Law of Contract

Introduction
Foundation of the Modern Business Business stands on Promise and Performance Law of Contract Rules of Promises, their formation, performance and enforceability. Contracts also deals with - Sales of Goods, Negotiable Instruments, Insurance, and Insolvency General Principles of Contract Precedes - Mercantile Law

Introduction
Definition of Contracts Elements of Contract Consideration, enforceability, Lawful object, etc Doctrine of Unjust enrichment Indemnity and Guarantee

Nature of Law of Contract

Right in Personam - means a right against particular person or persons. Example
A is entitled to receive a sum of money form B. This right can only be exercised by A.

Right in Rem - means right against the whole world. Example

A owns a plot of land and B is the immediate neighbour, the right of A to have complete possession and enjoyment of land is available not only against B but also the whole world.

The Indian Contract Act, 1872

Applicable whole over India except the State of Jammu and Kashmir Came into force on 01 Sept 1872 Originally has 266 Sections Presently has 238 Sections two parts
Sec. 1 to 75 General Principles of Contract Sec. 124 to 238 Special types of Contract, Indemnity & Guarantee, Bailment & Pledge, Agency etc.

Contract Definition
Sir William Anson
A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others.

Halsbury
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 abstain from doing some act.

Definition
Contract - Sec. 2( h) - An agreement enforceable by law
Two elements Agreement and Enforceability of law

Agreement Sec. 2 (e) Every promise or every set of promises forming the consideration for each other
Two elements Promise and Consideration

Promise Sec. 2 (b) a proposal when accepted becomes a promise.

Characteristics of Agreement

Plurality of Persons
Tow or more persons to make an agreement

Consenus-ad-idem
Consenting Minds Agree on the subject-matter in the same sense

Types of Agreements Unenforceable

A Offer to make Arms B Accepts

Offer

Mutually agreed

Agreement

Illegal Contract

Unenforceable

Types of Agreements Enforceable

A Offer to print books B Accepts

Offer

Mutually agreed

Agreement

Valid Contract

Enforceable

Agreement
An agreement comes into existence when one party makes a proposal or offer and the other accepts it.

Offer

Acceptance

Agreement

All contracts are agreements but all agreements are not contracts

Agreement - Example
Mr. Ram invites Mr. Shyam to a dinner at a Leela Palace Hotel. Mr. Shyam accepts the invitation. It is purely a social agreement if Mr. Ram doesnt arrive for the dinner, Mr. Shyam cannot file a case against Mr. Ram for not fulfilling the promise. There was no intention between two parties for creating any legal obligation.

Contract - Case
Balfour v. Balfour
Mr. Balfour (D) and Mrs. Balfour (P) lived in Ceylon and visited England on a vacation. The plaintiff remained in England for medical treatment and the defendant agreed to send her a specific amount of money each month until she could return. The defendant later asked to remain separated and Mrs. Balfour sued for restitution of her conjugal rights and for alimony equal to the amount her husband had agreed to send.

Contract - Case
Issues Must both parties intend that an agreement be legally binding in order to be an enforceable contract? Under what circumstances will a court decline to enforce an agreement between spouses? Holding and Rule Yes. Both parties must intend that an agreement be legally binding in order to be an enforceable contract. The court will not enforce agreements between spouses that involve daily life.

Contract
Agreements between husband and wife over matters that affect their daily lives are not subject to contractual interpretation, even when consideration is present. The court held that it was presumed that the parties made the agreement as husband and wife and did not intend that it could be sued upon. The court held that as a matter of public policy it could not resolve disputes between spouses.

Contract

Agreement

CONTRACT

ENFORCE ABILITY

Not Expressly Declared Void

Offer & Acceptance

Intention to Create Relationship

Writing and Registration

Lawful Consideration

Essentials of Contract
Possibility of performance

Capacity of Parties

Certainty Lawful Object

Free Consent

Offer and Acceptance

Lawful Offer by one party Lawful acceptance by another party According to the Rules of Indian Contract Act Proper Communication

Intention to Create Legal Relationships

If no intention of parties Not a contract Social and domestic nature do not contemplate legal relations Agreement must attach legal consequences and create legal obligations Example
A promised his wife B for a movie if she sings a song. B sang a song but A did not take her for a movie. B cannot initiate a case against A because it lacked the intention to create any legal relations

Consideration
Major Elements of Contract An agreement without consideration is void Blackstone
Consideration is recompense given by the party contracting to another.

