Difference among Supply, Services & Works Contracts (1)

Hi Friends,

In the previous posts, we have covered Basic Concepts and Definition of a Contract. Now the next step in the journey is discuss different kind of contracts and rationale behind their classification.

Contracts could be classified into various types based on the followings categories;

In this post, we will discuss various types of contracts based on: Nature of Transaction. Contracts types based on other categories shall be covered in the subsequent posts. After reading all blogs under this chapter, we will come to know the characteristics and application of each kind. Accordingly, we would be able to appreciate their distinguishing features

A) Contract Classification based on Nature of Transaction

There exists thousands of firms, companies or commercial organization across the world who are doing business locally, regionally or globally. Can we think off what exactly they are doing? You know that all business entities either sells goods or provides services or both. This is true irrespective of whether a firm is small, medium, large or local, national, multinational

At macro level, nothing exists beyond goods or services, a business entity may be doing or can think of doing. So, all commercial entities around the globe undertake transaction of selling goods and/or providing services to their customers. And they are earning profits out of such transactions.

So, depending upon whether the transaction is a Sale or Service or a combination of both, contracts are classified as Supply; Services or Works, as further explained below

1 Supply Contracts

There are the contracts for SALE and PURCHASE of GOODS between the parties. The party who sells the GOODS is known as Seller or Supplier and party who buy/purchase the goods is called buyer or purchaser.

[In the above, ‘GOODS’ means “moveable property” and as defined under the Sale of Goods Act. Sale of immoveable property such as residential house and others is outside the purview of this blog. As per Section 2.7 of Sale of Goods Act, ‘Goods’ means every kind of moveable property other than the actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale]

[In the above, ‘GOODS’ means “moveable property” and as defined under the Sale of Goods Act. Sale of immoveable property such as residential house and others is outside the purview of this blog. As per Section 2.7 of Sale of Goods Act, ‘Goods’ means every kind of moveable property other than the actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale]

Under supply contracts, seller transfers the property in the GOODS to buyer for money consideration and transaction between the parties is known as SALE (or Purchase) of GOODS.

Important ingredients of Supply Contracts are as follows:

  • Sale of moveable property (called ‘Goods’)
  • Transfer of ownership of ‘goods’ from Seller to buyer
  • Delivery of goods (or transfer of possession) from seller to buyer
  • Payment of money consideration from buyer to seller

The GOODS as described above may be readily available with the seller or alternately, seller need to procure or manufacture it before supply. Accordingly, Seller transfer the possession of goods to buyer if goods already existing or Seller agree to transfer the possession of goods at later mutually agreed date (if goods need to be procured or manufactured) as per the terms of Contract of Sale of Goods between the parties. So under supply contracts there is a physical movement of goods from one party to another. And this is key distinguishing features of Supply Contracts when compared with Service Contracts

Examples of Supply Contracts:

Supply Contracts are pure sale contracts without any element of service. We deal with supply contracts daily sometime consciously or sometime even not knowing that we are doing so. Few examples of supply contracts are as follows;

i) Procurement of general provision items from local retail shops; Purchase of furniture, mobiles phone, garments, TV & AC from a retail stores are typical example of supply contracts in personal life

ii) Procurement of raw materials, components, finished product or a complete package/system from our vendors by the organization byers are typical example of supply contract in our work life.

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Sale of Goods Act – Law Governing Supply Contracts

In the last post we discussed Indian Contract Act, a statue applicable to the contractual relationships between the parties. Please click on the link below to read the post again

http://www.rkstrainings.com/indian-contract-act-law-governing-contracts/

In this post we are going to discuss Sale of Goods Act, a specific law related to sale/purchase of good

Sale of Goods Act

Sale of Goods Act, 1930 is the another most important and relevant Business Law for Contracts and Procurement. This law was enacted in 1930 and known as Sale of Goods Act, 1930. The statue came into force on 1st July 1930 and was drafted based on English Sale of Goods Act, 1893

The Act defines set of rules with regards to Sale of Goods. The Statue deals with transaction of sale/purchase of moveable goods between buyer and seller. The term “Goods” is clearly defined under the law and hence statue apply to the things covered in the definition. This act provides the norms with regards to: Formation, Performance and Suit for Breach with regards to the Contract of Sale of Goods between the buyer and seller. It also provides stipulations regarding the rights of buyer and un-paid seller

