contract act- 1872 ( 2nd module)

8/8/2019 Contract Act- 1872 ( 2nd Module)

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NATURE OF CONTRACT

DEFINITION OF CONTRACT

A contract is an agreement made between two or more parties which

the law will enforce. According to Sec. 2 (h), a contract is an agreement

enforceable by law. An agreement comes into existence by the process

of offer by one party and its unqualified acceptance by the other party.

The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the same time, i.e., there must be

consensus ad idem.

An agreement may be a social agreement or a legal

agreement. A social agreement is that which does

not give rise to legal consequences. In case of its

breach the parties cannot go to the Law Court to

enforce a right. A legal agreement is that which

gives rise to legal consequences and remedies in

the Law Court in case of its breach.



ESSENTIALS OF CONTRACT

1. There must be an agreement. This involves two parties, one

party making the offer and the other party accepting it.

2. The parties must intend to create legal relationship.

3. The parties must be capable of entering into an agreement as

regards age and understanding.

4. The agreement must be supported by consideration on both

sides.

5. The consent of the parties must be free and genuine.

6. The object of the agreement must be lawful.

7. The terms of the agreement must be certain

and capable of performance.

8. The agreement must not have been expressly

declared as void.



CLASSIFICATION OF CONTRACT

Void agreement ± an agreement not enforceable by law

[Sec.2(g)]Void contract ± a contract which ceases to be enforceable by law

[Sec.2(f)]

Voidable Contract ± a contract which is enforceable by law at the option

of one party thereto, but not at the option of the other [Sec.2(i)]

Illegal Agreement ± an agreement which involves the transgression of

some rule of basic public policy and is criminal in nature or immoral. It

is not only void as between the immediate parties but it also taints the

collateral transactions with illegality.

Express contract ± a contract is which the termsare stated in words (written or spoken) by the parties.

Implied contract ± a contract which is inferred

from the circumstances of the case or from the

conduct of the parties.

Cont««d



CLASSIFICATION OF CONTRACT (Cont«.d)

Quasi-contract ± an obligation created by law,regardless of agreement.

Executed contract ± a contract which is wholly performed by both

the parties.

Executory contract ± a contract in which the promises of both theparties have yet to be performed.

Partly executory, partly executed ± a contract in which one party

has performed his obligation, but the other party has yet to perform

his obligation.

Unilateral contract ± a contract in which only one

party has yet to perform his obligation.

Bilateral contract ± a contract in which both the

parties have yet to perform their obligations.



OFFER & ACCEPTANCE

OFFER

An offer is an undertaking by the offeror to be contractually bound

in the event of a proper acceptance of the offer by the oferee. It

may be made by express words spoken or written, or it may beimplied when it is inferred from the conduct of the offeror or from

the circumstances of the case. It is specific when it is made to a

particular person, and general when it is made to the world at

large. In the former case, it is called a specific offer; in the latter

case, it is called a general offer.



Legal Rules as to Offer

1. It must be intended to create legal relations.

2. It must be certain.

3. It must be distinguished from

a) A declaration of intention, and

b) and invitation to make offer.

4. It must be communicated to the offeree.

5. It must be made with a view to obtaining the assent of the

offeree.

6. It must not contain a term the non-compliance of which would

amount to acceptance.

7. A statement of price is not an offer.



Lapse of Offer

An offer lapses or comes to an end -

1. By communication of notice of termination of offer to the

offeree.

2. By lapse of the specified or reasonable time.

3. By death or insanity of the offeror.

4. By a counter-offer. Counter-offer is an offer to the original

offer.

5. By not being accepted according to the prescribed or usual

mode.6. By non-fulfillment of a condition precedent.



Communication of Offer, Acceptance and Revocation

The communication of a proposal (offer) is completewhen it comes to the knowledge of the person to whom it is made.

The communication of an acceptance is complete ± as against the

purposer when it is put into a course of transmission to him, so as

to be out of the power of the acceptor; as against the acceptor,

when it comes to the knowledge of the proposer. Thecommunication of a revocation is complete ± as against the person

who makes it, when it is put into a course of transmission to the

person to whom it is made so as to be out of the power of the

person who makes it; as against the person to whom it is made,

when it comes to his knowledge (Sec. 4).



Special terms of offer.These must be brought to the notice of the other party before the

acceptance of the offer, otherwise the acceptor will not be bound

by such terms. Where the acceptor knows that there are some

special terms, and his attention is drawn to them, he is bound by

them if he accepts the offer.

Contract by Telephone or Telex

It has the same effect as an oral agreement entered into between

the parties when they are face to face.



