Indian Contract Act-Part2& 3 2003

7/28/2019 Indian Contract Act-Part2& 3 2003

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Capacity to Contract:

In law, persons are either natural or artificial. Naturalpersons are human beings and artificial persons are

corporations. Contractual capacity or incapacity is an

incident of personality.

Section 11 provides that every person is competent to

contract

who is of the age of majority

who is of sound mind

who is not disqualified from contracting by any law to

which he is subject.


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MINOR:

According to the Indian Majorities Act,1875, a

minor is a person, male or female, who has not

completed the age of 18 years. In case a guardian

has been appointed to the minor or where the minoris under the guardianship of the Court of Wards, the

person continues to be a minor until he completes

his age of 21 years.


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According to Indian Contract Act, only a major person is

competent to contract. Thus, contract with or by a minoris altogether VOID. The word void when used in

relation to a minor, it should be understand as void

against the minor. Thus, an agreement by or with a

minor is void only if it involves a promise on his part orhis promise is a necessary part of the agreement because

a minor is incapable of giving a promise imposing a legal

obligation. But if the minor has carried out his part of the

contract, the contract is valid and he can proceed, against

the other party. The rationale, is to protect the minors

interest.


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In the case of Mohiri Bibee Vs Dharmadas

Ghose, a minor borrowed Rs.20,000 from Y, a

money lender. As a security for the money

advanced, X executed a mortgage, in the Ys

favour. When sued by Y, the Court held that thecontract from X was void and he cannot be

compelled to repay the money advanced to him.

It was also held that mortgage was also voidand, therefore, it was cancelled.


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The following points must be kept in mind with respectto a minors contract:

Aminors

contract is void-ab-initio. Therefore, neither aminor nor his property can be held liable to repay thedebts of the contract.

A minor cannot ratify contracts entered into by him onattaining the age of majority.

A minor can always plead his minority even in contractsin which he has entered by falsely representing his age.However, the Court may direct the minor to restore the

property to the other party.

A minors estate is liable to pay for necessaries suppliedto him or anyone whom he is bound to support.Necessaries means the things the minor actually needsaccording to his position and status in life.


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The Court will never direct Specific Performance of the

contracts entered into by the minor since it is void.

Minor can be agent but he cannot be a principal nor can he

be a partner unless he is admitted for the benefits of the

partnership.

Since, a minor cannot be held personally liable, he can

never be adjudged as an insolvent.


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Person of Unsound Mind:

Section 12 defines a person is of unsound mind if at the

time when he makes the contract, he is incapable of

understanding it and forming a rational judgment as to his

effect upon his interest.

Unsound mind includes:

-lunatics

-idiots

-drunkards

Agreements by person of unsound mind are void. However,for necessaries supplied to him or to any of his dependants,

or contracts entered into for his benefit can be enforced.


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Persons Disqualified by law:

1. Alien Enemies: A person who is not an Indian citizen is an alien.On declaration of war between a country and India, the citizens of

the other country become alien enemies. Contracts with alien

enemies becomes unenforceable at the outbreak of law.

2. Foreign Sovereigns and Ambassadors: Foreign sovereigns and

accredited representative of foreign states cannot ordinarily be sued

in the Indian Courts. However, they can enter into contracts through

agents residing in India. In such cases, the agent becomes personally

liable.

3. Corporations: A corporation is an a artificial person created by law.The capacity and powers of a corporation to contract are limited by

its Charter or MOA. Any contract beyond its power is ultra vires and

void.


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4. Insolvents: Such persons cannot sue or be sued. However,

they can enter into contracts for supply of necessaries. The

disqualification ceases to operate once he is discharged asan insolvent.

5. Convicts: Such persons are incapable of entering into

contracts during the continuance of their sentence of

imprisonment. However, he can enter into contracts whenpardoned by the Court


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Free Consent:

Section 13 of Indian Contract Act, 1872 defines consent astwo or more persons are said to consent when they agree upon

the same thing in same sense. This is known consensus-ad-

idem i.e., meeting of two minds upon the same thing in the

same sense.

