7d055indian contract act 1872

8/3/2019 7d055Indian Contract Act 1872

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Indian Contract Act 1872 (S.2)

Module I: Indian Contract Act 1872

Nature and kinds of contracts, concepts related to

offer, acceptance and consideration, principles

governing capacity of parties and free consent,

legality of objects, performance and discharge of

contract, breach of contract and its remedies,

basic element s of law relating to Agency,

guarantee and Pledge, Contract of Agency


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Indian Contract Act 1872 (S.2)

Contract: Agreement, enforceable by law

Proposal: is an offerto do or to abstain from doinganything in order to obtain the assent of another

Acceptance

Promise: An accepted proposal

Consideration: doing or abstaining from doing

anything Agreement is a set of promises, forming

Consideration for each other.


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Contract (Def.)

A contract is an agreement, enforceable by law,

made between at least two parties, by which

rights are acquired and obligations are incurred

by parties. If the party which had agreed to dosomething fails to do that, then the other party

has a remedy.

Examples- Sale, Purchase, Franchise, Agency,

Employment, Partnership, going to a restaurant

and giving an order, etc.


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What Agreements are Contracts

All agreements are contracts if they are

made by free consentof parties competent

to contract, for a lawful consideration witha lawful object, and are not expressly

declared void.

Some contracts are required to be made in

writing, in the presence ofwitnesses,

affixed with stamps and registered.


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Kinds of Contracts

Types of Contracts- Indemnity, Guarantee,Bailment, Pledge, Agency

Classification of contracts -on the basis of:validity, mode of formation, performance

1. Validity: Valid, Voidable, Void, Unenfoceable,Illegal

2. Mode of Formation: Written, oral, express,implied

3. Performance: Executed, Executory4. Contingent Contract

5. Quasi Contract


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Conditions essential for a Valid Contract

1. Parties should be competent to contract[ Age

of majority(18 years or more), sound mind, not

disqualified from contracting under any law]

2. Agreement should be made by the free

consent of parties. Consent should not be

caused by coercion, undue influence, fraud,

misrepresentation or mistake

3. Agreement should have lawful consideration

and lawful object.


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Conditions essential for a Valid Contract (contd.)

4. Agreement should not be expressly

declared void. ( see the slides on void

agreements)


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Free consent (S.14)

Not caused by:

Coercion (threat), S.15

Undue Influence (doctor-patient, etc.), S.16

Fraud ( to deceive), S.17

Misrepresentation, S.18, 19

Mistake (mutual mistake of fact,), S.20,21,22.-mistake of law.

Meaning of agreement should be certain

Agreement must be capable of performance.


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Free consent (Contd.)

Coercion: (1)Committing or threatening to commit any actforbidden by the Indian Penal Code 1860, or,(2)unlawful detaining of any property for causing anyperson to enter into an agreement (S.15)

Undue Influence: Where one of the parties is in a positionto dominate the will of the other ( holds real or apparentauthority, stands in a fiduciary relation or the mentalcapacity of one of the parties is affected by age, illnessor distress) and uses that position to obtain an unfair

advantage over the other. If the transaction appearsunconscionable, the burden of proof is on the party whois in a position to dominate the will of the other. (S.16)


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Fraud: An act intended and fitted to deceive toinduce him to enter into the contract, andincludes:

(i) Suggestion as a fact of that which is not true byone who does not believe it to be true

(ii) Active concealment of a fact by one havingknowledge or belief of the fact

Explanation: mere silence as to facts likely toaffect willingness is not fraud, unless there is aduty to speak (s.17)


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Misrepresentation: Means and includes:

(i) Positive assertion, in a manner not

warranted by information, of that which isnot true, though he believes it to be true

(ii) Causing , howoever innocently, a party

to make mistake as to the substance of

the thing which is the subject of the

agreement


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Voidability of Agreements without free

consent (S 19, 19A)

When consent is caused by coercion, fraud ormisrepresentation, the agreement is a contractvoidable at the option of the party whose

consent was so caused A party whose consent was caused by fraud or

misrepresentation may insist that he be put in aposition in which he would have been if the

representations made had been true Contract not voidable if the party whose consentwas so caused had the means of discovering thetruth with ordinary diligence (S.19)


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Voidability of Agreements without free

consent (S 19, 19A) (Contd.)

Power to set aside contract induced by

undue influence. Such a contract is

voidable at the option of the party whose

consent was so caused. Such a contract

may be set aside absolutely or, if the party

entitled to avoid has received any benefit,

upon such terms and conditions as to thecourt may seem just.