Consideration is the price for which the promise of another is brought.

Capacity of Parties
Parties must be competent to enter into contract Sec. 11 Major according to law Contract not valid with incompetent persons Minors Persons of unsound mind Persons disqualified by law

Free Consent
Parties must have agreed upon the same thing in the same sense. No influence Absence of consent
Coercion Undue influence Fraud Misrepresentation Mistake

Lawful Object
Object should be enforceable by law Should not be
Fraudulent illegal immoral opposed to public policy

Certainty
Terms should be precise and certain No Vague terms should be used A promises to sell C 100 Kg of Oil. This is vague as specifications are not clear and what is the type of oil that to be supplied is also mentioned.

Possibility of Performance
Capable of Performance Physically and Legally A agrees to B to discover treasure by magic.
Not enforceable because cannot be performed.

Writing and Registration

Oral Contracts are Valid Special cases written and registered agreements are only valid Arbitration Agreements, Transfer of Property, Mortgage etc

Not expressly declared Void

Agreement must not be declared void under this Act Except according to Sections 24-30
Restraint from marriage Restraint from trade etc

Types of Contract

Validity & Enforceability Valid Contract Voidable Contract Void Contract Unenforceable Contract Illegal or Unlawful Contract

Creation Express Contract Implied Contract Constructive or Quasi-Contract

Execution Executed Contract Executory Contract

Types of Contract Valid and Enforceability

Valid Contract Enforceable by law Voidable Contract At the options of one or more of the parties not at the option of other party if right not exercised its a valid contract Void Contract Useless contract not enforceable by law Unenforceable Contract though a valid contract became unenforceable because of technical or other reasons Illegal or Unlawful Contract agreements prohibited by law

Types of Contract Creation

Express Contract Proposal and Acceptance are spoken or written Implied Contract Conduct of parties Quasi or Constructive Contracts obligations arising not by agreement but because of operation of law

Types of Contract Execution

Executed Contract Both parties have performed their part of the contract Executory Contract Yet to be performed wholly or partly

Offer and Acceptance

Proposal or Offer
Sec. 2(a) When one person signifies to another his willingness to do or 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. Essentials
Expression of willingness Made to another person With a object of gaining the consent of the other person

A person who makes the proposal or offer is called promisor or offeror A person to whom its made is called offeree A person accepting the offer is called the promisee or acceptor

Rules regarding a Valid Offer

1. An offer must be either words or in conduct Express Offer which is expressed in words Implied Offer which is inferred from the conduct of a person or the circumstances 2. An offer must contemplate giving rise to legal consequences and be capable of creating legal relations 3. Must be certain and loose words not to be used X purchase a horse from Y and promised to purchase another if the first one proves to be luck. X refused to buy second one. Y could not enforce the agreement, its being loose and vague. 4. An invitation to offer is not an offer

Rules regarding a Valid Offer

5. An Offer may be specific or general Specific Offer Made to a definite person General Offer made to the world at large 6. Offer must be communicated to the Offeree 7. Offer should not contain a term, the noncompliance of which would amount to acceptance 8.Offer can be made subject to any terms and conditions 9. Cross-offers is not contract

Lapse and Revocation of Offer

An offer lapses after a stipulated or reasonable time Offer lapses by not being accepted in the mode prescribed. Offer lapse by rejection Death or insanity of the offeror or offeree Revocation Revocation by non-fulfilment of condition precedent to acceptance Subsequent illegality or destruction of subject matter

Acceptance
When the person to whom the proposal is made signifies his assent it is an acceptance of the proposal. Expressed Acceptance made in words spoken or written Implied Acceptance by conduct Can be made only by the person to whom its been made

