General Principles of
General Principles of
La
La
w o
w o
f Contract
f Contract
Dr. R. Rajesh Babu
Introduction
Introduction
o
o Fundamental to all business/commercial transactionsFundamental to all business/commercial transactions
o
o TheThe Indian Contract Act,1872Indian Contract Act,1872 creates an obligationcreates an obligation
between the parties and not
between the parties and not against the whole worldagainst the whole world
(
(right in personamright in personam).).
o
o The Act lays down the general principles relating toThe Act lays down the general principles relating to
formation, performance and enforceability of contracts
formation, performance and enforceability of contracts
and the rules
and the rules relating to certain special types of contractsrelating to certain special types of contracts
like, Indemnity and Guarantee; Bailment and Pledge, and
like, Indemnity and Guarantee; Bailment and Pledge, and
Agency
Agency
o
o Separate enactments: The Partnership Act; the Sale Separate enactments: The Partnership Act; the Sale of of
Goods Act; the Negotiable Instruments Act.
Introduction
Introduction
o
o Fundamental to all business/commercial transactionsFundamental to all business/commercial transactions
o
o TheThe Indian Contract Act,1872Indian Contract Act,1872 creates an obligationcreates an obligation
between the parties and not
between the parties and not against the whole worldagainst the whole world
(
(right in personamright in personam).).
o
o The Act lays down the general principles relating toThe Act lays down the general principles relating to
formation, performance and enforceability of contracts
formation, performance and enforceability of contracts
and the rules
and the rules relating to certain special types of contractsrelating to certain special types of contracts
like, Indemnity and Guarantee; Bailment and Pledge, and
like, Indemnity and Guarantee; Bailment and Pledge, and
Agency
Agency
o
o Separate enactments: The Partnership Act; the Sale Separate enactments: The Partnership Act; the Sale of of
Goods Act; the Negotiable Instruments Act.
What is a Contract?
What is a Contract?
•
•
A contract is “
A contract is “
An agreement enfor
An agreement enfor
ceable
ceable
by law
by law
”
”
•
• ‘‘Every promise and every set of promises, formingEvery promise and every set of promises, forming
the consideration for each other is an
the consideration for each other is an agreement.agreement.’’
•
• A promises B a laptop. B promises Rs. 10 and AA promises B a laptop. B promises Rs. 10 and A
agrees. Is this a
agrees. Is this a contract or an contract or an AgreeAgreement?ment?
•
•
All contracts are agreements but all
All contracts are agreements but all
agreements are not contracts.
Conditions for enforceability
Conditions for enforceability
‘‘ All agreements are contracts, if the All agreements are contracts, if they are madey are made
by the
by the free consent free consent of the partiesof the parties competent competent toto
contract, for a
contract, for a lawful considerationlawful consideration and with aand with a
lawful object
lawful object , and are not hereby e , and are not hereby expressly xpressly
declared to be void.
declared to be void.’ (S. 10)’ (S. 10)
Essential elements of Essential elements of ContrContract:act:
1.
1. OffOffer and er and AcceptanceAcceptance
2.
2. ConsiderationConsideration
3.
3. Capacity to enter into contractCapacity to enter into contract
4.
4. Free consent of the parties andFree consent of the parties and
5.
1. Offer and Acceptance
1.1 Specific and General Offer
•
Specific Offer:
•
made to a specified person or a group of persons - can be accepted only by theperson to whom made.
•
General Offer:
made to the world at large.•
can be accepted by anyone by complying with the terms of the offer.1.2 Offer vs. Invitation to offer
•
Taxi for hire.
•
Prospectus issued by a company.
•
Tenders - bid
•
Price-catalogues, price lists, quotations
•
Display of goods with a price-tag in a shop
window.
1.3 Acceptantce
•
Acceptance must be absolute and
unqualified (counter-offer)
•
Acceptance must be communicated to the
person making the offer (in the manner
mentioned
– eg – email/fax)
•
Would silence imply acceptance? Eg.
Discount on DVD for CC holder.
