Mercantile Law Unit 1 Notes PDF

## L. J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 #### NATURE OF CONTRACT A contract is an agreement made between two or more parties which the law will enforce. Sec.2 (h) defines a contract as an agreement enforceable by law. #### Agreement and its enforceability If we...

## L. J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 #### NATURE OF CONTRACT A contract is an agreement made between two or more parties which the law will enforce. Sec.2 (h) defines a contract as an agreement enforceable by law. #### Agreement and its enforceability If we analyse the definitions of contract we find that a contract essentially consists of two elements, viz (1) agreement, and (2) its enforceability by law. An agreement is defined as "every promise and every set of promises, forming consideration for each other." [Sec. 2 (e)] In order, therefore, to form an agreement, there must be a proposal or offer by one party and its acceptance by the other. To sum up: > Agreement = Offer + Acceptance #### Agreement is a very wide term An agreement may be a social agreement or a legal agreement. If A invites B to a dinner and B accepts the invitation, it is a social agreement. A social agreement does not give rise to contractual obligations and is not enforceable In a Court of law. It is only those agreements which are enforceable in a Court of law which are contracts. A father promises to pay his son Rs. 100 every month as pocket allowance. Later he refuses to pay. The son cannot recover as it is a domestic agreement and there is no intention on the part of the parties to create legal relations. To conclude: Contract = Agreement + Enforceability at law. Thus all contracts are agreements but all agreements are not necessarily contracts. ### COMMERCIAL AND INDUSTRIAL LAW ## INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 #### ESSENTIAL ELEMENTS OF A VALID CONTRACT According to Sec. 10, all agreements are contracts 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. In order to become a contract, an agreement must have the following essential elements: 1. **Offer and acceptance.** There must be two parties to an agreement, ie, one party making the offer and other party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the offeror. 2. **Intention to create legal relationship.** When the two parties enter into an agreement, their intention must be to create legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship, as such they are not contracts. **Example.** A husband promised to pay his wife a household allowance of £ 30 every month. Later the parties separated and the husband failed to pay the amount. The wife sued for the allowance. Held, agreements such as these were outside the realm of contract altogether [Bat/our v. Balfour, (1919) 2 Κ.Β. 571]. 3. **Lawful consideration :** An agreement to be enforceable by law must be supported by consideration. In simple words, it means 'something in return'. The agreement is legally enforceable only when both the4 parties give something and get something in return. A promise to do something, getting nothing in return is usually not enforceable by law. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 **Question:** Define offer or Proposal? State the essentials of a valid offer. **Answer:** An offer is the first step in the creation of a legal and valid contract. This is because, Offer + Acceptance = Promise and Agreement + enforceability by law = contract. Generally offer is a proposal from one party to another to enter into a legally binding agreement. According to the contract act, Sec 2(a) offer proposal is defined as "When one person signifies to another his willingness to do or to abstain from doing anything, with a view of obtaining the assent of that another to such an act or abstinence he is said to make a proposal." The person who makes the offer is called the "offerer". And the person to whom it is made is called the "offeree". The offer can be 1) Express oral i.e. by spoke words in writing. 2) Implied = by conduct. 3) General = put to many persons at a time. 4) Specific = put to an identified person or even a specified group of people. **Essential Elements of a valid offer:** 1) Intension of legal relation: The offer should be made with the intension of creating legal relations. So that the offer when accepted gives rise to legal relationship and in returns give out Rights and liabilities on the parties. E.g. An invitation to go for a cup of tea is ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 such an offer than even on acceptance it does not give out any legal consequences and Hence is not an offer in eyes of law. 2) The offer must have the intension of acceptance: The offer must be made to the offeree with a view to obtain the assent of the said person and thereby creating legal relationship between parties. It should not be such that a person can not accept. E.g. "A" agrees to pay Rs. 1 lacs to "V" if he remains alive, healthy even after drinking 1 liters of pure poison. 