal is being made when a person tells someone else that the person is willing to do or not do something with a motive of getting the assent of the person being told so.
A proposal is an Indian equivalent of what an offer is in the English law. In order to make a contract, one of the parties has to make a proposal with regards to some subject matter. That is the first step of making a contract.
Section 2(b) of the act defines acceptance. The acceptance has to be made by the person to whom the proposal is being made. So in order to make a contract, acceptance of the proposal has to be made without any condition. The made proposal has to be accepted in the way it is.
Parties wanting to make a contract should be having a very clear intention of making a legal relationship. This helps in differentiating between social or domestic agreements. Agreements such as a father’s promise to give his son pocket money or to go and have dinner with a friend are not with the intention to make a contract.
So it is important to understand that when a proposal is made and accepted there should be an intention to make a legal relationship. Making a legal relationship means that if the contract is avoided by either of the sides then the other party gets some rights on the basis of which they can go to court.
Consideration of a contract is said to be the subject matter which the person making the proposal (promisor) tries to get the assent of the acceptor or the promisee. The proposal in which the promisor promises to do or abstain from doing something has to be lawful.
By lawful, it is meant that the consideration should not be explicitly illegal. For ex, A promises to sell slaves to B. This is not a lawful consideration because in India it is not allowed to trade people as slaves.
For a contract to be valid it is a must that it should have consideration. A contract without consideration is void and does not hold merit in a court of law. Section 25 of the act states that there are some conditions under which only can contracts be valid without consideration.
Capacity of Parties
Section 10 of the act requires people getting into a contract to be competent. Everyone cannot make a legally sound contract. Section 11 of the act speaks of who is competent to make a contract or be a party to it.
As per the act a person who fulfils the following categories are competent to contract:
- Has attained the age of majority as per the law to which he is a subject.
- Is not of unsound mind.
- Is not disqualified from becoming a party to a contract by any other law operational at the time making the contract.
Therefore a minor, a person who is not in a proper mental condition and someone who is restricted by any other law cannot be a party to a contract. The phrase ‘capacity of parties’ means that if someone wishes to make a legally sound contract then that person should not fall under these three categories. Section 10 and 11 of the act states that parties can only make a contract if they are competent as per the law but it does not provide a way out if a minor gets into a contract.
To form a contract it is an absolute necessity that the parties who are making the contract are freely consenting to the terms of the contract. The proposal being made and the acceptance of it should not be done under any duress or pressure from anyone else. It is important because otherwise, it would be unfair if a party is asked to fulfil the terms of a contract which he did not consent to be a part of.
Section 13 of the act defines what consent is and section 14 states 5 situations under which if a party enters a contract, then it will not be accepted as free consent. These 5 situations are further explained in sections 15 (coercion), 16 (undue influence), 17 (fraud), 18 (misrepresentation), 20, 21 and 22 (mistake).
The act provides various illustrations under each of these situations which help in ascertaining what exactly is meant by coercion, undue influence, fraud, misrepresentation and mistake. Free consent is one of the most or probably the most important essential of forming a contract because this induces the element of malice in the formation of contracts. These situations hold one party above the other and can, therefore, be used by that party to overpower the other party. This essentially helps in holding fairness among the parties that enter into a contract. Therefore this is the most important essential of forming a contract.
Arbitrariness is one of the things that are not allowed when it comes to making a contract. The terms of the contract should be such that a proper understanding can be created from reading it. It a proposal is being made it should be clearly understandable and not bring up questions and doubts in the mind of the promisee.
For example, A promises to B to give him oil. This contract is not a contract at all because on reading it, there arise questions such as what time of oil is to be given, what quantity to be given, what is the price he will give it for? A contract that gives rise to these questions is not a proper contract. A simple reason being that A might have a different understanding and B can have a completely different one. Let’s say when A made the proposal he meant that he will 50 litres of rice bran oil to B for Rs.4000 but B understood that A promises to give him 2 litres of mustard oil for Rs.280.
Section 29 of the act speaks of uncertain agreements. It says that agreements which cannot be understood become void. In other words, those agreements do not hold merit in a court of law.
Possibility of Performance
Any contract that is made should be made with the aim of actually implementing it; therefore practicality is an important aspect that should be kept in mind while forming a contract. Possibility of performing a contract is more of a common sense that should be kept in mind while writing out a contract.
For example, A agrees to use a kite to take down an aeroplane for his girlfriend B. A simple prima facie understanding of this agreement will make the reader question the mental soundness of A because it is not something which is possible, given the physics known to man. This agreement cannot become a contract because it is impossible to take down an aeroplane with a kite. So if B takes A to court, if he fails to uphold the terms of the agreement it will not be enforceable because of the impossibility of performance.
Section 56 of the act speaks of agreements that are impossible to be performed. The section is divided into (a) contracts to do an act afterwards becoming impossible or unlawful and (b) Compensation for loss through non-performance of the act known to be impossible or unlawful. Possibility of performance also means that the consideration in the agreement should not be something that is explicitly forbidden under any act of the government.