‘Contract’ is a bilateral transaction between two or more than two parties. Every contract has to pass through several stages beginning with the stage of negotiation during which the parties discuss and negotiate proposals and counter-proposals as also the consideration resulting finally in the acceptance of the proposal.

The proposal when accepted gives rise to an agreement. It is at this stage that the agreement is reduced into writing and a formal document is executed on which parties affix their signatures or thumb impression so as to be bound by the terms of the agreement set out in that document.

Such an agreement has to be lawful as the definition of contract, as set out in Section 2(h) provides that “an agreement enforceable by law is a contract“.

Section 2(9) sets out that “an agreement not enforceable by law is said to be void“.

It is not necessary under law that every contract must be in writing. There can be an equally binding contract between the parties on the basis of oral agreement unless there is a law which requires the agreement to be in writing.

Lawful Agreement

Section 10 of the Contract Act provides as under:-

10. What agreements are contracts. – All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

Nothing herein contained shall affect any law in force in India and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.”

The essentials of contract set out in Section 10 above are:-

(1) Free consent of the parties

(2) Competence of parties to contract

(3) Lawful consideration

(4) Lawful object Competence to contract is set out in Section 11 which provides that every person is competent to contract who is of the age of majority and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Section 12 provides that a person will be treated to be of sound mind if, at the time when he makes the contract, he is capable of understanding it and forming a rational judgment as to its effect upon his interests.

“Consent” and “Free Consent”, are defined in Section 13 and 14 of the Act as under:-

“13. Two or more persons are said to consent when they agree upon the same thing in the same sense.”

“14. Consent is said to be free when it is not caused by-

(1) coercion, as defined in section 15, or

(2) undue influence, as defined in section 16, or

(3) fraud, as defined in section 17, or

(4) misrepresentation, as defined in section 18, or

(5) mistake subject to the provisions of sections 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.”

Section 15, 16, 17 and 18 define “Coercion”, “undue Influence”, “Fraud” and “Misrepresentation”.

Voidable Contract

Section 19 provides that when consent to an agreement is caused by coercion, fraud or misrepresentation, such agreement is voidable at the option of the party whose consent was so caused. So also is the agreement to which consent of a party was obtained by undue influence.

Void Contract

Section 20 of the Act lays down as under: –

“20. Agreement void where both parties are under mistake as to matter of fact.- Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

Explanation. – An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement, is not to be deemed a mistake as to a matter of fact.”

While explaining the section, the Supreme Court in the case of Shri Tarsem Singh v. Shri Sukhvinder Singh (1998)’ said that,

“This Section provides that an agreement would be void if both the parties to the agreement were under a mistake as to a matter of fact essential to the agreement. The mistake has to be mutual and in order that the agreement be treated as void, both the parties must be shown to be suffering from mistake of fact. Unilateral mistake is outside the scope of this Section.

The other requirement is that the mistake, apart from being mutual, should be in respect of a matter which is essential to the agreement.”