contract act

Law of Contract CHAPTER 3

Business Law for Managers P.K. Goel Biztantra Copyright©2010, P.K. Goel

"NO CAUSE OF ACTION ARISES FROM A BARE PROMISE." - LEGAL MAXIM

CHAPTER OBJECTIVES After reading this chapter, you should be able to understand: • The need for the law of contract. • Basis and extent of the law of contract. • Meaning of a contract. • What is an agreement? • What is an enforceability of agreement? • Proposal (offer), its meaning and essentials, Legal rules as to valid • offer and lapse and revocation of proposal. • Acceptance, its meaning and essentials. • Communication of Proposal, Acceptance and Revocation. • Consideration, its meaning and essentials. • Capacity of parties: • Consent and free consent: • Legality of object and Consideration. • Expressly declared void agr~ement. • Distinctions between insurance .and wagering agreements. • Contingent Contract, its meaning and essentials. • Quasi Contract, its meaning and kinds. • Distinction between Contract and Quasi-Contract. • Performance of Contracts. • Discharge of Contract, its meaning and modes. • Remedies for breach of Contract. • Indemnity and Guarantee, Distinction between Indemnity and Guaranlll

.:. Discharge of surety from liability. • Bailment, its meaning, essential features:


3.1 INTRODUCTION

The law of contract is the basis upon which the super structure of all business is built. It affects every person in one way or the other, as all of us enter in! some kind of contract every day. All contracts are based on agreements whit are either express or implied. Everyone of us enters into a number of contract almost everyday. Most of the time we do so without realising what we are doing from the view point of law. A person seldom realises that when he gives clothe for drycleaning, or when he buys milk, bread or biscuits, or when he goes to auditorium to see a movie, he is entering into a contract. In business transaction normally first promises are made followed by performance. If parties were free to go back on their promises without incurring any liability it would be impossible to carryon any trade, industry or commerce.


3.2 BASIS AND EXTENT OF THE LAW OF CONTRACT

In India, the law of contract is contained in the Indian Contract Act, 1872, here in after referred to as the Act. It extends to whole of India except the State of J&K and came into force on the first day of September, 1872. The Act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate Acts which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance etc.

3.3 Meaning of Contract

The word 'contract' is derived from the Latin 'Contractum' meaning drawing together According to the Act, "An Agreement enforceable by law is- a Contract"l. Some authors have defined contract in the following words: "Every agreement and promise enforceable at law is a contract".

-Sir Federick Pollock


3.4 WHAT IS AN AGREEMENT?

According to the Act, "Every promise and every set of promises forming the consideration for each other is an agreement."2

Now the question is, What is Promise? According to the Act" A proposal when accepted becomes a promise"." Example:

Ram offers to sell his car to Shyam for Rs. 2,00,000. Shyam accepts the offer.

This offer after acceptance becomes promise and this promise is treated as an agreement between Ram and Shyam.

Thus an agreement consists of a proposal (offer) by one party and its acceptance by the other. In the form of an equation it can be shown as under:

Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer)


3.5 WHAT IS AN ENFORCEABILITY OF AGREEMENT?

An agreement is enforceable by law if it creates some Legal Obligation. In other words, the parties to an agreement must be bound to perform their promises. In case of social or domestic agreements, the usual presumption is that the parties do not intend to create legal relations. Example: Madhur invites his friend Vidur to a dinner and Vidur accepts the invitation. If Vidur fails to turn up for dinner, Madhur cannot go to the Court to claim his loss.

In commercial or business agreements the usual presumption is that the parties intend to create legal relations. Example: Vikreta offers to sell his car to Kreta for Rs. 1 lakh. Kreta accepts the offer. Such an agreement is a contract because it creates legal obligation i.e. a duty enforceable by law.

From this, it will be clear that all contracts are agreements, but all agreements are not contracts. Salmond has rightly observed: "The Law of Contracts is not the whole law of agreements, nor is it the whole law of obligations. It is the law of those agreements which create obligations and those obligations which have their source in agreements."


3.6 ESSENTIAL ELEMENTS OF A VALID CONTRACT

We have seen that a contract is an agreement enforceable by law. To be enforceable by law, an agreement must possess the essential elements of a valid contract. The Act (sections 10, 29 and 56) provides that all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared to be void, and where necessary, satisfy the requirements of any law as to writing or registration.

The essential elements of a valid contract are the following:

a. Proposal (offer) and Acceptance.

b. Intention to create Legal Relations.

c. Lawful Considerations.

d. Capacity of Parties.

e. Free Consent.

f. Lawful Object.

g. Writing and Registration.


