2-Contracts ILS 2013

8/12/2019 2-Contracts ILS 2013

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Fundamentals of Contract Law

Dr. V.K. Unni

Public Policy & Management Group

Indian Institute of Management CalcuttaE-mail: [email protected] / [email protected]


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Contract Law

Law of Contract is the most crucial branch of Business Law.

It plays a lead role in regulating daily trade, commerce andindustry.

The Contract Act creates an obligation between the parties tothe contract and not against the whole world.

In India, the Law of Contracts is contained in the IndianContract Act,1872.

The Act lays down the general principles relating to formation,performance and enforceability of contracts and the rulesrelating to certain special types of contracts like, Indemnity andGuarantee; Bailment and Pledge, Agency, NegotiableInstruments etc.


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Contract Law The Partnership Act; the Sale of Goods Act; the Negotiable

Instruments Act; though technically belonging to the Law of

Contracts, have been covered by separate enactments

However, the general principles of the Contract Law are the

basis for all such contracts as well

Difference between Agreements and Contracts

Though the two terms synonymously but, from a legal

standpoint, there is an important difference.

All contracts are agreements but all agreements are not

contracts.

An agreement enforceable by law is a contract


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Contract Law

All agreements that are made by free consent of the people who arecompetent to contract, for a legal object, having a legalconsideration, with an intention to create a legal relationship arecontracts

Thus, there are five factors that determine whether an agreement canbe legally enforced or not.

1) Free Consent

Two or more people are said to consent when they agree upon thesame thing in the same sense.

However, many a times, a consent may not reflect the true intentionsof a party.

For example, one party may give consent because of beingfinancially pressured or criminally threatened.

Thus, such a consent should not make the agreement enforceable


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Contract Law

Some factors can vitiate a consent

Consent that is not obtained through coercion, undue influence,fraud, misrepresentation, or mistake is called free consent

Coercion means committing or threatening to commit any actforbidden by law or unlawful detaining or with an intention to causethat other person to enter into an agreement.

A good example would be to force someone to consent on gun pointor by hurting or threatening to hurt.

Undue influence occurs when because of the nature of therelationship that exists between the parties, one party is able todominate the will of the other and uses this dominance to obtainunfair advantage over the other.


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Contract Law A person is in a dominant position when he holds a real or apparent

position of authority for example manager vis a vis an employee

When a person intentionally tries to cheat another person, it is calledas fraud in a general sense.

Fraudmeans and includes any of the following activities done by aparty with an intent to deceive another party or induce the other partyto enter into the contract.

1. the suggestion of a fact which is not true,

2. active concealment of a fact by one who knowledge or belief of thefact

3. making a promise without an intention to perform.

4. any act intended to deceive

5. any such act or omission that the law declares to be fraudulent.


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Contract Law When a person makes an unwarranted statement, however

innocently, which the person believes to be true, and which turnsout to be false, it is misrepresentation.

Contract induced due to coercion, fraud, or misrepresentation is

voidable at the option or the party whose consent was obtained bycoercion.

Where both parties to an agreement are under a mistake as to amatter of fact essential to the agreement, the agreement is void

2) Competence to Contract

The following persons are incompetent to contract

Minors

Persons of unsound mind

Persons disqualified by law to which they are subject to (likeundischar ed insolvents alien enemies


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Contract LawMinor's Contract

According to the Indian law a minor is a person, male or female,

who has not completed the age of 18 years.

According to the Indian Contract Act, no person is competent toenter into a contract who has not attained majority.

In the landmark case of Mohiri Bibee (1903) it was held that a

minor has no capacity to contract and minor's contract is absolutely

void.

In this case, X, a minor borrowed Rs. 20,000 from Y, a money

lender. As a security for the money advanced, X executed a

mortgage in Y's favour. When sued by Y, the Court held that the

contract by X was void and he cannot be compelled to repay the

amount advanced by him.


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Contract Law

Indian Courts have applied this decision to those cases where the

minor has incurred any liability and in such cases the minor is not

liable.

But if the minor has carried out his part of the contract, then the

Courts have held that he can proceed against the other party

A minor's contract is altogether void in law, and a minor cannot

bind himself by a contract.

If the minor has obtained any benefit, such as money on a

mortgage, he cannot be asked to repay nor can his mortgaged

property be made liable to pay


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Contract Law

Unsound Mind: According to the Law, a person is of sound

mind for the purpose of contracting if at the time of contracting,

he is capable of understanding the contract and capable of

making a rational judgment as to the effects of the contract

upon his interests.

