Formation of Contract

Introduction

A contract may be defined as an agreement between two or more parties that is intended to be legally binding. Salmond defines a contract as “an agreement creating and defining obligations between the parties.” Sir William Anson observes, a contract is an agreement enforceable by law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of other or others.

Section 2(h) of the Indian Contract Act 1872 defines contract as an agreement enforceable by law. For a contract to exist, usually one party must have made an offer, and the other must have accepted it. Once acceptance takes, a contact usually becomes binding on both the parties.

These definitions divide themselves into two parts

  1. There must be an agreement.
  2. The agreement must be enforceable by law and the agreement enforceable must be coupled with obligation and the obligation has its source in law.

Modes of Formation of Contract: There are three modes of formation of contract, i.e.

  1. By mutual negotiations: Mutual negotiation means agreement and then contract. The main idea behind this mode of formation of contract is Laissez Faire or freedom of contract.
  2. By standard form: In this mode of formation of contact there is a pre – defined contract by the offeror and the person to whom is made accepts it by signing. Here there is inequality between the parties. The acceptor is at a disadvantage.
  3. By promissory estoppel: Promissory estoppel is a promise made by a person or an assurance made by a person to another on the basis of which that other person changes his position. Then that person who has made promise cannot escape by saying that the other requirements of a valid contract is absent.

To constitute contract there must be

  1. Two Parties: There must be two parties to form a contract. A person cannot enter into a contract with himself. The person who making the proposal is called the “promisor” and the person accepting the proposal is called “promise”.
  2. Agreement:According to Section 2(e) of ICA every promise and every set of promises, forming the consideration for each other, is an agreement.An agreement is constituted by means of an offer and a binding acceptance of the offer. Thus, an agreement occurs when two minds meet for a common purpose, i.e. doing same thing in the same sense at the same time it is known as consensus ad idem. For example, if A says to B that he is willing to sell his house for Rs 25, 00,000 and B gives his assent to the offer of A, the agreement will come into existence.
  3. Obligation: agreement enforceable by law is contract. An agreement must impose an obligation upon the parties entering into a contract. An agreement to a contract should give rise to some legal obligation i.e. obligation which is enforceable at law.For example a father promising his son to go out for dinner is not a contract as it does not create a legal obligation

Essential Elements of a Valid Contract:

The essentials of a valid contract are inherent in Section 10 of the Indian Contract Act 1872. An agreement to be enforceable by law must satisfy the essentials of a valid contract. According to Section 10 of the Act “All agreements are contracts, if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and not hereby expressly declared to be void.

Essentials are

  • Offer and Acceptance
  • Intention to create legal relationship
  • Free consent
  • Capacity to Contract
  • Lawful consideration
  • Lawful object
  • Not expressly declared to be void
  • Certainty and possibility of Performance
  • Compliance with legal formalities.
  1. Offer and Acceptance:

A contract is formed when an offer by one party is accepted by the other party. It is also called agreement. One party, the offeror, makes an offer which once accepted by another party, the offeree, creates a binding contract. An offer need not to be given to a specific person. It may be given to a person, a class of people, pr to the whole world.

  1. Intention to create Legal relationship:

There must be an intention among the parties to create legal relationship. If such intention is not present, there is no contract between the parties in case of social or domestic agreements the usual presumption is that the parties do not intend to create legal relationship but in commercial or business agreements the usual presumption is that the parties intend to create legal relationship unless otherwise agreed upon.

The case of Balfour vs. Balfour (1919) 2KB 571 has become well known illustration of this principle. McGregor vs. McGregor (1888) 21 QBD 424 is an early illustration of a binding engagement between a husband and wife. Here a husband and wife withdrew their complaints under an agreement by which the husband promised to pay her an allowance and the wife refrain from pledging his credit. The agreement was held to be a binding contract.

The test of contractual intention is objective, not subjective. In Merrit vs. Merrit (1970) 1WLR 121 an agreement to transfer to the wife the beneficial ownership of the matrimonial home made at the time of separation was held to be binding.

  1. Free Consent :

Agreement must have been made with the free consent of the parties, if consent is not free: the contact becomes voidable. The expression “free consent” is defined in Section 14:

Consent is said to be free when it is not caused by:-

Coercion, undue influence, fraud, misrepresentation, mistake.

  1. Capacity of Parties.

The parties to an agreement must be competent to contract. In other words they must be capable of entering into a contract. According to section11 of the Indian contract “every person is competent to contract who is the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject”.

  1. The Agreement must be made for lawful consideration

To constitute a valid contract, it is essential that agreement is made for lawful consideration. According to sec 2(d) of the act, When at the desire of the promisor, the promises 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. . According to section 23 of the Act, if the Agreement is not for a lawful consideration the agreement is void.

  1. The Agreement must be made for Lawful Object:

The object of agreement must be lawful otherwise the Agreement becomes void. The agreement must not be contrary to the provisions of law or has expressly forbidden by law or which is against public policy or immoral. All agreement which are unlawful cannot be enforced by the law.

  1. Not expressly declared void:

The agreement should not from amongst such agreement which have been specifically declared void as per sec 26, 27, 28, 29, 30 and 56 of the act.

  1. Certainty and possibility of performance:

The agreement between the parties must be certain. It should not be vague or indefinite. If it is vague and the determination of its terms and condition is not possible, it is not a contract and cannot be enforced. An agreement to do an impossible act cannot be a contract and cannot be enforced.

  1. Compliance with Legal Formalities:

If any legal formalities of writing registration etc. which are necessary by law, these must be satisfied in the absence of these formalities, agreements will not be enforceable in the court of law.

 

Different types of Contract:

Contract on the basis of creation.

  1. Express Contract: Express contract are one which is made by words spoken or written. For example A says to B, will you buy a house for Rs. 25, 00,000? B says to A, I am ready to buy the house. It is an express contract.
  2. Implied Contract: an implied contract is one which is inferred from the conduct of a person or the circumstances of the case. It is made otherwise than by words spoken or written. For example if, A entered into a restaurant and orders food. His act shows that he has entered into an implied contract that he will pay the specified amount of the food to the owner of the restaurant for providing him the desired food.

Contract on the basis of Execution

  1. Executed Contracts: When both the parties to the contract have fulfilled their respective obligation, contract is said to be executed.
  2. Executory Contract: When one of the parties to the contract have still to perform certain things in future, the contract is termed as an executory contract. For example X offers to sell his car of to Z for Rs 5lakh. Z accepts X offer. If the car has not yet been delivered by X and the price has not been paid by Z, it is an Executory Contract.

Contract on the basis of Enforceability:

  1. Valid Contract: A contract which satisfies all the terms and conditions prescribed by the law is a valid contract.
  2. Void Contract: According to Section 2(j) of the Indian Contract Act 1872, a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. In other words, a contract which is valid when entered into but subsequently becomes void due to impossibility of performance or illegality for some other reason.
  3. Void Agreement: According to Section 2(g), an agreement not enforceable by law is void. Such agreements are void-ab-initio which means contract which are unenforceable right from the beginning. For example agreement with a minor or unsound person is void –ab- initio.
  4. Voidable Contract: Contract which can be set aside at the option of the aggrieved party is voidable contract. According to Section2 (i) of the ICA 1872, an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.

 

 

 

 

 

 

 

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