3.7 CLASSIFICATION OF CONTRACTS 3.7.1 On the/basis of enforceability

a. Valid Contracts: Contracts which satisfy all the essential elements of a valid contract;" are enforceable in a court of law.

b. Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable." A void contract is a nullity from its inception. No rights accrue there under.

c. Voidable Contract: 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.'! A contract is voidable when one of the parties to the contract has not exercised his free consent. One of the essential elements of a formation of a contract, i.e. free consent. All voidable contracts are those which are induced by c<:,undue influence, fraud or misrepresentation.

d. Illegal contracts: It is contrary to law and hence void abinitio. Business Law for Managers P.K. Goel Biztantra Copyright©2010, P.K. Goel

3.7.2 ON THE BASIS OF MODE CREATION

a. Express contract: When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation, the contract is express.

b. Implied contract: The terms of a contract are inferred from the conduct or dealings between the parties. When the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Such an implied promise leads to an implied contract. Example: A boards a bus. It is implied from his conduct that A has entered into an implied promise to purchase a ticket ..

c. Quasi contract: Constructive or Quasi contracts arise out of obligations enjoyed by one person from the voluntary acts of the other which are intended to be performed only on the happening of some future uncertain event.


3.7.3 ON THE BASIS OF THE EXTENT OF EXECUTION

a. Executed contract: Where both the parties have performed their obligations, it is an executed contract. Even when one party to the contract has performed his share of the obligation, the contract is executed, though the other party is still under an outstanding obligation to perform his part of the promise.

b. Executory contract: Where neither party to the contract has performed his share of the obligation, i.e. both the parties have yet to perform their promises, the contract is executory.

c. Contingent contract: A contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening of some future uncertain event.


3.8 PROPOSAL (OFFER) AND ACCEPTANCE

3.S.1 Meaning of Proposal

'Proposal' of the Act is synonymous with the term 'offer' of the English Law. The words 'proposal' and 'offer' are used inter-changeably.

"When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a 'proposal' .15 The first step towards creating a contract is that one person shall signify or make a proposal to the other, with a view to obtaining the assent or acceptance of that another to that act or abstinence. A proposal is then said to be made.

In order to constitute a contract, a person should offer to do something. This offer must be sufficiently communicated to the person for whom he intends to do something with a view to obtaining his assent to it. The person who makes such an offer or proposal is called the 'Offerer' or 'Proposer," the person to whom the proposal or offer is made is called the 'prop osee ' or 'offeree' and the person accepting it is called the 'promisee' or 'acceptor'.


3.8.2 ESSENTIALS OF A PROPOSAL

The definition of the word proposal given in the Act reveals the following three essentials of a 'proposal'.

a. The expression of willingness: to do or to abstain from doing something.

b. This expression must be to another person.

c. This must be made with a view to obtaining the assent of the other person.


3.8.3 LAPSE AND REVOCATION OF PROPOSAL

A proposal lapses and becomes invalid in the following circumstances:

a. An offer lapses after stipulated or reasonable time ."

b. A proposal lapses by not being accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable rnarmer.P"

c. A proposal lapses by rejection by the proposee ..

d. A proposal lapses by the death or insanity of the proposer or the prop osee before acceptance.

e. A proposal lapses by revocation by the -proposer before acceptance."

f. Revocation by non-fulfillment of a condition precedent to acceptance."

g. A proposal lapses by subsequent illegality or destruction of subject matter.


3.8.4 ACCEPTANCE

A contract as already observed, emerges from the acceptance of an offer. Acceptance is defined when the person to whom a proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal when accepted becomes a promise." The person making the proposal is called the Promisor, and the person accepting the proposal is called the Promisee." Performance of the conditions of a proposal, the acceptance of any consideration for reciprocal promise which may be offered with a proposal is an 'acceptance' of the proposal (Sec. 8). An acceptance need not always be expressed in words. Performance of the conditions of a proposal is an acceptance of the proposal. In order that there must be a binding contract, there must be absolute and unconditional acceptance of the terms of a proposal.


3.9 CONSIDERATION

3.10.1 Meaning of Consideration

Consideration is one of the essential elements of a valid contract. When a person promises to do something, he must get 'something' in return. If he does not get 'something' in return, the contract is, generally, not valid. This 'something' is known as consideration. In other words, consideration is the price for which the promise of the other party is bought. The Act defines consideration as "when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise"27


3.9.2 ESSENTIALS OF A VALID CONSIDERATION

The essentials of consideration are as follows:

a. Consideration must move at the desire of the promisor: The act or abstinence forming the Consideration must be done at the desire or request of the promisor. If it is done at the instance of the third party or- without the desire of the promisor it is not consideration. Example: Amar sees Bhushan's house on fire and helps in extinguishing it. Amar cannot demand payment for his services- because Bhushan never asked him to come for help.

b. Consideration may move from the promisee or any other person: The consideration need not move from the promisee alone but may proceed from any third person. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract. This is also called as 'Doctrine of Constructive Consideration' . For example: X by a deed of gift transferred


a. certain property to her daughter Y with a direction that Y should pay Z an annuity. Y executed a deed in writing in favour of Z an agreed thereby to pay the annuity. Later Y refused to pay annuity c the plea that no consideration had moved from Z. It was held that was entitled to maintain suit because a consideration need not necessari. move from 'the promisee, it may move from any other person (i.e. X in t~ present case)."

b. Consideration may be past, present or future.

c. Consideration must be 'Something of Value: The consideration need not b adequate to the promise but it must be of some value in the eye of th law.

d. Consideration must be legal.

e. Consideration may be doing something, or abstaining from doing something (positiv or negative act) or a promise to do something.