Sale of Goods Transaction

Chapter VII of Indian Contract Act, 1872 also lay down certain provisions in relation to Sale of Movable Goods. However, subsequently, after few decades, environment of business & trade undergone substantial changes. Hence new relationships developed between business entities. So the provision of Chapter VII of Indian Contract Act appeared to be inadequate to address issues concerning mercantile transaction

Accordingly, need was felt to enact a new law that exclusively set forth the specific provisions in relation to sale/purchase dealings of modern business relationships/methods. However, general provision of Indian Contract Act will continue to apply to newly enacted Sale of Goods Act

Sale of Goods constitutes the majority share of all the business transaction undertaken across the globe. So a thorough understanding of this act is important to fully appreciate the subject

Relationship of Sale of Goods Act with Indian Contract Act

Indian Contract Act and Sale of Goods Acts are: related, interdependent & complementary. They are not totally independent statues. This is clear from the followings provisions of Sale of Goods Act 1930

  • Chapter 1, Section 2 – Definitions, Serial No (15) of Sale of Goods Act, 1930 says that the expression used but not defined in this act and defined in Indian Contract Act, 1872 have the meaning assigned to them in that act
  • Section 3 of Sale of Goods Act, 1930 titled Application of Provision of Act 9 of 1872 stated that all such provisions of Indian Contract Act, 1872, if not inconsistent with express provisions of Sale of Goods Act, shall continue to apply to the Contract for Sale of Goods
  • Sale of Goods Act uses terms such as Contract of Sale of Goods or Agreement to Sell, Offer, Acceptance, void & voidable contracts. The true meaning of such terms has been defined in Indian Contract Act, 1872
  • Sale of Goods Act refers to the Indian Contract Act at number of places. So, this act is a specialized branch of Indian Contact Act rather than a distinct act

Indian Contract and Sale of Goods Act not mutually exclusive

From the above, we can say that two acts are not mutually exclusive. Actually they do consist of common term and overlapping provisions. Hence both Acts must be read together to draw a full understanding on the subject. Sale of Goods Act, 1930 is subsequently step to provide specific provisions in relations to Sale of Goods while keeping the fundamental & general provision of Indian Contract Act, 1872 intact and applicable thereto

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Significance of MOU and its most suitable use

Dear Readers,

In the last post we discussed what MOU is and how it is different from a contract. Please click on the link below to read it again

http://www.rkstrainings.com/2022/01/31/difference-between-mou-and-contract/

In this post, I wish to explain the significance of MOU and its most appropriate usage. Accordingly, we will realize its relevance for commercial and non-commercial agreements entered between stakeholders. Here, we shall cover the followings topics;

A) What is most suitable use of MOU
B) What is significance of MOU
C) MOU a first step towards contract formation

A) What is most suitable usage of MOU

Both, MOU and Contracts, set out the promises made by parties to meet certain objectives. Also, by signing such documents, parties make commitment to keep such promises. The only differentiator is whether the parties intends to be legally bound or not. In the event, parties are willing to create legal relationship, the document is called a Contract, otherwise, it is a just a MOU even if we name it otherwise. 

In view of the above, MOU is perfect document to form related parties’ agreements. Whereas, contract is a right document for non-related parties’ transactions. Accordingly, MOU seems a perfect fit for the following types of agreements and relationships

  1. Inter-departmental agreements of big corporates
  2. Agreements between regional offices of large organizations or between different entities of a diversified Business Group
  3. Agreements between state governments or state-central governments
  4. Cooperation agreements between different countries through their governments or government entities as part of diplomatic relationships
  5. Agreements between different ministries or between a ministry & associated PSU (e.g. between MoP and Power Generation Entity)
  6. Community development agreements to meet common objectives for mutual benefits where there is no intention of profit
  7. Collaboration agreements to undertake social, moral or public cause as a volunteer

In the above cited example, parties do not want to drag each other to court for breach of promises, rather they wish to exist freely without any legal complication. Article dated 02-03-2018 published in The Time of India – “State signs MOU with Tata Trusts for Comprehensive cancer care network” is good example to realize right usage and significance of MOU. https://www.tatatrusts.org/article/inside/government-of-telangana-tata-trusts-sign-mou-to-provide-state-wide-cancer-care

