Law of Contract

LAW OF CONTRACT

IMPORTANCE OF CONTRACTBoarding a bus, buying a cold drink, house we

rent, electricity that is supplied to us, telephone and cable we use

Meaning and Introduction of Law

• Law: The rules which regulate the relations between individuals and individuals, individuals and society and individuals and government.

• Different types of laws: Administrative law, Criminal Law, Civil Law, Constitutional Law, Business Law, Industrial Law etc.,

Law of Contract

• Governed by Indian Contract Act, 1872• The basic constituents of contracts:• 1. Formation of agreements• 2. Consideration• 3. Setting aside of bad contracts• 4. Damages and Compensation

Division of Contract Act

• Chapter I: Of the communication, Acceptance and Revocation of Proposals

• Chapter II: Of Contracts, Voidable Contracts and Void Agreements

• Chapter IV: Of the Performance of Contracts• Chapter VI: ‘Of the Consequences of Breach of

Contract.

Definition of Contract

• Section 2(h) of the Indian Contract Act, 1872: “A contract as an agreement enforceable by law”

• Section 2(e): Every promise and every set of promises, forming consideration for each other”

• Section 2(b): When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise”

• This in other words means An agreement is an accepted proposal.

Explanation for Contract

• Contract consists of essentially two elements:• They are:• 1. Agreement• 2. Its enforceability of law• Agreement = Offer + Acceptance• Difference between Agreement and Contract:• Agreement is a wide term and contract is a narrower

term. • Agreement is of two types they are : Social Agreement,

Legal Agreement.

Essential Elements of a Valid Contract

• According to Section 10 all agreements are contracts if they are made by the free consent, of parties to competent to contract, for a lawful consideration and with a lawful object.

• Agreement: A invites B to his home to stay with him for a period of one week but the previous day A’s wife died. If A cancels the visit it cannot be challenged as violation. As it is a social agreement.

• A father promises to pay his son 100/- per month as pocket allowance. Later he refuses to pay. The son cannot claim it in a court of law as it is a domestic agreement.

Essentials elements of a Contract

• Offer and Acceptance• Intention to create legal relationship• Balfour vs Balfour[A husband promised to pay his wife a

household allowance of 30 pounds every month. Later when they separated and the husband failed to pay the amount. The wife sued for allowance. Held agreements such as these were outside the realm of contract altogether.

• In commercial and business agreements the presumption is usually that the parties intended to create legal relations.

Essential Elements of a Contract:

• Rose and Frank Company vs Crompton Brothers( There was an agreement between R Company and C company by means of which the former was appointed as the agreement is not entered into as a formal or legal agreement, and shall not be subject to legal jurisdiction of courts. It was held that there was no binding contract as there was no intention to create legal relationship.

Essential Elements of Contract• Lawful consideration• Capacity of parties – competency• Free and genuine consent• Lawful object• Agreement not declared as void• Certainty and possibility of performance• Montreal gas company vs Vassey: A company agreed with V that

on expiration of V’s existing contract, it would favourably consider an application by V for a renewal of his contract. Held the agreement was not intended to bind the company to renew its contract with V and imposed no obligation on it to review

Essential Elements of a Contract

• Legal Formalities• Classification of a Contract:• Classification according to Validity: • Voidable contract: An agreement which is enforceable by law

at the option of one or more of the parties thereto, but not at the option of the other or others is a voidable contract. This happens when the essential element of free consent.

• Egg: A promises to sell his car to B for Rs. 2,000. His consent is obtained by use of force. The contract is voidable at the option of A. He may avoid the contract or elect to be bound by it.

Classification of Contracts

• A contract becomes voidable in the following two cases also:

• When a person promises to do something for another person for a consideration but the other person prevents him from performing his promise, the contract becomes voidable at his option.

• When a party to a contract promises to perform an obligation within a specified time, any failure on his part to perform his obligation within a fixed time makes the contract voidable at the option of the promisee.

Voidable Contract

• When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. If the party rescinding the contract has received any benefit under the contract from another party to such contract he shall restore such benefit, so far as may be, to the person from whom it was received.

Void agreement and void contract

• Void agreement: An agreement not enforceable by law is said to be void. A void agreement does not create any legal rights or obligations. It is a nullity and is a destitute of legal effects altogether.

• Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void.

Agreements

• Illegal agreements: An illegal agreement is one which transgresses some rule of basic public policy or which is criminal in nature or which is immoral. Such an agreement is a nullity and has much wider import than a void contract. All illegal agreements are void but all void agreement or contract are not necessarily illegal.

• Unenforceable contracts: An unenforceable contract is one which cannot be enforced in a court of law because of some technical defect such as absence of writing or where the remedy has been barred by lapse of time.

Contracts: According to Formation

• A contract may be made in writing or by word of mouth or inferred from the conduct of the parties or the circumstances of the case.

• Express Contract: If the terms of a contract are expressly agreed upon (whether by words spoken or written) at the time of formation of the contract, the contract is said to be an express contract. Where the offer or acceptance of any promise is made in words, the promise is said to be express. An express promise results in an express contract.

According to formation

• Implied Contract: An implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between them. It is not the result of any express promise or promises by the parties but of their particular acts. It may also result from a continuing course of conduct of parties. Where the proposal or acceptance if any promise is made otherwise than in words, the promise is said to be implied.

• Egg: gets into a public bus, takes a cup of tea in a restaurant.


• Quasi Contract: It is not a contract. A contract is intentionally entered into by the parties. A quasi contract on the other hand is created by law. It resembles a contract in that a legal obligation is imposed on a party who is required to perform it. It rests on the ground of equity that “ a person shall not be allowed to enrich himself unjustly at the expense of another”.


