Contract Law• Agreements enforceable by law• …..mostly commonsense.• The Indian Contract Act 1872

Constituents of the working of Contracts:

•Formation of the agreement•Consideration•Setting aside of bad contracts•Damages & Compensation

Formation of agreements

• An agreement is about meeting of two minds.• This can be formed when one party makes an

offer and the other accepts it.• An offer or proposal can be accepted or rejected.

If the offer is rejected, that is the end of it. However, if an offer is accepted, an agreement is formed.• Offer and acceptance can be express (spoken or

written in words) or implied in gestures, body language, actions, commissions and omissions.

Formation of agreements

• Contracts formed through spoken or implied offers and/or acceptances, are as valid as contracts formed through a written offer and acceptance• The founding principle for the

formation of agreements is the meeting of minds (consensus ad idem), offer and acceptance is only a modality.

Offer

•An offer is an expression to contract without further negotiations.• It requires only acceptance from the

other party to form a contract.

Offer•Offer must be communicated to the offeree.•Lalman v Gauri Datta (1913) - Case involving absconding nephew – reward of Rs. 501

• It is the duty of the offeror to communicate all the terms of the offer to the offeree. Actual communication may not be required.

•Offer constitutes a willingness to do some act or abstinence.

Offer

•Offer must be made to some other person.• Offer to one particular person….

• Offer to a group of persons…..

• Offer to the whole world….. (Continuing offer v Offer of Reward for Information).

• Carlill v Carbolic Smoke Ball Co (1893)

- Case involving cure for influenza – reward for contracting influenza – money lodged in the bank.

Offer

•Offer may be expressed or implied.

•Offer must be made with a view to obtaining the assent of the other and should not be an expression of intention or enquiry.

Offer

•Offer may be conditional.• The terms of the offer must be

certain.•An offer must not thrust the burden

of acceptance on the offeree.

Revocation of offer…..• An offer can be revoked.• It may come to an end due to lapse of

time.• It may be revoked when the acceptor fails

to fulfil the condition precedent to acceptance.• It may be revoked by the death or insanity

of the proposer. • A long silence implies rejection of an offer.

Offer - Summary• Internet is only a medium for communication. The

content of the communication decides whether it is an invitation to offer or an offer.• Advertisements can be offers or invitations to offer

depending upon the intended communication.• Ordinarily, displays in shop windows, product catelogues

and price lists are invitations to offer.• Ordinarily, in a self-service store, the customer offers.• Ordinarily, in auctions and tenders, the bidders offer.• Choice of words used to express an offer will not decide

whether a communication is an offer or not. The essence of the communication is important for this purpose.

Unqualified Acceptance• An offer should be accepted without changing its terms. • Changing the terms of the offer amounts to an implied

rejection of the offer.• An acceptance changing the terms of an offer is a

counter-offer.• Acceptance should be directed and communicated to

the person making the offer.• Mental acceptance is no acceptance• Silence can only imply rejection, not acceptance

• An offer can specify the modality of communication of acceptance. • It cannot be made in ignorance of the offer.• It must be given before the offer lapses.

Intention to create legal relations • The requirement of intention to create legal relations in

contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts. For example you may have an agreement to meet a friend at a restaurant. You may have a moral duty to honour that agreement but not a legal duty to do so. This is because in general the parties to such agreements do not intend to be legally bound and the law seeks to mirror the party's wishes. In order to determine which agreements are legally binding and have an intention to create legal relations, the law draws a distinction between social and domestic agreements and agreements made in a commercial context.

Consideration

• Consideration is the benefit accruing to the parties to a contract.• Consideration can be ‘right, interest, profit or

benefit’ for one party. It can also be ‘some forbearance, detriment, loss or responsibility given, suffered or undertaken’ by the other.• Agreements without consideration are not

enforceable.• Consideration does not have to be

commensurate or sufficient.

Consideration• Consideration must move at the desire of the promisor• Durga Prasad v Baldeo (1880)

– Case involving construction of market place on the order of DC – Occupants of shops to pay commission on sale.

