A contract is a formal agreement that takes place between two parties when they agree upon an arrangement in the same sense for a particular amount of consideration. All contracts are regulated by the Indian Contract Act, 1872. A contract acts as legal evidence when disputes arise between two parties.
When there is a business, it is mandatory to secure loose ends with contracts. Even small businesses are required to fulfil contractual obligations. These contracts may be made for the following purposes:
- Agreements or contracts that are made under Partnerships, Joint Ventures or Consortium.
- There are agreements made for goods and services, the retailers, wholesalers, and independent contractors.
- Contracts are also formulated when goods are purchased or rented from another party. Such agreements are termed as Rental agreements and Franchise Agreements.
- Offer and Acceptance
For a contract to take place, it is essential that one party has something to offer and the other party is willingly ready to accept the offer without any further conditions. A valid contract will only come into existence when one party accepts the offer in an exact manner. If either of the party is not satisfied with the terms and conditions of the contract laid down, negotiation can re-done by both parties.
- Legalities of the Contract
The contract should include terms and conditions which adhere to the rules and regulations of Indian Contract Law, 1872. It should fulfil all the legal requirements of the contract law.
- Capacity of Parties
It is one of the most important elements for the validity of a contract. The Capacity of Parties includes:
- Mental Capacity of both the parties to carry out the agreement.
- Agree to the terms and conditions of the contract.
- The parties involved in the agreement should be above the age of legal consent.
For a contract to be considered as valid, there has to be some consideration which should be agreed upon by both the parties in the same sense. It is not mandatory that consideration should be in the form of money. A consideration can be an interest, right, benefit ( to both the parties) or it can be of monetary value.
- Written and Verbal Contracts
Agreements can be both oral as well as written. However, written agreements are easy to enforce in the court of law, although both kinds of agreements are valid. Written contractual agreements are needed in situations where a considerable amount of time will pass before the contract is honoured, such as a last will and testament which includes a high value or amount of consideration, debts, and/or property.
Invalid and Fraudulent Contracts
Businessmen have a belief that after signing a contract, there are very few exceptions to its enforcement in the court of law and contracts are otherwise free from issues. A contract is a way through which two or more parties agree upon things to carry out a business activity in exchange for consideration. But, these contracts are only valid when they meet the required criteria as mentioned above. The fact is that not every contract made is valid. There may be circumstances where the elements of a contract are absent and thus making it unenforceable or not otherwise fully enforceable.
Sometimes, a situation arises wherein the elements of a contract are met but they are against the public policy. In such circumstances, even though the contracts meet all the requirements, it is not enforceable.
Situations where a contract is Invalid or Fraudulent:
- Contracts against the Public Policy
Sometimes, even when the contract meets all the elements of a valid contract, still they cannot be enforced in the court as such agreements are against the Public Policy. When contracts do not adhere with the policies made for the general public, they are termed as invalid. For example, a clause in an employment contract to not compete in the organization is against public policy. Employers may do this to ensure that employees do not leave the organization. Therefore, such agreements are morally not possible to impose.
- Illegal Contracts
Contracts which are imposed on the party through ways of coercion, undue influence, or by any other way which is against the law are illegal contracts. The consent is obtained through illegal means which is not ethically correct and therefore such agreements are voidable on the choice of the party whose consent is so obtained.
- Offer/Acceptance/Consideration violates the law
If any of the elements of a contract like the offer, acceptance, or consideration is related in such a way that it violates the law then such contracts are invalid in the eyes of the law. For example: when consideration for a contract is gambling, robbery or a murder.
- Purpose is Illegal
A contract will only be enforceable when they are ethical and moral in the eyes of Law. Any contract made for an illegal purpose does not constitute the elements of a valid contract. If the purpose of a contract is to commit a crime or do any sort of illegal activity through such an agreement, the court will not interfere, and the agreement will be considered as an invalid one.
It is important to note that, breach of contract cannot be imposed, if the contract, itself is invalid. In such cases, the suing party is not awarded any damages or compensation and therefore, it is the responsibility of both the parties to make sure that elements of a contract are met and there are no mistakes or errors. It is always recommended to draft a business contract, a professional person is contracted as such agreements, involves huge amounts and can lead to losses for both the parties. A lawyer will make sure that there are no errors and no legal consequences arising further.