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CONTRACT ACT

INDIAN

CONTRACT ACTOF 1872



Relevance of Contract in daily life

Taking a seat in a train

Money deposited in the bank

Borrowing a book from the library

4/7/2010 CONTRACT ACT 2



Indian Contract Act of 1872

Enforced on Sept-1st ,1872

Amended in

± 1886, 1891, 1899, 1930, 1932, 1997




The Act

This act largely deals with:

± General principles applicable to the act

± Conditions necessary to make a contract ± Principles to quasi-contracts

± Special contracts like indemnity, guarantee, bailment and agency




Exceptions to the Contract Act

All contracts are not covered under the Act

There are certain contracts covered under special laws:

± Transfer of Property Act ± Negotiable Instruments Act

In such cases these special acts override the provisions

of the contract act




Types of Rights

Rights in rem; rem means rights available against the

world

Rights in personam; personam means right availableagainst an individual




Definition of Contract

³An agreement creating and defining obligations

between the parties´ ± Salmond

Every agreement and promise enforceable at law is acontract




Section 2H of Indian Contract Act

A contract is an agreement enforceable by law

This means there are two basic elements

± Agreement ± Obligation

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2010 CONTRACT ACT 8



Essential Requirements of Contract

At least two parties

± promisor and promisee

An agreement ± offer and acceptance

Legal obligation

± Balfour vs Balfour ± Rose and Frank Co. vs Crompton and Brothers

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2010 CONTRACT ACT 9



Hence

All agreements are not contracts

But

All contracts are agreements

All obligations also do not constitute contract only which

directly contemplate legal obligation are contracts

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2010 CONTRACT ACT 10



Classification of contracts

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2010 CONTRACT ACT 11



Section 10 of the Indian Contract Act says ±

³All agreements are contracts if they are made by the

free consent of parties, competent t o contrac t ,

for lawful considerati on, with a lawful obj ec t

and are not hereby expressly dec lared t o be v oid ́

Valid Contracts


Agreement FreeConsent

Competent

LawfulConsiderati

on

LawfulObject

DeclaredVoid



Agreement

That means communication by the parties to one

another, intending to create a relationship

± Offer/ proposal and its acceptance


Agreement

Free

Consent

Competen

t

Lawful

Consideration

Lawful

Object

Declared

Void



What is a Proposal

When one person signifies to another ± his willingness to do or ± abstain from doing anything with a view to obtaining

the assent of the other to such act or abstinence, ± ...he is said to make a proposal.

A proposal is accepted when the other party gives its consent on the proposal.

Thus, a ¶proposal· can be to do a positive act or abstinence from an act (i.e. negative act)

English Act uses the word ¶offer· , while Indian Contract Act uses the word ¶proposal· .



Is this a valid proposal (1)?

X applied for the post of a head-master in a school. Atits meeting, the managing committee passed aresolution appointing him to that post. X did not receive

any official intimation of his appointment, but one of the members of the Committee privately informed himabout it. The resolution was subsequently rescinded.Can X sue the managing committee for breach of contract?

Note: There is no offer till it is communicated to the offeree.



Is this a valid proposal (2)?

A, a second-hand book-seller, published a catalogue quoting prices against various second-hand books. Areceived letters from the customers B, C and D offering to buy a particular book. A wants to refuse to sell the book for the price. Can he do so?

A sends an invitation to his friend B in Bombay to come to Poona to play in A·s friendly cricket match during the weekend. B sends a letter accepting A·s offer and travels to Poona at his own expense. He presents himself on the cricket field, but A refuses to include him in the team.Can B sue A for a breach of contract?

Note: An offer must be distinguished from an invitation to offer.



Acceptance of an off er

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be ´acceptedµ.

Essentials of a valid acceptance: ± In order to convert a proposal into a promise, the acceptance

must be

Absolute and unqualified - Any departure from the terms of the offer or any qualification vitiates the acceptance unless itis agreed to by the person from whom the offer comes. An

acceptance with a variation is no acceptance; it is simply acounter proposal.

Expressed in some usual and reasonable manner - If the proposer prescribes any particular manner of acceptance it has to be in that manner and where no manner is prescribed itshould be in a usual and reasonable manner



Are these Acceptances valid?