• Consideration may move from the promisee or any other person• Chinnaya v Ramayya (1882)

- Case involving an old lady, her daughter & her sister

• It must have some value in the eyes of law.• It must be real not illusory.• Stilk v Myrick (1809)

- Case involving salary of crew who deserted the ship

• It must be something which one is not already bound to do.• Ramachandra Chintaman v Kalu Raju (1877)

- Case involving promise to pay to the Vakil an additional sum if the suit was successful

Nude ContractsAn agreement made without consideration is void

• Exceptions:• Love and affection.• A written and registered agreement based on

natural love and affection between near relatives.• Compensation for past voluntary services.• Promise to pay a time barred debt.• Completed gift.• Transfer of property by one person to another as a

gift according to the provisions of Transfer of Property Act.

Continued…..

Nude ContractsAn agreement made without consideration is void

• Exceptions:• Contract of agency does not require

consideration.• Consideration is not required for remission of

debt.• A contract of guarantee is made without

consideration.

Parties to a contract• Only the contracting parties have rights and obligations

towards one another. All others are strangers and can claim no rights and have no obligations.• Exceptions:1. Where a trust or charge has been created in favour of

a person.• Gandy v Gandy (1884)

- Case of promise to pay to trustees to pay for expenses for the maintenance of wife from whom he had separated.

2. Cases of marriage settlement, partition or other family arrangement where provision is made for the benefit of a person.

• Shuppu Ammal v Subramaniyam (1910 )- Case of brothers, on partition of joint properties, agreeing to invest in equal shares a certain sum of money for the maintenance of their mother.

Continued….

Parties to a contract• Only the contracting parties have rights and obligations towards

one another. All others are strangers and can claim no rights and have no obligations.

• Exceptions:3. Where the promisor 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 .

4. An assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties

• E.g. holder in due course of a negotiable instrument5. Covenants running with the land• Tulk v Moxhay (1848)

- Case of sale of large immovable property in 1808 with a covenant to keep ‘garden square’ uncovered with buildings – after property exchanged hands several times, buyer M in 1848 refused to abide by the covenant as he claimed he was not in privity of contract and so was not bound by it.

Privity of Contract• Preist & Wife v Last (1903) - P asked L for a

hot water bottle – Having being shown one by L he asked L if it would stand boiling water – L replied no, but it would stand hot water – P then bought for his wife – Fifth night of use bottle bursts & injures Mrs. P – turned out that the bottle burst because pure rubber formed a very small proportion of the material – P claims price & damages for wife’s pain & suffering from L – Issues – Privity of contract: Mrs. P has no right?

Privity of Contract• Donoghue v Stevenson(1932)

– Snail in the bottle case – There was no contractual relationship between Ms. May Donoghue and the drinks manufacturer or even the café owner, as Donoghue had not ordered or paid for the drink herself. Although there was a contractual relationship between the café owner and Donoghue's friend, the friend had not been harmed by the ginger beer. As ginger beer was not a dangerous product, and the manufacturer had not fraudulently misrepresented it, the case also fell outside the scope of the established cases on product liability. On the face of it, the law therefore did not provide a remedy for Donoghue

Continued……

Privity of Contract• Donoghue v Stevenson(1932) -On an appeal to the House of Lords laid down the following main points:1. Negligence is a distinct Tort2. A contract is not necessary3. Manufacturer’s liability ‘a manufacturer of products, which he sells in

such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumers life or property, owes a duty to the consumer to take that reasonable care’

4. The Neighbour Principle ‘persons who are so closely and directly affected by my act that I ought to have them in contemplation as being so affects when I am directing my mind to the acts or omissions which are called question’

Privity of Contract• Klaus Mittelbachert v East India Hotels Ltd (1997) – Co pilot of Lufthansa – injured

by defective pool at Hotel Oberio Intercontinental – hotel room booked by Lufthansa, not Klaus – There was no privity of contract between Klaus & the hotel.

