Essentials of Valid Contract PDF

Copyright Protected - Adv.Beena Menon 2024 Valid Contracts Essentials of Valid Cont...

Copyright Protected - Adv.Beena Menon 2024 Valid Contracts Essentials of Valid Contract Free consent Offer Coercion, Undue influence, Fraud, Acceptance Misrepresentation, Competency/Capacity of parties Mistake Consideration Agreement with a person of unsound mind Intent Inder Singh vs Parmeshwardhari Singh Free Consent Mohori Bibi vs Dharmodas Ghose Legality/Enforceable Certainty 47 46 Minor’s Contract Void Competency - Parties to Contract  A Minor is NOT Competent to contract (sec. 11)  Section 3 of the Indian Majority Act 1875 a minor domiciled in India is one who has to complete his eighteen years of age. Parties to Contract – Competent  Guardian of the minor’s person / property (or both) Appointed or if Court of Wards (minor’s property is taken over) minority – 21 yrs Minor’s Service Contracts  VOID – But not Unlawful No Ratification on attaining Majority Sec.11 :- “Every person is competent to contract who   A minor may bind himself by contract of apprenticeship but cannot be sued for failing to is of the age of majority according to law to which  serve. Parent/Guardian can contract on behalf for benefit of Minor he is subject, and who is of sound mind, and is not   Jointly with Adult – can contract without any liability on self As a partner – gets all benefits disqualified from contracting by any law to which he  As an Agent – but no binding As Shareholder – benefits, no liability is subject.”   Cannot be adjudged insolvent  Liability for supply of necessities is only upon Minor’s property, not person 48  Tort Liability – if action is outside the contract – out of Contract law 49 Mohori Bibi vs Dharmodas Ghose Sound Mind Capable of understanding the terms of the contract Minors Agreement  A Minor executed a mortgage for the sum of Rs 20,000 out of which he Ability to form a rational judgment of its effects and received some advance sum. consequences  Minor filed a suit subsequently for setting aside the mortgage. Period of sound/unsound mind - lucid intervals  The money lender clamed refund of the advance amount given by him to the minor. Disqualified by Law  It was held that minor’s contract is altogether void and the money Alien enemies lender therefore cannot recover the amount. Convicts A minor’s contract being absolutely Void, Undischarged insolvents he can neither Sue nor be Sued upon it. Foreign sovereigns/ambassadors Jt stock companies/Statutory corpns limited to only that which 50 their internal memorandum/constitution permits them to. 51 Page 1 Copyright Protected - Adv.Beena Menon 2024 Sec-12: A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of Inder Singh vs Parmeshwardhari Singh- 1957 understanding it and of forming a rational judgment as to its effect  "..... the test of soundness of mind is that he is capable of understanding the upon his interests. business and of forming a rational judgment as to its effect upon his A person who is usually of unsound mind, but occasionally of interest. There being a presumption in favour of sanity, the person who sound mind, may make a contract when he is of sound mind. relies on the unsoundness of mind must prove it sufficiently to satisfy this A person who is usually of sound mind, but occasionally of test.....mere weakness of mind is not sufficient.....“ unsound mind, may not make a contract when he is of unsound  incapable of understanding business and forming a rational judgment as to mind. its effect upon his interest Illustrations  Trial court verdict was set aside by the Patna HC – Transaction held to be (a) A patient in a lunatic asylum, who is at intervals of sound mind, void may contract during those intervals. (b) A sane man, who is delirious from fever or who is so drunk that Referred : Amina Bibi v. Saiyid Yusuf - "Not being in a position to he cannot understand the terms of a contract, or form a rational understand or to determine rationally whether it was likely to operate to his judgment as to its effect on his interests, cannot contract whilst such benefit by reason of his mental condition, the lease must be held to be void delirium or drunkenness lasts. and unenforceable.“ 52 53 Uncertain Agreements  No ambiguity Free Consent (sec.10,13,14)  Contracts must be clear Free and Genuine Consent of the parties  It should not be vague Ad idem  Should be certain (mistake of identity of person/facts/transaction) Court will not take upon itself to clarify the ambiguities – this will  When No Consent – Void result in enforcing upon the parties a new contract.  