Law of Contract PDF

# 1 LAW OF CONTRACT ## Introduction The Indian Contract Act, 1872 is an act which specifies and deals with the principles of the Law of Contract. This Act came into force from the 1st day of September, 1872. It extends to the whole of India except to the State of Jammu and Kashmir. The Act was pass...

# 1 LAW OF CONTRACT ## Introduction The Indian Contract Act, 1872 is an act which specifies and deals with the principles of the Law of Contract. This Act came into force from the 1st day of September, 1872. It extends to the whole of India except to the State of Jammu and Kashmir. The Act was passed by British India and is based on the principles of English Common Law. This act describes different stages in the formation of a contract, its performance, essential elements, breach of contract and remedies for the breach of contract. The act deals with a number of limiting principles subject to which the parties to the contract may create certain rights or duties for themselves. ## Contracts: The Agreement with Law Section 2(h) defines "Contract as an agreement enforceable by law". - A Contract is an agreement; an agreement is a promise and a promise is an accepted proposal. - An Agreement which is legally enforceable alone is a contract. If we decode the above definition, it is very important to understand three terms - Agreement - Promise - Accepted Proposal i.e., Offer and Acceptance. ## (a) Agreement Section 2(e) of the act defines the term 'Agreement' as 'every promise or every set of promises forming consideration for each other'. An agreement is a promise or a commitment or set of reciprocal promises or commitments. An agreement involves an offer or proposal by one person and acceptance of such offer or proposal by another person. In order to constitute a contract, there must be an agreement in first place. An agreement in turn is composed of two elements- offer and acceptance. The two important elements of agreement are- - Plurality of person : There must be at-least two parties- one making the offer and another accepting it. A person cannot enter into agreement with himself or with an inanimate object. - Consensus ad idem: The promisor and promise of the agreement should have agreed in same sense & on same thing. There should be meeting of minds. An agreement consists of promises between the two parties. For forming a contract, an agreement must have the following elements- - Two or more parties. - Offer and acceptance. - Intention to create legal relationship. - Lawful object and consideration. - Capacity and competency of the parties. - Free and genuine consent - Agreement must not be void or declared void by law. - Possibility of performance. ## (b) Promise Section 2(b) defines term Promise i.e., “When a person to whom proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a promise". - Offer + Acceptance = Promise - Promise + Consideration = Agreement - Agreement + Enforceable by law = Contract or Voidable Agreement - Agreement + Not Enforceable by law = Void Agreement ## (c) Offer or Proposal Section 2(a): 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 either to such act or abstinence, he is said to make a proposal; The person making the proposal is called the "promisor", and the person accepting the proposal is called “promisee” ## Essentials of valid offer - It may be express or implied ## Example: 1. M says to N that he will sell his motorcycle to him for Rs.40,000. It is an express offer. 2. A railway coolie carries the luggage of B without being asked to do so B allows him to do so. It is an implied offer. ## 2. It must create legal relation ## Example: 1. A invites B to dinner. B accept the invitation. It does not create any legal relations, so there is no agreement. ## 3. It must be definite & clear ## Example: 1. A has two motorcycles. He offers B to sell one motorcycle for Rs.27, 000. It is not a valid offer because it is not clear that which motor cycle A wanted to sell. ## 4. It is different from invitation to offer ## Example: 1. Quotations, catalogues of prices, display of goods with price issue of prospectus by companies are examplesof invitation to offer. ## 5. It may be specific or general ## Example: 1. M makes an offer to N to sell his bicycle for Rs.800, itis a specific offer. In this case, only N can accept it. ## 6. It must be communicated to the offeree ## Example: 1. A without knowing that a reward has been offered for the arrest of a particular criminal, catches the criminal and informs the police. A cannot recover the reward as he was not aware of it. ## 7. It should not contain negative condition ## Example: 1. A wrote to B offering to sell his book for Rs.500 adding that if he didn't reply within 5 days, the offeree would be presumed to have been accepted. There is no agreement b/c such condition can't be imposed on the offeree. It is only a one-sided offer. ## Invitation to offer An invitation to offer is an act before an offer, in which one person induces another person to make an offer to him, it is known as invitation to offer. When appropriately responded by the other party, an invitation to offer results in an offer. It is made to the general public with intent to receive offers and negotiate the terms on which the contract is created. ## Examples - Menu card of a restaurant showing the prices of food items. - Railway time table on which the train timings and fares are shown. - Government tender ## Types of offer There are following types of offer: - General offer: The type of offer which is made to the public at large. - Specific offer: The type of offer made to a particular person. - Cross offer: When the parties to the contract accept each other's offer in ignorance of the original offer, it is known as the cross offer. - Counter offer: This is a type of offer in which the offeree does not accept the original