LAW OF CONTRACT

MODULE 1

-Sucheta S. Sirsikar

LEARNING OBJECTIVES
Introduction Proposal Offer Acceptance Essentials of a valid contract Consideration Competency of parties for contract Free consent Classification of unlawful agreements Quasi contracts Performance of contract Breach of contract and remedies

INTRODUCTION
DEFINITION OF LAW
Law is the body of principles recognised and applied by the state in the administration of justice.

LAW OF CONTTRACT
The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised shall be performed -Anson

CONTRACT
Contract is an agreement between two or more persons which is intended to be enforceable at law and is constituted by the acceptance by one party of an offer made to him by the other party to do or to abstain from doing some act. -Halsbury

Definition Of a proposal: Sec. 2(a)

When one person, signifies to another, his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Types of Offer : 1. General /public offers 2. Specific Offers 3. Invitation to offer 4. Counter offer 5. Cross offer 6. Continuing offer

Rules of a valid proposal:

It may be express or implied.

It must contemplate to give rise to legal relationship. Terms must be certain. It may be specific or general.

Rules of a valid proposal:

Invitation to offer is not an offer.

Offer must be communicated Special terms must be communicated in a special manner Offer should not contain a term the non-

compliance
acceptance.

of

which

would

amount

to

How to make an offer ?

An offer must create a legal obligation, It should not be a mere statement of Intention , The terms of an offer must be certain or capable of being made certain , A general offer must be distinguished from a specific offer, Offer must be communicated , Attention of the offeree must be drawn to the terms & the conditions of the offer .

Definition Of acceptance: Sec. 2(b)

When a person to whom the offer is made, signifies his assent thereto, the offer is said to be accepted. Rules of a valid acceptance: It must be communicated It is left to the offerer to waive the communication of the acceptance Silence cannot be prescribed as a medium of communication , Acceptance must be made before the offer lapses

Rules of a valid acceptance:

It must be accepted in the prescribed manner as desired by the

offerer ,
It should be accepted with in the prescribed time limit, An offer lapses by death of the offerer or offeree, An offer lapses by Counter offer , An acceptance must be absolute &unconditional, An acceptance must be made by the offeree , An acceptance conveyed through telephone , telex ,fax , e-mail will take effect at the place where the messages of such an acceptance is received as against acceptance by post.

Revocation of offer/ acceptance

The communication of revocation is complete : -as against the person who makes it when it is put in to a course of transmission to the person to whom it is made , so as to be out of the power of the person who makes it , -as against the person to whom it is made ; When it comes to his knowledge An offer lapses by revocation which may be express or implied or by the conduct of the parties .

'Every contract is an agreement but every agreement may not be a contract

Essentials of a valid contract:

Offer and acceptance

Intention to create legal relationship

Lawful consideration Capacity of the parties Free consent Lawful object Certainty of terms Possibility of performance Writing and registration

Consideration: Sec. 2 (d)

When, at the desire of the promisor, the promisee or any other person; has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called as Consideration for the promise. Essentials of valid consideration: Consideration must move at the desire of the promisor Consideration may move from the promisee or any other person It may be past, present or future It must be something of value

CONSIDERATION
It is known as quid pro quo ,that is something in return for something done. It may be in the form of negative acts also. Consideration must be at the desire of the Promisor, It must move from the promisee only; Privity of Contract :

Consideration may past , present ,or future Contract with out Consideration is Void. Consideration must be for lawful purpose , It need not be adequate , INDIAN CASE : K.P. Varghese vs The Income Tax Officer,ernakulam, And Another on 4 September, 1981

Exceptions to the rule No consideration no contract:

Agreement made on account of natural love and affection Agreement to compensate for past voluntary acts Agreement to pay a time barred debt

Completed gift
Contribution to charity

Competency of parties to a contract:

Sec.10 states: Essential ingredient of a valid contract is that the contracting parties must be competent Competency of parties to a contract: Sec 11 says: Every person is competent to contract; who is of 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

Who is a Minor?
As per Indian Majority Act: a person below age of eighteen years under normal circumstances and a person below age of twenty one years in case of a guardian being appointed for his person or property.