• Egg: T a tradesman leaves goods at C’s house by mistake. C treats the goods as his own. C is bound to pay for the goods.

• E- Commerce Contract: An E-Commerce contract is one which is entered into between two parties via internet. In Internet, different individuals or companies create networks which are linked to numerous other networks.

Classification according to performance

• Executed contract: Executed means that which is done. An executed contract is one in which both the parties have performed their respective obligations.

• Thus when a person buys a bun containing a stone and subsequently breaks one of his teeth, he has a right to recover damages from the seller. (chaproniere vs Mason)

Classification according to performance

• Executory Contract: Executory means that which remains to be carried into effect. An executory contract is one in which both the parties have yet to perform their obligations.

• Unilateral or one sided contract: A unilateral or one-sided contract is one which only party has to fulfil his obligations at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before comes into existence. Such contracts are also known as contracts with executed consideration.

• Bilateral contract: A bilateral contract is one in which the obligations on the part of both the parties to the contract are outstanding at the time of the formation of the contract. It is also known as contracts with executory consideration, executory contracts.

Offer and Acceptance

• At the inception of every agreement, there must be a definite offer by one person to another and its unqualified acceptance by the person to whom the offer is made.

• An offer is a proposal by one party to another to enter into a legally binding agreement with him. A person is said to have a made a proposal when he “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”

• The person making the offer is called as offeror, proposer or promisor and the person to whom it is made is called as offeree, or proposee. When the offeree accepts the offer,he is called the acceptor or promisee.

Offer

• An offer may be made by express words, spoken or written. This is known as an express offer.

• An offer may be implied from the conduct of the parties or the circumstances of the case. This is known as an implied offer.

• Thus when a transport company runs a bus on a particular route there is an implied offer by the transport company to carry passengers for a certain fare. The offer is complete as soon as passenger boards the bus. ( Wikie vs London Passenger Transport board)

Types of Offer

Specific Offer: When an offer is made to a definite person it is called as an specific offer. It can be accepted only by the person to whom it is made. General Offer: When an offer is made to the world at large it is called as an general offer. Elements of an offer: Not every proposal made by an offeror is legally regarded as an offer.

Elements of an offer

• 1. The offer must show an obvious intention on the part of the offeror to be bound by it. That is the offeror must signify to the offeree his willingness to do or to abstain from doing something.

• The offeror must make the offer with a view to obtaining the assent of the offeree to such act or abstinence.

• The offer must be definite• It must be communicated to the offeree.

Legal rules to the offer

• 1. Offer must be such as in law is capable of being accepted and giving rise to legal relationship.

• 2. Terms of offer must be definite, unambiguous and certain and not loose and vague

• 3. An offer is different from:• A. A declaration of intention and an announcement• B. “A father wrote to his would be son-in-law that his

daughter would have a share of what he left. Held it was merely a statement of intention ( Re Ficus)

Legal rules for an offer

• An auctioneer advertised in a newspaper that a sale of office furniture would be held. A brokers came from a distant place to attend that auction, but all the furniture was withdrawn. The broker thereupon sued the auctioneer for his loss of time and expenses. Held a declaration of intention to do a thing did not create a binding contract with those who acted upon it, so that the broker could not recover. ( Harris vs Nickerson)


• An invitation to make an offer or do business• Display of goods by a shop keeper in his window,

with prices marked on them, is not an offer but merely an invitation to the public to make an offer to buy the goods at the marked prices.

• Likewise quotations, catalogues, advertisements in a newspaper for sale of an article, or circulars sent to potential customers do not constitute an offer. They are instead an invitation to the public to make an offer.

Legal Rules for an offer

• Offer must be communicated• An acceptance of an offer, in ignorance of the offer is no

acceptance and does not confer any right on the acceptor.

• S sent his servant L to trace his missing nephew. He then announced that any body who traced his nephew would be entitled to a certain reward. L traced the boy in ignorance of this announcement. Subsequently when he came to know of the reward, he claimed it. Held he was not entitled. (Lalman shoukla vs gouri dutt)


• Offer must be made with a view to obtaining the assent

• Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.

• A statement of price is not an offer• Three telegrams were exchanged between

Harvey and Facey:


• ‘Will you sell us your Bumper Hall pen? Telegraph lowest cash price – answer paid” (Harvey to Facey)

• ‘Lowest price for Bumper Hall 900” (Facey to Harvey)

• “We agree to buy Bumper Hall pen for the sum of 900 asked by you” (Harvey to Facey)

• Held there was no concluded contract between Harvey and Facey.

Offer

• Cross Offer: When two parties make identical offers to each other, in ignorance of each other offer, the offers are cross offers. In such a case the Court will not construe one offer as the offer and the other as the acceptance and as such there is no concluded the contract.

• P agreed to purchase a machine and signed a contract to the effect. The contract contained several clauses in small print which P did not read. Held P was bound by those clauses. (L ‘ Estrange vs Graucob Ltd)

Acceptance

• A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an offer. In other words it is the manifestation by the offeree of his willingness to be bound by the terms of the offer.

• When the offeree signifies his assent there to the offeror the offer is said to be accepted.

• Acceptance may be express or implied. It is express when it is communicated by words, spoken or written or by doing some required act.

• It is implied when it is to be gathered from the surrounding circumstances or the conduct of the parties.

Acceptance

• A widow promised to settle some immovable property on her niece if the niece stayed with her in her residence. The niece stayed with her in her residence till her death. Held the niece was entitled to the property. ( v rao vs a rao)

• When an offer is made to a particular person, it can be accepted by him alone. If it is accepted by any other person, there is no valid acceptance. The rule of law is clear that is you propose to make a contract with A, B cannot substitute himself for A without your consent.

