Legal Aspects of Business PDF

Legal Aspect of Business DEBSL605 Edited by: Dr. Sukhpreet Kaur Legal Aspect of Business Edited By Dr. Sukhpreet Kaur  Title: LEGAL ASPECTS OF BUSINESS Author’s Name: Dr. Razia Sehdev...

Legal Aspect of Business DEBSL605 Edited by: Dr. Sukhpreet Kaur Legal Aspect of Business Edited By Dr. Sukhpreet Kaur  Title: LEGAL ASPECTS OF BUSINESS Author’s Name: Dr. Razia Sehdev Published By : Lovely Professional University Publisher Address: Lovely Professional University, Jalandhar Delhi GT road, Phagwara - 144411 Printer Detail: Lovely Professional University Edition Detail: (I) ISBN: 978-93-94068-20-9 Copyrights@ Lovely Professional University  CONTENTS Unit 1: Indian Contract Act, 1872 1 Dr. Razia Sehdev, Lovely Professional University Unit 2: The Sale of Goods Act, 1930 40 Dr. Razia Sehdev, Lovely Professional University Unit 3: The Consumer Protection Act, 2019 64 Dr. Razia Sehdev, Lovely Professional University Unit 4: Intellectual Property Rights 87 Dr. Razia Sehdev, Lovely Professional University Unit 5: The Negotiable Instruments Act, 1881 109 Dr. Razia Sehdev, Lovely Professional University Unit 6: The FEMA Act, 1999 129 Dr. Razia Sehdev, Lovely Professional University Unit 7: The Competition Act, 2002 148 Dr. Razia Sehdev, Lovely Professional University Unit 8: The Companies Act, 2013 (Preliminary) 164 Dr. Razia Sehdev, Lovely Professional University Unit 9: Company Documents 198 Dr. Razia Sehdev, Lovely Professional University Unit 10: Prospectus 223 Dr. Razia Sehdev, Lovely Professional University Unit 11: Raising of Capital 240 Dr. Razia Sehdev, Lovely Professional University Unit 12: Company Management 260 Dr. Razia Sehdev, Lovely Professional University Unit 13: Company Meetings 277 Dr. Razia Sehdev, Lovely Professional University Unit 14: Company Winding Up 292 Dr. Razia Sehdev, Lovely Professional University  Notes Dr. Razia Sehdev, Lovely Professional University Unit 01: Indian Contract Act, 1872 Unit 01: Indian Contract Act, 1872 CONTENTS Objectives Introduction 1.1 The Indian Contract Act, 1872: Introduction 1.2 Contract: Meaning and Definition 1.3 Essential Elements of a Valid Contract 1.4 Kinds of Contract 1.5 Free Consent 1.6 Discharge of Contract 1.7 Breach of Contract Summary Keywords Self-Assessment Answers for Self Assessment Review Questions Further Reading Objectives After studying this unit, you will be able to:  appraise the importance of the Indian Contract Act, 1872.  illustrate the difference between agreement and contract.  explain the essentials of a valid contract.  categorize and illustrate the various types of contract.  explain the meaning of free consent.  illustrate the situations where consent of a party to a contract is not free.  review the situations under which the consent of a party to a contract is not free and comment on its effect on the validity of the contract.  explain the meaning of discharge of a contract.  illustrate the various modes of discharge of a contract.  explain the meaning of Breach of contract.  review the remedies for the Breach of Contract.  review the relevance of the Indian Contract Act, 1872 in protecting the interests of contractual parties. Introduction The law relating to contracts is contained in the Indian Contract Act, 1872. For business executives, contract law is tremendously significant because it underlies or is related to all major areas of law affecting business.It is the most important branch of business law.It is, however, of particular importance to people engaged in trade, commerce and industry as the bulk of their business transactions are based on contracts. The law of contract is branch of law that determines the circumstances in which promises made by the parties to a contract shall be legally binding on them.Its rules define the remedies that are Lovely Professional University 1 Notes Legal Aspects of Business available in a court of law against a person who fails to perform his contract, and the conditions under which remedies are available. The law relating to contracts is contained in the Indian Contract Act, 1872. The Act deals with: a) General principles of the law of contract (Secs. 1 to 75), b) Some special contracts (Secs. 124 to 238). In the present unit, meaning and essentials of a valid contract, kinds of contract, concept of free consent, discharge of contract, and remedies for breach of contract are discussed. 1.1 The Indian Contract Act, 1872: Introduction  It is applicable to all states of India.  It does not affect any usage or custom of trade.  It is the most important part of commercial law because every commercial transaction starts from an agreement between two or more persons.  The main objective of law of contract is to bring definiteness in commercial and other transactions.  This act came into force on September 1, 1872.  The Act is not exhaustive:The act does not profess to be a complete and exhaustive code.  It creates Jus in Personam NOT Jus in Rem Did you know? What is meant by Jus in Personam?  A Jus in Personam: It means a right against or in respect of a specific person. It is available only against particular persons. What is meant by Jus in Rem?  A jus in rem: means a right against or in respect of a thing. It is available against the world at large.  Mr. Amit owes an amount of ₹ 80,000 to Mr. Bhasin. Mr. Bhasin has the right to Examples: recover this amount from Mr. Amit only, not from anybody else. This right is known as Jus in Personam.  Mr. Sahil owns 50 acres of land. In this case, Mr. Sahil has the full liberty to enjoy the land against every member of the public. This right is known as Jus in Rem. 1.2 Contract: Meaning and Definition A contract is an agreement, enforceable by law, made between at least two parties to do a particular act or abstain from doing a particular act. When parties create a contract, they create legal rights and obligations between themselves. If the party, which had agreed to do something, fails to do that, then the other party has legal remedies. “Contract is an agreement, enforceable by law” - Sec.2(h) “A contract is an agreement, creating and defining the obligation between Parties.” - Salmond “Every agreement and promise enforceable at law is a contract.” - Sir Fredrick Pollock 2 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 We can easily understand that a contract essentially has two following elements from the above definitions:  An agreement, and  Enforceable by Law or Legal obligation Agreement + Enforceableby Law = Contract Agreement “Every promise and every set of promises forming the consideration for each other is an agreement”. -Sec.2(e) In this context, the word ‘promise’ is defined by Sec. 2(b) as follows: “A proposal, when accepted becomes a promise”. In a contract there are at least two parties. The person making the proposal is called ‘promisor’ and the person accepting the proposal is called the ‘promisee’ [Sec. 2(c)]. Thus, an agreement is an accepted proposal. Thus an agreement has two following elements:  Offer  Acceptance Offer + Acceptance = Agreement Example: Ritu offered to sell his car to Shruti for ₹ 2,00,000. Shruti accepted this offer. Now, this offer to sell and acceptance to purchase can be treated as an agreement. Two Parties There should be two parties for making a valid agreement viz. Offeror and Offeree. One of them makes a proposal (or an offer) to the other, to do something, with a view to obtaining the assent of that other to such act. The person who makes an offer is termed as Offeror and the person to whom the offer is made is termed as Offeree. When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Consensus ad idem (Similarity of Minds) The second important aspect of a valid agreement is consensus ad idem that is the identity of minds. Difference in opinion of two parties involved in forming an agreement will render the agreement void. Example: Varun owns two houses, One located in Delhi and the other in Chandigarh. He offers to sell his Chandigarh house to Karan. Karan accepts the offer under the impression that he is buying the Delhi house. Here, in the minds of Varun and Karan, there are two different houses. So, there is no agreement on the subject-matter of the intended contract. In this case, although an offer and acceptance involves two separate parties, this agreement is void because of absence of consensus at idem that is similarity of minds. Thus, it is clear that the identity of minds has to be essentially present to bring an enforceable agreement into existence. Enforceableby Law, or Legal Obligation The agreement must be such which is enforceable by law to become a contract. Thus, there are certain agreements which do not become contracts as this element of enforceability by law is absent. Example: An agreement to go for a stroll together or a picnic does not become a contract, and therefore, neither rights nor obligations are created on the part of the parties to the agreement. Lovely Professional University 3 Notes Legal Aspects of Business  There is no intention to create legal obligation in moral, religious or social Caution: agreements.  All business agreements are created with an intention to create legal obligations. Example: Tom agrees to sell his car to Bruno for ₹ 50,000. The agreement gives rise to an obligation on the part of Tom to deliver the car to Bruno and on the part of Bruno to pay ₹50,000 to Tom. Hence, it can be concluded from the above discuss that all contracts are agreements but all agreements are not necessarily contracts. 