Indian Contract Act 1872 PDF

SCHOOL OF MANAGEMENT STUDIES UNIT – I– BUSINESS LAW - SBAA1206 1. INDIAN CONTRACT ACT 1872: GENERAL PRINCIPLES OF CONTRACT Contract Act - Definition, Classification - Essentials of a Contract - Offer and Acceptance - Consideration - Contractual Capacity - Free Consent - Legality of Object- Void agreements - Performance of Contract - Modes of Discharge of Contract - Remedies for Breach of Contract. INTRODUCTION ABOUT LAW The rule of conduct imposed by a Govt. to maintain order and fairness is called law; laws are exacted and backed by authority and power of the state. THE INDIAN CONTRACT ACT, 1872 The law of contract of India is contains in the Indian Contract Act 1872.This act is based mainly an English common law. It extends to the whole of India (Except the state of Jammu & Kashmir) and came into force on the first day of September 1872. The Act is not exhaustive because, it does not deal with all the Branches of the law of contract. There are separate set which deal with contracts relating to negotiable instruments, transfer of properly, state of goods, partnerships, Insurance etc. Scheme of the Act: 1. General principles of the law of the contract(sec1-75) 2. Specific kinds ofcontracts a) Contracts of indemnity and guarantee(124-147) b) Contracts of Bailment & Pledge (sec148-181) c) Contracts of Agency (sec 182-238) Definition of contract: According to sec 2(h) of the Indian Contract Act, An Agreement enforceable by law is a contract”. So, it is clear that a contract is an agreement made between two or more parties which the law will enforce. There are two elements in the above definition such as 1. An agreement between twoparties 2. Enforceability Agreement and two parties: As per sect 2(e): “Every promise and every set of promises, forming consideration for each other, is an agreement.” Thus, it is clear that the ‘promises’ is an agreement. As per sec 2(b): “A proposal, if it is accepted becomes a promise”, this means that an agreement is an accepted proposal. So, an agreement comes into existence only when one party makes a proposal (or offer) to the other party and the other gives his acceptance there to. Agreement= offer+ Acceptance Enforceability: An agreement, to become a contract, should create legal obligation or duty. If an agreement is incapable of creating legal duty, it is not a contract.So, agreement of moral, religious or social nature are not contracts, because they do not create legal obligations between the parties. For eg: inviting a friend to dinner, a father promise to his son for a gift etc. are of social obligations. As these agreements cannot create legal duties, they cannot become contracts. But in business agreements, it is assumed that the parties concerned create legal duties, hence they arecontracts. So, it is clear that an agreement is a wider term than a contract. “All contracts are agreements but all agreement are not contracts”. To sum up: Contract = Agreement+ Enforceability Consensus ad-idem: The essence of an agreement is the meeting the minds of the parties in all this means that the parties to the agreement must have agreed about the subject-matter of the agreement in the same sense and the same time, in other word, there should be consensus ad=idem between the mind of the parties. Unless there is consensus ad-idem, there should be no contract. ESSENTIAL ELEMENT OF VALID CONTRACT: 1. Offer andAcceptance: There must be a lawful offer and a lawful acceptance of the offer. So, there must be two parties to an agreement. i.e., one party making the offer and the other party accepting it. The terms of the offer should be definite and acceptance should be absolute. 2. Intention to create legalrelationship: Where the two parties, enter into agreement, their intention must be to create legal relationship between them. If there is no such an intention, there is no contract between them. Agreements of social, religious or domestic nature cannot make the legal relationship between the parties. In case of law of balfour vs. balfour (1919) insisted this point. Balfour vs. balfour 1919:The husband promised to pay his wife a household allowance of ₤30 every month. Later, the husband failed to pay the amount. The wife sued for the allowance. Held, she could not recover the amount as the agreement did not create any legal relationship; hence, there was no contract at all. But, in business agreements it is assumed that parties concerned create a legal relationship. Thus, an agreement to buy and sell goods intends to create legal relationship, there is a contract. But, if the parties have expressly declared their intention not creates any legal relationship even in the business agreement, such type of agreement cannot become a contract. The case of Rose & Frank co vs. Corruption Bros, in a good illustration on thepoint. 3. Lawfulconsideration: The term “consideration” means an advantages or benefits moving from one party to the other. It means “something in return”. The agreement between lawful only when party gives something to theother party and receives something from the other party. Consideration need not necessarily be in cash on hand. It may be an act or forbearance not doing something or promise to do or not to do something. But it must be real and lawful. 4. Capacity of parties: The parties entering into a contract must have certain capacity. They must be legally competent to enter into a valid contract. They should not suffer from any incapacity either on account of status like forgiveness of an account of mutual deficiency like minors, lunatics or any ground if the parties have no capacity, the contract entered into by them as void of initio. 5. Free and genuineconsent: It is essential that the parties must be on the same mind and on the same subject. There should consensus ad-idem between the parties to the contract. The parties should have a free and genuine willingness in making the contract. The consent should have to been obtained by force or any other by force or any other coercive methods. The consent is said to be free of it is not obtainedby, A. coercion B. undueinfluence C. fraud D. mistakeand E. misrepresentation 6. Lawfulobject: The act of a contract and consideration should be lawful an object. Lawful if it is not prohibited by law. An agreement is lawful when it is not. a) illegal b) immoral c) oppose to publicpolicy 7. Certainty and Possibility of Performance: The terms of meaning of the agreement must be certain and definite, otherwise the agreement will not be enforceable. For example, if A agrees to sell to B ten tone of oil; no contract is there because it is not clear what kind of oil is intended to be sold. An agreement to do an impossible act is not valid. For example, an agreement between A and B to construct a house in one day cannot become a valid contract, because, the act of the agreement is not possible. 8. Agreement not declaredValid: The agreement should not have been expressly declared void by any law, providing in the country. 9. LegalFormalities: The agreement may be in oral or written form. It is in writing, it must comply with the prescribed legal formalities in regard to writing, registration and attestation. There are some legal formalities also in order to make an agreement legally enforceable. In some cases the document in which the contract has been written, should be stamped and registered. Thus the legal formalities should be complied with. Then only a contract can be enforced in a court of law. CLASSIFICATION OF CONTRACTS: Contracts can be classified according to: 1. On the basis ofValidity: a) ValidContract: The contract which is enforceable by law is known as valid contract.Sec.10 of the Indian Contract act, 1872 explains various legal requirements for a valid contract; they are: offer and acceptance, capacity of parties, lawful consideration, lawful agreements, free consent, etc. in short a valid contract is one which posses all the requirements of legal enforceability. b) Void Contract and Void Agreement: It is a contract which has no legal effect. It is unenforceable by law. It is not enforceable at the option of either party. The void contract is not void ab initio. It is valid at the time of making it, but it becomes invalid in future. This void contract cannot be enforced by law. A valid contract becomes void contract due to the following reasons: i) Due to impossibility – A valid contract becomes void be impossibility of performance after the formation of the contract. Illustration: A and B contract to marry each other. But before the date A goes mad. The contract becomesvoid. ii) Due to subsequent illegality – A contract also becomes void be subsequent illegality. Illustration: A agrees to sell 100 bottles of wine to B for Rs.1000 within 15 days. But before delivery, the govt. may prohibit the purchase and sells of wine, if it happens the contract becomesvoid. c. Voidable Contract: An agreement which is enforceable by law at a option of one or more of the parties thereto, but not at the option of the others, is voidable contract. In short, a voidable contract is one which is enforceable by law at the option of one of the parties. Until it is avoided or cancelled by one of the parties, it is a validcontract. Example: A promises to sell his car to B for Rs.1, 00,000. But his consent has obtained by use of force. Now the contract is voidable at the option of A. he may cancel it or acceptsit. Circumstances under which a contract becomes voidable: a) When the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation orfraud. b) When one party prevents the other party from perform his duty, and then the contract becomes voidable at the option of the party soprevented. Example: A contract with B that A shall white wash B house for Rs.100. A isreally and willing to execute the work accordingly. But B does not entrust his house for whitewash. c) When one party fails to carryout promise within the specified period, then the contract becomes voidable at the option of the promise. Example: X accepts to sell and deliver 50 days of rice to Y for Rs.10, 000 within one week. But X does not supply the 50 bags of rice within the specified period. Here, the contract becomes voidable at the option of Y. d) Illegal or unlawfulagreement: An agreement is illegal and void if its object or consideration is prohibited by law or is of fraudulent or it’s against to public policy or morality. An illegal agreement is void ab initio. e) Unenforceable Contract: An unenforceable contract is one which cannot be enforced in a court of law because of some technical defect such as absence of writing or lapse of time, etc. 2. On the basis offormation: a) Express Contract: If the terms of a contract are expressly agreed upon (whether by words, spoken or written) at the time of formation of the contracts, it is called as express contract. Example: A tells B on telephone that he offers to sell his car for Rs.1,00,000 and B in reply informs A that he accepts the offer. There is an expresscontract. b) Implied Contract: the contract which is not expressed in written or spoken words, but is tobe inferred from the conduct of the parties is called as impliedcontract. Example: There is an implied contract if a person; i) gets into a publicbus ii) takes a cup of coffee in ahotel iii) permits a porter to liftluggage c) Quasi Contract: A quasi contract is one which resembles a contract but not possess all the essentials for a valid contract. But quasi contract is valid contract. It is created by law and it resembles a contract, such a contract does not arise by virtue of any agreement, express or implied, between the parties but the law infers or recognizes a contract under certain specialcircumstances. For example: 1) Obligation of finder of last goods to return them to true owner 2) Liability of a person to whom money is paid under mistake, to repay it back In the above cases, there are no offer, acceptance, agreement etc. but in the eyes of law these are considered as quasi contracts. The quasi contract is known as “constructive contracts”. d) E-Commerce contract: An E-Commerce contract is one which is entered into between two parties via internet. 