3) The offer must be certain and definite: The terms of the offer should be clear definite, unambiguous and hot vague. The offer which is vague or ambiguous does not convey, what it means. Law does not permit for contracts which are illusory or indefinite. 4) Communication of the offer: No person can accept the offer without its know edge. And therefore it is necessary to convey the offer to the "offeree" so that the he can accept it. There cannot be any acceptance, without the knowledge of the offer. (Case Law: Lalman v/s Gauridutt). 5) The offer may be conditional but clear: The offer is the starting point of any contract or agreement. It is open for the offerer to put any condition in the offer it self provided that should be clear. The attention of the "offeree" should be drawn towards special condition. 6) The offer may be general or specific. : When the offer is made to specific or definite or identified persons it is termed as specific offer. 7) The offer should not have the burden of acceptance: The offer should not contain any term which would throw the burden of acceptance on the "offeree". ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 **Question:** Explain the terms. a) Declaration of intension: A declaration by one person about his intensions is jus1: announcement and gives no right of action to another. E.g. I will go to Mumbai today. b) An invitation to offer: The display of the names of the movies and their show timings along with the price on the window of the cinema hall is not an offer. It is an invitation to people to come to watch the movie by purchasing its ticket by paying price. Same way different advertisements, signboard, catalogues, quotations or circular are not offers, but an invitation to make the offer. c) Auction sale: Here also the articles are displayed with the intension chat the bidders present there may bid for them. i.e. make the offer. Thus it can be said that in an action sale, a bid is an offer. d) Tender: Any tender invited by the Govt, or some company for some work is an invitation to offer. A tender (Filled in response of an invitation to offer) is an offer. To make it clearer we may say that when tenders are invited for the supply of specified goods or service, each tender submitted is an offer. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 **Question:** State various modes, how the offer lapses? Explain Revocation of offer. **Answer:** An offer may come to an end by revocation or lapse, or rejection In the below mentioned conditions the offer comes to an end and there after is not open for acceptance. 1) By the time ending: If the time limit stated in the offer for acceptance is over without acceptance, the offer is said to lapse with that period ending. When no time limit is given in an offer, it is said to lapse on the expiry of a 'reasonable time'. The term of 'reasonable time' depends and differs upon the circumstances of each case. 2) By Failing to Fulfill condition: If the acceptance, the offer fails to fulfill any condition stated in the offer for its acceptance, the offer is said to lapse or revoked. 3) By death or insanity: An offer is said to have lapsed due to insanity or death of the offerer or offeree. Similarly if any one of the parties dies or gees insane before acceptance, the offer ceases to be operative. However, if the acceptance is done in ignorance of the death or insanity of the offerer, the acceptance is termed as valid. 4) By rejection: Once an offer is rejected it is dead and hence cannot be accepted after some time. Hence rejection of the offer also gives out the same position of that in case of lapse of an offer. 5) By counter offer: When any offer is put in reply of the offer it is known as counted offer. The original offer is rejected, if any counter offer is made or any new condition is put forward for its acceptance. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 **Question**. Define 'Acceptance', state its venous modes And Discuss its essential elements according to law of contract. **Answer:** 'Acceptance' is the act of assenting i.e. giving positive reply by the offeree to the offerer. In other words it is the significance or expressing of the willingness by the offeree to be bound by the term of the offer. Section 2(b) of the I.C.A. Definesit as "The proposal is said to be accepted when the person to whom the proposal is made signifies his assent there to. Acceptance may be given by any of the three modes i.e. (1) By spoken words; (2) in writing; or (3) By conduct The following are the essentials of a valid acceptance: 1) Only by the offeree: The offer when it is specific can only be accepted only by the person to whom it is made. E.g. If the offer is made or put to 'X', then no one else can accept it only 'X' can do it. This is because the offeree is the only person, intended by the offerer to accept the offer. But if the offer is general, made to public at large, any member of the public, who has the knowledge of the offer, may accept it. 2) Acceptance should be absolute & unconditional: An acceptance with any change in the terms of main offer is not acceptance but a counter_offer. There fore the acceptance should be unqualified, without