Law of Contracts is the most important branch of Mercantile Law without which it would be difficult to carry on any trade or business in a smooth manner. Further, in the course of the discussion that follows, one will learn that the law of contract is applicable not only to business but also to all day to day personal dealings. In fact, each one of us enters in to a number of contracts from sunrise to sunset. When a person buys a newspaper or rides a bus or purchases goods or gives his watch for repair or borrows a book from the library or even from a friend, he is actually entering into a contract.
The provisions of the Indian Contract Act, 1872, hereinafter referred to as The “Act”, define the extremely important aspects of business transactions relating to contracts. In business dealings, offer for sale are made and accepted, consideration or the price is agreed upon, conditions of the sale or transaction are specified. Disputes arise when an offer or acceptance is violated, consideration or price is not paid or the conditions of the transaction are violated. A contract may be made in writing or by word of mouth or inferred from the conduct of the parties or circumstances of the case.
According to Section 2(h) of the Act, ‘an agreement enforceable by law is a Contract’. An agreement will be enforceable by law only if it contains all the essential elements of a contract. A person signifying his willingness to do or abstain from doing something is said to make a proposal and is called the “Proposer”. When the person to whom the proposal is made signifies his assent to the proposal, it is called “Acceptance”. Upon acceptance, the proposal becomes a “promise”, the proposer becomes the ‘promisor’ and the acceptor becomes ‘promisee’.
“ALL CONTRACTS ARE AGREEMENTS BUT ALL AGREEMENTS ARE NOT CONTRACTS”. Thus, an agreement will become a contract which will be enforceable in a court of law only if the essential elements of a contract are present in the said agreement. “An offer and acceptance make an agreement but an agreement and enforceability make a contract”. The Essential elements of a valid contract are highlighted as follows:- 1) Offer and Acceptance:- There should be an offer which is properly communicated to the offeree.
When the person to whom the offer is made signifies his assent, the proposal is said to be accepted. When an organization runs tramway cars along the streets, it is an implied offer by the organization to carry passengers. When a person boards the tram with an intention to travel it is an acceptance. An offer should be distinguished from an invitation to offer. A prospectus issued in a public offer of shares is an invitation to offer and the persons making an application for the shares are said to make the offer, which may or may not be accepted by the Company by way of allotment of the shares.
The issue of when THE COMMUNICATION of an offer or acceptance or the revocation of an offer or acceptance is COMPLETE is of importance under the Indian contract Act. Persons may enter in to contracts (1) when they are face to face, (2) over telephone or telex or (3) through post office courier service etc. When persons are face to face, one person making the offer and the other accepting, the contract comes into existence immediately.
Similarly, in the case of conversation over telephone, the contract is formed as soon as the offer is accepted but the offeree must make sure that his acceptance is received by the offeror, as otherwise there will be no contract as communication of acceptance is not complete. Section 4 of the Indian Contract Act explains this issue in the circumstance when the offer, acceptance and revocation are made through post office/courier :- The communication of proposal is complete, when it comes to the knowledge of the person to whom it is made. (ie the offeree).
The communication of acceptance is complete, -as against the proposer:- When it is put in course of transmission to him, so as to be out of the power of the acceptor. -as against the acceptor, when it comes to the knowledge of the proposer. (ie till the proposer is unaware of the acceptance, the acceptor is not liable and can withdraw the acceptance) Where a contract by correspondence is made? A contract by correspondence is made at the place where the letter of acceptance is posted-Dhanraj Mills Ltd. Vs. Boobna, 1948, Patna 723. The communication of revocation is complete, -As against the person who makes it:
– When the communication of revocation is put into a course of Transmission to the person to whom the revocation is made, so as to be out of power of the person who Makes the revocation. -as against the person to whom it is made:- When the revocation comes to the knowledge of the person to whom it is made. Section 5 of the Indian Contract Act deals when a proposal or acceptance can be revoked. A proposal may be revoked at any time BEFORE the COMMUNICATION OF ACCEPTANCE is complete against the proposer.
An acceptance may be revoked at any time BEFORE the COMMUNICATION OF ACCEPTANCE is complete against the acceptor. An Offer lapses or ceases to remain in operation on the happening of any one of the following events, namely:- a) When the offeror gives notice of revocation to the offeree expressly withdrawing the offer before the same is accepted and the acceptance is complete against the offeror. b) By lapse of prescribed time limit. c) When no time has been prescribed, after expiry of a reasonable time. d) When the acceptor fails to fulfill a condition precedent.
e) By death or insanity of the proposer; if the fact of death or insanity comes to the knowledge of the acceptor before acceptance. f) When a proposal once refused it is dead and cannot be revived by a subsequent acceptance. 2) Intention to create legal relationship:- An agreement which does not create any legal relationship or obligation will not be enforceable by law. When ‘A’ agrees to go to a cinema hall to view a film, it is not a contract, since there was no intention to create a legal relationship.
