B.Com Commercial & Company Law PDF

B.Com-Commercial &Company law B.Com. Second Year Paper No. IX COMMERCIAL LAW AND COMPANY LAW BHARATHIAR UNIVERSITY SCHOOL OF DISTANCE EDUCATION...

B.Com-Commercial &Company law B.Com. Second Year Paper No. IX COMMERCIAL LAW AND COMPANY LAW BHARATHIAR UNIVERSITY SCHOOL OF DISTANCE EDUCATION COIMBATORE – 641 046 1 B.Com-Commercial &Company law 2 B.Com-Commercial &Company law CONTENTS Lesson Page No. 1. Nature and Kinds of Contracts 5 2. Discharge of Contract 19 3. Remedies for Breach of Contract 35 4. Offer 47 5. Acceptance 59 6. Bailment 67 7. Pledge 81 8. Contract of Sale of Goods Act 1930 87 9. Rights and Duties of a Buyer and Seller 101 10. Company form of Business – On Over View 108 11. Formation of a Company 121 12. Memorandum of Association 133 13. Doctrine of Ultravires 149 14. Articles of Association 156 15. Prospectus of a Company 169 16. Shares 185 17. Debenture 196 18. Directors 205 19. Company Secretary 224 20. Meeting 234 21. Winding up - Compulsory Winding up by the Court 248 22. Winding up - Voluntary Winding up 262 3 B.Com-Commercial &Company law SYLLABUS PAPER IX COMMERCIAL LAW AND COMPANY LAW Objective : To enlighten the Students Knowledge on Commercial and Company Laws. UNIT - I Law – Meaning – Law of Contract – Definition – Classification of Contracts – Essential Elements of Valid Contract – Discharge of Contract – Remedies of Breach of Contract – Offer – and Acceptance – Legal Rules relating to Offer and Acceptance – Revocation of Offer and Acceptance. UNIT - II Bailment and Pledge – Essentials of Bailment – Rights and Duties of Bailor and Bailee-Pledge-Essentials-Rights and Duties of Pawnee. Contract of Sale of Goods Act 1930 –Rules regarding Delivery of Goods – Rights and Duties of a Buyer and Seller. UNIT - III Company – Definition-Characteristics – Kinds – Privileges of Private Company – Formation of a Company – Memorandum of Association – Meaning – Purpose – Alteration of Memorandum – Doctrine of Ultravires – Articles of Association - Meaning Forms – Contents – Alteration of Articles – Doctrine of Indoor management. UNIT - IV Prospectus – Definition – Contents – Deemed Prospectus – Misstatement in Prospectus - Shares and Debentures – Meaning – Types – Director and Secretary – Qualification and Disqualification – Appointment – Removal – Remuneration – Powers, Duties and Liabilities. UNIT - V Meeting – Requisites of Valid Meeting – Types of Meeting – Winding up – Meaning – Modes of Winding Up. Books for Reference 1. N.D.Kapoor, “Business Law”, Sultan Chand & Sons, New Delhi 2005. 2. R.S.N.Pillai & Bagavath, “Business Law” S.Chand, New Delhi 2005 3. Bagrial A.K, “Company Law”, Vikas Publishing House, New Delhi 4. Gower L.C.B, “Principles of Modern Company Law”, Steven & Sons, London. 5. Ramaiya A, “Guide to the Companies Act”, Wadhwa & Co., Nagpur 6. Singh Avtar, “Company Law”, Eastern Book Co., Lucknow. 4 B.Com-Commercial &Company law LESSON-1 NATURE AND KINDS OF CONTRACTS CONTENTS 1.0 Aims and Objectives 1.1 Introduction 1.1.1 Definition of law 1.1.2 Object of law 1.1.3 Classification of law 1.2 Contract 1.2.1 Meaning 1.2.2 Definition 1.3 Law of contract 1.3.1 Purpose of the law of contract 1.3.2 Definition 1.3.3 Nature of the law of contract 1.3.4 Components of a contract 1.4 Classification of contract 1.4.1 Classification according to Validity 1.4.1 (a) Essential elements of a valid contract 1.4.2 Classification according to formation 1.4.3 Classification according to performance 1.5 Let us Sum Up 1.6 Questions for discussion 1.7 Model answer to check your progress 1.8 References 1.0 AIMS AND OBJECTIVES In this lesson, we discuss the meaning, objectives, classification of law, definition of contract, classification of contract and essential elements of valid contract. After going through this lesson you will able to 5 B.Com-Commercial &Company law 1) know the meaning of Law 2) understand the definition and classification of Law 3) understand the definition of contract and classification of contract 4) study the essential elements of valid contract 1.1 INTRODUCTION The word law is a general term and has different connotations for different people It is not possible to give a single, accurate definition. In general law includes all the rules and principles which regulate our relations with other individuals and with the state. Here, we discuss the definition of Law, objects and classification of Law. 1.1.1 Definition of Law Professor Holland defines law as the external rule of human action enforced by sovereign political authority. In case of inanimate objects, they are governed by law of nature. In the words of Salmond, “Law is the body of principles recognised and applied by the State in the administration of justice.” Law is not static, as circumstances and conditions in a society changes, Laws are changed to fit the requirements of the society. 1.1.2 Object of Law 1. The object of law is to establish socio-economic justice and remove the existing imbalance in the socio-economic structure. 2. Law has to serve as a vehicle of social change and as a harbinger of social justice. 1.1.3 Classification of Law Law can be divided in to substantive law and Procedural law. Substantive law speaks about substantial rights and duties of parsons to enter into transactions. Procedural law speaks about procedure to be followed. Further, Law may be broadly classified as private law, public law and personal law. Private law deals with laws that are applicable to and among individuals in society. Personal laws are laws that are applicable to various communities pertaining to marriage, divorce, adoption, succession and inheritance, etc. Public law deals with matters pertaining to rights of the individuals versus the state, rights of the state versus centre, rights inter se amongst states. Mercantile law is that branch of law which is applicable to mercantile transactions. Commercial law is quite essential for anyone who desires to have a basic knowledge in respect of commercial transactions like sale of goods, guarantee, bailment, agency, partnership, insurance and negotiable instruments 6 B.Com-Commercial &Company law 1.2 CONTRACT A contract is an agreement made between two or more parties which the law will enforce. In this section, we discuss the meaning and definition of contract 1.2.1 Meaning Contract is an agreement between two or more parties mentally agrees upon doing or not doing a particular work. 1.2.2 Definition William : “ a legally binding agreement between to or Anson more persons by which rights are acquired by one or more to acts or forbearance on the part of the other or others” Savigny : “the union of several persons in an accordant expression of will with the object of creating an obligation between them” Salmond a contract is “an agreement creating and defining obligations between the parties.” Commercial transactions are made by parties who do not expect contingencies of failure with regard to fulfilment of the obligations. It is only when parties to the transactions refuse, omitted or unable to fulfil their obligations; the question of forming a contract with legal terms becomes essential. In this connection, the ingredients of commercial obligations cannot be converted by parties into legal obligations, according to their own convenience. Hence, it is very important that the basic ingredients of a contract must be known to everyone. 1.3 LAW OF CONTRACT Its rules define the remedies that are available in a court of law against a person who fails to perform his contract, and the conditions under which the remedies are available. The law of contract is the most important branch of commercial law.It introduces definiteness in business transactions and determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. In this section we discuss definition of law, purpose of law and nature of law. 1.3.1. Purpose of the law of Contract The purpose of the law of contract is to ensure the realisation of reasonable expectation of the parties who enter into a contract. Agreement enforceable by law becomes contract. All contracts are agreements and obligations but not vice versa. 7 B.Com-Commercial &Company law 1.3.2 Definition John Salmond “the law of contracts is not the whole law of agreements, nor is it the whole law of obligations, but it deals with those agreements which create obligations and those obligations is which have their source in agreements” 1.3.3 Nature of the law of Contract The law of contract differs from other branches of law in an important respect. It does not lay down a number of rights and duties which the Law will enforce; it consists rather of a number of limiting principles, subject to which the parties may create rights and duties for themselves which the law will uphold. The parties to a contract, in a sense, make the law for themselves. So long as they do riot infringe some legal prohibition, they can make what rules they like in respect of the subject-matter of their agreement, and the law will give effect to their decisions 1.3.4 Components of a Contract Contract essentially consists of two elements viz., a) agreement and b) obligations. 1.3.4.(a )Agreement: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Every promise forming consideration for each other is called as an agreement. An agreement is an accepted proposal there must be a proposal or offer by one party and its acceptance by the other. The Law of Contract does not exhaustively deal with all types of agreements i) it does not deal with agreements which destroy rights. Example: Surrender deed. When rights are surrendered there is nothing to be enforced. (ii) it does not deal with agreements which transfer rights. Example: Assignment deed. When rights are assigned in favour of another, here also there can be no contract for enforcement, (iii) Therefore, the law of contract deals with such type of agreements which create, define, protect and preserve rights and obligations. An agreement may be a social agreement or a legal agreement. A social agreement does not give rise to contractual obligations and is not enforceable in a court of law. 8 B.Com-Commercial &Company law Examples: 1. Nithilan invites his friend Saminathan to come and stay with him for a week. B accepts the invitation but when he comes to Nithilan, Nithilan cannot accommodate him as his wife had died the day before. Saminathan cannot claim any compensation from Nithilan as the agreement is a social one. 2. A father promises to pay his son Rs. 200 every month as pocket allowance. Later he refuses to pay. The son cannot recover as it is a domestic agreement and there is no intention on the part of (he parties to create legal relations. 