For instance, Amar, who owns two horses named X and Y, is

selling horse X to Shyam. Shyam thinks he is purchasing horse

Y. Thus, there is noconsensus-ad-idemand consequently nocontract.


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According to Section 14, Consent is said to be

free when it is not caused by

Coercion

Undue Influence

Fraud

Misrepresentation

Mistake


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Misrepresentation (Innocent Misrepresentation):

If a person makes a representation which is actually nottrue but believing what he says is true, he commits

innocent misrepresentation. The effect of innocent

misrepresentation is that party misled by it can avoid the

contract, but cannot sue for damages (compensation) in thenormal circumstances.

Misrepresentation as to fact renders the contract voidable,

but misrepresentation as to law does not, ordinarily, make

the contract voidable.


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Fraud (Wilful Misrepresentation):

Fraud means and includes any of the following acts

committed by a party to a contract with intent to deceiveanother party or to induce him to enter into the contract:-

i. The suggestion, as to a fact, of that which is not true, by

one who does not believe it to be true;

ii. The active concealment of a fact by one having knowledgeor belief of the fact;

iii. A promise made without any intention of performing it;

iv. Any other act fitted to deceive;

v. Any such act or omission as the law specially declares to

be fraudulent.


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Mere silence as to facts likely to affect the willingness of a

person to enter into a contract is no fraud; but where it isthe duty of a person to speak, or his silence is equivalent to

speech, silence amounts to fraud.

In contracts uberrimae fidei (contracts requiring utmost

good faith), law imposes a special duty to disclose allmaterial information and non-disclosure of the same will

render the contract voidable.

For example, in contracts of insurance, the insured must

disclose to the insurer all material facts, otherwise thecontract will be voidable at the option of the insurer.


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DIFFERENCE BETWEEN

MISREPRESENTATION AND FRAUD

S.

No.

MISREPRESENTATION FRAUD

1. The person making

representation believes it to betrue.

The person making

representation does notbelieve it to be true

2. There is no intention to deceive

the other party.

Here, the intention is to

deceive the other party.

3. The aggrieved party can avoid

the contract only and nothing

else.

The aggrieved party can

avoid the contract as well as

claim the damages.


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Coercion:

It means the committing or threatening to commit any actforbidden by the Indian Penal Code, or unlawful detaining or

threatening to detain, any property to the prejudice of any personwhatever with the intention of causing any person to enter intoan agreement. The Indian Penal Code need not be in force in

place where the coercion is employed.

Coercion may proceed from any person and may be directedagainst any person, even a stranger and it makes a contractvoidable.

Example: X threatens to kill Y if Y refuses to sell his house to Z.Y agrees to sell his house. Here, Ys consent has been obtained

by coercion though X is a stranger to the consent.


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Undue Influence:

A contract is said to be produced by undue influence where the

relations subsisting between the parties is 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.

A person is deemed to be in a position to dominate the will of

another in the following three circumstances:

Where he holds a real or apparent authority over the other

Where he stands in a fiduciary relation to the other Where he makes a contract with a person whose mental capacity

is temporarily or permanently affected by reason of age, illness

or mental or bodily distress.


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DIFFERENCE BETWEEN COERCION AND

UNDUE INFLUENCE

S.

No.Coercion Undue Influence

1. Coercion involves the physicalforce or threat.

Undue influence involves moralor mental pressure.

2. There need not be any

relationship between the parties.

Some sort of relationship is

absolutely necessary between

the parties.

3. It may proceed from any person

and may be directed against any

person.

It is always exercised between

parties to the contract.


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DISCHARGE OR TERMINATION OFCONTRACTS

Discharge of a contract means termination of the contractual relationsbetween the parties to a contract. A contract is said to be dischargedwhen the rights and obligations of the parties under the contract cometo an end i.e., when they cease to exist.