A bought some goods from B and proposed that the goods will be delivered at a particular place. B delivers the goods, but at some different place than the one

promised. Is A bound to accept the goods at the different place?

M offered to sell some land to N for Rs. 2,800. N repliedaccepting M·s offer enclosing a cheque for Rs. 800 with a

promise to pay the balance by monthly installments of Rs. 500. State whether N·s acceptance is valid?



Promise

A proposal, when accepted, becomes a promise.

The person making the proposal is called the promisor.

The person to whom it is made is called the promisee.



Free consent

Both the parties understand the clauses with same

meaning

Consent without any fear

Consent without any favours


Agreement

Free

Consent

Competen

t

Lawful

Consideration

Lawful

Object

Declared

Void



Lack of Free consent (1)

Coercion

± A railway company refuses to deliver certain

goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order toobtain the goods. He is entitled to recover somuch of the charge as was illegally excessive.



Fraud

± A fraudulently informs B that A·s estate is free

from encumbrance. B thereupon buys the estate.The estate is subject to mortgage. B may either avoid the contract or may insist on its being carried out and the mortgage debt redeemed.




Mistake

A agrees to sell to B a specific cargo of goods

supposed to be on its way from England to Bombay.It turns out that, before the day of the bargain, the

ship conveying the cargo had been cast away and

the goods lost. Neither party was aware of the facts.

The agreement is void.




Competent Parties

Majority

Sound mind

Without any other legal disqualification


Agreement

Free

Consent

Competen

t

Lawful

Consideration

Lawful

Object

Declared

Void



Consideration

Something given in return by the parties to contract


Agreement

Free

Consent

Competen

t

Lawful

Consideration

Lawful

Object

Declared

Void



Consideration

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 ²

Such act, abstinence or promise is called a consideration for the promise.

The definition of agreement itself states that the mutual promises should form consideraton of each other. Thus consideration is essential for an agreement. A promise withoutconsideration is not agreement and hence naturally it is not acontract.



Consideration Example

A agrees to sell his house to B for 10000 Rs. Here, B·s promise to pay the sum of 10000 is the consideration for A·s promise to sell the house; and A·s promise to sell the house is consideration for B·s promise to pay 10000 Rs.



Agreement without consideration ± Exception 1 (Natural Love and Affection)

A promises, for no consideration to give B Rs. 1000. This is avoid agreement.

A, for natural love and affection, promises to give B Rs.1000. A puts his promise to B in writing and registers it.This is a contract.

± Exception 2 (Promise to compensate for voluntary services)

A finds B·s purse and gives it to B. B promises to give A Rs.

50. This is a contract. ± Exception 3 (Promise to pay time-barred debts)

A owes B Rs. 1000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500 on accountof the debt. This is a contract.

Void Agreement (2)



Void Agreement (3)

Agreement in restraint of marriage ± Every agreement in restraint of the marriage of any

person, other than a minor is void.

± It is the policy of law to discourage agreements, which restrain freedom of marriage.

± Where a party is restrained from marrying at all, or for marrying for a fixed period or from marrying aparticular person, or class of persons, the agreementis void



Void Agreement (4)

Agreement in restraint of trade ± Every agreement, by which one is restrained from

exercising a lawful profession, trade or business of

any kind, is to that extent void

Agreement in restraint of legal proceedings ± Every agreement by which any party thereto is

restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights is void to that extent



Void Agreement (5)

Agreement for uncertainty ± Agreements the meaning of which is not certain, or

capable of being made certain, are void.

Agreement by way of wager/bet. ± Agreements by way of wager are void; and no suit

shall be brought for recovering anything alleged tobe won on wager, or entrusted to any person to bide

by the result of any game or other uncertain eventon which any wager is made. (Wager means betting or gambling). However certain prizes for horseracing are exempted



Void Agreement (6)