However, if ‘A’ agrees to supply raw material to ‘B’ within a particular period, there is an intention to create legal relationship. 3) Consideration:- Section 2(d) of the Act defines ‘consideration’ as follows, namely, “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing something, or does or abstains from doing, or promises to do or abstain from doing, something, such an act or abstinence or promise is called a consideration for the promise. Consideration, thus, is something received in return by the promisor and vice versa.
When ‘A’ agrees to sell his house to ‘B’ for Rs. 10 lakhs, A’s consideration is the price of Rs. 10 lakhs and B’s consideration is the house. One can observe from the above definition of consideration that a consideration can move from the promisee or ANY OTHER PERSON. The Consideration can be PAST, PRESENT OR FUTURE. Consideration may be a positive act or a promise not to do an act. (abstinence) It is extremely important to note that INADEQUACY OF CONSIDERATION is a good consideration. Inadequacy of consideration is BAD only if the agreement does not have FREE CONSENT.
Further, one can infer from the definition of “consideration” that there can be a “stranger to consideration”. Thus, there can be a stranger to consideration but there cannot be a stranger to contract”. Section 25 of the Act provides that an agreement without consideration is void unless any one or more of the following conditions are fulfilled, namely:- a) The agreement is made in writing and registered (if required under the law for the time being in force for registration of documents) on account of NATURAL LOVE AND AFFECTION between the parties STANDING IN NEAR RELATION TO EACH OTHER.
b) A promise to compensate a person who has already voluntarily done something for the promisor. c) A promise IN WRITING signed by the person to be charged therewith or by his agent to repay a debt which the creditor could not enforce repayment due to law of limitation. d) If a person has already gifted certain property to another person, the validity of the gift will not be affected due to absence of consideration. It has to be very clearly understood that an agreement to which the consent of the promisor is freely given is not void merely because THE CONSIDERATION IS INADEQUATE.
However, where there is a dispute as to the existence of free consent or not, the inadequacy of the consideration may be taken in to account by the court in determining the question whether the consent of the promisor was freely given or not ie whether it is not vitiated by coercion, undue influence, fraud etc. 4) Capacity of the parties to contract:- Parties to the contract must be competent to make a contract. ie he must not be a minor, must be of sound mind and is not disqualified from contracting by any law.
(like the law of insolvency etc. ,) An agreement made by a guardian of a minor or a person incapable of entering into contract is valid if it is suitable to the condition in life of the minor or the life of the persons whom the minor or the person incapable of entering into contract is bound to support or for their legal necessity. It may not be out of place to state here that under the Negotiable Instruments Act, 1881,a minor, however, can draw, make or endorse, and deliver negotiable instruments to bind all parties except himself.
5) Free Consent :- Two or more persons are said to consent when they agree upon the same thing in the same sense. An agreement is valid only when there is a free consent between or among the parties to the contract. Free consent is absent when an agreement is entered into due to coercion, undue influence, fraud, misrepresentation or mistake. Coercion is the Committing or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention causing any person to enter into an agreement.
Expl:- It is immaterial whether the IPC is in force in the place where the coercion is employed. A threat to file a suit(whether civil or criminal) does not amount to coercion unless the suit is on FALSE charge. Threat to file a suit on false charge is an act forbidden by the IPC and thus will Amount to an act of coercion. A, threatens to kidnap B’s son if B does not agree to sell his house to him. If B agrees to sell his house under the threat, the said agreement is without free consent and hence cannot be enforced.
Undue Influence:- A contract is said to be influenced by “undue influence” where the relations subsisting between the parties are such that (1) one of the parties is in a position to dominate the will of the other and (2) uses that position to obtain an unfair advantage over the other. When a patient suffered from a disease or age and his medical practitioner influenced him to pay an unreasonable sum for his service, it was a case of undue influence. “Fraud” means all acts committed by a person with a view to deceive another person by false statement, active concealment, intentional non performance, deception etc.
Normally silence is not fraud UNLESS IN THE CIRCUMSTANCES OF THE CASE IT IS THE DUTY OF THE PERSON TO SPEAK AND DISCLOSE THE MATERIAL FACTS. The aggrieved (or suffering party can rescind(cancel) the agreement and can also claim Damages(ie compensation) UBERRIMAE FIDEI contracts are contracts where law(respective laws)demands full disclosure of all material facts.