3. On the basis ofperformance: On the basis of performance, the contract can be classified as follows: 1) Executed contract: an executed contract is one, in which both the parties have fulfilled their obligations and which are completely carriedout. 2) Executory contracts: an executory contract is one in which both the parties do not fulfill their obligations. Example: if A makes a contract with B regarding the sales ofhisscooter. As per the terms and conditions. A will deliver his scooter to B within a specified time; B will pay the price offer one month. Here, at the time of making the contract, both the parties have to fulfill the obligation henceforth. This is executory contract. 3) Unilateral contract: if one party has to be fulfilling his obligation and the other has already fulfilled his obligation, it is known as unilateralcontract. 4) Bilateral contract: if both the parties have fulfilled their obligation hence, it is known as bilateralcontract. OFFER AND ACCEPTANCE OFFER is the first and foremost requirement to make an agreement. An offer is a proposal by one party to another to enter into a legally binding agreement with him. By means of an offer, a person signifies his willingness to do some acts in order to get consent from the other party. By making an offer, a person shows his willingness to enter into an agreement with other. Ex: ‘A’ says to ‘B’ will you purchase my house for Rs.2, 00,000. ‘A’ in this case, is making an offer to ‘B’ as he signifies to ‘B’ his willingness to sell his house to ‘B’ for Rs.2,00,000 in order to get ‘B’s acceptance to buy the house. The person making the offer is known as the “Offeror”, “Proposer”, “Promisor” and the person to whom it is made is called the “Offeree”, “Proposee”. If the offeree accepts the offer he is called the “acceptor” or “Promisee”.The term “offer” is used in English law and it is known is “proposal” in Indian law. Types of Offer: 1. ExpressOffer: An offer, which is express by words, spoken, or written is called an “Express Offer”. Ex: “M” says or writes to “N” like, “I am ready to sell my house to you for Rs.1, 00,000” This is an offer. 2. ImpliedOffer: If the offer is made by the conduct of the parties, it is called as “Implied Offer”. Illustration: If a transport company runs buses on a particular route, there is an implied offer by the transport company to carry passengers for a certain fare. 3. SpecificOffer: Where an offer is made to a definite person it is called a specific offer. It can be accepted only by the person to whom it is made. 4. GeneralOffer: A general offer is one which is made to be world at large or public in general and not to any specific person. Advertisement for tracing a missing person or thing, seeking valuable. Information relating to a missing person or thing etc., are the best examples for the general offer. Here the offer can be accepted by anybody if interested in the offer. The general offer binds the offeror, the leading case on the subject of general offer is that of Mrs.Carlill vs. carbolic smoke ball co. Case law:The carbolic smoke ball company issued an advertisement in which the company offered to pay of $100 to any person who contracts influenza, after having used their smoke balls three times daily for two weeks, as per the printed directions. Mrs.Carlill, on the faith of the advertisement, bought and used the balls according to the direction, but she contracted influenza. She sued the company for the promised reward. Held, she could recover the amount as by using the smoke balls she had accepted theoffer. 5. Standing Offer orTender: A tender (in response to the advertisement) is an offer. It may be either a “definite offer” or a “Standing offer”. If a person a tender to supply specified goods or to tender specified services to the person, who invites the tender, such tender is called as a “definiteoffer”. Ex: ABC Company invites tender for the supply of 100 tables. For this reason, it means an advertisement (this advertisement inviting tender, is not the offer) JK and TIRESsubmit the tenders are definite offer. If the company accepts the J’s offer.It is meant that is a binding contract between ABC co andC. If the goods or services are required over a certain period, a person may invite tenders. Such type of tender to supply goods or to tender services over a certain period, the tender are called as “Standing Offers”. 6. CounterOffer: When some changes are made by the offeree in the original made by the offeror, it is called the “Counter Offer”. Here the offeree does not accept the terms and conditions of the original offer as laid down by the offeror. He wants to make some changes in the original offer. This counter offer will not become a contract unless the conditions given by the offeree are accepted by the offeror. Ex: “A” offers to sell his cycle to “B” for Rs.2000. This is the original offer. “B” makes a reply offering to purchase it for Rs.1,500. In this case B’s reply is not acceptance, but it is only a counteroffer. 7. CrossOffer: If two parties makes an identical offer for the same subject matter to each other, it is called cross offer. None of them is aware of the fact that the other party is also making the offer for the same thing. In the case of cross offers they shall not(Institute acceptance of one’s offer by the other). Illustration: “A” writes to “B”, agreeing to sell his car for Rs.1,50,000 on the sameday, without knowing this “B” writes to “A”, agreeing to buy A’s car for Rs.1,50,000. Both the parties are unaware of the letters written by one to the other. This is not regarded as a contract, because it is meant that both the parties make offers simultaneously; but there is not acceptance at all moreover there is no consensus add idem. LEGAL RULES OF A VALID OFFER OR ESSENTIALS: A valid offer should be in confirming with the following rules: 1. An offer must be capable of creating legalrelationship: A social invitation, even if it is accepted, does not create legal relationship because it is not so intended. An offer therefore, must be such as would results in a valid contract when it is accepted. 2. An offer must contain definite terms andconditions: Terms of contract must be definite and not lose or vague. If the terms of an offer are vague or indefinite, it acceptance cannot create any contractual relationship. 3. An offer must be communicated: An offer to be complete must be communicated to the person to whom it is made. 4. An offer must be made in order to get assent of the other: An offer must be made with a view to obtain the assent the offer to do something must be made with a view to obtain the assent of other party addresser and merely with a view to disclosing the intention of making an offer. 5. A statement of price is not anoffer: A mere statement of price is not an offer to sell some goods or things. ACCEPTANCE Acceptance refers to an act of giving consent by the offeree. If the offer is considered as the starting point in a contract, acceptance is the concluding point. Who can accept? When an offer is made to a particular person, it can be accepted by him alone. If it is accepted by any other person, it is not a valid acceptance. In the case of equal offer, any person can accept it. This was incurred in the case law of Mr.carlill vs. carbolic smoke ball company. Essentials/legal rules for a valid acceptance: The acceptance of an offer must satisfy the following conditions. 1. Acceptance should be absolute andunqualified: It should be given by the offeree without making any variation or addition to the original. Offeree, even if there is a slight variation effected by the offeree to the original offer; it will not be a valid acceptance. If any alteration is made to the original offer unless the counter offer is accepted by the offered is total, it will not become a valid acceptance. 2. Acceptance should becommunicated: Acceptance should be communicated to the offers in due course. Mere acceptance by the offeree without communicating to it the offeror cannot become a valid acceptance. In the case of general offer, it is not necessary to communicate the acceptance to the offered. Mere complying with terms and conditions of the offer will amount to a valid acceptance this was confirmed in the case law of carlill vs. carbolic smoke ballco. 