ESSENTIALS OF A

VALID CONTRACT

BUSINESS
LAW
ASSIGNMENT

Submitted by : Aswin S Pradeep

2016031

1st MBA

AIMIT

Submitted to : Rajani Suresh

MBA Dept.

AIMIT
CONTRACT

A contract means when two parties put into writing an agreement which contains
certain obligations (promises) which are to be performed by such parties, and when such
written agreement becomes enforceable by law, it becomes a Contract. Enforceable by law
means when the agreement has acquired the force of law only for those who are a party to it
and a violation of those obligations would attract legal action, including repudiation of the
entire contract.

Contract Act defines a Contract as “An agreement which is enforceable by Law”. An

Agreement is a settlement between two parties, which contains obligations or promises which
both parties need to fulfil. When such an agreement is made binding by Law it becomes a
Contract.

In simple words,

Contract = Agreement + Enforceability

ESSENTIALS OF A VALID CONTRACT

Most people assume that once one party has made an offer and the other party has accepted, a
contract has been formed. However, there is more to a valid contract than this, and it has
nothing to do with the formalities of a contract. A contract can be formal or informal or
written
The six Elements of valid contract are :

1. Acceptance 
Acceptance is an agreement to the specific terms of an offer. Offers do not have to be
accepted through words; they can be accepted through conduct. If someone purports
to accept an offer but accepts on different terms than that of the original offer, that
will constitute a counter-offer rather than an acceptance.   The acceptance must
normally be communicated to the offer or – silence cannot be treated as an
acceptance.    In exceptional circumstances (for example, where the offeree has been
given terms of dealing and the offeree proceeds with the dealing without formally
communicating acceptance) silence may be treated as an acceptance.
2. Intention to Create Legal Relations
  An agreement does not need to be worked out in meticulous detail to become a
contract. However, an agreement may be incomplete where the parties have agreed on
essential matters of detail but have not agreed on other important points.    The
question of whether the parties have reached an agreement is normally tested by
asking whether a party has made an offer which the other has accepted. Agreements
may not give rise to a binding contract if they are incomplete or not sufficiently
certain. There will usually be no contract if the parties agree ‘subject to contract’ but
never quite agree on the terms of the contract.   If the agreement is a stepping stone
for a future contract or is an agreement to agree, then the agreement might be void for
a lack of intention to create legal relations. Moreover, a domestic contract is presumed
to not be legally binding in common law jurisdictions.
3. OFFER
Offer and acceptance analysis form the basis of contract law and the formation of a
valid contract. Developed in the 19th century, the offer and acceptance formula
identify the point of formation, where the parties are of 'one mind'.   An offer is a
proposal constituting specific terms for one party to enter into an agreement with
another party, which is essential to the formation of an enforceable contract. 
It is important to distinguish between an offer and an invitation to treat. A valid
contract requires an offer to be accepted, whereas an invitation to treat is not an
essential element to a contract.   Whilst an offer can be accepted, an invitation to treat
is merely an invitation or willingness to negotiate that one party makes to the other.
Again, this is not an offer as it does not show a willingness to be bound on specific
terms once accepted. An invitation to treat gives the party who issues the invitation
control over if the contract should be made or when it should be made. An invitation
to treat only constitutes an offer when the wordings are clear, definite and explicit,
which leaves nothing open for further negotiation
Examples of an 'Offer' and an 'Invitation to Treat'   In general, an invitation to tender
is an invitation to treat. However, if the invitation is addressed to everyone known to
the inviter and the invitation contains an agreement to accept the most competitive bid
or states that at least one of the tenders will be considered, then that invitation can be
regarded as an offer.
4. Capacity of parties
As per, section 10 of the contract act, an agreement is a contract if it is made among
other essentials, by free consent of parties who are competent to contract. People who
are of the age of majority (i.e., above 18 years of age) and are of sane mind, and are
not disqualified to contract by any law to which such person is subjected to, are
competent to contract.
Thus, a minor or a person with an unsound mind is not competent to contract or if
such person has been barred from contraction by laws to which he is subjected. In
such a case the contract is void.

