Contract law

Contract law - Transcript

Module

2

Law o f Contrac t

Indian Contract Act 1872
pacta sunt servanda agreements must be kept

Introduction
The law relating to contracts is contained in the Indian Contract Act 1872 For business executives contract law is tremendously significant because it underlies or is related to all major areas of law affecting business The general principles of the law of contracts are covered in 75 sections The Indian Contract Act 1872 is not a complete code on the law of contracts The preamble to the Act reads Whereas it is expedient to define and amend certain parts of the law relating to contracts it is hereby enacted as follows Further the Indian Contract Act does not affect any usage or custom of trade Thus the parties to a contract which clearly provide for the application of usages into their contracts are expressly saved from the operation of this Act

Meaning and Essentials of a Valid Contract
Contract A contract is an agreement enforceable by law made between at least two parties by which rights are acquired by one and obligations are created on the part of another Agreement Section 2 e defines an agreement as every promise and every set of promises forming consideration for each other In this context the word promise is defined by s 2 b In a contract there are at least two parties One of them makes a proposal or an offer to the other to do something with a view to obtaining the assent of that other to such act
Agreement Legal Obligation

Contract Contract Agreement Legal Obligation

Thereby for the formation of a contract There must be an agreement An agreement must be enforceable by law

Section 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 here by expressly declared to be void

Examples i A agrees to sell his motorcycle to B for Rs 10 000 The agreement gives rise to a legal obligation on the part of A to deliver the motorcycle to B and on the part of B to pay Rs 10 000 to A The agreement is a contract If A does not deliver the motorcycle then B can go to a court of law and file a suit against A for non performance of the promise on the part of A On the other hand if A has already given the delivery of the motorcycle and B refuses to pay the price A can go to the court and file a suit against B for nonperformance of promise ii A invites B for dinner in a restaurant B accepts the invitation On the appointed day B goes to the restaurant To his utter surprise A is not there or A is there but refuses to entertain B B shall have no remedy against A Similarly in case A is present in the restaurant but B fails to turn up then A shall have no remedy against B iii A gives a promise to his son to give him a pocket allowance of Rs 150 every week In case A fails or refuses to give the promised amount his son has no Cont remedy against A

Privity of Contract As a contract is entered into by two or more persons thereby creating rights and obligations for them it is a party to the contract only who can enforce his rights as against the other party i e the promisor The basic principle underlying law of contracts is that a stranger to a contract cannot maintain a suit for a remedy The law entitles only those who are parties to the contract to file suits for exercising their rights This is known as privity of contract Example A is indebted to B A sells certain goods to C C gives a promise to A to pay off A s debt to B In case C fails to pay B has no right to sue C being a stranger to the contract between C and A In other words C is not in privity with B However C is in privity with A

The concept of privity of contracts is illustrated below
M Goods W Rs M Manufacturer W Wholesaler R Retailer B Buyer Goods R Goods B Rs
Privity of Contract

Rs

B is in privity of contract with R only but not with W and M

Classification of Contracts Contracts may be classified in terms of their i Validity or enforceability ii Mode of formation and iii Performance

Essentials of a Valid Contract Essentials
There should be a valid agreement for which there should always be a offer and acceptance Intention to create legal relationship A valid Consideration Consent of the parties should be free Lawful objects Not expressly declared to be void The formalities laid down under Section 10 should be compiled with

Proposal or offer and Acceptance Ss 3 9
Modes of Making an Offer Express offer Implied offer Offer by abstinence Specific and general offers Philosophy underlying general offers Implied offer

Difference between Offer and Invitation to Offer An offer is to be distinguished from an invitation to offer A prospective shareholder by filling up a share application form usually attached to the prospectus is making the offer An auctioneer at the time of auction inviting offers from the bidders is not making an offer Cont

Proposal Offer concurrence of wills or a meeting of the minds of two or more parties Acceptance Matures into a promise