1.3.4 (b) Obligations Obligation is a legal tie which imposes upon determinate person or persons the necessity of doing or abstaining from doing a definite act or acts. Obligations are also said to be varied, such as social obligations, obligations arising out of torts (civil wrong or breach of duty), obligations arising out of compromise decree, obligations arising out of quasi contract and obligations arising out of agreements. 1) The Law of Contract does not deal with social obligations. 2) Obligations may also arise out of torts. Tort means civil wrong which amounts to breach of duty. 3) The Law of Contract does not take notice of obligations arising out of a compromise decree in a suit between two litigants. 4) The Law of Contract again does not deal with obligations arising out of quasi contracts. 5) It is needless to say that the Contract Act deals with such obligations arising out of agreement which again creates, defines, protects and preserves rights and obligations. Check your progress 1 Write short notes on need for the “knowledge of law” Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson ( pp) -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- 9 B.Com-Commercial &Company law 1.4 CLASSIFICATION OF CONTRACT In this section we discuss the classification of Contract under three headings i) Classification according to Validity ii) Classification according to formation iii) Classification according to performance 1.4 1 CLASSIFICATION ACCORDING TO VALIDITY From the point of view of validity a contract is classified as follows i) Valid contract ii) Void contract iii) Voidable contract iv) Unenforceable contract v) Void agreement vi) Illegal agreement 1.4.1.(i) Valid Contract (section 2 (h) ) According section 2(h) contract is an agreement enforceable by law. All contracts are agreements but not vice versa. The formation of the contract requires certain important ingredient without which the contract cannot be constituted. An agreement becomes a valid contract when all the following essential elements are present. If any one of these elements is missing, the contract is voidable, void, illegal or unenforceable. 1.4.1.(i) ( a) ESSENTIAL ELEMENTS OF A VALID CONTRACT The term ‘agreements’ it is much wider than the term ‘contract’. An agreement becomes enforceable by law when it fulfils certain conditions. According to sec, 10 of the Act lay down the essentials of a valid contract. In this section, we discuss the essential elements of a valid contract.List of essential Elements: 1. Offer and Acceptance 2. Intention to create legal 3. Lawful Consideration 4. Capacity of parties 5. Free and genuine consent 6. Lawful object 7. Agreement not declared void 8. Certainty and possibility of performance 9. Legal formalities. 10 B.Com-Commercial &Company law 1. Offer and Acceptance: An agreement is the result of an offer and its acceptance. So, there must be ‘lawful offer’ and a ‘lawful acceptance’ of the offer. In an agreement there must be atleast two parties, one of them making the offer and the other accepting it. The offer and acceptance must satisfy the requirements of the contract Act in relation thereto. 2. Intention to Create Legal Relations There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. If the parties do not intend to create legal obligations, there is no contract between them. An agreement which gives rise to a moral or social obligation is not contract. Example: Ram invited Raja for a dinner. Raja accepted the invitation. It is a social agreement. If Ram fails to serve to Raja, Raja cannot go to Courts of Law for enforcing the agreement. Similarly, if Raja fails to attend the dinner, Ram cannot go to Courts of Law for enforcing the agreement. 3. Lawful Consideration One of the essential elements a valid contract is the presence of ‘consideration’. The agreement must be supported by lawful consideration on both sides. Each party to the agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. The consideration is lawful, unless it is forbidden by law or is fraudulent. Example: If A offers to sell his scooter to B for Rs. 10,000 and B accepts the offer, then for A Rs. 10,000 is the consideration and for B the scooter is the consideration 4. Capacity of Parties The parties to an agreement must be competent to a contract; otherwise it cannot be enforced by a Court of Law. If any of the parties to the agreement suffer from Minority, Lunacy, Drunkenness, idiocy, etc., the agreement is not enforceable at law, except in some special cases. Under section 11 of the act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject” 11 B.Com-Commercial &Company law 5.Free and Genuine Consent “Consent” means that the parties must have agreed upon the same thing in the same sense. The consent of the parties to the agreement must be free and genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. If the consent is obtained by any of these flaws, then the contract is not valid. 6. Lawful Object For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered must not be illegal or immoral or opposed to public policy. If the object is unlawful, the agreement is void. Example: ‘A’ lets his house to a prostitute to carry on prostitution; he cannot recover the rent through a court of law. 7. Agreement not declared Void The agreements must not have been expressly declared to be void by any law in force in the country. If certain agreements are expressly declared to be void by the law of the country, f then such agreements if entered into shall not be enforceable by Courts of Law. 8. Certainty and Possibility of Performance Agreements to form valid contracts must be certain. If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. The performance of an agreement must be possible. An agreement to do an impossible act is not valid. Example: X agrees to sell Y hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. 9. Legal Formalities A contract may be oral or in writing. If, however, a particular type of contract is required by law to be in writing, it must comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not carried out, then the contract is not enforceable at law. 1.4.1. (ii) Void contract The word ‘void’ means ‘not binding in law’. Accordingly the term ‘void contract’ implies, contract which has no legal effect at all. A void contract is that which is not enforceable by law. Sec. 2 (j) defines: “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. A contract which is enforceable by law at the time it was made. But later on if it becomes legally unenforceable due to some reasons, it is called void contract. 12 B.Com-Commercial &Company law Example: Prasath promised to marry uma. Later on uma died. In this case, the contract becomes void on the death of uma. A void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect of certain reasons. The reasons which transform a valid contract into a void contract, as the Contract Act, are as follows: i) Supervening impossibility (Sec. 56) A contract becomes void by impossibility of performance after the formation of the contract. Example: “Narayanan” and “Suba” contract to marry each other. Before the time fixed for the marriage Narayanan goes mad. The contract to marry becomes void. ii) Subsequent illegality (Sec. 56) A contract also becomes void by subsequent illegality. Example, A agrees to sell B 100 bags of wheat at per bag. Before delivery, the Government bans private trading in tie contract becomes void. iii) Repudiation of a voidable contract A voidable contract becomes void, when the party, whose consent is not free, repudiates the contract. Example: Kannan by threatening to murder satha’s son, makes satha agree to sell his car 3, 00,000 for a sum of Rs 1, 00,000 only. The contract, being the result of coercion is voidable at the option of satha. satha may either affirm or reject the contract. In case satha decides to rescind the contract, it becomes void. iv) In the case of a contract contingent on the happening of an uncertain future event, if that event becomes impossible. A contingent contract to door not to do something on the happening of an uncertain future event, becomes void, when the event becomes impossible. Example: Selvi to give Rs 15,000 as loan to seethe, if seetha marries loganathan.. Loganathan dies without being married to seethe. The contract becomes void. 13 B.Com-Commercial &Company law 1.4.1.(iii) Voidable Contract According to section2 (i)“An agreement which is enforceable by law at the option of one or more of the parties thereon, but not at the option of the other or others, is a voidable contract”. A voidable contract is one which is enforceable by law at the option of one of the parties, until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf, it is a valid contract. The consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud such a contract is voidable at the option of the aggrieved party i.e., the party whose consent was so caused (Secs. 19 and 19 A). In such cases where the consent is not free, the party whose consent is so caused becomes the aggrieved party who can either affirm the contract or set aside or rescind it. This right of recession should, however, be exercised within reasonable time and before the third party acquires rights under the contract Example: A agreed to sell his car to B for Rs. 50,000. The consent was obtained by use of force. The contract is voidable at the option of A. A can put an end to this contract, if he so decides. 1.4.1. (iv) Unenforceable contract The unenforceable contracts are those which cannot be enforced in a Court of Law because of some technical defects such as absence of writing, registration, requisite stamp etc., If such formalities are not properly observed, the contract cannot be enforced is court of law. Such contracts can be enforced if the technical defect is removed. Example: An oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing. Similarly, a bill of exchange or promissory note, though valid in itself, becomes unenforceable after three years from the date of bill or note falls due, being time barred under the Limitation Act. 1.4.1. (v) Void Agreement According to section 2 (g), “An agreement not enforceable by law is said to be void”. There is absence of one or more elements of a valid contract, except that of ‘free consent’ in the case of a void agreement. A void agreement has no legal effect. It confers no rights on any person and creates no obligations. Example: An agreement with a minor is void ab-initio as against him, because a minor lacks the capacity to contract. Similarly, an agreement without consideration is void ab-initio, 14 B.Com-Commercial &Company law 1.4.1. (vi) Illegal Agreement An agreement is illegal and void if its object or consideration: (a) is forbidden by law; or (b) is of such a nature that, if permitted, it would defeat the provisions of any law ;or ( c) is fraudulent; or (d) involves or implies injury to the person or property of another; or (e) the court regards it as immoral, or opposed to public policy (Sec. 23).Thus an agreement to commit murder, robbery etc. 1.4.2 CLASSIFICATION ACCORDING TO FORMATION From the point of view of mode of creation a contract can be classified into the following three types i) Express contract ii) Implied contract iii) Quasi contract 1.Express contract According to section 9 “In so far as the proposal or acceptance any promise is made in words the promise is said to be express”. An express promise results in an express contract. When such contract is formed, there is no difficulty in under standing the rights and obligations of the parties. In other worlds, where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written, it is an express contract. Example: A tells B on telephone that he offers to sell his car for Rs 20, 000 and B in reply informs A that he accepts the offer, there is an express contract. 