Module II - Indian Contract Act

8/8/2019 Module II - Indian Contract Act

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Amity School of Business

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BBA, III SEMESTER

Business Law

Maninder Jeet and Nidhi Gupta


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MODULE- II

INDIAN CONTRACT ACT, 1872


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Indian Contract Act, 1872

The Indian Contract Act extends to the whole of India

(except the State of Jammu and Kashmir) and it

came into force on the first day of September 1872

The law of contract is that branch of law whichdetermines the circumstances in which promises made

by the parties to a contract shall be legally binding on

them.

The Act deals with:

1. The general principles of the law of contract

2. Some special contracts.


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WHAT IS A CONTRACT?

Section 2(h)-An agreement enforceable by

law is a contract.

Thus for the formation of a contract there

must be

an agreement

the agreement should be enforceable by

law


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The definition of Contract u/s2(h) emphasis

an agreement enforceable by law

Consensus-ad-idem Exceptions

Rights & duties social & domesticAgreements

Contract = Agreement + Enforceability at

LawAll contracts are agreements but all

agreements are not contracts


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ESSENTIAL ELEMENTS OF A VALID CONRACT

1. Offer and its acceptance

2. Free consent of both parties

3. Mutual and lawful consideration for agreement

4. It should be enforceable by law- intentionshould be to create legal relationship.

5. Parties should be competent to contract

6. Object should be lawful

7. Certainty and possibility of performance8. Contract should not have been declared as

void under Contract Act or any other law


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CLASSIFICATION OF CONTRACT

Contracts may be classified according to their

I. Validity.

II. Formation.

III. Performance.

I. According to validity:

a. Valid.

b. Void.c. Voidable.

d. Illegal & unenforceable.


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Contd-

II. According to formation:

a. Express contract.

b. Implied contract.

III. According to performance:a. Executed contract.

b. Executory contract.

c. Unilateral contract.d. Bilateral contract


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1.Offer or Proposal and

Acceptance Offer and acceptance analysis is a traditional approach in contractlaw used to determine whether an agreement exists between twoparties. An offer is an indication by one person ("offerer") to another("offeree") of the offerer's willingness to contract on certain termswithout further negotiations. A contract is then formed if there isexpress or implied agreement. A contract is said to come intoexistence when acceptance of an offer has been communicated tothe offerer by the offeree.

For the formation of a contract the process ofproposal or offerbyone party and the acceptance thereof by the other is necessary.This generally involves the process of negotiation where the partiesapply their minds make offer and acceptance and create a contract.

When one person signifies to another his willingness to do orabstain from doing anything with a view to obtaining the assent ofthe other to such act or abstinence, he is said to make a proposal oroffer.


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Rules of Offer

Offer must create legal relationship.

Offer must be definite & certain.

Offer must be communicated. Offer must be made with a view to

obtaining the assent.

Offer should not contain a term the non-

compliance of which may be assumed toamount to acceptance.

A statement of price is not an offer.


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Acceptance

When the person to whom the proposal ismade signifies his assent thereto, theproposal is said to be accepted.

Rules of acceptance

It must be absolute and unqualified. The acceptance must be communicated. Carlill v.Carbolic Smoke BallCo

An offer can only be accepted by the offeree, that is, theperson to whom the offer is made.

An offeree is not bound if another person accepts theoffer on his behalf without his authorization.

It must be according to the mode prescribed and mustbe given within a reasonable time.

Silence cannot be construed as acceptance. Felthousev. Bindley


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Revocation or Lapse of offer

By communication of notice

By lapse of time

By non-fulfillment of a condition By death or insanity of the offeror

If offer is not accepted in usual manner

Counter offer is made If law is changed


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WHO CAN ENTER INTO A

CONTRACT?A person whois of the age of majority according to the law to which he is subject

is of sound mind ? A person is said to be of sound mind for the purpose ofmaking a contract, if, at the time when he makes it, he is capable ofunderstanding it and of forming a rational judgement as to its effect upon hisinterests.

is not disqualified from contracting by any law to which he is subject

is competent to contract.