In India, a contract done by a person of unsound mind is

absolutely void ab initio.

3) Lawful Object

The object is unlawful if

1. It is forbidden by law,

2. Is of such a nature if permitted it would defeat the provisions of

any law,


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Contract Law3) It is fraudulent

4) The court regards it immoral,

5) The court regards it opposed to public policy.

Thus every agreement of which the consideration or object is

unlawful is void.Void Agreements

Agreement without consideration is void

Agreement in restraint of marriage is void.

a) It is the policy of law to discourage agreements, which restrainfreedom of marriage.

b) Where a party is restrained from marrying at all, or for marrying for afixed period or from marrying a particular person, or class of persons,the agreement is void

Agreement entered between persons not competent to contract arevoid


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Contract Law Wager contract is one in which parties professing opposing views on

the result of an uncertain event, mutually agree that depending on theoutcome of such event, one will pay or hand over a sum of money orother stake.

Neither party has any other interest in the event other than their stake

that they may lose or win. Exception - Any amount more than Rs. 500 can be paid to the winner

or winners of any horse race.

Wagering agreement being void cannot be enforced in any court oflaw

If chance does not play a role and victory is completely dependent onskill, the competition is not a wager/lottery

The principle behind treating an agreement by way of wager as voidis that, the law wants to dissuade people from playing games ofchance and make an earning by trying their luck instead of doing

some productive work


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Derivatives: Legal PositionAre Derivatives Contract Void ??

Derivatives as financial instruments are used to transfer orhedge the risk

They are assets, whose values are derived from values of

underlying assets which can be commodities, energyresources like hydrocarbons, financial assets such asshares, foreign currencies etc

There are at least four categories of derivatives, that arecommonly used in transactions called Forwards, Futures,

Swaps,Options. Some are traded through exchanges and thus known by the

name Exchange-Traded-Derivatives (ETD).

Others which are traded directly between the parties are

called as Over-The-Counter (OTC) derivatives.


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Derivatives: Legal Position Post liberalization Indian laws also began to accept the

concept of derivatives

Initially derivatives in securities/shares, were statutorilyrecognised

This was done by the 1999 amendment wherein Section18A was inserted in the Securities Contracts(Regulation) Act, 1956

Derivatives Contract

It states that contracts in derivatives shall be legal andvalid if such contracts are :

(a) traded on a recognised stock exchange;

(b) settled on the clearing house of the recognised stockexchange, in accordance with the rules and bye laws ofsuch stock exchange


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Derivatives - Legal Position

Landmark Case-law, Rajshree Sugars and Chemicals Ltd.(RSCL) vs. Axis Bank, 2008, Madras High Court

Issue before the court was whether the RSCL was liable to

pay dues to the bank arising out of a derivatives contract RSCL contended that the derivatives contract (OTC forex

swap) the company entered into with Axis Bank was a wagerand speculative in nature and thus it could not be enforced

RSCL entered into contract with bank to protect fromfluctuations in the forex market and found itself at the wrongend of the deal after the dollar depreciated sharply againstthe rupee and also against other currencies in 2007


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Derivatives - Legal Position

Court rejected the argument of RSCL and held that

the prices of derivatives are now scientifically

determined on the basis of a mathematical model

(or formulae) called Black-Scholes Model andsimilar models derived from it

Court noted that the pricing of the deals, follows a

scientific pattern on the basis of Financial

Mathematics and they cannot be termed as wagers.

Finally the court held that the contract was not void

and thus the arguments raised by Axis Bank was

held valid


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Contract Law

4) Consideration: When, at the desire of the Promisor, the Promisee haddone or abstained from doing, something, such act or abstinence iscalled a consideration for the promise.

Consideration is nothing but the price paid by one party for thepromise of the other.

It can be in the nature of a positive act or the forbearance of acertain act, it can be past, present or future.

Thus, consideration forms an essential part of an agreement without

which the agreement is void. This is because, in the absence of consideration, there is no legal

obligation formed between the parties and, therefore, in such ascenario, they are not bound by the terms of the agreement.


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Contract LawThere are three exceptions for consideration

Mutual love and affection- Any agreement, made withoutconsideration, is valid if it is made on account of natural loveand affection between the parties, standing in near relation toeach other, provided it is expressed in writing and it isregistered under the law.