3. It must be given within a reasonabletime 4. It must be in the prescribedmode 5. It must be made by theofferee 6. It must show to fulfill hispromise 7. It cannot precede anoffer 8. It must be made before the lapse or revocation of an offer 9. It must be aware of the proposal at the time of theoffer 10. Silence does not implyacceptance 11. Acceptance must be in contractualintention Communication of Offer and Acceptance and Revocation of Offer The two very important aspects of a contract are the offer and the acceptance of the offer. However, in the practical world of business and economics, the communication of the offer and the acceptance and the timings of these are also very important factors. Communication of Offer and Acceptance Now we have seen previously that an offer cannot be revoked after the offeror has communicated it to the offeree. Then the offer becomes binding, it creates legal relations between the two parties. So when is the communication complete? Effective communication of the offer and a clear understanding of it is important to avoid misunderstanding between all the parties. If the parties are talking face-to-face this is not a problem. The communication happens in real time and the offer and acceptance will be communicated on the spot, creating no confusion. But often times in business the communication occurs via letters and emails etc. So, in this case, the timeline of communication is important. Communication of Offer Section 4 of the Indian Contract Act 1872 says that the communication of the offer is complete when it comes to the knowledge of the person it has been made to. So when the offeree (in case of a specific offer) or any member of the public (in case of a general offer) becomes aware of the offer, the communication of the offer is said to be complete. So when two people are talking, face-to-face or via telephone, etc the communication will be complete as soon as the offer is made. Example if A tells B he will fix his roof for five thousand rupees, the communication is complete as soon as the words are spoken. Let us take the same example. A writes to B offering to fix his roof for five thousand rupees. He posts the letter on 2nd July. The letter reaches B on 4th July. So the communication is said to complete on 4th July. Communication of Acceptance According to sec.4 of the Indian Contract Act, the Communication of acceptance is complete as against the acceptor when it comes to the knowledge of the proposer. Mode of Acceptance In case of communication of acceptance, there are two factors to consider, the mode of acceptance and then the timing of it. Acceptance can be done in two ways, namely A. Communication of Acceptance by an Act: This would include communication via words, whether oral or written. So this will include communication via telephone calls, letters, e- mails, telegraphs, etc. B. Communication of Acceptance by Conduct: The offeree can also convey his acceptance of the offer through some action of his, or by his conduct. So say when you board a bus, you are accepting to pay the bus fare via your conduct. Timing of Acceptance The communication of acceptance has two parts. Let us take a look A. As against the Offeror: For the proposer, the communication of the acceptance is complete when he puts such acceptance in the course of transmission. After this it is out of his hand to revoke such acceptance, so his communication will be completed then. So, for example, A accepts the offer of B via a letter. He posts the letter on 10th July and the letter reaches B on 14th For B (the proposer) the communication of the acceptance is completed on 10th July itself. B. As against the Acceptor: The communication in case of the acceptor is complete when the proposer acquires knowledge of such acceptance. So in the above example, A’s communication will be complete on 14th July, when B learns of the acceptance. REVOCATION OF OFFER The revocation means, “Taking back” or “withdrawal” By means of revocation of an offer, the offers is withdrawn or cancels by the offeror. The offer can be revoked at any time, before the offeree posts the letters of acceptance once the letters of acceptance is posted by offeree, even if it does not reach the offer, the acceptance is over then the offer cannot be revoked. Let us take the same example of before. A accepts the offer and posts the letter on 10th July. B gets the letter on 14th July. But for B (the proposer) the acceptance has been communicated on 10th July itself. So the revocation of offer can only happen before the 10th of July. Circumstances in which the offer is revoked: In the following circumstances the offer comes to an end either by revocation or laps of time. 1. Revocation by givingnotice: The offeror can revoke his offer before it is being accepted by the offeree. Mere posting of letters of acceptance is considered as the time of acceptance and revocation should be pursued before passing the letter of acceptance and not after words. More over the revocation must be communicated to the offeree. 2. Lapse oftime: If the offeror has fined any time within which the offeree has to give his acceptance, the offeree must act so, if he fails to give his acceptance within the time limit the offer is invoked by the expiry of the time limit. 3. Non-fulfillment ofconditions: If the offeror has laid down any condition for accepting the offer, the offeree must fulfill them. If not the after stands revoked. 4. Death orInsanity: If offeror dies or becomes in same the offer is revoked. But, if the offeror without having the knowledge of the death or insanity of the offeror gives his acceptance, the executes of the deceased offered is bound to execute the contract. 5. CounterOffer: If the offeror makes some changes to the original made by the offeror, it is known as counter offer. Unless the changes are accepted by the offeror the offer stands revoked. 6. Not following the mode prescribed by theofferor. If the offeror has prescribed any mode to the offeror to communicate the acceptance the offered is bound to comply with it. On the contrary, if the offeror chooses a different mode, the offer is considered as revoked, if the offeror has not prescribed any mode the offeror must follow the usual or reasonable mode. Revocation of Acceptance Section 5 also states that acceptance can be revoked until the communication of the acceptance is completed against the acceptor. No revocation of acceptance can happen after such date. Again from the above example, the communication of the acceptance is complete against A (acceptor) on 14th July. So till that date, A can revoke his/her acceptance, but not after such date. So technically between 10th and 14th July, A can decide to revoke the acceptance. CONSIDERATION Consideration is a technical term and it means “something in return”. When a party of an agreement to do something. They must get something in return. This “something in return” is known as consideration. Ex: ‘A’ wants to sell his car to B for Rs.50, 000. Car is the consideration for B and the price is the consideration for A. Sec 2(d) defines consideration as “when at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.” Lawful consideration Consideration is one of the essential elements of a valid contract. An agreement without consideration is null and void; such an agreement is not enforceable by law (However sec 25 of the Indian contract act lays down certain exceptions where there is no necessary for the consideration even for a valid contract a gratuitous promise will not create any legal obligation. A promise without consideration cannot be enforced bylaw. The “something in return” may be in the form of cash, any goods or services. In short, the consideration refers to: a) An act(or). b) A returnpromise(or) c) Some benefit to thepromises. d) Some detriment or loss, or damage to the promisee. LEGAL RULES AND ESSENTIALS OF A VALID CONSIDERATION: 1. It is required both for formation and discharge of an agreement orcontract. 2. It must belawful 3. It need not beadequate 4. It must be real and notillusory 5. It must move at the desire of the offeror 6. It must be of some value in the eyes oflaw 7. It may be past, present or future 8. It may be either positive ornegative 9. It may be furnished by the promisee or any other person Exceptions to the rule “No consideration No contracts” or “A contract without consideration is void” – Discuss: 1. Love andaffection: If any agreement is made, which is expressed in writing and is made out of natural love and affection between the parties, standing in near relation to each other without consideration is void. In short. i) The contracting parties should be near relatives for eachother. ii) The agreement should be made out of natural love and affection between oneparty. iii) The agreement should be in written form and it should be registered under the law for the time being inforce. Ex: “A” out of his love and affection, promises to give his daughter “B” Rs.15, 000 this promise is made in writing and registered. This is a valid contract though there is no consideration. 2. Compensation for voluntaryservices: If there is an agreement to compensate wholly or partly for the voluntary acts done by another for the promisor, the agreement is valid even the consideration is absent.Ex: i. “A” finds B’s purse and gives it to him. “B” promises to give “A” Rs.50. This is a contract. ii. “A” supports “B” infant son. “B” promises to pay A’s expenses in so doing. This is a contract. It is an important point that the past consideration is not at all a consideration in English law and it should be either present or future consideration. Under Indian law the past consideration is a validconsideration. 3. Promise to pay a time-barreddebt A promise by a debtor to pay a time-barred debt is enforceable provided it is made in writing and is signed by the debtor or by his agent generally or specially authorized in that behalf. A debt is barred by limitation if it remains unpaid or unclaimed for a period of three years. Such a debt becomes legallyirrecoverable. Ex: D owes C Rs.1,000 but the debt is barred by the Limitation Act. D signs a written promise to pay C Rs.500 on account of the debt. This is a contract. 4. CompletedGift The rule “No consideration, no contract” does not apply to completed gifts. 5. Agency No consideration is necessary to create an agency. 6. CharitableSubscription Where the promisee on the strength of the promise makes commitments, i.e., changes his position to his detriment. Doctrine of Privity of Contract The Indian Contract Act clearly states that there cannot be a stranger to a contract. This is explained through the Doctrine of Privity of a Contract. Doctrine of Privity of Contract or Stranger to Contract It is a general rule of law that only parties to a contract may sue and be sued on that contract. This rule is known as the doctrine of privity of contract. Privity of Contract means relationship subsisting between the parties who have entered into contractual obligations. The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to proceed from a third-party. However, a stranger (third-party) to consideration is different from a stranger to a contract. The law does not allow a stranger to file a suit on the contract. This right is available only to a person who is a party to the contract and is called Doctrine of Privity of Contract. Ex. Peter has borrowed some money from John. Peter owns a property and decides to sell it to Arjun.Arjun promises to pay John on behalf of Peter.However, if Arjun fails to pay, then John cannot sue since Arjun is a stranger to the contract. It is important to note that the Doctrine of Privity has exceptions which allow a stranger to enforce a claim as given below. Exceptions to the Doctrine of Privity of Contract A stranger or a person who is not a party to a contract can sue on a contract in the following cases: 1. Trust 2. Family Settlement 3. Assignment of a Contract 4. Acknowledgement or Estoppel 5. A covenant running with the land 6. Contract through an agent Trust If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract. Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of the estate in Ravi’s name, once he becomes 21 years old. After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue upon the contract between Arjun and his father, even though he was not a party to it. Family Settlement, Partition or other family arrangements If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract. Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary. Ritika was living in a Hindu Undivided Family (HUF). The family had made a provision for her marriage. Eventually, the family went through a partition and Ritika filed a suit to claim her marriage expenses. The Court held the case because Ritika was the beneficiary of the provision despite being a stranger to the contract. Assignment of a Contract If a contract is made for the benefit of a person, then he can sue upon the contract even though he is not a party to the agreement. It is important to note here that nominees of a life insurance policy do not have this right. Acknowledgment or Estoppel If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied. Peter gives Rs. 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the amount. Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of the sale price, Pankaj was to be paid Rs. 25,000 as his professional charges. Seema promised to pay Pankaj the amount before taking possession of the property. She made three payments of Rs. 5,000 each and then stopped paying him. Pankaj filed a suit against Seema which was held by the Court because Seema had acknowledged her liability by conduct. A Covenant Running with the Land When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract. Peter owned a piece of land which he sold to John under a covenant that a certain part of the land will be maintained as a public park. John abided by the covenant and eventually sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant. Contract through an Agent If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal). CONTRACTUAL CAPACITY The parties who enter into a contract must have the capacity to do so. All persons cannot make a valid contract. Eligible persons: A person who is of the age of majority, is of sound mind is not disqualified from contracting by any law, a make a valid contract. So, the following persons are not competent to contract 1) minor 2) persons of unsound mind 3) other persons, disqualified by law. MINOR: According to sec 3 of the Indian Majority Act, 1875, ‘A minor is a person, who has not completed 18 years of age’. In the following two situations, he attains majority offer 21 years of age. i. If there is any guardian, appointed by the court(or). ii. If the properties of minor are in superintendence of the court. Minor’s agreement: The law regarding minor agreement is as follow 1) An agreement with or by a minor is void andinoperative: Generally the agreements entered into by a minor are void and the other party cannot enforce the claim in a court of law. A party who has advanced money or obtainer mortgage on the properties of a minor cannot recover the amount and the mortage is void. (Mohiribibi Vs Dharmados Ghose). In this case, a minor executed a mortage deed for Rs.20,000 but received only 8,000…later, he filed a case to cancel the agreement and the creditor (the money lender) claimed the refund of Rs.8000. Held, the agreement is void and the amount cannot be recovered. 2) Minor can be beneficiary or a promisee or apayee: In some cases, contracts entered into a minor are voidable and they are enforceable at the option of the minor and not at time option of the other party. Ex., if a person has advanced money to a minor it cannot be recovered and the contract is void. On this contrary, if a minor has advanced any loan to a party, this contract is enforceable at the option of the minor and the other party cannot refuse to repay the amount. Thus the contract is voidable. Ex. M aged 17 agreed to buy a second-hand bike for Rs.5,000 from S. He paid Rs.200 as advance and agreed to pay the balance the next day and collect the bike. When he came with money the next day, S told M that he had changed his mind and offered to return the advance. S cannot avoid the contract though M may, if he likes. 3) Valid contract in the case ofnecessaries: Some contracts made by the minor are perfectly valid and they can find the minor, if they are for their “necessaries”. If a person supplies necessaries to a minor or lends money to the minor to purchase necessary things, or to meet his educational of medical expenses, such an amount can be recovered. Hence, the contracts by minor with minor for necessary goods or necessarily services to mine become valid absolutely. His properties can be held for this purpose, but he is not personally liable for this case. 4) Notification: Notification means the act of confirming, or make as valid. The minor cannot satisfy his agreement after attaining the agreement of majority. For eg: A minor borrows Rs.5000 from”A” and executes a promissory note in favor of “A”. After attaining the age of majority, he executes another promissory note in settlement of the first note. The secondary promissory note is void. 5) Norestitution: The minor cannot be ordered to make compensation for a benefit obtained under a void agreement. In other words, if he has received only benefit under a void agreement, he need not return back the benefit; he need not give any compensation for it. 6) He can always pleadminority: If a minor by misrepresenting this age, makes a contract with another person, he cannot be sued.Eg: “J” a minor, by fraudulently representing himself to be full age, induced to “L” sends him for the money. Held, the contract was void and “s” was not liable to repay the amount. Hence the principle of estoppels is not applicable tominor. 7) No specific performance: Specific performance means the actual carrying out of the contract as agreed. Since an agreement by a minor is void, the court will never direct “specific performance” of such an agreement but a contract entered into by his guardian or his manager of the estates. (Behalf of the minor) can find the minor, if the following conditions are fulfilled. a. The contract should be within the authority of the guardian ormanager. b. It should be for the benefits of theminor. 8) Minor as a partner: Generally a minor cannot become a partner in a partnership firm. But, he may be admitted to the benefits of an existing partnership firm as a partner, with the consent of the entire partner. But, his liability is limited. 9) The minor can acts as an agent. The acts done by the minor as the agent are binding the principal if they are done within the scope of authority given tohim. 10) The minor cannot be declared asinsolvent. a) The partner or guardian, are not capable for agreement. Made by the minor on though the agreement is fornecessaries. b) The minor is not liable, if he is a surety in a contract ofguarantee. INCAPACITY OF CONTRACT Thus incapacity makes contracts in valid, and incapacity may be broadly classified into two: a) Incapacity arising from status. b) Incapacity arising from mental deficiency. Incapacity arising from status: Person is disqualified to make a valid contract because of this position/status, they are as follows: I) Foreign Ambassador: This person enjoys special status. They are competent to enter into a valid contract. But they can be sued only if they submit themselves to the judicious of the court. Further contract gouts permissions are also essentials to suit them. II) Alienenemy: An alien is a person who is not a subject of the Republic of India. He may be (i) an alien friend or (ii) an alien enemy During normal time, trade can be takes place between trades of two different nations, but if war breaks out, the enemy countries is regarded as alien enemy, and no contract can be entered into during the time of war with it. Contracts made before the war may either be suspended or dissolved. III) Convicts: Persons who are undergoing imprisonment cannot make a contract during the convictionsperiod. IV) Insolvent: Persons who are adjudicated as insolvents or bankrupt cannot there after enter into a contract and all the contracts entered previously by them also comes to anend. V) Company: A company cannot enter into a contract which requires physical capacity or physical entry. The contract entered into by a company will be valid only if its contractual capacity permits in objects clause of Memorandum of Association. VI) Marriedwomen: Married women are having capacity to make valid contract, they can their husbands for their basic committees. A married woman may sue or be sued in her own name in respect of her separate property. INCAPACITY ARISING FROM MENTAL DEFICIENCY: Person who is mentally deficient cannot make a valid contract. The following persons are having mental deficiency and they are disqualified from making contracts. i) Minor: Minor is a person who has not obtained the age of majority as per 20 c (3) of the Indian Majority Act 1875. The persons who are below the age of 18 years. A minor is mentally not matured and he is incompetent to make a valid contract. ii) Idiots: A person who has completely lost his mental powers and who is incapable of forming a rational judgment is called an idiot. Idiocy is a permanent one. An idiot or a natural food is a person who has no understanding power. All agreement, other than those for necessaries of life with idiots is absolutelyvoid. iii) Lunatics: A person, whose mental powers are due to some mental strain, is called as a lunatic. It is not armament as in the case of idiocy. The lunatic will suffer from intervals of sanity and insanity. In other words, lunatics in some intervals will be of sound mind and the said intervals are called lucid intervals and in some intervals, they will be of unsound mind. They can enter into a contract during the lucid intervals. Persons of unsound mind: One of the essential conditions of competency of parties to a contract is that they should be sound mind. According to the contract act, the term soundness refers to. a) Capacity of understanding the contents of agreement (at the time of making anagreement). b) Ability to make a national decision regarding the contract at the time of making anagreement. If a person is capable of both, he suffers from unsound mind. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract, when he is of sound mind.A person, who is usually of sound mind, but occasionally of unsound mind.Cannot make a contract, when he is of unsound mind. FREE CONSENT Meaning of “consent” and “free consent”:- Consent, it means acquiescence or act of assenting to an offer. “Two or more persons are said to consent when they agree upon the same thing in the same sense.”