3.9.3 NO CONSIDERATION, NO CONTRACT The general rule is that "an agreement made without consideration is void". But there are a few exceptions to this rule. These exceptions are as follows:

a. Agreement made on account of natural love and affection: An agreement mad without consideration is enforceable if, it is

i. made on account of natural love and affection.

ii. between parties standing in a near relation to each other. iii. expressed in writing, and

iv. registered as per law.

b. Agreement to Compensate for past voluntary service: Example: A finds B'! purse and gives it to B. B promises to give A Rs. 100. This is a Contract.

c. Agreement to pay a time barred debt: Where there is an agreement, made ir writing and signed by the debtor or his authorised agent, to pay wholly 0: in part a debt barred by the law of limitation, the agreement is valid ever though it is not supported by any consideration.


3.10 CAPACITY OF PARTIES

3.10.1 Who is competent to Contract?

According to the Act31 every person is competent to contract, who: is of the age of majority, according to the law to which he is subject, and is of sound mind, and is not disqualified from contracting by any law to which he is subject.

3.10.2 Who is a Minor?

As per the Indian law." a person domiciled in India, who is under 18 years of age is a minor. Accordingly every person who has completed the age of 18 years becomes a major. Only when a person is under the guardianship of court of wards or under a person appointed under the Guardians and Wards Act, then he attains majority on completion of 21 years of age.


3.10.3 POSITION OF AGREEMENTS BY MINOR

The law regarding minor's agreements may be summed up as under:

a. An agreement by a minor is absolutely void and inoperative as against him: Law protects the rights of the minors, because their mental faculties are not mature- they do not possess the capacity to judge what is good or bad for them. In the leading case of Mohori Bibi vs. Dharam das Chose." a minor executed a mortgage for Rs. 20000 and received Rs. 8000 from the mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and for sale of the property in case of default. It was held that an agreement by a minor was absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor could he have the minor's property sold under his mortgage.


a. No restitution: Except in certain cases. A minor cannot be ordered to make compensation for a benefit obtained under a void agreement. However under the Specific Relief Act, 1963,34 a minor may be asked to restore any benefit which he may have received from other party.

b. Beneficial agreements are valid contracts: Any agreement which is of some benefit to the minor and under which he is required to bear no obligation, is valid. In other words, a minor can be a beneficiary.

c. No ratification on attaining the age of majority: Ratification means the subsequent adoption and acceptance of an act or agreement. A minor's agreement being a nullity and void ab-initio, has no existence in the eyes of law. It cannot be ratified by the minor on attaining the age of majority.

d. The rule of estoppels does not apply to a minor: A minor is not stopped from pleading minority in a suit against him even in those cases where he had earlier misrepresented himself as a major to the other party.


f. Minor's liability for necessaries: Minor's property is liable for reimbursing tl person who has supplied necessaries to a minor (Sec. 68).

g. Specific Performance: Specific performance means the actual carrying out the contract as agreed. Only a contract entered on behalf of a minor, by h guardian is binding on the minor and can be specifically enforced by or agai~ the minor. Other than this, no other minor's agreement can be ordered Ii a specific performance.

h. Minor Agent: A minor can be an agent." He binds his principal by his ac but is not liable to him in any manner for losses suffered by the principia

i. Minor Partner: A minor being incompetent to contract cannot be a partner! a partnership firm. But he can be admitted as a partner for the benefits ~ partnership (only for sharing of profits and not losses).

j. Minor and Insolvency: A minor cannot be declared insolvent as he is not competer to contract.


3.10.4 WHAT IS A 'SOUND MIND'? The. Act provides" A person is said to be of sound mind for the purpose of makirq a contract, if at the time when he makes it, he is capable of understanding it ana of forming a rational judgement as to its effects upon his interests. A person who is usually of unsound mind but occasionally of sound mind may make a contract when he ~s of sound mind. A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind .. "36

3.10.5 Position of Agreement with persons of Unsound mind

Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the period when he is of sound mind.

Idiots: An idiot is a person who has completely lost his mental powers. Idiocy is permanent whereas lunacy denotes peri odical insanity with lucid intervals. An agreement of an idiot is void.