• It was held by the Delhi High Court, that though the contract was between Lufthansa & the hotel, the beneficiaries are the crew who would stay, and hence the contract was for their benefit.

• M C Chacko v State Bank of Travancore (1970) – M C Chacko’s father guarantees his overdraft – father gifts his property under a gift deed to family members– which states that M C Chacko should meet the liability under the guarantee from the share of property gifted to him - Bank tries to enforce a provision of this gift deed.

• It was held by the SC that ‘except in the case of a beneficiary under a trust created by a contract or in the case of a family arrangement, no right may be enforced by a person who is not a party to the contract’

Capacity to Contract

• The following persons are incompetent to contract:1. Minors2. Persons of unsound mind• Idiot• Lunacy or insanity• Drunkenness or intoxication

3. Disqualified persons• Alien enemies• Foreign sovereigns & ambassadors• Convicts• Undischarged insolvent

Minors• A contract with a minor is void abinitio.• Payment can be made out of the property of a minor for the

necessaries of life supplied to him.• Necessaries are those without which an individual cannot reasonably

exist.

• A minor cannot ratify any contract made during his minority.• A minor may be admitted to the benefits of a partnership.• The minor’s contracts do not impose any liability on his

parents even if the contract is for necessaries.• A minor cannot be declared insolvent because he is

incapable of contracting debts.• If a minor takes the plea of minority in fulfilling contractual

obligations, the court would accept it and hold the contract unenforceable. However, it would restore the benefits to the other party

Consent

• Free & genuine consent:.

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

1. Coercion, 2. Undue influence, 3. Fraud, 4. Misrepresentation or 5. Mistake.

Coercion

• Coercion is :• The committing or threatening to

commit any act forbidden by the Indian Penal Code, 1860.• Or the unlawful detaining, or

threatening to detain any property to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

Coercion

• Even threat to commit suicide amounts to coercion.• The threat need not proceed from the party

to the contract, it may proceed from a third person also.• A threat to file a civil or criminal suit is not

forbidden by the Indian Penal Code.• The burden of proving that the consent was

obtained by coercion shall lie upon the aggrieved party who wants to set aside the contract.

Coercion

• Effect of Coercion:• The contract is voidable at the option of the

party whose consent was so obtained.• When the aggrieved party decides to set aside

the contract, it must give back any benefit received from the other party under the contract. Moreover, the other party need not perform his part of the contract.• If the aggrieved party does not opt to set aside

the contract, it works as a valid contract.

Undue Influence

•Where relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

Undue Influence

• When is a person in a position to dominate the will of the other:• Real or apparent authority.• Fiduciary relation.• Persons with affected mental capacity.• When a transaction appears to be

unconscionable, it is presumed that the stronger party has exercised undue influence over the weaker party.

Undue Influence

• Undue influence may be exerted by a person who is not a party to the contract.• Lack of foresight is not a ground for establishing

a case of undue influence.• The law presumes undue influence in a contract

with a ‘pardanashin woman’, and the courts throw the burden on the other party to prove that undue influence was not exercised.

Undue Influence

• Effect of undue influence:• The contract is voidable at the option of the party

whose consent was so obtained.• The court may direct the aggrieved party to refund the

benefit whether in whole or in part or set aside the contract without any direction for refund of benefit.• If the aggrieved party does not opt to set aside the

contract, it works as any other valid contract.

• Burden of proof: is on the party who is in a position to dominate the will of the other.

Fraud

• Fraud: Fraud exists when it is shown that a false representation has been made, • knowingly, • or without belief in its truth, • or recklessly, not caring whether it is true or false,

• and the maker intended the other party to act upon it. • It also exists when there is a concealment of a

material fact.

Fraud• Fraud cannot be committed by a stranger to

the contract.• Fraud must have been committed upon the

other party.• The following acts constitute a fraud:• Suggestion that a fact is true, by one, who

does not believe it to be true.• An active concealment of fact, by one,

having knowledge of the act. • A promise made without any intention of

performing it.• Any such acts or omission which law

specifically declares to be fraudulent.