The examples of Uberrimae Fidei contracts are contract between the solicitor and the client, contract of sale of immoveable property, statements made in the prospectus by a limited company on the basis of which public would make a decision to subscribe to the share of the company, Insurance contracts etc. , “Misrepresentation” arises when with no intention to deceive, one party asserts some facts relating to a contract which proves to be untrue. Here, the aggrieved party can rescind the contract but cannot claim damages. An agreement which suffers from lack of free consent is VOIDABLE at the option of the aggrieved party. That means, if the aggrieved party wants to treat the contract as valid, it can do so and enforce the contract. If such a contract was caused by “misrepresentation” or “silence fraudulent within the meaning of S.
17”, the Contract is NOT VOIDABLE” if the contracting party, whose consent was so caused, had the means of discovering the truth with ordinary diligence. ie it is valid in such cases. (However, discovering with ordinary diligence etc. , are evidentiary matters to be proved with evidence, when the matter goes to court. An agreement is valid as a contract only when the parties to it do not suffer from a mistake or Erroneous belief in respect of matters related to the agreement. A mistake may be a mistake of law or mistake of facts. A contract due to a mistake of law is valid.
A contract caused by mistake of one party to the contract as to matter of fact is not voidable and hence VALID. S. 20 of the Contract Act states that an agreement is VOID where both parties are under mistake as to matter of fact essential to the agreement. However, the explanation to S. 20 states that an erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not deemed to be a mistake of fact. 6) Legality of object and Consideration:- The object and the consideration of an agreement must be lawful and if not, it will not be enforced by the court.
The following situations make an agreement unlawful, namely, a) An act forbidden by law and hence punishable. b) An act of such nature that if permitted would defeat the provisions of any law. An example:- Mr. A gave his house on rent and to reduce municipal taxes, a part of the rent was shown as service charges. When the tenant defaulted in paying service charges, the court held that the agreement was to defraud the municipality and hence was void. The landlord could not recover the service charge. c) A fraudulent act. d) An agreement involving or implying injury to a person or property.
e) An immoral agreement like letting out a house for carrying on immoral activity. In this case the landlord could not recover the rent as the agreement is void. f) Agreement opposed to public policy. It means an agreement injurious or against the interest of the public or the society such as an agreement between the citizens of two countries engaged in war with each other, unless specially allowed by the Govt. of India. When a Consideration or object is unlawful, the agreement is void(S. 23). Agreement void, if considerations and objects, unlawful in part(S. 24).
There can be a single consideration and one or more objects or several considerations and single object. 7) Possibility of performance:- The terms of the agreement must be such as are capable of performance. An agreement to do an act impossible in itself is void. If the act is impossible of performance physically or legally, the agreement cannot be enforced by law. It is immaterial whether at the time of making the contract, the impossibility was known to the parties or not. The reasoning is simple. We make an agreement with a view to perform it and if the performance is not possible, what is the fun of making such agreements?
For example, A promises to B that two parallel lines shall meet or that he will ride on horse to the moon. All these acts are such which are impossible of performance and the agreement is not treated as valid. 8) It is not expressly declared to be void:- Sections 24 to 30 of the Act specify certain types of agreements which have been expressly declared to be void. They include agreements in restraint of marriage, agreements in restraint of trade, agreements is restraint of legal proceedings, agreements where the consideration or object is unlawful in whole or in part, agreement without consideration etc.
The following agreements(other than what is mentioned above or below separately)are expressly declared void, namely:- S. 26:- Agreement in restraint of marriage (other than that of a minor) is void. S. 27:- Agreement is restraint of trade is void. Exception:- agreement not to carry on the business, of which the goodwill is sold. S. 28:- Agreement is restraint of legal proceedings is void. Exception:- Agreements to refer disputes which may or which has arisen to arbitration. S. 29:- Uncertainty of meaning:- Section 29 of the Act says that an agreement, the meaning of which is not certain or capable of being made certain is void.
S. 30:- Agreement by way of wager, void. No suit shall be brought for recovering anything alleged to have been won on any wager or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. What is a wager? It is a promise to give money or money’s worth upon determination or ascertainment of an uncertain event. Exception:- A Subscription or contribution of Rs. 500/- or more towards or for any price or sum of money to be rewarded to the winner or winners of horse race. Whether insurance contracts are wagers? No.
