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Unit - 1Unit - 1Indian Contract

Act, 1872

• What is Law ?

• Object of Law ?

• Need for the knowledge of Law ?

• What is Law ?

• Object of Law ?

• Need for the knowledge of Law ?

Object of the law of contractObject of the law of contract

The law of contract is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. Its rules define the remedies that are available in a court of law against a Person who fails to perform his contract, and the conditions under which the remedies are available. It is the most important branch of business law. It affects all of us in one way or the other. It is, however, of particular importance to people engaged in trade. Commerce and industry as bulk of their business transactions are based on contracts.

Indian Contract act 1872

Indian Contract act 1872

Definition

According to section 2(h) defines contract “As an agreement enforceable by Law”.

According to Salmond “A contract is an agreement creating and defining obligations between the parties”.

From the above definition, we find that a contract

essentially consists of two elements :

(i) An agreement,

(ii) Legal obligation (i.e., a duty enforceable by law.)

1. Agreement.

(a) Plurality of persons.

(b) Consensus-ad-idem.

2. Legal obligation.

VALID CONTRACTVALID CONTRACTEssential elements of a valid contract :

From the point of view of enforceability

Offer and Acceptance

The proposal or offer

• Legal Rules Regarding a Valid Offer

1. An offer may be ‘express’ or ‘implied’.

2. An offer must be capable of creating legal relations.

3. The terms of the offer must be certain and not loose or vague.

4. An invitation to offer is not an offer.

• Lapse and revocation of offer

1. An offer lapses after stipulated or reasonable time.

2. An offer lapses by rejection.

3. An offer lapses by the death or insanity of the offeror or the

offer before acceptance.

4. An offer lapses by subsequent illegality or destruction of

subject matter.

THE ACCEPTANCETHE ACCEPTANCE

• Acceptance must be given only by the person to whom the offer is made.

• Acceptance must be absolute and unqualified.• Acceptance must be communicated by the

acceptor.• Acceptance must be given within a reasonable

time and before the offer lapses and / or is revoked.

Legal Rules Regarding a Valid AcceptanceLegal Rules Regarding a Valid Acceptance

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ConsiderationConsideration“Consideration is the price for which the promise of the other is bought.”

Section 2(d) of the Indian Contract Act 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 th promise.”

An analysis of the above definition will show that it consists of the following three components :

(a) it must be done by the promises or any other person;

(b) it may have been already executed or is in process of being done or may be still executory;

(c) it must be something to which the law attaches a value.

Essential of Valid ConsiderationEssential of Valid Consideration• Consideration may move from promisee or any other person.

The second essential of valid consideration, as contained in the definition of consideration in Section 2(d), is that consideration need not move from the promisee alone but may proceed from a third person. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promisee or from any other person. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract.

• Consideration may be past, present or future.

The words, “has done or abstained from doing; or does or abstains from doing; or promises to do or to abstain from doing,” used in the definition of consideration clearly indicate that the consideration may consist of either something done or not done in the past, or done or not done in the present, or promised to be done or not done in the future. To put it briefly, consideration may consist of a past, present or a future act.

• Consideration must be ‘something of value’.

The fourth and last essential of valid consideration is that it must be ‘something’ to which the law attaches a value. The consideration need not be adequate to the promise for the validity of an agreement. Thus, where A agrees to sell his motorcar worth Rs. 20,000 for Rs. 1,000 only and his consent is free, the agreement is a valid contract.

• Consideration may be past, present or future.

The words, “has done or abstained from doing; or does or abstains from doing; or promises to do or to abstain from doing,” used in the definition of consideration clearly indicate that the consideration may consist of either something done or not done in the past, or done or not done in the present, or promised to be done or not done in the future. To put it briefly, consideration may consist of a past, present or a future act.

Capacity of PartiesCapacity of Parties

• MINOR

According to Section 3 of the Indian Majority Act 1875, a person, domiciled in India, who is under 18 years of age is a minor. Accordingly every person who has completed the age of 18 years becomes a major. But minors of whose person or property or both a guardian is appointed by a court, and monors of whose property superintendence has been assumed by a Court of Wards, attain majority at the age of 21 years.

Minor’s Agreements :

An agreement by a minor is absolutely void.

• PERSONS OF UNSOUND MIND

As stated earlier, as per Section 11 of the Contract Act, for a valid contract, it is necessary that each party to it must have a ‘sound mind’.

What is ‘sound mind’ ? Section 12 of the Contract Act defines the term ‘sound mind’ as follows : “A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interests.”

According to this section, therefore, the person entering into the contract must be a person who understands what he is doing and is able to from a rational judgment as to whether what he is about to do is to his interest or not.

• DISQUALIFIED PERSONS

The third type of incompetent persons, as per Section 11, are those who are “disqualified from contracting by any law to which they are subject.” Thus :

(a) Alien enemies.