OFFER & ACCEPTANCE

ACCEPTANCE

Legal Rules as to Acceptance

1. It must be absolute and unqualified.

2. It must be communicated to the offeror.

3. It must be according to the prescribed or usual mode.

4. It must be given within the prescribed or reasonable time.

5. It must be given by the specific person to whom the offer is

made. If the offer is general, it may be accepted by any person.

6. It must show an intention to fulfil the promise.

7. It cannot precede an offer.

8. It must be given before the offer lapses.

9. Mental acceptance is no acceptance.



Effect of silence on acceptance

The acceptance of an offer cannot be implied from the silence of

the offeree unless the offeree has by his previous conduct

indicated that his silence means that he accepts.

Acceptance subject to contract

An acceptance subject to contract means that the parties do not

intend to be bound until a formal contract is prepared and signed

by them.

Agreement to agree in future

If the parties have not agreed upon the terms of their

agreement but have agreed to agree in future,

there is no contract.



CONSIDERATION

Consideration means something in return. It is the price for which

the promise of the other is bought. It must result in a benefit to

the promisor and / or a detriment to the promisee or both. Sec. 2

(d) defines it as follows:

³When at the desire of the promisor, the promisee or any other

person has done or abstained from doing, or does or abstains

from doing something, such act or abstinence or promise is

called a consideration for the promise.´



Legal rules as to consideration

It is essential to support every contract.

It must move at the desire of the promisor.

It may move from the promisee or any other person.

It may be past, present or future.

It need not be adequate.

It must be real and not illusory.

It must not be something which the promisor is already legally

or contractually bound to do.

It must not be illegal, immoral or opposed to public policy.



Stranger to contract

The general rule is that a stranger to a contract cannot sue. But

he may sue where -

1. a trust or charge is created in some specific immovable

property in favour of him;2. a provision is made in a marriage settlement, partition or

family arrangement for his benefit;

3. there is an acknowledgement of a liability by the promisor or

the promisor constitutes himself as agent;

4. he is the assignee of rights and benefits under

involving personal skill;

5. he enters into a contract through an agent; and

6. there are covenants running with the land.



An agreement made without consideration is void

[Sec. 25]

The following are the exceptions to this rule, i.e.,

no consideration is required in case of -

1. A written and registered agreement based on natural love and

affection between parties standing in a near relation to each

other [Sec. 25 (1)];

2. A promise to compensate, wholly or a part, a person who has

already voluntarily done something for the promisor

[Sec. 25(2)];

3. A promise by a debtor to pay a time-barred debt if it is made

in writing and is signed by the debtor or byhis agent [Sec. 25(3)];

4. An agency [Sec. 185];

5. A complete gift [Expl. 1 to Sec. 25]



CAPACITY TO CONTRACT

Every person is competent to contract who is of the age of

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

sound mind, and is not disqualified from contracting by any law to

which he is subject (Sec. 11)

1.Minor

A minor is a person who has not completed eighteen years of

age. But where a guardian has been appointed to a minor under

the Guardians and Wards Act or where a minor

is under the guardianship of the Court of Wards, he attains majority at the age of

twenty-one. The positions as regards his

agreements is as follows:

Cont««d



1) His agreement is altogether void and inoperative.

2) He can be a promisee or a beneficiary in a contract.

3) His estate is liable for the necessary goods supplied or necessary

services rendered to him or to anyone whom he is legally bound to

support or for money lent to him to buy necessaries.4) He may enter into contracts of apprenticeship, service, education

and instruction provided these are beneficial to him.

5) He can be an agent.

Cont««d



6) He cannot be a partner. But he can be admitted to the benefits of

an already existing partnership with the consent of the other

partners.

7) If he has received any benefit under a void agreement, he cannot

be asked to compensate or pay for it.

8) The court never orders specific performance of his agreements.

9) He can always plead minority and is not estopped from doing so

even when he enters into an agreement by falsely misrepresenting

his age.

10) He cannot be adjudged insolvent.



2. Persons of unsound mind

Lunatics. A lunatic can enter into a contract

when he is of sound mind.

Id iots. An agreement of an idiot like that of a minor is

altogether void.

Dr unk en or I ntoxicated persons. Their position is similar to

that of lunatics.

These persons, like a minor, are liable for necessaries

supplied to them or their minor dependants.

3. Other persons. Alten enemies. During the war an Indian

citizen cannot enter into a contract with a

alien enemy. Contracts made before the

war are either suspended or dissolved.



F oreig n sovereig ns and accred ited representatives

of a foreig n state. They can enter into contracts and enforce

these contracts in our Courts. But they cannot be sued in our

Courts without the prior sanction of the Central Government.

Corporations. The contractual capacity of a statutory

corporation is limited by the Statute governing it. As regards acompany registered under the Companies Act, 1956, its

contractual capacity is regulated by its Memorandum of

Association and the Companies Act, 1956.