Therefore a minor is not competent to contract and an agreement by aminor is void ab initio. He can not ratify an agreement on attaining theage of majority and validate the same. (Void ab initio means it has at

no time had any legal validity).The following persons are therefore incompetent to contract

Minors

Persons of unsound mind

Persons disqualified by law to which they are subject


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Minors and Contractual Capacity

An agreement with or by a minor is void

Can be a promissee or a beneficiary

NO ratification of agreement on the age of majority

There can be no claim for compensation from a minor

Minor can always plead minority

Liability - for necessities, the item contracted for mustbe necessary for minors existence, the value must be upto that of the current standard of living or financial/socialstatus (not excessive in value),

-for tort or a civil wrong. Can act as a agent

Cannot be a partner in a firm or adjudged insolvent


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Others and Contractual Capacity

Insanity, mental illness, or mental/medical condition

Drunkenness/drug abuse

Bankruptcy

Enemy aliens and/or terrorists

Convict

Foreign sovereigns & accredited representatives of a foreign state

Business entitiesCorporations

The extent of an artificial person's capacity depends on the law of the place of incorporationand the enabling provisions included in the constitutive documents of incorporation. Thegeneral rule is that anything not included in the corporation's capacity is unenforceable by thecorporation, but the rights and interests of innocent third parties dealing with the corporationsare usually protected.

Insolvency

When a business entity becomes insolvent, an administrator, receiver, or other similar legalfunctionary may be appointed to determine whether the entity shall continue to trade or besold so that the creditors may receive all or a proportion of the money owing to them. Duringthis time, the capacity of the entity is limited so that its liabilities are not increasedunreasonably and to the detriment of the existing creditors.


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Consideration

Consideration is a central concept in the Indian contractact:

It is value paid for a promise or the inducement, price ormotive that causes a party to enter into an agreement or

contract. Consideration is needed for a valid contract.An example; If you sign a contract with a man, agreeingto buy his car for an amount of money, his considerationis the car, which he promises to give to you. Yourconsideration is the money that you pay for the car.However, a contract saying that he would give you hiscar for nothing would not be valid per se, because youaren't giving him any consideration.


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Legal Rules for Consideration

1. Moved at the desire of the promisor

2. It may be moved from promisee or any other person

3. It may be an act ,abstinence or forbearance or a return promise

4. It may be past , present or future

5. It need not be adequate

6. It must be real and not illusory

7. It must be something which the promisor is not already bound to do8. It must not be illegal ,immoral or opposed to public policy

STRANGER TO CONTRACT CANNOT SUE -DOCTRINE OF PRIVITY OFCONTRACT

Only parties to contracts should be able to sue to enforce their rights or claimdamages as such. However the doctrine has proven problematic due to itsimplications upon contracts made for the benefit of third parties who are unable toenforce the obligations of the contracting parties.

Privity is the legal term for a close, mutual, or successive relationship to the same right of propertyor the power to enforce a promise or warranty.


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Common law exceptions

There are exceptions to DOCTRINE OF PRIVITY OF CONTRACT

These are:1. Collateral Contracts (between the third party and one of the contracting parties)

2. Trusts (the beneficiary of a trust may sue the trustee to carry out the contract)

3. Land Law (restrictive covenants on land are imposed upon subsequent purchasersif the covenant benefits neighboring land)

4. Agency and the assignment of contractual rights are permitted.5. Marriage settlement ,partition ,family arrangements.

There are exceptions to -A CONTRACT IS VOID WITHOUTCONSIDERATION

1. Love and affection

2. Compensation for voluntary services

3. Payment for time barred debt

4. Completed gift

5. Charitable subscription


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FREE CONSENT IN INDIAN CONTRACT

ACT

Consent defined.

U/S13. Two or more persons are said to consent whenthey agree upon the same thing in the same sense.

Free consent defined.

U/S14. Consent is said to be free when it is not causedby

(1) coercion, as defined in section 15, or

(2) undue influence, as defined in section 16, or

(3) fraud, as defined in section 17, or

(4) misrepresentation, as defined in section 18, or(5) mistake, subject to the provisions of sections 20, 21 and

22.


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FREE CONSENT OF PARTIES

Consent is said to be free if it is not caused by-

Coercion ? Consent is said to be caused by coercion when it is obtained by pressure exertedby either committing or threatening to commit an act forbidden by the Indian Penal Code orunlawfully detaining or threatening to detain any property.

Undue influence ?A contract is said to be induced by "undue influence" where the relationsubsisting between the parties are such that one of the parties is in a position to dominate the will

of the other and uses that position to obtain an unfair advantage over the other. Fraud ? Means and includes the following acts done with the intention to deceive or to induce a

person to enter into a contract. (a) the suggestion that a fact is true when it is not true and theperson making the suggestion does not believe it to be true (b) active concealment of a fact by aperson who has knowledge or belief of the fact, (c) promise made without the intention ofperforming it.