Duty to
deny?
•
Offer and acceptance can be revoked by
notice, expiry of time (reasonable time)
1.3 The Postal Rule (mailbox rule)
Day 1: Ramesh makes an offer to Suresh.
Day 2:
Ramesh
decides to revoke the offer
and puts a letter in the mail to
Suresh
. Day 3:
Suresh
puts a letter accepting the offer in the
mail. Day 4:
Suresh
receives Ramesh's
The letter of revocation can be effective only when received, that is Day 4. However, a
contract was formed on Day 3 when the
letter of acceptance was posted. It is too late for Ramesh to revoke the offer.
Acceptance is from the date of letter not
when offeror opens. Acceptance is complete as soon as the letter is put into the box.
2. Consideration
‘An agreement made without consideration is void…’
(Sec 25)
Consideration means something which is of some
value in the eye of law…
Consideration must be mutual. Both parties must
receive something of value. Involvement of money is not required.
It may be:
the promisee has done or abstained from doing; or promises to do or abstain from doing;
Including - forbearance, deteriment, loss or
2.1 Movement of consideration
Consideration must move from the promisee. If consideration moves from a third party? Consideration need not be ‘adequate’:
A contract to sell horse worth Rs. 50000 for Rs. 1000? Whether consent is freely given? – coercion, fraud,
mistake!
Forbearance to sue! Sufficient consideration? BUT consideration must be ‘sufficient’, i.e. not:
performance of a public duty or a duty imposed by law performance of a previous contractual obligation
Promise to pay less than amount due – no consideration. Part payment as full discharge.
2.2 Consideration
Not illusory: An agreement will not be enforced if the
consideration is so vague as to be illusory.
o Eg. A promises to give B his Rolls Royce car if he
fetch it from garage
o Vijaya Minerals Pvt. Ltd v. Bikash Chandra Deb
(1996): Agreement to sell manganese and iron ore – price in agreement only 16% of the current market value.
o Bank of India v. Swaranakar (SC 2003) – Agreement against revocation – VRS – once applied cannot
withdraw – ‘promise to keep an offer open needs consideration to make it binding…’
2.3 E
xceptions to consideration
Mutual love and affection- Any agreement, made
without consideration, is valid if it is made on account of natural love and affection between the parties,
standing in near relation to each other, provided it is expressed in writing and it is registered under the law.
Promise to compensate for something done: Any agreement, made without consideration, is valid if it is a promise to compensate a person, who has already voluntarily done something for the person making the promise.
Promise to pay a debt, barred by Limitation law: Any promise, made in writing and signed to pay a
debt, is binding on the person signing it even though it may be barred by the law of limitation.
2.4 Test cases
1. A, promises, for no consideration, to give to B Rs 1000.
2. A, for natural love and affection, promises to give his son, B, Rs. 1000.
3. A, finds B’s purse and give it him. B promises to give Rs. 50.
4. A owes B Rs. 1000, but the debt is barred by
limitation Act. A signs a written promise to pay B Rs. 500.
3. Free and Genuine Consent
Two or more people are said to consent when they agree upon the same thing in the same sense.
However, if the consent is obtained through:
Coercion
undue influence (dominate the will of the other and obtain unfair advantage)
fraud
misrepresentation
mistake
Contract induced due to coercion, fraud, or misrepresentation is voidable.
Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void
• Workmen of Appin Tea Estate vs. Industrial
Tribunal (1966): The demand of the workers for bonus was accepted after a threat of strike. The
question was, whether such a decision between the Union of the workers and the Indian Tea Association could be declared void on the ground that there was coercion?
• It was held that because of the doctrine of collective bargaining under the Industrial Dispute Act the
demand of the workers could be backed by a threat of strike. Such a threat was neither a threat to commit an offence under the IPC, nor was it unlawful
detaining or threatening to detain any property and hence it did not amount to coercion, and as such the agreement was valid.