Effects of agreement with or by a minor

Usually it is Void ab - initio (absolutely void and inoperative) No ratification on attaining age of majority No estoppel against a minor

Effects of agreement with or by a minor

Under the following circumstances , a contract with a minor is

valid:
-For supply of necessaries , -For education imparted , -For discharge of family & legal obligation incurred for the benefit of the minor. There is no estoppel against the minor. The minor can be a beneficiary for the benefit of profit without any

liability.
Minor can deposit money in the bank , but cannot borrow.

Minor can be admitted to benefits of partnership

Sound mind: Sec. 12

A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effects on his interests

Persons of usually of unsound mind but occasionally of sound mind & Vice versa; -Lunatics , -Drunkard Persons.
Disqualified from contracting: Alien enemies Foreign sovereigns Convicts Insolvent As per any other law applicable

Free Consent
Section 13: Consent :Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent to be free it must have been given & not obtained . Consent is said to be free ,when it is not caused by : a) coercion or b) undue influence or c) fraud or d) misrepresentation or e) mistake .

Coercion Section 15
A contract is said to be caused by coercion , when it is caused by : a) committing any act which is forbidden by I P C , b) threatening to commit any act forbidden by I P C,

c) unlawful detaining of property ,

d) threatening to detain any property. Effect of Coercion:
Contract is voidable at the option of the party whose
consent was so obtained Burden of proof that coercion was used lies on the aggrieved party.

Undue Influence: Sec 16(1)

A contract is said to be influenced by undue influence :

a) where the relationship subsisting between the parties are such that
one of them is in a position to dominate the WILL of the other , b) the dominant party uses that position to obtain an unfair advantage

over the other.

Relationship under Undue Influence ; Employer Employee ; Teacher student ;Doctor Patient :Income Tax officer _ assesse ;Guru Disciple :Solicitor Client ;

No presumption of undue influence between the relationships:

a) Husband & wife b) Landlord & Tenant C) Creditor & Debtor .

Difference between Coercion & Undue Influence

Coercion
Parties to the contract may be related or not. Consent is obtained by threat of an offence under I P C. Physical Pressure exercised by the parties or by strangers. It is to be proved by the party alleging it . Crimes are punishable under the I PC .

Undue Influence
Some sort of relationship exists, Consent is obtained by dominating the WILL of the other. It is only a moral pressure .exercised by the parties only . It may be presumed by the law in certain cases . It is to be disproved by the person against whom it is made . It does not involve any criminal liability

Fraud
Section 17: Fraud means & 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 there to or his agent or to induce him , to enter in to the contract : a) the suggestion , as to a fact , of that which is nor true by one who believes it to be true , b) the active concealment of a fact by one having knowledge or belief of the fact , c) a promise made without any intention of performing it ,

d) any such act or omission as the law specially declares to be fraudulent. INDIAN CASE : Hajra Bai v/s Jadav Bai AIR 1986 MP 106

Effects of Fraud:

The aggrieved party has three remedies 1. He can rescind (set aside) the contract, treating it as voidable 2. He may affirm the contract and insist that he shall be put in a position in which he would have been, if the statement were true. 3. He can also sue for damages, if any, because fraud is a civil wrong and hence compensation is payable

Misrepresentation
Section 18: Misrepresentation means & includes: a) a positive assertion , in a manner not warranted by the information of person making it , of the fact which is not true , though he believes it to be true ,

b) Any breach of duty which , without an intent to deceive , gains an advantage to the person committing it or any one claiming under him , by misleading another to his prejudice or to the prejudice of anyone claiming under him ,
C) 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.

INDIAN CASE : Bhagwani Bai v/s LIC India AIR 1984 MP 126

Effects of Misrepresentation
The aggrieved party has two options

1.

He can rescind the contract, treating it as

voidable

2. He may affirm the contract and insist that he

shall be put in a position in which he would

have been, if the statement was true.

DIFFERENCE BETWEEN FRAUD & MISREPRESENTATION

Fraud
A wrong representation is made willfully with intent to deceive the other party The person making the statement does not believe it to be TRUE , Can claim damages . Except where silence amounts to fraud , the contract is VOIDABLE even if the aggrieved party had the means to discover the TRUTH with ordinary diligence .

Misrepresentation
A wrong representation is made without any intention to deceive the other party , The person making the statement belives it to be TRUE. Cannot claim damages Cannot avoid the Contract if the party had means of discovering the TRUTH with ordinary diligence.

