ICAI Notes- Unit 3: Other Essential Elements of a Contract | Business Laws for CA Foundation PDF Download

 Page 1


  BUSINESS LAWS 2.58 
LEARNING OUTCOMES 
UNIT-3: OTHER ESSENTIAL ELEMENTS OF A 
CONTRACT 
After studying this Chapter, you will be able to understand: 
? The various ingredients of incapacity to contract. 
? The legal consequence of contracting with a minor. 
? The concept of ‘consensus ad idem’ i.e. parties agreeing upon the 
same thing in the same sense. 
? The characteristics of different elements vitiating free consent and 
particularly to distinguish amongst fraud, misrepresentation and 
mistake. 
? The circumstances when object and consideration become 
unlawful. 
? Agreements opposed to public policy. 
 
Essential Elements of a Valid
Contract
Capacity to 
Contract
Major
Sound 
Mind
Not 
Disqualified
Free 
Consent
Not Caused by
Coercion
Undue 
Influence
Fraud
Misrepresentation Mistake
Lawful 
Consideration 
& Object
Not 
Expressly 
declared 
Void
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 2


  BUSINESS LAWS 2.58 
LEARNING OUTCOMES 
UNIT-3: OTHER ESSENTIAL ELEMENTS OF A 
CONTRACT 
After studying this Chapter, you will be able to understand: 
? The various ingredients of incapacity to contract. 
? The legal consequence of contracting with a minor. 
? The concept of ‘consensus ad idem’ i.e. parties agreeing upon the 
same thing in the same sense. 
? The characteristics of different elements vitiating free consent and 
particularly to distinguish amongst fraud, misrepresentation and 
mistake. 
? The circumstances when object and consideration become 
unlawful. 
? Agreements opposed to public policy. 
 
Essential Elements of a Valid
Contract
Capacity to 
Contract
Major
Sound 
Mind
Not 
Disqualified
Free 
Consent
Not Caused by
Coercion
Undue 
Influence
Fraud
Misrepresentation Mistake
Lawful 
Consideration 
& Object
Not 
Expressly 
declared 
Void
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.59 THE INDIAN CONTRACT ACT, 1872 
It has already been discussed that an agreement results from a proposal by one party and its 
acceptance by the other party. We have already discussed offer, acceptance and 
consideration in detail. We shall now discuss in detail the elements which constitute a valid 
contract enforceable in law. 
Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a 
contract, must satisfy the following conditions: 
(1) the parties must be competent to contract; 
(2) it must be made by the free consent of the parties;  
(3) it must be made for a lawful consideration and with a lawful object;  
(4)  it should not have been expressly declared as void by law. 
3.1 CAPACITY TO CONTRACT 
Meaning: Capacity refers to the competence of the parties to make a contract. It is one of 
the essential elements to form a valid contract. 
Who is competent to contract (Section 11) 
Every person is competent to contract who- 
(A)  has attained the age of majority, 
(B)  is of sound mind and  
(C)  is not disqualified from contracting by any law to which he is subject. 
(A) Age of Majority: In India, the age of majority is regulated by the Indian Majority  
Act, 1875.  
Every person domiciled in India shall attain the age of majority on the completion of 
18 years of age and not before. The age of majority being 18 years, a person less 
than that age even by a day would be minor for the purpose of contracting. 
Law relating to Minor’s agreement/Position of Minor 
1. A contract made with or by a minor is void ab-initio: A minor is not 
competent to contract and any agreement with or by a minor is void from the 
very beginning.  
In the leading case of Mohori Bibi vs. Dharmo Das Ghose (1903), ““Mr. D a 
minor, mortgaged his house for Rs. 20,000 to money lender, but the 
mortgagee i.e. money lender has paid him Rs. 8,000. Subsequently the minor 
© The Institute of Chartered Accountants of India
Page 3


  BUSINESS LAWS 2.58 
LEARNING OUTCOMES 
UNIT-3: OTHER ESSENTIAL ELEMENTS OF A 
CONTRACT 
After studying this Chapter, you will be able to understand: 
? The various ingredients of incapacity to contract. 
? The legal consequence of contracting with a minor. 
? The concept of ‘consensus ad idem’ i.e. parties agreeing upon the 
same thing in the same sense. 
? The characteristics of different elements vitiating free consent and 
particularly to distinguish amongst fraud, misrepresentation and 
mistake. 
? The circumstances when object and consideration become 
unlawful. 
? Agreements opposed to public policy. 
 