Promise to compensate for something done: Anyagreement, made without consideration, is valid if it is a

promise to compensate a person, who has already voluntarilydone something for the person making the promise.

Promise to pay a debt, barred by Limitation law: Anypromise, made in writing and signed to pay a debt, is bindingon the person signing it even though it may be barred by thelaw of limitation.


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Contract Law

5) Intention to Create a Legal Relationship

The intention to create legal relation is an essentialrequirement of contract

Normally the intention to create legal relations is

expressly stated by the contracting parties In other scenarios the law will presume the intention,

because of the nature of the commercial dealingsbetween the parties

In many domestic agreements, like the kind of

agreements made between parents and children, there isno intention to create legal relations and no intention thatthe agreement should be subject to litigation

Family relationships do not preclude the formation of abinding contract, but to create contractual relations, there

must be a clear intention on either party to be bound


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Voidable Contract Voidable Contract :- Voidable Contract are valid unless

the aggrieved party decides to set it aside

Voidable Contract generally happens when one side of

the party is tricked into entering a contract by other party

Voidability of contract without free consent :- whenconsent to a contract is caused by coercion, undue

influence, fraud or misrepresentation the agreement is

voidable at the option of the party whose consent was so

obtained. However a party to a contract whose consent was not

free may if he thinks fit insist that the contract shall be

performed.


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Contract Law

Difference between Void and Voidable Contract :-

A void contract is considered to be a contract that is invalid, even

from the start of signing the contract.

On the other hand, a voidable contract is also a legal contract

which is declared invalid by the aggrieved party, for certain legalreasons

While a void contract becomes invalid at the time of its creation, a

voidable contract only becomes invalid if it is cancelled by the

aggrieved party who has signed the contract In the case of a void contract, no performance is possible, whereas

it is possible in a voidable contract.


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Contract LawBreach of Contract

The parties to a contract must either perform or offer toperform, their respective promises, unless such performanceis dispensed with or excused under the provisions of the Act,or any other law.

Promises bind the legal representatives of the promisor inthe case of death of such promisor before performance,unless a contrary intention appears from a contract.

In a contract each party to the contract is legally bound toperform his part of the obligation.

Non-performance of the duty undertaken by a party in acontract amounts to breach of contract, for which he can bemade liable.


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Contract LawREMEDIES

When a party to the contract makes a breach of contract, there aretwo possible alternatives available to the other party.

1. To bring an action for the breach of contract

2. To bring an action for specific performance of the contract.DAMAGES IN CASE OF BREACH

For the breach of contract damages is the most appropriateremedy.

When a contract has been broken, the party who suffers by such

breach is entitled to receive, from the party who has broken thecontract, compensation for any loss or damage caused to him

Such compensation is not to be given for any remote or indirectloss or damage sustained by reason of the breach


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Contract Law

Damages are compensatory and not penal and one who

has suffered loss from breach of contract must take every

reasonable step that is available to him to mitigate the

extent of damages caused by the breach

Loss of damages must be actual and not by way of

punishment.

The basic principle of law of damages is that the person

affected by breach of contract shall have fair and just

compensation proportional to the loss sustained in

consequence of the defendants breach of contract which

gives rise to the action


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Contract Law For e.g. under a contract for the sale of goods, the measure of

damages upon a breach by the buyer is the difference between the

contract price and the market price at the date of breach.

On a breach of contract to supply goods by the seller, the buyer is

entitled to recover all the expenses of procuring same or similargoods

In case of breach of contract, the aggrieved party is only entitled to

recover such part of the loss actually resulting as was at the time of

the contract reasonably foreseeable as liable to result from the breach What was at that time reasonably so foreseeable depends on the

knowledge then possessed by the party who later commits the breach


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Contract LawCompensation for breach of contract where Damages are stipulated

for (Liquidated Damages)

When a contract has been broken and a sum has been named in the

contract as the amount to be paid in case of such breach, the party

complaining of the breach is entitled, to receive from the partyreasonable compensation not exceeding the amount so named,

whether or not actual damage or loss is proved

This is beneficial for the aggrieved party as it will get a pre-

determined sum of money without proving any actual damage Jurisdiction of the Court to award compensation in case of breach of

contract is unqualified except as to the maximum stipulated

But compensation has to be reasonable, and that imposes upon the

court a duty to award compensation


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Contract LawSpecific Performance

Specific performance means actual execution of the contractas agreed between the parties.