• General offer.

Legal Rules as to acceptance

• It must be absolute and unqualified• It must be Communicated to the offeror• F offered to buy his nephew’s horse at 30 pounds saying : “ If I

hear no more about it I shall consider the horse is mine at 30 pounds.”

• The nephew did not write to F at all, but he told his auctioneer who was selling his horses not to sell that particular horse because it had been sold to his uncle. The auctioneer inadvertently sold the horse. Held F had no right of action against the auctioneer as the horse had not been sold to F his offer of 30 pounds not having been accepted. ( Felthouse vs Bindley)

Legal rules as to acceptance• It must be according to the mode prescribed or usual and reasonable

mode• It must be given within a reasonable time• It cannot be precede an offer• It must show an intention on the part of the acceptor to fulfil terms of

the promise• It must be given by the party or parties to whom the offer is made• It must be given before the offer lapses or before the offer is withdrawn• It cannot be implied from silence• Where an offeree accepts an offer “subject to contract” or “subject to

formal contract” or “subject to contract to be approved by solicitors” the matter remains in the negotiation stage and the parties do not intend to be bound until a formal contract is prepared and signed by them.

Legal rules to acceptance

• An agreement to enter into an agreement upon terms to be afterwards settled between the parties is a contradiction in terms.

• An actress was engaged by a theatrical company for a certain period. One of the terms of the agreement was that if the play was shown in London, she would be engaged at a salary to be mutually agreed upon. Held there was no contract ( Loftus vs Roberts)

Communication of Offer, Acceptance and Revocation

• Mode of communication: The communication of offer, its acceptance and their revocation respectively are deemed to be made by any act, or omission of the party offering, accepting and revoking. Such act or omission must however have the effect of communicating such offer, acceptance or revocation. It can be in the form of written, spoken or by conduct.

Communication when it is complete

• The communication of an offer is complete when it comes to the knowledge of the person to whom it is made.

• Communication of acceptance: The communication of an acceptance is complete

• 1. as against the proposer when it is put into a course of transmission to him, so as to be put out of the power of the acceptor.

• 2. As against the acceptor when it comes to the knowledge of the proposer.

• Revocation means taking back, recalling or withdrawal is complete as against the person who makes it, when t is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it.

• As against the person to whom it is made, when it comes to his knowledge.

Time for revocation of offer and acceptance.

• A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards.

• Time for revocation of acceptance: An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.

Time for revocation of offer and acceptance

• Loss of letter of acceptance in postal transit• Contracts over telephone: It is equated to oral agreements.

But the offeree must make sure that his acceptance is properly received that is heard and understood by the offeror.

• Offer comes to an end: • By communication of notice of revocation• By lapse of time• By death or insanity of the offeror provided the offeree

comes to know of it before acceptance. • By non fulfilment by the offeree of a condition precedent to

acceptance.

Offer comes to an end:

• If a counter offer is made• If an offer is not accepted according to the

prescribed or usual mode.• If the law is changed• But still it has to follow the changes:• It can be revoked at any time before its

acceptance is complete as against the offeror.• Revocation takes effect only when it is

communicated to the offeree.

Offer comes to an end

• If the offeror has agreed to keep his offer open for a certain period. He can revoke it before the expiration of that period only –

• If the offer has in the meantime not been accepted.• If there is no consideration for keeping the offer open.• Rejection of an Offer: Once rejected it cannot be

accepted. It can be expressed or implied. • Express rejection is effective only when notice of

rejection reaches the offeror.• Implied rejection (counter offer, conditional acceptance)

Consideration

• Section 2(d) defines consideration as follows: “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 to abstain from doing, something such act or abstinence or promise is called a consideration for the promise”.

Consideration• An act that is doing of something. In this sense consideration is in an

affirmative form.• An abstinence or forbearance that is abstaining or refraining from

doing something.• A return of promise.• Abdul Aziz vs Masum: The secretary of a Mosque committee filed a

suit to enforce a promise which the promisor had made to subscribe Rs. 500 to the rebuilding of a mosque. Held the promise was not enforceable because there was no consideration in the sense of benefit as the person who made the promise gained nothing in return for the promise made”. And the seceratry of the committee to whom the promise was made suffered no detriment as nothing had been done to carry out the repairs. Hence the suit was dismissed.

Legal rules for Consideration

• It must move at the desire of the promisor• It may move from the promisee or any other person. • An old lady by a deed of a gift made over certain property

to her daughter D under the direction that she should pay her aunt, P (sister of the old lady) a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount. Later D refused to pay the amount on the plea that no consideration had moved from P to D. Held P was entitled to maintain suit as consideration had moved from the old lady sister of P to the daughter D. (Chinnayya vs Ramayya)

Legal rules to consideration• It may be an act, abstinence or forbearance or a return promise:• Forberance to sue: If a person who could sue another for the

enforcement of a right agrees not to pursue his claim, this constitutes a good consideration for a promise by the other person. This results in a benefit to the person not sued and a detriment to the person who could sue.

• Compromise to a dispute claim• Composition with creditors: A debtor who is financially

embarrassed may call a meeting of his creditors and request them to accept lesser amount in satisfaction of their debt. If the creditors agree to it, the agreement is binding upon the debtor and the creditors and this amounts to a compromise of the claims of the creditors.

Legal rules to Consideration

• It may be present, past or future• It need not be adequate• It must be real and not illusory• It must not be something which the promissor is not

already bound to do• Ramachandra Chintamani vs Kalluraju ( There was a

promise to pay a vakil an additional sum if the sit was successful. Held the promise was void for want of consideration. The vakil was under pre-existing contractual obligation to render the best of his services under the original contract.