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Void Agreements (S. 24-29)

Agreements are void:

(i) If consideration and objects are unlawful inpart

(ii) Agreement without consideration is void,unless it is in writing and registered (made dueto natural love and affection between parties innear relation) or is a promise to compensatefor something done, or is a promise to pay a

debt barred by limitation law, or is a gift(iii) Agreement in restraint of trade is void except

an agreement to carry on business of whichgoodwill is sold


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Void Agreements (S. 24-29)(Contd.)

(iv) Agreements in absolute restraint of legalproceedings in respect of a contract arevoid, except contracts to refer a dispute to

arbitration(v) Agreements the meaning of which is not

certain are void

(vi) Agreements by way of wager are void,except agreements for horse racingcarrying a prize of rs 500 or upwards


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Void/ Voidable Agreements

An agreement not enforceable by law is

said to be void

An agreement enforceable at the option ofone or more of the parties, but not at the

option of the other(s) is a Voidable

agreement


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Distinction between Void and

Voidable Contracts

Legal effect can be repudiated at the

option ofone party

B

ecomes unenforceable, when thatpartyrescinds

Does not affect collateral transactions

The person who has received any benefitmust restore it, when the contract is

rescinded


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Example

Collateral Contract: A purchased from B by

making a misrepresentation. Later B

comes to know about the representation.

However, he does not within a reasonable

time, repudiate the contract. A sells those

goods to C, a bonafide purchaser for

value, Cs title shall be good


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Essentials of a Valid Contract (S10)

There should be free consent

Parties should be competent to contract

There should be lawful consideration There should be lawful object

Contract should not expressly be declared

void or illegal


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Examples

1. Mistake: A pays B rs 10,000 in

consideration of Bs promise to sell him

some goods. The goods had been

destroyed at the time of promise. The

agreement is void and unenforceable.

2. Impossibility: A promises to pay B Rs

10,000; for Bs promise to make twoparallel lines meet. The agreement is void.


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Contract when Essentials are

Missing Void

Voidable

Illegal

UnenforceableExamples:

1. A contract for paying bribe is illegal.

2. A contract with an alien enemy is unenforceable

3. An unstamped sale deed is unenforceable,unless the required stamps are fixed and penaltypaid


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Contracts Expressly Declared Void

1. Agreement with a minor (S.11)

2. Mutual mistake of fact between parties

(S.20)3. Consideration, or a part, unlawful

(S.23,24)

4. Agreements without consideration (S.25)5. Agreements in restraint of marriage (S.26)

6. Agreements in restraint of trade (S.27)


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Contracts Expressly Declared Void

7. Agreements in absolute restraint of legal

proceedings (S.28)

8. Uncertain agreements (S. 29)9.Wagering agreements (S. 30)- Insurance,

sanctioned lotteries are not wagers

10. Impossible agreements ( S. 56)11.An agreement to enter into an agreement

in future


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Performance of Contracts

1. Parties to a contract must perform or offer toperform their respective promises. Promisesbind the representatives of promisors in case of

their death. (S.38)However, If it appears that the intention of theparties was that the contract should beperformed by the promisor himself, suchpromise must be performed by the promisorhimself.

Example: giving money, painting


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Performance of Contracts (Contd.)

2. A stranger to a contract can not sue for performance(privity of contract)

3.When the promisor has made to the promisee an offer(unconditional offer, made at a proper time and place) to

perform, and the promisee has not accepted the offer,the promisor is not responsible for non-performance, nordoes he loose his right under the contract. (S.38)

4.When one party has refused to perform his part of thepromise, the other party can repudiate and claimdamages

5.When contract consists of reciprocal promises to besimultaneously performed, promisor not bound toperform, unless reciprocal promisee ready and willing toperform [payment on delivery] (S.51)


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6.When a party has refused or is unable to perform wholly,the promisee may rescind or acquisce in its continuance.(S.39)(Singer wilfully absenting )

7. Devolution of joint rights. Any one of joint promisors can

be compelled to perform. Sharing of loss by default incontribution: the remaining joint promisors must sharethe loss. (S. 43)

Example: A,B and C jointly promise to pay D 3,000 rupees.C is compelled to pay the whole. A is insolvent, but his

assts are sufficient to pay 500 rs. C is entitled to receive500 rs from As estate, and 1250 rs from B


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8. Contract to do an act, afterwards becoming impossibleor unlawful becomes void when the act becomesimpossible or unlawful. Frustration, Force majeure,discharge of contract by supervening impossibility(S 56)

[ taking in cargo at a foreign port]9. Failure to perform at a fixed time in contracts where time

is of the essence make the remaining part of the contractvoidable at the option of the promisee, and it entitles thepromisee to compensation. However, acceptance by the

promisee of performance at time other than the agreedtime, waives his right to compensation unless he gives anotice at the time of such acceptance [S 55]


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Discharge of Contracts

1. By Performance

2. By mutual consent or agreement [ Novation(substitution), rescission, remission (acceptance of alesser sum), waiver, etc.]