When Consent Not Free – Voidable (at option of such party )  Act/Product should be identifiable Sec.14 Consent is free when  Consideration should be identifiable / measurable Not caused by :  Parties should be identifiable  Coercion  Place of performance of contract should be identifiable  Undue Influence  Time (period) of performance should be identifiable (not wait in  Fraud eternity)  Object should be identifiable  Misrepresentation 54  Mistake – of Fact, of Law 55 Coercion  Threatening A – needs money- already owes the Money lender – M.L  Committing act forbidden by law contracts fresh loan-unconscionable terms  Unlawful detainment of person/property with INTENT to force person to enter into contract - it lies on M.L to prove that contract not induced by undue UNDUE INFLUENCE influence.  Uses position power  Dominate the will of the other A applies to Banker for loan – stringency in market – banker  Real or apparent authority declines loan except at unusually high rate of interest-A accepts  Mental capacity is affected temporarily/sick  Unfair advantage over the other the terms.  Prima facie unconscionable – burden on the other person to prove This is in ordinary course of business. Dominating the will, real/apparent authority, unconscionable 4 considerations – righteous, improvident -(not master of himself), legal expertise, intention 56 57 Page 2 Copyright Protected - Adv.Beena Menon 2024 FRAUD MISREPRESENTATION Vs FRAUD Connivance of someone Intent to deceive  Misrepresentation Intent to induce No Intention to deceive Suggestio Falsi False innocent statement Suppresso Veri False Promise Contract voidable Any act of deception intentionally Any act the law considers fraudulent  Fraud Silence and duty to speak MISREPRESENTATION Intention to deceive Asserting something which is not truth False statement with intention to deceive No Intent to deceive Contract voidable and independent action in tort. Breach of duty Misleading another unintentionally Mistake of law presented Mistake of fact presented 58 59 MISREPRESENTATION Vs FRAUD Mistake of Law / Mistake of Fact Fraud – a. suggestio falsi, b. suppresso veri suggestion of fact as true active concealment cannot avoid voidable knowing it is not true of fact, knowing it c. act to deceive d. False promise Mistake – Bilateral mistake e. Any act/omission law specifically declares fraudulent as to matter of fact essential to the agreement disclosure of fact reqd, non-compliance amounts to fraud Misrepresentation – not fraudulent 60 61 Chwee Kin Keong & ors V Digilandmall.com Pte Ltd Ad Idem – no mistake on terms/price Classification of Contracts Absurdly low price was a mistake Law of contracts prevails in contracts made on Express, Implied Contracts internet. Valid, Void, Voidable Contracts A viewer from any part of world may want to enter into contract to purchase an advertised product. Discharge of Contracts Remedies for Breach The prospective buyer makes offer to purchase Offer is accepted by the merchant. Once the payment is received, the servers are programmed to generate an auto acceptance of the offer. 62 63 Page 3 Copyright Protected - Adv.Beena Menon 2024 Classification of Contracts Quasi Contract Express Contract Certain relations resemble those of contract - (Implied/fiction of law) When the terms of contract are reduced in writing. Reimbursement of money paid, in which he is interested (Lessee paying Parties explicitly state their agreement and the conditions in writing or verbally. govt dues on behalf of Lessor) The terms and conditions are clear and direct, Eg: (i) A supplies basic necessities to B a minor. No room for mis-interpretation. (ii) Obligation of person to pay for enjoying benefit of non-gratuitous Easy to enforce act (A saves B’s house from Fire, drowning,….) Used in commercial transactions Person who receives the benefit to pay or compensate the person giving Implied Contract the benefit The terms of a contract are inferred from the conduct between the parties. even though he receives the benefit without any contract. Formed based on the actions, conduct, or circumstances of the parties involved, rather than In fact - No contract explicit words. Contract is inferred from the behavior that suggests a mutual agreement. Contract created by law, fiction by law - Implied by law – Implied - Travelling in a train, metro etc, contract - Customer enters a restaurant, orders, and eats a meal, an implied contract to pay for the meal is formed. Deeming provision of law imposing obligations - No agreement - If parties have a history of conducting similar transactions, a court might infer an implied Right in personam arises, not right in rem contract based on their prior dealings. 