offer, but after modifying the terms and conditions accept it, it is termed as a counter offer. - Standing offer: An offer which is made to public as a whole as well as it remains open for a specific period for acceptance it is known as standing offer. ## Lapse and Revocation of Offer An offer lapses after stipulated or reasonable time. An offer lapses by not being accepted in the mode prescribed, or if no made is prescribed, in some usual and reasonable manner. An offer lapses by rejection. An offer lapses by the death or insanity of the offeror or the offeree before acceptance. An offer lapses by revocation - Revocation by non- fulfillment of a condition precedent to acceptance. - An offer lapses by subsequent illegality or destruction of subject matter ## Acceptance According to Section 2(b), "When the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted. ## Essentials of valid acceptance - Acceptance must be absolute and unqualified - It should be communicated to the offeror. - Acceptance must be in the mode prescribed. - Acceptance must be given within a reasonable time before the offer lapses - Acceptance by the way of conduct. ## Mere silence is no acceptance. ## Types of Acceptance An acceptance may be conditional, express, or implied. ## Conditional Acceptance A conditional acceptance, sometimes called a qualified acceptance, occurs when a person to whom an offer has been made tells the offeror that he or she is willing to agree to the offer provided that some changes are made in its terms or that a condition or event occurs. This type of acceptance operates as a counteroffer. A counter offer must be accepted by the original offeror before a contract can be established between the parties. ## Express Acceptance An express acceptance occurs when a person clearly and explicitly agrees to an offer or agrees to pay a draft that is presented for payment. ## Implied Acceptance An implied acceptance is one that is not directly stated but is demonstrated by any acts indicating a person's assent to the proposed bargain. An implied acceptance occurs when a shopper selects an item in a supermarket and pays the cashier for it. The shopper's conduct indicates that he or she has agreed to the supermarket owner's offer to sell the item for the price stated on it. ## Lawful Consideration According to Section 2(d), Consideration is defined as "whenat the desire of the promisor, the promisee has done or abstained from doing, or does or abstains from doing, or promises to door abstain something, such an act or abstinence or promise is called consideration for the promise." Consideration means to do something in return. In short, consideration means quid pro quo i.e. something in return. An agreement must be supported by a lawful consideration on both sides. Essentials of valid considerations are: - It must move at the desire of the promisor. An act constituting consideration must have been done at the desire or request of the promisor. - Consideration may move from the promisee or any other person. Under Indian law, consideration may be from the promisee of any other person i.e. even a stranger. - Consideration must be an act, abstinence or a returned promise - Consideration may be past, present or future. - Consideration must be real. - Consideration must be something which the promiser is not already bound to do. - Consideration need not be adequate ## Essentials of Valid Contract /Pillars of Contract : According to Sec. 10, "All agreements are contract if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object and are not expressly declared to be void.” Thus, section 2(h) and sec. 10 of the act state that there are some essential elements of a valid contract. If any of these elements is not satisfied by an agreement, it will affect the validity and will not form a valid contract. On analysing the content of Sec.10, it is revealed that the following are the essentials of a valid contract:- - Offer and acceptance In a contract, there must be at least two parties one of them making the offer and the other accepting it. There must thus be an offer by one party and its acceptance by the other. The offer when accepted becomes agreement. - Legal relationship Parties to a contract must intend to constitute legal relationship. It arises when the parties know that if any one of them fails to fulfil his part of the promise, he would be liable for the failure of the contract. If there is no intention to create legal relationship, there is no contract between parties. - Consensus-ad-idem The parties to an agreement must have the mutual consent i.e. they must agree upon the same thing and in the same sense. This means that there must be consensus ad idem (i.e. meeting of minds). - Competency of parties The parties to an agreement must be competent to contract. In other words, they must be capable of entering into a contract. According to Section 11 of the Act, "Every person is competent to contract who is of the age of majority. According to the law to which he is subject to and who is of sound mind and is not disqualified from contracting by any law to which he is subject." ## Thus, according to Section 11, every person with the exception of the following is competent to enter into a contract:- - A minor - According to section 3 of the Majority Act 1857 & Amendment Act 1999, 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. - A person of unsound mind, As per section 11 of the contract Act, for a valid contract it is necessary that each party to it must have a "sound mind." ## What is a Sound Mind? According to Sec. 12 of the Contract Act "A person is said to be of sound mind for the purpose of making a contract, If, at the time when he makes it, he is capable of understanding it & of forming a rational judgement as to its effects upon his interest." According to this section therefore the