1.3 Essential Elements of a Valid Contract “All agreements are contracts if they are made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” -Sec. 10  Offer and Acceptance  Intention to Create Legal Relationship  Lawful Consideration  Capacity of Parties  Free or Genuine Consent  Lawful Object  Agreement Not Expressly Declared Void  Certainty of Meaning  Possibility of Performance  Legal Formalities Offer and Acceptance To create a valid contract, there must be two or more parties. One who makes the offer and the other who accepts the offer. One person cannot make an offer and accept it. There must be at least two persons namely offeror and offeree. Also the offer must be clear and properly communicated to the other party. Similarly acceptance must be communicated to the other party and the proper and unconditional acceptance must be communicated to the offeror. Proper offer and proper acceptance should be there to treat the agreement as a contract which is enforceable by law. Intention to Create Legal Relationship The parties entering into a contract must have an intention to create a legal relationship. If there is no intention to create a legal relationship that agreement cannot be treated as a valid contract. In case of Domestic Agreements Presumption: Generally, there is no intention to create a legal relationship in social and domestic agreements. Case Study A husband promised to pay his wife a household allowance of ₹5,000 every month. Later, the parties separated and husband failed to pay the amount. The wife sued for an allowance. Point of Discussion Will she succeed in the lawsuit? [Hint: No, held these agreements are outside the realm of contract.] 4 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Case Study A resident of India invited her daughter who lived and worked in the US to move to India to study. They agreed that the mother would let the daughter stay in the house without any expectation of house rent from her daughter. A dispute arose and the mother took an action to evict the daughter from the house. Point of Discussion Will such an agreement bind the mother and daughter legally? [Hint: No, the court decided the case in favor of the mother and stated that there was no legally binding agreement between the parties.] Rebutting the presumption The presumption can be easily debited in certain circumstances, for example if the parties who are in a familial relationship are contacting in a business context. Even, if the word used in the contract indicates a legal intention, that may otherwise have a Rises may be rebutted. Example: If a husband and wife enter into an agreement in such circumstances in which they are no longer living in harmony. Case An elder brother, owner of considerable wealth, invited his sister and her husband, who gave up paid employment, to come to Australia to live with him and care for him until his death. In consideration of the services of his sister and brother-in -law, the brother promised to pay them an income for life and his property upon his death. Subsequently the brother changed his mind and breached the promise. A dispute arose and the couple sued for breach of contract. Point of Discussion Can couple win the case? [Hint: Yes, the court held that in the given circumstances, the agreement was something more than a familial relationship because of the serious consequences of the arrangement for the plaintiffs namely the husband giving up his salaried position and pension and both of them moving permanently to Australia.] In case of Commercial Agreements Presumption: Where parties negotiate and agree in a business setting, it is assumed that they intend the agreement to have legal consequences. Rebutting the presumption: The intention not to create legal relations may be evident in a number of different ways. Example: The agreement may contain an express clause that no legal consequences flow from the document. Lawful Consideration An agreement must be supported by a consideration of something in return. That is, the agreement must be supported by some type of service or goods in return of money or goods. However, it is not necessary the price should be always in terms of money. It could be a service or another goods. Example: Samiksha agreed to buy a Hindi Literature book from Yuvan for ₹ 500. Here, the consideration of Samiksha is book and the consideration of Yuvan is ₹500. Lovely Professional University 5 Notes Legal Aspects of Business Capacity of Parties As per Sec. 11, every person is competent to contract who is of the age of majority according to law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject. Case Study Trinum agreed to sell a government property to Bittu, Bittu agreed to buy that property. Point of Discussion Is this a valid agreement? [Hint: No, as Trinum is not competent to sell the property which is owned by government. Free or Genuine Consent The consent of the parties must be genuine and free consent. According to section 14, consent is said to be free when it is not caused by (i) coercion, (ii) undue influence, (iii) fraud, (iv) misrepresentation, or (v) mistake. If the contract made by any of the above reasons except for “mutual mistake", the could be treated as a voidable contract. It means the contract can be rescinded at the option of the aggrieved party. If the agreement induced by mutual mistake the agreement would stand void or canceled. An agreement can be treated as a valid contract when the consent of the parties are free and not under any undue influence, fear or pressure etc. Lawful Object The objective of the agreement must be lawful. Any act prohibited by law will not be valid and such agreements cannot be treated as a valid contract. Case Study Anand and Krish agree that Anand shall pay him ₹10,000 if Krish shall deliver Anand Opium afterwards. Point of Discussion Is it a valid Contract? [Hint: No, due to illegal object.] Agreement Not Expressly Declared Void Sec.24-30 of the Act specify certain types of agreement that have been expressly declared void. Like: an agreement in restraint of legal proceedings, agreement in restraint of trade, agreement in restraint of marriage (Sec.26) and agreement by way of wager. Case Study Carew Co Ltd. V North Bengal Two sugar manufacturers had entered into an agreement allocating zones to procure sugar for meeting the needs of their respective factories. It was agreed between the parties that none of them would draw any cane from the zones allotted to the factory of other party. Point of Discussion Is the agreement between the sugar manufacturers enforceable by law? [Hint: No, as the agreement is in restraint of trade and hence void.] Certainty of Meaning The wording of the agreement must be clear and must not be uncertain or vague. 6 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Example: Johny agrees to sell 500 tons of oil to Mathew. But, what kind of oil is not mentioned clearly. So on the ground of uncertainty, this agreement stands void. Possibility of Performance As per Sec. 56, if the act is impossible of performance, physically or legally, the agreement cannot be enforced by law. There must be possibility of performance of the agreement. Example: Ananya agreed with Bhushan to put life into Bhushan’s dead wife, the agreement is void as it is not possible to perform. Legal Formalities The contract act does not insist that the agreement must be in writing, it could be oral. But, in some cases, the laws strictly insist that the agreement must be in writing. Example: An agreement to sell immovable property must be in writing and should be registered under the Transfer of Property Act, 1882. 1.4 Kinds of Contract Contracts can be classified as follows: On the basis of Validity a) Valid contract A contract that satisfies all the conditions prescribed by law is a valid contract, and hence enforceable by law. Example: Suman offers to buy Devansh’s Motor bike for ₹80,000. Devansh accepted her offer. This constitutes a valid contract between Suman and Devansh. b) Voidable contract “An agreement which is enforceable by law at the option of one or more of the parties thereon but not at the option of the other or others, is a voidable contract”. - Sec. 2(i) Case Study Jamuna Das threatens to shoot Bittu Lal, if he does not sell his new Audi Car to Jamuna Das for ₹2,00,000, Bittu Lal agrees. Point of Discussion Is this a valid contract? [Hint: No, the contract is voidable at the option of Bittu Lal as his consent is taken through coercion.] c) Void contract Lovely Professional University 7 Notes Legal Aspects of Business A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable [Sec. 2(j)]. In other words, a void contract is a contract which is valid when entered into but which subsequently became void due to impossibility of performance, change of law or some other reason. Example: Danny, a resident of America, entered into a contract to import certain toys from Chin Chen, a resident of China, for $ 50,000. This is a valid contact. However, subsequently, before the execution of the contract, a trade war was declared between America and China. And the American government banned the import of toys from China. Thus, after the declaration of such trade war. The contract turned into a Void contract due to the impossibility of performance. d) Void Agreements According to Section 2(g), an agreement not enforceable by law is said to be void. Example: An agreement with a minor or a person of unsound mind is void-ab-initio because a minor or a person of unsound mind is incompetent to contract. e) Unenforceable Contracts It is a contract that is legally binding but cannot be enforced due to a technical flaw (such as not being in writing or not being properly stamped or some other reasons). Such contracts can be enforced if the technical defect involved is removed. f) Illegal or unlawful Agreement An illegal agreement is one the object of which is unlawful. Such an agreement cannot be enforced by law. Thus, illegal agreements are always void-ab-initio (i.e. void from the very beginning).  