Essential Elements of a Valid
Contract
Capacity to 
Contract
Major
Sound 
Mind
Not 
Disqualified
Free 
Consent
Not Caused by
Coercion
Undue 
Influence
Fraud
Misrepresentation Mistake
Lawful 
Consideration 
& Object
Not 
Expressly 
declared 
Void
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.59 THE INDIAN CONTRACT ACT, 1872 
It has already been discussed that an agreement results from a proposal by one party and its 
acceptance by the other party. We have already discussed offer, acceptance and 
consideration in detail. We shall now discuss in detail the elements which constitute a valid 
contract enforceable in law. 
Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a 
contract, must satisfy the following conditions: 
(1) the parties must be competent to contract; 
(2) it must be made by the free consent of the parties;  
(3) it must be made for a lawful consideration and with a lawful object;  
(4)  it should not have been expressly declared as void by law. 
3.1 CAPACITY TO CONTRACT 
Meaning: Capacity refers to the competence of the parties to make a contract. It is one of 
the essential elements to form a valid contract. 
Who is competent to contract (Section 11) 
Every person is competent to contract who- 
(A)  has attained the age of majority, 
(B)  is of sound mind and  
(C)  is not disqualified from contracting by any law to which he is subject. 
(A) Age of Majority: In India, the age of majority is regulated by the Indian Majority  
Act, 1875.  
Every person domiciled in India shall attain the age of majority on the completion of 
18 years of age and not before. The age of majority being 18 years, a person less 
than that age even by a day would be minor for the purpose of contracting. 
Law relating to Minor’s agreement/Position of Minor 
1. A contract made with or by a minor is void ab-initio: A minor is not 
competent to contract and any agreement with or by a minor is void from the 
very beginning.  
In the leading case of Mohori Bibi vs. Dharmo Das Ghose (1903), ““Mr. D a 
minor, mortgaged his house for Rs. 20,000 to money lender, but the 
mortgagee i.e. money lender has paid him Rs. 8,000. Subsequently the minor 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 2.60 
had filed a suit for cancellation of contract. Held the contract is void as Mr. D 
is minor and therefore he is not liable to pay anything to lender.” 
2. No ratification after attaining majority: A minor cannot ratify the 
agreement on attaining majority as the original agreement is void ab initio 
and a void agreement can never be ratified. 
Example 1: X, a minor makes a promissory note in favour of Y. On attaining 
majority, he cannot ratify it and if he makes a new promissory note in place of 
old one, here the new promissory note which he executed after attaining 
majority is also void being without consideration.
3. Minor can be a beneficiary or can take benefit out of a contract: Though a 
minor is not competent to contract, nothing in the Contract Act prevents the 
minor from making the other party bound to him. Thus, a promissory note 
duly executed in favour of a minor is not void and can be sued upon by him, 
because he though incompetent to contract, may yet accept a benefit. 
 A minor cannot become partner in a partnership firm. However, he may with 
the consent of all the partners, be admitted to the benefits of partnership 
(Section 30 of the Indian Partnership Act, 1932). 
Example 2: A mortgage was executed in favour of a minor. Held, he can get a 
decree for the enforcement of the mortgage. 
4. A minor can always plead minority: A minor can always plead minority and 
is not stopped to do so even where he has taken any loan or entered into any 
contract by falsely representing that he was major. Rule of estoppel cannot be 
applied against a minor. It means he can be allowed to plea his minority in 
defence. 
Example 3: A, a minor has falsely induced himself as major and contracted 
with Mr. X for loan of 
` 
20,000. When Mr. X asked for the repayment A denied 
to pay. He pleaded that he was a minor so cannot enter into any contract. 
Held, A cannot be held liable for repayment of amount. However, if he has not 
spent the same, he may be asked to repay it but the minor shall not be liable 
for any amount which he has already spent even though he received the same 
by fraud. Thus, a minor can always plead minority and is not estopped from 
doing so even where he had produced a loan or entered into some other 
contract by falsely representing that he was of full age, when in reality he was 
a minor. 
5. Liability for necessaries: The case of necessaries supplied to a minor or to 
any other person whom such minor is legally bound to support is governed by 
© The Institute of Chartered Accountants of India
Page 4