Misrepresentation ? When a person positively asserts that a fact is true when his informationdoes not warrant it to be so, though he believes it to be true, it is misrepresentation. A breach ofduty which brings an advantage to the person committing it by misleading the other to his

prejudice is also a misrepresentation. Mistake ? Where both parties to an agreement are under a mistake as to a matter of fact and

law, essential to the agreement, the agreement is void. An erroneous opinion as the value of thething, which forms the subject matter of the agreement, is not deemed as mistake as to a matterof fact. Unilateral mistake, i.e. the mistake in the mind of only one party does not affect the validityof the contract


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LAWFUL OBJECT

Object or consideration 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,(3) It is fraudulent,

(4) The court regards it immoral,

(5) The court regards it opposed to public policy.

Every agreement of which the consideration orobject is unlawful is void.


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Void agreements

Void agreements - An agreement not enforceable by law is said to bevoid. [section 2(g)]. - - Note that it is notvoid contract, as anagreement which is not enforceable by law does not becomecontract at all.

Following are void agreements

. Agreement by incompetent party (section 11) Both parties under mistake of fact (section 20)

Unlawful object or consideration (section 24)

Agreement without consideration (section 25)

Agreement in restraint of marriage (section 26)

Agreement in restraint of trade (section 27)

Agreement in restraint of legal proceedings (section 28)

Uncertain agreement (section 29)

Wagering agreement (section 30)

Agreement to do an impossible Act (section 56).


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Performance of contract

Obligation of parties to contracts. U/S 37

The parties to a contract must either perform, or offer to perform, theirrespective promises, unless such performance is dispensed with orex-cused under the provisions of this Act, or of any other law.

Promises bind the representatives of the promisors in case of the death ofsuch promisors before performance, unless a contrary intention appears

from the contract.

Tender of performance.

Where a promisor has made an offer of performance to the promisee, andthe offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.

Effect of refusal of party to perform promise wholly.

When a party to a contract has refused to perform, or disabled himself fromperforming his promise in its entirety, the promisee may put an end to thecontract, unless he has signified, by words or conduct.


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Person by whom promises is to be performed

If it appears from the nature of the case that it was the intention of the parties to anycontract that any promise contain in it should be performed by the promisor himself,such promise must be performed by the promisor.In other cases, the promisor or his representative may employ a competent person toperform it.

Effect of accepting performance from this person

When a promisee accepts performance of the promise from a third person, he cannotafterwards enforce it against the promisor.

Devolution of joint liabilities Sec. 42-44

When two or more person have made a joint promise, then, unless a contraryintention appears by the contract, all such persons, during their joint lives, and, afterthe death of any of them, his representative jointly with the survivor or survivors, and,after the death of the last survivor the representatives of all jointly, must fulfill thepromise.


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Discharge of contract

BY PERFORMANCE

BY MUTUAL CONSENT

LAPSE OF TIME OPERATION OF LAW

IMPOSSIBILITY OF PERFORMANCE

BREACH OF CONTRACT


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BREACH OF CONTRACT

The parties to a contract must either perform or offerto perform, their respective promises, unless suchperformance is dispensed with or excused under theprovisions of the Act, or any other law.

Promises bind the representatives of the promisor in thecase of death of such promisor before performance,unless a contrary intention appears from a contract.

In a contract the agreement being enforceable by law,

each party to the contract is legally bound to perform hispart of the obligation. Non-performance of the dutyundertaken by a party in a contract amounts to breach ofcontract, for which he can be made liable.


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REMEDIES

When a party to the contract makes a breach of

contract, there are five possible alternatives

available to the other party.

Rescind the contract

Sue for damages

Specific performance Quantum meruit

Injunction


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DAMAGES: Types of damages/compensation are-

Ordinary- includes direct loss incurred by the party.

Special- Damages under special circumstances or indirect loss

Exemplary- Are a kind of punishment as in case of cheque dishonour

Nominal- Very small in amount given only to recognise the right of party.

SPECIFIC PERFORMANCE

Specific performance means actual execution of the contract as agreedbetween the parties.

When there exists no standard for ascertaining the actual damagecaused by the non-performance of the act agreed to be done; or

When the act agreed to be done is such that compensation in money

for its non-performance would not afford adequate relief.


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Quantum meruit means as much as earned. A contract maycome to end by * breach of contract * contract becoming voidor * Voidable contract avoided by party. In such case, if a partyhas executed part of contract, he is entitled to get aproportionate amount i.e. as much as earned by him. This is

not by way of damages

or compensation for loss

. - - Theprinciple is that even when contract comes to a premature end,the party should get amount proportional to the workdone/services provided/goods supplied by one party. Oneparty should not get enriched at the cost of other

Injunction: where a party is in breach of a negative term of a contract

(i.e. where he is doing something which he promised not to do), thecourt may by issuing an order, restrain him from doing what hepromised not to do. Such an order of the court is known asInjunction.

Documents

Module II - Indian Contract Act