Because a) there is insurable interest and b) only the loss to be compensated. 9) Necessary legal formalities :- An oral agreement is as good as the written agreement. But, in some cases, law requires an agreement to be in writing like a promise to repay a debt which is barred by the law of limitation. As per the Transfer of Property Act and the Indian Registration Act read together, a transfer of an immovable property with a value of Rs. 100/- or more has to be registered. In such cases, only when such formalities are fulfilled the agreement can be enforced as a contract in the court of law.
An agreement containing all the essential elements of a contract, becomes a contract enforceable in a court of law. Performance of Contract:- A contract creates obligation and carrying out these obligations is performance. The parties to the contract must perform or offer to perform their promise. An offer to perform the contract is called “tender” and it must be unconditional. A tender is conditional where it is not in accordance with the terms of the contract. Thus, where X offers to Y to repay the principal amount of the loan, this is not a valid tender since the whole of the principal and interest is not offered.
When a contract involves performance by personal skill, the promisor must perform himself. In all other cases, it is immaterial who performs the contract if the contractual obligations are met to the satisfaction of the other party. When the performance is promised jointly by more than one person, on the death of one person it devolves upon others. Any one of the joint promisors may be compelled to perform. Promises bind the representatives of the promisors in case of death of such promisors BEFORE performance unless contrary intention appears from the contract. (S. 37)
A contract is discharged or terminated in the following circumstances, namely:- 1) by performance 2) by mutual consent :- If the parties to the contract agree to substitute a new contract in place of the original one or to rescind (cancel) it or alter it, the original contract is discharged. A contract may terminate by mutual consent in any one of the following ways like a) Novation:- Novation means substitution of a new contract for the original one. (either between the same parties or between different parties) b) Rescission:- Rescission means cancellation of all or some of the terms of the contract.
When the parties mutually decide to cancel the terms of the contract, the obligations of the parties there under terminate. c) Alteration:-If the parties mutually agree to change certain terms of the contract, it has the effect of terminating the original contract. There is however no change in the parties. d) Remission:- Remission is the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. THUS, IN INDIA, PROMISEE MAY REMIT OR GIVE UP A PART OF HIS CLAIM AND PROMISE TO DO SO IS BINDING EVEN THOUGH THERE IS NO CONSIDERATION FOR DOING SO.
e) Waiver:- Waiver is the relinquishment or the abandonment of a right. Where a party waives his rights under the contract, the other party is relieved of his obligations. f) Merger:- A contract is said to have been discharged by way of ‘merger’ where an inferior right possessed by a person coincides with the superior right of the same person. For example, a lessee becoming the owner of the leased property by purchasing the same. 3) by subsequent impossibility of performance :- Impossibility in a contract may be either inherent in the transaction or it may be introduced later by the change of circumstances material to the contract.
When a contract at the time of being entered into, had been impossible to perform, it was void ab initio(from the very beginning). When a contract becomes impossible to perform at a date subsequent to the agreement, it is called doctrine of supervening impossibility or doctrine of frustration. Illustration:- An Agreement was entered into between the owner of Cinema hall and a producer of films for public exhibition of certain film. The municipal authorities subsequently ordered for demolition of the hall since it was unsafe, a fact which was not known to both the parties. This contract was discharged.
A contract with an alien enemy during war is void ab initio(void from the beginning). When the war breaks out subsequent to the agreement, the contract becomes suspended and may be revived after return of peace. Supervening impossibility may arise due to a)destruction of subject matter of the contract or b) by the death or disablement of the parties or c)subsequent illegality or d)declaration of war or e) Non existence or Non occurrence of a particular state of things. It must be remembered that mere impossibility either due to difficulty of performance or commercial impossibility does not discharge the contract.
4) by operation of law:- Death, Insolvency, Merger or a Material Alteration without seeking the consent of the other party discharges the contract. 5) by Breach of contract:- A contract terminates by breach of contract. Breach of contract may arise in two ways: a) anticipatory breach and b) actual breach. Anticipatory breach of contract occurs when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract.
In such cases, the promisee or the other party may either a) rescind the contract and treat the contract as at an end and at once sue for damages or b) he may decide not to rescind the contract but to treat the contract as operative and wait for the time of performance and then hold the other party liable for the consequences of non-performance. In the second case, the party who has repudiated the contract may still perform if he can. Actual breach of contract occurs when during the performance of the contract, one party fails or refuses to perform his obligation under the contract.
Remedies for breach of contract:- As soon as either party commits a breach of the contract, the other party becomes entitled to any of the following reliefs, namely:- 1)Rescission of the Contract. A party who rightfully rescinds the contract is entitled to compensation for any damages which he has sustained through the non-fulfilment of the contract. 2)Damages which are generally speaking of four kinds, namely a) Ordinary damages:- are those which NATURALLY arose in the usual course of things from the breach of the contract.