B) What is significance of MOU

Importance of MOU is evident from the following points;

  • Though MOU does not bind the parties legally, but, it clearly outlines the understanding between them by putting in record the broad terms agreed. So, by signing MOU, parties bind each other with respect to agreed terms so that they discharge their respective duties smoothly
  • MOU being a formal document imparts full clarity about the requirements & responsibilities of the parties. It lay down the action to be taken by each one to achieve the common goal. Hence, it binds the parties morally and professionally. Also it makes the parties accountable to each other with respect to agreed terms
  • In view of the above and because of signed MOU in place, a party simply cannot back out from its commitments without losing its face value, respect and reputation. This demonstrate the significance of MOU

C) MOU first step towards contract formation

MOU is generally a first steps towards contract formation. It also paves the way to enter into a legally binding contract at later stage. Please see below few situations where commercial entities prefer to initiate the relationship through MOU before signing a formal contract;

  1. Emerging business scenarios where rules of the game are not settled
  2. New experiments/first time experiences where parties want to test the strength of their relationship through a non-binding MOU before entering into a formal contract. This is additional step to limit the risk exposure
  3. Business relationships where parties wish to enter into relationship initially through MOU to see how it work before getting into a legally binding
  4. Situations where parties first sign MOU to record broad level understanding. This could be followed by detailed formal agreement at later stage. Signed MOU will them become a base for drafting contract. And MOU become a reference document and facilitates the review, negotiations and finalization of the contract

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Difference between MOU and Contract

Dear Readers,

MOU is a common term and we deal with it almost daily in our work life. Contracts and procurement professional regularly draft new MOU’s to records the mutual promises of parties. Also, they keep on referring/interpreting existing MOU to administer it or to know the duties of parties. So what is the relevance of this term with respect to the agreements made by the parties? In this blog, I shall try to explain meaning & significance of document and its relationship with Agreement and Contact

In this post we are going to discuss briefly the followings topics;

  1. What is a Memorandum of Understanding
  2. Difference between Memorandum of Understanding and Contract
  3. Relationship between Memorandum of Understanding and Agreement

1) What is a Memorandum of Understanding

The word memorandum means: a written message or a written note or a written report prepared for future use by parties or intended recipients. The term understanding means: agreement or mutual consent or in depth knowledge of a subject matter. Understanding is said to be reached when both parties agree something in the same sense (meeting of mind) and have full clarity of their own and each other’s promises

From the above, we can define Memorandum of Understanding as a written document describing an understanding and/or agreement between two or more parties. Parties signing the MOU assures each other to act as per agreed terms but do not intend to be legally bound for such terms. So, MOU expresses the promises made by the parties to achieve a common goal but such promises are not enforceable by the Law. Hence, MOU seems to be a more formal alternative to gentlemen’s agreement, but, lacks the binding power of a contract

If you wish to read what is a Contract and/or Agreement, please click on below link

http://www.rkstrainings.com/what-is-a-contract/

http://www.rkstrainings.com/agreement-meaning-and-definition/

2) Difference between MOU and Contract

Above points demonstrate how MOU is different from a Contract

3) Difference between MOU and Agreement

There is no major difference between MOU and Agreement and both terms have almost similar meaning because;

  • Both documents emerge from the promises made by parties to fulfil a need or to have certain benefits or common goal
  • MOU and Agreement reflect the intentions or understanding between the parties
  • Both Terms differ from Contract in term of enforceability by law
  • Parties signing MOU/Agreement are responsible for each other for fulfilling their promises but without legal binding

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Difference b/w Contract Administration and Management

Dear Readers,

In the last post we discussed Contract Life Cycle and its 4 stages. Please click on below link to read this post again

http://www.rkstrainings.com/contract-life-cycle-and-its-various-stages/

In this post, we are going to discuss the meaning and definition of other key terms related to Contracts i.e. Contract Formation, Administration and Management. Contract life cycle explains the activities under Contract Formation and Administration.  This post will clearly bring out the difference between Contract Administration and Management

The above discussion will eventually give a clear overview of Contract Management Process