Some examples of different types of offers i A real estate company proposes by a letter to sell a flat to Rajiv at a certain price This is an offer by an act by written words i e letter This is also known as an express offer ii If the company proposes over telephone to sell the flat to Rajiv at a certain price then this is an offer by an act by oral words This is an express offer iii A company owns a fleet of motor boats for taking people from Mumbai to Goa The boats are in the waters at the Gateway of India This is an offer by conduct to take passengers from Mumbai to Goa Even if the incharge of the boat does not speak or call the passengers the very fact that the motor boat is in the waters near Gateway of India signifies company s willingness to do an act with a view to obtaining the assent of other s i e would be passengers This is an example of an implied offer iv Akbar a creditor offers not to file a suit against Begum a debtor if the latter pays him the amount of Rs 2000 outstanding This is an offer by abstinence or omission to do something

Proposal or Offer
Section 2 a When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal

Essentials Of a Valid Offer Essentials
Offer must either be expressed or implied Upton Rural District Council V Powell Offer must intend to create a legal relationship Balfour V Balfour Mc Gregor V Mc Gregor Offer must be certain and not vague in meaning

Offer may be specific or general Carlill V Carbolic Smoke Ball Company Offer must be communicated Lalman Shukla V Gauri Dutt Offer must be distinguished from invitation to offer An offer should not force an action on the offeree

Acceptance Acceptance
Essentials of a valid Acceptance Acceptance should be given by a proper person i e to whom the offer was made Within proper time even if no specific time has been mentioned Must be communicated Mental acceptance is no acceptance It can either be expressed or implied Acceptance must succeed the offer Offer once rejected cannot be accepted

Cross Offers Counter Offers

Capacity to Contract Ss 10 12
Persons who are Competent to Contract Any one cannot enter into a contract he must be competent to contract according to the law Every person is competent to contract if he i is of the age of majority ii is of sound mind and iii is not disqualified from contracting by any law to which he is subject s 11 Capacity of a Minor to Enter into a Contract The contract law defines maturity as the age of majority That usually is 18 years Does this mean that a minor is not competent to contract No a minor may make a contract but he is not bound by the contract however the minor can make the other party bound by the contract A minor s parents guardians are not liable to his creditors for the breach of a contract by him whether the contract is for necessaries of life or not

A minor cannot contract null and void ab intitio
As per Section 3 of Indian Majority Act 1875 a person who is over 18 years of age is major However if a guardian of a minor s person or property has been appointed under the Guardian and Wards Act or superintendent of minor s property is assumed by a court of Wards and he become major after completing the age of 21 Mohiri Bibi vs Dharmodas Ghose



Minor can be a beneficiary in a contract Person of Unsound mind An insolvent A convict undergoing imprisonment Alien Enemy Foreign Diplomats

Consent and Free Consent
Meaning of Consent We have seen earlier that an offer by one party is accepted by the other party The consent of the offeree to the offer by the offeror is necessary It is essential to the creation of a contract that both parties agree to the same thing in the same sense When two or more persons agree upon the same thing in the same sense they are said to consent Free consent For a contract to be valid it is not only necessary that the parties consent but also that they consent freely Where there is a consent but no free consent the contract is voidable at the option of the party whose consent was not free Thus free consent is one of the essentials of a valid contract A consent is said to be free when it is not caused by i coercion ii undue influence iii fraud iv misrepresentation or v mistake
Cont

Examples i A agrees to sell his Maruti car Delux model for Rs 1 20 lakhs B agrees to buy the same There is a valid contract since A and B have consented to contract on the same subject matter ii A who owns two Maruti cars offers to sell one say yellow coloured to B for Rs 1 20 lakhs B agrees to buy the car for the price thinking that A is selling the other car red coloured There is no consent and hence no contract A and B have agreed not to the same thing but are thinking for different cars iii A signed a promissory note which he was told was a letter of guarantee He was held not liable on the promissory note as there was no consent and consequently no agreement entered into by him

Meaning of Coercion Ss 15 and 72 Coercion is i the committing or threatening to commit any act forbidden by the Indian Penal Code or ii the unlawful detaining Meaning of Undue Influence s 16 Undue influence consists in the improper exercise of power over the mind of one of the contracting parties by the other Meaning of Misrepresentation Ss 18 19 Misrepresentation is also known as simple misrepresentation whereas fraud is known as fraudulent misrepresentation Meaning of Mistake Ss 20 21 Mistake may be defined as an erroneous belief on the part of the parties to the contract concerning something pertaining to the contract Meaning and Effect of Unilateral Mistake There is a unilateral mistake where only one party to a contract is under a mistake as to a matter of fact Mistake of Law It may be i mistake of law of the land or ii mistake of foreign law In the first case the rule is Ignorantia juris non excusat

