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SCHOOL OF MANAGEMENT STUDIES UNIT – I– BUSINESS REGULATORY FRAMEWORK – SBAB1301 1. INDIAN CONTRACT ACT 1872: GENERAL PRINCIPLES OF CONTRACT Definition - Essentials of Contract - Types of Contracts - Competent Party - Free Consent – Consideration – Lawful Object – Void Agreements - Performance of...

SCHOOL OF MANAGEMENT STUDIES UNIT – I– BUSINESS REGULATORY FRAMEWORK – SBAB1301 1. INDIAN CONTRACT ACT 1872: GENERAL PRINCIPLES OF CONTRACT Definition - Essentials of Contract - Types of Contracts - Competent Party - Free Consent – Consideration – Lawful Object – Void Agreements - Performance of Contract - Discharge of Contract & Remedies for Breach of Contract - Contingent Contract & Quasi 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 two parties 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 ESSENTIAL ELEMENT OF VALID CONTRACT: 1. Offer and Acceptance: 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 legal relationship: 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. Lawful consideration: 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 the other 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 genuine consent: 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 obtained by, A. coercion B. undue influence C. fraud D. mistake and E. misrepresentation 6. Lawful object: 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 declared Valid: The agreement should not have been expressly declared void by any law, providing in the country. 9. Legal Formalities: 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 of Validity: a) Valid Contract: 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 possess 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 becomes void. 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 becomes void. 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 valid contract. 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 or fraud. b) When one party prevents the other party from perform his duty, and then the contract becomes voidable at the option of the party so prevented. Example: A contract with B that A shall white wash B house for Rs.100. A is really 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 unlawful agreement: 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 of formation: 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 express contract. b) Implied Contract: the contract which is not expressed in written or spoken words, but is to be inferred from the conduct of the parties is called as implied contract. Example: There is an implied contract if a person; i) gets into a public bus ii) takes a cup of coffee in a hotel ii) permits a porter to lift luggage 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 special circumstances. 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 of performance: 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 carried out. 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 of his scooter. 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 unilateral contract. 4) Bilateral contract: if both the parties have fulfilled their obligation hence, it is known as bilateral contract. 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. 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 o f 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 be true. 2. The active concealment of a fact by a person having knowledge or belief of the fact: 3. A promise made without any intention of performing it; 4. Any other act fitted to deceive; 5. Any such act or omission as the law specially declares to be fraudulent. 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 not voidable. 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.(Sec-21) 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 return promise(or) c) Some benefit to the promises. 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 or contract. 2. It must be lawful 3. It need not be adequate 4. It must be real and not illusory 5. It must move at the desire of the offeror 6. It must be of some value in the eyes of law 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 and affection: 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 each other. ii) The agreement should be made out of natural love and affection between one party. 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 voluntary services: 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-barred debt 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 legally irrecoverable. 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. Completed Gift The rule “No consideration, no contract” does not apply to completed gifts. 5. Agency No consideration is necessary to create an agency. 6. Charitable Subscription Where the promisee on the strength of the promise makes commitments, i.e., changes his position to his detriment. 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 of necessaries: 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) No restitution: 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 plead minority: 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 to minor. 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 or manager. b. It should be for the benefits of the minor. 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 as insolvent. 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) Alien enemy: 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) Married women: 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 absolutely void. 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 an agreement). b) Ability to make a national decision regarding the contract at the time of making an agreement. 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. 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 off act (Sec. 20) 3. Agreements the consideration or object of which is unlawful (Sec. 23) 4. Agreements the consideration or object of which is unlawful in part (Sec. 24) 5. Agreements made without consideration ((Sec. 25) 6. Agreements is restraint of marriage (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 is uncertain (Sec. 29) 10. Agreements by way of wager (Sec. 30) 11. Agreements contingent on impossible events (Sec. 36) 12. Agreements to do impossible acts (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 void agreement. (Sec. 57) 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 whole obligation. 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 the promise. It must be made at the proper time and place. 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 joint promisees It must give the reasonable opportunity to the promisee for the inspection of goods. 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 is illegal. BY WHOM MUST CONTRACT BEPERFORMED 1. Promisor himself 2. Agent 3. Legal representative 4. Third person 5. Joint person WHO CAN DEMAND PREFORMANCNCE? It is only the promisee 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. By performance. 2. By agreement or consent 3. By impossibility of performance 4. By lapse of time 5. By operation of law 6. By breach of contract 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 this manner. b) Attempted performance or tender. Tender is not actual performance but is only an offer to perform the obligation, under the contract. 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 and B may alter the terms of the contract by mutual consent. 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 is discharged. 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 for waiver. 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 OF PERFORMANCE 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 was discharged. 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 the contract. 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 OF CONTRACT 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. RECESSION 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 special damages; 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 exemplary damages:- 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. But in case of breach of dishonor of a cheque by a banker wrongfully 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 a rupee. 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 the breach. f) Damages for inconvenience and discomfort: 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 of damages: 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 recovering them, 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 the court. 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) SPECIFIC PERFORMACNE 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 an injunction”. 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. Contingent Contract In a contingent contract, the performance of the promisor is dependent on the fulfillment of certain conditions. These contracts create an obligation on the promisor only if the conditions collateral to the contract are met. According to the Indian Contract Act, “If two or more parties enter into a contract to do or not do something if an event which is collateral to the contract does or does not happen, then it is a contingent contract.” Insurance contracts, indemnity contracts, and guarantee contracts are some examples of contingent contracts. Contingent Contract Example: A promises to pay B a sum of 20 thousand rupees if there is damage to his house from fire. The payment of the amount is contingent on the house being destroyed by fire. If there is no fire, B cannot claim the amount from A who is not liable to pay since the fire that was the collateral condition, did not happen. Essentials of a Contingent Contract 1. There should be existence of a contingency; happening or non-happening of some event in future. Example: A promises to pay Rs. 5000 to B if it rains on first of the next month. 2. Contingency must be uncertain – Where the contract is certain or bound to happen, the contract is due to be performed means it is not a contingent contract. 3. The event must be collateral to the contract – The event should be neither performance promised nor a consideration for a promise. 4. The Contingent event should not be a mere will of the promisor - It should not just depend upon the willingness of the promisor, it can be in addition to it. QUASI CONTRACTS: Quasi means almost or apparently but not really “A quasi contract is a contract that exists by order of a court, not by agreement of the parties”. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for a good or service. It is based on the maxims “No man can grow rich out of another persons loss” Sections 68 to 72 deals with "certain relations resembling those created by contract" under Indian contract act, 1872.