The measure of ordinary damages is the difference between the contracted price and the market price at the date of the breach. b) Special damages:- Special damages are claimed in case of loss of profits etc. When there are certain special or extra ordinary circumstances present and their existence is communicated to the promisor, the non performance of the promise entitles the promisee to not only the ordinary damages but also damages which are consequent upon such special circumstances.
c) Vindictive or punitive or Exemplary damages:- Such damages are awarded with a view to punish the defendant and not solely with the idea of awarding compensation to the plaintiff d) Nominal damages:- are awarded in cases of breach of contract where there is only a technical violation of the legal right and no substantial loss is caused thereby. Liquidated damages and penalty:-Sometimes, the parties to the contract themselves at the time of entering into a contract agree that a particular sum will be payable by a party in case of breach of the contract by him.
Such a sum may either be by way of liquidated damages or it may be by way of “penalty”. The essence of liquidated damages is a genuine pre-estimate of damages. In case of “Penalty”, the parties made no attempt to estimate the loss that might happen to them on breach of the contract but still stipulated a sum to be paid in case of breach with the object of coercing the offending party to perform the contract. Thus, in case of penalty, the amount stipulated to be payable in case of breach is out of all proportion with the loss. Under English law, penalty cannot be claimed.
In India, there is no distinction between liquidated damages and penalty. Under Section 74, where the amount payable in case of breach is fixed in advance in a contract, whether by way of liquidated damages or penalty, the party may claim only a REASONABLE COMPENSATION for the breach subject to the amount so fixed. 3) A decree for specific performance:- Where damages are not an adequate remedy, the court may direct the party in breach to carry out his promise according to the terms of the contract and this is called the specific performance of the contract.
Some of the instances where the court may direct specific performance are a) a contract for the sale of a particular house or b) some rare article or c) any other thing for which monetary compensation is not enough because the injured party will not be able to get an exact substitute in the market. 4) Injunction:- Injunction means an order of the court. Where a party does something which HE PROMISED NOT TO DO, the court may, by issuing an order, prohibit him from doing so. 5) Quantum Meruit:- The phrase “Quantum Meruit”(QM) means “as much as is merited” or “as much as earned”.
When a person has done some work under a contract, and the other party repudiated the contract or some event happens which makes the further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done. This right of Quantum Meruit does not arise out of the contract as the right to damages does; it is a claim based on the quasi contractual obligation which the law implies under the circumstances. QM is not available to the party who breaks the contract even though he might have partly performed it.
However, QM can also be paid when a contract is discovered to be void. The remedy of QM is RESTITUTORY, it a recompense for the value of the work done by the plaintiff in order to restore him to the position which he would have been in if the contract had never been entered into. In this respect QM is different from claim for damages which is a COMPENSATORY REMEDY. Contingent Contract:- A contract is called contingent contract when it is a contract to do or not to do something, if some event does or does not happen.
For example, a) A contracts to pay B Rs. One Lakh if B’s house is burnt Quasi Contracts:- Quasi Contracts are certain relations resembling those created by contract. 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, expressed or implied, has infact been entered into by them. For example, A supplies B, a lunatic, with necessities suitable to his condition in life.
A is entitled to reimbursement from B’s property. The types of Quasi Contracts are as follows:- 1) S. 68:- Claim for necessaries supplied to person incapable of contracting or on his account:- If, a person, incapable of entering into a contract or any one whom he is bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the PROPERTY of such incapable person. 2) S.
69:- Reimbursement of person paying money due by another, in payment of which he is interested:- A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. 3) S. 70:- Obligation of person enjoying benefit of non-gratuitious act:- Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitiously(freely), and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect thereof, or to restore, the thing so done or delivered.
4) S. 71:- Right of finder of goods:- A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a BAILEE. 5) S. 72:- Liability of person to whom money is paid or thing delivered, by mistake or under coercion:- Any person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Contract of Indemnity :- A Contract of Indemnity means a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person.
(Section 124 of the Act) The person who promises to compensate for the loss is called the “indemnifier” and the person to whom this promise is made or whose loss is to be made good is known as the “Indemnity holder” or “Indemnified”. For example, A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of certain sum of money. This is a contract of Indemnity and A is the Indemnifier and B is the Indemnified. 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 the “Principal debtor”; and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. For example, Where A requests B to lend Rs. 20,000/- to C and guarantees that C will repay the amount within the agreed time and that o