Difference between Contract Administration and Management

A) Contract Formation

This process starts after receipt of user requirements and ends when Contract is signed with selected vendor. Contract formation process commence upon sending RFQ/Enquiries to identified bidders/agencies. It continues until offers received, technical and commercial evaluation completed, price agreed and LOA issued. The process ends when both parties sign the formal agreement

Let us understand Contract Formation Process in context to painting example

We know that objectives in term of ScopeTimeBudget, and Quality are set under stage 1 of Contract Life Cycle. So, the next step is to identify and appoint a painter who is a best fit for meeting such objectives. We achieve this by undertaking following steps

  1. Identify 2-3 potential painting agencies
  2. Send RFP/Enquiries (with requirements: Scope, Time, Quality) and invite offers from agencies identified
  3. Receiving offers and evaluating against set requirements
  4. Shortlist agency who meets most of requirements & offer better price
  5. Discuss, negotiate and agree upon the final price and payment terms
  6. Put all agreed terms on a piece of paper and sign the agreement

Contract Formation is a pre-award process because it covers all activities until Contract Award. Because it starts with PR and ends with PO (Contract Award), we also call it Purchase Requisition (PR) to Purchase Order (PO) Process

Contract Administration

Contract Administration is a process that involves all activities undertaken by Owner to ensure receipt of goods/services or completion of works as per the contract thereby meeting the intended contract objectives. This process commences upon Contract Award. It continues until goods/services received or work completed, payment made, claim settled and all contractual obligations met by both parties. This Process ends when the contract is formally closed

In context to painting example, here painter carryout the painting work as per Contract and Raj makes due payment to painter. Once both parties have completed their respective obligations to the satisfaction of each other, they formally close the Contract and come out of the binding relationship

Contract Administration is a post-award process because it covers all activities after contract award. It is also called PO to Closeout Process because it starts with PO (Contract Award) & ends with Contract Closeout

The process focuses on getting goods/services/works of requisite quality, on time and within Contract Price

Contract Management

Contract Management is a process of entering into a Contract with vendor/contractor for meeting certain objectives and undertaking Contract Administration for achieving such objectives through performance by each party as per Contract. This is broader term which includes Contract Formation, Administration and Closure

From the above, we can say that:

1) Contract Management = Contract Formation + Contract Administration
2) Contract Management = PR to PO Process + PO to Closeout Process

The above explanation brings out the difference between Contract Administration and Management. In other words, Contract Management is a larger process and Contract Administration is one part of it

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Contract Life Cycle and its various stages

Dear Readers,

In previous posts we discussed the meaning and definition of Contract, Agreement and Consideration. Subsequent posts briefly touched Contracts Laws and Principles. To read last posts again, please click on link below;

http://www.rkstrainings.com/contract-principles-equity-justice-and-reasonableness/

In this post, let us discuss Contract Life Cycle and its 4 distinct stages as mentioned below

A) Stage 1 of Contract Life Cycle – Identifying Contract Objectives

This is first stage of Contract Life Cycle. This deals with WHY to enter into a contract and WHAT is the purpose of signing a binding agreement. This stage addresses questions such as: what a person want or desire to have. Accordingly, this want or need, when worded in the form of a statement, becomes the purpose or goal to achieve. Subsequently, the purpose emerges into clearly defined and measurable requirements called objectives. Accordingly, Contract Life Cycle starts when a person has certain need or desire and he wishes to fulfil the same

Let us illustrate the above with a simple example

Let us assume Raj wants to see his house painted before Diwali and Diwali falls 90 days from now. Therefore, Raj’s need or purpose is to get the house painted within next 90 days. In order to achieve the purpose, Raj needs to find out the followings

  1. Detailed Scope for Painting Work (work items / quantities)
  2. Paint specifications, manufacturer & color and application requirements
  3. Amount of money he want to spend
  4. Time available to plan and execute the Work

From the above, we see that the purpose of having the house painted gets translated into followings “specific requirements”

  1. Scope of work (SCOPE)
  2. Color/manufacturer/specification (QUALITY)
  3. Budget and Funds Allocation (COST)
  4. Time for completion for entire Works (TIME)

Above requirements in term of Scope, Cost, Time & Quality are called Contract Objectives. These objectives shall become the basis of forming a contract with the eventual painter