2. Implied contract According to section 9 “In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”. The both offer and acceptance constituting in an agreement enforceable at law are made otherwise than in words such contract comes into existence on account of act or conduct of the parties. Example: Mr. X went to a restaurant and took a cup of coffee. In this, there is an implied contract that he will pay for the cup of coffee, even though he makes no express promise to do so. 3. Constructive or quasi contract Quasi contract is a misnomer. If a contract does not arise by virtue of any agreement, express or implied between the parties but the law infers a contract under certain special circumstances is called as quasi contract. There are certain dealings which are not contracts strictly, the parties act as if there is a 15 B.Com-Commercial &Company law contract. In fact, it is an obligation which the law creates in the absence of any agreement. It rests on the ground of equity that "a person shall not be allowed to enrich himself unjustly at the expense of another. Thus, a finder of lost goods is under an obligation to find out the true owner and return the goods Example: Mr. X supplied Y, a lunatic, with necessaries suitable to his conditions in life, this case, X is entitled to be reimbursed from Y’s estate. 1.4.3 CLASSIFICATION ACCORDING TO PERFORMANCE: From the point of view of the extent of execution a contract may be executed or executory 1. Executed contract: When both the parties have completely performed their obligations, under the contract, the contract is said to be executed. That is, it is a contract under the terms of a contract nothing remains to be done by either the party. Example: Cash sales, the contract is executed at once. Where only one of the parties to a contract has performed his share of obligation and the other party is still to perform his share of obligation, then the contract is called ‘executed’. Example: M advertises a reward 1,000 to anyone who finds his missing son. B knowing the offer finds missing boy and brings him. As soon as B traces the boy, there comes existence an executed contract because B has performed his share of ion and it remains for M to pay the amount of reward to B. 2. Executory Contract In this contract the obligations of the parties are to be performed at a later time. When both the parties have not performed their respective obligations under the contract, the contract is said to be executory. Example: Mr. A agrees to sell his bus to B for a certain amount. Delivery and payment are to be made in the month following. The contract is said to be executory. Suppose, a delivered the bus- to B, but fi has not paid the amount, the contract is still executory because B is still under obligation to pay the price. As such, the contract as a whole is executory one, though it is partly executed and partly executory. 16 B.Com-Commercial &Company law Check your progress - 2 Distinguish between Express and implied Contract Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson ( pp) ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- 1.5 LET US SUM UP In this lesson, we have briefly touched upon the following points. A contract is an agreement made between two or more parties which the law will enforce. An agreement may be a social agreement or a legal agreement. Essentials of contract: 1.There must be an agreement. 2. The parties must intent to create legal relationship. 3. The parties must be capable of entering into an agreement.4.The agreement must be supported by consideration on both side.5.The consent of the parties must be free and genuine 6. The object of the agreement must be lawful.7.The terms of the agreement must be certain and capable of performance.8.The agreement must not have been expressly declared as void. Contract can be classified according to Validity, according to formation and according to performance. 1.6 QUESTIONS FOR DISCUSSION 1. What are the object and nature of law of contract? 2. Discuss the essential elements of a valid contract 3. Distinguish between void and voidable contract. 4. Write short notes on i) Quasi contract and ii) Bilateral contract 1.7 MODEL ANSWER TO CHECK YOUR PROGRESS Check- 1 Write short notes on need for the “knowledge of law” It is not possible for a layman to learn every branch of law, yet it is to the advantage of each member of the community to know something of rules and regulations by which he is governed and as such he must acquaint himself with the general principles of the law of 17 B.Com-Commercial &Company law the country. The law now –a-days is a matter of great intricacy. As such no sound businessman would attempt to solve important legal questions affecting his business interest without legal advice. A general knowledge of some of the more important legal principles and how they apply to certain problems will certainly help a business man in avoiding conflict with the persons with whom he comes into business contacts. Check- 2 Distinguish between Express and implied Contract Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written, it is an express contract. In executory contract the obligations of the parties are to be performed at a later time. When both the parties have not performed their respective obligations under the contract, the contract is said to be executory. 1.8 REFERENCES 1. M.C. Kuchhal - Mercantile Law 2. R.S.N Pillai & Bagavathi - Business Law 3. N.D. Kapoor - Elements of Company Law 18 B.Com-Commercial &Company law LESSON-2 DISCHARGE OF CONTRACT CONTENTS 2.0 Aims and objectives 2.1 Introduction 2.2 Various modes of discharge of contract 2.2.1 by Performance 2.2.2 by Agreement 2.2.3 by Impossibility of Performance 2.2.4 by Lapse of Time 2.2.5 by Operation of Law 2.2.6 by Breach of Contract 2.3 Let us sum up 2.4 Questions for discussion 2.5 Model answer to check your progress 2.6 References 2.0 AIMS AND OBJECTIVES In the first lesson, we discussed the meaning and law of contract, definition and various kinds of contracts. Here we discuss the meaning of discharge of contract and different ways of discharge of contract. After going through this lesson, you will able to 1. know the meaning of discharge of contract 2. understand various modes of discharge of contract 2.1 INTRODUCTION Discharge of Contract means termination of the contractual relationship between the parties. When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated. 19 B.Com-Commercial &Company law 2.2 VARIOUS MODES OF DISCHARGE OF CONTRACT A contract may be discharged by various modes which are discussed one by one in this section By Performance By Agreement By Impossibility of Performance By Lapse of Time By Operation of Law By Breach of Contract 2.2.1. Discharge by Performance of contract Performance means the doing of that which is required by a Contract. Performance of a contract is the most usual mode of discharge of Contract. It may be Actual or Attempted. (i) Actual Performance Actual performance mean when each party to a Contract fulfils his obligation arising under the Contract within the time and in the manner Prescribed, most of the contracts are discharged by performance in this manner. (ii) 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 the promise refuses to accept the performance, it is called attempted performance or tender. 2.2.2 Discharge by Agreement: A contract is created by an agreement, is the same way it can be discharged by an agreement. It means the rights and obligations created by an agreement can be discharged without their performance by another agreement which provides for the extinguishment of the earlier rights and obligations. A contract can be discharged by the following two types of agreements. (1) Express consent (2) Implied consent 1) Express consent Express consent can be classified in the following two types (1) Express consent at the time of formation of contract (2) Express consent subsequent to formation of contract 20 B.Com-Commercial &Company law Express consent at the time of formation of contract: The consent of one party to a contract is given to other parties at the time of the formation of the contract. Example: “R” sells a computer to “M” on approval with the condition that if the computer does not work efficiently M may return it. Consent to return the computer is given to M at the time of the formation of the contract. Express consent subsequent to formation of contract: According to see 62 if the parties to a contract agree to substitute a new contract for it, or rescind or alter it, the original contract need not be performed. According to see 63 “Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit”. Implied consent Since contract is created by means of an agreement, it may also be discharged by another agreement between the same parties. Implied consent means the parties to contract enter into a fresh contract in place of original contract. The following are the important methods for the discharge of a contract by a new contract. (1) Novation (2) Rescission (3) Alteration (4) Remission (5) Waiver (6) Accord and satisfaction (7) Merger 1.Novation: Novation means substitution of a new contract for the existing one. There are two types of novation. a) New contract is substituted for old one with change of parties. b) New contract is substituted for an existing one without change of parties. a) Novation with change of parties: In this type, the nature of the obligation remains the same but the parties are changed with the consent of one party of the contract. 