Upload
venkat-ravi
View
230
Download
0
Embed Size (px)
Citation preview
7/31/2019 Essential Elements of Contract (1)
1/53
Essential Elements of Contract
P.S.SwathiAssociate Professor
SSIMSecunderabad
7/31/2019 Essential Elements of Contract (1)
2/53
Introduction The law of contract is described in the
Indian Contract Act, 1872 which deals with:1. the general principles of law governing all
contracts ,and2. covers the special provisions relating to
special contracts like Bailment, Pledge,Indemnity, Guarantee and Agency.
3. Therefore the law of contract is applicablenot only to business but also to all day-to-day personal dealings.
7/31/2019 Essential Elements of Contract (1)
3/53
Standard terms for contracts In the present scenario the are certain standard terms for
contracts used worldwide.
Several Indian public sector companies use the standard terms
for specialized functions like construction, banking andtransportation.
These are called General Conditions of Contract(GCC).
It is called General Conditions because it is attached to every
contract the organization makes. The General Conditions of Contract is supplemented by the
Special Conditions of contract (SCC).
7/31/2019 Essential Elements of Contract (1)
4/53
Contd. The issues specific to the particular contract are entered in this
and even the SCC has now been standardized. Only requiredblanks has to be filled in.
Example: If a manufacturing company puts up its GCC (Goods)which will become the standard conditions for all contracts ofsale. For each individual purchase there will be a SpecialConditions of Contract which will stipulate the specific goodsbeing purchased.
The two documents together will be the terms of contract forthe purchase.
Often business organisations settle on a contract through atender process.
7/31/2019 Essential Elements of Contract (1)
5/53
To settle a contract through tender process one may need tostudy the tender notice, tender document where terms andconditions of bid, award of contract and the GCC and SCC to
understand the rights and conditions of bids. The details range from the scope of the contract to terms of
payment, delivery, bank guarantee, taxation and liquidateddamages.
7/31/2019 Essential Elements of Contract (1)
6/53
Meaning of Contract According to Section 2(h) of the Indian Contract Act, 1872, An
agreement enforceable by law is a contract. Hence, there are two contents in the agreement, a) Agreement
B) enforceable at Law According to Section 2 (e) of the Act An agreement means an
offer by one party and its acceptance by the other. Ex: X offers to sell his car for Rs.1,00,000 to Y. Y accepts this
offer. This offer after acceptance becomes promise and thispromise is treated as an agreement between X and Y.
An agreement is said to be enforceable by law if it creates some
legal obligation. Social Agreements cannot create contracts Hence all contracts are agreements but all agreements are not
contracts. (Social Contracts cannot create contracts)
7/31/2019 Essential Elements of Contract (1)
7/53
Kinds of Contracts Classification on the basis of
communication: Express and Implied
Classification on the basis of numberof persons: Unilateral and Bilateral
Classification on the basis of
performance: Present and Futurecontracts.
7/31/2019 Essential Elements of Contract (1)
8/53
Classification on the basis of validity:1. Valid contracts: One which fulfills all the essentials given under
the law Void contracts: A contract which is initially declared to be valid
at the time of formation but declared to be void at the time ofperformance.
Void agreements: An agreement which is void ab initio, i.e.,void right from the beginning
Voidable contracts: A contract which can be decalred to be voidor valid at the discretion of the party who is effected/suffered
by it. Uneforceable contracts: A contract which is not fulfilling the
legal formalaities and which cannot be enforced. They willbecome valid after the deficiency is rectified.
Illegal contracts: Contracts which are legally prohibited. In thiscase both civil and criminal action is taken against the party
who is responsible for making the contract illegal.
7/31/2019 Essential Elements of Contract (1)
9/53
Essential Elements of Contract1. Agreement supported by Consensus Ad Idem2. Two Parties3. Proper offer and its proper acceptance4. Intention to create legal relationship5. Free consent6. Capacity to contract7. Lawful consideration8. Lawful object9. Agreement not expressly declared void10. Certainty of meaning11. Possibility of performance12. Legal formalities
7/31/2019 Essential Elements of Contract (1)
10/53
7/31/2019 Essential Elements of Contract (1)
11/53
Agreement supported by
Consensus Ad idem What is an agreement is already explained
Consensus Ad Idem means meeting of two minds.
