BUSINESS STUDIES (CLASS 11) WORKSHEET 25-ELEMENTS OF CONTRACT

 

The law relating to contract is governed by the Indian Contract Act, 1872. 

As per section 2(h) of the Indian Contract Act, 1872, contract means “an agreement enforceable by law”. 

Essential elements of a valid contract 

Sec. 10 of Indian Contract Act says, “All, agreements are contracts if it includes: 

• -  Offer and Acceptance 
• -  Intention to create legal relationship
• -  Lawful consideration and object 
• -  Capacity to contract 
• -  Free consent 
• -  Lawful object 
• -  Agreement not expressly declared void.
• -  Consensus -ad- idem i.e. meeting of minds 
• -  Certainty of meaning 
• -  Possibility to perform 
• -  Legal formalities 

(a)  Plurality of persons: There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself. 

(b)  Consensus ad idem: The meeting of the minds is called consensus-ad-idem. It means both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. 

What is an agreement?

As per Section 2(e) of the Indian Contract Act “every promise and every set of promises, forming the consideration for each other, is an agreement.” 

An agreement to become a contract must give rise to legal obligation. If an agreement is incapable to be enforced by law, it remains only agreement and not contract, such as:

(a) Social Agreements
(b) Agreements without legal intention
(c) Agreements without consideration.
Agreements of a social or domestic nature do not contemplate legal relationship. As such they are not contracts

The second essential element of a valid contract is that there must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. If there is no such intention on the part of the parties, there is no contract between them.. 

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract. Its only the parties to the contract, who can sue each other. 

The third essential element of a valid contract is consideration. Consideration’ means “something in return”, i.e. quid pro quo that is an essential element to find out the genuine intention of the parties of the promise to create legal relationship. Consideration is an essential component of a valid contract. Consideration is the price for the contract. An agreement without consideration is void and thus not enforceable by law except under certain circumstances. According to Sir Frederick Pollock. Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” An agreement without consideration is a bare promise and exnudo pacto non aritio actio, i.e., cannot be held to binding on the parties

Void Agreement

A void agreement is one which is destitute of all legal effects. It cannot be enforced and confers no rights on either party. It is ‘void an initio’ i.e. not exist in the eyes of law. For example an agreement without consideration is void.

Void Contract

A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. For example throat cancer a singer refused to sing for the musical concert for which he was agreed before six month without knowing his disease. The only remedy is whatever is advanced can be restored.  

What is indemnity?

A contract of indemnity is a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. 

The person who promises to indemnify or make good the loss is called the indemnifier and the person whose loss is made good is called the indemnified or the indemnity holder. A contract of insurance is an example of a contract of indemnity according to English Law. In consideration of premium, the insurer promises to make good the loss suffered by the assured on account of the destruction by fire of his property insured against fire. 

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor -

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it,
(3) all sums which he may have paid under the terms of any compromise of any such suit,