any change or variation and of the full offer and not in parts ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 3) Should be in the manner stated in the offer: If the offer has cleany shown manner in which it is to be accepted, then it should be accepted in that manner only. Eg. In a particular offer the acceptance is to be given only by the wav of writing, then acceptance to such offer cannot be otherwise, it should only be in written form, 4) It should be communicated: Just as the offer is to be communicated, the acceptance should also be communicated. Without the communication of the acceptance the offer will never know if the offer is accepted or not, law says that mental acceptance is not acceptance, and for this reason also the acceptance should be communicated. It should also be communicated at the usual place of business in usual manner and at a usual time. Here usual means normal routine or as per custom adopted by both the parties. 5) Within Time: The acceptance should be within the time limit stated for acceptance in the offer. If it is to be accepted in 10 days it has to be in 10 days only and not after 10th day If no time limit is stated in an offer it has to be accepted within reasonable time. The reasonability of time is different in each case. Apart from this, below mentioned are the important points regarding acceptance. When acceptance is by performance of any condition there is no compulsion of its communication (Caso low Carlil vis Carbolic Smoke Ball Co.) 6) Acceptance cannot be without the knowledge of the offer. 7) Mental acceptance is no acceptance. 8) It must be giyen before the offer lapses or before the offer is withdrawn or revoked. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 The acceptance cannot be implied from the failure to answer or silence on the art of the part of the offeree, unless by his previous conduct the offeree indicated that his silence means acceptance. **Question:** Define the term Consideration and state its legal rules. **Answer** **Introduction:** The consideration is one of the essential elements of a valid contract. If consideration is not supported to the contract, the agreement shall not be enforceable by Law. Consideration is a technical term used in the sense of quid pro quo which [means, something in return. **Example:** A agrees to sell his car to B for Rs 70000. Car is the consideration for B and the price is the consideration for A. **Definition:** "Consideration is the price for which the promise of other is bought, and promise thus given for value is enforceable". According to Section: 2(d) of Indian Contract Act, 1872: "When, At the desire of the promisor, The promisee or any other person Has done or abstained from doing; or Does or abstains from doing; or Promises to do or abstain from doing Something Than Such act or abstinence or promise ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 Is called a consideration for the promise." **Legal rules regarding consideration:** 1) **Consideration must move at the desire of promisor:** It is necessary that consideration to an agreement ans moved at a desire of the promisor because, if a consideration is not moved at the desire of promisor, then agreement is not enforceable. **Example:** A has done the repair work for the motorcycle of B, being asked to do so.A can demand remuneration for the services rendered as the work has been done as per B's wish. **Case Study:** Durgaprasad V/s Baldev & others. The landlord of the shops got the repairing of the shop done at the wish of the collector and than claimed then demanded increase in the rent from the tenants, which they denied to pay. The court held that, the tenants are not liable to pay any increase in rent as the work has not been done has not been done as per their wish or desire. 2) **Consideration may move from promise or any other person:** It means that consideration may be provided by promise or any other person under such cases the agreement is enforceable, thus, it is immaterial for the law that who furnishes the consideration. **Case Study:** Chinnaiya V/s Rammaiya. An old lady by a deed of gift, made over certain property to her daughter D. under the direction that she should pay her aunt, P. a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount Later D refused to pay the amount on the plea that no consideration has moved from P ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 to D. Held, P was entitled to maintain suit as consideration had moved from the old lady, Sister of P, to the daughter D. 3) **Consideration may be past, present or future:** a) **Past consideration:** When consideration by a party for a present promise was given in the past, it is said to be past consideration. Example: A saved B's property from fire at B's desire, B promised to pay Rs 1000 as reward, this is past consideration. b) **Present consideration:** When consideration is given simultaneously with promise, it is said to be present consideration, cash sale is an example of a present consideration. c) **Future consideration:** When consideration is to pass subsequently to the making of the contract, it is future consideration.Example: A promised to paint a picture for B after, week. B promised to pay Rs 1000 after fortnight, it is a future consideration. 