Minor: A contract, entered into with or by a minor is void-ab-initio, i.e. no obligation

shall arise since its inception.
A contract during the minority age of a party cannot be subsequently ratified after
attaining the age of majority, this is because every contract needs separate
consideration. However, if a contract is made for the benefit of a minor, then it is a
valid contract.
Further, a minor can plead his minority as a defense in a suit, thus the rule of
promissory estoppel is not applicable.
Doctrine of Estoppel: Estoppel is principle in law, which prevents a person from
taking a different stance, from what he had when he had entered into a contract. Thus
Promissory estoppel means when a party (A) made a promise to B that he will
purchase tomatoes grown on his farm and B accordingly grows tomatoes on the belief
that A will purchase them. Now promissory estoppel prevents A form denying that he
did not promise any such thing, or in other words it prevents him from going back on
his promise and not purchasing the tomatoes.
In the real world it applies to cases where the promisor attempts to evade any promise
made by him. For instance, in the above example, if A afterward came to B and said
that he would not be able to purchase tomatoes because he got a better deal, then
doctrine of promissory estoppel will stop him from taking this stance, because B has
acted on A promise.
Elements of promissory estoppel, in Indian jurisprudence can be understood from
apex court’s ruling in MP Sugar Mills Co. Ltd. V. State of Uttar Pradesh. It said that
 where one party (promisor) in clear and unequivocal words or conduct, promised
something which is either intended to create legal relations or may create legal
relations in future and on that promise the other party has acted upon then the promise
would be binding on the party making it and he would not be entitled to go back upon
it, and his would be so irrespective whether there is any pre-existing relationship
between the parties or not.

So, in case of a minor, he cannot be forced to fulfil the promise, which he made when
he was in minority and estoppel which usually prevents a promisor from going back
on a promise will not apply. This is because a minor being incompetent to contract is
incapable of incurring any liability.
Unsound Mind: According to section 12 a person is said to be of sound mind if at the
time of the making of the contract he is capable of understanding it (understanding its
terms) and is capable of forming a rational opinion about the effects thereof upon his
interests (i.e. capable of understanding its consequences).
A person need not be lunatic, he should be simply incapable of understanding the
consequences of the contract. Thus, a person who does not understand a particular
trade or business, and despite that enters into a contract relating to the business, in
such cases the court will hold the person to be of unsound mind.
Disqualified to contract means a person not permitted to enter into a contract. E.g.
alien enemy, convicts of a crime, an insolvent person
All these conditions must be fulfilled concurrently.

5. Consideration

  Consideration constitutes something of benefit to the person who has the obligation
or who makes a promise to do something (the promisor). It can also be something
detrimental to the person who wants to enforce the obligation, or who has the benefit
of the promise (the promise). There is no need for an 'adequate' value: if some value is
given for the promise, it would be sufficient consideration. Where the consideration of
one party is not absolutely clear, the agreement will generally include language such
as ‘FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is
 hereby acknowledged’ in the recital.  Alternatively, one can make the document in a
deed without the need for consideration.

6. Certainty

A valid contract requires reasonable certainty for the essential terms. If the parties fail
to reach an agreement on the essential terms with reasonable certainty, then the
agreement might be void even if all other essential elements are present.
What is an essential term?
The definition of essential terms depends on what the parties have set out to achieve.
In general, under common law, there are two essential terms: (I) consideration or
price of a bargain, and (ii) price to be paid for the promised obligation.
Whether the term is essential is determined by asking whether the term is so important
and fundamental to the contract that any breach of such a term will justify termination.
For commercial contracts, provided that the parties have shown an intention to be legally
bound, the court can fill in the gaps through five special rules:
• constructing an essential term by referencing the agreed mechanism,
• constructing an essential term by referencing the contract as a whole
• imply an essential term by referencing to prior course of dealings
• imply an essential term by referencing the parties' post-contractual conduct
• imply an essential term by law.

7. Writing and Registration:

According to Contract Act, a contract may be oral or in writing. Although in practice, it is

always in the interest of the parties that the contract should be made in writing so that it may
be convenient to prove in the court. However, a verbal contract if proved in the court will not
be considered invalid merely on the ground that it not in writing. It is essential for the validity
of a contact that it must be in writing signed and attested by witness and registered if so
required by the law.

Example:
1. A Verbally promises to sell his book to y for Rs.200 it is a valid contract because the law
does not require it to be in writing.
2. A verbally promises to sell his house to B it is not a valid contract because the law requires
that the contract of immovable property must be in writing.