21 B.Com-Commercial &Company law Example: “X” borrowed Rs.1000 from “Y” now x is a debtors and y is a creditor. “Y” borrowed Rs.1000 from “Z” Here, “Y” is a debtor and “Z” is a creditor. By mutual agreement Y’s debt to “Z” and Y’s loan to “X” are cancelled and “Z” accepts “X” as his debtor. There is novation involving change of parties. b) Novation without change of parties: The concerned parties to a contract agree to substitute the existing contract with out change of parties. Here parties are not changed but the nature of the obligation must be altered substantially in the new substituted contract. The original contract is discharged with out performed. Example: Sheela owes Bala Rs.5000. sheela enters into an agreement with Bala and gives Bala a mortgage of her estate for Rs.2500 in place of the debt of Rs.5000. This is new contract and extinguishes the old contract. The following points are also worth noting in connection with Novation: (1) The new contract must be valid and enforceable. (2) An agreement to substitute a contract in future will not be Novation. (3) Novation cannot be compulsory it can only be with the mutual consent of all the parties. Example: A owes B Rs.5,000 under a contract. B owes C Rs.5,000. B orders A to credit C with Rs.5,000 in his books, but C does not assent to the agreement. B still owes C Rs.5,000 and no new contract has been entered into. 2. Rescission Novation means a new contract in place of the old one. Rescission means cancellation of the contract. A contract may be discharged, before the date of performance, by agreement between the parties to the effect that it shall no longer bind them. Such an agreement amounts to rescission or cancellation of the contract, the consideration for mutual promises being the abandonment by the respective parties of their rights under the contract. Rescission of a contract takes place by mutual consent of the parties or where one party fails in the performances of his obligation. In such a case, the other parties may rescind the contract without prejudice to his right to claim compensation for the breach of contract. 22 B.Com-Commercial &Company law Example: 1) ‘A’ promises to deliver certain goods to ‘B’ on a certain date. Before the date of performance, A and B mutually agree that the contract will not be performed. The contract stands discharged by rescission. 2) “Anbu” promises to supply certain good to “Babu” six months after date. By that time, the goods go out of fashion. Anbu and Balu may rescind the contract. 3.Alteration Alteration of a contract means change in one or more of the material terms of a contract. It a material alteration in a written contract is done by mutual consent, the original contract is discharges by alteration and the new contract in its altered form takes its place. The alteration is valid when it is made with the consent of all the parties. An alternation may cither be material or immaterial. i) Material alteration A material alteration is one which alters the legal effect of the contract. Example: A charge in the amount of money to be paid, the rate of interest or the names of the parties. ii) Immaterial alteration Immaterial alteration has no effect on the validity of the contract and does not amount to alteration in the technical senses. Example: Correcting a clerical error in figure or the spelling of a name. If the parties mutually agree to change certain terms of the contract, it has the effect to terminating the original contract. It is relevant to state that a material alteration make in a written contract by one party without the consent of the other, will, make the whole contract void and no person can maintain an action upon it. The difference between “novation” and “alteration” may be noted. In case of novation. There may be a change of parties also while in case of alteration parties remain the same, only the ferns of a contract are altered. Example: “Arasu” enters into a contract with “Bala” for the supply of a material at his warehouse on 1st February. Later both Arasu and Bala agree to post pone the date of delivery to 1st march. This change amounts to alteration of the contract. 4.Remission: A contract may be discharge by remission of performances. Remission means acceptance of a lesser fulfillment of the promise made. Remission may be 23 B.Com-Commercial &Company law defined “as the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made”. According to section 63, “Every promise may dispense with or remit, wholly or in part, the performance of the promise make to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit”. It is not necessary that there must be some consideration for the remissions of the part of the debt. It is a unilaterial act of the promises discharging the obligation of the other party, either partly or wholly. Example: A owes B Rs.10, 000. A pays to B who accepts in satisfaction of the whole debt Rs.7, 000 paid at the time and place at which the Rs.10, 000 were payable. The whole debt is discharged. 5. Waiver Waiver is nothing but foregoing one’s own right, authorized under law, whereupon the other party to the contract is released form his obligation. There is no need of an agreement for a waiver and consideration is not necessary for it. Example: A promises to tailor a shirt for B if he will sing a song at his birthday party and accordingly B sang the sons but offer wards B forbids A to tailor the shirt to which A consents, the contract is terminated by waiver. 6. Accord and satisfaction The term “accord” may be defined as the promise to accept lesser amount than what is due under the contract. Satisfaction means the payment or fulfillment of the lesser obligation. An accord accompanied by satisfaction is valid and there by discharges the obligation under the old contract. The old contract is discharged only when the lesser sum is actually paid and accepted by the promisee, i.e., there must be actual performance of the new promise and its acceptance by the other party. 7. Meger Where an inferior right Contract merges into a Superior right Contract, the former Stands discharged automatically. Merger the inferior rights vanish and one not required to be enforced. Example: ‘A’ Purchase a house, which he was having on lease. His right as a lessee will merge into his right as on owner, as right of a lessee is Inferior to the right of an owner. 24 B.Com-Commercial &Company law Check your progress 1 List out essentials of a valid tender Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson ( pp) -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- 2.2.3 Discharge by impossibility of performance A contract is discharged if its performance becomes impossible. In other words, there is no question of discharged of a contract which is entered into to perform something that is obviously impossible, e.g. an agreement to discover treasure by magic, because, in such a case there is no contract to terminate, it being an agreement void ab-initio by virtue. According to sec.56, Impossibility of performance may fall into either of the following categories: 1. Initial impossibility 2. Subsequent impossibility 1. Initial impossibility This is known as pre-contractual or impossibility existing at the time of agreement. If an agreement contemplates doing something which is absolutely impossible, the same becomes void ab -initio. The rule is based on the following two maxims: a) Lex- non -cogit ad impossiblia est i.e., the law does not recognize what is impossible; and b) Impossibilium nulla obligatio est, i.e., what is impossible does not create an obligation. Section 56, pare 1 which provides: “an agreement to do an act impossible in itself is void”. It is notice that something which is impossible inherently or by its very nature and which may or may not be known to both the parties at the time, when the contract is made. The impossibility may be; (a) Known to the parties (b) Unknown to the parties. 25 B.Com-Commercial &Company law (a) Known to the parties This is known as absolute impossibility. In case of absolute impossibility the agreement is void ab- inito. For example: When A agrees with B to discover treasure by magic, or undertakes to put life into the wife of B, the agreement is void. (b) Unknown to the parties Where at the time of making the contract both the parties are ignorant of the impossibility, as in the case of destruction of subject-matter to the ignorance of both the parties, the contract is void on the ground of mutual mistake. It, however, the promisor alone knows of the impossibility of performance at the time of making the contract, he shall have to compensate the promise for any loss which such promise sustains through the non-performance of the promise. Examples: (a) X sold to Y certain goods supposed to be on a voyage. The goods had ceased to exist due to the periles of the sea held, the contract was void. (b) ‘A’ contracts to marr ‘B’, being already married to ‘C’, and being forbidden by the law to which he is subject to practise polygamy. ‘A’ must make compensation to ‘B’ for the can caused to her by the non performance of his promise. 2. Subsequent impossibility Impossibility which arises subsequent to the formation of a contract is called post-contractual or supervening impossibility. In such a case, the contract becomes void when the act becomes impossible or unlawful. Section 56 para 2 declares, “A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”. In order that the section would apply the following conditions must be fulfilled. 1. that the act should have become impossible. 2. that impossibility should be by reason of some event which the promisor could not prevent. 3. that the impossibility should not be self-induced by the promisor or due to his negligence. 26 B.Com-Commercial &Company law The word “impossible” should be construed here in its practical sense and not only in a physical or literal sense. Impossibility of performance of a contract, as a general rule, is no excuse for the non performance of the contract; but where this impossibility is caused by the circumstances beyond the control of the parties, the parties are discharged from further performance of the obligation under the contract. Example: A contract to take in cargo for B at a foreign port, A’s Government afterwards war against the country in which the port is situated. The contract becomes void when war is declared. Supervening impossibility may occur in ways, some of which are explained below: 1. Destruction of subject-matter of contract: when the subject matter of a contract, subsequent to its formation, is destroyed without any fault of the parties to the contract, the contract is discharged. Taylor V.S. Caldwell (1863) Back burn observed as follows: “In contracts in which the performance depends on the continued existence of a given person of thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance”. Example: A music hall was let for a series of concerts of certain days. The hall was burnt down before the date of the first concert. The contact becomes void. 2.Death or personal incapacity: A promise may become physically incapable or performance by reason of the death or incapacity or some person whose continues life and health are necessary for the performance of the contract. Such impossibility discharges the promisor from liability. Example: A and B contract to marry each other, before the time fused for the marriage, a goes mad. The contract becomes void. 3. Failure of ultimate purpose: Where the ultimate purpose for which the contract was entered into fails, the contract is discharged, although there is no destruction of any property affected by the contract and the performance of the contract remains possible in literal sense. 