Tom promises to give Jerry five grams of cocaine if Jerry promises to drive Tom to Examples: Manhattan on Saturday.  Tom promises to give Jerry $5,000 if Jerry robs a bank on Saturday. All illegal agreements are void but all void agreements or contracts are not necessarily illegal. Caution: Task: Karan agrees to pay Vishal ₹1 lakh, if Vishal kills Sameer. Vishal killed Sameer and claims ₹1 lakh. Karan denied paying ₹1 lakh to Vishal. Point of Discussion Can Vishal recover ₹1 lakh from Karan through a law suit? Justify. On the basis of Formation a) Express Contact It is contract that is made in writing or by word of mouth.  Apple calls Banana and offers to sell his car for $80,000; Banana responds by Example: informing Apple that he accepts the offer.  Vivan writes a letter to Yuvraj, “I offer to sell my car for ₹ 1,00,000 to you”. Yuvraj sends a letter to Vivan saying “I am ready to buy you a car for ₹100000”. 8 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 b) Implied Contract An implied contract is inferred from the conduct of a person or the circumstance of a particular case. Ankush, a coolie in uniform, takes up the luggage of Bharat to be carried out of the Example: railway station without being asked by Bharat, and Bharat allows him to do so. In this case there is an implied offer by the coolie (Ankush) and an implied acceptance by the passenger (Bharat). Now, there is an implied contract between Ankush and Bharat. Hence, Bharat is bound to pay for the services of the Ankush. If Akash boards a bus to go to his destination and whether he takes a seat or not, the law will imply a contract from the very nature of the circumstances, and Akash will have to pay the fare. c) Quasi Contact or Constructive Contract A quasi contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another. These contracts are strictly not contracts as there is no intention of parties to enter into a contract.  ABC ltd., a TV co., wrongly delivered a new TV to Mrs. Zenith that she did not order. Example: She kept the TV and did not attempt to return it. In this case, a Quasi-contract may be enforced on her to pay for the TV.  Where certain books are delivered to a wrong address, the person receiving the sameis under an obligation to either pay for them or return them. If the person opts to retain the books, then quasi contract will be created between the book seller and the person retaining the books and he/she will be liable to pay the price of books to the book seller. d) E-Commerce Contract A contract modelled, specified, executed and deployed by a software system. It is very similar to traditional contracts. Formation of E-Commerce contracts:  Click-Wrap:In click-wrap contract, the party’s affirmative acceptance is taken by means of checking on an ‘I accept’ tab with the scroll box that allows the accepting party to view the terms and conditions.  Browse-Wrap: In case of browse-wrap agreement the mere use (or browse) of the website makes the terms binding on the contracting party.  Shrink-Wrap:In case of shrink-wrap agreement the contracting party can read the terms and conditions only after opening the box within which the product (commonly a license) is packed. Such agreements are relevant in the context of e-commerce mostly because of the kind of goods associated with shrink-wrap agreements. On the Basis of Performance a) Executed Contract It is a contract where both the parties to the contract have fulfilled their respective obligations under the contract. Lovely Professional University 9 Notes Legal Aspects of Business Example: Amita agrees to paint a picture of Seema for ₹ 1 Lakh. Amita paints the picture on set time and Seema pays ₹1 Lakh to Amita. b) Executory Contract It is a contract where both the parties to the contract have to perform their respective obligations. Example: Ankur offers to sell his car to Nitin for ₹1 lakh. Nitin accepts the offer. If the car has not yet been delivered by Ankur and the price has not yet been paid by Nitin. It will be an executory contract as the performance from both parties is due. Executory contracts can be further classified as Unilateral Contract and Bilateral Contact. i) Unilateral Executory Contract It is a contract in which only one party has to fulfill his/her obligation at the time of the formation of the contract. Such contracts are also known as contracts with executed consideration. Example: Shilpa offers to sell her car to Rahul for ₹ 3 lakhs on a credit of 1 month. Rahul accepts the Shilpa offer. Shilpa sold the car to Rahul and delivered the same to him. It is an example of a unilateral executory contract. Here the contract is executed as to Shilpa and Executory as to Rahul. ii) Bilateral contract It is a contract in which the obligations on the part of both parties to the contract are outstanding at the time of formation of the contract. These contracts are known as contracts with executory consideration. 1.5 Free Consent According to Section 14, Consent is said to be free when it is not caused by:  Coercion (Sec. 15)  Undue Influence (Sec. 16)  Fraud  Misrepresentation  Mistake (Sec. 18) Did you know? What is consent? As per Sec. 13, when two or more persons agree upon the same thing in the same sense, they are said to consent and have consensus ad idem. In other words, consent is defined as an act of assenting to an offer. Case Study Bala Debi v. S. Majumdar, A.I.R (1956) An illiterate woman executed a deed of gift in favour of her nephew to manage her lands. The evidence showed that the woman never intended to execute such a deed of gift, nor was the deed ever read or explained to her. Point of Discussion Is the deed operative in the eyes of law? [Hint: It was held, the deed was void and inoperative due to absence of consent.] Coercion: Sec. 15 Coercion is: 10 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 1) the committing, or threatening to commit, any act forbidden by the Indian Penal Code, 1860. Case Study Ranganayakamma v. Alwar Shetty (1889) A young girl of 13 years was forced to adapt a boy to her husband who had just died by the relatives of her husband who prevented the removal of his body for cremation until she consented. Point of Discussion Was the consent of young girl free? [Hint: the consent was not free but was free but was induced by coercion.] 2) the unlawful detaining, or threatening to detain, any property. Case Study Muthta v. Muthu Karuppa (1927) An agent refused to hand over books of accounts of a business to new agent unless principal released him from all liabilities, principal had to give release deed as demanded. Point of Discussion Was the release deed valid? [Hint: It was held, the release deed was given under coercion and voidable at the option of the principal.] Threat to Commit Suicide----Does it amount to Coercion? A threat to commit suicide amounts to coercion. Case Study ChikhamAmiraju v. Seshamma (1917) A person held out a threat of committing suicide to his wife and son if they did not execute a release in favour of his brother in respect of certain properties. The wife and son executed the release deed under the threat. Point of Discussion Discuss the validity of deed. [Hint: It is held, the threat of suicide amounted to coercion with Sec. 15 and the release deed under the threat.] Duress-----Does it amount to Coercion? Duress involves actual or threatened violence over the person or another (or his wife, parent, or child) with a view to obtain his consent to the agreement. If the threat is with regard to goods or property of the other party, it is not duress. Case Study Xavier forcibly kidnaps the son of David and asks him to execute a promissory note of rupees one lakh in his favour. Now, under threat, David signs a promissory note in favor of Xavier. Point of Discussion Is the promissory note enforceable? [Hint: Such a promissory note cannot be enforced in the court of law as the consent was not free Lovely Professional University 11 Notes Legal Aspects of Business and was induced by coercion. Effect of Coercion (Section 19)  Agreement is voidable at the option of the aggrieved party.  A person to whom money has been paid, or anything delivered under coercion must repay or return it. Example: A railway company refuses to deliver certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods.  