Fraud• Mere silence is not fraud, except;• When it is the duty of the person keeping

silence to speak. • Contracts based on absolute good faith.

• Where silence is sometimes equivalent to speech• Silence is deceptive

• When it is the duty of the seller to disclose latent or hidden defect.

Fraud• Effect of fraud:• The contract is voidable at the option of

the defrauded party.• The defrauded party is entitled to

compensation for any damage he has sustained.• The defrauded party may insist that the

contract shall be performed and that he should be put in the position in which he would have been if the representation made was true.

Misrepresentation

• Misrepresentation is a misstatement of a material fact made innocently with an honest belief as to its truth or non-disclosure of a material fact, without any intent to deceive the other party.• The effect of misrepresentation is that

the agreement is voidable by the party whose consent is obtained by misrepresentation.

Mistake• Mistake is erroneous belief about something.

It may be mistake of law or mistake of fact. • Mistake of law does not result in a voidable

contract.• Bilateral mistake of fact renders a contract

void. (lack of consensus ad idem). • The mistake must relate to fact, not opinion. • The fact must be essential to the agreement

& • The fact must be existing at the time of

contract.

Mistake• Instances of Bilateral Mistake:

• Mistake as to:1. the existence of the subject matter.

• Couterier v Hastie (1856)- Case involving sale of goods on board a ship

2. the identity of the subject matter.• Raffles v Wichelhaus ( 1864)- Case involving cotton arriving on ship named Peerless from Bombay

3. title or rights.• Cooper v Phibbs (1867)- Case involving renting of a fishery by nephew from uncles’ daughter whereas it actually belonged to the nephew

4. the quantity of subject matter.5. the quality of subject matter.

• Smith v Hughes (1871)- Case involving sale of old oats where the age of the oats were not disclosed, but sample allowed to remain with the buyer for 24 hours

6. assumptions.

Mistake

• Unilateral mistake does not effect the validity of an agreement. However, if it can be proved that the mistake was caused by fraud or misrepresentation it can be avoided.• Instances of Unilateral Mistake:• Mistake as to.1. Identity of the contracting party.• Said v Butt(1920)

- Case of the drama critic S, with whom the management, of which B was the managing director, never intended to enter into a contract.

2. The character of document.

Mistake• Mistake as to identity of the contracting party (caused

by fraud):• Cundy v Lindsay (1878)

- Case where a fraudulent man called Blenkarn posing as a well known firm Blenkiron & Co ordered a large quantity of handkerchiefs in writing from Cundy – received the goods & disposed off the goods to Lindsay , who acted in good faith – held that there was no contract between Cundy & Blenkarn and therefore, he had no right to sell the goods.

• Philips v Brooks (1919)- Case of a jeweler & a certain North masquerading as Sir George Bullough – mistake was not about identity but only about the attributes of the buyer.

Mistake• Mistake as to identity of the contracting party (caused by

fraud):• Ingram v Little (1961)

- Case of sale of car by three ladies including I – cheque offered but refused – buyer persuaded them to believe he was a certain Hutchinson, leading businessman quoting an address & a telephone number – particulars verified by the ladies – car given for the cheque – car resold to L – cheque proved worthless – I sued L for car or for its value – held that as the ladies intended to enter into contract with the real Hutchinson there could be no contract with a rogue – since the rogue had no title to the car, he could not convey a good title to L.

• Lewis v Averay (1971)- Case of sale of car by L – cheque offered – buyer, masquerading as a famous film actor, asked to wait till cheque was cleared – sellers resistance broken – proof of identity, a special pass of admission to a film studio, given – cheque bounced – buyer had in the meantime sold it to innocent buyer A – held that L should suffer, it was he who had allowed the possession of goods to pass without waiting for the cheque to be cleared.

Lawful Object

• The object of an agreement is unlawful if: it is forbidden by law; or it is of such a nature that, if permitted, it would defeat the provisions of any law; or it is fraudulent; or it involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy.

Agreements opposed to Public Policy

1. Trading with an enemy.2. Agreements interfering with the

administration of justice.• Interference with the course of justice• Stifling prosecution.• Maintenance and champerty agreement.

