Page 13 - DCOM103_COMMERCIAL_LAW

Commercial Law

Notes 1.4 Essential Elements of Valid Contract

According to Section 15 “All agreements are contracts if they are made by the free consent of
the parties competent to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void” As per the above section, a contract must have the
following elements.
1. Proper offer and its acceptance: To create a valid contract, there must be two or more parties.
One who makes the offer and the other who accepts the offer. One person cannot make an
offer and accept it. There must be at least two persons. Also the offer must be clear and
properly communicated to the other party. Similarly acceptance must be communicated
to the other party and the proper and unconditional acceptance must be communicated to
the offerer. Proper offer and proper acceptance should be there to treat the agreement as a
contract which is enforceable by law.
2. Intention to create legal relationship: The parties entering into a contract must have an
intention to create a legal relationship. If there is no intention to create a legal relationship
that agreement cannot be treated as a valid contract. Generally there is no intention to
create a legal relationship in social and domestic agreements.

Example: Invitation for lunch does not create a legal relationship. Certain agreements
and obligation between father and daughter, mother and son and husband and wife does
not create a legal relationship. An agreement wherein it is clearly mentioned that “This
agreement is not intended to create formal or legal agreement and shall not be subject to
legal jurisdiction in the law of courts” cannot be treated as a contract and not valid.

Example: A husband promised to pay his wife a household allowance of £ 30 every
month. Later the parties separated and the husband failed to pay the amount. The wife
sued for the allowance. Held, agreements such as these were outside the realm of contract
altogether [Balfour vs. Balfour, (1919) 2 K.B. 571]
In commercial and business agreements, the presumption is usually that the parties
intended to create legal relations. But this presumption is rebuttable which means that it
must be shown that the parties did not intend to be legally bound.

Example: (a) There was an agreement between R Company and C Company by
means of which the former was appointed as the agent of the latter. One clause in the
agreement was: “This agreement is not entered into .... as a formal or legal agreement,
and shall not be subject to legal jurisdiction in the law courts.” Held, there was no binding
contract as there was no intention to create legal relationship [Rose & Frank Co. vs. Corruption
Bros. (1925) A.C. 445].
(b) In an agreement, a document contained a condition “that it shall not be attended by or
give rise to any legal relationship, rights, duties, consequences whatsoever or be legally
enforceable or be the subject of litigation, but all such arrangements, agreements and
transactions are binding in honour only.” Held, the condition was valid and the agreement
was not binding [Jones vs. Vemon’s Pools. Ltd. (1938)].
3. Lawful consideration: An agreement must be supported by a consideration of something
in return. That is, the agreement must be supported by some type of service or goods in
return of money or goods. However, it is not necessary the price should be always in terms
of money. It could be a service or another goods.

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