Both the parties to the agreement should understandthe terms and conditions in the same manner
If there is any miscommunication ormisunderstanding the agreement is not created
Ex: X has two houses and he wants to sell his house
situated at Delhi to Y and Y is assuming that X isgoing to sell his other house which is situated atMumbai. There is no consensus ad idem and there isno agreement
7/31/2019 Essential Elements of Contract (1)
12/53
Two Parties At least there must be two parties to create a
contract.
Hence, a partner can not enter into a contractwith his firm, but a director of a company canenter into a contract with the company as thecompany has separate legal existence.
Separate legal existence has certain featureslike common seal, perpetual succession, cansue and be sued etc.
7/31/2019 Essential Elements of Contract (1)
13/53
Proper Offer and Its Proper
Acceptance There must be a lawful proposal and a lawful
acceptance of that proposal thus resulting in anagreement.
It means that there must be two parties to anagreement, i.e. one party making the proposal andthe other party accepting.
The two requirements are: The proposal must bedefinite and the acceptance of the proposal must
be absolute and unconditional. Ex: X offered to sell two plots of land to Y at a
certain price. Y accepted the offer for one plot. Itwas held that the acceptance was not validbecause it was not for the whole of the offer.
7/31/2019 Essential Elements of Contract (1)
14/53
Types of Offer General Offer: Offer made in general to all public Specific Offer: Offer made only to a particular person. In that
case others cannot accept the offer and the person to whom theoffer is made alone can accept.
Counter Offer: When the offer is accepted with some newterms and conditions it is known as Counter Offer
Standing Offer: An offer which stands good for a longer periodis known as standing offer. Ex: Supply of raw material for 3years by a party. The terms and conditions can be modifiedfrom time to time
Express offer: Where offer is expressly mentioned eitherverbally or nonverbally.
Implied offer: Offer is understood with the behaviour of theofferor.
7/31/2019 Essential Elements of Contract (1)
15/53
AcceptanceAcceptance must be absolute and
unconditional
It must be made with an intention toperform
It must be made by the person to
whom the offer is madeAcceptance may be express or implied
Silence does not amount to acceptance
7/31/2019 Essential Elements of Contract (1)
16/53
Mode of Communication ofacceptance
According to Section 7(2) of the Indian Contract Act,1872 the acceptance of an offer must be given in themanner prescribed by the offeror otherwise it must
be in a usual and reasonable manner. Ex. X of Agra sends a letter by post to Y of Delhi
offering to sell his car for Rs1,00,000 and also writessend your acceptance by telegram. Y sends hisacceptance by an ordinary post . X can reject theacceptance and the same has to be communicated toY otherwise it will be treated as accepted.
7/31/2019 Essential Elements of Contract (1)
17/53
The acceptance is complete only when it hasbeen communicated to the offerer.
Ex: X offered to supply coal to a RailwayCompany. The manager of the companyaccepted as soon as he received the offer andprepared acceptance letter in a properlyaddressed and stamped letter and put it in
the drawer of his table and forgot all about it.It was held that no contract was madebecause acceptance was not communicated.(Brogdon v. Metropolitan Railway Co.).
Communication: When it iscomplete
7/31/2019 Essential Elements of Contract (1)
18/53
Communication to Whom
Acceptance must be communicated to the offererhimself. It means that if acceptance is communicatedto an unauthorized person, it will not give rise tolegal relations.
Ex: F offered by a letter to buy his nephews horsefor 30 dollars saying If I hear no more about this, Ishall consider the horse mine. The nephew sent noreply at all but told B his auctioneer, not to sell thatparticular horse as he intended to sell that horse to F.
B sold the horse by mistake. It was held that contractwas not created because his nephew had notcommunicated acceptance to him. (Felthouse v.Bindley).
7/31/2019 Essential Elements of Contract (1)
19/53
Lapse and Revocation ofProposal and Acceptance
1. An offer lapses after stipulated or reasonable time2. A proposal lapses by not being accepted in the
mode prescribed
3. A proposal lapses by rejection by the offeree.4. A proposal lapses by the death or insanity of the
proposer or the proposee before acceptance.5. Proposal lapses by revocation by the proposer
before acceptance.6. Revocation by non-fulfillment of a condition
precedent to acceptance.7. A proposal lapses by subsequent illegality or
destruction of subject matter.
