contract act- 1872 ( 2nd module)
TRANSCRIPT
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NATURE OF CONTRACT
DEFINITION OF CONTRACT
A contract is an agreement made between two or more parties which
the law will enforce. According to Sec. 2 (h), a contract is an agreement
enforceable by law. An agreement comes into existence by the process
of offer by one party and its unqualified acceptance by the other party.
The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the same time, i.e., there must be
consensus ad idem.
An agreement may be a social agreement or a legal
agreement. A social agreement is that which does
not give rise to legal consequences. In case of its
breach the parties cannot go to the Law Court to
enforce a right. A legal agreement is that which
gives rise to legal consequences and remedies in
the Law Court in case of its breach.
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ESSENTIALS OF CONTRACT
1. There must be an agreement. This involves two parties, one
party making the offer and the other party accepting it.
2. The parties must intend to create legal relationship.
3. The parties must be capable of entering into an agreement as
regards age and understanding.
4. The agreement must be supported by consideration on both
sides.
5. The consent of the parties must be free and genuine.
6. The object of the agreement must be lawful.
7. The terms of the agreement must be certain
and capable of performance.
8. The agreement must not have been expressly
declared as void.
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CLASSIFICATION OF CONTRACT
Void agreement ± an agreement not enforceable by law
[Sec.2(g)]Void contract ± a contract which ceases to be enforceable by law
[Sec.2(f)]
Voidable Contract ± a contract which is enforceable by law at the option
of one party thereto, but not at the option of the other [Sec.2(i)]
Illegal Agreement ± an agreement which involves the transgression of
some rule of basic public policy and is criminal in nature or immoral. It
is not only void as between the immediate parties but it also taints the
collateral transactions with illegality.
Express contract ± a contract is which the termsare stated in words (written or spoken) by the parties.
Implied contract ± a contract which is inferred
from the circumstances of the case or from the
conduct of the parties.
Cont««d
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CLASSIFICATION OF CONTRACT (Cont«.d)
Quasi-contract ± an obligation created by law,regardless of agreement.
Executed contract ± a contract which is wholly performed by both
the parties.
Executory contract ± a contract in which the promises of both theparties have yet to be performed.
Partly executory, partly executed ± a contract in which one party
has performed his obligation, but the other party has yet to perform
his obligation.
Unilateral contract ± a contract in which only one
party has yet to perform his obligation.
Bilateral contract ± a contract in which both the
parties have yet to perform their obligations.
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OFFER & ACCEPTANCE
OFFER
An offer is an undertaking by the offeror to be contractually bound
in the event of a proper acceptance of the offer by the oferee. It
may be made by express words spoken or written, or it may beimplied when it is inferred from the conduct of the offeror or from
the circumstances of the case. It is specific when it is made to a
particular person, and general when it is made to the world at
large. In the former case, it is called a specific offer; in the latter
case, it is called a general offer.
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Legal Rules as to Offer
1. It must be intended to create legal relations.
2. It must be certain.
3. It must be distinguished from
a) A declaration of intention, and
b) and invitation to make offer.
4. It must be communicated to the offeree.
5. It must be made with a view to obtaining the assent of the
offeree.
6. It must not contain a term the non-compliance of which would
amount to acceptance.
7. A statement of price is not an offer.
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Lapse of Offer
An offer lapses or comes to an end -
1. By communication of notice of termination of offer to the
offeree.
2. By lapse of the specified or reasonable time.
3. By death or insanity of the offeror.
4. By a counter-offer. Counter-offer is an offer to the original
offer.
5. By not being accepted according to the prescribed or usual
mode.6. By non-fulfillment of a condition precedent.
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Communication of Offer, Acceptance and Revocation
The communication of a proposal (offer) is completewhen it comes to the knowledge of the person to whom it is made.
The communication of an acceptance is complete ± as against the
purposer when it is put into a course of transmission to him, so as
to be out of the power of the acceptor; as against the acceptor,
when it comes to the knowledge of the proposer. Thecommunication of a revocation is complete ± as against the person
who makes it, when it is put into 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 (Sec. 4).
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Special terms of offer.These must be brought to the notice of the other party before the
acceptance of the offer, otherwise the acceptor will not be bound
by such terms. Where the acceptor knows that there are some
special terms, and his attention is drawn to them, he is bound by
them if he accepts the offer.
Contract by Telephone or Telex
It has the same effect as an oral agreement entered into between
the parties when they are face to face.
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OFFER & ACCEPTANCE
ACCEPTANCE
Legal Rules as to Acceptance
1. It must be absolute and unqualified.
2. It must be communicated to the offeror.
3. It must be according to the prescribed or usual mode.
4. It must be given within the prescribed or reasonable time.
5. It must be given by the specific person to whom the offer is
made. If the offer is general, it may be accepted by any person.
