Necessary Elements of Contract

A contract is basically a deal that will be upheld by the legal system. When multiple parties agree to specific terms and obligations in a contract, each party commits to fulfilling their respective responsibilities.

Making it more clear,

Legal Agreement with Binding Force: This indicates that the agreement can be upheld by legal authorities. If one party doesn't meet their duties in the contract, legal action can be taken by the other party to enforce it or seek remedies.

A contract includes two or more parties, which can be individuals, companies, or other entities. Each party has duties and entitlements specified in the contract.

Mutual Responsibilities: Both parties in the agreement are obligated to fulfill duties to each other. All parties must have a clear understanding of and agree to these responsibilities.

Proposal: One party suggests an agreement, outlining what they are prepared to offer, such as selling a product, offering a service, or transferring a sum of money.

Agreement: The proposed terms are agreed upon by the other party. Clear and unambiguous acceptance is necessary and typically needs to align precisely with the offer.

Consideration: This is a valuable item that both parties agree to provide or trade. Consideration can encompass various forms of value, like currency, products, assistance, or a commitment to perform (or abstain from) an action. The presence of consideration in the contract transforms it from a mere promise into a binding commitment, requiring both parties to fulfill their respective obligations.

The contract goes beyond being merely an agreement. It is a common saying that while all contracts are agreements, not all agreements are contracts. If a contract lacks valid elements, it is simply considered an agreement or could potentially be a void or voidable contract. The following are the essential elements of a valid contract:

1. Two or more than two parties or plurality in parties;
2. Offer and Acceptance
3. Lawful Consideration
4. Lawful Object
5. Capacity of Party
6. Contractual Intention of Parties
7. Free Consent
8. Not Expressly Declared Void by Laws
9. Certainty and Possibility
10. Legal Formalities

Explanation:

1. Two or more than two parties or plurality in panties

In each agreement, there must be a minimum of two parties, which are the maker of the offer and the one who accepts it. The parties could be individuals or groups, whether they are created by laws and whether they are natural or legal persons. A real person can perform any task unless prohibited by law, while a legal entity can only engage in activities that are allowed by law. In section 22 of The National Civil Code, 2017, all citizens have the privilege to enter contracts within the confines of the law.

2. Offer and Acceptance

In a legal agreement, there are two parties involved - one who makes the offer and the other who accepts it. One party suggests an idea to another party in hopes of receiving approval. If the other party agrees, they are referred to as the acceptor. Therefore, in each agreement, there needs to be a proposal and agreement. Nonetheless, a contract requires a legal agreement to an offer. Both the offer and acceptance needs to be clear, without conditions and communicated to each party in a specified or appropriate manner and timeframe. The agreement must be consensus ad-idem, meaning both parties must agree on the same thing in the same way.

The National Civil Code of 2017, section 508 discusses the procedure for an offer and acceptance, while Section 509 discusses the requirements for revoking an offer and acceptance.

3. Lawful Consideration

Consideration is necessary for a contract to be valid at all times. In contract law, both parties need to provide something in return for the promise made; this is known as 'quid pro quo'. Both parties must assist each other in fulfilling their obligations. The contract generally stipulates, 'Without consideration, no contract.' The evaluation is rooted in the principles of enough and appropriate followed by negotiation, mutual exchange, and practical perspective, which need to be legitimate and legal. An illegal consideration renders the contract invalid.

4. Lawful Object

Legality refers to the state of being valid or in accordance with the law. Object refers to the intention or goal behind the contract. Each agreement involves an item and in exchange for something of value. The goal of the agreement must be within the bounds of the law. Legal remedies in case of contract breach are ensured by the legality of both object and consideration. The importance of the legality of an object lies in its role of safeguarding fair business practices, preventing unfair competition, discouraging undesirable behavior, enforcing contracts, maintaining order in business transactions, and preventing illegal activities through legal agreements.

In accordance with the National Civil Code of 2017, section 517(2) (f), a contract that is made for an unethical purpose or goes against public morality or public order will be considered null and void. The agreement becomes illegal if the purpose is prohibited by legislation.

Examples of void contracts include selling liquor without a license to bypass the law, forming a partnership to avoid legal action in disputes, making a contract to sell illegal drugs, and providing a property for prostitution or sexual activities with a prostitute. Any agreement where someone offers their house, land, or transportation for prostitution is invalid and no one can do it knowingly. If caught, the offender can be punished with a sentence.