Mistake
Section 20 : Where both parties to an agreement are under MISTAKE as to a matter of fact essential to the agreement , the agreement is void. INDIAN CASE : ITC Ltd. v/s George Joseph Fernandez AIR 1989 SC 839 Types of Mistakes : -Mistake of Law: 1) Foreign Law 2) Indian Law, -Mistake of Facts : 1) Bilateral mistakes 2) Unilateral Mistakes

Mistake can be of Law Or of Fact

Mistake of law |
|
Mistake of Law

|
Mistake of law

of the country country

Mistake of Fact | | Bilateral Mistake

of foreign

| Unilateral Mistake

Bilateral mistake

a) Both parties to an agreement misunderstood each other and are at cross purposes b) Mistake relates to a fact and not to judgment or opinion etc. c) The fact must be essential to the agreement Mistake as to the existence of the subject matter of the agreement Effect: (agreement void) Mistake as to the identity of the subject matter Effect: (agreement void) Mistake as to the title of the subject matter Effect: (void ab-initio) Mistake as to the quantity of the subject matter Effect: (agreement void) Mistake as to the quality of the subject matter Effect: (agreement void)

Unilateral Mistake
only one of the contracting parties is mistaken as to a fact material to the contract Effect of Unilateral Mistake: Contract remains valid unless caused by misrepresentation or fraud. Where the mistake is caused by is representation or fraud the contract becomes voidable at the option of the aggrieved party. Cases where agreement does not give rise to any contract in spite of a unilateral mistake: Mistake as to the identity of the person contracted with, where such identity is important Mistake as to nature and character of the written document. Reason for these two exceptions is that the mistake is so fundamental as to go to the roots of the agreement

Unlawful Agreements
Cases where agreement does not give rise to any contract in spite of a unilateral mistake: Mistake as to the identity of the person contracted with, where such identity is important Mistake as to nature and character of the written document. Reason for these two exceptions is that the mistake is so fundamental as to go to the roots of the agreement INDIAN CASE : Union Carbide Corporation v/s Union of India AIR 1992 SC 248

Classification of Unlawful Agreements

Illegal; Opposed to the provisions of law,

Immoral : Against the society in large ,

Opposed to public Policy : 1) Civil Matters, 2) Judicial matters , 3) Individual matters affecting individual liberty. A) Restraint on marriage ,

B) Restraint on Parenthood,
c) Restraint on Trade, D) Restraint on Personal Freedom ,

Quasi Contracts
It means certain relations resemble those of Contract It may also defined as implied contract & also as constructive contract. Kinds of Quasi contracts : 1) Right to recover the price of necessaries supplied to the Minor; 2) Right to recover the money paid for another person . 3) Right to recover for non gratuitous act. 4) Responsibility of finder of goods 5) Right to recover from a person to whom money is paid or thing is delivered by mistake/ coercion .

Performance of Contract
INDIAN CASE : Keshori Engineering Works v/s Bank of India AIR 1991 Pat. 194

Types of performance : -Actual -Attempted .

Who can demand performance ? -Promisee. -Legal Representative , -Jt Promisee -Third party,
Who should perform? -Promisor -His agent , -Legal representative , -Jt promisor -Third party,

Performance of Contract
Time & Place of Performance; -When time & place is specified , -When no time & place is mentioned , Reciprocal Promises: -Mutually independent, -Mutual Dependent , -Mutual Concurrent , -Promisor not bound to perform unless reciprocal promisee is ready & willing to perform

Discharge of contract

by performance(tender)

actual

or

attempted

by mutual consent or agreement

o by supervening impossibility o by lapse of time o by operation of law

o by breach of contract

Essentials of a valid tender:

It must be unconditional At a proper time and place Must be of the whole obligation contracted for Must give a reasonable opportunity to the promisee for inspection of goods Must be made to the proper person Must be made by a person who is in a position and is willing to perform In case of money, the exact amount should be tendered

Refusal to accept a properly made Tender

The contract is deemed to have been performed by the tenderer (promisor). A suit for breach can lie against the promisee.

Modes of discharge by Mutual consent

Novation
Alteration Rescission Remission Waiver

Discharge by operation of law Death of any of the parties Insolvency Merger of rights Unauthorized material alteration

Discharge by Breach of contract- Actual Anticipatory

Remedies for Breach of contract:

Rescission of the contract

Suit for damages Suit upon quantum meruit Suit for specific performance Suit for injunction

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