A contract may be discharged or terminated by any of the followingways:

a) By performance of contract

b) By mutual consent or agreement

c) By lapse of time

d) By operation of law

e) By impossibility of performance

f) By breach of contract


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PERFORMANCE OF CONTRACT

Section 37 provides that the parties to a contract must either

perform, or offer to perform, their respective promises, unless

such performance is dispensed with (made unnecessary) or

excused under the provisions of this Act, or of any other law.

TYPES OF PERFORMANCES :

i.Actual Performanceii.Attempted Performance


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ACTUAL PERFORMANCE

Where a promisor has made an offer of performance to the promiseeand the offer has been accepted by the promisee, it is called anactual performance.For Example, X contracted to deliver to Y at his warehouse on 1stOctober, 100 bales of cotton of a particular quality. X bought thecotton of requisite quality to the appointed place on the appointedday during the business hours, and Y took the delivery of goods.

This is Actual Performance.

ATTEMPTED PERFORMANCE (Tender)Where a promisor has made an offer of performance to the

promisee, and the offer has not been accepted by the promisee, it is

called an attempted performance.If in the aforesaid example, Y refuses to take the delivery of goods,it is a case of attempted performance because X has done what hewas required to do under the contract.


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WHO MAY PERFORM THE CONTRACT

Promisor: If it appears from the nature of the case that it was theintention of the parties to any contract that any promise containedin it must be performed by the promisor himself, such promisemust be performed by the promisor.

Promisors Agent: If it was not the intention of the parties thatthe promise must be performed by the promisor himself, suchcontracts can be performed by the promisor himself or anycompetent person employed by him.

Legal Representatives: In case of death of promisor, his legalrepresentative can perform the contract unless a contraryintention appears or the contract is of personal nature.


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WHO MAY DEMAND PERFORMANCE

Promisee: Promisee can only demand the performance of thepromise under the contract.

Legal Representative: In case of death of promisee, his legalrepresentative can demand performance unless a contrary

intention appears from the contract or the contract is of a personalnature.

Third Party: A third party can also demand the performance of

the contract in some exceptional cases like beneficiary in case oftrust, the person for whose benefit the provision is made in thefamily agreements.


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REFUSAL TO PERFORM WHOLLY

When a party to a contract has refused to perform or has disabledhimself from performing his promise in entirety, the aggrieved

party may:-

1. Terminate the contract and claim compensation

2. Indicate by words or conduct that he is interested incontinuance of the contract.

In the latter case, once the aggrieved party decides to continue the

contract, he would not be entitled to put an end to the contract onthis ground afterwards. However, he is entitled to compensationfor the loss caused to him.


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IMPOSSIBILITY OF PERFORMANCE

Impossibility existing at the time of contract: A contract, which is

entered into to perform something that is clearly impossible to

perform, is void-ab-initio and hence stands discharged.

CASE EFFECT

Where both the promisor and

promisee know about the

initial impossibility

Such agreement is void ab initio.

Example: X undertakes to put life into the dead wife

of Y. This agreement is void.

Where both the promisor and

promisee do not know about

the initial impossibility

Such agreement is void on the ground of mutual

mistake.

Example: X agrees to sell his horse to Y unknown to

both the parties, the horse was dead at the time of

making the agreement. This agreement is void.Where the promisor alone

knows about the initial

impossibility

Such promisor must compensate for any loss which

such promisee sustains through the non-performance

of the promise.

Example: A contracts to marry B being already

married to C.


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SUPERVENING IMPOSSIBILTY means impossibility whichdoes not exist at the time of making the contract but which arisessubsequently after the formation of the contract.

A contract is discharged by supervening impossibility in the followingcases:

Destruction of Subject Matter after the formation of the contractwithout any fault of either party

Death or Personal Incapacity or illness of a person if the performance

of a contract depends on his personal skill or ability At the time of Declaration of War, the Pending contracts are either

suspended or declared as void.

The contract is discharged if the performance of the Contract becomesimpossible or unlawful due to Change in Law after the formation ofthe contract.

Non-existence or Non-occrrence of a Particular State of ThingsNecessary for Performance The contract is discharged if that

particular state of thing, which forms the basis of a contract ceases toexist or occur.