5. Capacity of Party

Capacity refers to the party's capability. Contractual capacity refers to the legal ability of individuals involved to make a binding agreement. It is dictated by the legal regulations of the nation and can vary from one country to another. Inability to finalize a contract renders the contract null from the beginning. In section 506 of the National Civil Code, 2017, it is stated that individuals who are minors, of unsound mind, or disqualified by law cannot legally enter into contracts.

6. Contractual Intention of Parties

In order for a contract to be valid, the parties must have the intention to enter into the agreement. Both parties entering into the contract need to intend to form a legal relationship. If there is no intention to form a legal relationship or to have a contractual intent between the parties, then the agreement cannot be considered a valid contract and may instead be a social, religious, or domestic agreement.

7. Free Consent

For a contract to be valid, both parties must give their consent, meaning their intentions must align and they must agree on certain terms. This is known as a consensus ad idem. Free consent of the parties is necessary in order to form a contract. If there is no agreement, then there is no valid contract. The parties to a contract must freely, mutually, and clearly communicate their consent to each other. If consent is given through coercion, fraud, misrepresentation, undue influence, or mistake, then the contract is deemed to lack the parties' free consent. It is not considered valid, but rather in such a situation, it is deemed invalid.

Contract that can be avoided: If consent is not given voluntarily, the party that has been wronged can choose to cancel the contract. If the contract is not rejected, it will be considered valid and legally binding.

8. Not Expressly Declared Void by Laws

The law should not explicitly deem a contract made by parties as void. Some contracts, even if they meet all the requirements of a valid contract, are specifically deemed invalid by law. Section 517 of the National Civil Code 2017 outlines 12 conditions for void contracts, stating that these agreements are null from the start and do not establish any legal consequences or rights and obligations for the parties involved.

Nonetheless, in the event that a section of a contract is deemed invalid, the rest of the contract can still be enforced in accordance with the law. The agreements mentioned below are null and void.

• A contract restraining exercising profession, trade, or business;
• A contract in restraint of a marriage other than one prohibited by the law;
• A contract restraining anyone from enjoying the facilities being enjoyed by the public;
• A contract restraining the legal right of any person from being enforced by a court;
• A contract concluded contrary to law or on a matter prohibited by the law in force;
• A contract made for an immoral purpose or against public order or public interest;
• A contract that cannot be performed because the parties thereto do not exactly ascertain or know about the matter, in relation to which it has been concluded;
• A contract the performance of which is impossible at the time of its conclusion or a fictitious contract;
• A contract that is vague because of its subject matter is incapable of giving a reasonable meaning;
• A contract concluded by a person not competent to make a contract;
• A contract with an illegal purpose;
• A contract concluded by mistake of both parties as to the essential fact of the contract at the time of its conclusion.

9. Certainty and Possibility

The basic principle of a contract is that it should be clear and definite regarding the obligations related to the contract's subject matter. A valid contract must have clear and definite terms and conditions, or at least be capable of being clarified. The duty arising from the contract should be dependent on the feasibility of execution, meaning it should be achievable and feasible to carry out.

10. Legal Formalities

Another crucial factor in a valid contract is that it can be written, spoken, or demonstrated through the actions of the parties involved. It is written in accordance with the legal requirements of that specific country. The contract should be carried out according to the law, or if not specified, a convenient method can be used to convey the agreement. According to section 505(2) of the 2017 National Civil Code, a contract can be created through written or verbal agreement, or by the actions of those involved.

In summary, the components of contract are necessary for creating a legally binding agreement. Every component has a vital function in guaranteeing that the agreement is more than just a collection of pledges but a legal obligation that will be upheld. If there is no clear acceptance and offer, the parties do not have a mutual agreement. Likewise, without thought, there is no motivation for the parties to fulfill their obligations. Capacity ensures all parties are legally capable of comprehending and consenting to the contract, while legality ensures the contract's purpose is lawful and not against public policy. These components establish a structure that safeguards the concerns of everyone involved, lessens the chance of disagreements, and offers legal solutions if an agreement is violated. Therefore, it is important to grasp and follow these key components for the effectiveness and validity of all contracts.