7/31/2019 Essential Elements of Contract (1)
20/53
Communication ofProposal,Acceptance and Revocation
1. Communication of a proposal is complete when it comes tothe knowledge of the person to whom it is made.
2. Communication of a revocation is complete as against theperson who makes it when the letter of revocation is posted .
3. Communication of a revocation is complete as against theperson to whom it is made, when the letter of revocation isreceived by him.
4. Time during which an offer or acceptance can be revoked:5. A proposal may be revoked at any time before the
communication of its acceptance is complete as against the
proposer, but not afterwards. An acceptance is complete asagainst the acceptor but not afterwards.
7/31/2019 Essential Elements of Contract (1)
21/53
Intention to create LegalRelations
In commercial and business agreements, an intentionto create legal relations is presumed.
If it is contrary which means that the parties did not
intend to be legally bound the burden of proof lies onthem and they have to prove that there is nointention to create legal relationship.
Moreover agreements of a social or domestic naturedo not contemplate legal relationship. As such theyare not contracts.
Ex: Balfour VS. Balfour
7/31/2019 Essential Elements of Contract (1)
22/53
Free Consent
Free Consent: There must be free consentof the parties to the contract. According toSection 14 consent is said to be free when itis not caused by
1. Coercion
2. Undue Influence
3. Fraud4. Misrepresentation
5. Mistake
7/31/2019 Essential Elements of Contract (1)
23/53
Coercion
Physically or mentally harassing a person toobtain consent is known as Coercion.
Contract created by coercion is voidable. Threatening to commit suicide is coercion.
There should be an act or behaviour which is
prohibited by law.
7/31/2019 Essential Elements of Contract (1)
24/53
Undue influence
Undue influence is something where theperson who is giving consent is undulyinfluenced.
To determine undue influence, it is necessarythat there should be fiduciary relationshipbetween the parties.
A fiduciary relationship is something where
one can dominate the will of the other.(Master and Servant, guardian and ward,guru and discipile, Advocate and Client)
Contract created by undue influence is void.
7/31/2019 Essential Elements of Contract (1)
25/53
Fraud
Making a promise without an intention toperform is known fraud.
Deceiving a person by making false promisesintentionally and making him to believe falsethings as true facts is fraud.
Intentional suppression of facts also amountsto fraud
Contracts created by Fraudulentrepresentations are void and criminal actionwill be taken against the person who madefradulent representations.
7/31/2019 Essential Elements of Contract (1)
26/53
Misrepresentation
If misrepresentation of facts is doneinnocently it is not considered as fraud
but as misrepresentation The court may direct the party who
made misrepresentation to rectify the
things and go ahead with theperformance of the contract.
7/31/2019 Essential Elements of Contract (1)
27/53
Mistake
Lapse on the party to the contracts is known asMistake.
It is of two kinds: Mistake of Fact or Mistake of Law.
Mistake of Fact is excused but mistake of law is notexcused. If mistake cannot be rectified contract is considered
as void. Ex: While making an offer to supply automobile
components X wrote the price as Rs.30 instead ofRs.300 and communicated it to Y. Y cannot ask forthe performance of contract for Rs.30 on the groundthat mistake of a person should not give undueadvantage to someone else.
7/31/2019 Essential Elements of Contract (1)
28/53
4. Capacity of Parties
The parties to an agreement must becompetent to contract it means that:
1. The person must be major
2. The person must be of sound mind
3. The person should not be disqualifiedfrom contracting by any law to whichhe is subject.
7/31/2019 Essential Elements of Contract (1)
29/53
Minor: A person who has not attained theage of 18 is considered as Minor, and if aTrust is appointed for his/her property a
person who has not attained the age of 21 isdecalred as Minor. A contract with a minor is void ab initio
(Mohiribibi Vs. Dharma das Gose)
It is assumed under the law that minorcannot discriminate between what is goodand bad for him and as such any contractwith a minor is void.
7/31/2019 Essential Elements of Contract (1)
30/53
Minor Contd.
Under the Indian law Minor is extremely protectedby law.
Any contract created with a minor is void but
following are the exceptions.1. If the contract is made for the benefit of the minor,
it is valid ( Taking minor as a partner)2. If the contract is made for the supply of necessities
to a minor and what are considered to be
necessities are decided on the basis of social statusand life style of the minor.3. A minor cannot ratify a contract, which he created
when he was minor, after he becomes a major.