Stage 2 of Contract Life Cycle – Contract Formation

It is second stage of a Contract Life Cycle. It starts upon finalization of contract objectives. Here Raj needs to identify a person/painter who can meet the above mentioned contract objectives. Subsequently, he will sign a legally binding agreement with selected agency

Above stage which ends with signing of agreement between the parties is called Contract Formation. Such signed contract shall become the basis of work execution. Here both parties commit to execute the work as per contract

It is also called planning stage because here;

  1. Works execution planned
  2. Requirements and responsibilities of parties frozen
  3. Price and payment terms agreed and
  4. Time period for work execution fixed

Stage 3- Contract Administration

The word administration means to executefollow upenforce or implement what has been stated in a policy or law or a rule book. This is third stage of Contract Life Cycle and is known as work execution stage. Work is actually performed and delivered here. During this stage, parties execute the work and discharge their responsibilities as per contract

For painting example, painter execute the work in accordance with agreed technical requirements and timelines. Accordingly, Raj see that, job has been performed as per the contract. Also, Raj make due payment as agreed. Here owner receives the painting services and painter receives the agreed money. Hence, parties receive what they wanted & intended contract objectives are met

Stage 4 – Contract Closure

This is final stage of the Contract Life Cycle. Here parties intend to come out of the binding relationship. This is because, there is no need to continue the contractual relationships anymore when

  • Owner gets the painting services to his full satisfaction and
  • Painter receive due payment
  • Intended contract objectives met for both parties

Once both parties have discharged their responsibilities under the contract, they need to formally close the contract. This is necessary so that parties are free from any further obligation towards each other. The cycle ends here upon formal contract closure

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Next Post – Contract Administration versus Management

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Contract Principles – Equity, Justice and Reasonableness

Dear Readers

In the earlier posts we covered two important acts related to Contracts and Procurements i.e. Indian Contract Act and Sale of Goods Act. To read this post again, please click the link below:

http://www.rkstrainings.com/sale-of-goods-act-law-governing-supply-contracts/

In this post we are going to discuss Contract Principles. These principles not only are the basis of enacting such laws, but, courts also apply them while deciding a case and arriving at the fair judgement

Contract Principles

Contracts and procurements transactions between the parties are governed by Indian Contract Act and Sale of Goods Act. Therefore, we should draft and administer a Contract in accordance with certain fundamental principle which applies to other laws. Any law whether civil or criminal is based on the principle of natural justice and equity. Accordingly, we need to give due importance to the following principles both during contract formation and administration stage

A) Equity

Equity means equal or even or fair. This essentially means each party of a contract have same status and no one is bigger or smaller. Accordingly, all parties should be treated equally, without any prejudice, bias or discrimination

A contract document is paramount with respect to rights and obligations of the parties. Hence, each party is liable to fulfil its respective obligations for the other one strictly as per the contract and no one deemed to be superior or inferior. All general duties (e.g. applicable laws; general defaults, indemnities and other) of a party towards other one and consequences for breach shall also apply on reciprocal basis

B) Justice

Justice means fair treatment for all and punishment for wrong doing. In context to contractual relationship, it implies that the defaulting person, who has broken the promises, should not be able to escape freely. Also, the genuine person (victim), who has been complying with the agreement in good faith, should get compensation for loss or damages suffered. Defaulting person who has failed to fulfil its obligations under the contract shall face consequences under the law

A contract writer needs to give due importance to this principle while drafting an Agreement. Accordingly, he should incorporate remedial provision in the contract for all possible breach of promises. This is necessary to compensate the party who has sustained loss or damage due to other party. Similarly, during Contract Administration stage, both parties should attempt to resolve their disputes by applying the sense of right and wrong and fair play

C) Reasonableness

Reasonableness means what is actual, factual and true rather than assumptions, perceptions and feelings. It also signifies: logical, rational and sensible. This means that both parties need be genuine and should act based on facts and reasons. No one should be taking undue advantage of the situation or mis-using its dominating position

It signifies that no party should raise any demand or claim on other unless it has really incurred cost because of the reason of other party. Also, other party is liable to compensate the loss actual suffered and proved through documentary evidences. Both parties should act towards other with good conscience and mutual trust

Significance of Applying Contract Principles

Let us apply above principles during contract formation, interpretation and administration. This is necessary to avoid any dispute at later stage. The cost one may incur in contractual dispute could be multi-fold in comparison to the cost of applying such principles.