3.10.6 PERSONS DISQUALIFIED BY LAW

The third type of incompetent persons are those who are (disqualified from contracting by any law to which they are subject'. They are:

a. Alien Enemies: An alien (citizen of a foreign state) is a person who is not a citizen of India. When there is a war between India and another country, that country's citizen becomes an alien enemy and cannot enter into contract.

b. Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those contracts in our courts but they cannot be sued in our courts without the sanction of the Central Government unless they choose to submit themselves to the jurisdiction of our courts.

c. Convict: A convict is one who is found guilty by a court and is undergoing sentence of imprisonment. During the period of his imprisonment, he is incompetent to contract and also to sue on contract made before conviction.


d. Company or Corporation: A company / corporation is an artificial person created by law. It cannot enter into contract outside the powers, conferred upon it by its Memorandum of Association (object clause) or by the.provisions of its Special Act.

e. Insolvents: When a person's debts exceed his assets, he is adjudged insolvent and his property stands vested in the Official Receiver or Official Assignee appointed by the court. Such a person cannot enter into contracts relating to his property.


3.11 FREE CONSENT

3.11.1 Meaning of Consent

Consent means an act of assenting to an offer. Two or more persons are saia consent when they agree upon the same thing in the same sense."

3.11.2 Free Consent

Consent is said to be free when it is not caused by: Coercion, or Undue Influence, or Fraud, or Misrepresentation, or Mistake."?

3.11.3 Effect of absence of free consent

When there is consent but it is not free (caused by coercion, undue influena fraud or misrepresentation), the contract is voidable, at the option of the part whose consent was so caused. When consent is caused by 'bilateral mistake' to a matter of fact essential to the agreement, the agreement is void.


3.11.4 COERCION

Coercion means compelling a person to enter into a contract under a pressill or a threat. The Act defines 'Coercion' as follows:

"Coercion is the committing or threatening to commit, any act forbidden by~ Indian Penal Code, or the unlawful detaining or threatening to detain, any proper to the prejudice of any person whatever, with the intention of causing any per5(J to enter into an agreement."40

Example: A Hindu widow was forced to adopt a boy under threat that her husbard dead body would not be allowed to be removed if she does not adopt the b~ She adopted the boy. Here, Widow's c~msent has been obtained by coercion becas preventing the dead body from being removed for cremation is an offence und! section 297 of the Indian Penal Code. (Ranganayakamma v. Alwar Setti).


3.11.5 ESSENTIALS OF COERCION

I To constitute coercion the following are the essential features:

a. Coercion may proceed from any person and it is not necessary that it mus be exercised by a party to the contract.

b. It may be directed against any person and not necessarily against the oth1: contracting party.

c. Coercion may be an act causing physical hardship or unlawful detention of property belonging to another. It may also include those cases where the party is subjected to mental agony.


3.11.6 UNDUE INFLUENCE

The Act defines the term 'Undue Influence' as follows:

"A contract is said to be induced by "undue 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.r""

The Act further lays down that a person is deemed to be in a position to dominate the will of another.

a. If he holds a real or apparent authoring over the other (e.g., the relationship between father and son, or master and servant).

b. If he stands in a fiduciary relation to the other (e.g., the relationship between doctor and patient, spiritual guru and disciple, lawyer and client).

c. 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 (e.g., old illiterate persons)."


3.11.7 FRAUD

According to the Act, "Fraud means and includes any of the following acts committed by the party to a contract, or with his connivance, or by his agents, with intent to deceive another party there to or his agent, or to induce him to enter into t contract:

a. The suggestion as a fact, of that which is not true, by one who does not belie, it to be true:

b. The active concealment of a fact by one having knowledge or belief of the fan

c. a promise made without any intention of performing it;

d. any other act intended to deceive; and

e. any such act or ommission as the law specially declares to be fraudulent."


3.11.8 ESSENTIAL ELEMENTS

Of fraud are as follows:

a. The fraud must be committed by a party to a contract or by anyone with his connivance or by his agent.

b. There must be a false representation and it must be made with the knowledge of its falsehood.

c. The representation must relate to a fact.

d. The fraud must have actually deceived the other party.

e. The party acting on the representation must have suffered loss.


3.11.9 MISREPRESENTATION

The Act, defines the term 'misrepresentation' as follows:

"Misrepresentation means and includes:

a. the positive assertion, in a manner not warranted by the information to the person making it, of that which is not true, though he believes it to be true;

b. any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him;

c. causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement."44


3.11.10 ESSENTIAL ELEMENTS

Of misrepresentation are as follows:

a. By a party to a contract: The representation must be made by a party to a contract or by anyone with his connivance or by his agent.

b. False representation: There must be a false representation and it must be made without knowledge of its falsehood.

c. Representation as to fact: The representation must relate to a fact. In other words, a mere opinion, a statement of expression or 'intention does not amount to misrepresentation.

d. Object: The representation must be made with a view to inducing the other party to enter into contract but without the intention of deceiving the other party.

e. Actually acted: The other party must have acted on the faith of the representation.


