Q-1. Define Contract? Explain essentials of Contract?
CONTRACT: Section 2(h) of the Indian contract Act 1872(Act), defines the term contract as "any agreement enforceable by law" i.e. Contract = Agreement + Enforceability
Agreement: Section 2(e) defines agreement as "every promise and every set of promises, forming the consideration for each other."
i.e. Agreement = Promise (Proposal /offer +Acceptance)+Consideration
(a) At least two persons. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself.
(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.
Enforceability: An agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. Mutual binding obligations are created under law.
(a) One party to contract can enforce its rights against other party if the other party fails to fulfill its obligation under contract. The aggrieved party to Contract can enforce it right by approaching Courts, for specific reliefs and compels the other party to perform its obligations under contract and indemnify for loss suffered due to non-performance. Depending upon circumstances of each case the Court may allow i) specific relief, ii) award compensation or damages to the aggrieved party 3) or may penalize the defaulting party with interest.
(b) Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend's house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences.
ESSENTIALS OF VALID CONTRACTS:
According to Section 10 of the Act, "All agreements are contracts, if they are made by the free consent of the parties, competent to contract, for a lawful consideration with a lawful object, and not hereby expressly to be void."1) AGREEMENT: There must be mutual understanding and agreement between two or more persons.
i) Proposal u/s. 2(a) "when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal ".
· Proposal also called as Offer
· Proposal/offer
o must be expressed and communicated.
o may be positive or negative i.e. to do something or not to do something.
o must be with the objective to obtain assent from the other party.
o must be unconditional. It should not be made with presumption that if acceptance is not communicated it would be deemed to be acceptance.
· Various types of offer are:
o General Offer: to public in general e.g announcement, prize.
o Special Offer: to a definite person e.g. lottery, derby, customer etc.
o Cross Offer: Exchange of identical offer in ignorance of each other.
o Counter Offer: Modification and Variation of Original offer.
o Standing, Open or Continuing Offer: Which is open for a specific period of time.
· “Offer is not Invitation to offer”. An invitation to offer is only a circulation of an offer, it is an attempt to induce offers and precedes a definite offer.
o Advertisement, visiting shop induced under illusion.
o Acceptance of an invitation to an offer does not result contract and only an offer emerges in the process of negotiation.
o A statement made by a person who does not intend to bound by it but, intends to further act, is an invitation to offer.
· Revocation of Proposal: A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. A proposal is revoked -
o by the communication of notice of revocation by the proposer to the other party;
o by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance;
o by the failure of the acceptor to fulfill a condition precedent to acceptance; or
o by the death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance.
ii) Acceptance: u/s. 2(b), "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted."
· Acceptance must be absolute and unqualified.
· Communicated to proposer.
· Acceptance must be in the mode prescribed.
· Acceptance must within a reasonable time before the offer lapses.
· Acceptance by the way of conduct.
· Silence does not per-se amounts to communication.
· Proposer and proposee must be in consent
2) INTENTION TO CREATE LEGAL RELATIONSHIPS: There must be an intention among the parties that the agreement and it should be attached by legal consequences and create legal obligations.
3) LAWFUL CONSIDERATION: Consideration means “something in return”. It can be cash, kind, an act or abstinence. It can be past, present or future. However, consideration should be real and lawful.
U/s. 2(d), Consideration is defined as: "When at the desire of the promisor, the promisee has done or abstained from doing, or does or abstains from doing, or promises to do or abstain something, such an act or abstinence or promise is called consideration for the promise."
An agreement must be supported by a lawful consideration on both sides. The consideration or object of an agreement is lawful, unless and until it is-
· forbidden by law, or
· is of such nature that ,if permitted ,it would defeat the provisions of any law ,or
· is fraudulent ,or involves or implies injury to the person or property of another ,or
· the court regards it as immoral ,or opposed to public policy.
· Consideration may take in any form-money, goods, services, a promise to marry, a promise to forbear etc.
4) COMPETENT TO CONTRACT: In order to make a valid contract the parties must be competent to be contract. U/s. 11 of the Contract Act, a person is considered to be competent to contract if he satisfies the following criterion:
a. The person has attained age of maturity i.e above 18 years.
b. The person is of sound mind.
c. The person is not disqualified from contracting by any law.
If any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec 68).
5) FREE CONSENT: To constitute a valid contract there must be free and genuine consent of the parties to the contract. U/s. 13, “two or more persons are said to be consented when they agree upon the same thing in the same sense”.
A consent is said to be free when it not caused by coercion or undue influence or fraud or misrepresentation or mistake. There is absence of 'free consent,' if the agreement is induced by (i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v) mistake (sec. 14). If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act.
1. Coercion U/s. 15: "Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code under(45,1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
2. Undue influence U/s. 16: "Where a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it, or on the evidence, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other."
3. Fraud U/s. 17: "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract.
4. Misrepresentation U/s. 18: "causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement".
5. Mistake of fact U/s. 20: "Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void".
6) LAWFUL OBJECT AND AGREEMENT: The object of the agreement must not be illegal or unlawful. 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 into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law.
7) LEGAL FORMALITIES - WRITING AND REGISTRATION. As per the Indian contract Act, a contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed
8) CERTAINTY, POSSIBILITY OF PERFORMANCE
Certainty. Section 29 of the contract Act provides that “Agreements, the meaning of which is not certain or capable of being made certain, are void." In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced Illustration. A, agrees to sell B " a hundred ton of oil" there is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainly.