I nsolvents. When a debtor is adjudged insolvent he

is deprived of his power to deal in his property divisible

among his creditors.

Convicts. A Convict when undergoing

imprisonment is incapable of entering into a contract.



FREE CONSENT

All agreements are contracts if they are made by the free

consent of the parties. Two or more persons are said to

consent when they agree upon the same thing in the same

sense [Sec. 13.] Consent is said to be free when it is not

caused by(i) Coercion, or

(ii) Undue influence, or

(iii) Fraud, or

(iv) Misrepresentation, or

(v) Mistake, subject to the provisions of Secs. 20, 21

and 22.



Effect of agreement without free consent.

When consent to an agreement is caused by coercion, fraud,

misrepresentation, or undue influence, the agreement is a

contract voidable at the option of the party whose consent was so

caused [Secs. 19 and 19-A]

COERCION

³Coercion´ is the committing or threatening to commit any act

formidden by the Indian Penal Code, 1860 or the unlawful

deaining, 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 (Sec. 15).

A threat to commit suicide amounts to coercion.



UNDUE INFLUENCE

A contract is said to be induced by ³undue influence´ where 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 uses

that position to obtain an unfair advantage over the other. Aperson is deemed to be in a position to dominate the will of

another where he ±

Cont««d



(a) Holds real or apparent authority over the other, or

(b) Stands in a fiduciary relation to the other; or (c) Makes a contract with a person whose mental capacity is

temporarily or permanently affected by reason of age,

illness or mental or bodily distress. Where a person who

is in a position to dominate the will of another, enters into

a contract with him, and the transaction appears to beunconscionable, the burden of providing that such contract

was not induced by undue influence lies upon the person

in a position to dominate the will of the other (Sec. 16).



R elationships which raise presu mption of und u e

i nfl u ence:

Parent and Child. Trustee and Beneficiary.

Religious Guru and Disciple.

Guardian and Ward.

Solicitor and Client Doctor and Patient.

Fiance and Fiancee.

No presu mptions of und u e i nfl u ence i n the followi ng cases:

1. Husband and Wife.

2. Landlord and Tenant.

3. Creditor and Debtor.



MISREPRESENTATION AND FRAUD

³Misrepresentation is a mis-statement of a material fact made

innocently with a honest belief as to its truth or non-disclosure of

a material fact, without any intent to deceive the other party.

³Fraud´ exists when it is shown that a false representation has

been made.

Knowingly, or

Without belief in its truth, or

recklessly, not caring whether it is true or false, and the maker intends the other party to act upon it.

It also exists when there is a concealment of a

material fact.



MISTAKE

Mistake is erroneous belief about something.

It may be a

(1) Mistake of Law, or

(2) Mistake of fact.

Mistake of Law, It may be a

a) Mistake of law of the country, or

b) Mistake of law of a foreign country.

The general rule as regards mistake of law of the country is

that ignorance of law is no excuse. Mistake of law of a

foreign country is regarded as a mistake of fact.



2. Mistake of Fact, It may be a -

(1) Bilateral mistake. Where both the parties to an agreement

are under a mistake as to a matter of fact essential to the

agreement, the agreement is void [Sec. 20].

Mistake of Fact (bilateral mistake) may relate to:

a ) S ubject-matter. Mistake of fact regarding subject-matter may relate to

i. Existence of the subject-matter;

ii. Price of the subject-matter;

iii. Quantity of the subject-matter;

iv. Identity of the subject-matter.

v. Quality of the subject-matter, or

vi. Title to the subject-matter.

Cont««d



b ) P ossibility of performance. Mistake of fact may also

relate to

i. Physical, or

ii. Legal, impossibility of performance.In both these cases, the agreement is void.



2. Mistake of Fact (C ont«.d )

(2) U nilateral mistake. Where only one of the partiesis under a mistake as to a matter of fact, the contract is not

voidable [Sec. 22]. There are however two exceptions to

this rule.

( i ) I dentity of the person contracted with. If A intends to

enter into a contract with B. C cannot give himself anyright in respect of the contract by accepting the offer.

In such a case the contract is void.

( ii ) N ature of contract. Where a person is made to enter

into a contract through the inducement of another but

through no fault of his own, there is amistake as to the nature of the

contract, and the contract is void.



DISCHARGE OF CONTRACT

A contract is said to be discharged when the obligations created

by it come to an end. The various modes of discharge of a

contract are as follows:

1. Discharge by performance.

Discharge of a contract by performance takes place when the

parties to the contract fulfill their obligations arising under the

contract within the time and in the manner prescribed. The

performance may be(i) actual performance, or

(ii)attempted performance



2. Discharge by agreement or consent.

A contract rests on the agreement of the parties. As it is

agreement which binds them, so by their agreement or consent

they may be discharged. The discharge by consent may be

express or implied. Discharge by implied consent takes place by±



(a) Novation, i.e., when a new contract is substituted for

an existing one, either between the same parties or

between one of the parties and a third party.(b) Alteration, i.e., when one or more of the terms of the contract

is/are altered by the mutual consent of the parties to the contract.