27 B.Com-Commercial &Company law 4. Change of law A contract is discharged by impossibility of performance by the subsequent change in the law. He law may actually forbid the doing of some act undertaken in the contract, or it may take from the control of the promisor something in respect of which he has contracted to act or not to act in a certain way. Impossibility created by law is a valid excuse for non-performance. Example: A sold to B 100 bags of wheat as Rs.700 per bad. But before delivery the Government rendered the sale and purchase of wheat by private traders illegal under the defence of India rules. The contract was discharged by impossibility created by subsequent change in law. 5.Declaration of war Contracts entered into before the outbreak of war are suspended during the war and may be revived after the war is over provided they have not already become time-barred. It may be noted that if war is declared between the countries of the contracting parties than only the contract is suspended during war. If war is declared between the country of one of third country, contract remains binding, and if the party of the country now at war could not perform the contract because of dislocation of transport etc., It will be treated as “difficulty in performance” only and does not discharge the contract. Example: A contract to take in cargo for B at a foreign port. A’s Government after wards declares war against the country in which the port is situated. The contract becomes void when he war is declared. 6. Failure of pre-condition: When certain things necessary for performance cease to exist the contract becomes void on the ground of impossibility. If a contract depends on the occurrence of an event, which does not in fact happen, the contract is discharged. Example: “A” person “B” got a lease of land from “P” on a rental basis, then a German prince seized the land and it was not possible for B to use it. The landlord “P” sued for rent. The court held that B must carry out all the terms on the contract including the payment of rent. Cases not covered by supervening impossibility: Impossibility of performance is, as a rule, not an excuse for non performance, “He that agree to do an act must do it or pay damages for not doing it” is the general rule of the law of contract. When a person undertakes to do something, he must do it unless its performance becomes absolutely impossible, a person is 28 B.Com-Commercial &Company law bound to perform cannot claim to be excused by the mere fact that performance has subsequently become unexpectedly burden some, more difficult or expensive. In the following cause, a contract is not discharged on the ground of supervening impossibility: 1. Difficultly of performance: A contract is not discharged by the more fact that it has become more difficult of performance due some uncontemplated events or delays. Example: “X” contracted with “Y” to send certain goods from Bombay to Delhi in September. In August transport companies went on strike and transport was available at very high rates. Held, the increase in freight rate did not excuse performance. 2.Commercial impossibility: When in a transaction profits dwindle to a very low level or actual low becomes certain, it is said that the performance or the contract has become commercially impossible. Such a situation may arise on account of higher price of the raw material or increase in the wage bill etc. commercial impossibility also does not discharge a contract. Example: ‘A’ promised to send certain goods from Bombay to Antwerp in September. Before the goods were sent, war broke out and there was sharp increase in shipping rates. Held, the contract was not discharged. 3. Impossibility due to failure of a third person Where a contract could not be performance because of the default by a third person on whose work the promisor relied, it is not discharged. Example: “K” a wholesaler, enters into a contract with “B” for the sale of certain goods ‘to be produced by “Z” a manufacturer of those goods. “Z” does not manufacturer those goods. “K” is liable to ” B” for damages. 4. Strikes and lock-outs: A strike by the workmen or a lock-out by the employer also does not excuse performance because the former is manageable and the letter is self induced. Events such as these do not discharge a contract unless the partics have specifically agreed in this regard at the time of formation of the contract. 29 B.Com-Commercial &Company law Example: The unloading of a ship was delayed beyond the date agreed with the ship owners owing to a strike of dock workers. Held, the ship owners were entitled to damages, the impossibility of performance being no excuse. 5. Failure of one of the objects When a contract is entered into for several objects, the failure of one of them does not discharge the contract. Example: A company agreed to let out a boat to H, (a) for viewing a naval review on the occasion of the coronation of king Edward VII, and (b) to sail round the fleet. Due to illness of the king, the naval review was later cancelled but the fleet was assembled. Held, the contract was not discharged because the holding of the review was not the sole basis of the contract. To sail round the fleet, which formed an equally basic object of the contract was still capable of attainment. Check your progress 2 What do you mean by Doctrine of frustration? Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson ( pp) -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- 2.2.4 Discharge by lapse of time: A contact is discharged by lapse of time. A contract should be performed with a specified period, called period of limitation. The period of limitation for simple contract is three years. If the three years expire and creditors fails to file a suit to recover his amount, the debtor, is discharged from his liability. Example: The price of goods sold without any stipulation as to credit should be paid within three years of the delivery of the goods. Where goods are sold on credit to be paid for after the expiry of a fixed period of credit, the price should be paid with in three years of the expiry of period of credit. If the price is not paid and creditors does not file a suit against the buyer for the recovery of price within three year the debt becomes time barred and hence irrecoverable. 30 B.Com-Commercial &Company law 2.2.5 Discharge by operation of law A contract terminates by operation of law in the following cases: (a) Death In contracts involving personal skill or ability. Death of the promisor results in termination of the contract. The rights and liabilities of the deceased person pass on to the legal represent actives. (b) Merger Where an inferior right contract mergers into a superior right contract, the former stands discharged automatically. (c) Insolvency A contract is discharged by insolvency of one of the parties to it an insolvency court passes an “order of discharge” exonerating the insolvent from liabilities on debts incurred prior to his adjudication. (d) Unauthorized material alteration: A material alteration made in a writer document or contact by one party without the consent of the other, will, make the whole contract void. A material alteration is one which changes, in a significant manner, the legal identify or character of the contract or the right and liability of the parties to the contract. The effect of making such an alteration is exactly the same as that of concelling the contract. Both parties will be discharged from their respective obligations. 2.2.6 Discharge by breach of contract: The “breach of contract” means the failure of a party to perform his obligations. The party, who fails to perform his obligations, is said to have committed a breach of contract. A breach of a contract discharged the aggrieved party from performing his obligations of course the aggrieved party i.e., the party not a fault can sue for damages for breach of contract as par law; but the contract as such stands terminated. Breach of contract may be of two kinds 1. Anticipatory breach 2. Actual breach 1. Anticipatory breach An anticipatory breach of contract is a breach of contract. It occurs when a party to executory contract declarers his intention of not performing the contract before the performance is due. In other words, a refusal by the promisor to perform his part of the contract, before the due date of performance is known as the anticipatory breach of contract. 31 B.Com-Commercial &Company law Anticipatory breach may take place in two ways: (a) Expressly by words spoken or written: Here a party to the contract communicates to the other parity, before the due date of performance his intention not to perform it. Example: A contracts with B to supply 5000 bags of wheat for is Rs.6,00,000 on 1st June on 15 March A inform B that he will not be able to supply the wheat. There is express rejection of the contract. (b) Impliedly by the conduct of one of the parties: Here a party by his own voluntary act disables himself from performing the contract. Example: Ramu contracts to sell a particular horse to somu on 1st of July and before that date he sells the horse to somebody else. Section 39 of India contract act lags down “when a party to the contract (i) has refused to perform or (ii) disables him self from performing the contract, (iii) in its entirety, the promise may put and end to the contract (iv) unless he had signified by words or conduct, his acquiescence in its continuance”. Effect of an anticipatory breach: When anticipatory breach occurs, the aggrieved party can take the following steps: (1) He can treat the contract as discharged, so that the is no longer bound by any obligations under the contract and (2) He can immediately adopt the legal remedies available to him for breach of contract viz., tile a suit fro damages or specific performance or injunction. 2. Actual breach Actual breach may also discharge a contract. It occurs when a party fails to perform his obligation upon the date fixed for performance by the contract. Actual breach entitles the part not in default to elect to treat the contracts s discharged and to she the part at fault for damages for breach of contract. 