• Shri Krishan Vs. Kurushetra University 1976 SC,
-ShriKrishan, acandidate for the LL.B. Part I exam, who was short in attendance, did not mention that fact
in the admission form for the exam. Neither the Head of the law department nor the University
authorities made proper scrutiny to discover the truth. Has he committed fraud?
• It was held by the Supreme Court that there was no fraud by the candidate and the University had no
power to withdraw the candidature of the candidate.
4. Parties competent to contract
The following persons are incompetent to contract
Minors
Persons of unsound mind
Persons disqualified by law to which they are subject (insolvent)
According to the Law, a person is of sound mind for the purpose of contracting if at the time of contracting, he is capable of understanding the contract and capable of making a rational judgment as to the effects of the
contract upon his interests.
In India, a contract done by a minor or person of unsound mind is absolutely void ab initio.
5. Lawful object
The object is unlawful if It is forbidden by law,
Is of such a nature if permitted it would defeat the provisions of any law,
It is fraudulent
The court regards it immoral,
The court regards it opposed to public policy. Thus every agreement of which the
Dixon v Francis [1956-60]
o The Appellant agreed that the Respondent would have
the right to live in her house and occupy the garage free of cost “so long as he and his wife live together in peace”. Is this agreement valid or void for uncertainty?
o Held: In order to constitute a valid contract the parties
must so express themselves that their meaning can be determined with a reasonable degree of certainty. The words “so long as he and his wife live together in peace” are uncertain and the proviso is void.
o The language used was so obscure and so incapable of
any definite or precise meaning that the court is unable to attribute to the Parties any particular contractual
Classification according to validity
•
Voidable contract: An agreement
enforceable by law at the option of one or
more of the parties thereto., but not at the
option of the other.
•
Eg: Consent obtained by force.
•
Void agreement: An agreement not
enforceable by law is void.
•
Void contract: A contract ceases to be
enforceable by law becomes void when it
ceases to be enforceable.
Void Agreements
oAgreement without consideration is void oAgreement in restraint of marriage is void oAgreement in restraint of trade
oNon-compete Agreements?
opartial and not total; unreasonable; public interest oAgreement in restraint of legal proceedings
oAgreements by way of wager/ bet. Wager contract is
one in which parties professing opposing views on the result of an uncertain event , mutually agree that depending on the outcome of such event, one will pay or hand over a sum of money or other stake.
Agreements by way of wager, void :S. 30
• Subhash K. Manwani v. State of MP (2000) MP HC... “….to treat an agreement by way of wager as void, is that the law discourages people to enter into games of chance and make earning by trying their luck instead of spending their time, energy and labour for more
fruitful and useful work for themselves, their family and society .”
• Exceptions: (1) Horse racing; (2) Prize competitions : The Prize Competitions Act, 1955; (3) contests, where the results are based predominantly on skill, rather than on mere chance; (4) Lotteries sanctioned by specific legislation.…
Privity of Contract
•
Only a Party to a Contract (not a stranger) can sue on it. The contract can confer rights orimpose obligations only on the parties to the contract.
There are two aspects of this doctrine.
1.Only parties to the contract are entitled under it.
•
Rights or benefits may be conferred upon a third party but such a third party can neither sueunder the contract nor rely on defenses based on the contract.
2.Secondly the parties to a contract cannot impose liabilities on a third party
Exceptions to Privity Rule…
• Agency: The rule here is that if one of the
contracting parties contracts as an agent, then
either the agent or the principal, but not both, can sue to enforce the contract.
• Trusts: The law of trusts can enable a third party beneficiary to initiate action that will enforce the promisor’s obligation.
Conclusion of a Contract :
Discharge,
Frustration, Breach and Damages
Discharge of a contract
It means that the contract has been performed
and is no longer a pending legal obligation.
A contract may be discharged by:
1. Performance
2. Termination by time
3. Mutual agreement - by novation, alteration
or recession (Sec.62), remission or waiver
(Sec.63).
