In our day-to-day conversations with people, we may agree with them or disagree with them. Sometimes we may also find a middle ground. While conversations, talks and discussions are an inherent part of our lives, they help us build our relationships with people. Our communications may be formal or informal. And some of these relationships have a legal binding.
For two persons to agree on something, they should be on the same page mentally. When one makes such agreements out of an obligation or formal relationship, it is preferred to make them in writing to avoid confusion. When an agreement is made under a legal obligation, it is a contract.
We also enter into agreements in our daily life, yet we are not aware of it due to a lack of awareness. So let us first know what a contract means.
What Is a Contract?
A contract is an agreement that is valid by the legal system. In India, contracts are governed by the Indian Contract Act, 1872. In law, it is quoted as,
“All contracts are agreements, but all agreements are not contracts.”
When an agreement is legally binding under any law in India, it becomes a contract. Whenever two or more persons enter into a contract, they legally agree to do something. Alternatively, a contract might mean an agreement not to do something.
Some examples are employment contracts, sales agency agreements, consultancy agreements etc.
Types of Contract
Because of its legal nature, a contract is dependent on its performance. Based on their execution, contracts are divided into five parts.
1. Valid Contract
A valid contract is a contract that can be lawfully executed. A good contract must have all the essentials required to perform a contract, i.e. agreement, consideration, mutual consent, intention, and competency.
2. Void Contract
A void contract is when an agreement is not tenable as it does not fulfil one or more essentials of a valid contract.
3. Voidable Contract
When a contract is such that a part of it is valid and another part is void, it is a voidable contract. The valid part can be executed in a voidable contract, whereas the void part cannot be achieved.
4. Illegal Contract
An illegal contract is a contract that cannot be executed as it is not tenable by law.
5. Unenforceable Contract
An unenforceable contract is a contract that is valid but cannot be executed due to the orders by the court.
Essentials of a Valid Contract
The Indian Contract Act, 1872, governs contracts in India. Therefore, it is crucial to know the basic requirements while making any contract. The essentials of a valid contract are as mentioned below.
For a contract to be made, one person has to make an offer to another person. One person will make an offer to another person to do something or to not do something.
The execution of a contract is incomplete without accepting the offer by the person to whom it is made.
3. Mutual Consent
When one person makes an offer and another person accepts, such an offer should be with the mutual consent of both parties. For a contract to be valid, one cannot enter into it by forcing either of the parties into the contract.
4. Persons Competent to Contract
For a contract to be valid, the persons entering into a contract should be capable of entering into a contract.
5. Certainty of the Contract
A contract entered into should be for an event that is certain to happen. Contracts cannot be made for impossible events.
Who Is Competent for a Contract?
Now, we know that one of the essentials of a valid contract is that the persons entering the contract must be competent. But what does ‘competent to contract’ mean? Let us understand.
A person competent to contract means a person capable of entering into a contract. The law sets forth the persons who can be capable of entering into a contract.
1. A person who is above 18 years of age.
2. A person of sound mind.
3. A person who is not disqualified by the court or law to enter into a contract.
A contractual relationship is a relationship between the persons who have agreed.
A contractor is a person who takes up work on a contractual basis, whereas the person who offers work to the contractor is called a contractee.
There are two parties to the contract, and both parties have specific responsibilities towards the contract. If any of the parties fail to fulfil their duties towards the agreement, it is a breach of contract. It may be due to a lack in providing service or the lack of payment, or any other reason.
Discharge of Contract
A contract is discharged when it ceases to exist, and it is when the parties’ responsibilities to the contract come to an end. The contractual relationship is over when the contract is discharged.
A contract is a formal relationship between parties, and it is an agreement that is legal and put down in writing. For an agreement to be valid, it should fulfil all the essentials of a valid contract. Any contract that is not tenable as per the Indian Contract Act, 1872 is not valid. Therefore, it is essential to know what is necessary to enter into a contract before one agrees.