THE CONTRACT ACT, 1872Session 3

CS Shashikala Rao

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CREATIONEXPRESS: by words spoken or written. X: will you buy this bag for Rs.500. Y: I am ready to buy this bag for Rs.500/-IMPLIED: Otherwise than by words spoken or written. By conduct. Board a bus going to station.

EXECUTIONEXECUTED: Both the parties have fulfilled their obligations. Y pays Rs.500/- and X gives the bag.

EXECUTORY: parties yet to perform their obligations. X and Y agrees to do the exchange on Sunday.PARTLY EXECUTED PARTLY EXECUTORY: Y gives Rs.500/- but X yet to give the bag

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Distinction between void and voidable contracts Basis of Distinction

Void Contract Voidable Contract

Meaning A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.

Right to Rescind the contract

No question arises The party whose consent was not free has the right to rescind the contract

Sue for performance of contract

No party can sue the other party for claiming the performance of a void contract

If the aggrieved party does not, within reasonable time, exercise its right to avoid the contract, any party can sue other for claiming the performance of the contract.

Reason A contract becomes void due to change in law or change in circumstances

Consent of parties is not free.

Right to claim damages

No right to any party Right to party whose consent is not free. 4

EnforceabilityAn agreement is enforceable by law if it creates some legal obligation.

Intention to create legal relationship Commercial or business agreement - X offers to sell his car to Y for Rs. 1 lac. Y accepts this offer. Such an agreement between X and Y is a contract because it creates legal obligation. In this agreement, if X refuses to sell or Y refuses to buy, the other party can file a suit in the court of law for the breach of the contract. Social or domestic agreements – X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for dinner, X cannot go to the court to claim his loss.

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Agreements - Enforceability• VALID Agreement : Enforceable by law• VOID Agreement : not enforceable by law

Agreement with a minor or in restraint of trade or restraint of marriage or restrained of legal proceedings or against public policy.

• VOIDABLE Agreement : enforceable by law at the option of one or more parties Agreement induced by coercion, undue influences, fraud or misrepresentations

• ILLEGAL Agreement : Illegal Agreement is something against the law itself. It is void-ab-initio.X agrees to pay Y Rs. 1 lac if Y kills Z. Y kills Z and claims Rs. 1 lac. Y cannot recovers from X because the object of the agreement is unlawful.

• UNENFORCEABLE Agreement: valid in law but is incapable of proof because of some technical defect.Promissory note which is not at all stamped or is insufficiently stamped.

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Contracts : Enforceability• VALID contract: Perfectly according to law

X offers to marry Y, Y accepts X’s offers. This is a valid contract • VOID contract : which is not enforceable by lawX offers to marry Y, Y accepts X’s offers. Later on Y dies. The contract

becomes void on the death of Y. • VOIDABLE contract : enforceable at the option of one party but

not at the option of other or othersAll contracts induced by coercion, undue influence, fraud or misrepresentation X threatens to kill Y, if he does not sell his house for Rs. 1 lac to X. Y sells his house to X and receives payment. This contract is voidable at the option of Y as his consent was obtained by coercion.

• UNENFORCEABLE contract : An unenforceable contract is a valid contract in law, but is incapable of proof, and therefore cannot be enforced in a Court of Law, because it is not in writing or is unstamped.

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VOID Agreement

• If consideration and objects are unlawful in partsA promises to B to supervise trade of yarn and trafficking of opium or marijuana. The agreement is void as part of the object is unlawful.

• If without consideration unless it meets the criteria set in Sec. 25 − it is in writing and registered or− it is a promise to compensate for past performance or − It is a promise to pay a time barred debt•Void for uncertainty A agrees to sell B 100 tons of oil. What kind of oil is not clear hence agreement is void for uncertainty. •Agreements against public policy, for wager, restraint of trade, etc

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Exceptions to agreements in restraint of trade

• Sale of goodwill• Partners – outgoing partners, existing partners• Trade combinations• Sole dealerships• Agreement to refer to arbitration

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Uncertain AgreementsAn uncertain agreement means an agreement the meaning of which is not certain or capable of being made certain. Such agreements are void. 1. A agrees to sell to B “a hundred ton of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. 2. A agrees to sell B a hundred ton of oil of a specified description. There is no uncertainty here to make the agreement void. 3. A, who is a dealer in coconut oil, agrees to sell to B “100 ton of oil”. The nature of A’s trade implies that A intends to sell 100 tons of coconut oil. Hence, there is no uncertainty. 4. A agrees to sell to B “100 tons of rice at a price to be fixed by C” As the price is capable of being made certain, there is no uncertainty here to make the agreement void.