Rules Regarding Valid Acceptance

Acceptance must be given by the person to whom the offer is made Acceptance must be absolute and unqualified Acceptance must be in some usual and reasonable manner, unless specified Communicated by the acceptor Acceptance must be given with a reasonable time, before its lapse Acceptance must succeed the offer Rejected offer can be accepted only if renewed

Communication of Offer, Acceptance and Revocation

When the parties are physically present and negotiate in person, agreement comes into existence Sections 4 and 5 of the Contract Act deals with rules regarding acceptance of offer through post and other communication modes

Rules of Communication
Communication of Offer complete when its reaches the offeree Communication of acceptance
As against the proposer, when it is put in course of transmission to him, so as to be out of the power of the acceptor to withdraw the same As against the acceptor when it comes to the knowledge of the proposer

Rules of Communication
A proposes by letter to the sell the house to B for 10 lakh. B accepts As proposal sent by Post. The communication of the acceptance is complete a against A, when the letter is posted, as against B when the letter is received by A. Communication of Revocation
As against the person who makes it, when it is put into a course of transmission As against the person to whom it is made, when it comes to his knowledge

CONSIDERATION
Consideration is the price for which the promise of other is brought and the promise thus given for value is enforceable Sec 2 (d) Indian Contract Act
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 Such act or abstinence or promise is called a consideration for the promise

Essentials of a Valid Consideration

Consideration should move at the desire of the Promisor
A sees B drowning and saves his life. A cannot demand payment for his services as it is a voluntary act on his part and B never asked his to do so

Consideration must move from the promisee or any other person

X, Y and Z enter into an agreement under which X pays Rs.1 Crore to Y and Y agreed to build a House for Z. Here Z is a party to the contract but stranger to consideration and can enforce the contract.

Consideration may be Past, Present or Future

Past Consideration consideration for the promise is given before Present Consideration - Consideration and Promise is Simultaneous Future Consideration - Future or Executory Consideration

Essentials of a Valid Consideration

Consideration need not be adequate Consideration must be real Consideration must be Lawful Consideration must be something which the promisor is not already bound to do.

Consent of Parties
Competent Persons to contract. (Sec. 10) Every person is competent to contract who is of the age of majority according t the law to which he is subject, and who is of sound mind, and is not disqualified form contracting by any law to which he is subject.

Consent of Parties
Minor Sec 3. of Indian Majority Act 1875 A person under 18 years of age. Absolutely - Void contracts because their mental faculties are not mature Beneficial agreements valid

Consent of Parties
Person of Unsound 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 effect upon its interests. Absolutely void and inoperative against him.

Capacity of Parties
Unqualified persons Alien Enemies Foreign Sovereign and Ambassadors Convict Insolvent

Capacity of Parties
Free Consent Sec 13 Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent to be free and caused by
Coercion threatening to commit voidable contract Undue influence (a) one party in a position to dominate the will of the other (b) Uses the position to obtain an unfair advantage over the other voidable contract

Capacity of Parties Free Consent

Misrepresentation wrongly representing of fact by one party to the other either before or at the time of the contract with the intention to induce the other to enter into the contract voidable contract Fraud intentionally deceive the other person voidable contract Mistake erroneous belief concerning something

Legality of Object & Consideration

Object and Consideration of agreement must be lawful Sec. 23 kinds of consideration and objects are lawful Forbidden by Law Defeat the provisions of Law Fraudulent Implies or involves injury to the person or property Immoral Opposed to Public Policy

Void Agreement
Sec. 2. (g) An agreement not enforceable by law is void. Minor Unsound person Unlawful Consideration Unlawful object With consideration Impossible events or Acts Restraint of marriage Restraint of Trade Restraint of Legal Proceedings Uncertain Meaning Wager Agreement Impossible Events Impossible Acts

Performance of Contract
A person cannot acquire rights under a contract to which he is not a party Promisee can demand the performance of Contract Exception Legal heirs Competent person to perform a contract
Promisor Agent of Promisor Legal Representatives Performance by third Person