3. By lapse of time (Time barred debt)

4. By operation of law ( Insolvency, merger, unauthorizedalteration in written doc.)

5. By act afterwards becoming impossible or illegal due to

some event which the promisor could not prevent.[Frustration-Force majeure] (singer falls ill, contract totake cargo in a foreign port)

6. Breach of Contract (actual or anticipatory breach)


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Privity of Contract

Contracts create jus in personam and notjus in rem. A stranger to a contract cannot file a suit for breach of contract

Example: A is indebted to B. A sells certaingoods to C, and C promises to pay off Asdebt to B. In case C fails, B has no right tosue C

Buyer is in privity of contract with retaileronly, and not with manufacturer


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Quasi Contracts (S.68-72)

Certain relations resembling those created by

law.(Obligations imposed on a party by law). Eg.

No body should enrich himself unduly at the

expense of another. Example- A trader leaves goods at a warehouse

by mistake. The warehouse treats the goods as

his own. The warehouse must pay for them. It

would be unjust to permit one party to benefit atothers expense.


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Quasi Contracts (Contd.)

Quasi-contracts deal with claims for:

1. Necessaries supplied to a person incapable ofcontracting

2. Reimbursement of person paying money dueby another in whom he is interested(lessee payingowners dues)

3. Obligation of a person enjoying benefit of non-gratuitous act (trader leaves goods at bs house)

4. Responsibility of a finder of lost goods5. Liability of a person to whom money is paid or

goods delivered by mistake or coercion (Jointdebtors paying the debt twice, railawys realising an illegal charge)


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Right of Finder of Lost Goods

Finding is not owning. Finder is a bailee. Inaddition, he also has the responsibility/duty ofmaking reasonable efforts to find the realowner

Rights:1. Right to retain the goods till he receives due

remuneration for expenses made onpreserving the goods

2. Right to sell when goods preishable, when thelawful charges for preserving the goodsamount to two-third of its value


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Contingent Contracts

A contingent contract is a contract to do ornot to do a thing, if some event, collateralto the contract, does or does not happen.

Eg-A contracts to pay B Rs 10,000, if Bshouse is burnt

A contingent contract becomes void if the

event becomes impossible (S.32) Eg-A contracts to pay B, when he marries

C. C dies without marrying.


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Novation of Contract (S.62)

Novation is substitution

Novation, Rescission and Alteration of Contract:

If the parties to a contract agree to substitute a

new contract for it, or to rescind or alter it, theoriginal contract need not be performed.

Example: A owes money to B. A,B and C agree

that B shall, thenceforth, accept C as the debtor;

the old debt of A to B comes to an end, and a

new debt from C to B has been contracted.


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Breach of Contract_ Remedies

Against (S.73-75)

1. Compensation forloss or damage which

naturally arose in the usual course of things from

such breach (ordinary damage= Market price on

the date of the breach-Contracted Price)). or,2. Loss which parties knew, when they made the

contract, to be likely to result from the breach

(special damage, eg loss of profit),

3. Compensation not to be given for any remote

and indirect loss or damage


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Damage- Explanation

4. The means which existed of remedying the

inconvenience caused by non performance must

be taken into account. The aggrieved party is

required to take reasonable steps to minimizethe loss due to the breach of contract.

Example: Delay in carriage of perishable articles,

like fruits. Damage can be minimized by selling

the stranded fruits before they perish.


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Remedies for Breach of Contract

1. Rescind the contract

2. Claim damages-ordinary, special, liquidateddamages, unliquidated damages, penalty(punitive or vindictive damages)

3. Suit for specific performance. However,specific performance may not be granted:

(i) Where monetary compensation is adequate

(ii) Where the contract is of personal nature (painting a picture,marriage, personal service)

(iii) Where it is not possible for the court to supervise theperformance of the contract (building contract, contract ofpersonal service)

(iv) Where contract is beyond the objects clause ofMOA(Memorandum of Association) of a company


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Remedies for Breach of Contract (Contd.)

