Law of Contracts : Elements, Purpose and FAQs

What is a Contract?

Indian Contract Act, 1872 frames the contracts or agreements between different parties. An agreement involving legal enforceability is said to be a contract. It specifies the responsibilities of the parties concerned. In every contract, the offeror makes an offer to enter into a contract with the offeree. The offeror agrees to do something in particular, and if the offeror accepts the offer, a contract is made. The contract itself must prove to have certain elements. 

Meaning of ‘Contract’ as per The Indian Contract Act, 1872

The Indian Contract Act, 1872 defines the term “Contract” under its section 2(h) as “An agreement enforceable by law”. In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land. 

Essential Elements of a Valid Contract

Contract is the heart of most professional relationships. A contract is legally enforceable which ensures that if one party fails to do what he or she has agreed to do, the other party can then proceed to the court as a result of violation of the terms of the contract. However, a contract can be considered valid only if it satisfies certain essential terms and conditions:

• Offer and Acceptance: In order to constitute a valid contract, there must be at least two parties, i.e., one who proposes the offer and the other who accepts the same. Hence, the acceptance of such a proposal is said to form an agreement.
• Free Consent: This ensures that the parties to the contract must agree on the same thing in the same sense. Free consent implies no influence of coercion, undue influence, fraud, misrepresentation and mistake.
• Competent Parties: This implies the party’s ability to enter into a contract. The Indian Contract Act specifically mentions who is capable of entering into a contract, such as a person of sound mind, a person who has attained the age of majority and a person who is not prohibited by law.
• Lawful Consideration: Consideration implies when both parties agree to do or not to do something. In addition, it is very important for consideration to be lawful otherwise the contract shall be declared void.
• Intention to create legal relations: Considering intention, it must be in sync with creating legal relations as it is highly required to accept the legal consequence of entering into an agreement.
• Contract is not expressly declared null and void: The provisions of the act mention unlawful agreements that are forbidden by the law. If the acts impact any injury to a person or a property, it shall be void in nature.

What is the Purpose of Contracts in Business?

The contract is a written agreement that is agreed upon by all the participants, the employer and the employee. The main objective behind the contract is to formalize new relationships and outline the various legal obligations each party owes to the other. According to the following mentioned factors, contracts can be considered extremely important :

• Detailed proof of information: The main purpose behind the contract is to document the entire specifics that have been decided by both parties through mutual consent. Such information will serve as a legal fact and are very much relevant for business deals.
• Prevention of miscommunication and misunderstanding: The preparations of a contract are mandated in order to deter situations of miscommunication and misunderstanding. It is very important for both parties to read and obey the terms and conditions mentioned in the contract in a negotiable form in order to avoid future conflicts.
• Offers protection: When the agreement is legal in nature, it provides security between the parties since it explicitly mentions the contract tenure and collection of obligations. The contract acts as legitimate proof in cases where parties violate the terms of the contract.
• Ensures confidentiality: Since the contract covers sensitive information, there is a requirement for a Non-Disclosure Agreement (NDA). If the terms are disclosed by any party, in such a case, they may be liable for violation of contract law.
• Works as a corporate record: The contract in written form shall be the relevant document since it will describe in detail the duty each party has to the other. As a result of this, contracts act as a useful document to remind the parties of the responsibilities that they owe.

Conclusion

Hence, for a contract to be legally valid all the essential elements should be present. The contract acts as a shield for workers where employers fail to abide by the terms and conditions of the contract by making false promises to the employees and misguiding them. These essentials are very important from a contractual point of view however, in addition to it, it also protects the basic fundamental rights of people whose interests and rights might have been violated.

Frequently Asked Questions (FAQs)

1. What are Social Agreements? Are they legally binding?

Answer:

A social agreement is an agreement that does not give rise to legal enforceability or legal consequences. In case of a breach in social agreements, parties cannot go to the law courts for initiating a legal proceeding.

2. What is e-Contract?

Answer:

Electronic contracts are not paper based contracts but are in electronic form. Like every other contract, e-Contract is also required to fulfill the essential elements of a contract laid down in Indian Contract Act, 1872.

3. What are the criteria for a party to be competent for a contract according to section 11 of the Indian Contract Act, 1872?

Answer:

The major criteria for a person to be eligible to enter into a contract are :

• The person must have attained the age of majority, i.e.. 18 years or more
• The person must be of sound mind
• The person must not be prohibited by law to enter into contract

4. Mr Rohit tells Miss Priya that Mr Rahul expressed his willingness to marry Miss Priya on 25th December, 2015. Is this a valid contract? Comment.

Answer:

As per section 10 of Indian Contract Act, 1872, the essential conditions of communication of offer from one party to another must exist. In the given case, there was no communication between Mr. Rahul and Miss Priya. Hence, this is not a valid contract nor an agreement.

5. What constitutes a ‘Breach of Contract’?

Answer:

When a party denies to perform the duties mentioned in the contract then it would amount to breach of a contract, for which parties can be made liable.

6. What compensations are available to the party suffering from such a breach?

Answer:

As per the provisions of the contract, if a sum is mentioned in the contract as the amount to be paid in case of such a breach, the party complaining for the breach is entitled to receive compensation from the party at fault.

7. When are contracts said to be completed: when the signing party submit the signed copy or the receiving party receive the signed copy of the contract?

Answer:

Contracts are said to be completed the moment the signing party signs the copy in the form of acceptance and dispatches them to the receiver.