3. Traffic in public offices.4. Agreements creating interest opposed to

duty.5. Agreements unduly restraining

personal libertyContinued

Agreements opposed to Public Policy

6. Agreements interfering with parental duties.

7. Marriage brokerage agreements.8. Agreements creating monopolies.9. Agreements to defraud creditors.10.Agreements to defraud revenue

authorities.11.Agreements interfering with marital

duties.

Agreements expressly declared void

1. Agreements in restraint of marriage2. Agreements in restraint of trade

(exception is the sale of goodwill, or agreements by partners under the partnership act)

3. Uncertain agreements (the meaning of which is uncertain)

4. Agreements in restraint of legal proceedings

5. Curtailing the period of limitations6. Wagering agreements

Contingent Contract

• A contingent contract is a conditional contract.• ‘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.’• Insurance agreements are best examples

of contingent contracts.

Quasi Contract

• These are contracts which are not founded on actual promises. These contracts are created by circumstances & are based on the maxim: no man must grow rich out of other person’s cost.

1. Supply of necessaries.2. Payment of lawful dues by interested person.3. Obligation of a person enjoying benefit of a

gratuitous act.4. Finder of goods.

Discharge of a Contract

• Discharge by performance• Discharge by agreement or consent• Discharge by impossibility of performance• Discharge by lapse of time• Discharge by operation of law• Discharge by breach of contract

Discharge by performance

• ACTUAL PERFORMANCE•When both parties perform their promises

& there is nothing remaining to perform.• ATTEMPTED PERFORMANCE •When the promisor offers to perform his

obligation, but promisee refuses to accept the performance. It is also known as tender.

Discharge by agreement or consent• NOVATION :New contract substituted for old contract with the

same or different parties.• RESCISSION : When some or all terms of a contract are

cancelled.• ALTERATION :When one or more terms of a contract is/are

altered by the mutual consent of the parties to the contract.• REMISSION :Acceptance of a lesser fulfilment of the promise

made.• WAIVER :Mutual abandonment of the right by the parties to

contract.• MERGER :When an inferior right accruing to a party to

contract merges into a superior right accruing to the same party.

Discharge by impossibility of performance• Initial impossibility• Subsequent impossibility

• Destruction of subject matter• Non-existence of state of things (Failure of

Ultimate Purpose – frustration of the contract)• Krell v Henry (1903) - Case of hiring a flat to

witness coronation procession of King Edward VII• Death or incapacity of personal services• Change of law• Outbreak of war

Impossibility of performance – not an excuse1. Difficulty of performance – due to some

uncontemplated events or delays2. Commercial impossibility – e.g. expectations of higher

profits not realised, sudden depreciation of currency etc

3. Impossibility due to failure of a third person on whose work the promisor relied

4. Strikes, lock-outs & civil disturbances; unless the parties have specifically agreed in this regard at the formation of the contract.

5. Failure of one of the objects, where there are several objects, does the discharge the contract

Discharge by lapse of time

• The Limitation Act 1963, clearly states that a contract should be performed within a specified time called period of limitation.• If it is not performed and if the

promisee takes no action within the limitation time, then he is deprived of his remedy at law.

Discharge by Operation of Law

• Death•Merger• Insolvency• Unauthorised alteration of the terms of a

written agreement• Rights & liabilities becoming vested in the

same person • (e.g. bill of exchange gets into the hands of the

acceptor)

Discharge by breach of contract

• ACTUAL BREACH• At the time when the performance is due• During the performance of the contract

• ANTICIPATORY BREACH• Declaration of not performing the contract before

the performance is due

Remedies

•When a there is breach of contract, the injured party has one or more of the following remedies:1. Rescission of contract2. Suit for damages3. Suit upon ‘quantum meruit’4. Suit for specific performance of the

contract5. Suit for injunction

Damages…

•….monetary compensation for the loss caused to the injured party.• Every action for damages raises two

problems:•Remoteness of damage•Measure of damages

Remoteness of damages….• Hadley Vs Baxendale (1854)• A shaft in Hadley’s (P) mill broke rendering the mill inoperable.