Agreement not by free consent

± When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement

is a contract voidable at the option of the party whose consent was so caused



Not expressly declared void

Not declared void by any law of the country


Agreement

Free

Consent

Competen

t

Lawful

Considerati

on

Lawful

Object

Declared

Void



Legal object

Should not be violative of the provisions of law in any

manner


AgreementFree

Consent

Competen

t

Lawful

Considerati

on

Lawful

Object

Declared

Void



Lawful consideration

± Not forbidden by law

± Should not defeat any provisions of law

± Court should not regard as fraudulent

± Should not be opposite to public policy

Lawful Consideration



To be complied with the legal formality

Writing

Registration

Proper procedure of enforceability




Contracts which have to be in writing

Promise to pay time-barred debt

Arbitration agreement

Lease agreement for more than three years

Contracts of insurance Negotiable instruments

Memorandum and article of association

Transfer of property




Contracts which must be registered

A promise made without consideration on account of

love (gift deed)

Documents of which registration is compulsory under theprovisions of registration act

Transfer of Property Act

Debentures, mortgages and charges under the

companies act




Are these Contracts?

Buying a newspaper

Getting into a taxi to go to your destination

Going for a movie



Contracts «

In some cases, Freedom of contract is a myth.

The standard-form contract (with printed terms and

conditions) is in vogue today, and several contracts entered into laymen are not the result of individual negotiations.

± Eg. If a person is in need of a electricity or a gas connection, it is not possible for him to settle the terms of

the agreement with the Electric board or the Gas company.



Breach of contract

The parties to a contract must either perform or offer toperform, their respective promises, unless such performance is dispensed with or excused under the provisions of the Act, or any other law.

In a contract the agreement being enforceable by law, each party to the contract is legally bound to performhis part of the obligation. Non-performance of the duty

undertaken by a party in a contract amounts to breach of contract, for which he can be made liable.



Remedies

When a party to the contract makes abreach of contract, there are two possible alternatives available to the other party. ± Firstly to bring an action for the breach of

contract(Damages)

± Secondly he may bring an action for specific performance of the contract

± Suit for Rescission(S-39)

± Suit for In junction ± Penalty by Courts(S-74)

± Suit for Quantum Meruit



CONTRACTS OF AGENCY

± Section 182 of the Contract Act says- ± ´an agent is the person employed to do any act for

another or to represent another in dealings with third persons. The person for whom such act is done or who is represented is called the ¶ · and the relationship between the agent and the principal is called the ¶

± The term ¶Agent· is to be used only for a person who represents another and who has the power to

effect contractual relationship between the person he represents (principal & third parties)



Thus;

± The duty of the agent is to enter into contractual relations on behalf of the principal, who gives this authority with his own consent BUT the AGENTdoes not become a party to the contract or does notincur or bear any kind of liability on account of

contract. ± But it is his personal liability for any kind of

unauthorized Acts.



Principles of Contracts of Agency

± ¶Qui facit per alium facit per se· meaning he who does through others does by himself i.e.The Acts of the agent ,for all legal purposes shall be considered as the act of the

Principal. ± Whatever a person is competent to do by

himself, shall also be allowed to do through an agent except in the case of contracts

involving personal services such as painting, marriage etc.



Competence Of Parties to enter into contracts

of agency

± The person employing the agent must himself have the legal capacity or be competent to do the act for which he employs the agent.

± A minor or a person of unsound mind cannotappoint an agent(S-183,184).and nor can a person with unsound mind be appointed as an agent.



Consideration Not Required

± A Contract of agency does not require any consideration.(S-185).

± It comes under the category of contracts declaredvalid by law without any consideration.



MAJOR DIFFERENCES

An agent is employedto establish contractual relationship with the third parties on behalf of the principal.. A

servant works under the direct control.

The principal has the right to direct the agentbut the agent will not be subject to control..aservant is

A person can work as an agent for several principals but a servantgenerally works for only one master

48



Agent and the Bailee

± An agent also differs from the bailee .A person is abailee as long he has the possession of the goods of the bailor, but a person may act as an agent of another person without having the possession of his goods. Moreover an agent represents the principal

in his dealings with the third parties, which is notthe case with the bailee.



KINDS OF AGENTS

± Mercantile agent-in the customary course of business has an authority to sell goods, consign goods to sale or buy goods or raise money on the security of goods on behalf of his principal.

± Factor agent-is an agent employed to sell goods or

merchandise consigned or delivered to him by or for his principal. he ahs wide powers, he can sell them in his own name, receive payment and give valid receipts of discharge.

