Background: Contracts are the basis of most kinds of business deals and agreements. In their previous article Vakilsearch explained the income tax benefits of life insurance and medical insurance policies. Here they explain what makes a valid contract.
A contract serve as a legally binding agreement that allows someone to do something and prevents them from doing other things. As it is enforceable and binding, it works as an agreement that gives people the right to perform certain actions. As per the Indian Contract Act, 1872, there are certain essentials that a contract must uphold to be valid and legal. Section 10 of this Act lays down the requirements of a contract that make it binding and legal in the eyes of the Indian judiciary. Here’s a look at everything you need to know regarding the requirements for a valid contract.
What is a Contract?
As per the Contract Act of 1872, a contract is defined as a legally enforceable agreement. Hence, for any contract to be deemed legal it must be an enforceable agreement. Let us look at these two components. An agreement is essentially a set of promises that outline a function of the do’s and don’ts that make up an operation. If the proposal is accepted, then that means that the one to whom the terms have been defined is okay with the nature of the operation. Once the proposal is accepted, it becomes a promise, and hence, the agreement becomes valid.
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Guidelines for an Agreement
- It must be made between two people; the offeror and offeree.
- Both individuals must be independent people as one cannot agree with oneself.
- Both individuals involved must carefully and meticulously go through the agreement and understand it fully before assenting or accepting it.
- To become a contract, an agreement must generate some sort of legal obligation via contract laws.
- Hence, the individuals who have agreed must be able to approach a court if someone falters.
- If a court of law can avail legal remedy to the sufferer, then the agreement is regarded as a legally binding contract.
Essentials of a Valid Contract
- All valid offers once accepted, becomes a legally binding agreement between an offeror and acceptor.
- The parties to a contract are part of a legal relationship, and hence, if one of them fails to uphold the promises enlisted in the agreement, the other can file a case against the defaulter.
- In the absence of a legal relationship, a valid contract cannot be formed between the parties. Therefore, social agreements are not contracts.
- The validity of a contract is determined by consideration or return element. The contract must contain a clause that highlights what the compensation or consideration is. Any agreement that states that an operation will be carried out with nothing being done in return is not considered a contract. This consideration may not necessarily be in cash or kind and can be any service.
- The consideration must be bound by certain laws and cannot be something illegal. Furthermore, contracts which do not have such a clause are deemed as wagering contracts or betting.
- The individuals involved in the making of the contract must be adults, with a sane mind. They must be capable of understanding the full extent of the terms and conditions mentioned in the contract.
- Furthermore, the parties must enter into the contract by their own free will, and not under any illegal coercion, misrepresentation, undue influence, fraud or mistake.
- The contract in writing must comply with the required formalities such as attestation and registration as failure to do so will result in the contract becoming null or void.
- All the terms mentioned in the contract must be clear, concise and free of any uncertainty because otherwise it cannot be fully enforced.
- Finally, the contract cannot be one which is expressly declared void. For instance, agreements without any considerations, agreements in restraint of marriage, trade, judicial proceedings or wager are deemed void.
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Exceptions for making contracts
The following individuals or parties are exempted from creating contracts owing to the fact that they are not in a position to fully understand the agreement.
- People of unsound mind
- People which the Law deems unqualified to create contracts
Any contract that has terms which are unlawful or illegal, makes the entire agreement invalid or illegal. As per the Contract Act, the following considerations are deemed illegal:
- If something is forbidden by law and is deemed illegal by a court of law
- If something goes against the rights or provisions mentioned under any law
- Fraudulent claims and measures
- If something causes damage to anyone’s health or property
- If something is considered by courts of law to be immoral, illegal or against the best interest of the people
As contract play important roles in most businesses and transactions, parties must be extremely careful while drafting and agreeing to contracts. All the clauses in the contract must be well-read and understood before committing to anything. Also, for a contract to be legally binding, it must adhere to all the conditions given above. Use this article as a guide to make sure that every contract you enter into is legally binding and sound.
Also read: MCA guidelines for accounting and auditing for private limited companies
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