person entering into the contract must be a person who understands what he is doing & is able to form a rational judgement as to whether what he is about to do is to his interest or not. The section further states that : - "A person, who is usually of unsound mind, but occasionally, of sound mind, may make a contract when he is of sound mind." Thus, a patient in a lunatic asylum who is at intervals of sound mind may contract during those intervals. - "A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when of unsound mind." ## 5. Lawful consideration Consideration is known as 'something in return'. It is also essential for the validity of a contract. A promise to do something or to give something without anything in return would not be enforceable at law and, therefore, would not be valid. Consideration need not be in cash or in kind. A contract without consideration is a 'wagering contract' or 'betting'. Besides, the consideration must also be lawful. ## 6. Lawful objects According to Sec. 10, an agreement may become a valid-contract only, if it is for a lawful consideration and lawful object. According to Sec. 23, the following considerations and objects are not lawful - - If it is forbidden by law; - If it is against the provisions of any other law; - If it is fraudulent; - If it damages somebody's person or property; or - If it is in the opinion of court, immoral or against the public policy. ## 7. Agreement not expressly declared void An agreement to become a contract should not be an agreement which has been expressly declared void by any law in the country, as it would not be enforceable at law. Under different sections of the Contract Act, 1872, the following agreements have been said to be expressly void, - Agreements made with the parties having no contractual capacity, e.g. minor and person of unsound mind (Sec. 11) - Agreements made under a mutual mistake of fact (Sec. 20) - Agreements with unlawful consideration or object (Sec. 23) - Agreements, whose consideration or object are unlawful in part (Sec. 24) - Agreements having no consideration (Sec 25) - Agreements in restraint of marriage (Sec. 26) - Agreements in restraint of trade (Sec. 27) - Agreements in restraint of legal proceedings (Sec. 28) - Agreements, the meaning of which is uncertain (Sec. 29) - Agreements by way of wager (Sec. 30) - Agreements to do impossible acts (Sec. 56) ## 8. Certainty and possibility of performance Agreements to form valid contracts must be certain, and possible and they should not be uncertain, vague or impossible. ## 9. Legal formalities The agreement may be oral or in writing. When the agreement is in writing, it must comply with all legal formalities as to attestation, registration. If the agreement does not comply with the necessary legal formalities, it cannot be enforced by law. ## 10. Free consent Another essential of a valid contract is the consent of parties, which should be free. Under Sec. 13, “Two or more parties are said to consent, when they agree upon the same thing in the same sense." Under Sec. 14, the consent is said to be free, when it is not induced by any of the following: - ## i. Coercion (Section 15): "Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code under(45,1860) or the unlawful detaining, 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. For example, A threatens to shoot B if he doesn't release him from a debt which he owes to B. B releases A under threat. Since the release has been brought about by coercion, such release is not valid. ## ii Undue influence (Section 16) : “Where a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it, or on the evidence, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other." ## iii. Fraud (Section 17) : “Fraud” means and includes any act or concealment of material fact or misrepresentation made knowingly by a party to a contract, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract. Mere silence is not fraud. A contracting party is not obliged to disclose each and everything to the other party. There are two exceptions where even mere silence may be fraud, one is where thereis a duty to speak then keeping silence is fraud or when silence is in itself equivalent to speech, such silence is fraud. ## Effect of Fraud: A party which has been induced to enter into a contract by fraud, has the following remedies: - It can avoid the performance of the contract being voidable at its option. - It can ask for restitution insists that the contract shall be performed. - The aggrieved party can also sue for damages ## iv. Misrepresentation (Section 18): "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". ## Example: X learns from A that Y would be director of a company to be formed. X tells this to B in order to induce him to purchase shares of that company & B does so. This is misrepresentation by X, though he believed in the truthiness of the statement & there was no intention to deceive, as the information was derived not from Y but from A & was mere hearsay. ## Essentials of Misrepresentation - There should be a representation, made innocently, with an honest belief as to its truth & without any desire to deceive the other party, either expressly or impliedly. - The representation must relate to facts material to the contract & not to mere opinion or hearsay. - The representation must be or must have become untrue. - The representation must have been instrumental in inducing the other party to enter into a contract ## v. Mistake of fact (Section 20) : “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". A party cannot be allowed to get any relief on the ground that he had done some particular act in ignorance of law. Mistake may be bilateral mistake where both parties to an agreement are under mistake as to the matter of fact. The mistake must relate to a matter of fact essential to the agreement.