  BUSINESS LAWS 2.58 
LEARNING OUTCOMES 
UNIT-3: OTHER ESSENTIAL ELEMENTS OF A 
CONTRACT 
After studying this Chapter, you will be able to understand: 
? The various ingredients of incapacity to contract. 
? The legal consequence of contracting with a minor. 
? The concept of ‘consensus ad idem’ i.e. parties agreeing upon the 
same thing in the same sense. 
? The characteristics of different elements vitiating free consent and 
particularly to distinguish amongst fraud, misrepresentation and 
mistake. 
? The circumstances when object and consideration become 
unlawful. 
? Agreements opposed to public policy. 
 
Essential Elements of a Valid
Contract
Capacity to 
Contract
Major
Sound 
Mind
Not 
Disqualified
Free 
Consent
Not Caused by
Coercion
Undue 
Influence
Fraud
Misrepresentation Mistake
Lawful 
Consideration 
& Object
Not 
Expressly 
declared 
Void
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.59 THE INDIAN CONTRACT ACT, 1872 
It has already been discussed that an agreement results from a proposal by one party and its 
acceptance by the other party. We have already discussed offer, acceptance and 
consideration in detail. We shall now discuss in detail the elements which constitute a valid 
contract enforceable in law. 
Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a 
contract, must satisfy the following conditions: 
(1) the parties must be competent to contract; 
(2) it must be made by the free consent of the parties;  
(3) it must be made for a lawful consideration and with a lawful object;  
(4)  it should not have been expressly declared as void by law. 
3.1 CAPACITY TO CONTRACT 
Meaning: Capacity refers to the competence of the parties to make a contract. It is one of 
the essential elements to form a valid contract. 
Who is competent to contract (Section 11) 
Every person is competent to contract who- 
(A)  has attained the age of majority, 
(B)  is of sound mind and  
(C)  is not disqualified from contracting by any law to which he is subject. 
(A) Age of Majority: In India, the age of majority is regulated by the Indian Majority  
Act, 1875.  
Every person domiciled in India shall attain the age of majority on the completion of 
18 years of age and not before. The age of majority being 18 years, a person less 
than that age even by a day would be minor for the purpose of contracting. 
Law relating to Minor’s agreement/Position of Minor 
1. A contract made with or by a minor is void ab-initio: A minor is not 
competent to contract and any agreement with or by a minor is void from the 
very beginning.  
In the leading case of Mohori Bibi vs. Dharmo Das Ghose (1903), ““Mr. D a 
minor, mortgaged his house for Rs. 20,000 to money lender, but the 
mortgagee i.e. money lender has paid him Rs. 8,000. Subsequently the minor 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 2.60 
had filed a suit for cancellation of contract. Held the contract is void as Mr. D 
is minor and therefore he is not liable to pay anything to lender.” 
2. No ratification after attaining majority: A minor cannot ratify the 
agreement on attaining majority as the original agreement is void ab initio 
and a void agreement can never be ratified. 
Example 1: X, a minor makes a promissory note in favour of Y. On attaining 
majority, he cannot ratify it and if he makes a new promissory note in place of 
old one, here the new promissory note which he executed after attaining 
majority is also void being without consideration.
3. Minor can be a beneficiary or can take benefit out of a contract: Though a 
minor is not competent to contract, nothing in the Contract Act prevents the 
minor from making the other party bound to him. Thus, a promissory note 
duly executed in favour of a minor is not void and can be sued upon by him, 
because he though incompetent to contract, may yet accept a benefit. 
 A minor cannot become partner in a partnership firm. However, he may with 
the consent of all the partners, be admitted to the benefits of partnership 
(Section 30 of the Indian Partnership Act, 1932). 
Example 2: A mortgage was executed in favour of a minor. Held, he can get a 
decree for the enforcement of the mortgage. 