6. It must show an intention to fulfil the promise.
7. It cannot precede an offer.
8. It must be given before the offer lapses.
9. Mental acceptance is no acceptance.
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Effect of silence on acceptance
The acceptance of an offer cannot be implied from the silence of
the offeree unless the offeree has by his previous conduct
indicated that his silence means that he accepts.
Acceptance subject to contract
An acceptance subject to contract means that the parties do not
intend to be bound until a formal contract is prepared and signed
by them.
Agreement to agree in future
If the parties have not agreed upon the terms of their
agreement but have agreed to agree in future,
there is no contract.
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CONSIDERATION
Consideration means something in return. It is the price for which
the promise of the other is bought. It must result in a benefit to
the promisor and / or a detriment to the promisee or both. Sec. 2
(d) defines it as follows:
³When at the desire of the promisor, the promisee or any other
person has done or abstained from doing, or does or abstains
from doing something, such act or abstinence or promise is
called a consideration for the promise.´
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Legal rules as to consideration
It is essential to support every contract.
It must move at the desire of the promisor.
It may move from the promisee or any other person.
It may be past, present or future.
It need not be adequate.
It must be real and not illusory.
It must not be something which the promisor is already legally
or contractually bound to do.
It must not be illegal, immoral or opposed to public policy.
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Stranger to contract
The general rule is that a stranger to a contract cannot sue. But
he may sue where -
1. a trust or charge is created in some specific immovable
property in favour of him;2. a provision is made in a marriage settlement, partition or
family arrangement for his benefit;
3. there is an acknowledgement of a liability by the promisor or
the promisor constitutes himself as agent;
4. he is the assignee of rights and benefits under
involving personal skill;
5. he enters into a contract through an agent; and
6. there are covenants running with the land.
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An agreement made without consideration is void
[Sec. 25]
The following are the exceptions to this rule, i.e.,
no consideration is required in case of -
1. A written and registered agreement based on natural love and
affection between parties standing in a near relation to each
other [Sec. 25 (1)];
2. A promise to compensate, wholly or a part, a person who has
already voluntarily done something for the promisor
[Sec. 25(2)];
3. A promise by a debtor to pay a time-barred debt if it is made
in writing and is signed by the debtor or byhis agent [Sec. 25(3)];
4. An agency [Sec. 185];
5. A complete gift [Expl. 1 to Sec. 25]
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CAPACITY TO CONTRACT
Every person is competent to contract who is of the 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 (Sec. 11)
1.Minor
A minor is a person who has not completed eighteen years of
age. But where a guardian has been appointed to a minor under
the Guardians and Wards Act or where a minor
is under the guardianship of the Court of Wards, he attains majority at the age of
twenty-one. The positions as regards his
agreements is as follows:
Cont««d
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1) His agreement is altogether void and inoperative.
2) He can be a promisee or a beneficiary in a contract.
3) His estate is liable for the necessary goods supplied or necessary
services rendered to him or to anyone whom he is legally bound to
support or for money lent to him to buy necessaries.4) He may enter into contracts of apprenticeship, service, education
and instruction provided these are beneficial to him.
5) He can be an agent.
Cont««d
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6) He cannot be a partner. But he can be admitted to the benefits of
an already existing partnership with the consent of the other
partners.
7) If he has received any benefit under a void agreement, he cannot
be asked to compensate or pay for it.
8) The court never orders specific performance of his agreements.
9) He can always plead minority and is not estopped from doing so
even when he enters into an agreement by falsely misrepresenting
his age.
10) He cannot be adjudged insolvent.
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2. Persons of unsound mind
Lunatics. A lunatic can enter into a contract
when he is of sound mind.
Id iots. An agreement of an idiot like that of a minor is
altogether void.
Dr unk en or I ntoxicated persons. Their position is similar to
that of lunatics.
These persons, like a minor, are liable for necessaries
supplied to them or their minor dependants.
3. Other persons. Alten enemies. During the war an Indian
citizen cannot enter into a contract with a
alien enemy. Contracts made before the
war are either suspended or dissolved.
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F oreig n sovereig ns and accred ited representatives
of a foreig n state. They can enter into contracts and enforce
these contracts in our Courts. But they cannot be sued in our
Courts without the prior sanction of the Central Government.
Corporations. The contractual capacity of a statutory
corporation is limited by the Statute governing it. As regards acompany registered under the Companies Act, 1956, its
contractual capacity is regulated by its Memorandum of
Association and the Companies Act, 1956.