4) **Consideration need not be adequate:** The law does not require the adequacy of consideration. It can be anything upon which the contracting parties agree. The law simply requires that an agreement has to be supported by consideration. However, it should be noted that when the consideration is not adequate, the consent of the party must be free. 5) **Consideration must be real and not fictitious:** the consideration must be something which practically exists. It must be something tangible. The consideration must be capable of performance and it must be certain. The consideration is not real in the following cases: - **Physical impossibility:**Example: A promises to put life into B dead wife, if B pays Rs 50 to him. A's promise is physically impossible of performance. - **Legal impossibility:** Example: A owes 500000 to B he ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 promises to pay Rs 500 to C. the servant of B, who in return promises to discharge A from the debt. This is legally impossible because C give discharge for a debt due to B, his master. - **Uncertainty:** Example: A engages B for doing a certain work and promises to pay a reasonable remuneration. There is no method of ascertaining the reasonable remuneration. The promise is unenforceable as consideration is uncertain. 6) **It must be something which the promisor is not already bound to do:** it must not be anything which the person is already bound to do as a duty. Example: There was a promise to pay to the lawyer an additional amount if the suit was successful held, the promise was void for want of consideration. The lawyer was under a pre existing contractual obligation to render the best of his services under the original contract. 7) **It must not be illegal, immoral or opposed to public policy:** The consideration given for an agreement must not be unlawful, where it unlawful, the courts do not allow an action on the agreement. **Question**: "An agreement without consideration is void unless it is in writing and registered."- Elucidate this with illustration. Or Write a note on: "No consideration, No contract" I **Answer:** According to Section: 10, consideration is one of the essential elements of a valid contract. According to Section; 25, An agreement made without consideration is void". ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 Thus, if the agreement is not supported by consideration, it cannot result into a valid contract. Example: A promises to pay Rs 10,000 to his friend B this promise can not be enforced by B because he is not giving any thing to A for this promise. Thus, there is no contract between A and B. **Exceptions to the rule that an agreement without consideration is void:** Section 25, states the exceptions to this rule, in such cases the agreements ate enforceable even though they are made without consideration. Such cases are as under. (1) **Natural Love and Affection:** When there is a promise, in writing. registered and signed between the parties, who are standing in near relation to each other and when it is out of natural love and affection, then the contract is not void even though there is no consideration. Following are the four requirements for this case: a) The promise must be in writing. b) The promise must be registered and signed by the party making it. c) It must be out of natural love and affection. d) Parties must be in near relations to each other. **Example:** A for natural love and affection promises to give his son B Rs 1 lakh. A puts this promise to B in writing and registered it. This is a contract. **Note:** It should also to be noted that Nearness of Relationship, however, does not necessary import natural love and affection. **Example:** A husband and wife were continuously quarrelling and there was a lot of disagreement between them. Dud to this, husband executed a registered document in favor of his wife agreeing, to pay her for maintenance, but no consideration moved from the wife. The ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 agreement is void for want of consideration, as the essentia requirement that the agreement is made on, account of natural love and affection between the parties is missing. (2) **Compensation, for voluntary services:** When one person dos something for another person voluntarily or willingly which the other party is bound to do legally for himself. In such a case, if other person gives something to a person who has done, something, then no consideration is necessary. The following points should be noted in this connection: (a) The act of doing something for the promisor must have been done voluntarily. (b) The services must have beån rendered for the promisor. (c) The promisor-must have been in existence at the time when the services were rendered of the voluntary act was done. (d) The intention of the promisor must have been to compensate the promise. **Example:** P finds D's purse, and gives it to