4. A minor can always plead minority: A minor can always plead minority and 
is not stopped to do so even where he has taken any loan or entered into any 
contract by falsely representing that he was major. Rule of estoppel cannot be 
applied against a minor. It means he can be allowed to plea his minority in 
defence. 
Example 3: A, a minor has falsely induced himself as major and contracted 
with Mr. X for loan of 
` 
20,000. When Mr. X asked for the repayment A denied 
to pay. He pleaded that he was a minor so cannot enter into any contract. 
Held, A cannot be held liable for repayment of amount. However, if he has not 
spent the same, he may be asked to repay it but the minor shall not be liable 
for any amount which he has already spent even though he received the same 
by fraud. Thus, a minor can always plead minority and is not estopped from 
doing so even where he had produced a loan or entered into some other 
contract by falsely representing that he was of full age, when in reality he was 
a minor. 
5. Liability for necessaries: The case of necessaries supplied to a minor or to 
any other person whom such minor is legally bound to support is governed by 
© The Institute of Chartered Accountants of India
2.61 THE INDIAN CONTRACT ACT, 1872 
section 68 of the Indian Contract Act. A claim for necessaries supplied to a 
minor is enforceable by law. But a minor is not liable for any price that he may 
promise and never for more than the value of the necessaries. There is no 
personal liability of the minor, but only his property is liable. 
 To render minor’s estate liable for necessaries two conditions must be 
satisfied. 
(i) The contract must be for the goods reasonably necessary for his 
support in the station in life. 
(ii) The minor must not have already a sufficient supply of these 
necessaries. 
Necessaries mean those things that are essentially needed by a minor. They 
cannot include luxuries or costly or unnecessary articles. Necessaries extend 
to all such things as reasonable persons would supply to an infant in that class 
of society to which the infant belongs. Expenses on minor’s education, on 
funeral ceremonies come within the scope of the word ‘necessaries’. 
The whole question turns upon the minor’s status in life. Utility rather than 
ornament is the criterion.  
Example 4: Shruti being a minor purchased a laptop for her online classes of 
` 
70,000 on credit from a shop. But her assets could pay only 
` 
20,000. The 
shop keeper could not hold Shruti personally liable and could recover only 
amount recoverable through her assets i.e. upto
` 
20,000.
6. Contract by guardian - how far enforceable: Though a minor’s agreement is 
void, his guardian can, under certain circumstances enter into a valid contract 
on minor’s behalf. Where the guardian makes a contract for the minor, which 
is within his competence and which is for the benefit of the minor, there will 
be valid contract which the minor can enforce.  
 But all contracts made by guardian on behalf of a minor are not valid. For 
instance, the guardian of a minor has no power to bind the minor by a contact 
for the purchase of immovable Property. But a contract entered into by a 
certified guardian (appointed by the Court) of a minor, with the sanction of 
the court for the sale of the minor’s property, may be enforced by either party 
to the contract. 
7. No specific performance: A minor’s agreement being absolutely void, there 
can be no question of the specific performance of such an agreement.  
© The Institute of Chartered Accountants of India
Page 5


  BUSINESS LAWS 2.58 
LEARNING OUTCOMES 
UNIT-3: OTHER ESSENTIAL ELEMENTS OF A 
CONTRACT 
After studying this Chapter, you will be able to understand: 
? The various ingredients of incapacity to contract. 
? The legal consequence of contracting with a minor. 
? The concept of ‘consensus ad idem’ i.e. parties agreeing upon the 
same thing in the same sense. 
? The characteristics of different elements vitiating free consent and 
particularly to distinguish amongst fraud, misrepresentation and 
mistake. 
? The circumstances when object and consideration become 
unlawful. 
? Agreements opposed to public policy. 
 