Coercion may be directed against anybody Example: Amit threatens to kill Chirag (Ashok’s son) if Ashok does not let out his house to Amit. Is this agreement caused by coercion? Onus of Proof It lies with the party who wants to relieve himself of the consequences of coercion. Undue Influence: Sec. 16 (1) 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. - Sec. 16(1) (2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-- (a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b) 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. - Sec. 16(2) Examples: Lina, a woman enfeebled by disease and age, is induced by Sonu’s influence over her as her medical attendant, to agree to pay Sonu an unreasonable amount for his professional services. In this example, Sonu employs undue influence. Viren applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. Viren accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence. Case Study Mannu Singh v. Umadat Pandey, 1890 A spiritual guru induced his devotee to gift him his entire property in return for a promise of salvation from the devotee. Point of Discussion Will the consent of devotee be treated as free? State reasons. [Hint: The consent of the devotee was given under undue influence.] (3) Burden of Proof: Sec. 16(3) 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 adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. 12 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Caution: In an action to avoid a contract on the ground of undue influence, the plaintiff has to establish that---  The other party was in a position to dominate his will.  The other party actually used his influence to obtain the plaintiff’s consent to the contract.  The transaction is unreasonable. Effect of Undue Influence: Agreement is voidable at the option of the aggrieved party. The Court may: a) Set aside the case, or b) Implement it in the modified form, or c) Ask the parties to contract to return the benefit if contract is set aside. Case Study RaneeAnnapurni v. Swaminatha (1910) A poor Hindu widow who was in dire need of money was forced by a money lender to agree to pay a 100% rate of interest. She needed the money to establish her right to maintenance. Point of Discussion Is the contract valid? [Hint: No, it was case of undue influence and the court reduced the interest to 24%.] Difference between Coercion and Undue Influence Basis Coercion Undue Influence Definition Committing, or threatening to Where the relations subsisting commit, any act forbidden by between the parties are such the Indian Penal Code or the that one of the parties is in a unlawful detaining or position to dominate the will threatening to detain, any of the other and uses that property, to the prejudice of position to obtain an unfair any person whatever, with the advantage over the other. intention of causing any person to enter into an agreement. Nature of force It involves mostly use of Use of moral Force/Pressure physical or violent force. to obtain consent. Burden of Proof Party whose consent was so Party who was in a position to caused by Coercion. dominate the will of other party. Effect Rescission of contract- return Court discretion to direct any benefit received by aggrieved party to restore aggrieved party. benefit whether in whole or part or set aside the contract with directions for refund of benefit. Criminal Liability Yes, under Indian Penal Code. No criminal liability. Directed against Directed against a person or Threat against person himself Lovely Professional University 13 Notes Legal Aspects of Business his property. and not against his property. Existence of Relation No relationship need to exist Some sort of relationship between parties. between the parties to contract. Fraud: Sec. 17 Fraud means and includes any of the following acts committed by a party to a contract with intent to deceive the other party thereto or to induce him to enter into a contract:  The suggestion as a fact of that which is not true by one who does not believe it to be true;  The active concealment of a fact by one having knowledge or belief of the fact;  A promise made without any intention of performing it;  Any other act fitted to deceive;  Any such act or omission as the law specifically declares to be fraudulent. Essential elements of Fraud  The representation or assertion must be false.  The representation or assertion must be of a fact.  There must be an intention to deceive the other party.  Fraudulent act must be committed with knowledge of its falsity.  Fraudulent act must be done by a party to the contract or his authorized agent.  Fraudulent act must have deceived the other party.  Maggie, a seller of a horse, says that the horse is a “Beauty” and is worth ₹5 lakh. It Example: is merely Maggie’s opinion. Thus, it will not act as a fraud. But if, in fact, Maggie paid only ₹2 lakh for it, then he has misstated a fact and will be considered as fraud on grounds of Representation or assertion must be a fact.  Priya sells to Mohit locally manufactured goods as imported goods charging a higher price. This amounts to fraud.  Zeenat, a seller, claimed that his projector is made in Japan, and sold it for ₹1,50,000. However, the fact is that the projector was made in China. This amounted to fraud. Does mere silence amount to fraud? [Sec. 17] No, mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud. There are two statutory exceptions to the above rule:  Where the circumstances of the case are such that, regard being had to them, it is the duty of the person to keep silence to speak.  Where silence, is in itself, equivalent to speech. Example: Lalit sells, by auction, to Bablu, a horse which Lalit knows to be unsound. Lalit says nothing to Bablu about the horse unsoundness. This is not fraud in Lalit. Apple and Banana, being traders, enter upon a contract. Apple has private information of a change in prices which would affect Banana’s willingness to proceed with the contract. Apple is not bound to inform B. It is not a fraud. Case Study 14 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Bheem says to Ajay , “If you do not deny it, I shall assume that the horse is sound.” Ajay says nothing. Point of Discussion Is it a case of fraud? [Hint: Yes, it is a case of fraud as silence is equivalent to speech.] Effects of Fraud: Sec. 19  Aggrieved party can avoid or rescind the contract.  Aggrieved party may affirm the contract and insist that he shall put in same position in which he would have been if the representation made was true.  Aggrieved party can claim for damages. Case Study A company issued a prospectus giving false information about the unbounded wealth of the company. A share broker who bought shares on the faith of that information wanted to avoid the contract. Point of Discussion Can a share broker avoid the contract? [Hint: He could do so as the false representation in the prospectus amounted to fraud.] Misrepresentation: Sec. 18-19 It is a false statement that the person making it honestly believes to be true or that he is unaware is false. Sec. 18 defines that "Misrepresentation" means and includes— (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) 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: Arun, by a misrepresentation, leads Bhushan erroneously to believe that 500 kilos of indigo are made annually at Arun’s factory. Bhushan examines the account of the factory, which shows that only 400 kilos of indigo have been made. After this, Bhushan buys the factory. The contract is not voidable on account of Arun’s misrepresentation. Essentials of Misrepresentation  There should be a representation or assertion – mere expression or opinion will not amount to misrepresentation.  Such representation must relate to a matter of fact which has become untrue.  It should be done prior to the finalization of transaction to induce other party to enter into the contract.  The party should have actually acted upon it.  It should have been done by the party or his authorized agent.  It should be made not with the intention of deceiving.  It need not to be made directly to other party. Effect of Misrepresentation (Section 19) Lovely Professional University 15 Notes Legal Aspects of Business  The aggrieved party may avoid or rescind the contract.  The aggrieved party may affirm the contract and insist upon the misrepresentation being made good.  If truth could have been discovered by means of diligence-then no remedy for Caution: misrepresentation.  If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence [Sec. 19].  A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable[Sec. 19]. (a) Apple, intending to deceive Banana, falsely represents that five hundred maunds of indigo are made annually at Apple’s factory, and thereby induces Banana to buy Example: the factory. The contract is voidable at the option of Banana. (b) Apple, by a misrepresentation, leads Banana erroneously to believe that, five hundred maunds of indigo are made annually at Apple’s factory. Banana examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this Banana buys the factory. The contract is not voidable on account of Apple’s misrepresentation. Difference b/w Fraud and Misrepresentation Mistake: Sec. 21 Mistake may be defined as an erroneous belief about something. It may be a mistake of fact or a mistake of law. It is an erroneous belief on the part of the parties to the contract concerning something pertaining to the contract. Example: Vicky agrees to buy from Shanky a certain house. It turns out that the house had been destroyed by fire before the time of the bargain, though neither party was aware of the fact. The agreement is void. Vicky cannot insist on possession of the house. The agreement is void as there is a mistake on the part of both the parties about the existence of the subject-matter. Kinds of Mistake 1. Mistake of fact 16 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 (A) Bilateral mistake i) Bilateral Mistake as to the subject-matter: a) Existence b) Identify c) Title d) Quantity e) Quality f) Price ii) Bilateral Mistake as to the possibility of performing the contract a) Physical impossibility b) Legal impossibility (B) Unilateral mistake 2. Mistake of law (A) Mistake of law of country (B) Mistake of law of a foreign country 1. Mistake of fact A. Bilateral mistake When both parties to an agreement make a factual error that is critical to the agreement, the mistake is referred to as a bilateral mistake, and the agreement is null and void. In case of Bilateral Mistake, the contract is void. The following two conditions should be fulfilled to hold a mistake as bilateral mistake: 1. Mistake should be mutual Example: Arun agreed to purchase Bheem’s motor cycle which was lying in Bheem’s garage. Unknown to either party, the motor cycle and garage were completely destroyed by fire a day earlier. Thus, it is a void agreement. Caution: An erroneous opinion about something is not a mistake. 