Essentials of Valid Contract
As given by Section 10 of Indian Contract Act, 1872. Not given by Section 10 but Indian Contract Act,
1872 are also considered essential
1. Aggrement
2. Free consent
3. Lawful consideration
4. Competency of the parties
5. Legal object
6. Not expressly declared to bevoid
7. Two parties
8. Intention to create legalrelationship
9. Fulfilment of legal formalities
10. Certainty of meaning
11. Possibility of performance
Valid Contract
According to Section 10, all agreements are contracts if
1. They are made by the free consent of the parties,
2. Competent to contract,
3. For a lawful consideration
4. With a lawful object, and
5. Not hereby expressly declared to be void.”
Valid Contract
Since section 10 is not complete and exhaustive, so there are certain others sections which also contains
requirements for an agreement to be enforceable.
Thus, in order to create a valid contract, the following elements should be present:
– 1. Two Parties
– 2. Parties must intend to create legal obligations:
– 3. Other Formalities to be complied with in certain cases:
– 4. Certainty of meaning:
– 5. Possibility of performance of an agreement:
1. Two Parties:
One cannot contract with himself.
A contract involves at least two parties- one party making the offer and the other party accepting it.
• A contract may be made by natural persons and by other persons having legal existence e.g.
companies, universities etc. It is necessary to remember that identity of the parties be ascertainable.
• Example: To constitute a contract of insurance, there must be two parties- Insurer and Insured.
The insurer and insured must be two different persons, because a person cannot buy his own goods.
• In State of Gujarat vs. Ramanlal S & Co. when on dissolution of a partnership, the assets of the
firm were divided among the partners, the sales tax officer wanted to tax this transaction. It was held
that it was not a sale. The partners being joint owner of those assets cannot be both buyer and seller.
2. Parties must intend to create legal obligations:
• There must be an intention on the part of the parties to create legal relationship between them.
• Social or domestic type of agreements are not enforceable in court of law and hence they do not
result into contracts.
• Example: A husband agreed to pay to his wife certain amount as maintenance every month while he
was abroad. Husband failed to pay the promised amount.
• Wife sued him for the recovery of the amount. Here in this case wife could not recover as it was a
social agreement and the parties did not intend to create any legal relations. (Balfour v. Balfour)
3.Other Formalities to be complied with incertain cases:
• In case of certain contracts, the contracts must be in writing,
– e.g. Contract of Insurance is not valid except as a written contract.
• Further, in case of certain contracts, registration of contract under the laws which is in force at the
time, is essential for it to be valid, e.g. in the case of immovable property.
4. Certainty of meaning:
• The agreement must be certain and not vague or indefinite.
• Example: A agrees to insure his vehicle with B Insurance company.
• There is nothing certain in order to showwhich vehicle was intended for.
5. Possibility of performance of an agreement:
• The terms of agreement should be capable of performance.
• An agreement to do an act impossible in itself cannot be enforced.
• Example: A agrees with B to get his car repaired by magic. The agreement cannot be
enforced as it is not possible to be performed.
Essential elements of a valid
Essential Elements of a Valid Contract
1. Proper offer and proper acceptance.
There must be an agreement based on a lawful offer made by person to another and lawful acceptance
of that offer made by the latter.
Section 3 to 9 of the contract act, 1872 lay down the rules for making valid acceptance
According to Section 2(e) of the Indian Contract Act, 1872, “Every promise and every set of promises,
forming consideration for each other, is an agreement” and according to Section 2(b) “A proposal when
accepted, becomes a promise”. An agreement is an outcome of offer and acceptance.
2. Free Consent:
Two or more persons are said to consent when they agree upon the same thing in the same sense.
This can also be understood as identity of minds in understanding the terms viz consensus ad idem.
Further such a consent must be free. Consent would be considered as free consent if it is not caused by
coercion, undue influence, fraud or, misrepresentation or mistake. When consent to an agreement is
caused by coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable
at the option of the party whose consent was so caused.
When consent is vitiated by mistake, the contract becomes void.
Example: A threatened to not to sanction his loan application of B if he (B) does not get himself insured
with him and B agreed to it. Here the agreement is entered into under coercion and hence voidable at
the option of B.
3. Competent to contract or capacity:
In order to make a valid contract the parties to it must be competent to be contracted.
According to section 11 of the Contract Act, a person is considered to be competent to contract if he
satisfies the following criterion:
– The person has reached the age of maturity.
– The person is of sound mind.
– The person is not disqualified from contracting by any law. Such persons are: an alien enemy,
foreign sovereigns, convicts etc. They are disqualified unless they full certain formalities required by
law.
4. Consideration
• It is referred to as ‘quid pro quo’ i.e. ‘something in return’.
An agreement to form a valid contract should be supported by consideration.
Consideration means “something in return”. It can be cash, kind, an act or abstinence.
It can be past, present or future.
• A valuable consideration in the sense of law may consist either in some right, interest, profit,
or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered
or undertaken by the other.
• Example:- A agrees to sell an insurance plan to B for Rs. 10,000, B’s promise to pay Rs. 10,000
is the consideration for A’s promise to sell his insurance plan and A’s promise to sell the insurance is
the consideration for B’s promise to pay Rs. 10,000.
5. Lawful consideration and Object : Consideration should be real and lawful.
Section 23 states that consideration or object is not lawful if it is prohibited by law, or it is such as
would defeat the provisions of law, if it is fraudulent or involves injury to the person or property of
another or court regards it as immoral or opposed to public policy.
Example : ‘A’ promises to drop prosecution instituted against ‘B’ for robbery of his car and ‘B’
promises to restore the value of the car taken. The agreement is void, as its object is unlawful.
6. Not expressly declared to be void:
• The agreement entered into must not be which the law declares to be either illegal or void.
• An illegal agreement is an agreement expressly or impliedly prohibited by law.
• A void agreement is one without any legal effects.
Example: Threat to commit murder or making/publishing defamatory statements or entering into
agreements which are opposed to public policy are illegal in nature.
Similarly any agreement in restraint of trade, marriage, legal proceedings, etc. are classic examples of
void agreements.
Understanding Principles of Insurance
The business of insurance aims to protect the economic value of assets or life of a person.
Through a contract of insurance the insurer agrees to make good any loss on the insured property or
loss of life (as the case may be) that may occur in course of time in consideration for a small premium
to be paid by the insured.
Apart from the above essentials of a valid contract, insurance contracts are subject to additional
principles.
These are:
1. Principle of Utmost good faith
2. Principle of Insurable interest
3. Principle of Indemnity
4. Principle of Subrogation
5. Principle of Contribution
6. Principle of Proximate cause
7. Principle of Loss of Minimization