Essential Elements of a Valid
Contract
Capacity to 
Contract
Major
Sound 
Mind
Not 
Disqualified
Free 
Consent
Not Caused by
Coercion
Undue 
Influence
Fraud
Misrepresentation Mistake
Lawful 
Consideration 
& Object
Not 
Expressly 
declared 
Void
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.59 THE INDIAN CONTRACT ACT, 1872 
It has already been discussed that an agreement results from a proposal by one party and its 
acceptance by the other party. We have already discussed offer, acceptance and 
consideration in detail. We shall now discuss in detail the elements which constitute a valid 
contract enforceable in law. 
Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a 
contract, must satisfy the following conditions: 
(1) the parties must be competent to contract; 
(2) it must be made by the free consent of the parties;  
(3) it must be made for a lawful consideration and with a lawful object;  
(4)  it should not have been expressly declared as void by law. 
3.1 CAPACITY TO CONTRACT 
Meaning: Capacity refers to the competence of the parties to make a contract. It is one of 
the essential elements to form a valid contract. 
Who is competent to contract (Section 11) 
Every person is competent to contract who- 
(A)  has attained the age of majority, 
(B)  is of sound mind and  
(C)  is not disqualified from contracting by any law to which he is subject. 
(A) Age of Majority: In India, the age of majority is regulated by the Indian Majority  
Act, 1875.  
Every person domiciled in India shall attain the age of majority on the completion of 
18 years of age and not before. The age of majority being 18 years, a person less 
than that age even by a day would be minor for the purpose of contracting. 
Law relating to Minor’s agreement/Position of Minor 
1. A contract made with or by a minor is void ab-initio: A minor is not 
competent to contract and any agreement with or by a minor is void from the 
very beginning.  
In the leading case of Mohori Bibi vs. Dharmo Das Ghose (1903), ““Mr. D a 
minor, mortgaged his house for Rs. 20,000 to money lender, but the 
mortgagee i.e. money lender has paid him Rs. 8,000. Subsequently the minor 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 2.60 
had filed a suit for cancellation of contract. Held the contract is void as Mr. D 
is minor and therefore he is not liable to pay anything to lender.” 
2. No ratification after attaining majority: A minor cannot ratify the 
agreement on attaining majority as the original agreement is void ab initio 
and a void agreement can never be ratified. 
Example 1: X, a minor makes a promissory note in favour of Y. On attaining 
majority, he cannot ratify it and if he makes a new promissory note in place of 
old one, here the new promissory note which he executed after attaining 
majority is also void being without consideration.
3. Minor can be a beneficiary or can take benefit out of a contract: Though a 
minor is not competent to contract, nothing in the Contract Act prevents the 
minor from making the other party bound to him. Thus, a promissory note 
duly executed in favour of a minor is not void and can be sued upon by him, 
because he though incompetent to contract, may yet accept a benefit. 
 A minor cannot become partner in a partnership firm. However, he may with 
the consent of all the partners, be admitted to the benefits of partnership 
(Section 30 of the Indian Partnership Act, 1932). 
Example 2: A mortgage was executed in favour of a minor. Held, he can get a 
decree for the enforcement of the mortgage. 
4. A minor can always plead minority: A minor can always plead minority and 
is not stopped to do so even where he has taken any loan or entered into any 
contract by falsely representing that he was major. Rule of estoppel cannot be 
applied against a minor. It means he can be allowed to plea his minority in 
defence. 
Example 3: A, a minor has falsely induced himself as major and contracted 
with Mr. X for loan of 
` 
20,000. When Mr. X asked for the repayment A denied 
to pay. He pleaded that he was a minor so cannot enter into any contract. 
Held, A cannot be held liable for repayment of amount. However, if he has not 
spent the same, he may be asked to repay it but the minor shall not be liable 
for any amount which he has already spent even though he received the same 
by fraud. Thus, a minor can always plead minority and is not estopped from 
doing so even where he had produced a loan or entered into some other 
contract by falsely representing that he was of full age, when in reality he was 
a minor. 
5. Liability for necessaries: The case of necessaries supplied to a minor or to 
any other person whom such minor is legally bound to support is governed by 
© The Institute of Chartered Accountants of India