Legal rules to consideration

• It must not be illegal, immoral or opposed to public policy

• Stranger to a Contract: It is a general rule of law that only parties to a contract may sue and be sued on that contract. This rule is known as the doctrine of privity of contract. Privity of contract means relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality of will and creates a legal bond or tie between the parties to a contract.

Legal rules to consideration

• Consequences of doctrine of privity of a contract:

• A person who is not a party to a contract cannot sue upon it even though the contract is for his benefit and he provided consideration.

• A contract cannot confer rights or impose obligations arising under it on any person other than the parties to it. Thus if there is a contract between A and B, C cannot enforce it.

Exceptions to Privity of a contract

• A trust or charge• Marriage settlement, Partition or other family

arrangements: When an arrangement is made in connection with marriage, partition or other family arrangements and a provision is made for the benefit of a person, he may sue although he is not a party to the agreement.

• Acknowledgment or Estoppel : Where the promissor by his conduct, acknowledges or otherwise constitutes himself as an agent of a third party a binding obligation is thereby incurred by him towards the third party.

Exceptions of a privity of a contract

• Egg: A receives some money from T to be paid over to P. A admits of this receipt to P. P can recover the amount from A who shall be regarded as the agent of P.

• Assignment of a Contract: The assignee of rights and benefits under a contract not involving personal skill can enforce the contract not involving personal skill can enforce the contract subject to the equities between the original parties. Egg; Thus the holder in due course of a negotiable instrument can realise the amount on it even though there is no contract between him and the person liable to pay.

Exceptions to Privity to a contract

• Contracts entered into through an agent• Covenants running with the land: In cases of

transfer of immovable property, the purchaser of land with notice that the owner of the land is bound by certain conditions or covenants crated by an agreement affecting the land shall be bound by them although he was not party to the original agreement which contained the conditions or covenants.

Contract without Consideration is Void - Exceptions

• Love and affection: In simple words a written and registered agreement based on natural love and affection between near relatives is enforceable even if it is without consideration.

• A hindu husband after referring to quarrels and disagreement between him and his wife executed a registered document in favour of his wife agreeing to pay her for maintenance, but no consideration moved from his wife. Held the agreement was void for want of consideration (Rajluky vs Bhoothnath). As the essential requirement that the agreement is made on account of natural love and affection between the parties was missing.

Contract without consideration is void-Exceptions

• Compensation for voluntary services: A promise to compensate wholly or in part a person who has already voluntarily done something for the promissor is enforceable even though without consideration. In simple words a promise to pay for a past voluntary service is binding.

• Promise to pay a time barred debt: A promise by a debtor to pay a time barred debt is enforceable provided it is made in writing and is signed by the debtor or by his agent generally or specially authorised in that behalf. The promise may be to pay the whole or any part of the debt.

• A debt is barred by limitation if it remains unpaid or unclaimed for a period of three years.

Contract without consideration is void - Exceptions

• Completed gift: No consideration no gift doesn’t apply here also

• Agency• Charitable subscriptions: Where the promisee

on the strength of the promise makes commitments that is changes his position to his detriment.

Capacity to Contract

• Capacity means competence• An agreement becomes a contract if it is entered into

between the parties who are competent to contract. • According to section 11 every person is competent to

contract who • (a ) is of the age of majority according to the law to

which he is subject• (b) is of sound mind• (c ) is not disqualified from contracting by any law of

which he is subject to.

Minors

• According to Section 3 of Indian Majority Act, 1875 a minor is a person who has not completed eighteen years (18) of age. In the following two conditions he will attain majority after 21 years of age:

• 1. Where a guardian of a minors person or property has been appointed under the Guardians and Wards Act, 1890

• 2. Where the superintendence of a minor property is assumed by a Court of Wards.

Minors

• Basic rules for minors (2):• Law protects minors against their own

inexperience and against the possible improper designs of those more experienced

• Law should not cause unnecessary hardship to persons who deal with minors.

• Minors agreements: • An agreement with or by a minor is void and

inoperative ab initio:

Minors

• Mohiribibi vs Dharmodas Ghose: In this case a minor mortgaged his house in favour of a money lender to secure loan of Rs. 20,000/- out of which the mortgagee (the money lender) paid the minor a sum of Rs. 8000/-. Subsequently the minor sued for setting aside the mortgage stating that he was underage when he executed the mortgage. Held the mortgage was void and therefore it was cancelled. Further the money lenders request for returning back his money was also rejected.

Minor

• He can be a promisee or a beneficiary• His agreement cannot be ratified by hi on attaining his

majority.• If he has received any benefit under a void agreement he

cannot be asked to compensate for it or pay for it.• He can always plead for minority.• Egg: S a minor by fraudulently representing himself to be

of full age, induced L to lend him 400 pounds. He refused to repay it and L sued him for the money. Held the contract was void and S was not liable to repay the amount.

Minor

• The court may where a loan or some property is obtained by the minor by some fraudulent representation and the agreement is set aside, direct him, on equitable considerations to restore the money or property to the other party, Where as the law gives protection to the minors, it does not give them liberty to “cheat men”.

Minor

• There can be no specific performance of the agreements entered into by him as they are void ab initio

• He cannot enter into a contract of partnership• He cannot be adjudged insolvent• He is liable for ‘necessaries’ supplied or

necessary services rendered to him or anyone whom he is legally bound to support.

• He can be an agent

Minor

• His parents/guardian are/is not liable for the contract entered into by him even though the contract is for the supply of necessaries to the minor. But if the minor is acting as an agent for the parents/ guardian shall be liable under the contract.