(c) Rescission, i.e., when all or some of the terms of the contract

are cancelled.

(d) Remission, i.e., acceptance of a lesser fulfillment of the promise

made.

(e) Waiver which means intentional relinquishment or giving up of a

right by a party entitled thereto under a contract.

(f) Merger, i.e., when an inferior right accruing to aparty under a contract merges into a superior right

accruing to the same party under a new contract.



3. Discharge by impossibility.

Impossibility of performance may be-

I nitial impossibility. An agreement to do an act

impossible in itself is void.

S u perveni ng impossibility. Impossibility which arises

subsequent to the formation of a contract (which could be

performed at the time when the contract was entered into) is

called subsequent or supervening impossibility.T he cases covered by supervening impossibility include;

(a) Destruction of subject-matter of contract;

(b) Non-existence or non-occurrence of a particular state of

things:

(c) Death or incapacity for personal service;

(d) Change of law or stepping in of a person

with statutory authority;

(e) Outbreak of war.

The contract is discharged in these cases.



T he following cases are not covered by supervening impossibility:

(a) Difficulty of performance;

(b) Commercial impossibility;

(c) Failure of a third person on whose work the promisor relied;

(d) Strikes, lock-outs and civil disturbances;

(e) Failure of one of the objects.

The contract is not discharged in these cases.



4. Discharge by lapse of time.

If a contract is not performed within the period of limitation and if

no action is taken by the promisee in a Law Court, the contract

is discharged.

5. Discharge by operation of law.This includes discharge by

(a) death,

(b) merger,

(c) insolvency,

(d) unauthorised alteration of the terms of a

written agreement, and

(e) rights and liabilities becoming vested in the

same person.



6. Discharge by breach of contract.

If a party breaks his obligation which the contract

imposes, there takes place breach of contract.Breach of contract may be

[1] Actual breach, or

[2] Anticipatory breach.

[1] Actual breach of contract may occur

(a) At the time when the performance is due, or

(b) During the performance of the contract.

[2] Anticipatory breach of contract occurs

when a party repudiates his liability or

obligation under the contract before

the time for performance arrives.



REMEDIES FOR BREACH OF CONTRACT

In case of breach of a contract, the injured party has one

or more of the following remedies:1. Rescission. When there is breach of a contract by a party, the

injured party may sue to treat the contract as rescinded. He is

also absolved of all the obligations under the contract.

2

. Damages.D

amages are monetary compensation awarded tothe injured party by Court for the loss or injury suffered by him.

The foundation of modern law of damages, both in India and

England, is to be found in the judgment in the case of H adley v.

Baxendale. Sec. 73 of the Indian Contract Act which deals with

³compensation for loss or damage caused

by breach of contract´ is based on the judgment

in the case of H adley v. Baxendale. Damages

may be of four types:

Cont«..d



1) Ordinary damages. These are damages

which actually arise in the usual course of

things from the breach of a contract.2) S pecial damages. Damages which may reasonably be

supposed to have been in the contemplation of both the

parties at the time when they made the contract as the

probable result of the breach of it, are known as special

damages and may be recovered.

3 ) V indictive or exemplary damages. These damages are

allowed in case of the breach of a contract to marry or

dishonour of a cheque by a banker wrongfully.

4 ) N ormal damages. Where the injured partyhas not suffered any loss by reason of the

breach of a contract, the court may award

a very nominal sum as damages.



Liquidated damages and penalty.

µLiquidated damages¶ represent a sum, fixed or

ascertained by the parties in the contract, which

is a fair and genuine pre-estimate of the probable loss that

might ensue as a result of the breach. A µpenalty¶ is a sum

named in the contract at the time of its formation, which is

disproportionate to the damage likely to accrue as a result of the

breach. The Courts in India allow only µreasonable

compensation¶.

3. Quantum Meruit.

A right to sue on a quantum meruit (as much as earned) arises

where a contract, partly performed by one party,

has become discharged by the breach of thecontract by the other party. This right is founded

on an implied promise by the other party

arising from the acceptance of a benefit by that

party.



4. Specific performance.

In certain cases the Court may direct the party in breach of a

contract to actually carry out the promise, exactly according to

the terms of the contract. This is called specific performance

of the contract.

5. Injunction.

It is a mode of securing the specific performance of the

negative terms of a contract.

contract act- 1872 ( 2nd module)

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