3.12 LEGALITY OF OBJECT AND CONSIDERATION

The object and the consideration of an agreement must be lawful, otherwise the agreement is void. According to the Act, the consideration or the object of an agreement is unlawful in the following cases:

a. If it is forbidden by law: An act, action or thing is said to be forbidden (i.e. prohibited) by law when it is punishable under any enactment. For example: Rangeela, a Hindu already married and his wife alive, entered into a marriage agreement with Kumari an unmarried girl. This agreement is void because. the second marriage is forbidden by Hindu Law.

b. If it is of such a nature that, if permitted it would defeat the provisions of any law: Such an agreement is void. For example: Nirdhan borrowed Rs. 1 lakh from Kuber and agreed not to raise any objection as to the limitation and that Kuber may recover the amount even after the expiry of limitation period (i.e., three years). This agreement is void as it defeats the provisions of Limitation Act.


c. If it is fraudulent: An agreement whose object or consideration is to defraud others, in unlawful and hence void. For example: A, Band C enter into an agreement of the division among them of gains acquired by them by fraud. The agreement is void, as its object is unlawful.

d. If it involves or implies injury to a person or property of another: If the object or consideration of an agreement is injury to the person or property of another, it is void, being an unlawful agreement. Example: An agreement to put certain property to fire is unlawful and void.

e. If the Court regards it as 'Immoral or opposed to public policy: If the object or consideration of an agreement is immoral or opposed to public policy, the agreement is void. Any agreement which interferes with marital relations of persons is regarded as immoral. Whenever an agreement is harmful to the public welfare or any established interest of society, it would be void as being against public policy.


Example -1

X gave Rs. 1 lakh to Y a married woman to obtain a divorce from her husband. X agreed to marry her as soon as she obtained a divorce. It was held that X could not recover back the amount because the agreement was void as its object was immoral.

Example - 2

A agrees to pay B, a major in the Army, Rs. 50,000 if he will assist his brother to desert the army. The object of the agreement is opposed to public policy and hence void.


3.13 VOID AGREEMENT

An agreement not enforceable by law is said to be void". Thus a void agreement does not give rise to any legal consequences and is void ab-initio.

3.13.1 Void Agreement already discussed The following type of void agreements have already been discussed:

a. Agreements by or with a person incompetent to contract. (paragraph 3.11)

b. Agreements made under a bilateral mistake of fact material to the agreement. (paragraph 3.12.15)

c. Agreements made without consideration. (paragraph 3.10)

d. Agreements the meaning of which is uncertain. (paragraph 3.6.8)

e. Agreements of which the consideration or object is unlawful. (paragraph 3.13)

f. Agreements to do impossible acts. (paragraph 3.6.9)


3.13.2 EXPRESSLY DECLARED VOID AGREEMENTS

is 'expressly declared' to be void under the Act. The following agreements have been expressly declared to be void:

a. Agreements in restraint of marriage: Every individual enjoys the freedom to marry. According to the Act "Every agreement in restraint of the marriage of any person, other than a minor, is void ".?' The restraint may be general or partial. An agreement agreeing not to marry at all, or a certain person, or a class of persons, or for a fixed period is void. A promise to marry a particular person, does not imply any restrain of marriage and is a valid contract. For . example: Preeti agrees with Sambandh for good consideration that she will not marry Kurup. It is void agreement.

b. Agreements in restraint of trade: The Constitution of India guarantees the freedom of trade and commerce to every citizen. According to the Act "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent, void"s2. There are some exceptions to this rule like sale of goodwill, partner's agreements, trade combinations or negative stipulations in service agreements wherein some reasonable restrictions on trade are permitted in law.


c) Agreements in restraint of legal proceedings: According to the Act'" the following agreements amount to restraint of legal proceedings and are thus void to that extent:

•Agreements restricting enforcement of rights: An agreement by which any party is restricted absolutely from enforcing his legal rights under or in respect of any contract is void to that extent. Example: A clause in a contract provided that no action should be brought upon it in case of breach. Such a clause is void because it restricts both the parties from enforcing -their legal rights.

•ii. Agreements limiting the period of limitation: An agreement which limits the time within which an action may be brought so as to make it shorter than that prescribed by the law of limitation, is void. For example: A clause in a contract provides that no action should be brought after two years. Such a clause is void because it limits the period of limitation to two years which is less than the period of limitation (i.e. three years) prescribed by the law of limitation.

•Exceptions-Agreements or clause referring the dispute to arbitration or subject to one court's jurisdiction are valid.


d) Wagering agreements: The word 'wager' means 'a bet'. A wagering agreement is an 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. Example: X promises to pay Rs. 1,000 to Y if it rained on a particular day, and Y promises to pay Rs. 1,000 to X if it did not. Such agreement is a wagering agreement and thus void ."