64 65 Finder of goods Void Agreements and Voidable Contracts  Void agreement 2(g):- An agreement not enforceable by Cannot appropriate it unto himself Duty to restore to true owner law is void. No right against true owner-no compensation for trouble  2(j) :- A contract which ceases to be enforceable by Law Only right to lien for expenses/rewards advertised becomes void when it ceases to be enforceable. Good possession as against the whole world, except the true owner  Voidablecontract 2(i):- An agreement is a voidable Right to sell if perishable or lawful charges not paid (lawful contract if it is enforceable by Law at the option of one or charges -2/3rd or more of value) more of the parties there to, but not at the option of the other A kind of quasi contract or others. 66 67 Declared to be Void Agreements (void ab initio)  Agreements in restraint of marriage Agreements expressly declared void or  Agreements in restraint of trade  Agreements in restraint of legal proceedings illegal by law –  Agreements by way of wager Are not enforceable at law  Agreements contingent on impossible events  Agreement to do impossible Acts Do not constitute a valid contract.  Agreements opposed to Public Policy A void agreement is not enforceable in law Exceptions  Restraints in Service Agreements It has no legal existence or sanctity.  Agreements between partners restraining some activity  Sale of goodwill  Consent terms of settlement filed in court for amicable resolution of dispute which may have some restraining clauses 68 69 Page 4 Copyright Protected - Adv.Beena Menon 2024 Restraint of Trade : Rt to choose ones lawful trade – Constitutional Fundamental Right. Restraining Agreement amongst Partners during  Agreement where one party agrees to close his business for the partnership or after retirement / dissolution consideration paid by another – Void If it affects the business of the Partnership –  Restraining freedom of action for carrying on business – Not Void (regulating business) reasonable restrictions on nature of business, area  Restraining freedom of competitor in order to create monopoly - of business, period of restraint. Void  Sale of Goodwill – reasonable restraints permissible Contract of service/Bonds A selling his business to B with Goodwill agrees not to carry on C.A. of company restricted from pvt practice, – Not same business anywhere in the world – Void A selling his business to B agrees not to carry on the same business Void within the same territory – area and surrounds – Not Void  Nature of business and reasonable area/space is valid 70 71  Restraint of Legal Proceedings : Frustration of Contracts Restrict from taking legal recourse - Void  Subject matter of the contract – destroyed - contract frustrated by Restrict the time period of legal recourse without regard to virtue of the same being impossible without default by either party. - Limitation Act – Void Sec.56 Changes in TDR, FSI, Government Policies Becomes unlawful, contract becomes void Exceptions Reason is beyond the control of the promisor Strikes at the root of the Contract Arbitration Clause Parties free to Select one of two courts competent to try Exception  Does not include commercial unviability. dispute between them.  Merely that performance of the contract has become onerous – no  “Any litigation arising out of this agreement shall be settled excuse. in the High Court of Judicature at Bombay”  Cost of construction rises. One party sues in Delhi, the other sues in Bombay. The  Where time is not the essence  Where event could be forseen Delhi Court will not entertain the suit. 72  Where event is self-induced/by own conduct 73 Instances Discharge of Contract Twelve ways (secs 37-39,56,62-64,67)  By Performance  When the subject matter ceases to exist.  By Death  Performance is dispensed with or excused  Where circumstances arise which make the performance of  Refusal of tender of performance the contract impossible.  One party refusing to perform  Where the party who is to perform dies or is incapacitated.  Act becoming impossible or unlawful  Where the object contemplated by the parties does not  Novation, Rescission or Alteration of contract occur.  By Waiver  By Accord and Satisfaction  Where the enactment or legislation prevents the  Rescission of a voidable contract performance of the contract  Promisee failing to accord facilities for performance  Where the act becomes unlawful.  