2. Must be related to a factual matter that is essential to an agreement. Example: A man and woman entered into an agreement of separation and under this agreement the man agreed to pay a weekly allowance, mistakenly believing that both were married. It was held that the agreement is void. Bilateral mistake can further be classified as: i) Bilateral Mistake as to the subject-matter a) Existence b) Identify c) Title d) Quantity e) Quality f) Price a) Mistake as to the existence of subject-matter: Where the both parties to an agreement are working under a mistake relating to the subject-matter, the agreement is void. Lovely Professional University 17 Notes Legal Aspects of Business Example: Jatin agrees to buy a horse from Saurabh. It turns out that the horse was dead at the time of the bargain. Thus, the agreement is void due to bilateral mistake related to existence of the subject-matter. b) Mistake as to the identity of the subject-matter: It usually arises where one party intends to deal in one thing and the other intends to deal in another. Example: Whisky agreed to buy from Rum, a cargo of cotton “to arrive ex-peerless from Bombay”. There were two ships of that name sailing from Bombay, one is in October and one is in December. Whisky meant the former ship and Rum meant the latter. There was a mutual mistake related to the identity of the subject-matter, so there was no contract. c) Mistake as to title of the subject-matter: If the seller is selling things which he is not entitled to sell and both parties are acting under a mistake then the agreement will be void. Example: Gopi told his nephew that he was entitled to a textile mill, and the nephew entered into a contract with Gopi’s daughter to rent the textile mill. Unknown to both parties, the textile mill belongs to Nephew himself. Thus, the agreement was held to be void. d) Mistake as to quantity of subject-matter: If both the parties are working under a mistake as to the quantity of the subject-matter, the agreement will be treated as void. Example : Ritu enquired about the price of the latest version of a smart mobile from Suraj, suggesting that he may buy as many as 15 such mobiles. Suraj intimated the price by writing a letter. Ritu sent an SMS for the supply of the 5 mobiles but due to a mistake in writing SMS, Suraj dispatched 15 mobiles. There is no valid contract between the parties as there was a mistake as to the quantity of the subject-matter. e) Mistake as to the quality of the subject-matter: If the subject-matter is something essentially different from what the parties thought it to be, the agreement is void. Example: Stupid entered into a contract with Crazy to sell him top-class Dehradun basmati rice. Both of them believed that the rice was of top-class Dehradun quality. But rice turned out to be of the local variety. The contract was held to be void as both parties were mistaken as to the quality of the subject- matter. f) Mistake as to the price of the subject-matter: If there is a mutual mistake as to the price of the subject-matter, the agreement is void. ii) Bilateral Mistake as to the possibility of performing the contract Consent is nullified if both parties believe that an agreement is capable of being performed when in fact it is not the case. the agreement, in such a case, is void on the ground of impossibility. a) Physical impossibility Example: A contract for the hire of a room for witnessing the (procession of king) procession that has been cancelled, unknown to both of the parties. b) Legal impossibility A contract is void if it provides that something shall be done which cannot, as a matter of law, be done. B) Unilateral mistake As per Sec. 22, a contract is not voidable due to a unilateral mistake. When only one party is mistaken in regard to subject-matter or any term and condition or the legal effect of a contract, it will be termed as unilateral mistake. A unilateral mistake is not allowed as a defense in avoiding a contract unless the mistake is brought about by the other party’s fraud or misrepresentation. 18 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Example: Tom offers to sell his house for an intended sum of ₹ 44,000 but mistakenly in writing, he wrote ₹40,000. He cannot plead mistake as a defense. Exceptions A unilateral mistake is generally not allowed as a defence in avoiding a contract. but in certain cases, the consent is given by a party under an error or mistake which is so fundamental as it goes to the root of the agreement. In such cases, the agreement is void. Thus, in the following cases, even though there is a unilateral mistake, the agreement is void.  Mistake as to the identity of the person contracted with. Example: Ankle intends to contract with backbone but finds she has contracted with chin, there is no contract if the identity of backbone was a material element of the contract and Chin knows it.  Mistake as to the nature of contract. Example: Madan, an old man of poor sight, indorsed a bill of exchange thinking that it was a guarantee. It was held that there was no contract on the ground that the mind of the signer did not accompany the signature. [Foster v. Mackinnon, 1869] Mistake of Law Mistake of law may be a mistake of the law of the home country and a mistake of the law of foreign country. a) Mistake of law of the home country: A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of law. But if a person enters into a contract by making a mistake of law through the inducement of another, whether innocent or otherwise, the contract may be avoided. b) Mistake of law of the foreign country: Such a mistake is treated as mistake of fact and the agreement in such a case is void.  The general rule as regards to mistake of home law is no excuse. Caution:  However, Mistake of law of the foreign country is regarded as mistake of fact. 1.6 Discharge of Contract A contract is discharged when rights and obligations created by it comes to an end, i.e., contracting parties no more have any responsibility or liability to each other. Discharge of contract is the termination of a contractual obligation on court orders (via an order of discharge) or mutual agreement (see Accord and Satisfaction), or caused by breach of contract, frustration of contract, performance of contract.  It means “termination” of a contractual relationship between the parties.  By discharge of contract, the rights and obligations of the parties come to an end. Modes of Discharge of Contract a) Discharge by Performance i. Actual ii. Attempted b) Discharge by Lapse of Time c) Discharge by Breach of Contract i. Actual ii. Anticipatory Lovely Professional University 19 Notes Legal Aspects of Business d) Discharge by Agreement or Consent i. Novation. ii. Rescission iii. Alteration iv. Remission v. Waiver vi. Merger e) Discharge by Operation of Law i. Death ii. Merger iii. Insolvency iv. Unauthorized alteration f) Discharge by Impossibility of performance i. Initial impossibility ii. Subsequent impossibility a) Discharge by performance When a contract is duly performed by both the parties and nothing more remains to be done. The performance may be either Actual or Attempted performance (tender). Case Study Peter agrees to sell his cycle to John for an amount of ₹10,000 to be paid by John on the delivery of the cycle. As soon as it is delivered, John pays the promised amount. Point of Discussion Has the contract discharged? [Hint: Yes, the contract is discharged through actual performance.] Did you know? What is Tender? The tender or attempted performance or offer of performance has the same effect as performance. If a promisor tenders performance of his promise but the other party refuses to accept, the promisor stands discharged of his obligations. b) Discharge by lapse of time Ordinarily, parties must perform their obligations at the stipulated time. But if the time is essence to the contract, then a failure to perform at time specified, renders the contract voidable at the option of opposite parties. Case Study Peter takes a loan from John and agrees to pay instalments every month for the next five years. However, he does not pay even a single instalment. John calls him a few times but then gets busy and takes no action. Three years later, John approaches