A contract is part of our everyday life. We form numerous contracts every day; when buying vegetables from a vegetable lender, or joining a new company and signing an employment contract.
Our everyday lives are filled with these kinds of contracts. Therefore, it is essential that we know the usage and the elements of a contract as it helps with our day-to-day life.
Hence, under this topic, the process of making a contract shall be discussed. In this process of formation of a contract, there are certain essentials that are a requirement. We shall briefly discuss the essentials of the formation of a contract below:
To understand the essential elements of the formation of a contract, one is required to know the meaning of a contract and why is it required?
WHAT IS A CONTRACT?
A contract refers to an agreement enforceable by law. To elaborate further, a contract is a spoken or written agreement between two or more parties that is lawfully enforceable.
But not all agreements are contracts.
A legal contract creates obligations and provides rights for each of the parties involved. If anyone violates the agreement, it results in a breach of the contract. Legal contracts can be written, verbal, or a mix of the two. While they are all legally binding, oral agreements are harder to prove in case of a dispute as it may not be possible to determine the rights and obligations of each party.
TYPES OF CONTRACTS
There are various kinds of contracts that take place. Although they come in all types of forms, employment contracts are most commonly formed. The following are all the types of contracts that are formed:
Unilateral or Bilateral
A unilateral contract is also known as a one-sided contract. It simply means a contract in which only one party has to fulfill its conditions.
Illustration: Anil promises to pay Rs. 500 to anyone who finds his lost cellphone. B finds it and returns it to Anil. From the time B found the cellphone, the contract came into existence. Now Anil has to perform his promise, i.e. the payment of Rs. 500.
On the other hand, in a bilateral contract, both parties are liable to perform their obligations mentioned in the contract. It is also known as a two-sided contract.
Illustration: Ajay promises to sell his car to Vijay for Rs. 1 lakh and agrees to deliver the car on receipt of the payment by the end of the month. The contract is bilateral as both the parties have exchanged a promise to be performed within a fixed period of time.
Implied or Expressed
An implied contract refers to a contract that is formed by the conduct of the parties rather than the words of the parties.
Illustration: A stops a cab by waving his hand and taking his seat. There is an implied contract that A will pay the prescribed fare to the cab driver.
On the other hand, an expressed contract is formed by a verbal conversation between the parties or by written communication.
Illustration: A says to B ‘will you purchase my motorcycle for Rs.30,000?” B says to A “Yes”. They form an expressed contract.
Under this type of contract, the obligations and rights arise by the operation of law rather than the agreement between the parties.
Illustration: If A leaves his goods at B’s shop by mistake, then it is up to B to return the goods or to compensate for the price of the goods.
It refers to a contract formed through digital mode.
Illustration: Online shopping
As the name suggests, under this contract, both the parties have performed their obligations.
Illustration: A forms a contract with B to buy a car from B by paying cash, and B instantly delivers his car.
In this contract, both parties are yet to fulfill their obligations.
Illustration: A contracts with B to sell his car for Rs. 2lakh. But A is still to deliver the car and B is yet to pay the price.
It refers to a contract that ceases to be lawfully enforceable.
Illustration: A agrees to sell 10 kilos of drugs to B. But the contract is void as selling drugs is illegal. Here the contract is void due to the unlawful objective of the parties.
Section 2(i) of the Indian Contract Act defines an agreement that is enforceable by law at the option of one or more parties but not at the option of the other or others as a voidable contract.
A voidable contract gives the right to the loss-bearing party to not perform their obligations to the contract.
This right might arise from committing Coercion, Fraud, misrepresentation, and undue influence by one of the parties to bring the contract in place. Hence, it gives the power to the other party to drop out of the contract.
A contract that cannot be enforced by a court of law is known as an illegal contract. It is also a void contract. These contracts are usually forbidden as they are based on immoral grounds.
Illustration: supari contracts.
ESSENTIAL ELEMENTS OF A CONTRACT
In a matter of dispute, only a contract that was legally binding will stand a chance to be decided upon by the court of law.
Therefore, for a contract to be binding, there are certain conditions that must be performed by both the parties involved.
The conditions are as follows:
The offer is the first step in the formation of a contract. A contract begins only when the other party accepts the offer of the proposer. An offer is a promise consisting of terms and conditions that are to be performed by both parties. The proposal depicts the willingness of the parties to enter into negotiations. It is an invitation to the other party to form a contract.