In the event a contract goes to litigation, court gives the justice based on above principles only. So, writing certain clauses and getting these accepted by other party may not hold well in the court, if such clauses violates above principles

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8 Essential Elements of a Valid Contract (2)

Dear Readers,

In the last post, we discussed the following four (4) key ingredients of a valid contract. Please click on the link below to read this post again;

A) Offer and Acceptance B) Intention to Create Legal Relationships C) Lawful Consideration D) Lawful Object

http://www.rkstrainings.com/8-essential-elements-of-a-valid-contracts-1/

In view of the above, let us now discuss balance 4 Essential Elements of a Valid Contract: 

E) Certainty & Possibility of Performance F) Capacity of the Parties G) Agreement not declared Void H) Free Consent

Essential Elements of a Valid Contract

E) Certainty and Possibility of Performance

E1 – Certainty of Performance

An agreement is ‘certain’ when Scope of Work and Timelines are mentioned specifically rather than generally. Scope means what to do and timelines means when to do. Accordingly, a contract writer must specify the goods or services expressly and clearly. This is necessary so that both parties draw the same understanding out of it. Otherwise, requirements will be subject to multiple interpretation with lot of subjectivity

Accordingly, certainty is important parameter of a valid contract. On the contrary, if the requirements are not definite (i.e. difficult to understand), such contracts become vague & difficult to enforce.

As per section 29 of Indian Contract Act, agreement, the meaning of which is not certain, or capable of being made certain, are void

E2 Possibility of Performance

If it is not possible for a party to fulfil the promises made under the agreement, the contract is invalid. As per section 56 of Indian Contact Act, an agreement to do an act impossible in itself is void. So, If an act is deemed to be impossible, such agreement is void. Similarly, If an act  become impossible afterwards, such agreement become void when the act become impossible

F) Capacity of the parties (competency)

As per Section 11 of Indian Contract Act, a party is competent to contract, if;

1) it has attained the age of majority accordingly to applicable law and

2) who is of sound mind and;

3) not disqualified from contracting by any law to which he is subject

In view of the above, all parties should be competent to enter into a contract. Accordingly, entering into a contract with a minor (age less than as stipulated under relevant law) is void

Further, Section 12 of Indian Contract Act says that a person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interest. Moreover, entering into a contract with a person who is disqualified from contracting by any law is void

G) Agreement not declared void

Few agreements are expressly declared as void by the law in force in the country. Consequently, one cannot enter into such agreements with other party. For example, under Indian Contract Act, followings agreements are expressly declared as void;

  • Section 26 (Agreement in restraint of marriage) – Every agreement in restrain of marriage of any person, other than a minor, is void
  • Section 27 (Agreement in restraint of trade) – Every agreement by which any one is restrained from exercising a lawful profession, trade or business, is void
  • Section 28 (Agreement in restraint of legal proceedings – Every agreement by which any party is restricted from enforcing his right under any contract or which limit the time within which he may enforce his rights are void

D) Free Consent

Parties must enter into a contract freely and with genuine consent. This means the parties accept the terms of the agreement with their own free will rather than under force. Section 13 of Indian Contract Act, says that two or more parties have consent when they agree upon the same thing in the same sense.

As per section 14 of Indian Contract Act, consent is free when it is not caused by any of the followings:

  1. Coercion – as defined in section 15, or
  2. Undue influence – as defined in section 16, or
  3. Fraud – as defined by section 17, or
  4. Misrepresentation– as defined by section 18
  5. Mistake subject to provision of section 20, 21 and 22

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8 Essential Elements of a Valid Contracts (1)

Dear Readers,

In the previous posts, we covered the meaning and definition of key terms such as: ContractAgreement and Consideration. Also, we discussed that an agreement without consideration is void. Please click on below link to read this post again

http://www.rkstrainings.com/what-do-we-mean-by-consideration/

Hence, one may wonder whether these are the only two necessary ingredients of a valid contract. In other words, if a contract satisfies these two requirements, whether, it is a legally binding and enforceable contract. The simple answer is NO. This is because there are few more things which are essential for a contract to be valid

