Agreements and contracts are two different things. It is important to know first what constitutes a contract and what constitutes an agreement. We will then study which agreements are contracts, their distinction different types of agreements and contracts.
Essentials Elements of a Valid Contract:
Different sections of the Indian Contract Act lay down the essential elements of the contract. They are as under:
1. Proposal and acceptance
2. Consideration – lawful consideration with a lawful object
3. Capacity of parties to contract – competent parties
4. Free consent
5. An agreement must not be expressly declared to be void.
6. Writing and Registration if so required by law
7. Legal relationship
9. Possibility of performance
10. Enforceable by law.
Proposal and Acceptance:
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.
The first step towards creating a contract is that one person shall signify or make a proposal or offer to the other, with a view to obtaining the acceptance of that another person to whom the offer is made. A proposal when accepted becomes a promise.
When the person to whom the proposal is made signifies his assent thereof the proposal is said to be accepted. A proposal when accepted becomes a promise.
Consideration: 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 doing something such act or abstinence or promise is called a consideration for the promise.
Every contract consist of two parts – (1) Promise and (2) Consideration for the promise. A promise is often made in return for a promise for example a buyer realizes the goods for the price. Price for goods is therefore, consideration here. Consideration is the cause of the promise. It is the most essential element of the contract. As a general rule, agreement without consideration is void. The promise for a promise in return is consideration.
A agrees to sell his house to B for Rs 10,000. Here A’s promise to sell his house is for B’s consideration to pay Rs 10,000. Similarly B’s promise to pay Rs 10,000 is for A’s consideration to sell his house to B.
An agreement is a contract, only if it is made for a lawful consideration and with a lawful object.
The consideration or object of an agreements is unlawful if —
(1) it is forbidden by law; or
(2) is of such a nature that, if permitted it would defeat the provisions of any laws
(3) is fraudulent; or
(4) involves or implies injury to the person or property of another
(5) the court regards it as immoral or opposed to public policy
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement if which the object or consideration is unlawful is void.
Capacity of parties to contract – Competent parties:
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.
Parties to a contract must give their consent. The parties must be ad idem, for example both the parties must agree upon the same thing in the same sense. Two or more persons are said to consent when they agree upon the same thing in the same sense. Mere consent is not enough. Consent of parties must be free, for example it must not have been obtained (1) coercion, (2) undue influence, (3) fraud, (4) misrepresentation, or (5) mistake.
An agreement must not be expressly declared to be void
A void agreement is not enforceable by law (Sec 2(g)). It has no legal sanctity. It does not give rise to any rights and obligations. Various agreements are expressly declared void under the Act.
Writing and registration:
Oral contract is a valid contact. However the contract must be in writing and registered, if so required by any law, for example, gift, mortgage, sale, lease under the Transfer of Property Act 1882, Memorandum and Articles of Association of a Company under the Indian Companies Act, contracts under sub sections (10 and 3) of section 25 of the Indian Contract Act, etc. Documents specified under section 17 of the Indian Registration Act, 1908, are required to be registered.
No particular form of writing is required to constitute a contract. Intentions of the parties to enter into a particular contract and to give effect to it must be manifest in it, in order to constitute a valid contract.
Agreements which create legal relations or are capable of creating legal relations are contracts, for example, an invitation to a dinner does not create any legal relation and therefore is not a contract.
The terms of a contract should be clear. In other words, the contract must not be vague. Contracts which are vague cannot be enforced.
Possibility of performance:
Contracts based on impossibility of performance are not valid. The contracts must be capable of being performed.
Enforceable by Law:
A contract in order to be valid must be enforceable by law which element distinguishes agreement and contract. It is enforceable by law it is contract otherwise it is an agreement. The aggrieved party should be able to obtain relief through law in the event of breach of contract. An agreement can also be inferred from correspondence exchanged between the parties.