7/31/2019 Essential Elements of Contract (1)
31/53
People of unsound mind
Lunatics, idiots and Drunken person cannot create contracts. Consensus ad idem is not present in these cases. Lunatic is a person who is some times sane and some times
insane. The gap between two insane states is known as Lucid
Interval. Contract created during the lucid interval is valid. Idiot is a person who is always insane and contract created with
Idiot is always void. A person who is in a drunken state or who is not with a
conscious mind cannot create a contract. However, it is to beestablished that at the time of creating contract he was in a
drunken state. In the case of lunatics and idiots burden of proof lies with the
opposite parties and in the case of drunken persons the burdenof proof lies with the party who is claiming it.
7/31/2019 Essential Elements of Contract (1)
32/53
Parties who are disqualified bylaw
Following persons are not allowed tocreate contracts
1. Alien enemies
2. Foreign Ambassadors
3. Convicts
4. Insolvents
5. Advocates
7/31/2019 Essential Elements of Contract (1)
33/53
Lawful Consideration
Under Section 2(d) of the Indian Contract Act, 1872defines consideration as : when at the desire of thepromisor, the promisee of any other person has doneor abstained from doing, or does or abstains fromdoing or promises to do or abstain from doingsomething, such act or abstinence or promise iscalled a consideration for the promise.
Ex: X promises to deliver his good to Y and Y promisesto pay Rs.1,000 on delivery.
Ex: X owes Y Rs.10,000. Y promises X not to file a suitagainst him for one year on Xs agreeing to pay himRs.500 more.
7/31/2019 Essential Elements of Contract (1)
34/53
Contd.
Consideration means an advantage or benefit moving from oneparty to the other.
It means something in return. The agreement is legally enforceable only when both the parties
give something and get something in return. Consideration need not necessarily be in cash or kind. It may be an act or abstinence (abstaining from doing
something) or promise to do or not do something. It may be past, present or future Consideration must be lawful i.e. not forbidden by law
7/31/2019 Essential Elements of Contract (1)
35/53
Essentials of a validConsideration
1. Consideration must move at the desire of the promisor.2. Consideration may move from the promisee or any other
person.3. Consideration may be past, present or
future.4. Consideration must be Something of Value: The
consideration need not be adequate to the promise but itmust be of some value in the eye of the law.
5. Consideration must be legal6. Consideration my be doing something or abstain from doing
something (positive or negative act ) or a promise to dosomething.
7/31/2019 Essential Elements of Contract (1)
36/53
Consideration must move atthe desire of the promisor
An act constituting consideration must have beendone at the desire or request of the promisor notfrom any third party
Ex: X spent Rs.1,00,000 on the construction of shopsat the request of the collector of the District. Inconsideration of this Y a shopkeeper promised to paysome money to X. It was held that this agreementwas void being without consideration because X had
constructed the shops at the request of collector andnot at the desire of Y. (Durga Prasad v Baldeo)
7/31/2019 Essential Elements of Contract (1)
37/53
Consideration may move fromthe promisee or any other person
1. Consideration may move from the promiseeor any other person.
2. Ex: X by a deed of gift transferred certainproperty to her daughter Y with a directionthat Y with a direction that Y should pay Zan annuity. Y refused to pay to Z as
consideration did not move from him heldthat consideration can be moved from anyperson.
7/31/2019 Essential Elements of Contract (1)
38/53
Consideration may be Past orPresent or Future
Past Consideration means the considerationwhich has already moved before the
formation of agreement. Ex. X renders some service to Y at Ys request
in the month of May. In June, Y promises topay X Rs.1,000 for his past services. Past
service amount to past consideration. X canrecover Rs 1,000 from Y.
7/31/2019 Essential Elements of Contract (1)
39/53
Present Consideration
Present Consideration means theconsideration which moves
simultaneously with the promise, iscalled present consideration.
Ex: In case of cash sale i.e. shopping
promise to pay the price and promise todeliver the goods are performedsimultaneously.
7/31/2019 Essential Elements of Contract (1)
40/53
Future Consideration
Future Consideration means theconsideration which is to be moved
after the formation of agreement iscalled future consideration.
Ex: X promises to deliver certain goods
to Y after 10 days and Y promises topay after 10 days from the date ofdelivery.