Possibility of performance. Yet another essential feature of a valid contract is that it must be capable of performance. Section 56 "An agreement to do an act impossible in itself is void". If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. E, g A agrees with B, to discover treasure by magic. The agreement is not enforceable.
9) AGREEMENT NOT DECLARED VOID OR ILLEGAL: Agreements which have been expressly declared void or illegal by law are not enforceable at law; hence does not constitute a valid contract. Not expressly declared void. The agreement must not have been expressly declared to be void under the Act. Sections 24-30 specify certain types of agreements that have been expressly declared to be void. For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an agreement by way of wager have been expressly declared void under sections 26, 27 and 30 respectively.
Q-2 Examine various types of Contract?
On the basis of Validity:
1. Valid contract: An agreement which is enforceable by law and has all the essential elements of a contract is called a valid contract.
2. Void contract [Section 2(j)]: A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void. A contract is illegal and void, if it is forbidden by law e.g. gambling, agreement not to sue each other or for criminal offence; or is of such nature that, if permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to public policy. These agreements are punishable by law. “All illegal agreements are void agreements but all void agreements are not illegal.”
Following are void agreements –
* Both parties under mistake of fact (section 20)
* Unlawful object or consideration (section 24)
* Agreement without consideration (section 25)
* Agreement in restraint of marriage (section 26)
* Agreement in restraint of trade (section 27)
* Agreement in restraint of legal proceedings (section 28)
* Uncertain agreement (section 29)
* Wagering agreement (section 29)
* Agreement to do an impossible Act (section 56).
Obligation of 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 agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.
3. Voidable contract [Section 2(i)]: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract. E.g. If the essential element of free consent is missing in a contract, the law confers right on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party.
4. Unenforceable contract: Where a contract is good in substance but because of some technical defect cannot be enforced by law is called unenforceable contract. These contracts are neither void nor voidable. E.g. If agreement are not registered as per the provision of Registration Act or if appropriate stamp duty is not paid under Stamp Act
On the basis of Formation:
1. Express contract: Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time of formation, the contract is said to be express contract.
2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise than in words, promise is said to be implied. E. g.-Taking ticket in the bus, during journey, hiring cab, movie ticket etc.
3. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not contracts as there is no intention of parties to enter into a contract. It is legal obligation which is imposed on a party who is required to perform it. A quasi contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another. Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This term is used when one subject resembles another in certain characteristics but there are intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’. These are – (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (d) Goods or anything delivered by mistake or coercion (section 72)
On the basis of Performance:
1. Executed contract: An executed contract is one in which both the parties have performed or agrees to perform their respective obligation.
2. Executory contract: An executory contract is one where one or both the parties to the contract have still to perform their obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed as executory contract.
3. Unilateral contract: A unilateral contract is one in which only one party has to perform his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes into existence.
4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known as contracts with executory consideration.
- Contingent contract –U/s. 31 A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration - A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.
Contracts which must be performed - The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract. - - Illustrations - (a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to A’s representatives. (b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A’s representative or by B [section 37]. The performance can be ‘actual performance’ or ‘attempted performance’, i.e. ‘offer to perform’.
Contracts which need not be performed - Normally, a contract is expected to be performed. The performance may be actual or by way of tender, i.e. attempted performance. However, in certain situations as stated below, the contract need not be performed. * Novation, rescission and alteration of contract * Promisee may dispense with or remit performance of promise * Effect of neglect of promisee to afford promisor reasonable facilities for performance * Merger of superior rights with inferior right under contract. This is usually termed as ‘discharge of contract’
Consequences of Breach of Contract - Compensation is payable for breach of contract. Penalty is also payable if provided in contract. Breach of contract may be actual or anticipatory.
- Summary of principles of compensation and damages - Following points are important - * Compensation for loss or damage is payable. Since the word used is ‘compensation’, punitive damages cannot be awarded. * These should be in usual course or known to parties i.e. both parties must be aware * No compensation for remote and indirect loss or damage * Same principle applies to quasi contract also.
- General damages – General damages are those which result from ‘direct and proximate’ consequences from breach of contract. Normally, what can be awarded is compensation for loss or damage which can be directly or proximately attributed to the breach of contract. One way of assessing damages is the difference between the contract price and the market price on date of breach of contract, plus reasonable expenses incurred by him on account of the breach plus cost of suit in court of law.
- Consequential loss or special damage – Special damages or consequential damages arise due to existence of special circumstances. Such damages can be awarded only in cases where the special circumstances were foreseeable by the party committing the breach or were specifically known to the party. Consequential losses like loss of profit due to breach, which may occur indirectly due to breach cannot be normally awarded unless there are special circumstances which parties were aware. Loss of profit can be awarded only in cases where seller could have foreseen those losses and arose directly as result of breach.
- Promisee should take steps to mitigate the loss or damage – Explanation to section 73 specifically provides that in estimating loss or damage, the means available for remedying the inconvenience caused by breach of contract shall be taken into account. Thus, promisee should take all reasonable steps to mitigate the losses e.g. if promisor does not supply goods, he should make efforts to procure from alternate sources may be even at higher price, to reduce his losses arising out of breach of contract.
- Vindictive or exemplary damages – Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances e.g. * Dishonor of cheque by Bank when there was balance in account, as it causes loss of reputation of credit worthiness of person issuing cheque * Breach of contract to marry, as it hurts both feelings and reputation.
References: The Indian Contract Act 1872
http://books.google.com/books?id=8kgTAAAAYAAJ&oe=UTF-8
http://www.netlawman.co.in/acts/indian-contract-act.php#Preamble
http://www.netlawman.co.in/acts/indian-contract-act.php#Preamble
