Definitions (Corporate Legal Framework)
1. Contract
A contract is an agreement enforceable by law. It consists of an offer, acceptance, and
consideration between competent parties with a lawful object and free consent. (As per
Section 2(h) of the Indian Contract Act, 1872)
2. Agreement to Sell
An agreement to sell is a contract where the transfer of ownership of goods is to take place
at a future date or subject to a condition. It is an executory contract. (As per Section 4(3) of
the Sale of Goods Act, 1930)
3. Sale
A sale is a contract where the ownership of goods is transferred from the seller to the buyer
immediately for a price. It is an executed contract. (As per Section 4(3) of the Sale of Goods
Act, 1930)
Essentials of a Valid Contract (Explained in Points with Examples)
1. Consensus (Consensus ad idem)
A valid contract requires mutual agreement between the parties, meaning both parties must
agree to the same thing in the same sense. They must be on the same page regarding the
subject of the contract.
Example: If A offers to sell his car to B and both agree on the specific car being sold, there is
a consensus. However, if A thought he was selling his SUV, but B thought he was buying A’s
sedan, there is no consensus, and the contract is not valid.
2. There Should Be No Flaw in the Consent of the Parties
The consent of both parties must be free and voluntary, without any kind of coercion, undue
influence, fraud, misrepresentation, or mistake. A contract where consent is flawed may be
voidable.
Example: If A threatens B to sign a contract to sell his house, the consent is obtained under
coercion, and B can later declare the contract void.
3. Capacity of the Parties (Competence)
The parties entering into the contract must be legally capable of doing so. According to
Section 11 of the Indian Contract Act, 1872, a person must be of sound mind, of legal age (18
years or older), and not disqualified by law (such as insolvents) to enter into a contract.
Example: A contract made with a minor (below 18 years) is void, as minors are not legally
competent to contract.
4. Lawful Consideration
Consideration refers to something of value exchanged between the parties. It can be in the
form of money, goods, services, etc. For a contract to be valid, the consideration must be
lawful.
Example: If A agrees to sell B an illegal substance, the consideration (payment for illegal
goods) is not lawful, making the contract void.
5. Lawful Object
The purpose or object of the contract must be lawful. The object cannot be illegal, immoral,
or opposed to public policy.
Example: If A hires B to commit a crime, such as theft, the object of the contract is illegal,
and hence, the contract is void.
6. Agreement Not Declared to Be Void
Certain agreements are explicitly declared void by law, such as agreements made without
consideration, agreements in restraint of trade, agreements to perform impossible acts, etc.
Example: A contract that restricts B from practicing a lawful profession for the rest of his life
would be void because it restrains trade, which is prohibited under Section 27 of the Indian
Contract Act, 1872.
Difference Between Agreement to Sell and Sale (Corporate Legal Framework)
Basis Sale Agreement to Sell
It is an executory contract; the transfer of
Nature of It is an executed contract; the transfer of
ownership happens at a future date or
Contract ownership happens immediately.
upon fulfillment of a condition.
Ownership Ownership of goods is transferred to the Ownership is to be transferred at a later
Transfer buyer immediately. date or upon meeting certain conditions.
Risk of loss passes to the buyer as soon
Risk Risk of loss remains with the seller until
as the sale is made, even if possession is
Transfer the ownership is transferred.
with the seller.
In case of a breach, the seller can sue for In case of a breach, the seller can only sue
Remedies for
the price of the goods, as ownership has for damages, as ownership has not yet
Breach
already transferred. transferred.
If the buyer becomes insolvent, the If the buyer becomes insolvent, the seller
Insolvency of
seller cannot claim the goods back, as can refuse to deliver the goods, as
Buyer
ownership has passed to the buyer. ownership has not passed yet.
If the seller becomes insolvent, the If the seller becomes insolvent, the buyer
Insolvency of
buyer can claim the goods, as ownership can only claim damages, not the goods, as
Seller
has already been transferred. ownership has not yet passed.
3rd Parties Seller can’t sell to 3rd party Seller can sell to 3rd parties
Nature of the Typically applies to specific goods that Can apply to both specific and
goods are identified and agreed upon. unascertained goods.