2.61 THE INDIAN CONTRACT ACT, 1872 
section 68 of the Indian Contract Act. A claim for necessaries supplied to a 
minor is enforceable by law. But a minor is not liable for any price that he may 
promise and never for more than the value of the necessaries. There is no 
personal liability of the minor, but only his property is liable. 
 To render minor’s estate liable for necessaries two conditions must be 
satisfied. 
(i) The contract must be for the goods reasonably necessary for his 
support in the station in life. 
(ii) The minor must not have already a sufficient supply of these 
necessaries. 
Necessaries mean those things that are essentially needed by a minor. They 
cannot include luxuries or costly or unnecessary articles. Necessaries extend 
to all such things as reasonable persons would supply to an infant in that class 
of society to which the infant belongs. Expenses on minor’s education, on 
funeral ceremonies come within the scope of the word ‘necessaries’. 
The whole question turns upon the minor’s status in life. Utility rather than 
ornament is the criterion.  
Example 4: Shruti being a minor purchased a laptop for her online classes of 
` 
70,000 on credit from a shop. But her assets could pay only 
` 
20,000. The 
shop keeper could not hold Shruti personally liable and could recover only 
amount recoverable through her assets i.e. upto
` 
20,000.
6. Contract by guardian - how far enforceable: Though a minor’s agreement is 
void, his guardian can, under certain circumstances enter into a valid contract 
on minor’s behalf. Where the guardian makes a contract for the minor, which 
is within his competence and which is for the benefit of the minor, there will 
be valid contract which the minor can enforce.  
 But all contracts made by guardian on behalf of a minor are not valid. For 
instance, the guardian of a minor has no power to bind the minor by a contact 
for the purchase of immovable Property. But a contract entered into by a 
certified guardian (appointed by the Court) of a minor, with the sanction of 
the court for the sale of the minor’s property, may be enforced by either party 
to the contract. 
7. No specific performance: A minor’s agreement being absolutely void, there 
can be no question of the specific performance of such an agreement.  
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 2.62 
8. No insolvency: A minor cannot be declared insolvent as he is incapable of 
contracting debts and dues are payable from the personal properties of minor 
and he shall never be held personally liable. 
9. Partnership: A minor being incompetent to contract cannot be a partner in a 
partnership firm, but under Section 30 of the Indian Partnership Act, he can be 
admitted to the benefits of partnership.  
10. Minor can be an agent: A minor can act as an agent. But he will not be liable 
to his principal for his acts. A minor can draw, deliver and endorse negotiable 
instruments without himself being liable. 
Example 5: A minor can have an account in the bank. He can draw a cheque 
for his purchases. But he shall not be liable for cheque bounces nor can he be 
sued under court of law for any fraud done from his account.
11. Minor cannot bind parent or guardian: In the absence of authority, express 
or implied, an infant is not capable of binding his parent or guardian, even for 
necessaries. The parents will be held liable only when the child is acting as an 
agent for parents. 
Example 6: Richa a minor entered into contract of buying a scooty from the 
dealer and mentioned that her parents will be liable for the payment of 
scooty. The dealer sent a letter to her parents for money. The parents will not 
be liable for such payment as the contract was entered by a minor in their 
absence and out of their knowledge.
12. Joint contract by minor and adult: In such a case, the adult will be liable on 
the contract and not the minor. In Sain Das vs. Ram Chand, where there was 
a joint purchase by two purchasers, one of them was a minor, it was held that 
the vendor could enforce the contract against the major purchaser and not 
the minor. 
13. Surety (Guarantor) for a minor: In a contract of guarantee when an adult 
stands surety for a minor then he (adult) is liable to third party as there is 
direct contract between the surety and the third party. 
Example 7: Mr. X guaranteed for the purchase of a mobile phone by Krish, a 
minor. In case of failure for payment by Krish, Mr. X will be liable to make the 
payment. 
14. Minor as Shareholder: A minor, being incompetent to contract cannot be a 
shareholder of the company. If by mistake he becomes a member, the 
company can rescind the transaction and remove his name from register. But, 
© The Institute of Chartered Accountants of India