4 Suit for injunction, where the breach is of a negative term of

contract (Film star agreeing to act exclusively for a particular

producer)

5 Suit for quantum Meruit (as much as merited/earned) It is a claim,

based on quasi-contractual obligation, by a party who has notperformed his obligations in full, against the party not in default

who has received any benefit:

(i) When a contract is discovered to become unenforceable or void (Singer

falling ill after part performance-S 65)

(ii) When one party abandons or refuses to perform the contract (part

supply)

(iii) When a contract is divisible

(iv) When an indivisible contract is completely but badly performed


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Compensation-Where Penalty

Stipulated

Reasonable compensation, not exceeding

the amount stipulated (Liquidated

damages or penalty),

Exception- Breach of bond for the

performance of a public duty- the whole

sum mentioned in the bond becomes

payable


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Special Contracts

1. Indemnity (S124)-Saving from loss, Kind of contingentcontract; eg. To indemnify against legal action

2. Guarantee (S.126); To perform the promise in case ofdefault; Guarantoris the Surety; eg. Bank Guarantee

3. Bailment (S148), Delivery of goods for return aftersome purpose is accomplished; eg. Warehousing,Carriage of goods, Repairs, Lending a book forreading

4. Pledge (S.172)- Bailments of goods as security forpayment or performance of some promise; Pawnor,Pawnee

5. Agency (S.182-238)-Person employed to do things foranother, or represent another in dealings with thirdparties; eg. Sales Agent, Auctioneer, Attorney, etc.


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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.

Example: general insurance

Parties: Indemnifier, Indemnified


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Contract of Guarantee

A Contract ofGuarantee is a contract to

perform the promise, or discharge the

liability, of a third person, in case of his

default

Surety- Liability of a surety is co-extensive

with that of the Principal Debtor

Principal Debtor

Creditor


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Bailment

Delivery of goods by one person to

another for some purpose, upon a contract

that the goods shall , when the purpose is

accomplished, be returned or otherwise

disposed of according to the direction of

the person delivering them. The person

delivering the goods is called the Bailor.The person to whom they are delivered is

called the Bailee


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Bailment-Examples

Lending

Hiring

Giving for Repair, Processing,Transportation or Carriage

Warehousing


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Bailment (Contd.)

Essentials:

1. Delivery of goods by one to another

2. Towards a specific purpose3. Agreement that the goods shall be

returned or disposed off as soon as the

purpose is accomplished

4. Ownership remains with the bailor,

possession is with the bailee


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Duties of Bailors and Bailees

Bailors duty to disclose faults in goodsbailed ( S.150)

Bailees duty to take care, as a man of

ordinary prudence would, under similarcircumstance, take of his own goods of thesame bulk, quantity and value (S. 151)

Termination ofB

ailment by Bailees actinconsistent with conditions.( using as ataxi,the car lent for personal use)


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Bailment (Contd.)

Duties of Bailor:

1. To disclose faults in goods

2. Liability for breach of warranty as to title

3. To bear expense in case of gratuitousbailment (bailee to receive noremuneration)

4. To bear extraordinary expenses in caseof non-gratuitous bailment; eg-car lent forjourney-repair expenses


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Bailment (Contd.)

Rights and Duties of Bailee:

1. To take care of goods

2. Not to make unauthorised use of goods

3. Not to mix goods received as Bailee with his own goods

4. To return the goods bailed when the purpose is accomplished

without demand5. To return any accretion to the goods bailed (Cow, calf) (S.163)

6. To receive the contracted consideration from the bailor

7. Right of lien against the bailor to retain the bailed goods until hereceives due remuneration for the services rendered. A (roughdiamond for polishing) (S.170,171)

8. General and particular lien (General lien of bankers, attorneys forany thing due to them in the balance of account)

9. Right against wrongful deprivation of or injury to goods, as theowner would have in the like case (S.180,181)


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Bailment (Contd.)