I nsolvents. When a debtor is adjudged insolvent he
is deprived of his power to deal in his property divisible
among his creditors.
Convicts. A Convict when undergoing
imprisonment is incapable of entering into a contract.
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FREE CONSENT
All agreements are contracts if they are made by the free
consent of the parties. Two or more persons are said to
consent when they agree upon the same thing in the same
sense [Sec. 13.] Consent is said to be free when it is not
caused by(i) Coercion, or
(ii) Undue influence, or
(iii) Fraud, or
(iv) Misrepresentation, or
(v) Mistake, subject to the provisions of Secs. 20, 21
and 22.
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Effect of agreement without free consent.
When consent to an agreement is caused by coercion, fraud,
misrepresentation, or undue influence, the agreement is a
contract voidable at the option of the party whose consent was so
caused [Secs. 19 and 19-A]
COERCION
³Coercion´ is the committing or threatening to commit any act
formidden by the Indian Penal Code, 1860 or the unlawful
deaining, 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 (Sec. 15).
A threat to commit suicide amounts to coercion.
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UNDUE INFLUENCE
A contract is said to be induced by ³undue influence´ where the
relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other, and uses
that position to obtain an unfair advantage over the other. Aperson is deemed to be in a position to dominate the will of
another where he ±
Cont««d
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(a) Holds real or apparent authority over the other, or
(b) Stands in a fiduciary relation to the other; or (c) Makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age,
illness or mental or bodily distress. Where a person who
is in a position to dominate the will of another, enters into
a contract with him, and the transaction appears to beunconscionable, the burden of providing that such contract
was not induced by undue influence lies upon the person
in a position to dominate the will of the other (Sec. 16).
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R elationships which raise presu mption of und u e
i nfl u ence:
Parent and Child. Trustee and Beneficiary.
Religious Guru and Disciple.
Guardian and Ward.
Solicitor and Client Doctor and Patient.
Fiance and Fiancee.
No presu mptions of und u e i nfl u ence i n the followi ng cases:
1. Husband and Wife.
2. Landlord and Tenant.
3. Creditor and Debtor.
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MISREPRESENTATION AND FRAUD
³Misrepresentation is a mis-statement of a material fact made
innocently with a honest belief as to its truth or non-disclosure of
a material fact, without any intent to deceive the other party.
³Fraud´ exists when it is shown that a false representation has
been made.
Knowingly, or
Without belief in its truth, or
recklessly, not caring whether it is true or false, and the maker intends the other party to act upon it.
It also exists when there is a concealment of a
material fact.
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MISTAKE
Mistake is erroneous belief about something.
It may be a
(1) Mistake of Law, or
(2) Mistake of fact.
Mistake of Law, It may be a
a) Mistake of law of the country, or
b) Mistake of law of a foreign country.
The general rule as regards mistake of law of the country is
that ignorance of law is no excuse. Mistake of law of a
foreign country is regarded as a mistake of fact.
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2. Mistake of Fact, It may be a -
(1) Bilateral mistake. 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 [Sec. 20].
Mistake of Fact (bilateral mistake) may relate to:
a ) S ubject-matter. Mistake of fact regarding subject-matter may relate to
i. Existence of the subject-matter;
ii. Price of the subject-matter;
iii. Quantity of the subject-matter;
iv. Identity of the subject-matter.
v. Quality of the subject-matter, or
vi. Title to the subject-matter.
Cont««d
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b ) P ossibility of performance. Mistake of fact may also
relate to
i. Physical, or
ii. Legal, impossibility of performance.In both these cases, the agreement is void.
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2. Mistake of Fact (C ont«.d )
(2) U nilateral mistake. Where only one of the partiesis under a mistake as to a matter of fact, the contract is not
voidable [Sec. 22]. There are however two exceptions to
this rule.
( i ) I dentity of the person contracted with. If A intends to
enter into a contract with B. C cannot give himself anyright in respect of the contract by accepting the offer.
In such a case the contract is void.
( ii ) N ature of contract. Where a person is made to enter
into a contract through the inducement of another but
through no fault of his own, there is amistake as to the nature of the
contract, and the contract is void.
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DISCHARGE OF CONTRACT
A contract is said to be discharged when the obligations created
by it come to an end. The various modes of discharge of a
contract are as follows:
1. Discharge by performance.
Discharge of a contract by performance takes place when the
parties to the contract fulfill their obligations arising under the
contract within the time and in the manner prescribed. The
performance may be(i) actual performance, or
(ii)attempted performance
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2. Discharge by agreement or consent.