Specific Performance of any contract may, in the discretion of thecourt be enforced in the following situations

When there exists no standard for ascertaining the actualdamage caused by the non-performance of the act agreed to

be done; or

When the act agreed to be done is such that compensation inmoney for its non-performance would not afford adequate

relief.Contracts which cannot be specifically enforced

1. When compensation in money is an adequate relief.


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Contract Law2. When a contract runs into such minute and complex details or

is dependent on personal qualifications

3. when a contract is in its nature terminable

4. when a contract, the performance of which involves

performance of continuous nature, which the court cannot

supervise.

Thus in other words, specific performance is equitable relief

granted by the courts in case of breach of contract in the form

of a judgment that the defendant must actually perform thecontract according to its terms and stipulations.


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Contract LawPrivity of Contract: A contract is an agreement between two or

more parties that creates an obligation to do or not to do something

The parties to the contract are under an obligation to perform theterms and conditions as provided in the contract.

The contract can confer rights or impose obligations arising under the

contract only on the parties to the contract. Third parties cannot be under such an obligation to perform or

demand performance under a contract.

This is generally called as Privity of contract

There are two aspects of this doctrine.

1. Only the parties to the contract are entitled under it.

Rights or benefits may be conferred upon a third party but such athird party can neither sue under the contract nor rely on defenses

based on the contract.

2.

Secondly the parties to a contract cannot impose liabilities on a thirdparty


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Contract LawExceptions to the principle

Over a period of time the Courts have through the variousjudgments laid down few exceptions to the principle. Theexceptions are as follows:

1. Trust : Where a person acts as a trustee and enters into acontract the beneficiary of the contract can sue if thepromise has not been performed by the trustee

2. Third-party Insurance: Third party may claim under aninsurance policy made for their benefit, even though that

party did not pay the premiums3. Collateral Contracts : Between the third party and one of

the contracting parties like Contracts involving ProjectFinance


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Contract LawContract: the elements of a contract There are certain elements that must be present for a

legally binding contract to be in place.

The first two are the most obvious:

An offer: an expression of willingness to contract on aspecific set of terms, made by the offeror with theintention that, if the offer is accepted, he or she will bebound by a contract.

Acceptance: an expression of absolute and unconditionalagreement to all the terms set out in the offer.

It can be oral or in writing.

The acceptance must exactly mirror the original offermade.


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Contract Law Thus, a promise cannot come into existence unless the willingness or

assent is communicated to the other party.

Further, even the revocation, if any, must be communicated to theother party for it to take effect.

Therefore, communication is the most critical aspect in the making ofa contract.

Communication

Thus, a proposal may be made in any way, which has the effect oflaying before another person his willingness to do or not do

something and the acceptance can be signified similarly. A promise (i.e. a proposal and its acceptance) can be formed either

by words, written or oral, is which case it is called express or byaction, in which case it is called implied.


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Contract LawCompletion of communication

Communication of a proposal is complete when it comes to the

knowledge of the party to whom the proposal is made.

For example, if X sends a proposal in the mail to Y and if the mail

is lost, then the communication of the proposal is not complete.

Thus there was no contract between the two in the first place

because Xs proposal never came to the knowledge of Y and thus

he could never accept it.

The communication of an acceptance is complete, as against the

proposer, when it is put in a course of transmission to him, so as to

be out of the power of the acceptor;


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Contract Law The communication of an acceptance is complete as against

the acceptor, when it comes to the knowledge of the proposer

A proposal can be revoked anytime before the communicationof its acceptance is complete as against the proposer but notafterwards.

The communication of a revocation is complete as against theperson who makes it, when it is put into a course oftransmission to the person to whom it is made, so as to be out ofthe power of the person who makes it;

The communication of a revocation is complete as against theperson to whom it is made, when it comes to his knowledge


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Contract Law If X makes an offer to Y to sell his car for Rs. 500000

and sends Y a letter at Ys office address on 1st January2007 and Y accepts that offer and sends back X anacceptance letter on 2ndJanuary 2007

The communication of acceptance is complete asagainst X when Ys letter is posted

The communication of acceptance would be complete -as against Y , when Ys letter reaches Xs address.

Thus any revocation of the offer by X should be done

before Ys letter is posted to X, i.e 2ndJanuary 2007 Thus any revocation of the acceptance by Y should be

done before Ys acceptance letter reaches Xs address.