4. Operation of law
5. Impossibility of performance (ss 37-67)
6. Breach of contract
3. Discharge by Mutual Agreement
• Parties are free to mutually abandon, modify or rescind the contract and the original contract need not be performed. Sec. 62
(i) Novation … - replacing party/contract (substantial alteration)
(ii) Rescission: - discharge of both parties from the obligations of a contract by agreeing to rescind the contract.
(iii) Alteration … must be a “material alteration”
• Remission or waiver: A owes B 27 lakhs. A pays Rs. 20 lakhs and B accepts in satisfaction of his full claim on A.
4. By operation of law
1. Material alteration;
2. Merger of an inferior contract into a
superior contract;
3. Discharge of an insolvent;
4. When rights and liabilities under the
same contract become vested in the
same person
5. Impossibility or Frustration of
Contract: Legal Excuses
•
The general rule followed in most
jurisdictions is that performance under a
contract will
only be excused in “extreme”
circumstances or when the performance
falls under a legally recognized excuse from
performance.
•
Impossibility; Subsequent Illegality; Acts of
God/Nature; Death of a Party; Destruction;
War
• Contract not frustrated by mere commercial difficulty: Merely because the procurement of the goods becomes difficult because of a strike in the mill, or there is a rise in prices, or a person will not be able to earn the expected amount of profits, is not enough to frustrate the contract.
• Benefits from void contracts: “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”
5.1 Impossibility of Performance or
Frustration of contract
• Initial impossibility: “An agreement to do an act impossible in itself is void”
• A agrees B to discover treasure by magic. The agreement is void. The performance of the agreement being
impossible, the agreement is void.
• Subsequent Impossibility: Performance of contract was quite possible when it was made, but some subsequently event rendered its
performance impossible or unlawful.
• A contracts to take in cargo for B at a foreign port. A’s
Government afterwards declares war against the country in which the port is situated. The contract become void when war is declared.
6. Breach or non-Performance of
contract
Breach of contract is failure of a party to perform his obligations under a contract. When one party
commits a breach, the other party can claim damages or specific performance.
The breach of contract may be:
• Actual breach of contract, or
• Anticipatory or constructive breach of contract .
-‘when a party to a contract has refused to perform, or
6.1 Effect of anticipatory breach
• Case: In Frost Vs. Knight (1872) the defendant promised to marry the plaintiff on the
defendant’s father’s death. While defendant’s
father was, still alive, he renounced the contract. The plaintiff did not wait till the defendant’s
father’s death and immediately sued him, and she was successful in her action.
• The aggrieved party may decide to ignore the anticipatory breach, and wait for the due date.
• Doctrine of anticipatory breach does not apply to promises to pay debts under
6.2 Remedies for breach of contract
The aggrieved party may:
•
Cancel the contract which will relieve him
from all contractual obligations (rescission)
•
Cover and receive damages.
•
Demand specific performance
•
Demand injunction.
•
Recover any consideration given to the
breaching party (restitution)
•
Recover proportionate payment for the work
done (Quantum Meruit ).
7. Damages/Compensation for breach
Damages are monitory compensation for thelosses suffered or gains prevented due to the breach.
Types of Damages:
• Vindictive or exemplary damages - punitive damages. e.g.. for dishonor of cheque.
• Compensatory damages- general damages and special damages.
• Nominal damages
• Liquidated damages and penalty
Remoteness of damage
-Hadley vs. Baxendale rule
• On the breach of a contract such damages can be recovered,
• (1) as may fairy and reasonably be considered arising naturally, i.e., according to the usual course of things from such breach, OR
• (2) as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract.
• The principle stated in the two branches of the rule is virtually the rule of “reasonable foresight.” The liability of the party making the breach of contract depends on the knowledge, imputed or actual, of the loss likely to arise in case of breach of contact.
Suit for specific performance
• The Specific Relief Act, 1877 gives the court
discretionary powers to order specific performance instead of or in addition to damages. The powers are subject to Sec.14 of the Specific Relief Act,
1877.
Suit for injunction:
• Injunction is an order of the court restraining a person from doing something which he promised not to do. This remedy is available where the