• A minor is liable in tort (a civil wrong) : But where a tort arises out of a contract a minor is not liable in tort as an indirect way of enforcing an invalid contract.

Minor

• Minor is liable for necessaries. That is his properties will be liable for meeting the liability arising out of the contract. He will not be physically responsible.

• Necessaries not defined.• Necessary goods doesn’t mean that which are needed for bare

needs but includes articles which are reasonably necessary to the minor having regard to his station in life.

• Services which are necessary: Education, Training for a trade, medical advice, legal advice, provision of a funeral for deceased husband of a minor widow, house given on rent for minor’s education and living purposes

• Loan taken for his necessities also makes him liable.

Persons of Unsound Mind

• Parties entering into a contract should be of sound mind.

• Sound mind means at the time of contract when he makes it he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

• A PERSON WHO IS USUALLY OF UNSOUND MIND BUT OCCASIONALLY OF UNSOUND MIND CAN MAKE A CONTRACT WHEN HE IS OF SOUND MIND

Persons of Unsound Mind

• Soundness of mind of a person depends on two facts:• 1. his capacity to understand the contents of the

business concerned and• 2. his ability to form a rational judgment as to its effect

upon his interests.• If a person is incapable of both he suffers from

unsoundness of mind. • Whether a party to a contract is of sound mind or not is

a question of fact to be decided by a court of law.

Persons of Unsound of Mind

• Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the period when he is of sound mind.

• Idiots: An idiot is a person who has completely his mental powers. Idiocy is permanent whereas lunacy denotes periodical insanity with lucid intervals.


• Drunken or intoxicated persons: A drunken or intoxicated person suffers from temporary incapacity to contract that at the time when he is so drunk or intoxicated that he is incapable of forming a rational judgment. The position is similar to that of lunatic.

• Agreements entered into by persons of unsound mind are void.


• Other persons:• Alien enemies• Foreign sovereigns and their diplomatic staff and accredited

representatives of foreign states• Corporations: It cannot enter into a contract which are

completely personal in nature because it is not an individual• Insolvents: When a debtor is adjudged insolvent, his property

vests with the official receiver or official assignee• Convicts: A convict when undergoing imprisonment is

incapable of entering into a contract. He can enter into a contract and sue if he is lawfully at large under a licence called “ticket of leave”.

Free consent

• Consent means acquiescence or act of assenting to an offer. “Two or more persons are said to consent when they agree upon the same thing in the same sense”.

• Free Consent : Consent is said to be free when it is not caused by

• Coercion• Undue influence• Fraud• Misrepresentation• Mistake

Discharge of a contract

• A contract may be discharged by any of the following means:

• 1. By performance• 2. By agreement or consent• 3. By impossibility• 4. By lapse of time• 5. By operation of law• 6. By breach of contract.

By performance• Actual performance• Attempted performance or tender: Tender is not

actual performance but is only an offer to perform the obligation under the contract. “Where the promissor offers to perform his obligation under the contract but the offeree refused to accept the performance” (Attempted performance)

• “Tender is equivalent to actual performance except in case of tender of money” (Tender)

Discharge by agreement or consent

• EODEM MODO QUO QUID CONSTITUITUR EODEM MODO DESTRUITUR ( that is a thing may be destroyed in the same manner in which it is constituted. The ways of discharge of contract by an agreement may be done in any of the following ways:

• Novation: When a new contract is substituted for an existing one between the same parties,

• A contract between two parties is rescinded in consideration of a new contract being entered into on the same terms between one of the parties and a third party.

• It should take place before expiry of the time of performance of the original contract.


• Rescission: When all or some of the terms of a contract are cancelled. It may occur by mutual consent of the parties, where one party fails in the performance of his obligation.

• Alteration : Alteration of a contract may take place when one or more of the terms of the contract is/are altered by the mutual consent of the parties to the contract.

• Remission: Remission means acceptance of a lesser fulfilment of the promise made


• Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be bound by the contract.

• Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a superior right accruing to the same party under the same contract or some other contract.

Discharge by impossibility of performance

• Impossibility existing at the time of agreement• 1. known to the parties• 2. unknown to the parties• Couturier vs hastie: A sold to B certain goods

supposed to be on a voyage. The goods had ceased to exist due to the perils of the sea.

• Impossibility arising subsequent to the formation of contract

Discharge by supervening impossibility

• Destruction of subject matter of contract• Non existence or non occurrence of a particular state of

things• A and B contract to marry each other. Before the time

fixed for marriage. A goes mad. The contract becomes void.

• Death or incapacity for personal service : personal skill (singing)

• Change of law or stepping in of a person with statutory authority:

• Outbreak of war

Impossibility of performance – not an excuse

• In the following cases, a contract is not discharged on the ground of supervening impossibility :

• Difficulty of performance• Commercial impossibility• Impossibility due to the failure of a third person• Strikes, lockouts and civil disturbances• Failure of one of the objects.

Discharge by lapse of time/ Discharge by operation of law

• By death• By merger• By insolvency• By unauthorised alteration of the terms of a

written agreement• By rights and liabilities becoming vested in the

same person

Discharge by breach of a contract

• Actual breach of a contract: • At the time when the performance is due• During the performance of a contract• Express repudiation of the contract• Implied repudiation• Anticipatory breach of a contract:• By expressly renouncing the contract• By doing some act so that the performance of his promise

becomes impossible.• It might not be completely void it depends upon the parties.

Remedies for breach of a contract

• There are remedies for breach of a contract. They are:

• 1. Rescission of the contract• 2. Suit for damages• 3. Suit upon quantum meruit• 4. Suit for specific performance of the contract• 5. Suit for injunction

Rescission

• When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case, he is absolved of all his obligations under the contract.