(Sec-13). Free consent, Consent is said to be free when it is not caused by- 1. Coercion as defined in sec, 15,or 2. Undue influence as defined in Sec. 16or 3. Fraud as defined in sec 17 ,or 4. Misrepresentation as defined in sec 18or 5. Mistake, subject to the provision of sec-20,21,22 Coercion When a person is compelled to enter into a contract by the use of force by the other party or under a threat, “coercion” is said to be employed. Coercion includes fear, physical compulsion and menace to goods. Example: - A threatens to kill B if he does not lend Rs. 1000 to C. B agrees to lend the amount to C. The agreement is entered into under coercion. Undue influence Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. This happens when a special kinds of relationship exists between the parties such that one party is in a position to exercise undue influence over the other. Difference between coercion and undue influence: - Coercion Undue influence The consent is given under the threat of an The consent is given by a person who is so offence (i.e., committing or threatening to situated in relation to another that the other commit an act forbidden by the Indian penal person is in a position to dominate his will. In code or detaining or threatening to detain other words, consent is given under moral property unlawfully.) influence. Coercion is mainly of a physical character. It Undue influence is of moral character< It involving mostly use of physical or violent involves use of moral force or mental pressure. force. There must be intention of causing anyperson Here the influencing party uses its positionto to enter into an agreement. obtain an unfair advantage over the otherparty. It involves a criminal act. No criminal act is involved. Misrepresentation and fraud A representation, when wrongly made, either innocently or intentionally, is a misrepresentation. Misrepresentation may be- 1. An innocent or unintentional misrepresentation,or 2. An intentional, deliberate or willful misrepresentation with intent to deceive or defraud the other party. The former is called “misrepresentation” and the latter “fraud”. MISREPRESENTATION Misrepresentation is a false statement which the person making it honestly believes to be true or which he does not know to be false. It also includes non-disclosure of a material fact or facts without any intent to deceive the other party. Example: - A while selling his mare to B, tells him that the mare is thoroughly sound. A genuinely believes the mare to be sound although he has no sufficient ground for the belief. Later on B finds the mare to be unsound. The representation made by A is a misrepresentation. FRAUD According to Sec.17”fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance (intentional active or passive acquiescence), or by his agent with intent to deceive or to induce a person to enter into a contract: 1. The suggestion that a fact is true when it is not true and the person making the suggestion do not believe it to betrue. 2. The active concealment of a fact by a person having knowledge or belief of thefact: 3. A promise made without any intention of performingit; 4. Any other act fitted todeceive; 5. Any such act or omission as the law specially declares to befraudulent. Example: - A sells, by auction, to B a horse which A knows to be unsound. A says nothing to b about horse’s unsoundness. This is not fraud in A. MISTAKE Mistake may be defined as erroneous belief about something. It may be a mistake of law or a mistake of fact. 1. Mistake of law of the country: - example: - A and B enter into a contract on the erroneous belief that a particular bet is barred by the Indian Law of Limitation. This contact is notvoidable. 2. Mistake of law of a foreign country. Such a mistake is treated as mistake of fact and the agreement in such a case is void.(Sce-21) MISTAKE OF FACT 1. BILATERALMISTAKE: When both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. A) Mistake as to the subject–matter: Where both the parties to an agreement are working under a mistake relating to the subject matter, the agreement is void. Mistake as to the subject-matter covers the following cases: i. Mistake as to the existence of the subject-matter:- If both the parties believe the subject matter of the contract to be in existence, which in fact at the time of the contract is non-existent, the contract is void. Example: - A agrees to buyfrom B a certain house. It turns out that the house was dead at the time of the bargain, though, neither party was aware of the fact. The agreement is void. ii. 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: - W agreed to buy from R cargo of cotton “to arrive ex-peerless from Bombay”. There were two ships of that name sailing. From Bombay”. There were two ships of that name sailing. From Bombay, one sailing in October and the other in December. W meant the former ship but R meant the later. Held. There was a mutual or a bilateral mistake and there was no contract. iii. Mistakes as to the quality of thesubject-matter: If the subject-matter is something essentially different from what the parties thought it to be, the agreement is void. Example: - table napkins were sold at an auction by a description “with the crest of Charles I and the authentic property of that monarch”. In fact, the napkins were Georgian. Held, the agreement was void as there was a mistake as to the quality of the subject- matter. iv. Mistake as to the quantity of the subject-matter:- If both the parties are working under a mistake as to the quantity of the subject- matter, the agreement is void. Example: - A silver bar was sold under a mistake as to its weight; There was a difference in value between the weight of the bar as it was and as it was supposed to be. Held, the agreement wasvoid. v. Mistake as to the title to the subject-matter:- Example: - a person took a lease of fishery which, unknown to either party, already belonged to him. Held, the lease was void. vi. Mistake as to the price of thesubject-matter: Example: - C wrote to W offering to sell certain property for $ 1250. He earlier declines an offer from w to buy the same property for $ 2000. W who knew that this offer of $ 1250 was a mistake for 2250, immediately accepted the offer. Held, W knew perfectly well that the offer was made by mistake hence the contract could not be enforced. vii. Mistake as to the possibility of performing the contract:- Consent is nullified if both the parties believe that an agreement is capable of being performed when in fact his is not the case (sec-56, para 1). The agreement, in such a case, is void on the ground of impossibility. Impossibility maybe— a. Physical impossibility: -Example:- A contract for the hire of a room for witnessing the coronation procession of Edward VII was held to be void because, unknown to the parties, the procession of Edward VII was held to be void because, unknown to the parties, the procession had already been cancelled. b. Legal impossibility. A contract is void if it provides that something shall be done which cannot, as a matter of law, bedone. II. UNILATERALMISTAKE:- When in a contract only one of the parties is mistaken regarding the subject-matter or in expressing or understanding the terms or the legal effect of the agreement, the mistake is a unilateral mistake. Example: - A buys an article thinking that it is worth Rs.1000 when it is worth only Rs50. A cannot subsequently avoid thecontract. LAWFUL OBJECT AND CONSIDERATION If an agreement is to be enforced in a court of law, both consideration and object of the agreement must be lawful. When one of consideration or object is unlawful, the contract is void. In order to constitute a valid contract, both consideration as well as object must be lawful; otherwise would be void. According to section 23 “The consideration or object of an agreement is lawful unless it is forbidden by law; or is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy. In each of these cases, the.consideration or object of an agreement is unlawful is void”. Section 2(d) of the Indian Contract Act defines consideration as when at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is described a consideration for the promise. Example: A agrees to sell his home to B for Rs.10,00,000. Here B's promise to pay Rs.10,00,000 is the consideration for A's promise to sell the home and A's to sell the home is the consideration for B’s promise to pay Rs.10,00,000. When Consideration or Object is Unlawful 1. If it is forbidden by law: Law forbids an act for various reasons. If the consideration or the object of an agreement is doing of such an act which is forbidden by law, the agreement is void. Example: A promises B to drop a prosecution which he has instituted against B for robbery, & B promise to restore the value of the things taken. The agreement is void, as its object is unlawful. 2. If it is of such a nature that, if permitted, it would defeat the provisions of law: It refers to cases where, there being no express statutory prohibition against a particular type of contract, the nature of the contract is such that it would be against the spirit of a particular law, whether enacted or otherwise. Examples: (a) An agreement between husband and wife to live separately is invalid as being opposed to Hindu Law. (b) An agreement by the debtor not to raise 3. If it is fraudulent: It refers to contract which are entered into between parties with an object which is fraudulent or with a purpose which will in effect promote fraud. Examples: (a) A, promises to pay Rs 200 to B, if B would commit fraud on C. B agrees. B’s agreeing to defraud is unlawful consideration for A’s promise to pay. Hence the agreement is illegal and void. (b) A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful. 4. If it involves or implies injury to the person or property of another: If the object of an agreement is to cause injury to the persons or property of another, it is unlawful. Injury means criminal or wrongful harm. An agreement to commit an assault is void. Examples: (a) An agreement by which a debtor, who borrowed Rs 100, promised to do manual labour without pay for the creditor, so long as the debt was not repaid in full has been held to be void, as it involved injury to the person of the debtor. (b) An agreement between some persons to purchase shares in a company, and thus by fraud & deceit to induce other persons to believe that there is a bonafide market for the shares, is void. 5. If the court regards it as immoral: Agreement which are contrary to good morals are illegal and void. If the consideration for the agreement is an act of sexual immorality the agreement is illegal. Examples: An agreement for future marriage, after death of first wife is against good morale. 6. Where the court regards it as opposed to public policy: If the court regards it as opposed to public policy, the agreement is void. Public policy means the policy of the law at a stated time. VOID AGREEMENTS A void agreement is one which is not enforceable by law (Sec. 2g). Such an agreement does not give rise to any legal consequences and is void abinitio. The following agreements have been expressly declared to be void by the Contract Act; 1. Agreements by incompetent parties (Sec. 11) 2. Agreements made under a mutual mistake offact (Sec. 20) 3. Agreements the consideration or object of which is unlawful (Sec. 23) 4. Agreements the consideration or object of which is unlawful inpart (Sec. 24) 5. Agreements made withoutconsideration ((Sec. 25) 6. Agreements is restraint ofmarriage (Sec. 26) 7. Agreements in restraint of trade (Sec. 27) 8. Agreements in restraint of legal proceedings (Sec. 28) 9. Agreements the meaning of which isuncertain (Sec. 29) 10. Agreements by way ofwager (Sec. 30) 11. Agreements contingent on impossibleevents (Sec. 36) 12. Agreements to do impossibleacts (Sec. 56) 13. In case of reciprocal promises to do things legal and also other things illegal, the second set of reciprocal promises is a voidagreement. (Sec. 57) WAGERING AGREEMENTS OR WAGER A wager is an agreement between two parties by which one promises to pay money or money’s worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the event does not happen.Ex.A and B enters into an agreement that A shall pay Rs.100 to B, if it rains on Monday. Essentials of a wagering agreement 1. Promise to pay money or money’sworth The wagering agreement must contain a promise to pay money or money’s worth. 