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Wagering AgreementsAn agreement between two persons under which money or money’s worth is payable, by one person to another on the happening or non-happening of a future uncertain event is called a wagering event. Such agreements are chance oriented and therefore completely uncertain.X promises to pay Rs. 1000 to Y if it rained on a particular day, and Y promises to pay Rs. 1000 to X if it did not. Such agreements are wagering agreements. Essentials:Promise to pay Money or Money’s worth.Uncertain eventMutual chances of gain or lossNeither party to have control over the event.No other interest in the event. No suit can be lodged for recovering anything won on a wager or for a person to abide by a result of any game. 12

Contingent agreement based on impossible eventsSec. 36. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not, to the parties to the agreement at the time when it is made. A agrees to pay Rs. 1000 if B marries C ( a Hindu) who is already married to D. This agreement is void since happening of an event is impossible.

Agreements to do an impossible actSec. 56 An agreement to do an impossible act is void.A undertakes to put life into dead wife of B. This agreement is void since the act is impossible at the time of making agreement.

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Contingent contract A contingent contract is a contract to do or not to do something if some event, collateral to such contract, does or does not happen.1. A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract. 2. A promise to pay B Rs. 1 crore if a certain ship does not return within a year.

Enforcement of contingent contractsContingent contract to do or not to do something if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts becomes void. A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.

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Principal of Restitution Restitution means “Return or Restoration of Benefits”.A, singer contracts with B the manager of a theatre to sing at his theatre for two nights every week during the next two months and B agrees to pay her Rs. 100 for each night’s performance. On the sixth night, A wilfully absents herself from the theatre and B in consequence rescinds the contract, B must pay A for five nights on which she had sung.Non-applicabilityThe principal of restitution does not apply to contracts which are void ab- initio with the exception where the minor has entered into agreement by misrepresenting his age.X pays Rs. 1000 to Y to beat Z. Y does not beat Z. X claims Rs. 1000 from Y. X cannot recover anything because this agreement is void ab-initio.

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Case Provision

When a person at whose option a contract is voidable rescinds it

The party rescinding a voidable contract must restore the benefit to the person from whom he has received it.

When an agreement is discovered to be void or the contract becomes void

The person who has received any benefit or advantage under such agreement or contract must restore it or compensate for it to the person from whom he has received it.

Distinction between an agreement and a contractBASIS OF DISTINCTION

AGREEMENT CONTRACT

What constitute? Agreement = Offer + Acceptance. Every agreement is a set of promises.

Contract = Agreement + its enforceability . Agreement enforceable by law is a contract.

Creation of legal obligation

An agreement may or may not create a legal obligation

A contract necessarily creates a legal obligation

One in other Every agreement need not necessarily be a contract

All contracts are necessarily agreements

Binding Agreement is not concluded or a binding contract

Contract is concluded and binding on the concerned parties.

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PERFORMANCE OF A CONTRACT (Sec. 37)The parties to a contract must either perform or offer to perform their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.Types:Actual performanceX contracted to deliver to Y at his warehouse on 1st October, 100 bales of cotton of a particular quality. X brought the cotton of requisite quality to the appointed place on the appointed day during the business hours, and Y took the delivery of goods. This is an actual performance. Attempted performance (Tender or offer to Perform)If in the aforesaid example, Y refused to take the delivery of goods, it is a case of attempted performance because X has done what he was required to do under the contract.