• Court will not accept under the following circumstances: where the plaintiff has expressed his ratification, owing to circumstances it is impossible to restore back to their original positions, where only one part of the contract is sought to be rescinded but it cannot be rescinded.

Rescission

• When a party treats the contract as rescinded he makes himself liable to restore any benefits he has received under the contract to the party from whom such benefits were received, if he has rightfully rescinded then he has to be rightfully compensated.

Damages

• Damages are monetary compensation allowed to the injured party by the court for the loss or injury suffered by him by the breach of a contract.

• Types of damages:• Ordinary damages: When a contract has been broken the

injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. Egg: A agrees to sell B and deliver 50 quintals of wheat at 475/- per quintal and B agreed to pay at the time of delivery but at the time of delivery it rose to 500/- per quintal. A refused to deliver B can go to a court of law for that 25/- of loss per quintal.

Damages

• Special Damages: Damages in contemplation of the parties. Damages other than those arising from the breach of a contract may be recovered if such damages may reasonably be supposed to have been in the contemplation of both the parties as the probable result of the breach of the contract. Such damages are known as special damages.

• Simpson vs London & NW Rail.co (goods coming late to the show and loss has to borne by the railway company)

Damages

• Vindictive damages: Damages for the breach of a contract are given by way of compensation for loss suffered and not by way of punishment for wrong inflicted.

• For breach of a promise to marry and dishonour of a cheque court may order exemplary damages.

Damages

• Nominal damages: Where any loss has not been suffered by either of the parties then the damages awarded will be nominal to the effected party.

• Damages for loss of reputation: • Damages for inconvenience and discomfort:

Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is that the measure of damages is not affected by the motive or the manner of the breach .

Quantum meruit

• The phrase quantum meruit literally means as much as earned. A right to sue on a quantum meruit arises where a contract partly performed by one party has become discharged by the breach of the contract by the other party.

Specific performance

• The court may in some circumstances direct the party in breach to carry out his promise according to the terms of the contract. This is a direction by the court for specific performance of the contract at the suit of the party not in breach.

Injunction

• Where a party is in breach of a negative term of a contract (that is where he is doing something which he is promised not to do) the court may by issuing an order restrain him from doing what he promised not to do. Such an order of the court is known as an injunction.

Contract and indemnity and guarantee

• Contract of indemnity: A contract by which one party promises to save the other from loss caused to him by the conduct of the promissor himself or by the conduct of any other person is called as ‘ a contract of indemnity’. The person who promises to make good the loss is called the indemnifier and the person whose loss is to be made good is called the indemnified or indemnity-holder (promisee). It is a class of contingency contract.

Contract of indemnity

• A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200/- This is a contract of indemnity.

• A and B claim certain goods from a railway company as rival owners. A takes delivery of the goods by agreeing to compensate the railway company against loss in case B turns out to be the true owner. There is a contract of indemnity between A and the railway company.

Contract of indemnity

• Rights of indemnity holder: • 1. all damages which he may be compelled to pay in any

suit in respect of any matter to which the promise to indemnify applies.

• 2. All costs which he may be compelled to pay in bringing or defending such suits.

• 3. All sums which he may have paid under the terms of any compromise of any such suit. The compromise should not be contrary to the orders of the indemnifier and should be prudent or authorised by the indemnifier.

Rights of Indemnifier

• Indian contract is silent regarding indemnifier rights.• Contract of guarantee: A contract of guarantee is a

contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called as principal debtor and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may either be oral or written. It may be express or implied and may even be inferred from the course of conduct of the parties concerned.

Contract of Guarantee

• S stands for surety, P stands for principal debtor and C stands for creditor.

• S requests C to lend 500/- to P and gurantees that if P fails to pay the amount he will pay. This is a contract of guarantee. S in this case is the surety C the creditor and P the Principal debtor.

Essential features of Guarantee

• Concurrence: A contract of guarantee requires the concurrence of all the three parties to it the principal debtor, the creditor and the surety. The liability of the principal debtor is primary.

• Essentials of a valid contract• Writing not necessary: A guarantee may be

either oral or written. It may be express or implied. Implied guarantee may be inferred from the course of conduct of the parties concerned.

Difference between Indemnity and Contract of guarantee

Sl No.

Contract of Indemnity Contract of guarantee

1 There are two parties to the contract the indemnifier and the indemnified

There are three parties to the contract the creditor, the principal debtor and the surety

2 The liability of the indemnifier to the indemnified is primary and independent

The liability of the surety to the creditor is collateral or secondary, the primary liability being that of the principal debtor .

3 There is only on contract in the case of a contract of indemnity

In a contract of guarantee there are three contracts one between the principal debtor and the creditor, the second between the creditor and the surety and the third between surety and principal debtor

4 It is not necessary for the indemnifier to act at the request of the indemnified

4. It is necessary that the surety should give the guarantee at the request of the debtor.

Difference between Indemnity and Contract of guarantee

Sl No Contract of Indemnity Contract of Guarantee

5 The liability of the indemnifier arises only on the happening of a contingency

There is usually an existing debt or duty the performance of which is guaranteed by the surety

6 An indemnifier cannot sue a third party for loss in his own name, because there is no privity of contract. He can do so only if there is an assignment in his favour

A surety on discharging the debt due by principal debtor, steps into the shoes of the creditor. He can proceed against the principal debtor in his own right.

Types of guarantee

• Specific guarantee: When a guarantee extends to a single transaction or debt it is called as a specific or simple guarantee. It comes to an end when the guaranteed debt is duly discharged or the promise is duly performed.

• Continuing guarantee: When a guarantee extends to a series of transactions it is called a continuing guarantee. The liability of the surety in case of a continuing guarantee extends to all the transactions contemplated until the revocation of the guarantee.