him. D promise to give Rs.50 this is a contract. Here P need not furnish any consideration. (3) **Promise to pay a time bared debt:** A promise to pay wholly or in part a debt which is barred by the lav/ of limitation can be enforced if the promise is in writing and is signed by the debtor or his authorized agent. (Section; 25(3)). The following points should be noted in this connection: (a) The promise to pay a time barred debt must be an express promise. (b) The promise to pay may be absolute or unconditional. (c) Such ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 promise must be writing and is signed by the debtor or his agent. (d) It must relate to a debt which could not be enforced by a creditor because of limitation. **Note:** According to the law of limitation, a debt which remains unpaid or unclaimed for a period of 3 years becomes a time barred debt which is legally not recoverable.. **Example:** On 1st Jan, 1995, A lent B Rs 50000. On 5th Jan 2001, В signs a written promise to pay Rs 50000. This is a valid contract. (4) **Agency:** According to Section 185 of Indian Contract Act, consideration is necessary to create an agency. Thus, when a person is appointed as an agent his appointment is valid ever. If there is no consideration, generally an agent is remunerated by way of commission for services rendered. However, no consideration is immediately necessary, at the time of appointment. (5) **Gifts actually made:** According to this exception, the gift actually made is valid even though it is made without consideration. Thus, absence of consideration shall not affect the validity of any gift actually made. **Example:** X transferred some property to Y by a duly written and registered deed as a gift. This is a valid contract even though no consideration moved. (0) **Charlly:** Where a person promises to contribute to charity and on the faith of this promise, the promise undertakes liability to the extent not exceeding the promised subscription, the contract shall be valid. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 **Question:** "A stranger to contract cannot sue" - Explain the statement with exception. OR Write a note on: "Privity of Contract". **Answer:** The term "Privity of contract" means rights and liabilities of only the contracting parties. As per the doctrine of Privity of contract, a person who is not a party to the contract cannot sue for carrying out the promise made by the parties to the contract. In other words, a contract cannot be enforced by a person who is not a party to the contract. The basis of the doctrine is that a contract is always a private relationship between the parties who make it. And no ocher person can acquire rights or incur liabilities under it. It will be interesting to note that there is no provision in Indian Contract Act, 1872 that a stranger to contract cannot sue. However, it has become an established practice and is validly applicable in India. **Example:** A owes B Rs 100000 and sells his property to C. C promises to pay off A's debt to B.C fails to pay. B cannot sue C because he is a stranger to the contract. **Case study:** Dunlop Pneumatic Tyre Co. Vs Shellfridge & Co. X bought tyres from Dunlop co. and sold them to Y, a sub-dealer who agreed with not to sell below Dunlop's list price and to pay to Dunlop Co. Rs 150 as damages or every tyre undersold, Y sold tyres at less than the list price and there upon, Dunlop co. sued him for the breach. It was held that Dunlop co. could net maintain die suit because it was a stranger to contract. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 The following are the exceptions to the rule that stranger to contract cannot sue: (a) **Trust or Charge:** The person for whose benefit the trust has been' created may enforce the contract, even though he is not a party to the contract. **Example:** A appointed B as a trustee to look after C's property. Thus, C is a beneficiary of the trust and he can enforce the contract/ ever though he is not a part to the agreement. (b) **Family Arrangement partition agreement etc:** The person for whose benefit the provision is made under the family arrangements may enforce the contract. **Example:** Two brothers decided to invest equal amount for the benefit of mother alter the partition of the family. Mother can legally require her sons to make the investment, even though she is not a party to the contract. **Case Study. Daropti Vs. Jaspat Rai** A ill-treated his wife B. she left him because of his cruelty. A entered, into an agreement with B's father to treat her property. He further agreed to pay monthly allowance to his wife if he failed to treat her property. Subsequently, B was again ill- treated by A and was driven out of the house. It was held in this case that B was entitled to enforce the promise made by A to her Father, though she was not a party to it. (c) **Acknowledgement of the payment:** When promisor constitute himself to be the agent of a third party then he becomes liable under the contract. Example: A received some money from B to be paid ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 