The party that makes the offer is known as the ‘offerer’ while the receiving party is the offeree.
In matters of dispute, it is difficult to determine the existence of an offer. Therefore, it is essential that a reasonable offer is made, one that the receiving party is able to believe the offer.
ESSENTIALS OF AN OFFER:
Often people can get confused between an offer and an invitation to offer. For example, an advertisement is more of an invitation to offer than an offer to enter a contract.
The following are the important factors that should be present in an offer:
● The offer must be direct and simple to comprehend.
● It must be communicated directly to the offeree.
● The offer must be of a give and take nature, meaning that there must be a service or an asset being provided to the receiving party.
● In an offer, the intention to enter into a contract must be present.
● There shall be no uncertainties present in an offer.
The party being proposed the offer can respond to the offer by either rejecting it or accepting it. Renegotiations of the offer can also take place if both parties intend to do the same.
The second step after the proposal of the offer is accepting the offer. Acceptance under contract law refers to the unconditional agreement to the terms of an offer.
For an acceptance to be valid, it must be made in the manner requested by the offering party. It may be expressed or implied in nature.
ESSENTIALS OF ACCEPTANCE:
● Accepting the offer unconditionally: The party being offered the contract needs to accept the terms of the contract as it is. If any alterations take place, the contract is now not the same, and hence, is called a counteroffer.
● The acceptance must be communicated: The party has to communicate the acceptance of the offer to the other party. It can be either in written or verbal form.
● Acceptance must be intentional: The party accepting the contract must be fully aware of all the terms and conditions of the contract before accepting it.
Consideration refers to the price of the formation of a contract. For a valid contract, there must be an exchange of something of value between the parties.
For example, an exchange of money for goods and services.
Consideration must not always be of money; it can be a service as well.
CAPACITY TO CONTRACT
For any person to be able to enter into a contract, they must be legally capable of understanding all the terms and conditions of the contract and then performing them. A person accepting the offer must do so without any coercion.
It is usually believed that any person who is capable of judgment and has reached the age of majority can enter a contract unless suggested otherwise.
Due to this reason, the parties are required to demonstrate that they understand the terms, consequences, and obligations that come with signing the contract.
The following are the group of people that the law exempts from entering into a contract:
● A minor
● A lunatic
● A person suffering from any mental illness
● A person under the influence of alcohol or drugs
● A person incapable of understanding the language of a contract
MEETING OF MINDS
Under contract law, a meeting of minds also known as consensually agreeing to the same objectives, terms, and conditions is essential to form a binding contract as it is a way for the court to decide that both the parties were aware of all the terms and conditions of the contract before entering the contract.
Therefore, for a contract to be valid, both the parties must enter the contract voluntarily and must agree on the same objectives, and terms of the contract.
For a contract to stand valid, it is a must that the reason for the formation of the contract is legally permissible. In simple words, any contract that is made to provide or gain illegal services or goods or is done for an illegal motive is void and does not stand in court.
For example, a contract to sell drugs. Since selling or purchasing drugs is illegal the contract is void in nature and cannot be taken to court or be performed.
LEGAL ASPECTS OF THE CONTRACT
Apart from lawful objective, offer, acceptance, and consideration, there are some other conditions that should be followed for a valid contract.
● For instance, the laws of jurisdiction must be obeyed by the parties to a contract.
● The contract that is formed to execute any criminal activity like murder would be termed void in nature.
● Not being aware of the law is not a justification for committing a crime. Hence, the court will not exempt a party at fault for the mere reason of their lack of knowledge of the law.
● Apart from any criminal activities, any contract that is formed due to:
⮚ Coercion: When a part is forced or threatened to enter a contract.
⮚ Undue influence: when a party is misled to enter a contract.
⮚ Force majeure: when unforeseen circumstances that are out of their control make it impossible for the parties to perform their obligation of the contract.
⮚ Mistake: when a fault of one party to a contract unknowingly causes loss to the other party.
Every individual at some point enters into a contract, whether it is a contract of marriage, employment, etc.
Often people lack the knowledge of how a contract is formed and how one can claim damages for its breach or are unaware if they are being forced into a contract.
Therefore, it is important to know the essentials of the formation of a contract that consists of an offer, acceptance, consideration, capacity, legality, etc, and other aspects of a contract that are prohibited by a court as they are of use in our daily lives.
Hopefully, this piece of information helped you in understanding the essentials of a contract.
This article is written by Nandini Sharma of IILM University, Gurugram.