3.14 CONTINGENT CONTRACT 3.14.1 Meaning

"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".55 Example: A contracts to indemnify B upto Rs. 20,000 in consideration of B paying Rs. 1,000 annual premium, if B's factory is burnt. This is a contingent contract. Contracts of insurance and contracts of indemnity and guarantee are other examples of contingent contracts.

3.14.2 Essentials of Contingent Contract

The essential features of a contingent contract are as follows:

a. Dependence on a future event: The performance of a contingent contract depends upon the happening or non happening of some future event.

b. Collateral event: The event must be collateral (i.e. incidental) to the contract.

c. Uncertain event - The event must be uncertain. Business Law for Managers P.K. Goel Biztantra Copyright©2010, P.K. Goel

3.14.3 Rules regarding Contingent Contracts

a. Enforcement of contracts contingent on happening of a future uncertain. Contingent contracts to do or not to do anything if an uncertain future event happens can be enforced only when the event happens.

Illustration

A makes a contract with B to buy B's house if A survives

B. This contract cannot be enforced by law unless and until C dies in A's lifetime.

b) Enforcement of contracts on the non-happening of a future uncertain event? Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced only when the happening of the event becomes impossible, and not before.

Illustration

A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.


c. Contracts contingent on future conduct of a living person" If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under future contingencies.

lItustration

A agrees to pay B a sum of money if B marries C. C married D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B.

d) Contracts contingent on a specified event happening within a fixed time:" Contracts contingent to do or not to do anything if a specified uncertain event happens within a fixed time would become void if, at the expiration of the time fixed, such event does not happen or if before the time fixed, such event becomes impossible.

Illustration

A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.


e) Enforcement of contingent contracts on specified event not happening within a fixed time" Contingent contracts to do or not to do anything if a specified uncertain event does not happen within a fixed time, may be enforced when such event has not happened, or shall not happen within the time fixed.

Illustration

A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.


3.15 QUASI-CONTRACT

3.15.1 Meaning of Quasi-Contract A Quasi-Contract is not a contract at all because the essential elements for the formation of a contract are absent. It is an obligation imposed by law upon a person for the benefit of another even in the absence of a contract. It is based on the principle of equity, (i.e., fairness, moral justice or ethics) which means no person shall be allowed to unjustly enrich himself at the expense of another. Such obligations are called quasi-contracts or implied contracts because the outcome of such obligations resemble those created by a contract.


3.15.2 Kinds of Quasi-Contracts

The various kinds of quasi contract (or quasi-contractual obligations) are given below:

a. Claim for necessaries supplied a person incapable of contracting or on his account:

"If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person."62 [Refer to paragraphs 3.11.3(f) and 3.11.5(d)] Example: A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B's property.

b. Reimbursement of person paying money due by another, in payment of which he is interested: "A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other".63 For example: A, sub-tenant pays the arrears of rent due by the tenant to the landlord, Business Law for Managers P.K. Goel

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b. in order to save the tenancy from forfeiture. The sub-tenant is entitled to recover from the tenant, the amount paid by him to the landlord, although there is no contract between the two.

c. Obligation of person enjoying benefit of non-gratuitous act: "Where a person lawfully does anything for another person, 0r" delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or deliverer's' For example: A, a tradesman, leaves goods pay A for them.


e) Responsibility of finder of goods: "A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee".65 For example: X a guest found a diamond ring on a birthday party of Y. X told Y and other guests about it. He has performed his duty to find the owner. If he is not able to find the owner he can retain the ring as bailee.

f) Liability of person to whom money is paid, or thing delivered by mistake or under coercion: "A person to whom money has been paid, or anything delivered by mistake or under coercion, must repay or return it".66 For example:

A and B jointly owe Rs. 1000 to C. A alone pays the amount to C, and B, not knowing this fact, pays Rs. 1000 over again to C. C is bound to repay the amount to B.


3.16 PERFORMANCE OF CONTRACTS

3.17.1 Meaning of Performance

Performance of contract means fulfilling of the terms of the contract by the respective parties to the contract. The Act lays down "The parties to a contract must either perform, or offer to perform, their respective promises, unless performance is dispensed with or excused under the provisions of this Act, or of any other law". 67 It means that the performance may be either actual - by fulfilling all obligations by the parties under the contract or attempted where an offer to perform one's obligations has been made by the promise, but the performance is not complete unless the offer of performance is accepted by the promise. by law.


Promises bind the legal representatives of .the promisors in case of death of such promisors before performance, unless a contrary intention appears from the contract. The liability of the legal representative is limited to the extent of the value of the property inherited from the deceased.

Illustrations

A promises to deliver goods to B on a certain day on payment of Rs. 1,000.

A dies before that day. A's representatives are bound to deliver the goods to Band B is bound to pay Rs. 1,000 to A's representatives.

A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A's representatives or by B.