(b) Foreign sovereigns and ambassadors.

(C) Convict.

(d) Married women.

(e) Insolvent.

Free Consent

‘Consent’ defined. Section 13 of the Contract Act defines the term ‘consent’ and lays down that “Two or more persons are said to consent when they agree upon the same thing in the same sense.”

‘Free Consent’ defined. “Consent is said to be free” when it is not caused by –

1. Coercion, Sec. 15

2. Undue influence, Sec. 16

3. misrepresentation, Sec. 18

4. fraud, Sec. 17

5. mistake, Sec. 20, 21 and 22.

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COERCIONDefinition :“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 of causing any person to enter into an agreement.”

Example :L threatens to shoot M, if he does not let out his house to him. M agrees to let out his house to L. The consent of M has been induced by coercion.

Threat to commit suicide.Neither ‘suicide’ not ‘threat to commit suicide’ is punishable under the Indian Penal Code; only ‘an attempt to commit suicide’ is punishable under it.

Duress.The term ‘duress’ is used in English Law to denote illegal imprisonment or either actual or threatened violence over the person (body) of another party or his wife or children with a view to obtain the consent of that party to the agreement.

Effect of Coercion.A contract brought about by coercion is voidable at the option of the aggrieved party.

Definition“A contract is said to be induced by undue influence where, (i) the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and (ii) he uses the position to obtain an unfair advantage over the other.”

Section 16(2). A person is deemed to be in a position to dominate the will of another –Where he holds a authority over the other, e.g., the relationship between master and the servant, police officer and the accused; or creditor and debtor.

UNDUE INFLUENCEUNDUE INFLUENCE

Pardanashin Woman

A contract by or with a ‘pardanashin woman’. She can avoid any contract entered by her on the plea of undue influence and it is for the other party to prove that no undue influence was used. For proving the absence of undue influence, the other party will have to satisfy the Court (i) that the terms of the contract were fully explained to her, (ii) that she understood their implications, and was free to have independent advice in the matter the term ‘pardanashin’ here refers to a woman who observes complete seclusion (parda) from contact with people outside her own family, because of the custom of her community, the protection granted to pardanashin woman is also extended to illiterate and ignorant ladies, who are eqully exposed to the danger and risk of an unfair deal.

Distinction between Coercion and Undue InfluenceCoercion is mainly of physical character involving mostly use of physical or violent force. Whereas undue influence is of moral character involving use of moral force or mental pressure.

MISREPRESENTATIONA representation when wrongly made, either innocently or intentionally, is termed as a misrepresentation. To put in differently, misrepresentation may be either innocent or intention or deliberate with an intent to deceive the other party. In law, for the former kind, the term ‘Misrepresentation’ and for the latter the term ‘Fraud’ is used.

ILLUSTRATION.A, innocently in good faith tells B that his T.V. Set is made in Japan. B, thereupon buys the T.V. Set. However, it comes out to be an Indian make. A, is guilty of misrepresentation. B, may either avoid the contract or may insist on its being carried out. In the latter case, B may either ask for replacing the set by a Japanese make set or may keep the Indian make set and claim the difference in price between that set and a Japanese make set.

FRAUD

The term ‘fraud’ includes all acts committed by a person with an intention to deceive another person.

Definition‘Fraud means and includes any of the following acts committed by a party to a contract, or by his agent, with intent to deceive or to induce another party thereto or his agent, to enter into the contract’.

*The active concealment of a fact by a person who has knowledge or belief of the fact.

Mere non-disclosure is not fraud, where there is no duty to disclose. Caveat Emptor or ‘Buyer Beware’ is the principle in all contracts of sale of goods. As a rule the seller is not bound to disclose to the buyer the faults in the goods he is selling.

Illustration – A, Sells by auction, to B a horse, which he knows to be unsound. A says nothing to B about the horse’s unsoundness. This in not ‘fraud’ because A is under no duty to disclose the fact to B, the general rule of law being ‘let the buyer beware’.

• A promise made without any intention of performing it.

Example -

X purchases certain goods from Y on credit without any intention of paying for them as he was in insolvent circumstances. It is a clear case of fraud from X’s side.

Can Silence be Fraudulent ?1. As a rule mere silence is not fraud

Ex. A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

2. Silence is fraudulent, if the circumstances of the case are such that ‘it is the duty of the person keeping silence to speak’.

(a) Contracts of insurance,

(b) Contract of marriage engagement.

(c) Contract of family settlements.

MISTAKEMistake may be defined as an erroneous belief concerning something. It may be of two kinds :

1. Mistake of law.

2. Mistake of fact.

Mistake of fact

Mistake of fact may be of two types :

1. Bilateral mistake.

2. Unilateral mistake.

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Legality of objectLegality of object

The object or consideration of an agreement must be lawful, in order to make the agreement a valid contract.