A contract rests on the agreement of the parties. As it is
agreement which binds them, so by their agreement or consent
they may be discharged. The discharge by consent may be
express or implied. Discharge by implied consent takes place by±
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(a) Novation, i.e., when a new contract is substituted for
an existing one, either between the same parties or
between one of the parties and a third party.(b) Alteration, i.e., when one or more of the terms of the contract
is/are altered by the mutual consent of the parties to the contract.
(c) Rescission, i.e., when all or some of the terms of the contract
are cancelled.
(d) Remission, i.e., acceptance of a lesser fulfillment of the promise
made.
(e) Waiver which means intentional relinquishment or giving up of a
right by a party entitled thereto under a contract.
(f) Merger, i.e., when an inferior right accruing to aparty under a contract merges into a superior right
accruing to the same party under a new contract.
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3. Discharge by impossibility.
Impossibility of performance may be-
I nitial impossibility. An agreement to do an act
impossible in itself is void.
S u perveni ng impossibility. Impossibility which arises
subsequent to the formation of a contract (which could be
performed at the time when the contract was entered into) is
called subsequent or supervening impossibility.T he cases covered by supervening impossibility include;
(a) Destruction of subject-matter of contract;
(b) Non-existence or non-occurrence of a particular state of
things:
(c) Death or incapacity for personal service;
(d) Change of law or stepping in of a person
with statutory authority;
(e) Outbreak of war.
The contract is discharged in these cases.
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T he following cases are not covered by supervening impossibility:
(a) Difficulty of performance;
(b) Commercial impossibility;
(c) Failure of a third person on whose work the promisor relied;
(d) Strikes, lock-outs and civil disturbances;
(e) Failure of one of the objects.
The contract is not discharged in these cases.
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4. Discharge by lapse of time.
If a contract is not performed within the period of limitation and if
no action is taken by the promisee in a Law Court, the contract
is discharged.
5. Discharge by operation of law.This includes discharge by
(a) death,
(b) merger,
(c) insolvency,
(d) unauthorised alteration of the terms of a
written agreement, and
(e) rights and liabilities becoming vested in the
same person.
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6. Discharge by breach of contract.
If a party breaks his obligation which the contract
imposes, there takes place breach of contract.Breach of contract may be
[1] Actual breach, or
[2] Anticipatory breach.
[1] Actual breach of contract may occur
(a) At the time when the performance is due, or
(b) During the performance of the contract.
[2] Anticipatory breach of contract occurs
when a party repudiates his liability or
obligation under the contract before
the time for performance arrives.
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REMEDIES FOR BREACH OF CONTRACT
In case of breach of a contract, the injured party has one
or more of the following remedies:1. Rescission. When there is breach of a contract by a party, the
injured party may sue to treat the contract as rescinded. He is
also absolved of all the obligations under the contract.
2
. Damages.D
amages are monetary compensation awarded tothe injured party by Court for the loss or injury suffered by him.
The foundation of modern law of damages, both in India and
England, is to be found in the judgment in the case of H adley v.
Baxendale. Sec. 73 of the Indian Contract Act which deals with
³compensation for loss or damage caused
by breach of contract´ is based on the judgment
in the case of H adley v. Baxendale. Damages
may be of four types:
Cont«..d
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1) Ordinary damages. These are damages
which actually arise in the usual course of
things from the breach of a contract.2) S pecial damages. Damages which may reasonably be
supposed to have been in the contemplation of both the
parties at the time when they made the contract as the
probable result of the breach of it, are known as special
damages and may be recovered.
3 ) V indictive or exemplary damages. These damages are
allowed in case of the breach of a contract to marry or
dishonour of a cheque by a banker wrongfully.
4 ) N ormal damages. Where the injured partyhas not suffered any loss by reason of the
breach of a contract, the court may award
a very nominal sum as damages.
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Liquidated damages and penalty.
µLiquidated damages¶ represent a sum, fixed or
ascertained by the parties in the contract, which
is a fair and genuine pre-estimate of the probable loss that
might ensue as a result of the breach. A µpenalty¶ is a sum
named in the contract at the time of its formation, which is
disproportionate to the damage likely to accrue as a result of the
breach. The Courts in India allow only µreasonable
compensation¶.
3. Quantum Meruit.
A right to sue on a quantum meruit (as much as earned) arises
where a contract, partly performed by one party,
has become discharged by the breach of thecontract by the other party. This right is founded
on an implied promise by the other party
arising from the acceptance of a benefit by that
party.
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4. Specific performance.
In certain cases the Court may direct the party in breach of a
contract to actually carry out the promise, exactly according to
the terms of the contract. This is called specific performance
of the contract.
5. Injunction.
It is a mode of securing the specific performance of the
negative terms of a contract.