32 B.Com-Commercial &Company law Example: On the appointed day the seller does not deliver the goods or the buyer refuses to accept the delivery actual breach of contract may take place. (i) at the time when the performance is due and (ii) during the performance of the contract. 2.3 LET US SUM UP In this lesson, we have briefly touched upon the following points. A contract is said to be discharged when the obligations created by it comes to an end. The various modes of discharge of a contract are as follows 1.Discharge by performance: The parties to the contract fulfil their obligations arising under the contract with in the time and the manner prescribed.2 Discharge by agreement: A contract rests on the agreement of the parties. As it is agreement which binds them, so by their agreement or consent they may be discharged. 3. Contract may be discharged by impossibility of performance.4. Discharged by lapse of time; if a contract is not performed within the period of limitation and if no action is taken by the promise in a law court, the contract is discharged. 5. Discharged by law; It includes discharge by death, merger, insolvency and unauthorized alteration of the terms of the written agreement. 6. Discharge by breach of contract; If a party breaks his obligation which the contract imposes, there takes place breach of contract. 2.4 QUESTIONS FOR DISCUSSION 1. Write a note on ‘discharge of contract by consent’ 2. Discuss fully the “doctrine of supervening impossibility” 3. State briefly the various modes in which a contract may be discharged. 4. What do you understand by anticipatory breach of contract? 5. Discuss fully the law relating to Novation of contract 2.5 MODEL ANSWER TO CHECK YOUR PROGRESS Check -1 List out essentials of a valid tender 1. It must be unconditional 2. It must be made at proper time and place 3. It must be of the whole obligation contracted for and not only of the part 4. It must be made a proper person 33 B.Com-Commercial &Company law Check – 2 what do you mean by Doctrine of frustration? It is the parallel concept of ‘supervening impossibility’. It come into play when ‘the common object of a contract can no longer be achieved or when the contract , after it is made , becomes impossible of performance due to circumstances beyond the control or contemplation of the parties. 2.6 REFERENCES 1. M.C. Kuchhal - Mercantile Law 2. R.S.N Pillai & Bagavathi - Business Law 3. 3.N.D. Kapoor - Elements of Company Law 34 B.Com-Commercial &Company law LESSON-3 REMEDIES FOR BREACH OF CONTRACT CONTENTS 3.0 Aims and objectives 3.1 Introduction 3.2 Various remedies for breach of contract 3.2.1 Suit for rescission 3.2.2 Suit for damages 3.2.3 Suit upon quantum meruit 3.2.4 Suit for specific performance 3.2.5 Suit for an injunction 3.3 Let us sum up 3.4 Questions for discussion 3.5 Model answer to check your progress 3.6 References 3.0 AIMS AND OBJECTIVES In the second lesson, we discussed the meaning of discharge of contract and different ways of discharge of contract. In this lesson we discuss the meaning of remedies and different types of remedies against the guilty party. After going through this lesson, you will able to 1. know the meaning of remedy 2. understand various remedies against the guilty party 3. know rules regarding damages 3.1 INTRODUCTION Where there is a right, there must be a remedy. A contract gives rise to correlative rights and obligations. In this section we discuss the meaning and definition of remedy for breach of contract. 35 B.Com-Commercial &Company law 3.1.1 Meaning Remedies means the rights of the aggrieved parties of seed redress by way or restoration or claim compensation from the parties who was responsible for causing the cuss, occasioned to them. Parties to a contract are expected to perform their respective promises. If a party fails, neglects, or omits to perform his promise, the other, must be entitled to enforce his right. In breach of contract the injured or the aggrieved part is entitled to bring an action for damages. 3.1.2 Definition Remedies can be define as “A remedy is the means given by law for the enforcement of a right”. 3.2 VARIOUS REMEDIES FOR BREACH OF CONTRACT Whenever there is breach of contract, the injured or aggrieved party is entitled to bring an action for damage. In this section, we discuss the various remedy for breach of contract. The aggrieved or injured part becomes entitled to any one or more of the following remedies against the guilty party: 1. Suit for rescission 2. Suit for damages 3. Suit upon quantum meruit 4. Suit for specific performance 5. Suit for an injunction. As regards the last two remedies stated above, the law is regulated by the specific relief Act, 1963. 3.2.1 Suit for rescission: Rescission means cancellation. Ever for canceling a contract, it must be done according to the norms laid down under law. When a contract is broken by one party, the other party may sue to treat the contract as rescinded and retuse to perform his part of performance on the rescission of he contract, the aggrieved or injured part is discharged from all the obligations under the contract. Example: Bharathi promises Narayanasamy to sell her building for Rs.7,00,000 on certain date. Narayanasamy agreed to pay the price on receipt of the building. Bharathi refuses to sell her building to Narayanasamy. Narayanasamy may cancel the contract and there is no liability on his part to pay price to the Bharathi. Narayanasamy may also file a “Suit for rescission” and claim damages. 36 B.Com-Commercial &Company law Rescission and the consequent payment of damages depend upon facts and circum stances under which contracts are cancelled. Under section 39, When a party to a contract has refused to perform or disabled himself from performing his promise in its entirely the promise may put an end to contract, unless he has signified, by words or conduct, his acquiescence in its continuance. Under section 65, Obligation of the person who has received advantage under void agreement or contract that becomes void. “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreements or contracts is bound to restore it, or to make compensation for its, to the person from whom he received it”. Under section 75“A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non- fulfillment of the contract”. Power of the Court has power to grant or refuse to rescission. The court may grant rescission of the contract. (1) Where the contract is avoidable by the plaintiff. (2) Where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff. The court may refuse to grant rescission of the contract: (1) Where the plaintiff has expressly or impliedly ratified the contract; or (2) Where owing to the change of circumstances, the parties cannot be restore to their original positions; or (3) Where third parties have, during the subsistence of the contract acquired rights in good faith and for value; or (4) Where only a part of the contract is sought to be rescinded and such part is not severable from the rest of the contract. Applying to the count for “rescission of the contract” is necessary for claiming damages for breach or for availing any other remedy. In practice a “suit for rescission” is accompanied by a suit for damages, etc., in the same plant. 37 B.Com-Commercial &Company law Check your progress - 1 What do you mean by cost of decree? Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson (pp) -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- 3.2.2 Suit for damages Damage means injury. Damages signify the method of making good the loss. Such as indemnification. Damages are a monetary compensation allowed to the injured party for the loss or injury suffered by him as a result or the breach of contract. The fundamental principle underlying damages is not punishment but compensation. In the event of a breach of contract, the other party have certain rights including the right to claim damages of loss arising three from. Damages are to be awarded for comes which naturally arose from the breach. The law of contract does not seek to punish the quality. The defaulter party is liable to pay damages to the aggrieved party. As a general rule, “compensation must be commensurate with the injury or loss sustained, arising naturally from the breach”. “It actual loss is not proved, no damages will be awarded”. According to section 73 insured party is entitled to received from the defaulter party are: a) Such damages which naturally arose in the usual course of things from such breach no compensation is to be given generally for any remote or indirect loss sustained b reason of the breach. b) Such damages which the parties knew, when they entered into the contract, as likely to result from the breach. c) In estimating the loss or damage caused to a party by breach, the means which existed of remedying the inconvenience caused by the breach must also be taken into account. With a view to making the study of the quantum of damages easily comprehensible, the above rules, as enunciated in section 73 may now be considered in some more details under appropriate heads. 38 B.Com-Commercial &Company law 3.2.2. (a) Kinds of damage Damages may be of four kinds. 