± Broker-is an agent who has been engaged by the principal to sell or by goods on his behalf, but abroker does not deal in his own name, nor is he in the possession of goods.



KINDS OF AGENTS(Contd)

± Auctioneer- is an agent employed to sell goods at apublic auction to the highest bidder. He has the possession of goods and has the authority to receive the purchase price and can sue for it in his own name.

± Del Credere Agent-is an agent employed to sell goods and who undertakes that purchasers he procures will pay for any goods they take. In case they do notpay ,he indemnifies the principal for the loss. He gets an extra commission for bearing this extra risk.Such commission is called del credere commission.



BUT-

± A del credere agent is not liable to the buyer for any default on the part of his principal. He is also notliable for any disputes between the principal andthe buyer regarding the contract. he is also notliable for the nonperformance of the contract



CREATION OF AGENCY

± Agency may be created in any of the following

ways;- ± EXPRESSLY -(S-187)-when an agent is appointed by

words: spoken or written, his authority is said to be express. e.g.-to appoint agents by executing aformal power of attorney.

± IM PL I EDLY-(S187)- when a agency arises from the conduct of the parties or inferred from the circumstances of the case it is called implied agency.Partners, sevants etc are usually regarded as agents

by implications because of their relationship. In an implies agency the principal will not be entitled tolimit the implied authority of the agent withoutnotice to the third party.



± A of patna has a shop in calcutta. B, the manager of the shop, has been ordering and purchasing goods from C for the purpose of the shop. The goods purchased were regularly paid for out of the funds provided by A. B shall be considered to be an agent

of A by his conduct.



AGENCY BY NECESSITY

± under certain circumstances, a person may be compelled to actas an agent to the other, however the agent must act under pressing conditions and for the benefit of the principal, under the following conditions:

± A) the agent should not be in the position or have an opportunity to communicate with his principle within the

available time. ± B)there should have been actual and definite commercial

necessity.

± C) the agent should act bonafide in the interest of the principal by adopting the most reasonable and practicable course.

± D)the agent must be in the possession of the goods of the principal which are subject to contract.



± The master of the ship on finding that the cargo is rapidly perishing is entitled to dispose it off at the best price available so as to bind the consignor as an agent by necessity.



AGENCY BY ESTOPPEL(S-237)

± When an agent has, without authority done acts or incurred obligations to third person on behalf of his principal, the principal is bound by such acts andobligations if he has by his words or conductinduced such third person to believe that such acts

and obligations were within the scope of the agents authority.

± For e.g. A says to B in the presence of C that he is C·s agent and C remains mum..B supplied goods worth Rs 1000 to A taking him as Cs agent .C is responsible for the payment of the price of those goods.



Agency By Ratification(S196-200)

± Ratification means subsequent acceptance andadoption of an act by principal originally done by agent without authority.

± Ratification may be expressed or implied in the conduct of the person on whose behalf the acts are

done.

± E.g. A, without authority, buys goods for B andafterwards B sells them to C on his own account. B·s conduct implies ratification of the loan.



Extent of Agents Authority.

± Principal is responsible for the acts of the agent

done by him within the scope of his authority.

± The authority may be expressed or implied.

± The authority of an agent extends to the performance of every lawful thing necessary to do

an act for which he is appointed. when he is appointed to carry on business he can do every lawful thing necessary for the purpose or as is usually done in the course of conducting such business.

± E.g-A is employed by B residing in London to recover atBombay a debt due to B.A may adopt any legal process necessary for the purpose of recovering the debt and may give a valid discharge for the same.



Delegation of Agent¶s Authority

± The principle is- Delegatus non ²potest delegare i.e.´A delegate cannot further delegate". however under certain circumstances this can be done-

± Such person may be either sub agent or substitutedagent.

± Sub agent (S 191) is a person employed by an acting under the control of the original agent in the business of the agency in case it is permissible by the custom of the trade, it becomes necessary to do

so, the act is purely ministerial and involves nodiscretion, the principal agrees for so, in case of emergency.



± Substituted agent ² where an agent holding an express or implied authority to name another person to act in the business of the agency has accordingly named another person ,such person is not the sub agent but the substituted agent.(S 194)

± E.g. A directs B his solicitor to sell his estate by auction and to employ an auctioneer for this purpose names C as an auctioneer to conduct sale .C is not the sub agent but the substituted agent.