Operation of law 74 75 Page 5 Copyright Protected - Adv.Beena Menon 2024 Violation of Contract / Breach Remedies for breach of contract Promisor of a contract has Breach refused to perform refusing from performing Damages his promise in its entirety the promisee may put an end to the contract. Injunctions It occurs when one party refuses to perform his Specific Performance part of the promise. Rectification Indian Limitation Act The period of time limit for bringing an action for breach of contract 76 3 years - from the date of breach. 77 McDermott International Inc. v Burn Standard Co. Anticipatory Breach of Contract Ltd(2006) 11SCC 181  Anticipation of breach Holding  sections 35 to 73 of the Indian Contract Act, 1872  Anticipation of its repudiation (rejection/renunciation of duty/obligation) do not lay down the mode and manner as to how and in what manner the computation of damages or compensation has to be  Before time fixed for its performance made  When one party has such anticipation, he may The method used for computation of damages will depend seek remedies under the law upon the facts and circumstances of each case  Anticipatory breach of Contract can happen due In the assessment of damages, the Court must consider only to: strict legal obligations and not expectations.  Repudiation of contract  Works contract - Party entrusting the work - commits breach - Contractor entitled to claim the damages for loss of profit which he  Impossibility of its performance 78 expected to earn. (A.T Brij Pal Singh Vs State of Gujarat) 79 Breach of Contract Promisor of a contract has Remedies  Suit for injunction refused to perform  Suit for specific performance refusing from performing  Suit for damages his promise in its entirety  Rectification the promisee may put an end to the contract. For damages, monetary compensation may be Itoccurs when one party refuses to allowed – assess and determination of the perform his part of the promise. damages 80 81 Page 6 Copyright Protected - Adv.Beena Menon 2024 SUIT FOR INJUNCTION  Injunction is a preventive relief - An artist enters into a contract with a theatre to  Where damages would not be adequate relief  Judicial Order perform. The contract restrains the artist from restraining a person performing in another theatre during the period of from beginning or continuing an action contract. threatening or infringing - The artist absents themself. the legal right of another compelling a person to carry out a certain act - The theatre may sue for an injunction seeking Forbearing a person to do a particular act Restitution/Restoration to an injured party. restraint against the artist. A mode of securing the specific performance of the negative terms of the contract (abstain from doing)  Court can restrain a party by an order of injunction from committing the breach. 82 83 Measure of Damages Suit for Damages  Restoration :Parties to be put in same situation in which they would have been if the contract had been Damages -> for the loss suferred performed.  Purpose of contract to earn profits.  Breach of contract results in loss of profit. Affected parties can claim damages for loss  Loss of profit is awarded as damages in commercial sustained by the breach of contract. contracts  Measure of damages is the difference between the contract price and the market price at the date of the breach. 84 85 Nominal and Exemplary damages, Ordinary damages, Hadley vs Baxendale Special damages, Punitive/Vindictive damages Leading case – foundation of modern law of damages  Breakage of crankship stopped the mill  No loss – party entitled to only nominal damages  H delivered broken shaft to carrier B to take to the manufacturers at Greenwich as pattern to  Special losses cannot be recovered unless stipulated for in manufacture new one  B was only informed that article is broken shaft of mill contract  B was not informed that delay would result in losses  B’s neglect caused the shaft to be delayed beyond reasonable time  Damages are always given by way of compensation  Consequently mill remained idle for longer period than would have been necessary  Damages are not a way for punishment  H brought an action against B claiming damages for loss of profits which could have been made during the period of delay  Party wronged is able to recover only actual pecuniary loss Holding sustained  B was not liable for loss of profits caused by delay  Duty of party to mitigate their own loss  It was remote