1. Ordinary damage 2. Special damage 3. Exemplary damage 4. Nominal damage We shall now see these kinds one by one. Ordinary damages Damages that could be claimed under ordinary circumstances in the regular course of business on account of the default committed by another party to a contract is known as ordinary damages. In other wards damages as may fairly and reasonably be considered as arising naturally and directly in the usual course of things from the breach of contract. It is other wise called as general or compensatory damages. General damages are usually assessed on the basic of actual loss. The measure of ordinary damage is the difference between the contract price and market price at the date of breach. Example: Abishnavi contracts to sell and deliver 500 quintals of wheat to Nitailan at Rs.600 par quintal, the price to be paid at the time of delivery. The price of wheat rises to Rs.700 per quintal and Abishnavi refuses to sell the wheat. Nithilan can claim damages at the rate of Rs.100 per quintal. According to section 73, Compensation is not to be given fro any remote or indirect loss or damage. Example: Abishnavi contracts to sell and deliver 1000 backs of cotton to Nithilan on a fixed day. Abishnavi knows nothing of Nithilan’s mode of conducting his business. Anishnavi breaks his promise and Nithilan, having no cotton, is obliged to close his mill. Abishnavi is no responsible to Nithilan for the loss caused to Nithilan by the closing of the mill. 2. Special damages: Special damages are those which arise on account of the special or unusual circumstances affecting the plaintiff. In other words, they one such remote comes which one not the natural and probable consequence of the breach of contract. Special damages cannot be claimed as matter or right these can be claimed only it the special circumstances which would result in a special loss in case of breach of contract are brought to the notice for the other party. It is important to 39 B.Com-Commercial &Company law note that notice to this special effect must have been given to the other party. It he had no knowledge, he is not answerable. Subsequent knowledge of special circumstances will not create any special liability of guilty party. Example: A builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the first of January, it falls down, and has to be rebuilt by B, who, in consequence loses the rent which he way to have received from C, and is obliged to make compensation for breach of that contract. A must pay to B, by way of compensation, (i) for the cost of rebuilding the house (ii) for the rent lost, and (iii) for the compensation made to C. 3. Exemplary or vindictive damages: Exemplary damages signify the claims with a view to punishing the guilty party for the breach and not by way of compensation for the loss suffered by the aggrieved party. As observed earlier, the cardinal principle of the law of damages for a breach of contract is to compensate the injured party for the loss suffered and not to punish the guilty party. Hence, obviously, exemplary damages have no place in the law of contract and are not recoverable for a breach of contract. There are two exceptions to this rule. Breach of a contract to marry: In this case the amount of the damages will depend upon the extent of injury to the party’s feelings, one may be ruined, other may not mind so much. Dishonor of a cheque by a banker when there are sufficient funds to the credit of the customer In this case the rule of ascertaining damages is “the smaller cheque, the greater the damage”, of course, the actual amount of damages will differ according to status of the party. Nominal damages: Nominal damages are those which are awarded only for the name sake. In latin, it is known as injury without damage. In this case there may be a breach of contract but no material loss would have been caused. Nominal damages are either awarded by way of compensation to the aggrieved party not by way of punishment to the quality party. These are awarded to establish the right to decree for breach of contract when the injured party has not actually suffered any real damage. 40 B.Com-Commercial &Company law 3.2.2.(b)Rules regarding damages Explanation to Section 73 provides that, “In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by non-performance of the contract must be taken into account” The principles regarding the measure of damages is based on the decision given in Hadley Vs. Baxendale. The rules may now be summarized as follows: 1. General Damages A party who suffers by breach of a contract is entitled to only such damages which arise naturally in the usual course of things as a result of such breach. Rest of the damages will be deemed to be a remote consequence and are not recoverable 2. Special Damages Special damages are recoverable only if the special circumstances were brought to the notice of the defaulting party. That is, where a party claims special damage for any loss sustained he must prove that the other party knew at the time of the making of the contract that special loss was likely to result from the breach of the contract.Example: Pinnock Bros. Vs. Lewis & Peat Ltd. (1923) 3. Remote Damages The second para of Section 73 states that “Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach”. The remote or indirect damages are not due to natural and probable consequences of the breach of the contract. In other words, these are the damages which arise indirectly from the breach. The injured party is not entitled to any remote or indirect loss. Example: Hobbs Vs. London A S.W. Railway Co. (1873) 4.Restitution and Compensation Damages are paid as restitution and compensation and not as punishment. In fact through damages, efforts are made to put the party back into the same position as if the contract had been performed. In other words, “If a contract is broken, law will endeavour, so far as money can do it, to place the injured party in the same position as if the contract had been performed”. 5. Mitigation of Loss The injured party has to take all reasonable steps to minimise the loss caused by the breach. Explanation to Section 73 of the Indian Contract Act reads as under: 41 B.Com-Commercial &Company law “In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account”. The loss caused by the breach must be kept to the minimum. The damages which results due to the negligence of the aggrieved party, are not recoverable. Example: Neki Vs. Prabhu 6. Nominal Damages Nominal damages area small amount awarded by the court when the aggrieved party cannot prove any substantial loss suffered by him. These are neither awarded by way of compensation to the aggrieved party nor by way of punishment to the guilty party. For instance if the contract price is Rs. 10 and after a breach the party obtained the goods from the market also for Rs. 10, he may get only nominal damages for his worries and inconvenience. 7. Actual Loss (Actual Damages) Ordinarily, the aggrieved party is entitled to recovery by way of compensation, only the actual loss suffered by him. In a breach of contract for the sale of goods, the damages payable would be the difference between the contract price and the market price at the date the breach takes place. 8. Vindictive or Exemplary Damages Vindictive or exemplary damages are not usually awarded for breach of contract except in case of breach of contract of marriage or wrongful refusal by the bank to honour the customer's cheque. Such damages are awarded by way of lesson to the wrongdoer. 9. Liquidated Damage When the parties to a contract mutually agree that in the event of a breach the one shall pay to the other a specified sum of money, called liquidated damage. When such an amount has been mentioned in the contract, under Sec. 74 of the Indian Contract Act, the injured party is entitled to get reasonable compensation not exceeding the amount mentioned. 10. Damages in Quasi Contracts According to Section 73, para 3, “When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.” 42 B.Com-Commercial &Company law Explanation: “In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account”. 11. Difficulty of Assessment Difficulty in calculating damages is no ground for refusing damages. The court must make an assessment of loss and pass a decree for it. Example: Chaplin Vs. Hicks (1911) Check your progress 2 Explain English law on Penalty and Liquidated damages? Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson ( pp) ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- 3.2.3 Suit upon quantum merit The next remedy for a breach of contract available to an injured party against the guilt party is to file a suit upon quantum merit. Quantum of work that is done by a person must be rewarded according to the merit of his work. The quantum merit means “as mush as is earned” or “in proportion to the work done”. A right to sue on a quantum merit arises where a contract, partly performed by one partly has become discharged by breach of the contract by the other party. This remedy may be availed of either without claiming damages or in addition to claiming damages for breach. The aggrieved party may file a suit upon quantum merit any may claim payment in proportion to work done or goods supplied in the following cases: 1. Where work has been done in pursuance of a contract, which has been discharged by the default of the defendant. 2. Where work has been done in pursuance of a contract which is “discovered void” or “become void”, provide the contract is divisible. 43 B.Com-Commercial &Company law 3. When a person enjoys benefit of non-gratuitous act although there exists no express agreement between the parties. One of such cases is provided in section 70 lays down that when services are rendered or goods are supplied by a person (i) without any intention of doing so gratuitously and (ii) the benefit of the same is enjoyed by the other party, the latter must compensate the former or restore the thing so delivered. 4. A party who is guilty of breach of contract may also sue on a quantum merit provided both the following conditions are fulfilled. a. the contract must be divisible and b. the other party must have enjoyed the benefit of the part which has been performed, although he had an option of declining it. 3.2.4 Suit for Specific performance Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances an aggrieved party may tile a suit for specific performance, i.e., for a degree by the court directing the defendant to actually perform the promise that he has made. Specific performance of the contract cannot be claimed as a matter or right rules regarding the granting of this relief are contained in the specific relief and specific performance is usually granted in contracts connected with land, buildings, rare articles and unique goods having some special value to the party suing because of family association. Notice that in all these contracts monetary compensation is not an adequate relief because the injured party will not be able to get an exact substitute in the market. Some of the cases in which specific performance of a contract may, in the discretion of the court, be enforced are as follows (a) When the act agreed to be done is such that compensation in money for its non-performance is not an adequate relief. (b) When there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done. (c) When it is probable that the compensation is money cannot be got for the non-performance of the act agreed to be done. Specific performance is not granted in the following case, when: (a) Damages are adequate remedy; (b) The contract is not certain; (c) The contract is inequitable to either party; (d) The contract is of revocable nature; 44 B.Com-Commercial &Company law (e) The contract is made by the trustee in breach of trust (f) The contract is of personal nature (g) The contract made by a company ultra vires of its memorandum of association; and (h) The court cannot supervise its carrying act. 3.2.5 Suit for an injunction “Injunction” is an order of a court restraining a person from doing a particular act. It is a mode of securing the specific performance of the negative terms of the contract. That is, it is order of the court restraining a person from doing something which he promised no to do. This type of order is generally issued in case where the compensation in terms of money is not an adequate relief. Thus injunction is a preventive relief. It is particularly appropriate in cases of “anticipatory breach of contract”. Example: “Nithilan” agreed to sing at “Abishnavi” theatre for three months from its April and to sing for on one else during that period. Subsequently he contracted to sing at Bharathi’s theatre and refused to sing at Abishnavi’s theatre. On a suit by Abishnati, the court refused to order specific performance of his positive engagement to sing at the plaintifit’s theatre, but granted an injunction restraining Nithilan from singing, else where and awarded damages to B to compensate him for the loss caused by Nithilan’s refusal. 