Discharge of a guarantee

• By revocation, By the conduct of the creditor( variance of the terms of the contract, release or discharge of principal debtor, compounding by creditor with principal debtor, creditors act or omission impairing surety's eventual remedy, loss of security), By invalidation of a contract ( obtained by misrepresentation, obtained by concealment, failure of a co-surety to join a surety, failure of consideration)

Bailment and Pledge

• Ballier means to deliver• Bailment is the delivery of the goods by one

person to another for some purpose upon a contract, that they shall when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering g them .

Requisites of bailment

• Contract• Delivery of possession• For some purpose• Return of specific goods• Bailment is concerned only with goods• Generally the consideration will be in the form

of money being paid

Classification of goods

• For the exclusive benefit of the bailor• For the exclusive benefit of the bailee• For the mutual benefit of bailor and bailee• Gratuitous bailment• Non – Gratuitous bailment

Duties and rights of bailor and bailee

• Duties of Bailor: To disclose know faults, to bear extra ordinary expenses of bailment, to indemnify bailee for loss in case of premature termination of gratuitous bailment (in this case the loss which the bailee has suffered should be less than the benefit if it exceeds then it has to be compensated by the bailor), to receive back the goods, to indemnify the bailee

Duties of bailee

• To take reasonable care of the goods bailed, not to make unauthorised use of goods, not to mix the goods bailed with his own goods, not to set up an adverse title, to return any accretion of goods, to return the goods

• Rights of bailor: enforcement of rights, avoidance of a contract, return of goods lent gratuitously, compensation from a wrong - doer

Rights of a bailee

• Delivery of goods to one of several joint bailors of goods, delivery of goods to bailor without title ( if the bailee doesn't know about the defective title of the bailor and if he returns to the bailor he that is bailee is not responsible), right to apply to court to stop delivery, right of action against trespassers, bailee’s lien (lien: means the right of a person to retain the possession of some goods belonging to another until some debt or claim of the person in possession is satisfied.

Termination of bailment

• A contract of bailment can be terminated in the following cases:

• On the expiry of the period• On achievement of the object• Inconsistent use of the goods• Destruction of the subject matter• Gratuitous bailment

Pledge

• The bailment of goods as security for payment of a debt or performance of a promise

• The promise is called as pledge• The bailor is in this case called as pledger or

pawnor and the bailee is Pawnee. • A bailment is for security. It is a different kind of

bailment.• Any kinds of movable property that is goods,

documents, or valuables may be pledged.

Difference between bailment and pledge

• Pledge is the bailment of goods as a security for the performance of a specific promise that is the payment of a debt or performance of a promise. Bailment on the other hand is for a purpose of any kind.

• In case of default by the pawnor to repay the debt the Pawnee may after giving notice to the pawnor sell the goods but may retain the goods and sue for his charges.

Difference between bailment and pledge

• In case of pledge the pawnee has no right to use the goods pledged with him. In case of bailment the bailee may do so if the terms of bailment so provide.

• Rights of pawnee:• Rights of retainer, Right of retainer for subsequent

advances, right to extra ordinary expenses, right against true owner, pawnees rights where pawnor makes default ( he may file a suit against the pawnor upon the debt or promise and may retain the goods pledged as a collateral security, he may sell the goods pledged after giving the pawnor a reasonable notice of the sale.

Rights of pawnor

• Right to get back the goods, right to redeem debt, preservation and maintenance of the goods, rights of an ordinary debtor

Principal and an Agent

• A person who has capacity to contract may enter into a contract with another either by himself or through another person. When he adopts the latter course he is said to be acting through an agent.

• The persons for whom such act is done or who is so represented is called the principal.

Principal and an Agent

• Essentials of relationship of agency:• Agreement between the principal and the

agent• Intention of the agent to act on behalf of the

principal• Rules for agency:• 1. Whatever a person can do personally he can

do through an agent.

Rules for agency

• 2. He who does an act through another does it by himself

• 3.A person who is a major only can appoint an agent

• 4. Any person who is authorised to act as such may be an agent

• 5. But no person who is not of the age of majority and of sound mind is responsible to his principal.

Principal and Agent

• Difference between agent and servant• A. no legal relationship (servant)• B. Servant is under direct control• C. An agent can work for several principals but

servant cannot• D. A principal is liable for agent’s wrongs and

master is liable for servant if they are committed in the course of employment

Agent and independent contractor

• There are differences between agent and an independent contractor

• Creation of agency:• By express agreement• By implied agreement• By ratification• By operation of law

Types of agency

• Agency by implied agreement ( A woman allowed her son to drive a car for her, she paying all the expenses of maintenance and operation. The son caused an accident injuring his wife. Held the wife could sue the mother as the son was an implied agent of the mother (smith vs moss)

Agency by ratification

• The agent must purport to act as agent for a principal who is in contemplation and is identifiable at the time of contract.

• The principal must be in existence at the time of a contract• The principal must have contractual capacity• Ratification must be with full knowledge of facts• It should be done within reasonable time• The whole transaction must be ratified• Must be communicated • It should not put a third party to damages.