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Effects of Tender•The promisor is not responsible for non-performance.•The promisor does not lose his rights under the contract.Types of Tender•Tender of goods or services•Tender of moneyEssentials of a Valid Tender•Unconditional A offers to give his house to B, if C permits. This is a conditional offer and therefore not a valid tender. •At proper time and place•Reasonable Opportunity to promisee•For whole obligation – minor deviation is acceptableDelivery of 100.10 tons of wheat in a contract for 100 tons of wheat is a valid tender but delivery of 120 tons of wheat is invalid tender.•To proper person•Of exact amount and in legal tender

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Effect of Refusal of party to perform promise wholly (sec. 39)When a party to a contract has refused to perform or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. 1.A, a singer enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her Rs. 1000 for each night’s performance. On the sixth night, A wilfully absents herself from the theatre. B is at liberty to put an end to the contract2.On the 7th night A sings, with the assent of B. B cannot put an end to contract as he has signified acquiescence in continuance of the contract

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Who can demand performance ?• PromiseeX promises Y to pay Rs. 1000 to Z. It is only Y who can demand performance and

not Z.• Legal representative1. A promises to deliver goods to B on a certain day on payment of Rs. 10000.

A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1000 to A’s representatives.

2. A promises to paint a picture for B by a certain day, at a certain price. A dies before that day. Neither A’s representatives nor B can demand performance. (being of a personal nature)

• Third party: trustee• Joint promiseeX promises Y and Z jointly to repay loan of Rs. 1000 on a specified day. Y dies

before that specified day. Y’s representative jointly with Z can demand the performance from X on specified day. If Y and Z both die before specified day, the representatives of Y and Z jointly can demand the performance from X on the specified day

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Who must perform ?• PromisorX promises to paint a picture for Y. X must perform the promise personally.• Promisor’s agent or Third partyA promises to pay B a sum of money. A may perform the promise either by personally paying

the money to B, or by causing it to be paid to B by another , and if A dies before the time appointed for payment, his representatives must perform the promise, or employ some proper person to do so.

• Legal representativeX promises to marry Y. X dies. X’s legal representative cannot perform this promise. • Joint promisors1. X & Y jointly promise to repay a loan of Rs. 1000 on a specified day . X dies before that

specified day. X’s representative jointly with Y must perform the promise on the specified day.

2. A, B & C jointly promise to pay D Rs. 3000. D may compel either A or B or C to pay him Rs. 3000. C is compelled to pay the whole. A is insolvent, but his assets are sufficient to pay 50% of

the debt, C is entitled to receive Rs. 500 from A’s estate and Rs. 1250 from B. C is unable to pay anything, and A pays. A is entitled to receive Rs. 1500 from B. A & B are sureties for C. C fails to pay. A & B are compelled to pay. They are entitled to

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Devolution of Joint liabilities The liabilities of joint promisors pass to their legal representativesDevolution of Joint rightsA in consideration of Rs. 5000 lent to him by B and C, promises B and C jointly to repay them that sum with interest on a specified day. B dies. The right to claim performance rests with B’s representative jointly with C during C’s life, and, after the death of C, with representatives of B and C jointly.

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Reciprocal Promises (Sec. 2(f))Promises which form the consideration or part of the consideration for each other.Rules regarding performance of Reciprocal Promises1.Simultaneous PerformanceIn a contract for sale, A promises to deliver the goods to B at a fixed price and B promises to give security for payment of the price. Such promises are reciprocal promises. A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery.B need not pay for the goods, unless A is ready and willing to deliver them on payment2. Order of PerformanceA and B contract that A shall build a house for B at a fixed price. A’s promise to build the house must be performed before B’s promise to pay for it. 3. Effects of preventing the performance – contract is voidable at the option of the person who is prevented from performance.

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4. Effect of non-performance in case of mutual and dependent reciprocal promisesA hires B’s ship to take in and convey, from Calcutta to Mauritius, a cargo to be provided by A, B receiving a certain freight for its conveyance. A does not provide any cargo for the ship. A cannot claim the performance of B’s promise, and must make compensation to B for the loss which B sustains by the non- performance of the contract. 5. Effect of promise to do legal and illegal thingsA and B agree that A shall sell B a house for Rs. 10,000 but that, if B uses it as a gambling house, he shall pay A Rs. 50,000 for it. 1st set of promise is legal but the 2nd set of promise is unlawful hence agreement is void. 6. Effect of alternative promises, one being illegal – only legal one can be enforcedA and B agree that A shall pay B Rs. 1000, for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract for rice and void agreement for opium.7. Effect of not performing at fixed time – voidable at the option of the promisee.