the court to help him recover his money. Point of Discussion Can John win in lawsuit and be able to recover his amount? [Hint: No, due to elapse of time] c) Discharge by Breach of Contract 20 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 When a party in a contract has refused to perform, or disabled himself from performing his promise in its entirety, the aggrieved party may put an end to the contract unless he has waived his right expressly or impliedly. Breach of contract may either be: i. an actual breach or ii. an anticipatory breach i) Actual breach: The actual breach can occur by (i) failure to perform as promised, (ii) making it impossible for the other party to perform. The failure to perform means that one party must not have performed a material part of the contract by a stated deadline. The actual breach by failure to perform may take place (a) at the time when performance is due, or (b) during the performance of the contract. Thus, if a person does not perform his part of the contract at the stipulated time, he will be liable for its breach. ii) Anticipatory breach: The anticipatory breach of contract occurs when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract. Where a party to a contract refuses to perform his part of the contract before the actual time arrives, the promise may either (i) rescind the contract and treat the contract as at an end, and at once sue for damages, or (ii) he may elect not to rescind but to treat the contract operative and wait for the time of performance and then hold the other party liable for the consequences of non-performance. In the latter case, the party who has repudiated may still perform if he can. Caution: The anticipatory breach of contract does not by itself discharges the contract. The contract is discharged only when the aggrieved party accepts the repudiation of the contract, i.e., elects to rescind the contract. Case Study Sanaya, a dance artist entered into a contract with Mukesh to perform at his theatre every night during next month. Mukesh agreed to pay her ₹ 5,000 for each night. On 10th night, Sanaya willfully absented herself from the theatre. Point of Discussion Such absenteeism amounts to breach of contract? [Hint: Yes, such absenteeism amounts to actual breach of contract.] d) Discharge by Agreement or Consent As we know that a contract is created by means of an agreement so it may also be discharged by another agreement between the same parties. Let’s learn how parties get discharged through mutual agreement or consent. Example: Priya and Bhanu entered into a contract, according to which Priya had to supply 1000 pairs of ready-made dresses to Bhanu on January 10, 2021. Where the date of formation of contract was January 1, 2021. On 2nd January, 2021, Priya told to Bhanu that the ordered dresses had been out of fashion and hence not possible to assemble 1000 pairs. Priya said that though Bhanu will be supplied with 1000 pairs by taking a lot of risk and efforts, Bhanu could not sell them due to their obsolesce. Bhanu decided to cancel the contract. Thus, by Mutual understanding, they have terminated their contract. i) Novation: It means substitution of a new contract for the original one. An older contract get discharged through new contract, when a  new contract is formed with same parties  same contract is formed with different party/parties Lovely Professional University 21 Notes Legal Aspects of Business Example: Ritu owes ₹ 80,000 to Minakshi and Minakshi owes ₹ 80,000 to Neetu. By mutual agreement, Ritu’s debt to Minakshi and Minakshi debt to Neetu are cancelled and Ritu accepts Neetu as her creditor for ₹80,000. ii) Rescission When a contract is discharged before the date of performance by agreement between the parties to the effect that it shall no longer bind them. Case Study: Mina promised to deliver certain goods to Tina on a certain date. Before the date of performance Mina and Tina mutually agreed that the contract would not be performed. Point of Discussion Is the contract get discharged? [Hint: Yes, through rescission.] iii. Alteration It means changes in the terms of contract. If the parties mutually are to change certain terms of the contract, it has the effect of terminating the original contract. There is, however, no change in the parties. Case Study Peter Contracted to deliver a rolling machine to Queen at ₹ 50,000 after six month. Because of the increase in price of the spare parts of the rolling machine, Peter was unable to deliver the machine at agreed price (₹50,000) and increased the price of rolling machine to ₹60,000. Point of Discussion Decide in this case the contract between Peter& Queen get discharged? [Hint: yes, the old contract is discharged through alteration.] iv) Waiver It means relinquishment or abandonment of a right. Where a party waives his rights under the contract, the other party is released of his obligations.In other words, waiver is to give up the rights under the contract. v) Remission Where a party to contract agrees to:  accept a lesser amount for full discharge of contract or  extends the time of performance. Example: Leena, the promisee agreed to accept ₹2,000 from Jacky in full settlement of a claim of ₹ 5,000, the promise is enforceable and the promisee cannot in future bring a suit for the recovery of ₹5,000. vi) Merger A contract is said to have been discharged by way of merger where an inferior right possessed by a person coincides with a superior right of the same person. Example Arun, who is holding a certain property under a lease, buys it. His rights as a lessee vanish; they are merged into the rights of ownership which he has now acquired. The rights associated with lease were inferior to the rights associated with the ownership. e) Discharge by operation of law 22 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Discharge by operation of law may take place in five ways: i) Insolvency The insolvency law provides for discharge of contracts under certain circumstances so where an order of discharge is passed by an insolvency court the insolvent stands discharged of all debts incurred previous to his adjudication. ii) Death Death of the promisor results in termination of the contract in cases involving personal skill or ability. iii) Merger When between the same parties, a new contract is entered into, and a security of a higher degree or a higher kind is taken, the previous contract merges in the higher security. Thus a right of action on an ordinary debt would be merged in the right of suing on a mortgage for the same debt. iv) By right and liability going into the hands of the same party Contract creates right to one party and liability to other when right and liability reach the same person, the result is discharge of contract. v) Unauthorized material alteration Where any of the parties alters any of the terms of the contract without seeking the consent of the other party to it, the contract terminates. f) Discharge by impossibility of performance A contract may be discharged because of impossibility of performance. There are two types of impossibility: (i) Initial Impossibility that may be inherent in the transaction (i.e., the contract), (ii) Subsequent Impossibility that may emerge later by the change of certain circumstances material to the contract. i) Initial Impossibility (Pre-contractual) It means impossibility at the time of formation of the contracts.  either known to the parties (Void ab initio)  or unknown to the parties (Void due to mutual mistake) Caution: Where the promisor knows about the initial impossibility then he is liable to pay compensation to promise. Examples  Arun promises to pay Bittu₹50,000 if Bittu rides on a horse to the moon. The contract is void ab initio.  Arun agrees with Bittu to discover treasure by magic. The agreement is void ab initio, as there is an impossibility inherent therein. ii) Subsequent or Supervening Impossibility (Post contractual) Sometimes a contract is capable of being performed when it was formed, but some subsequent event renders the performance impossible. In such a case also the contracts become void. 1. Destruction of subject-matter Where the subject matter of a contract is destroyed for no fault of the promisor, the contract becomes void by impossibility of performance. Example: A music hall was let for a series of concerts on certain days. The hall was burnt down before the date of the first concert. The contract was held to be void. 2. Non-existence/non-occurrence of particular state of things When certain things necessary for performance cease to exist, the contract becomes void. Lovely Professional University 23 Notes Legal Aspects of Business Example: Pihu and Biku contract to marry each other. Unfortunately, before the time fixed for marriage Pihu goes mad. The Contract becomes Void. 24 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 3. Death/ Incapacity for personal service Where the performance of the contract must be executed personally by the promisor, his death or physical disability to perform shall render the contract void and thus exonerate him from the obligation. Example: A boy was engaged for 5 years to perform as a drummer for all the seven nights in a week whenever the band had business. But on contract of Illness, he was certified to be able to perform only 4 nights, the contract was held to have been frustrated because of personal incapacity to perform. 