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CASES WHEN THE CONTRACT IS NOT DISCHARGED ON THEGROUND OF SUPERVENING IMPOSSIBILITY

Difficulty of Performance: A contract is not discharged simply on

the ground that its performance has become more difficult, moreexpensive or less profitable than that agreed at the time of itsformation.

Example:X agreed to supply coal within a specified time. He failedto supply in time because of Governments restriction on thetransport of coal from collieries. Here, X will not be discharged

because the coal was available in the open market where X couldhave obtained it.

Commercial Impossibility: A contract is not discharged simply onthe ground of commercial impossibility i.e., when the contract

becomes commercially unprofitable or unviable.

Example:X, a furniture manufacturer, agreed to supply certainfurniture to Y at an agreed rate. Afterwards, there was a sharpincrease in the rates of timber and wages. Since it was no longer

profitable to supply at the agreed rate X did not supply. X will not bedischarged on the ground of commercial impossibility.


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Default of a Third Party: A contract is not discharged if it couldnot be performed because of the default of a third party on whosework the promisor relied

Example:X entered into a contract with Y for the sale of goods tobe manufactured by Z. Z did not manufacture those goods. X willnot be discharged and will be liable to Y for damages.

Strikes, Lock-outs and Civil Disturbance: A contract is notdischarged on he grounds of Strikes, Lock-outs and Civil

disturbances unless otherwise agreed by the parties to the contract.Example:X agreed to supply to Y certain goods to be importedfrom Algeria. The goods could not be imported due to riots in thatcountry. It was held that this was no excuse for non-performance ofthe contract.

Supervening Impossibility is referred to as

Doctrine of Frustration in English Law


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BREACH OF CONTRACT

Where one party to a contract neither performs nor

offers to perform his promise; or where theperformance is defective, there is a breach ofcontract.

Types of Breach

of Contract

Actual Breach Anticipatory Breach


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Actual Breach of contract occurs in two ways:

i. On due date of performance, when any party to a contract

refuses or fails to perform his part of the contract at the time

fixed for performance.

ii. Dur ing the course of performance, when any party has

performed a part of the contract and then refuses or fails to

perform the remaining part of the contract.

Anticipatory Breach occurs when the party declares hisintention of not performing the contract before the performance

is due.

If one of the parties to a contract breaks the promise, the party

injured thereby has not only a right of action for damages but he

is also discharged from performing his part of the contract.


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REMEDIES FOR BREACH OF CONTRACT

A remedy is the course of action available to an aggrieved

party (i. e) the party not at default for the enforcement of a

right under a contract.

In case of breach of contract, the injured or the aggrieved

party has the following remedies:

i. Rescind the contract

ii. Sue for damages

iii. Sue for specific performanceiv. Sue for injunction

v. Sue for Quantum Meruit


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Rescind the Contract: When a party to a contract hasbroken the contract, the other party may treat the contract as

rescind and he is absolved from all his obligation under the

contract. When a contract is rescind, any person, who received

any advantage ant advantage or benefit under such contract, is

bound to restore it to the person from whom he received it.

Sue for damages: When a party to a contract breaks thecontract, the aggrieved party is entitled to receive compensation

to any loss or damages caused to him, from the party who has

broken the contract. The object of awarding damages to the

aggrieved party is to make good any financial loss or damagessuffered due to breach of contract.


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Sue for Specific Performance: Where damages are not anadequate remedy in the case of breach of a contract, the Courtmay, in its discretion, on suit of specific performance, direct

the party in breach for the specific performance of thecontract i.e., to carry out his promise according to the termsof the contract.

Suit for Injunction: The aggrieved party may bring a suitfor injunction i.e., an order of the Court restraining a personfrom doing a particular act. Where a party to the contractdoes something he promised not to do, the Court may issuean order prohibiting him from doing so. Injunction, is a modeof securing the specific performance of negative terms of a

contract. Suit for Quantum Merui t: Quantum Meruit means as

much as is earned. It is a right to claim the compensation forthe work already done.

Documents

Indian Contract Act-Part2& 3 2003