Hadley hired Baxendale (D) to transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley told Baxendale that the shaft must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived.

• Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut down for an additional five days. Hadley had paid 2 pounds four shillings to ship the shaft and sued for 300 pounds in damages due to lost profits and wages. The jury awarded Hadley 25 pounds and Baxendale appealed.

Remoteness of damages….• Hadley Vs Baxendale (1854)• Held that:• An injured party may recover those damages reasonably

considered to arise naturally from a breach of contract, or those damages within the reasonable contemplation of the parties at the time of contracting.

• The court held that the usual rule was that the claimant is entitled to the amount he or she would have received if the breaching party had performed; i.e. the plaintiff is placed in the same position she would have been in had the breaching party performed. Under this rule, Hadley would have been entitled to recover lost profits from the five extra days the mill was inoperable, if such loss of profit was in the contemplation of the parties at the time of contracting.

Two rules…

1. General damages are for loss which arises naturally in the usual course of things from the breach itself.

2. Special damages are for loss which arises on account of the unusual circumstances affecting the plaintiff. • They are not recoverable unless the special

circumstances were brought to the knowledge of the defendant so that the possibility of the special loss was in the contemplation of the parties.

Measure of damages

• Damages are compensatory; not penal• In ordinary cases, damages for mental pain

and suffering caused by the breach are not allowed.• Injured party has to take reasonable steps

to see that his loss is kept to the minimum. (Duty to mitigate)

Liquidated Damages• Monetary compensation for a loss, detriment, or

injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract.• Generally, contracts that involve the exchange of

money or the promise of performance have a liquidated damages stipulation. • The purpose of this stipulation is to establish a

predetermined sum that must be paid if a party fails to perform as promised.

Liquidated Damages• Damages can be liquidated in a contract only if :

1. the injury is either ‘uncertain’ or ‘difficult to quantify’; 2. the amount is reasonable and considers the actual or

anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and

3. the damages are structured to function as damages, not as a penalty.

• If these criteria are not met, a liquidated damages clause will be void.

Penalty• A penalty is a sum that is disproportionate to the actual

harm. It serves as a punishment or as a deterrent against the breach of a contract. Penalties are granted when it is found that the stipulations of a contract have not been met. For example, a builder who does not meet his or her schedule may have to pay a penalty. • Liquidated damages, on the other hand, are an amount

estimated to equal the extent of injury that may occur if the contract is breached. These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.

Why do we need written contracts?

• Basic lack of trust• Clearly establishes the risks and obligations of

each party• Provides means by which performance can be

assessed and measured• Provides means by which breaches can be

identified• Provides means by which default can be

established• Establishes the owner’s means of control• Establishes the contractor’s scope of work

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What does a written contract do for us?

•A written contract provides the document by which risks, obligations, and relationships of both parties are clearly established, thus ensuring the performance of these elements in a disciplined manner.

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Present Position

1. Expression of interest (prequalification)2. Request for proposal (invitation to tender/bid)3. Pre-bid conference4. Submission of bids5. Technical & commercial evaluation6. Selection of the lowest technically acceptable bid7. Letter of Award (LOA)8. Signing of the contract

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Structure of a Contract

1. Preamble2. Interpretation & definitions3. Scope, technical specifications & performance parameters4. Price5. Terms & mode of payment6. Price variation7. Taxes & duties8. Scheduled delivery date9. Force majeure10. Export license

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Structure of a Contract

10. Defaults & liquidated damages11. Inspection & acceptance12. Shipment13. Passing of title & risk14. Warranty15. Patents & copyrights16. Indemnities17. Spares18. Options19. Assignments

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Structure of a Contract

19. Termination20. Resolution of disputes21. Confidentiality22. Survival 23. Amendments24. Applicable Laws25. Effective Date26. Notices27. Contract Signatures28. Forms

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Thank you for listening!