4. Change of law If there is a subsequent change in law which may render the contract illegal, the contract is deemed discharged. Example: There was a contact between Lila and Kittu to supply of oilseeds of a specific quality. But the Indian Govt. rendered the sale and purchase of oilseeds illegal. Both parties were discharged from performance of such contract. 5. Outbreak of war If war is declared between two countries subsequent to the making of the contract, the parties would be exonerated from its performance.  Contracts Entered into during war with an alien enemy are void initially.  Even after the peace returns , they remain void and of no effect. 1.7 Breach of Contract Breach of contract amounts to a broken promise to do or not to do an act in legal terms. It may be single, occurring at a single point of time or continuing breaches. A lawsuit for breach of contract is a civil action and the remedies awarded to the aggrieved party are designed to place him in the position that he would be in if not for the breach. Remedies for contractual breaches are not designed to punish the breaching party but aim at compensating the injured party for its loss due to the breach. Breach of contract can be an Actual Breach or Anticipatory Breach. Actual Breach Actual breach occurs when one of the parties denies to perform its side of the bargain on the due date or performs incompletely. It is failure of one party to perform as promised, or making it impossible for the other party to perform. a) at the time when performance is due, or b) during the performance of the contract. Thus, if a person does not perform his part of the contract at the stipulated time, he will be liable for its breach. Example: Eraser contracted with a Railway Company to supply a certain quantity of railway chairs at a certain price. The delivery was to be made in installments. After a few installments had been made, the Railway Company asked Eraser to deliver no more. Held, Eraser could sue for breach of contract. Anticipatory Breach The anticipatory breach of contract occurs when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract. Lovely Professional University 25 Notes Legal Aspects of Business Example: Parker contracts to supply Marker with certain articles on 1st August. On 20th July, Parker informs Marker that he will not be able to supply the goods. Marker is entitled to sue Parker for breach of promise. Consequences of Anticipatory Breach  The aggrieved/injured party can rescind the contract and treat the contract as an end, and at once sue for damages, or  The aggrieved/injured party may elect not to rescind but to treat the contract operative and wait for the time of performance and then hold the other party liable for the consequences of non-performance. Remedies of Breach of Contract In case of breach of contract, the injured party may go for the following remedies available under the Act: 1) Rescind the contract and refuse further performance of the contract. 2) Sue for damages 3) Sue for specific performance 4) Sue for an injunction to restrain the breach of a negative term 5) Sue for quantum meruit 1. Rescind the Contract and Refuses Further Performance of Contract Under Sec. 65, when a party treats a contract as rescinded, it makes itself liable to restore any benefits it received under the contract to the party from whom such benefits were received. Example: Dhruv promises Star to supply 10 bags of cement on a certain day. Star agrees to pay the price after the receipt of the goods. Dhruv does not supply the goods. Star is discharged from liability to pay the price. The court may grant rescission— a) Where the contract is voidable by the plaintiff; or b) Where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff. The court may refuse to grant rescission— a) Where the plaintiff has expressly or implied ratified the contract; or b) Where owing to the change of circumstances, the parties cannot be restored to their original positions; or c) Where third parties, during the subsistence of contract, acquired rights in good faith and value; or d) Where only a part of the contract is sought to be rescinded and such part is not severable from the rest of the contract. Case Study Palak, a music teacher, enters into an contract with Rohit, a theatre manager, to provide music training to his singers at his theatre for two nights per week for the next two months, and Rohit agrees to pay her 5,000 for each night of training. Palak willfully absents herself from the theatre on the sixth night. Point of Discussion Can Rohit rescind the contract? [Hint:Yes, Rohit is entitled to claim compensation for the damage which he has sustained 26 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 through non-fulfilment of the contract.] 2. Sue for damages: Sec. 73 The party injured by the breach of contract can claim damages. Damage is the monetary compensation allowed by the court to the injured party for the loss or injury suffered by him as a result of breach by the other party. Case Study Mika, a buyer, agreed to purchase a TV for ₹ 50,000, but Jassi, the seller, failed to deliver it on the specified date. In such a case, normally, the buyer will be forced to go and buy a TV elsewhere. However, if, in the meantime, the price of a TV has gone up by ₹10,000. Point of Discussion What remedy does Mika have against Jassi? [Hint: Mika can claim ₹10000 from Jassi as damages.] Types of damages Unliquidated damages a) General or ordinary damages These damages are those which naturally arise in the usual course of things from such abreach. Case Study Pencil agreed to sell to Sharpener 100 quintals of Kalyan wheat at ₹335 per quintal and the price was to be paid at the time of delivery. The price of wheat rose to ₹ 350 per quintal and Pencil refused to sell the wheat. Point of Discussion Can Sharpener claim any damages from Pencil? [Hint: Yes, Sharpener can claim ordinary damages worth ₹1500.] b) Special damages Damages occur under some special or peculiar circumstances.The communication of the special circumstances is a prerequisite to the claim for special damages. Case Study Ritik delivered goods to the railway admin. to be carried to a place where an exhibition was being held and told the clerk that if the goods did not reach the destination on the stipulated date, he would suffer a special loss. The goods arrived late. Point of Discussion Can Ritik claim any damages from Railways? [Hint: Yes, Ritik can claim special damages as he pre-informed the railways about the special loss that he could have incurred in case railways would fail to perform its contractual obligation. c) Exemplary, or punitive, vindictive damages  These damages are awarded to punish the defendant and are not, granted for breach of contract. Lovely Professional University 27 Notes Legal Aspects of Business  These damages are awarded in case of breach of marriage promise and wrongful dishonour of cheque by the bank. Caution: In the case of breach of marriage, the amount of vindictive damages will depend upon the extent of injury to the party’s feelings. In the case of wrongful dishonour of cheque by the bank, the smaller the amount of the cheque dishonoured, the larger will be the damages as the credit of the customer would be injured in a far greater measure, if a cheque for a small amount is wrongfully dishonoured. d) Nominal damages Where there has been an infringement of contractual rights , but no actual loss has been suffered, then nominal damages are awarded. Case Study Preety agreed to supply sleepers to the railway administration. According to one of the terms of the contract, Preety was required to pay damages to railways on her failure to supply whether the railways suffered loss or not. Preety failed to supply the sleepers and railways did not suffer any loss. A case was filed by the Railways administration against Preety to claim the damages. Point of Discussion Could Railways administration be able to claim damages from Preety? [Hint: The court disallowed the suit and held that railways could claim only nominal damages from Preety.] e) Damages for loss of reputation  These damages are not recoverable.  An exception is banker who wrongfully dishonours the customer’s cheque.  In this case, the smaller the amount of cheque is dishonoured, the larger the amount of damages are awarded to a business man  Nominal damages can be recovered by non-business man f) Damages for inconvenience and discomfort These damages can be recovered for physical inconvenience and discomfort. The general rule is that the measure of these damages is not affected by the motive and the manner of breach of contract. Case Study Table, a surveyor told Chair, a client that the house which Chair is buying is in good condition, but, in fact, substantial work needed to be carried on it. This put considerable strain on Chair’s marriage as he has to live under those appalling conditions with his wife. Chair sued Table and claimed damages. Point of Discussion Could Chair win in the law suit? [Hint: Yes, Chair was entitled to receive an award for his physical discomfort and hardship.] Some other following damages can also get claimed in case of breach of contract:  Difficulty of assessment  Mitigation of damages  Cost of a decree Liquidated damages 28 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872 Where the contracting parties agree in advance the amount payable in the event of breach, the monetary compensation payable is called liquidated damages. The essence of liquidated damages is a genuine covenanted pre-estimate of the damages. If a contract includes a provision that, on a breach of contract, damages of a certain amount or calculable at a certain rate will be payable to the aggrieved party, the court will normally accept the relevant figure as a measure of damages. In case, the court finds the stipulated damages as unreasonable, then court may decide the reasonable damages itself to be paid as penalty for breach of contract. Case Study Promod gave Suresh a bond for the repayment of ₹ 1,000 with interest at 12%, at the end of 6 months, with a stipulation that in case of default, the interest would be payable at 75%, from the date of default. Point of Discussion Is such a rate of interest valid? [Hint: This is a stipulation by way of penalty, and Suresh is only entitled to recover from Promod such compensation as the court considers reasonable.] 