over C. A admitted to C that he had received money from B for making payment to him. In this case C can successfully recover the money form A. (d) **Agreement relating to land:** In certain cases, the owner of land is entitled to certain rights and obligations created by an agreement affecting the land. When any person purchases such land with the notice of rights and obligations of the owner, then he shall be bound by those rights and obligations although he was not a party to the agreement.. (e) **Contracts entered into through, agent:** The principal can enforce the contract entered into through agents if the agents act within the scope of his authority and in the name of the principal. (f) **Holder in due course:** A holder in due course of a negotiable instrument can realize the amount of the instrument even though; there is no contract between him and the person liable to pay. **Question What is meant by contingent Contract - Explain?** A contingent contract contains a conditional promise. It can be defined as follows: Any contract the performance of which depends upon the happening or non-happening of some uncertain collateral event is known as contingent or conditional contract. In this way, there are three important characteristics or a contingent or a conditional contract. A) Performance dependent: The performance of the work of the contract depends upon some other event. B) Event in future: Such a contract depends upon the happening or non happening of a certain event in future. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 C) Event is uncertain: The event must be uncertain which may or may not happen, D) Event collateral: The event must be collateral that is incidental to the contract. **Rules regarding the contingent contract :** Section 32 to 36 of the Indian Contract Act, have laid down the following rules regarding the contingent contract:- (1) The happening of a future uncertain event: This is a contract to do or not to do something if an uncertain event happens. Such a contract can be enforced only when the event happens. It can not be enforced if the event does not happen or if the event becomes impossible. a. Mr. X tells Mr. Y that he will give him Rs. 10,000/- if he marries Mr. X's daughter. Mr. Y does not marry her. He can not get money. b. In the above case, if the daughter of Mr. X dies before Mr. Y marries her then also Mr. Y can not get the money. (2) Non happening of uncertain future event: Contingent contracts to do or not to do something, it ar. uncertain future event does not happen, it can be enforced only when that event does not happen. **Example:** - Mr. X sells his scooter to Mr.Y on the condition that Mr. Y will pay him the full price of scooter if the scooter does not require any repairing within six months. Mr.Y can claim the entire price only when the scooter does not need any repairing within six months. (3) Happening of an event within a fixed time: Contingent contracts to do or not to do something if an uncertain event happens within a fixed ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 time, it can be enforced only if that happens within that period and not there after. **Example:-** Mr.Y sells his mixer to Mr.Y and tells him that he will replace the mixer if it goes out order within six months then he will have to replace the mixer only if it goes out of order within that time period. (4) The non happening of an event within a fixed time period:- The contingent contract to do or not to do something if a certain event does not happen within a fixed time, can be enforced only if that event does not happen with in the fixed time limit. **Example:-** Mr. X tells his son that he will give him Rs.50,000/- if he does not marry a girl before he passes his MBA examination, then the son can claim money only if he does not marry the girl within that fixed time limit. 5) Impossible event:- Contingent contract for impossible events are avoid. **Example: -** If Mr. X tells Mr. Y that he will pay him Rs.50,000/- if he can walk on water then contract is void because walking on water is physically impossible. **Question:** State various modes of discharge of a contract. Contract creates lega! obligations and rights on the part of the contracting parties. In other words a legal words a legal tie - legal knot comes into existence when there is a contract between any two parties. The parties would be free from their obligations when the contract is discharged i.e. when the contract comes to an end for one reason or the other. The following are the various modes through which the contract is discharged. (A) **PERFORMANCE OF THE CONTRACT:** a) **Actual performance:** When the parties to a contract do their respective duties or perform their respective promises the contract comes to an end. **Example:** Mr. A agrees to give his scooter to Mr.Y for Rs.20, 000 on 1/1/2001. He delivers the scooter on the date by taking Rs.20, 000 on 1/1/2001, the contract has ended. b) **Attempted performance (tender/offer to perform):** When one of the parties of the contract, offers to the other party to perform his part of liability under the contract before the actual time of performance, the first person is said to have made a tender/offer to perform. If the other person wrongfully refuses to accept the performance (attempted) then the promisor is exempted or discharged from his responsibility of performing the contract and his rights under the contract continue. ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 (B) BY LAPSE OF TIME: If the contract is not performed within a reasonable time then also it stands discharged. (C) BY MUTUAL CONSENT: The parties may agree and dissolve the contract in the following modes. a) Novation (new contract): When the partied of the contract end their old contract and enter into a new contract then their liabilities come to an end (liabilities under the old contract). b) Alteration in the terms of contracts: The parties continue the old contract but make some changes in its terms and ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 conditions, then also their liabilities Under the contract of old conditions are ended. c) By remission of contract (pay less then what is agreed): When the promisor voluntarily accepts a lesser amount paid by the other party towards the full payment the liable party is his liability. More like an amdavadi buyer who pays less than the agreed amount. d) By rescission ( cancellation of one or more terms) : When a contract is voidable either because of undue influence, or coercion, or fraud, misrepresentation etc the court ends that contract at the option of the aggrieved party, then also the parties to the contract are discharged from their liabilities. e) Accord and satisfaction: This is more or less similar to point discussed above as remission. Here one of the parties pays less than what had been agreed but the same is received by the other to satisfaction. It is more like an amdavadi seller who conveys a more mount as price to the buyer and then what ever he receives even after bargaining, he is satisfied with it. f) By Waiver : in contract the rights and liabilities of both the parties are against each other. If one of the party let-goes its right, automatically the liability of the other is discharged due to waiver by the first person. (D) BY IMPOSSIBILITY : in the following situations the contract's performance is not possible due to some impossibility and so the parties are discharged from the liabilities of the contract. (a) Death of the party: When any of the party of the contract dies before performance of the contract, it is discharged. (b) Incapacity of the party: If any of the party of the contract becomes physically or mentally incapable to perform the work ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 of the contract before performance of the contract, the contract is discharged. (c) Destruction of the subject matter: if the purpose or the_object for which the contract is made between the parties, is destroyed before the performance could take place, the parties are discharged from the liabilities of the contract. (d) Declaration of war: if the war is declared between the two countries of which the parties are citizens, then the contract will be discharged due to declaration of war. This is because of the declaration of the war ail the means of communication and transportation are stopped at that time. (E) BY CHANGE IN LAW: (a) Merger/Amalgamation: If any contract is made with some company which goes for a merger or amalgamation before the contract is performed, than the contacts liability cannot be enforced on the new identity and so the contract stands discharged. (b) Insolvency: if any of the party of the contract is declared as insolvent by a competent court before the contract is performed, the contract will be discharged due to impossibility. (c) Death of the party: When any of the party of the contract dies before performance of the contract, it is discharged. (F) BREACH OF CONTRACT: (a) By Actual Breach: This is one of the methods of discharging a contract whereby one of the parties do not perform its respective duty, the other party is discharged from its liability also. Example: Mr.A tells Mr.B that he would not to keep his ## J. INSTITUTE OF BUSINESS ADMINISTRATION ### INDIAN CONTRACT ACT 1872 promise. Here Mr.B also becomes free from the liability of doing his part of duty and gets the right to obtain damages from Mr. A. (b) By anticipatory breach: In any contract if the promisor informs the promisee before the date of the performance of the contract that he would not be able to keep his promise then there is an anticipatory breach of contract and the promisee has a right to end the contract on the same date. **Question:** Explain the doctrine or principle of discharge of contract by frustration or impossibility, arising subsequent to the formation of contract. One of the modes in which a contract is discharged is the impossibility of performance. The impossibility is of two types: (1) Impossibility existing at the time of contract: Any agreement to do an act impossible in itself is void. The agreement must be impossible in nature of the things. E.g. X contracted with Y that he