2. Uncertainevent The promise must be conditional on an event happening or not happening. A wager generally contemplates a future event, but it may also relate to a past event provided the parties are not aware of its result or the time of its happening. 3. Each party must stand to win orlose Upon the determination of the contemplated event, each party should stand to win or lose. An agreement is not a wager if either of the parties may win but cannot lose or may lose but cannot win. 4. No control over theevent Neither party should have control over the happening of the event one way or the other. If one of the parties has the event in his own hands, the transactions lacks an essential ingredient of a wager. 5. No other interest in theevent Lastly, neither partly should have any interest in the happening or non-happening of the event other than the sum or stake he will win or lose. The following transactions are, however, not wagers 1. A crossword competition involving a good measure of skill for its successfulsolution. 2. Games ofskill 3. A subscription or contribution or an agreement to subscribe or contribute towards any plate, prize or sum or money of thevalue 4. Share market transactions in which delivery of stocks and shares is intended to be given and taken 5. A contract of insurance. Difference between Contract of Insurance and Wagering Agreement Sl. No. Contract of Insurance Wagering Agreement 1. The assured has an insurable interest in the There is no such interest subject matter 2. Both the parties are interested inthe It is only one of the parties who is protection of the subject-matter interested in its protection 3. Except life insurance, it is a contract of The amount is fixed indemnity 4. It is beneficial to the public It do not serve any useful purpose 5. It is based on scientific and actuarial It is just a gamble calculation of risks. PERFORMANCE OF CONTRACT Performance of contract takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed. Sec 37 lays down that the parties to a contract must either perform or offer to perform their respective promises, unless such performance is dispensed with or excused. Offer to Perform Sometimes it so happens that the promiser offers his obligation under the contract at the proper time and place but the promisee does not accept the performance. This known as “attempted performance” or “tender”. Sec. 38 sums up the position in this regard thus: where the promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. Requisites of a valid tender / attempted performance It must be unconditional. Ex. D a debtor offers to pay to C, his creditor, the amount due to him on the condition that C sells to him certain shares at cost. This is not a valid tender. It must be of the whole quantity contracted for or of the wholeobligation. Ex. D a debtor offers to pay to C, his creditor, the amount due in instalments and tenders the first instalment. The tender is not of the whole amount due and hence it is not a valid tender. It must be by a person who is in a position and is willing to perform thepromise. It must be made at the proper time andplace. Ex. D owes Rs.1000 C on 1st of August with interest. He offers to pay on 1st July the amount and interest upto 1st July. This is not a valid tender. It must be made to the proper person. i.e. to the promisee or his agent. It may be made to one of the several jointpromisees It must give the reasonable opportunity to the promisee for the inspection ofgoods. CONTRACTS WHICH NEED NOT BE PERFORMED? A Contract need not be performed— 1. When its performance becomes impossible(sec-56) 2. When the parties to it agree to substitute a new contract for it or to rescind or alter it(sec- 62). 3. When the promise dispenses with or remits, wholly or in part, the performance of the promise made to him extends the time for such performance or accepts any satisfaction for it(sec-63) 4. When the person at whose option it is voidable, rescinds it(sec-64) 5. When the promise neglects or refuses to afford the promisor reasonable facilities for the performance of his promise 6. When it isillegal. BY WHOM MUST CONTRACT BEPERFORMED 1. Promisorhimself 2. Agent 3. Legalrepresentative 4. Third person 5. Joint person WHO CAN DEMAND PREFORMANCNCE? It is only thepromisee who can demand performance of the promise under a contract. It makes no difference whether the promise is for the benefit of the promisee or for the benefit of any otherperson.Example:-A promises B to pay C a sum of Rs. 500. A does not pay the amount to c. C cannot take any action against A. It is only B who can enforce this promise against A. Death of promisee, In case of death of promise, his legal representatives can demand performance. DISCHARGE OF CONTRACT Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations created by it come to an end. A contract may be discharged: 1. Byperformance. 2. By agreement orconsent 3. Byimpossibility of performance 4. By lapse oftime 5. By operation oflaw 6. By breach ofcontract I. DISCHARGE BY PERFORMANCE Discharge by performance takes place when the parties to the contract fulfill their obligations arising under the contract within the time and in the manner prescribed. a) Actual performance: When both the parties perform their promises, the contract is discharged. Performance should be complete, precise and according to the terms of the agreement, most of the contracts are discharged by performance in thismanner. b) Attempted performance or tender. Tender is not actual performance but is only an offer to perform the obligation, under thecontract. When the promisor offers to perform his obligation but promisee refuses to accept the performance. II. DISCHARGE BY AGREEMENT ORCONSENT As it is the agreement of the parties which binds them, so by their further agreement or consent the contract may be terminated. This means a contractual obligation may be discharged by agreement which may be express or implied. Example: - A sells a car to B on approval with the condition that it should be returned within seven days if it is found wanting in efficient functioning. B may return the car within seven days if it is found wanting. Consent to return the car is given to B at the time of the formation of the contract. The various cases of discharge of a contract by mutual agreement are dealt within (Secs-62): a) Novation takes place when a new contract is substituted for an existing one between the same parties, or a contract between two parties is rescinded in consideration of a new contract between thirdparty. Example: - A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is an end, and a new debt form C to B has beencontracted. b) Rescission (sec-62): Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It mayoccur i. By mutual consent of the parties,or ii. Where one party fails in the performance of hisobligation. Example: - A promises to supply certain goods to B six months after date. By that time, the goods go out of fashion. A and B may rescind the contract. c) Alternation (sec-62) Alteration of a contract may take place when one or more of the terms of the contract is/are altered by the mutual consent of the parties to the contract. In such case, the old contract is discharged. Example: - A enters into a contract with B for the supply of 100 bales of cotton at his godown No.1 by the first of the next month. A andB may alter the terms of the contract by mutualconsent. d) Remission (sec-63) Remission means acceptance of a lesser fulfillment of the promise made. Example :-A owes B Rs. 5000 A pays to B and B accepts, in satisfaction of the whole debt for Rs.2,000paid at the time and place at which Rs.5000 were payable. The whole debt isdischarged. e) Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be bound by the contract. Consideration is not necessary forwaiver. f) Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a superior right accruing to the same party under the same or some other contract.Example: - P holds a property under a lease. He later buys the property. His rights as a lessee merge into his rights as an owner. III. DISHARGE BY IMPOSIBILITY OFPERFORMANCE If an agreement contains an undertaking to perform an impossibility. It is void.According toSec-56, impossibility of performance may fail into either of the following categories. 1. Impossibility existing at the time of agreement, the first paragraphs of sec 56 lays down that “an agreement to do an act impossible in itself ifvoid. 2. Impossibility arising subsequent to the formation of contract. Impossibility which arises subsequent to the formation of a contract is called post-contractual or supervening impossibility. I) DISCHARGE BY SUPERVENING IMPOSSIBILITY:- 1. Destruction of subject-matter ofcontract. When the subject-matter of a contract, subject-matter of contract, subsequent to its formation, is destroyed without any fault of the parties to the contract, the contract is discharged. Example: - C let a music hall to T for a series of concerts for certain days. The hall was accidentally burnt down before the date of the first concert. Held, the contract was void.A contracted to sell a specified quantity of potatoes to be grown on his farms. The crop largely failed. Held, the contract wasdischarged. 2. Non-existence or non-occurrence of a particular state of things. Sometimes, a contract is entered into between two parties on the basis of a continued existence or occurrence of a particular state of things. Example: - Aand B contract to marry each other, before the time fixed for the marriage, A goes mad. The contract becomesvoid. 3. Death or incapacity for personal service: - Where the performance of a contract depends on the personal skill or qualification of a party, the contract is discharged on the illness or incapacity or death of the party. Example:- An artist undertook to perform at a concert for a certain price. Before she could do so, she was taken seriously ill. Held, she was discharged due toillness. 4. Change of law or stepping in of a person with statutory authority:- When subsequent to the formation of a contract, change of law takes place or the government takes some power under some ordinance or special Act, as for example, the Defence of India Act, So that the performance of the contract becomes impossible, the contract isdischarged. Example: - D enters into a contract with P on 1stMarch for the supply of certain imported goods in the month of September of the same year. In June by act of Parliament, the import of such goods is banned. The contract isdischarged. 