Classification of agents

• Special agents: To perform a particular act• General Agent: To do all the acts connected to

a particular trade, business or employment• Universal agent: His authority is unlimited. He

can bind his principal by any act which he does provided it should be legal and agreeable to the law of the land

Duties of an agent

• To carry out the work undertaken according to the directions given by the principal

• To carry out the work with reasonable care, skill and diligence

• To render proper accounts to his principal• To communicate with the principal in case of

difficulty• Not to deal on his own account

Duties of an agent

• To pay sums received for the principal• To protect and preserve the interests of the

principal in case of his death or insolvency• Not to use the information obtained in the

course of the agency against the principal• Not to make secret profit from agency• Not to put himself in a position where interest

and duty conflicts• Not to delegate authority

Rights of an agent

• Right of retainer• Right to receive remuneration• Right of lien• Right of indemnification

Duties of principal

• To indemnify agent for the acts done in good faith

• To indemnify agent for the acts done lawfully• To indemnify agent for injury caused by

principals neglect• To pay the agent the commission or other

remuneration

Rights of Principal

• To recover damages• SALE OF GOODS ACT• Sale: A contract of sale of goods is a contract

whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract with one part of the owner.

• Essentials of sale: Two parties, Goods, Price and Transfer of general property

Sale and agreement to sell

• Transfer of property• Type of goods• Risk of loss• Consequences of breach• Right to resell• General and particular property• Insolvency of the buyer• Insolvency of the seller

Types of goods

• Goods: Every kind of movable property other than actionable claims and money and include stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

• Existing goods, Future goods, Perishable goods, Durable goods, Contingent goods

Rights of an unpaid seller

• Unpaid seller: A seller of goods is deemed to be an unpaid seller when:

• The whole of the price has not been paid or tendered

• A bill of exchange or other negotiable instrument has been received as a conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.

Rights of an unpaid seller

• Right of lien• Right of Stoppage in transit• Right of resale• Right of withholding the delivery• Suit for price• Suit for damages• Repudiation of contract before due date• Suit for interest

Conditions and Warranties

• Condition: A condition is a stipulation which is essential to the main purpose of the contract. It goes to the root of the contract

• Warranty: A warranty is a stipulation which is collateral to the main purpose of the contract

• Differences: Difference as to the value, Difference as to breach, difference as to treatment

Implied condition

• Condition as to title• Sale by description• Condition as to quality or fitness• Condition as to merchantability• Condition implied by custom• Sale by sample• Condition as to wholesome ness

Implied warranty's

• Warranty of quiet possession• Warranty of freedom from encumbrances• Warranty to as to quality of fitness by usage of

trade• Warranty to disclose dangerous nature of

goods• Caveat Emptor

Partnership

• Governed by Indian Partnership Act, 1932• Partnership: Is the relation between persons

who have agreed to share the profits of a business carried on bay all or any of them acting for all. Persons who have entered into partnership with one another are called individually ‘partners’ and collectively as a firm.

Types of partners• Actual or ostensible partners: By an agreement joins and takes active

participation in the business.• Sleeping or dormant partner: Who does not take part in the business

but shares profits and invests capital• Nominal partner: Just lends his name to be utilised and no share in

profits and no investment. • Partner in profits only: only for profits• Sub partner: When a partner agrees to share his profits derived from

the firm with a third person that third person is known as a sub partner

• Partner by estoppel: Becoming a partner by holding out ( a retired businessman becoming a honorary president for a firm and later on to share the losses if occurs)

Characters of a firm

• Association of two or more persons• Agreement• Business• Sharing of profit• Mutual agency• Minor may be admitted for the benefits of partnership• Consideration – no need to be present• All people who are eligible to enter into a contract are

liable to enter into a partnership deed.

Registration of Partnership

• An application form of a statement giving the necessary information to be filed with the Registrar of Firms of the area

• The name of the firm• The place or principal place of business of the firm• The names of other places where the firm carries on

business• The date when each partner joined the firm• The names and full permanent addresses of all the partners• The duration of the firm

Process of registration

• The statement should be signed by all the parties or by their agents.

• When the registrar is satisfied that the above provisions have been duly complied with, he shall record an entry of the statement in the Register of Firms .

• Then a certificate of registration will be issued.• Registration will be effective from the date of

entry in the register of firms

Rights and duties of Partners

• Rights of a partner: Right to take part in the business, right to be consulted, right of access to accounts, right to share in profits, right to interest on capital, Right to interest in advances (any advances more than his capital for the firm he should be compensated with 6% interest per annum), right to be indemnified, right to the use of partnership property, right of partner as agent of the firm, no new partner to be introduced, no liability before joining on behalf of the partnership, right to retire, right not to be expelled

Duties of a partner

• To carry on the business for the greatest common advantage• To be just and faithful• To render true accounts and full information of all things

affecting the firm• To indemnify for fraud• To attend diligently• Not to claim remuneration• To share losses• To indemnify wilful neglect• To hold and use property of the firm exclusively for the firm• To account for personal profits

Termination of Partnerships

• Dissolution of firm:• By agreement• Compulsory dissolution( Partner becoming insolvent,

less than two members)• Dissolution on the happening of certain contingencies• Dissolution by notice of partnership at will• Dissolution by court:• Insanity, Permanent capacity, Misconduct, persistent

breach of agreement, transfer of interest, business working at a loss, any other ground

E contracts and Ecommerce

• Ecommerce: Is the online transaction of business which consists of buying and selling products or services over electronic systems such as the internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily since the spread of the internet.

• Ecommerce or electronic commerce is the practice of buying and selling varied good and services on the world wide web. Ecommerce happens over wired communication lines connected throughout the globe where the worldwide web serves as the central medium for all trading transactions.

Ecommerce and Contract's

• Ecommerce enables sell and purchase of commodities and services right from your home and without leaving for seeking what you need.

• Electronic Contracts: Contracts that are not paper based but rather in electronic form are born out of the need for speed convenience and efficiency.

• E-contracts is a contract modelled, specified, executed and deployed by a software system.

• IN India e-contracts are governed by IT Act, 2000.

Law of Contract

Documents

Transcript of Law of Contract