Consideration Ss 2 d 23 25 185
The term consideration is used in the sense of quid pro que i e something in return This something or consideration need not be in terms of money Abstinence or promise is called a consideration for the promise No Consideration No Contract Ss 10 and 25 A promise without consideration cannot create a legal obligation The benefit so received or the loss damage or inconvenience so caused is regarded in law as the consideration for the promise Rules Regarding Consideration 1 2 3 4 5 6 Consideration must move at the desire of the promisor Consideration may move either from the promisee or any other person Consideration need not be adequate Consideration must be real and competent Consideration must be legal A consideration may be present past or future

Consideration
Sec 2 d of Indian Contract Act 1872 defines consideration as When at the desire of the promisor the promisee or any other person has done or abstained from doing or does or abstains from doing or promises to do or promises to abstain from doing something such act or abstinence or promise is called consideration for the promise

Sec 10 of the Indian Contract Act 1872 says that Consideration is necessary for any valid contract According to Sec 25 an agreement made without consideration is void Hence No Consideration No Contract



CONTRACTS WITHOUT CONSIDERATION CONSIDERATION Agreements made on account of natural love and affection Sec 25 1 It is registered under the law If is between parties standing in near relation to each other

Exceptions to rule Compensation for past voluntary services Promise to pay time barred debt if it is in written Gifts made under Transfer of Property Act Contracts of Agency Contract of Gurantee as per section 127 of ICA 1872

Promise to pay time barred debt Sec 25 3 i If it is expressed in writing ii If it is signed by the debtor or his agent 4 Gifts

Unlawful Consideration And Object Ss 23 24
There are certain cases in which the consideration and the object of an agreement are unlawful thereby making it unenforceable Section 23 defines an illegal agreement as one the consideration or object of which i is forbidden by law or ii defeats the provisions of any law or iii is fraudulent or iv involves or implies injury to the person or property of another or v the court regards it as immoral or opposed to public policy Examples X agrees to buy from a jeweller certain jewellery to be delivered to him after two months In the meantime the government enacts a law on gold control and prohibits dealings in gold When the time for delivery of the jewellery comes the jeweller refuses to deliver the same What can X do He has no cause of action The contract becomes void when the law is enacted Thus the contract was originally valid but becomes void later on by subsequent supervening illegality

Agreements Declared Void Ss 26 30
The Act declares certain agreements to be void Some of them such as the following have already been explained i agreements entered into through a mutual mistake of fact between the parties s 20 ii agreements the object or consideration of which is unlawful s 23 iii agreements part of consideration of which is unlawful s 24 iv agreements made without consideration s 25 Some other agreements which are declared to be void are below Agreements Against Public Policy Ss 26 28 Agreement in Restraint of Trade Section 27 Restraint of Legal Proceedings s 28 Uncertain or Ambiguous Agreements s 29 Wagering Agreements s 30

Contingent Contracts Ss 31 36
Contingent Contract Defined s 31 A contingent contract is a contract to do or not to do something if some event collateral to such contract does or does not happen Examples i A contracts to pay B Rs 10 000 if B s house is burnt This is a contingent contract A contingent contract may be contingent upon i the happening or non happening ii the happening or non happening of some event within a specified time ii A contracts to pay B a sum of money when B marries C Essential Characteristics of a Contingent Contract i The performance of a contingent contract ii The event must be uncertain iii The event must be collateral i e incidental to the contract Types of Contingent Contracts Example A promises to pay B Rs 1 000 if A left Delhi for Mumbai it is a contingent contract because going to Mumbai is an event within A s will but is Cont not merely his will

Rules Regarding Enforcement of Contingent Contracts Ss 32 to 36 1 2 3 Contingent contracts to do or not to do anything if the event becomes impossible such contract becomes void s 32 Contingent contract to do or not to do anything if an uncertain future event becomes impossible and not before s 33 If a contract is contingent upon as to how a person will act at an unspecified time the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies s 34

4

Contracts contingent upon the happening of a specified uncertain event with in a fixed time become void if at the expiration of the time fixed such event has not happened or if before the time fixed such event becomes impossible s 35 para 1