Termination of Bailment:

1. On expiry of the stipulated period

2. On accomplishment of the specificpurpose

3. If bailee performs any act inconsistent

with with the contract of bailment

4. A gratuitous bailment can be terminated

any time


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Pledge

Bailment of goods as a security for

payment of a debt, or performance of a

promise, is called Pedge. The bailor is

called the Pawnor, the Bailee is called

Pawnee

Motgage: in the context of immovable

property ( Transfer of Property Act)


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Pawnees Right of Retainer

Pawnee may retain the goods pledged, not onlyfor payment of debt or the performance ofpromise, but for the interest of the debt, and allnecessary expenses incurred by him in respect

of the possession or preservation of the goodspledged. ( S. 173). He may retain the goods ascollateral security; or sell them, after giving thePawnor reasonable notice. (S.176). Right todamages because of defective title. Damages

because of non-disclosure of defects in goodspledged. Right to recover any extraordinaryexpenditure.


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Rights of Pawnor

1. Right to receive back the goods pledged

when the debt has been paid or the

promise fulfilled.

2. Right to sue the pawnee on default


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Agent

An agent is a person employed to do anyact for another, or to represent another indealings with third persons.

The person for whom such act is done , orwho is so represented, is called theprincipal

Only a person of age and understandingcan employ and be an agent.

Consideration is not necessary


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Agent (Contd.)

Agents authority may be express (given in words spoken or written);or implied (inferred from circumstances, ordinary course ofdealings). Ordinary course of dealings can be inferred. [Example: shop inFaridabad managed by B, owned by A in Delhi, B is in the habit of ordering goods from C in thename of A. B has implied authority from A to order goods from C]

Agent having authority to do an act has the authority to do all lawful

things necessary in order to do that act. In an emergency, he hasthe authority to do all acts for protecting his principal from loss, thatwould be done by a person of ordinary prudence in his own case;eg. Repair of goods, disposal if they are getting spoiled, agentauthorised to recover debt may adopt legal process . [Example: Aconsigns provisions to B at Calcutta, with direction to send them to C atCuttack. B may sell at Calcutta if the provisions will not bear the journey to

Cuttack without spoiling] Eg.- Necessity: Ship repair by the Master of the ship; Master has impliedauthority


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Agency (Classification, Creation)

Classification:

1. Express, Implied;

2. Mercantile Agents-Broker, Commission Agent, Auctioneer,Banker, Supplier, Indentor

3. Non-mercantile Agents-Wife, Attorney, Counsel, Estate Agent

Creation: Express, Implied, Agency by Estoppel (Apparent Authority),Agency by holding out, Agency by Necessity, Agency byratification-express or implied.

Apparent Authority: Express, Implied ( necessary for carrying outexpress authority). Apparent ( where the Principals words orconduct lead a third party to believe that the agent has authority)

Holding Out- Servant buying on credit, master paying for them.Estoppel: Telling A that B is your agent, later on A supplies goods to Bthinking that B is your agent


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Rights of the Agent

1. Remuneration

2. Retainership

3. Lien on Prinicipals goods4. Stoppage in transit

5. Indemnification from the Principal

6. Compensation for injury caused byPrincipals neglect


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Personal liability of the agent to Third Parties

1. Where it is agreed

2. Where the Principal is residing abroad

3. Breach of warranty .Where his act isbeyond his authority

4. Where he signs a negotiable instrumentin his own name

5. Where the Principal is a minor6. Where the trade usage makes him

personally liable


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Principals liability For Acts of Agent

Principal not liable for criminal acts of

agents even if done at the instance of the

Principal (S 224). Eg. B, a news paper,

publishes a libel against C, at the instance

and indemnity of A. A is not liable on the

indemnity

Principal indemnifies agent for his lawfulasts done in good faith.


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Agent/Servant (difference)

A servant is under supervision and control

of his principal not only as to what he does

but also as to the manner in which he

executes his work

The independent agent or contractor, on

the other hand, undertakes to produce a

given result and is not under the control ofthe principal in his manner of execution.


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Quantum Meruit

As much as merited: The general rule is

that unless a person has performed his

obligations in full, he can not claim

performance by the other. Quantum

Meruit is an exception based on Quasi

Contractual Obligations, which the law

implies in the circumstances.


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When a Suit Lies for Quantum Meruit

Suit for quantum Meruit (as much as merited/earned) It is aclaim, based on quasi-contractual obligation, by aparty who has not performed his obligations in full,against the party not in default who has received any

benefit:(i) When a contract is discovered to become unenforceable or void

(Singer falling ill after part performance-S 65)

(ii) When one party abandons or refuses to perform the contract (partsupply)

(iii) When a contract is divisible (contract with mile stones)

(iv) When an indivisible contract is completely but badly performed(cost of making repairs so as to conform to the contract) (S. 73)

7d055indian contract act 1872

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