3.3 LET US SUM UP In this lesson, we have briefly touched upon the following points. In case of breach of a contract, the injured party has one or more of the following remedies 1. Rescission: When there is breach of a contract by a party, the injured party may sue to treat the contract as rescinded. He is also absolved of all obligations under the contract 2. Damages: Damages are monetary compensation awarded to the injured party by Court for the loss or injury suffered by him. 3. Quantum meruit: A right to sue on a quantum meruit (as much as earned) arises where a contract, partly performed by one party, has become discharged by the breach of the breach of contract by the other party. This right is founded on an implied promise by the other party arising from the acceptance of a benefit by that/party. 45 B.Com-Commercial &Company law 4. Specific performance: In certain cases the Court may direct the party in breach of a contract to actually carry out the promise, exactly according to the terms of the contract. This is called specific performance of the contract 5. Injunction. It is a mode of securing the specific performance of the negative terms of a contract. 3.4 QUESTIONS FOR DISCUSSION 1. What are liquidated damages? 2. What is meant by injunction? 3. When do claims on quantum meruit arise? 4. What are remedies available to an aggrieved party in case of breach of contract? 5. State briefly the principles on which damages are awarded on the breach of a contract 3.5 MODEL ANSWER TO CHECK YOUR PROGRESS Check - 1 what do you mean by cost of decree? The aggrieved party is entitled in addition to the damages, to get the cost of getting the decree for damages. However, the cost of suit for damages is at the discretion of the court. Check – 2 Explain English law on Penalty and Liquidated damages? In the case of liquidated damages the amount is fixed by the parties at the time of formation of the contract on the basis of reasonable and fair calculation after making a genuine pre-estimation of loss. The amount fixed is considered to be a penalty if it is not based a reasonable calculation of actual loss but is fixed by way of punishment and as a threat. 3.6 REFERENCES 1. M.C. Kuchhal - Mercantile Law 2. R.S.N Pillai & Bagavathi - Business Law 3. N.D. Kapoor - Elements of Company Law 46 B.Com-Commercial &Company law LESSON-4 OFFER CONTENTS 4.0 Aims and objectives 4.1 Introduction 4.1.1 Definition of offer 4.1.2 Parties to the offer 4. 1.3 Essentials of an offer 4.1.4 How an offer is made 4.2 Types of offer 4.2.1 Specific offer 4.2.2 General offer 4.2.3 Counter offer 4.2.4 Cross offer 4.2.5 Continuing offer 4.3 Rules relating to offer 4.4 Revocation of an offer 4.5 Let us sum up 4.6 Questions for discussion 4.7 Model answer to check your progress 4.8 References 4.0 AIMS AND OBJECTIVES In the previous lesson, we discussed the remedies of breach of contract. Here we discuss the meaning, definition, legal rules relating to offer and Revocation of offer. After going through this lesson, you will able to 1. know the meaning and definition of offer 2. understand various rules relating to offer 3. know the different types of offer 4. study the revocation of offer 47 B.Com-Commercial &Company law 4.1 INTRODUCTION While discussing the essential elements of a valid contract in the preceding chapter we observed that as a first step in the making of a contract there must be a ‘lawful offer’ by one party and a ‘lawful acceptance’ of the offer by the other party. Offer or Proposal is nothing but conveyance of an idea by one person to another for obtaining the consent of the latter in respect of doing or not doing an act or acts. The words ‘proposal’ and ‘offer’ are synonymous and are used interchangeably. In this section we presented here the definition, essentials of offer and parties involved in offer. 4.1.1 Definition of ‘offer’ Section 2(a) of the Indian Contract Act defines an ‘offer’ as, “when one person signifies to another his willingness to another in respect of doing or to abstaining from doing anything, with a view to obtaining the assent of the other, he is said to make a proposal”. 4.1.2 Parties There are two persons involve in offer, the person making the ‘proposal’ is called the ‘promisor’ or ‘offeror’. The person to whom the offer is made is called the ‘propose’ or ‘offeree,’ and person accepting the offer is called the ‘promisee’ or ‘acceptor’ 4.1.3 Essentials of an offer The above definition reveals the following three essentials of an offer: (i) It must be an expression of the willingness to do or to abstain from doing something. (ii) The expression of willingness to do or to abstain from doing something must be to another person. There can be no 'proposal' by a person to himself. (iii) The expression of willingness to do or to abstain from doing something must be made with a view to obtaining the assent of the other person to such act or abstinence 4.1.4 How an offer is made An offer may be made by express words, spoken or written. This is known as an express offer. 48 B.Com-Commercial &Company law Example: A advertises in a newspaper offering Rs 500 to anyone who returns his lost dog. There is an express offer. An offer may also be implied from the conduct of the parties or the circumstances of the case. This is known as an implied offer. Example: A transport company runs a bus on a particular route; there is an implied offer by the transport company to carry passengers for a certain fare. 4.2 TYPES OF ‘OFFER’ An offer that is made by a party to an agreement reveals the intention of such party. Hence, to understand the offeror’s intention, offer has to be studied under different headings. In this section we attempt to make a brief explanation about different types of offers. 4.2.1 Specific offer An offer or proposal that is made by one person exclusively to a specific and identifiable person is known as specific offer. 4.2.2 General offer When an offer is made not to any specific person but made to the general public, it is known as general offer. Such offer can be accepted by any person from the public. Example: Announcement of reward through newspapers for restoration of lost goods to the owner. 4.2.3 Counter offer When the person to whom the offer is made, instead of accepting the offer modifies the same and sends it to the offeror in a different manner, then such modified offer made by the offeree is known as counter offer. Example: Rukmani wants 100% cotton shirt from Sundarm Readymade. But, Sundaram Readymade offers in return 85% cotton mixed with polyester, then the offer in return made by the Suadaram Readymade is known as counter offer. 49 B.Com-Commercial &Company law 4.2.4 Cross offer When two persons make offers against each-other simultaneously with regard to the same subject matter without knowing the intention of the other, then such offers are known as cross offers. Example: Rani makes an offer to sell garments to Shyamala. Simultaneously, without knowing the intention of Rani and the offer made by her, Shyamala makes an offer to buy garments from Rani. Both these offers made against each other cross simultaneously. This is known as cross offer which can never be accepted and ripen into a promise. 4.2.5 Continuing offer A continuing offer is one that holds good for a span of period (for a specific duration). In other words, it is a series of offer, which is made from time to time for duration of time. Example: Tender is a continuing offer. Ram agrees to supply 100 litres of oil every month commencing from January to December which has been accepted by Krishna Hotels. The offer made by Ram is a continuing offer. Check your progress 1 What constitutes an offer? Note: a) Write your answer in the space given below b) Check your answer with the ones given at end of this lesson ( pp) ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 4.3 RULES RELATING TO OFFER There are certain rules under contract Act for making a valid offer. In this section we pointed out some of the rules that are to be observed, adhered to, and acted upon in order to form a valid contract. 50 B.Com-Commercial &Company law 1. The offer must be communicated to the other party 2. The terms of the offer must be definite and clear 3. The offer must be capable of creating legal relationship 4. The offer must be made with a view to obtain acceptance 5. An offer may be positive or negative 6. The offer should not contain any term the non-compliance of which amounts to acceptance 7. Special terms and conditions of the offer be communicated 8. Two identical cross-offers do not result in a contract 4. 3. 1. The offer must be communicated to the other party According to Sec. 4 of the Act, “The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made”.An offer is effective only when it is communicated to the offeree. A person cannot accept an offer unless he knows of the existence of the offer. Until the offer is made known to the offeree, there can be no acceptance and no contract. An offer is completed only when it has been communicated to the offeree. An offer accepted without its knowledge, does not confer any legal rights on the acceptor. Example: Lalman Shukla Vs. Gauri Dutt (1913). The defendant sent the plaintiff who was in his service in search of his missing nephew. Later on the defendant announced that anybody, who discovered the missing boy would be given a reward of Rs. 501. The plaintiff discovered the boy without knowing the reward. When the plaintiff came to know about the reward, he brought an action against the defendant to recover the same. His suit was dismissed on the ground that he could not accept the offer, unless he had knowledge of it. 4.3.2. The Terms of the Offer must be definite and clear The terms of an offer should be definite and certain and not vague or ambiguous. Anson says “The law requires the parties to make their own contract: it will not make a contract for them out of terms which are indefinite or illusory”. Further Sec. 29 of the Act lays down “Agreements, the meaning of which is not certain, or capable of being made certain, are void” The offer must be reasonably definite and require