Quasi Contracts Ss 68 72 Certain Resembling those Created by Contracts

Relations

Meaning of Quasi Contracts Quasi Contracts are so called because the obligations associated with such transactions could neither be referred as tortious nor contractual but are still recognised as enforceable like contracts in courts According to Dr Jenks quasi contract is a situation in which law imposes upon one person on grounds of natural justice an obligation similar to that which arises from a true contract although no contract express or implied has in fact been entered into by them Example X supplies goods to his customer Y who receives and consumes them Y is bound to pay the price Y s acceptance of the goods constitutes an implied promise to pay This kind of contract is called a tacit contract In this very illustration if the goods are delivered by a servant of X to Z mistaking Z for Y then Z will be bound to pay compensation to X for their value This is a quasi Cont contract

Cases which are Treated as Quasi Contracts 1 2 3 4 5 Claim for necessaries supplied to a person incapable of contracting or on his account Reimbursement to a person paying money due by another in payment of which he is interested Obligation of a person enjoying benefits of non gratuitous act Responsibility of finder of goods Liability of a person to whom money is paid or thing delivered by mistake or under coercion s 72 When a contract is discovered to be unenforceable s 65 When one party abandons or refuses to perform the contract When a contract is divisible When an indivisible contract is completely but badly performed

Quantum Meruit 1 2 3 4

Performance of Contracts Ss 37 67
Meaning of Performance of Contract A contract creates obligations Performance of contract means the carrying out of obligations under it Meaning of Offer to Perform It may happen that the promisor offers performance of his obligation under the contract at the proper time and place but the promisee refuses to accept the performance This is called as Tender or Attempted Performance Contracts which Need Not be Performed Rules Regarding the Time Place and Manner of Performance of Contracts Ss 46 50 Reciprocal Promises Ss 51 54 Appropriation of Payments Ss 59 61 Assignment of Contracts

Different modes of Discharge of Contracts Ss 73 75
Discharge of Contracts by Performance or Tender Meaning of Mutual Consent s 62 Accord and Satisfaction Discharge of Contracts by Impossibility of Performance Subsequent or supervening impossibility as a mode discharge of contract s 56 Circumstances of supervening impossibility Destruction of the subject matter of the contract By the death or disablement of the parties Subsequent illegality Declaration of war Non existence or non occurrence of a particular state of things
Cont


i ii iii iv v



Circumstances in which a contract is not discharged on the ground of subsequent impossibility Practical note for business executives Effect of supervening impossibility Discharge of a Contract by Operation of Law Discharge of Contracts by Breach Anticipatory breach of contracts Consequence of anticipatory breach Actual breach of contracts Breach during the performance of the contract Partial breach of a contract Time as the Essence of a Contract s 55







Remedies for Breach of Contracts
When someone breaches a contract the other party is no longer obligated to keep its end of the bargain From there that party may proceed in several ways i the other party may urge the breaching party to reconsider the breach ii if it is a contract with a merchant the other party may get help from consumers associations iii the other party may bring the breaching party to an agency for alternative dispute resolution iv the other party may sue for damages or v the other party may sue for other remedies

Cont




1 2 3 4



What is the Point of Getting the Breaching Party to Reconsider Remedies for Breach of Contracts Rescission of the contract Damages s 75 Different types of damages Ordinary damages Special damages Vindictive or punitive damages Nominal damages Meaning of Specific Performance There are other remedies in a contract suit besides damages The main one is specific performance Remedy of Injunction Injunction means an order of the court prohibiting a person to do something where a party is in breach of a negative term of contract Remedy by Way of a Suit on Quantum Meruit The phrase quantum meruit means as much as is merited earned

Freedom to Contract
The Parties to a Contract in a Sense Make the Law for Themselves The law of contract differs from other branches of law in a very important aspect But many developments in the recent past have affected this freedom to contract Freedom to Contract is a Myth or an Illusion The freedom of the parties is limited by two factors There are certain laws for the protection of the employees and an employer cannot therefore induce his employees to enter into any contract favourable to the employer What is a Standard Form Contract A standard form contract is a document which is generally printed containing terms and conditions with certain blanks to be filled in It is prepared by the business people The customer has only to sign it Additional terms implied into the contract The additional terms may be implied by i custom ii courts iii statute i A contract must always be examined in the light of its surrounding commercial context