3. Sue for specific performance Where damages are not an adequate remedy, the court may direct the party in breach to carry out his promise according to the terms of the contract. This is called specific performance of the contract. Example: Zeenat, a party to a contract, paid for the delivery of goods, but Hema, the other party, did not ship them properly. A specific performance decree might require the goods to be properly delivered. Cases where specific performance is not granted:  Where monetary compensation is an adequate relief.  Where the court cannot supervise the execution of the contract.  Where a contract is for personal service.  Where one party is minor. Cases where specific performance is granted:  Where actual damage cannot be determined.  If monetary compensation will not be adequate.  Where the act to be done is in the performance of trust.  Where, in general, it would be just and equitable to do. 4. Sue for an injunction to restrain the breach of a negative term  The power to grant an injunction is discretionary.  It may be granted temporarily or for an indefinite period.  It may be prohibitory or mandatory. Case Study Lumley v. Wagner (1852) Wagner agreed to sing at Lumley’s theatre, and during a certain period to sing nowhere else. Afterwards, Wagner made a contract with Z to sing at their theatre and refused to perform the contract with Lumley. Point of Discussion Lovely Professional University 29 Notes Legal Aspects of Business Which remedy can Lumley use against Wagner in court? [Hint: Held, Wagner could be restrained by Injunction from singing for Z.] 5. Sue for quantum meruit It means “as much as earned or deserved” or “as much as is merited”. Example: A contractor was contracted to work at a school. The contractor did some work but messed up part of the work (breach of contract). The school suspended the construction work because of the problem. On the basis of quantum meruit, the contractor was entitled to be paid for the services he had already performed for the school. Summary  A contract is an agreement, enforceable by law, made between at least two parties to do a particular act or abstain from doing a particular act.  A contract essentially has two elements: Agreement and Enforceability.  All agreements are contracts if they are made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.  Contracts can be classified on the basis of validity, formation and performance.  When two or more persons agree upon the same thing in the same sense, they are said to consent and have consensus ad idem.  The consent is said to be free when it is not caused by Coercion, Undue Influence, Fraud, Misrepresentation, and Mistake.  Coercion is (i) the committing or threatening to commit any act forbidden by the Indian Penal Code or (ii) 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.  When consent to an agreement is caused by coercion the agreement is voidable at the option of the party whose consent was so obtained. Thus, the aggrieved party can have the contract set aside if he so desires otherwise the contract is a valid one.  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. The burden of proving that the contract is not induced by undue influence lies on the party who is in a position to dominate the will of the other.  Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak , or unless his silence is, in itself, equivalent to speech.  Misrepresentation is a false statement that the person making it honestly believes to be true or that he is unaware is false.  A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable.  Mistake is defined as an erroneous belief about something. It may be a mistake of fact or a mistake of law.  A contract is discharged when rights and obligations created by it comes to an end. 30 Lovely Professional University  Notes Unit 01: Indian Contract Act, 1872  A contract may be discharged by (i) performance; (ii) tender; (iii) mutual consent; (iv) subsequent impossibility; (v) operation of law; (vi) breach.  If the parties to a contract agree to substitute a new contract for it, or to rescind it or alter it, the original contract is discharged. A contract may terminate by mutual consent in any of the six ways viz. novation, rescission, alteration and remission, waiver and merger.  Breach of contract amounts to a broken promise to do or not to do an act in legal terms. It may be single, occurring at a single point of time or continuing breaches.  Breach of contract can be an Actual Breach or Anticipatory Breach.  Actual breach occurs when one of the parties denies to perform its side of the bargain on the due date or performs incompletely.  The anticipatory breach of contract occurs when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract.  In case of breach of contract, the injured party may go for the following remedies available under the Act: 1) Rescind the contract and refuse further performance of the contract. 2) Sue for damages 3) Sue for specific performance 4) Sue for an injunction to restrain the breach of a negative term 5) Sue for quantum meruit Keywords  Alteration: If the parties mutually are to change certain terms of the contract, it has the effect of terminating the original contract. There is, however, no change in the parties.  Contract: It is an agreement, enforceable by law, made between at least two parties by which rights are acquired by one and obligations are created on the part of another.  Executed contract: A contract which is wholly performed by both parties.  Executory contract: A contract at which performance of both parties have yet to be performed.  Express contract: The terms of a contract may be stated in words (written or spoken).  Illegal agreement: It is one that the courts will not enforce because the purpose is to achieve an illegal end.  Implied contract: May be implied in fact or implied in law. Contracts implied in fact and contracts implied in law are not really contracts at all.  Misrepresentation: It is also known as simple misrepresentation whereas fraud is known as fraudulent misrepresentation.  Mistake of foreign law: The above maxim – “ignorance of law is no excuse” is in-applicable to foreign law. The mistake of foreign law is to be treated as a mistake of fact.  Mistake: May be defined as an erroneous belief on the part of the parties to the contract concerning something pertaining to the contract.  Nominal damages: These are awarded in cases of breach of contract where there is only technical violation of the legal right but no substantial loss is caused thereby.  Ordinary damages: Cannot be claimed for any remote or indirect loss or damages by reason of the breach.  Remission: It is the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. Lovely Professional University 31 Notes Legal Aspects of Business  Special damages: These damages are claimed in case of loss of profit.  Waiver: It means relinquishment or abandonment of a right.  Undue influence: Consists in the improper exercise of power over the mind of one of the contracting parties by the other.  Vindictive or punitive damages: These damages are awarded with a view to punish the defendant and not solely with the idea of awarding compensation to the plaintiff.  Void agreement: An agreement not enforceable by law.  Void contract: A contract which ceases to be enforceable by law.  Voidable contract: A contract which is enforceable by law at the option of one party thereto, but not at the option of other. Self-Assessment 1. Mr. Akhilesh owes an amount of ₹ 76,000 to Mr. Keshav. Mr. Keshav has the right to recover this amount from Mr. Akhilesh only, not from anybody else. This right is known as: A. Jus in Personam B. Jus in Rem 2. An agreement between Neha and Arun to go for a picnic does not become a contract as: A. there is no valid offer involved B. there are not two competent parties involved C. it is not a valid agreement D. it is not enforceable at law as there is no intention of both parties to create legal obligations and rights for each other 3. Pretty agreed to sell a government property to Mandeep for ₹1.12 crores, Mandeep agreed to buy that property. Is this a valid agreement? A. Yes, as there is a lawful offer and acceptance B. Yes, as it is enforceable at law C. No, as Preety is incompetent to enter such a contract D. No, as the consideration is unlawful 4. If an agreement is induced by unilateral mistake, it will be: A. valid B. voi