5. Out break of war:-A contract entered into with an alien enemy during is unlawful and therefore impossible ofperformance.Example: - A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which, the port is situated. The contract becomes void when war is declared. Impossibility of performance –not an excuse:- Impossibility of performance is, as a rule, not and excuse for non-performance.” In the following cases, a contract is not discharged on ground of supervening impossibility: a. Difficulty ofperformance: A contract is not discharged by the mere fact that it has become more difficult of performance due to some uncontemplated events or delays. Examples: - A sold a certain quantity of Finland timber to B to be supplied between July and September. Before any timber was supplied, was broke out in the month of August and transport was disorganized so that a could not bring any timber form Finland. Held, the difficulty in getting the timber form Finland did not discharge A fromperformance. b. Commercial impossibility:- A contract is not discharged merely because expectation of higher profits is not realized, or the necessary raw material is available at higher profits is not realized, or the necessary raw material is available at a higher price because of the out break of war, or there is a sudden depreciation of currency. Example: - A promised to send certain goods from Bombay to Antwerpin September, before the foods were sent, war broke out and there was a sharp increase in shipping rates, held, the contract was notdischarged. c. Impossibility due to failure of a third person: - Where a contract could not be performed because of the default by a third person on whose work the promisor relied, it is not discharged. Example: - A, a wholesaler, entered into a contract with B for the sale ofa certain type of cloth to be produced by C, a manufacturer of that cloth. C did not manufacture that cloth. Held, A was liable to B fordamages. d. Strikes, lock out and civil disturbances. Events such as these do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of thecontract. Example: - A agreed to supply to B certain goods to be procured from Algeria. The goods could not be produced due to riots and civil disturbances in the county, held, there was no excuse for non performance of thecontract. e. Failure of one of the objects. When a contract is entered into for several objects, the failure of one of them does not discharge thecontract. Example: - H & B agreed to let out a boat to H fro viewing a naval review on the occasion of the coronation of Edward VII, and to sail round the fleet. Owing to the king’s illness the naval review was abandoned but the fleet was assembled. The boat, therefore, could be used to sail round the fleet. Held the contract was not discharged. IV. DISCHARGE BY LAPSE OFTIME The Limitation Act, 1963 lays down that a contract should be performed within a specified period, called period of limitation, if it not performed, and if no action is taken by the promise within the period of limitation, he is deprived of his remedy at law. In other words, we may say that that the contract is terminated. V. DISCHARGE BY OPERATION OFLAW A contract may be discharged independently of the wishes of the parties, i.e., by operation of law. This includesdischarge: By death By merge By insolvency By unauthorized alteration of the terms of a written agreement. By right and liabilities becoming vested in the same person VI. DISCHARGE BY BREACH OFCONTRACT Breach of contract means a breaking of the obligation which a contract imposes; it occurs when a party to the contract without lawful excuse does not fulfill his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. It confers a right of action for damages on the injureparty.Breach of contract may be:- 1. Actual breach of contract,or 2. Anticipatory or constructive breach ofcontract. REMEDIES FOR BREACH OF CONTRACT When a contract is broken, the injured party (i.e., the party who is not in breach) has one or more of the following remedies: 1. RESCISSION When a contract is broken by one party, the other may sue to treat the contract as rescinded and refuse further performance. In such a case, he is absolved of all his obligations under the contract Example: - A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price after the receipt of the goods. A does not supply the goods. B is discharged form liability to pay price. 2. DAMAGES Damages are a monetary compensation allowed to the injured party is the court for the loss or injury suffered by him by the breach of a contract. a) Damage arising naturally- ordinary damages:- When a contract has been broken, the injured party can be recovering form the other party such damages as naturally arose in the usual course of things from thebreach. Example: - A contracts to sell and deliver 50 quintals of Farm wheat to B at Rs. 475 per quintal, the price to be paid at the time of delivery. The price of wheat rise to Rs 500 per quintal and a refuses to sell the wheat. B claim damages at the rate Rs. 23 per quintal. b) Damages in contemplation of the parties specialdamages; Damage other than those arising form the breach of contract may be recovered if such damages may reasonable be supposed to have been in the contemplation of both the parties as the breach of the contract. Such damages, known as special damages, cannot be claimed as a matter of right. Example: - P brought from L some copra cake. He sold it to B who sold it to various dealers, and they in turn sold it to farmers, who used it for feeding cattle. The copra cake was poisonous and the cattle fed on it died. Claimed against L the damages and costs he had to pay to B. Cake were to be used for feeding cattle P could claimcompensation. c) Vindictive or exemplarydamages:- Damages for the beach of a contract are given by way of compensation for loss suffered, and not by way of punishment for wrong inflicted. Hence, vindictive or exemplary damages have no place in the law of contract because they are punitive (involving punishment) by nature. Butincaseofbreachofpromisetomarry,anddishonorofachequebyabankerwrongfully when he possesses sufficient funds to the credit of the customer, the court may award exemplary damages. d) Nominal damages:- Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damage recoverable by him are nominal, i.e., very small, for example arupee.These damages merely acknowledge that the plaintiff has case and won. Example: - A firm consisting of four partners employed B for a period of two years. After six months two partners retired, the business being carried on by the other two. B declined to be employed damages as he had suffered no loss. e) Damages for loss of reputation: Damages for loss of reputation in case of breach or contract are generally not recoverable. An exception to this rule exists in the case of a banker who wrongfully refuses to honour a customer’s cheque. If the customer happens to be a tradesman, he can recover damages in respect of any loss to his trade reputation by thebreach. f) Damages for inconvenience anddiscomfort: Damage can be recovered for physical inconvenience and discomfort. The general rule in this connection is that the measure of damages is not affected by the motive or the manner of the breach.Example: - A was wrongfully dismissed in a harsh and humiliating manner by G from his employment. Held. A could recover a sum representing his employment. Held, a could recover a sum presenting his wages for the period of notice and the commission which he would have earned during the period; but he could not recover anything for his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him to-obtain employment. g) Mitigation ofdamages:It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach he cannot claim to be compensated by the party in default for loss which he ought reasonable to have avoided that is he cannot claim compensation for loss which is really due not to the breach but due to his own neglect to mitigate the loss after the breach. h) Difficulty of assessment: - Although damages which are incapable of assessment cannot be recovered, the fact that they are difficult to assess with certainty or precision does not prevent they aggrieved party from recoveringthem, i) Cost of decree: The aggrieved party is entitled, in addition to damages to get the cost of getting the decree for damages. The cost of suit for damages is in the discretion of thecourt. 3) QUANTUM MERUIT The phrase quantum merit literally means as much as earned. A right to sue on a quantum merit arises where a contract, partly performed by one party, has become discharged by the breach of contract by the other party. The right is founded not on the original contract which is discharged or is void but on an implied promise by the other party to pay for what has been done. 4) SPECIFICPERFORMACNE In certain cases of breach of contract, damages are not an adequate remedy. The court may, in such cases, direct the party in breach to carry out his promise according to the terms of the contract. This is a direction by the court for specific performance of the contract at the suit of the party not in breach. 5) INJUNCTION Were a party is in breach of a negative term of contact (i.e., where he is doing something which he promised not to do), the court may, by issuing an order, restrain him from doing what he promised not to do. Such an order of the Court is known as aninjunction”. Example: - W agreed to sing at L’s theatre and, during a certain period to sign nowhere else. Afterwards W made contract with Z to sign at another theatre and refused to perform the contract with L. Held W could be restrained by injunction from singing for Z. References 1. Goel, P.K., Business Law for Managers, Wiley, 2006. 2. Kapoor, N.D., Elements of Mercantile Law, Sultan Chand & Co. Ltd, 37th Edition, 2015. 3. Shukla, V.N., Constitution of India, Eastern Book Company, 13th Edition, 2017 4. Kuchhal, M.C., Vivek Kuchhal, Business law, Vikas Publication, 7th Edition, 2018. 5. Sheth, T, Business Law, Pearson, 2nd Edition, 2017. Question Bank PART A Blooms Sno. Questions CO Level “Offer + Acceptance = Contract” – Is it true. Comment on your CO1 L5 1. answer. 2. “No Consideration No Contract” – Do you agree this statement. CO1 L5 3. State any four essential elements of a Contract. CO1 L2 4. List any four types of Contract. CO1 L2 5. ‘Mere silence does not amount to fraud’ – Examine. CO1 L4 6. Compare and contrast Misrepresentation and Fraud. CO1 L2 “Minor is liable to pay for the necessaries supplied to him” – CO1 L5 7. Justify this statement. 8. Write short note on Coercion and Undue Influence. CO1 L3 9. List out the modes in which a contract may be discharged. CO1 L2 10. State any four ways in which a Contract may get discharged. CO1 L2 11. Explain Quantum Merit. CO1 L2 12. Illustrate Remission. CO1 L2 PART- B Blooms Sno. Questions CO Level “An agreement enforceable by law is contract” – Justify this CO1 L5 1. statement. 