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Tenders as Invitations to Treat

Offers and Invitations to Treat:

It is sometimes difficult to distinguish statements of intention which

cannot, result in any binding obligation from offers which admit of

acceptance, and so become binding promises.

A person advertises goods for sale in a newspaper, or announces that

he will sell them by tender or by auction; a shopkeeper displays

goods in a shop window at a certain price etc

In such cases it may be asked whether the statement made is an offer

capable of acceptance or merely an invitation to make offers, and dobusiness.

An invitation of this nature, if it is not intended to be binding, is

known as an 'invitation to treat."


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Contract Law : Tenders

Tenders: A statement that goods are to be sold by tender is notnormally an offer to sell to the person making the highest tender; it

merely indicates a readiness to receive offers

Similarly, an invitation for tenders for the supply of goods or for

the execution of works is, generally, not an offer, even though thepreparation of the tender may involve very considerable expense

The offer comes from the person who submits the tender and

there is no contract until the person asking for the tenders

accepts one of them These rules, may be excluded by evidence of contrary

intention: e.g. where the person who invites the tenders

states in the invitation that he binds himself to accept the

highest offer to buy


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Contract Law : Tenders In such cases, the invitation for tenders may be regarded either as

itself an offer or as an invitation to submit offers coupled with an

undertaking to accept the highest

When parties negotiate with a view to making a contract, many

preliminary communications may pass between them before adefinite offer is made

One party may simply respond to a request for information or he

may invite the other to make an offer; he is then said to make an

"invitation to treat The question whether a statement is an offer or an invitation to

treat depends primarily on the intention with which it was made


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Contract Law: Tenders How a Tender differs from an Offer?

Offer in Section 2(a) of Indian Contract Act, 1872, is defined as

When one person signifies to another his willingness to do or to

abstain from doing anything, with a view to obtaining the assent of

that other to such act or abstinence, he is said to make a proposal

It is the willingness of a person to act or abstain from an act which

differentiates an Offer from a mere Invitation to Treat or an

Invitation to Offer.

In a Invitation to Treat this willingness is missing

Tenders, advertised mainly by government / public companies in

India, who ask Contractors to submit their best offers on the pre-

specified terms also fall within the category of invitation to treat


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Carlill v Carbolic Smoke Ball Company


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Carlil l v Carbolic Smoke Ball

Company The Carbolic Smoke Ball Company made a product called the

"smoke ball, it claimed to be a cure for influenza and a number of

other diseases

The Company published advertisements in newspapers in 1891 and

claimed that it would pay 100 to anyone who got sick with influenzaafter using its product according to the instructions set out in the

advertisement

Mrs Carlill saw the advertisement, bought and used three times daily

for nearly two months and finally she contracted the flu in 1892. She claimed 100 from the Carbolic Smoke Ball Company


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Carlil l v Carbolic Smoke Ball

Company Company did not pay saying that it was not a serious contract

and finally the case was filed

The Court rejected the company's arguments and held that there

was a fully binding contract for 100 with Mrs Carlill.

Among the reasons given by the three judges were

that the advertisement was a unilateral offer to all the world

that satisfying conditions for using the smokeball constituted

acceptance of the offer that the company's claim

that 100 was deposited at the Alliance Bank showed the serious

intention to be legally bound


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Discharge of a Contract Discharge of a valid contract involves the process under

which the primary (performance) obligations come to an end.

Discharge can be by way of a) Agreement b) Performance c)

Breach d) Frustration

Since contractual obligations are created by an agreement itcan also be discharged by agreement between the parties

Discharge by performance will not give rise to secondary

obligations, as the contract has been successfully completed

Discharge by breach gives rise to secondary obligations topay damages

Discharge by frustration happens when the performance

becomes impossible or illegal


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Discharge of a Contract This will only happen when the circumstances are so different

that performance in the changed circumstance would be

totally different from what the parties originally intended

A contract will only be frustrated by events which were totally

unforeseeable at the time

This means that performance must not merely be

cumbersome or unexpectedly costly for one party; there must

be no way for it to actually be accomplished.


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Contract Law

Dr. V.K. Unni

Public Policy & Management Group

Indian Institute of Management Calcutta

E-mail: [email protected]

2-Contracts ILS 2013

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Transcript of 2-Contracts ILS 2013