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Assignment of ContractsAssignment of a contract means transfer of contractual rights and liabilities to a third party.

Assignment by Act of Parties1. Assignment of contractual liabilities: Contractual liabilities cannot be assigned. Unless Novation takes place.2. By operation of lawThe rights and obligations of the deceased/ insolvent party pass on to legal representatives / official receiver/ assignee. 1.X promises to marry Y. Here, neither X can assign his obligation nor Y can assign his right because the contract is of personal nature. 2.X owes Y Rs. 10000 and Z owes X Rs. 10000. Here X cannot compel Y to recover the amount from Z. However, he can transfer his liability to Z with the consent of Y and Z. Y can also transfer his right to a third party to recover the amount from X.

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Appropriation of payment

Appropriation of payment means application of money to a particular debt.Rules:1.Where debt to be discharged is indicated – the payment, if accepted must be applied accordingly. A owes B, among other debts. Rs. 100000 upon a promissory note which falls due on the 1st June. He owes B no other debt of that amount. On the 1st June A pays to B Rs. 100000. The payment is to be applied to the discharge of the promissory note. 2. Where debt to be discharged is not indicated – the creditor has option to apply the payment to any lawful debt due from the debtor even if it is a time barred debt. But he cannot apply to disputed debt. 3. Where neither party makes any appropriation – the payment shall be applied in discharge of the debts in order of time whether or not they are time barred

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Discharge of a contract

Discharge of contract means termination of the contractual relations between the parties to a contract. A contract is said to be discharged when the rights and obligations of the parties under the contract come to an end.

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• Discharge of performance –– By actual performance– By attempted performance or tender

• Discharge by Mutual agreement Novation - A owes money to B under a contract. It is agreed between

A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B no longer exists and a new debt from C to B has been contracted.

Rescission – X promises Y to sell and deliver 100 bales of cotton on 1st October at his godown and Y promises to pay for goods on 1st November. X does not supply the goods. Y may rescind the contract.

• Effect of rescission of voidable contract - party who has received any benefit should restore.

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• When an agreement is void or contract becomes void – any party who has received any benefit should restore.

Remission Releasing a party from performance.A owes B Rs. 5000. A pays B Rs. 1000, and B accepts them in full satisfaction of his

claim. A’s debt stands discharged.

Waiver – Intentional discharge.Supervening Impossibility – Death, declaration of war, change of

law, etc..X agreed to sing on a specified day. X fell seriously ill and could not perform on that day.

The contract was discharged.

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Breach of ContractIf any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract.•Anticipatory – party declares his intention of not performing •Actual – on due date fails to perform OR

performs partly and then refusesConsequences of Breach of ContractThe aggrieved party (i.e. the party not at fault) – 1.Is discharged from his obligation and2.Is entitled to proceed against the party at fault.

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Remedies for Breach of contract• Rescission of contract – right not to perform obligation• Suit for damages: ordinary, special, punitive, for discomfort,

interest, • Suit for specific performance: demanding Court’s direction to

defaulting party for specific performance• Suit for injunction: prohibiting a person from doing an act • Suit upon quantum meruit: compensation for work already

done. C an owner of a magazine engaged P to write a book to be

published by instalments in his magazine. After a few instalments were published, the publication of the magazine was stopped. It was held that P could claim payment for the part already published.

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Quasi - contracts• It is not a contract at all because one or other essentials for the formation

of a contract are absent. • It is an obligation imposed by law upon a person for the benefit of the

other even in the absence of a contract.• Based on principle of equity which means no person shall be allowed to

unjustly enrich himself at the expense of other.1. A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B’s property. 2. A and B jointly owe Rs. 100 to C. A alone pays the amount to C, and B, not

knowing this fact, pays Rs. 100 over again to C. C is bound to repay the amount to B.

Compensation for failure to discharge obligation created by Quasi – contract

- the injured party is entitled to receive as if such person had contracted to discharge it and had broken his contract.

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THANK YOU

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