3.16.2 Who can demand performance

It is only the promisee who can demand performance of the promise. The general rule is that "a person cannot acquire rights under a contract to which he is not a party. "68

3.16.3 Who should perform the promise?

a. In case of personal contract by the promisor personally.

b. In case of non-personal contract: i. By the promisor personally.

ii. By a third person on behalf of the promisor.

iii. In the event of the death of promisor - by his legal representatives.

c) In case of Joint promisor - by the promisors jointly or third person on behalf of the promisors or their legal representatives.


3.17 REMEDIES FOR BREACH OF CONTRACT

3.17.1 Meaning of Breach of Contract

A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. In case of breach, the aggrieved party (i.e., the party not at fault) is relieved from performing his obligation and gets a right to proceed against the party at fault. As stated earlier [paragraph 3.18.2(f)] a breach of contract may either be anticipatory or actual.


3.17.2 Remedies of Breach of Contract

A remedy is the courses of action which are available to an aggrieved party for the enforcement of a right under a contract. The various remedies available are:

Rescission of Contract": Rescission means a right not to perform obligations.

In case of breach of a contract, the promisee may put an end to the contract. In such a case, the aggrieved party is discharged from all the obligations under the contract and is entitled to claim compensation for the damage which he has sustained because of the non-performance of the contract.

Suit for Damages: Damages are monetary compensation allowed for loss suffered by the aggrieved party due to breach of contract. Damages may be of five kinds:


I. Ordinary or general or compensatory damages: (i.e., damages arising naturally from the breach).

II. ii. Special damages: (i.e., damages in contemplation of the parties at the time of contract).

III. iii. Exemplary, Punitive or Vindictive damages: (i.e., damages which are in the nature 'of punishment).

IV. iv. Nominal damages: (i.e., awarded only for the namesake).

V. Liquidated damages: Means a sum fixed up in advance, which is a fair and genuine pre-estimate of the probable loss that is likely to result from the breach. _

c) Suit for Specific Performance: Means demanding the court's direction to the defaulting party to carry out the promise according to the terms of the contract. For example: X agreed to sell an old painting to Y for Rs. 50000. Subsequently X refused to sell the painting. Here, Y may file a suit against X for the specific performance of the contract. Business Law for Managers P.K. Goel Biztantra Copyright©2010, P.K. Goel

d) Suit for Injunction: Means demanding court's stay order Injunction means an order of the court which prohibits a person to do a particular act. For example: W agreed to sing at L's theatre only during the contract period. During the contract period, W made contract with Z to sing at another theatre and refused to perform the contract with L. It was held that W could be restrained by injunction from singing for Z.

e) Suit for Quantum meruit: Quantum-meruit means as much as is earned. In this suit, claim is made to compensate for the work already done. For. example: C an owner of a magazine engaged P to write a book to be published by instalrnents in his magazine. After a few instalrnents were published, the publication of the magazine was stopped. It was held that P could claim payment for the part already published.


3.18 INDEMNITY AND GUARANTEE3.18.1 Contract of Indemnity

3.18.1A Meaning

The term 'Indemnity' means to make good the loss or to compensate the party who has suffered some loss. "A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity"." For example:

A and B go into a shop. B says to the shopkeeper "Let A have the goods, I will see that you are paid". The contract is one of Indemnity.

3.18.1B Parties

The person who promises to make good the loss is called the 'Indemnifier' (promisor), and the person whose loss is to be made good is called the 'Indemnified or Indemnity holder' (promisee).


3.18.2 Contract of Guarantee 3.18.2A Meaning

"A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default"." For example: A and B go into a shop. A says to the shopkeeper, C, "Let B have the goods, and if he does not pay, I will". This is a contract of guarantee.

3.18.2B Parties to a Contract. of Guarantee

There are three parties to a contract of guarantee.

Principal debtor: The person in respect of whose default the guarantee is given is called the principal debtor. In the above example B is the principal debtor. ii. Creditor: The person to whom the guarantee is given is called the' creditor'. C is the creditor in the above said example.

iii. Surety: The person who gives the guarantee is called the 'surety'. A is the surety in the above said example.


3.20.2C Kinds of Guarantee

Guarantee may be classified under the following two categories:

Specific Guarantee: A guarantee which extends to a single debt or specific transaction is called a 'specific guarantee'. The liability of the surety comes to an end when the guaranteed debt is duly discharged or the promise is duly discharged. Continuing Guarantee: A guarantee which extends to a series of transactions is called a 'continuing guarantee'. A surety's liability continues until the revocation of the guarantee.