All requirements, which make a contract legally enforceable, are called Essential Elements of a Valid Contract. An Agreement shall remain valid, if it contains all such compulsory ingredients. Otherwise, it becomes void and cannot be enforced

Indian Contract Act provides the followings as Essential Elements of a Valid Contract

In this post, we shall be discussing 4 elements with brief explanation and examples. Balance 4 shall be discussed in next blog

Essential Elements of a valid Contract

A) Offer and Acceptance

This is the first and foremost requirements of a valid contract. Agreement said to arise between the parties when one party submits the offer and other one accept it. Provided the acceptance by other party is unconditional, absolute & unqualified and without any reservation or rider

In the event, other party gives conditional acceptance, the same constitute a counter offer rather than an agreement. As long as parties’ gives offer and counter offers, there is no agreement until they meet at mutually acceptable common point. We know this concept fully and deal with it daily while procuring goods or services from our vendors/contractors

B) Intention to create legal relations

This is the most fundamental requirement of a valid Contract. For a contract to be legally enforceable, parties to an agreement must have intention to create legal relationships. This means each party acknowledges that it is not only answerable to other party but also to the applicable law for its promises. Both parties understand that they are legally bound to fulfil their obligations as per agreed terms; otherwise, it may face legal consequences under the law.

However, if parties to an agreement do not intend to be bound legally, such an agreement is a mere MOU rather than a contract. Such agreements are void and cannot be enforceable by law. A document named as contract does not make it contract if it does not fulfil this requirement

C) Lawful Consideration

There must be some advantage or benefit moving from one party to another. Also, parties must be permitted under law to receive such advantage or benefit. As per section 25 of Indian Contract Act, agreement without consideration is void. Also, as per section 23, the agreement for which consideration is unlawful is void

In business transactions, one party provides the goods and other party make payment against the same. Similar one party provides services or executes work and other party makes the agreed payment. So, goods, services or work is consideration for one party and payment in lieu of the same is consideration for other party. All such considerations are lawful and permitted under law

However, law does not allow certain considerations. For example, if A & B agree that A will give a threat to C (A’s neighbour) against payment of Rs-10,000.00. Though money consideration available for A for carrying out the work for B, but, act of threat is neither legally permitted or nor morally correct. Hence, the consideration is illegal in nature and such contracts are VOID

D) Lawful Object

For a valid contract, the objective of the agreement should be lawful. If the purpose of an agreement is illegal, such agreement is void. As per section 23 of Indian Contract Act, the objective is said to lawful unless;

  1. It is forbidden by law or
  2. Is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent; or
  3. Involves or implies, injury to a person or property of another; or
  4. The Court regards it as immoral, or opposed to public policy

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What is Consideration

Dear Readers,

In the second post, we covered meaning of important term called Agreement. We discussed that an agreement is defined as every promise and every set of promises forming consideration for each other. Please click on link below to read the post again

http://www.rkstrainings.com/agreement-meaning-and-definition/

In view of the above, it is imperative to know what is Consideration, in order to understanding definition of Agreement. The purpose of this post is to discuss the meaning of Consideration and to explain its significance for a valid Contract

How we define Consideration

The term Consideration means an advantage or benefit or things of value in lieu of doing something for someone. Let us assume there is an Agreement between Party A and Party B. Whereas, Party A promises to provide (or do) something of value to the Party B, and in return, Party B provides certain advantages or benefit to B. All such benefits, rewards, and advantages moving from one party to the other and creating value for each other under the agreement are called Consideration

As per Section 25 of Indian Contract Act, 1872, an agreement without consideration is VOID. Hence, an agreement is legally enforceable only when both parties give something and get something in return. Therefore, Consideration is a necessary ingredient of a valid Contract and it must be there for all parties to the Contract. Consideration may be in cash or kind or a promise for doing or not doing something

Examples under commercial agreements

  1. Under Purchase Agreement, Buyer receives Goods and Seller receives the agreed Money. So, Goods are consideration for Buyer and money for the Seller
  2. In Service Contract, one party gets Services & other the agreed Money. So, Services are consideration for Service Receiver and agreed Money for Service Provide

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Next Post – Contract Laws and Principles

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