Law of Contract

Contract

Contract - All Agreement enforceable by Law is a Contract.

Enforceable by Law – Aggrieved party can approach Court of Law.

Unenforceable Agreements

Unenforceable Agreements

Agreements which are not enforceable by law is not contract.Social Agreements are not contract. Example :

A invites B for a dinner and B agreed – But B has failed to attend the dinner. A cannot have any legal remedy against B on ground of not attending the dinner.

Essential Conditions of Valid Contract

Section 10 of the Indian Contract Act, 1872 contains essential conditions of a Valid Contract.

1. Agreement must be between at least two partiesOffer from party and acceptance by the other party.Example : A makes an offer for lease of site to HPCL and HPCL accepts the offer. Contract is concluded.

When the file note is duly approved by the Management RO should immediately sent acceptance letter to the Lessor.

Essential Conditions of Valid Contract

2. Between Two Competent Persons

As per Section 11 of the Act, the following persons are not competent to contract: -

A. Minor – Not attained the age of 18 years as per Majority Act, 1875.

When a Guardian is appointed by the Court, age of majority attains at 21 years of age.

Contract with a minor is void.

Agreement

Void Agreement Agreements not enforceable by Law.

Voidable Agreement

Agreement which can be avoidable at the option of one of the partiesExample – When an agreement is obtained by coercion (force), the Agreement is voidable by the person against whom force is enforced.

Agreement

Unsound Mind

For Valid Contract persons should have sound mind – when a person is capable of understanding and making rational judgment of the implications of the Agreement, such person is having sound mind.

Agreement

ConsiderationIt means something in return for the promise. A promise to sell his house to B for Rs.10 lakhs. A’s consideration is Rs.10 lakhs and B’s consideration is the house.

Consideration is one of the essential conditions of a valid contract.

Subject to certain exceptions , an Agreement without consideration is void.Example: A and B create a Trust for the benefit of C. Though C has not paid any consideration for the agreement between A and B, C can have valid claim for obtaining the benefits conferred upon him.

Agreement

Under certain circumstances Agreement without consideration is valid

Example :

A. When Sale Deed is made between parties of near relation on account of natural love and affection.

B. Promise to compensate a person who has already voluntarily done something for the Promisor.

Example: A voluntarily finds the lost Dog of B. B promise to pay a certain amount. A can enforce the promise though there is no consideration (finding of dog was voluntary action)

Consideration need not be adequate

Contract is valid even if consideration is inadequate.

Parties are free to make terms of the contract

Court will not look into whether consideration is too low for treating the contract as valid.

When consideration is too low, Court may take into consideration whether consent was free or not.Example :

A agrees to sell his house worth Rs.10 lakhs for Rs.1 lakh. Later, A argues that his consent was not freely given Inadequacy of consideration is a fact which Court takes into account to decide whether consent was free or not.

Free Consent

Free Consent is another essentials of valid contract.

Consent is said to be free when it is not caused by

Coercion - Coercion exists when a person commits or threatens to commits any act forbidden by Indian Penal Code.Example :

A threatens to shoot B, if B does not agree to sell his property to A at a stated price.

Free Consent

(b) Undue influence -

Relationship between the parties are such that one of the party is in a position to dominate the will of the other.

Person uses his position to obtain consent of the other.

Example of relationships :

Landlord and tenant, principal and agent, doctor and patient, parent and child etc.

Free Consent

(c) Fraud -Fraud takes place under the following circumstances:-

(i) A person makes any statement or fact which is not true and he does not believe it as true.(i.e. if a person believes anything as true which is really not so, such statement is not fraud).

(ii) Concealment of any fact by a person having knowledge of it.(Dealership matter – non disclosure of employment /existing petroleum Dealership etc.)

(iii) Promise made without any intention to perform it(Ex. A person takes a loan when he is insolvent.)

Free Consent

(d) Mis-representation and Fraud -When a person makes a false statement believing it as true, it is misrepresentation.

When a person makes a false statement with the intention to deceive the other party, it is fraud.

(e) Mistake : Parties enter into agreement under misunderstanding or misapprehension of some fact.

There is no meeting of minds of the parties.

Free Consent

When consent to an Agreement is caused by coercion, undue influence, fraud or misrepresentation, the contract is voidable at the option of the party whose consent was so caused.

When the both the parties in a contract are under mistake as to the matter of fact, contract is void.Example : A agrees to buy a House from B. Unknown to both the parties the house was destroyed due to fire. Contract is void.

When only one of the parties in a contract is having mistake, contract is not affected – otherwise parties will try to avoid contract under this pretext.

Agreement restraining Legal proceedings

If one party is absolutely debarred from enforcing his rights through legal proceedings, such agreement is void.

Exception :

Contract for referring the matter for Arbitration is valid.

Where two Courts are competent to deal with the case, parties can choose one of the Court and state the same in the Agreement.

Agreement limiting time for a legal action which is less than the time limit prescribed under Limitation Act.

Privity of Contract

As per this doctrine, person who are parties to the contract alone can enforce the contract.

Stranger cannot enforce a Contract

Promissory Estoppel

A person making the promise or representation becomes bound by the same, if other person has acted on the faith of such promise or consideration.