3.20.20 Discharge of Surety from Liability

A surety is said to be discharged when his liability as surety comes to an end. A surety is freed from his obligation under a contract of guarantee under any of the following circumstances:

a. Notice of revocation: A specific guarantee cannot be revoked once it is acted upon. But a continuing guarantee may at any time, be revoked by the surety as to future transactions by giving notice to the creditor.?'

b. Death of Sureiv": In case of a continuing guarantee the death of a surety also discharges him from liability as regards transactions after his death, unless there is a contract to the contrary.

c. Variance in terms of contract": /I Any variance made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance“.


d) Release or discharge of principal debtor?': The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act of omissions of the creditor, the legal consequence of which is the discharge of the principal debtor.

e) Arrangement by creditor with principal debtor without surety's consent": A contract between the creditor and principal debtor, by which creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contract.

f) Creditor's act or omission impairing surety's eventual remedv": If a creditor does any act which is inconsistent with the rights of the surety, or omits to do any act, which is his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged ..

g) “Loss of Securiiv": If the creditor loses (by negligence or carelessness) OJ' without the consent of the surety, parts with security given to him, the surety is discharged from liability to the extent of the value of security.


3.19 BAILMENT AND PLEDGE 3.19.1 Meaning of Bailment

The word 'Bailment' is derived from the French word 'baillier' which means to deliver. According to the Act. "A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them". 83

The person delivering the goods is called the 'bailor'. The person to whom the goods are delivered is called the 'bailee'.

3.19.2 Essential Features of Bailment

A bailment has the following characteristic features:

a. It is the delivery of movable goods.

b. The goods are delivered for some purpose.

c. Return of specific goods - The goods which form the subject matter of a bailment must be returned to the bailor or otherwise disposed of according to the directions of the bailor, after the accomplishment of purpose or after the expiry of period of bailment. Business Law for Managers P.K. Goel

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3.19.3 Kinds of Bailment

Bailment may be classified from the point of view of benefit or reward. The benefit may be exclusive to the bailor or bailee or mutual. Bailment on the basis of reward may be:

a. Gratuitous: Neither the bailor nor the bailee is entitled to any remuneration i.e. loan of book to a friend, depositing of goods for safe custody. It is for the exclusive benefit of the bailor or bailee.

b. Non-Gratuitous: Here the goods ae given for reward, remuneration or for some consideration e.g. car let out on hire, goods given for repairs or tailoring for charges.

c. Pawn or Pledge: Goods delivered to another as a security for money borrowed is called Pledge.

3.19.4 Bailment, Sale and License

In 'Sale' the ownership is transferred to the buyer whereas in the bailment the ownership in goods is not transferred.

In a contract of 'License', one party is permitted to place his goods in the premises belonging to other person. Thus in a contract of license, the goods are not delivered to the licensor, while in bailment the goods are delivered to the bailee for safe custody.


3.19.5 Duties of Bailee

His duties are as follows:

a. To take reasonable care of goods delivered to him.

b. Not to make unauthorised use of goods entrusted to him.

c. Not to mix goods bailed with his own goods.

d. To return the goods.

e. To return accretions to the goods.

f. Not to set up any adverse title.

3.19.6 Duties of Bailor

His duties are as follows:

g. To disclose faults / defects in goods bailed.

h. To repay necessary expenses in case of gratuitous bailment.

i. To repay any extraordinary expenses in case of non-gratuitous bailment.

j. To indemnify bailee.

k. To receive back the goods.


3.19.7 Rights of Bailee

His rights are as follows:

a. Enforcement of bailor's duties.

b. To deliver goods to one of several joint bailors.

c. To deliver goods, in good faith, to bailor without title.

d. Lien - is of two types - general or particular. Bailee has particular lien unless the contract provides otherwise. 'Particular lien' means the right to retain that particular property in respect of which the charge is due. 'General lien' means the right to retain all the goods of the other party until all the claims of the holder against the party are settled.

3.19.8 Rights of Bailor

His rights are as follows:

e. Enforcement of bailee's duties.

f. To terminate bailment if the bailee uses the goods wrongfully.

g. To demand return of goods at any time in case of gratuitous bailment. Business Law for Managers P.K. Goel Biztantra Copyright©2010, P.K. Goel

3.20 AGENCY

3.20.1 General

It is not always possible for a person to do everything himself, hence it becomes necessary to delegate some of the acts to be performed by another person. Such other person is called an agent.

3.20.2 Definitions of Agent and Principal

II An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal" .85 The contract which creates the relationship of 'principal' and 'agent' is called an 'agency'. For example: X appoints Y to buy ten bags of wheat on his behalf, X is the principal, Y is the agent and the contract between the two is 'agency'.


3.20.3 General rules of Agency

There are two important general rules regarding agency, viz:

What one person can himself lawfully do, can as well get it done by any other person. This rule is of course, subject to some exceptions, e.g., in case, of acts required to be performed personally like marriage.

What a person does by another, he does by himself. In otherwords the acts of the agent are, for all legal purposes, the acts of the principal.

3.20.4 Who may employ an Agent

Any person who is competent to contract may employ an agent. A minor or a person of unsound mind cannot employ an agent."

3.20.5 Who may be an Agent

The Act lays down that "as between the principal and third persons any person may become an agent";" Thus even a minor or a person of unsound mind can be appointed as agent, but in such a case the principal shall be liable.


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