consequence  B was not informed about the consequence of delay being the loss of profits  Exemplary, Punitive, Vindictive damages are rare and in  H may have had another shaft, or maybe some other defect in machinery to cause the stoppage exceptional circumstances   There could have been another cause for the loss of profits It was not a direct consequence of the breach, so not recoverable  Only nominal damages were awarded 86 87 Page 7 Copyright Protected - Adv.Beena Menon 2024 - A contracts with B to supply 1000 tons of iron for Makkala Narsimlu v. Gunalal Ragunandan Rao When there is a breach of contract and when the contract itself Rs.100 per ton at a specified time, for which he enters  has provided that an amount of compensation has to be paid, the into a contract with C to purchase 1000 tons @ Rs.80 Court has power to award either the entire amount so fixed or a per ton, which he informs to C. reasonable portion thereof, whether or not the actual loss is proved. - C fails to deliver. A cannot procure it from anywhere Dharam Chand v Sunil Ranjan else, as a result he cannot perform his contract with B. Measure of damages are in two classes of cases B rescinds.  1. Where the contract fixes an amount to be paid in case of its - C is bound to pay A Rs.20,000/- as damages breach. - If C was not informed, then he would only have to pay  2. Where the contract provides for any other stipulation by way of penalty. damages on the difference in contract price and  In the second class of cases,the measure of damages is market price reasonable compensation ,not exceeding the stipulated penalty. 88 89 Specific Performance Requires a party to fulfill a specific act in order to complete a Essentials for S.Perf contract. It's a court-ordered remedy Inadequacy of damages Monetary compensation isn't enough to address the harm caused by a breach Uniqueness of subject matter There exist no standard of ascertaining actual damages caused by Any alternatives the breach Supervision and practicality Important in industries where reputation and trust are important Public policy and morality Continuous readiness and willingness to perform his part – The plaintiff in a suit for specific performance has to allege and must Discretion of courts prove his continuous readiness and willingness from date of contract to the time of hearing, to perform the contract on his part. Clean hands 90 91 Egs Alteration/Rectification Rare items, Unique items, Antique pieces  Change in one or more material terms of the Custom made products – similar substitute would be difficult or contract unavailable  Mutual consent Partnership – if a partner withholds their expertise or intellectual  Original contract discharged by alteration property  New one in altered form takes its place Contracts for hire of expertise – eg athlete/player to play for a  Cannot enforce the old terms particular team  New terms should be enforceable by law A software developer licenses a unique algorithm to a tech  Material alteration – alters the legal effect of the company for exclusive use. If the tech company breaches the contract contract by sublicensing the algorithm to another company, the  Correcting a clerical error is NOT material developer can seek specific performance to enforce the exclusivity alteration clause 92 93 Page 8 Copyright Protected - Adv.Beena Menon 2024 Rectification  Court orders a change in a written document to reflect what it ought to have said in the first place. Correct errors in the contract  Change the contract itself or make a new one to replace the old one Purpose: May be caused by Fraud make sure that contract reflects the intent of the parties May be caused by Mutual mistake of parties Prevent one party from taking undue advantage of the other Mistake of fact Identify Omissions, provisions, unintentional mistakes, discrepancies, inconsistencies Does not express the Real intention of parties Reflect the original intent of the parties, modify the existing terms Through a court only Should not alter or change the fundamental nature of the original contract Requires the consent of all the parties 94 95 Shamim Ahmed Siddique vs Society Ltd. And Ors. It must be proved that it was through the mutual mistake of the parties That the instrument in question did not truly express the intention of the parties. It must be proved that there has been a mistake in framing the instrument It must ascertain the real intention of the parties If the court is satisfied by these conditions, the court has the discretionary power to rectify it. 96 Page 9