2. Illustrate the various classifications of Contract. CO1 L3 “All agreements are not contracts but all contracts are CO1 L5 3. agreements” – Do you agree this statement. Explain with suitable examples. 4. Illustrate in detail, the legal rules relating to Offer. CO1 L3 5. Explain the legal rules relating to Acceptance. CO1 L2 “No Consideration No Contract” – Evaluate the exceptions to this CO1 L5 6. rule. If a consent is not obtained freely, do the parties in the contract CO1 L5 7. are having rights to repudiate? Give your comment. 8. Critically examine “whether a minor can enter into a contract”. CO1 L4 9. Differentiate Coercion and Undue influence. CO1 L4 Describe in brief about the contractual capacity of the parties to CO1 L2 10. enter in a contract. 11. Explain the different modes of discharge of a Contract. CO1 L2 12. Describe in detail how the contract is performed. CO1 L2 Examine the remedies available for an injured party when there is CO1 L4 13. a breach of contract. SCHOOL OF MANAGEMENT STUDIES UNIT – II– BUSINESS LAW - SBAA1206 1 II. INDIAN CONTRACT ACT, 1872: SPECIFIC CONTRACTS Contract of Indemnity and Guarantee - Contract of Bailment and Pledge - Contract of Agency CONTRACT OF INDEMNITY A Contract of indemnity is a direct engagement between two parties whereby one promises to save another from harm. A contract of indemnity means, “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person.” DEFINITION: - As provisions made in section 124 of the Indian Contract Act-1872 says that, “whenever one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a Contract of Indemnity.” Ex. A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs.200. This is a contract of indemnity. A and B goes into a shop. B says to the shopkeeper, “let him (A) have the goods, I will see you paid”. This is a contract of indemnity. ESSENTIAL ELEMENTS:-A contract of indemnity is a species of the general contract. As such it must have all the essential elements of a valid contract. The following are the essentials specific to the Contract of Indemnity:- 1. There must be a loss. 2. The loss must be caused either by the promisor or by any other person. 3. Indemnifier is liable only for the loss. Thus it is clear that this contract is contingent in nature and is enforceable only when the loss occurs. A contract of indemnity may be express or implied. RIGHTS OF INDEMNITY HOLDER WHEN SUED The promisee in a contract of indemnity acting within the scope of his authority is entitled to recover from the promisor so under Section 125 of the Act defines the rights of an indemnity holder which are as under:- 2 1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect of any matter to which the promise of indemnity applies. 2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in bringing or defending it he did not contravene the orders of the promisor and has acted as it would have been prudent for him to act in the absence of the contract of indemnity or if the promisor authorised him in bringing or defending the suit. 3. Right of recovering sums:- All the sums which he may have paid under the terms of a compromise in any such suite if the compromise was not contrary to the orders of the promisor and was one which would have been prudent for the promisee to make in the absence of the contract of indemnity. In another case of Mohit Kumar saha v/s New India Assurance Co.-1997 It was held that the indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the Surveyor. Any settlement at the lesser value is arbitrary and unfair and violates art.14 of the constitution. CONTRACT OF GUARANTEE The contract of guarantee may be an ordinary or some different type of guarantee which is different from an ordinary guarantee. Guarantee may be either oral or written. Basically it means that a contract to perform the promise or discharge the liability of third person in case of his default and such type of contracts are formed mainly to facilitate borrowing and lending money. DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge the liabilities of a third person in case of his default. i) The person who gives the guarantee is “Surety”. ii) The person in respect of whose default the guarantee is given is “Principal debtor” iii) The person to whom the guarantee is given is “Creditor”. Ex. S promises to a shopkeeper C that S will pay for the items being bought by P if P does not pay this is a contract of guarantee. In case if P fails to pay, C can sue S to recover the balance. (Birkmyr v/s Darnell-1704). ESSENTIALS: - The following are the essential elements of Guarantee:- 3 1. Existence of Creditor, Surety, and Principal debtor: - Existence of all the three parties are required. 2. Concurrence:- A contract of guarantee requires the concurrence of all the three parties viz. the principal debtor, the creditor and the surety. 3. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for the liability of the Principal debtor. 4. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally enforceable, the surety can be made liable. For example a surety cannot be made liable for a debt barred by Statute of Limitation. 5. Essentials of a valid contract:- A contract of guarantee must have all the essential elements of a valid contract. But i) All the parties must be capable of entering into a valid contract, though the principal debtor may be a person suffering from incapacity to contract. In such a case, the surety is regarded as the principal debtor and is liable to pay personally even though the principal debtor (ex., a minor) is not liable to pay ii) Consideration received by the principal debtor is sufficient for the surety, and it is not necessary that it must necessarily result in some benefit to the surety himself. The consideration in such contract is nothing but anything done or the promise to do something for the benefit of the principal debtor. The section 127 of the Act clarify as under :- “Anything done or any promise made for the benefit of principal debtor is sufficient consideration to the surety for giving the guarantee.” Ex. A agrees to sell to B certain goods if C guarantees for payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver goods to B. This is sufficient consideration for C’s promise. 6. Writing not necessary: - A guarantee may be either oral or written (sec.126). It may be either express or implied 7. It should be without misrepresentation or concealment: - Section 142 of the Act specifies that a guarantee obtained by misrepresenting facts that are material to the agreement is invalid, and section 143 specifies that a guarantee obtained by concealing a material fact is invalid as well. 4 Ex. 1. A appoints B for collecting bills to account for some of the bills. A asks B to get a guarantor for further employment. C guarantees B’s conduct but C is not made aware of B’s previous miss-accounting by A. B afterwards defaults. C cannot be held liable. Ex. 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment however, C is not made aware of the fact that A and B had contracted that B will pay Rs.5/- higher that the market price. B defaults. C cannot be held liable. DIFFERENCE BETWEEN INDEMNITY & GUARANTEE INDEMNITY GUARANTEE 1. In indemnity there are two, one who is There are three parties, Principal debtor, indemnified and the other indemnifier. surety and the Creditor. 2. It consists of only one contract under There are three contracts between surety, which indemnifier promises to pay in the principal debtor and creditor. event of certain loss. 3. The contract of indemnity is made to The object of contract of guarantee is the protect the promise against some likely loss. security of the creditor. 4. The liability of the indemnifier in a In guarantee the liability of surety is only a contract of indemnity is a primary one. secondary, when principal debtor default. NATURE, RIGHTS AND LIABILITIES OF A SURETY The surety who is entitled to be reimbursed by the principal debtor for the amount paid by him on his behalf. The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract under section 128. 5 NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal debtor which means that on a default having been made by the principal debtor the creditor can recover from surety the all what he could have recovered from the principal debtor. Ex. The principal debtor makes a default in the payment of a debt of Rs.10,000/- the Creditor may recover from the surety the sum of Rs.10,000/- plus interest becoming due thereon as well as the amount spent by him in recovering that amount. LIABILITY OF SURETY:- Section 128 of the Contract Act, it is clear that although, the liability of a surety is co-extensive with that of the principal debtor, he may limit his liability. A guarantee for a part of the entire debt and a guarantee for the entire debt subject to a limit. Ex. P owes to C Rs.8,000 on a continuing guarantee given by S. S may have given this guarantee in either of (a) ‘I guarantee the payment of the debt of Rs.5,000 by P to C.’ (b) ‘I guarantee the payment of any amount lent by C to P subject to a limit of Rs.5,000.’ RIGHTS OF SURETY:-The surety has certain rights against the principal debtor, the creditor and the co-sureties. His right against each one of them are being discussed as under :- RIGHT AGAINST PRINCIPAL DEBTOR 1. Right of Subrogation After the payment of the debt to the creditor, the surety is subrogated to the rights of the creditor i.e., he has the same rights as those of the creditors. Therefore, he can sue the principal debtor to exercise those rights. Thus if the surety has performed his promise towards the creditor, all the rights of the principal debtor against the creditor devolve upon him. 6 2. Right of Indemnity In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety i.e., to compensate the surety. Therefore, upon the payment of debt of the principal debtor, the surety becomes entitled to recover from the principal debtor, all the amount including interest plus costs rightly paid to the creditor under the guarantee. The reason is that the surety is entitled to full indemnification. 3. Right to be Relieved Earlier A surety can, even before making any payment, compel the debtor to relieve him from liability by paying off the debt. But, before doing so, the debt should be ascertained. RIGHTS AGAINST CREDITOR 1. Rights in Case of Fidelity Guarantee In case of fidelity guarantee i.e., guarantee as to good behaviour, honesty, etc., of the principal debtor, the surety can ask the employer to dispense with the services of the employee if the latter is proved to be dishonest. 2. Before the Payment of the Debt Guaranteed A surety may, after the debt has become due but before he is called upon to pay, require the creditor to sue the principal debtor to recover the debt. But, in such cases, the surety must undertake to indemnify the creditor for any risk, delay or expense resulting there from. 3. Right to Claim Securities After payment of the debt to the creditor or th

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