Quasi Contracts
Obligations resembling those created by a contract are imposed by law even though the parties have not entered into contract Claims for necessaries supplied to a person incapable of contracting or on his account. Reimbursement of person paying money due by another, in payment of which he is interested Obligation of person enjoying benefit of non-gratuitous act. Responsibility of finder of goods Liability of person to whom money is paid, or thing delivered by mistake

Breach of Contract & Remedies Available

Breach of Contract is another mode of discharge When one party fails to perform the contract Anticipatory before the time fixed for performance
Expressly by words spoken or written Impliedly by conduct of parties Effects either sue for damages or make the party responsible for consequences of non performance of contract

Breach of Contract & Remedies Available

Actual Breach When one party fails to perform the contract on the actual date of the performance of the contract Injured party is entitled to
Rescission of the Contract cancel the contract file suit for damages Suit for damages
Ordinary Special Exemplary Nominal

Suit upon Quantum Meruit as much as he earned or in proportion to work done Suit for Specific Performance Suit for injunction

Indemnity and Guarantee

Contract of Indemnity A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person A person who promises to make good the loss is called the indemnifier A person whom the loss is to be made good is indemnified

Indemnity and Guarantee

Contract of Guarantee A contract to perform the promise, or discharge the liability of a third person in case of his default A person who gives the guarantee is called a surety A person in respect of whose default the guarantee is given is called the principal debtor Consideration is important

Nature and Extent of Suretys Liability

The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Extent of Liability

Surety is liable only on the default of the principal debtor Liability of surety arises immediately on the default of the principal debtor Principal debtor need not resort to securities before suing the surety Surety will not be liable for creditor guarantee by misrepresentation

Continuing Guarantee
When a guarantee is given for a single or specific debt single or specific guarantee When a guarantee extends to series of distinct or separable transactions continuing guarantee Revocation of Continuing Guarantee
Notice to Creditor by surety Death of the surety

Discharge of Surety
Notice of Revocation Death Variance of Terms of Contract Release by principal debtor Arrangement by creditor with principal debtor Creditors Act or omission impairing suretys remedy Loss of security Invalidation of contract of Guarantee

CONTINGENT CONTRACTS
Section 31of the Indian Contract Act defines contingent contract as
A contract to door not to do something if some event, collateral to such contract, does or does not happen

So in simple words, it may be defined as a conditional contract.

Essential Elements of Valid Contingent Contract

There must be a valid contract. The performance of the contract must be conditional. The event must be future uncertain. The event must be collateral to the contract

Rules regarding the enforcement of the Contingent Contract

It depends on the happening of the future uncertain event. So the contract will be enforced only if that uncertain event has happened. (Section 32) It depends on the Non-Happening of the future uncertain event. So the contract will be enforced only if the happening of that uncertain event becomes impossible as that event cannot happen.(Section 33)

Rules regarding the enforcement of the Contingent Contract Cont..

It depends on the happening of the specified uncertain event within the fixed time. So the contract will be enforced only if that uncertain event happens within the fixed time. (Section 35) It depends on the Non-Happening of the specified uncertain event within the fixed time. So the contract will be enforced only if the happening of that uncertain event becomes impossible within the fixed time as that event cannot happen.(Section 35, second para)

Rules regarding the enforcement of the Contingent Contract Cont..

Contingent Contract dependent on the impossible event is void and cannot be enforced by law as the impossible event will never happen. This will be void whether the impossibility of the event is known or not to the parties at the time of making the contract.

Problems

Problems
A invites B for a Dinner. B accepts the invitation. A makes an elaborate arrangement but fails to turn up. B sues for the loss sustained

Answer
No , A cannot sue B for the loss he has suffered, because the agreement of a social nature and hence lacks the intention to create legal relationship. Essentials of a valid contract

Problem
N agrees to pay Rs.100, and in consideration M agrees to write 100 pages of report form him in five minutes. Is it a valid contract

Answer
No, it is not a valid contract. It is a void agreement because an agreement to do an act impossible in itself is void.

Problem
A aged 15 yrs obtains a loan form B. Can A be asked to repay the money.

Answer
No, A cannot be asked to repay the money. A minors agreement is void abnitio

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