7/31/2019 Essential Elements of Contract (1)
41/53
Consideration must be ofSome Value
The consideration need not be adequate tothe promise but it must be of some value inthe eye of the law.
Ex: X agrees to sell his house which is worthof Rs.20,00,000 for 10,00,000.A denies thathis consent to the agreement was freelygiven. The inadequacy of the consideration isa fact which the Court should taken intoaccount in considering whether or not Asconsent was freely given.
7/31/2019 Essential Elements of Contract (1)
42/53
Consideration must be Realand not Illusory
It must be real and not Illusory
Ex: X engages Y for doing a certain wok and
promises to pay reasonable remuneration.This promise is not enforceable because theconsideration is uncertain.
Ex: X promises to put life into Ys dead wife
and Y promises to pay Rs.1,00,000.Thisagreement is void because consideration isphysically impossible to perform.
7/31/2019 Essential Elements of Contract (1)
43/53
Consideration something other thanthe Promisors Existing Obligation
The consideration must be something which thepromisor is not already bound to do because apromise to do what a promisor is already bound to do
adds nothing to the existing obligation. Ex: X had received summons to appear before a
court of law as witness on behalf of Y who promisedto pay some money for his trouble. It was held thatthe promises to pay money was void for want of
consideration because X was under a legal duty toappear as a witness before court of law.( Collins v.Godefroa).
7/31/2019 Essential Elements of Contract (1)
44/53
Lawful Consideration
The consideration must neither beunlawful nor opposed to public policy
X promises Y to obtain an employmentin the public service and Y promises topay Rs.1,00,000 to X. The agreement is
void on the ground of unlawfulconsideration.
7/31/2019 Essential Elements of Contract (1)
45/53
Stranger to a Contract
Exceptions to stranger to a contract:
1. Trusts
2. Family Settlement
3. Acknowledgement Ex: Acts of Agent
4. Assignment of a Contract: Ex: theassignee of an insurance policy.
7/31/2019 Essential Elements of Contract (1)
46/53
No consideration , No contract
Exceptions to General Rule Noconsideration No contract:
1. Agreements made on account ofNatural Love and Affection
2. Promise to compensate
3. Promise to pay time barred debt4. Completed gifts
5. Agency
7/31/2019 Essential Elements of Contract (1)
47/53
Lawful Object
The object is considered lawful unless itis forbidden by law or is fraudulent or
involves or implies injury to the personor property of another or is immoral oris opposed to public policy
7/31/2019 Essential Elements of Contract (1)
48/53
Agreements opposed to publicpolicy.
Trading with Alien enemies
Agreements to stifle prosecution
Agreement for the sale of public offices Agreements in restraint of parental rights
Agreements in restraint of movements
Agreements interfering with the course of
justice
7/31/2019 Essential Elements of Contract (1)
49/53
Agreement must not ExpresslyDeclared Void
Agreement must not have declaredvoid like:
1. Agreement in restraint of marriage2. Agreement in restraint of trade
3. Agreement in restraint of legal
proceedings.4. Agreement in restraint of service
5. Agreement by way of wager
7/31/2019 Essential Elements of Contract (1)
50/53
Certainty of dealing
Agreements the meaning of which is notcertain or capable of being made certain arevoid.
However the meaning of the agreement couldbe made certain from the circumstances ofthe case, it will be treated as a valid contract.
Ex. X who is a dealer in mustard oil, agreed
to sell 100 tones of oil to Y. This agreement isvalid because the meaning of the agreementcould be easily ascertained from thecircumstances of the case.
7/31/2019 Essential Elements of Contract (1)
51/53
Possibility of Performance andLegal Formalities
An agreement to do an impossible act isvoid.
Legal Formalities: The agreement mustcomply with the necessary formalitiesas to writing, registration, stamping.
7/31/2019 Essential Elements of Contract (1)
52/53
Conclusion
Contract is an agreement which is enforceable at law. A contract is said to be legally valid if it fulfills the following
essentials.1. Agreement2.
Two Parties3. Intention to create legal relations4. Offer5. Acceptance6. Consideration7. Capacity to contract
8. Free Consent9. Lawful Object10. Agreement not to be declared void11. Certainty and possibility of performance12. Legal formalities.
7/31/2019 Essential Elements of Contract (1)
53/53