What considerations and objects are unlawful ?• If it is forbidden by law.• If it is fradulent.• If it involves injury to the person or property of

another.• If the court regards it as “opposed to public policy”.

Performance and Discharge of Contract

“Performance of contract” means fulfilling of their respective legal obligations created under the contract by both the promisor and promisee.

When a contract is duly performed by both the Parties, the contract comes to a happy ending and nothing more remains.

• By the promisor or his agentIn the case of a contract of impersonal nature e.g., a contract of sale of goods or a contract to lend a sum of money; the promisor himself or his agent may perform the contract.

• By the legal representatives* In case of the death of the promisor before performance, the liability of performance falls on his legal representatives.* In case of contracts involving personal skills, the heirs or legal representatives are not bound to perform contract.

Discharge of contractDischarge of contract

• By performances.

• By mutual consent or agreement.

• By lapse of time.

• By breach of contract.

Remedies for Breach of ContractRemedies for Breach of Contract• Rescission of the contract.

When there is a breach of contract by one party, the other party may rescind the contract and need not performs his part of obligations under the contract and may sit quietly at home or vice versa.

• Suit for Damages.Damages are a monetary compensation allowed to the injured party for loss or injury suffered by him.

• Suit for specific performance of the contract.Specific performance means the actual carrying out of the contract as agreed: It is usually granted in contracts connected with land, buildings, rare articles and unique goods.

In all these contracts monetary performance is not an adequate relief because the injured party will not be able to get an exact substitute in the Market.

• Suit for an injuction.‘Injuction’ is an order of a Court (decree) restraining a person from doing a particular act. It is a mode of securing the specific performance of the negative terms of the contract. (i.e. where he is doing something which he promised not to do).Thus ‘injuction’ is a preventive relief.

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Indemnity and GuaranteeIndemnity and Guarantee

“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, is called a contract of indemnity”

Definition. “A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default”

A contract of guarantee is entered into with the object of enabling a person to get a loan or goods on credit or an employment.

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.

Distinction between a Contract of Indemnity and a Contract of Guarantee

1. Number of parties. The indemnifier and the indemnity-holder. In a contract of guarantee, there are three parties – the creditor, the principal debtor and the surety.

2. Object or purpose. A contract of indemnity is for the reimbursement of loss, where-as a contract of guarantee is for the security of a debt or good conduct of an employee.

3. Number of contracts. In indemnity there is only one contract between the indemnifier and the indemnified, while in 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 the surety and the principal debtor.

4. Right to sue. In a contract of guarantee, the surety, after he discharges the debt owing to the creditor, can proceed against the principal debtor in his own right. But in the case of a contract of indemnity, the indemnifier cannot sue the third party for loss in his own name, because there is no privity of contract.

AgencyAgency

The two terms – ‘agent’ and ‘principal’ – have been defined in Section 182 of the Contract Act as follows :

“An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal.”

The contract which creates the relationship of ‘principal’ and ‘agent’ is called an ‘agency’. Thus where A appoints B to buy ten bags of sugar on his behalf, A is the ‘principal’, B is the ‘agent’ and the contract between the two is ‘agency’.

General Rules of Agency

• Whatever a person competent to contract may do by himself, he may do through an agent, except for acts involving personal skill and qualifications.

• “He who does through another, does by himself.” In other words, ‘the acts of the agent are, for all legal purposes, the acts of the principal.’

• Advisors are not agents.

Test of Agency

It is only when one acts as a representative of the other in business dealings so as to create contractual relations between that other and third persons, that he is an agent and there is an agency.

Distinction between Agent and Servant

A servant acts under the direct control and supervision of his employer, that is, he has to act according to the orders of the master in every particular case. He does not create relations between his employer and third persons and cannot bind the master to third parties.

An agent is not subject to the direct control and supervision of the principal.

A ‘principal’ directs the agent “as to what is to be done” while a ‘master’ has the further right to direct “how the work is to be done”.

Distinction between Agent and Independent ContractorDistinction between Agent and Independent Contractor

Who may Employ an Agent ?

According to Section 183, “any person who is of the age of

majority according to the law to which he is subject, and

who is of sound mind, may employ an agent.”

Kinds of Agents

1. General agent. A general agent is one who is employed to do all acts connected with a particular business or employment, e.g., a manager of a firm.

2. Special agent. A special agent is one who is employed to do some particular act or represent his principal in some particular transaction, e.g., an agent employed to sell a motor a car. As soon as the act is performed, the authority of such an agent come to an end.

3. Universal agent. A universal agent is said to be one whose authority is unlimited i.e., who is authorised to do all the acts which the principal can lawfully to and can delegate. He enjoys extensive powers to transact every kind of business on behalf of his principal.

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