Personal Liability Of Agent

± As a general rule, neither an agent can personally

enforce contracts entered into by him on behalf of the principal nor can be personally held liable for them unless the contract provides otherwise. Exceptfor certain exceptional cases. They are-:

± Foreign principal i.e. if the principal resides abroadon the presumption that the credit is given exclusively to the agent.

± Undisclosed principal i.e. when the agent does notdisclose the name of the principal.

± If the principal is a sovereign ambassador or expressly disqualified from contracting.

± When the agent expressly by an agreement or conduct undertakes the personal liability of the

contract.



± Agent signs the contract in his own name. ± In case there is some special I interest of the agent.

± If an agent beyond his authority commits a breach of warranty.

± Misrepresentation or fraud done by the agent. ± In case of a non existent principal.

± In case where the agent is personally liable a person dealing with him hold either him or his principal or both of them liable(S-233)



Rights Of An Agent

± Right to claim reimbursement of expenses((-217). ± Right to receive remuneration.

± Right of indemnification against consequences of all lawful acts.(S-222).

± Right of indemnification of all the acts done in goodfaith.(S-223)

± Right of indemnification for in juries caused by the principal·s neglect.(S-225)

± Right to a Particular lien.(S-221)



Duties Of An Agent

± To follow the instructions of the principal(S-211) ± Duty to act with skill and diligence(S-212)

± Duty to render accounts(S-213).

± Duty to communicate with the principal(S-214).

± Duty not to deal on his own account.(S-215,216) ± Duty not to delegate his authority

± Duty to protect the interest of the principal or his legal representative in the event of principal·s unsoundness of mind or his death.(S-209)

± Duty to pay sums received for the principal.(218)



Termination Of Agency

± An agency may be terminated by any of the following ways-

± By the Act of the parties.(agreement, revocation andrenunciation of business)

± By operation of law.(completion of business, efflux of time, death or insanity of principal, insolvency of the principal, destruction of the subject matter of agency, principal becoming an alien enemy)



CONTRACTS OF GUARANTEE

± A Contract of Guarantee is a contract to performthe promise of discharge the liability of a thirdperson in case of default. The person who gives the guarantee is called the surety and the person for whom this guarantee is given is called the principal

debtor and the person to whom the guarantee is given is called the Creditor.(S-126)

± Contracts of guarantee are usually entered into for the following purpose;



Contracts of guarantee are usually entered into for the

following purpose; A)to secure the performance of something which may

be immediately related to mercantile agreement.

B) to secure the honesty of someone who is to be

appointed to some office. C)To secure someone from in jury.

A contract of guarantee must satisfy all the conditions of a valid contract but something done or any promise made for the benefit of the principal debtor is supposed to be the sufficient consideration for the surety to give the guarantee.



INVALID GUARANTEE

± Though a contract of guarantee is not a contract of utmost good faith and can be avoided by mere disclosure of any material contract ,except;

± 1)guarantee by misrepresentation.(S-142)

± 2) guarantee by concealment.(S-143)

± 3) when the co surety does not join.(S-144)



KINDS OF GUARANTEE

± Contracts of guarantee can be-

± 1) Specific ± 2)continuing

± Specific guarantee means guarantee given for aspecific transaction.

e.g. guarantee for time specific loan.Continuing guarantee is that which extends to a sreies

of transactions.

e.g. A in consideration that B will employ C in collecting the rents of B·s zamindari to be responsible to the amount of Rs 5000 for the due collection and payment by C of those rents is acontinuing guarantee.



Revocation Of Continuing Guarantee

± By Notice ± By Death of the surety.



LI ABILITY OF THE SURETY

± Where the parties do not specifically agree as to the extent of the liability or the surety does not put upany limit on his liability at the time of entering intothe contract the liability of the surety will be co-extensive with that of the principal debtor i.e.

whatever amount of money a creditor can legally realize from the principal debtor including the interest cost of litigation, damages etc , the same he can recover from the surety as well.

RIGHTS OF THE SURETY



RIGHTS OF THE SURETY

± AGAINST THE DEBTOR

± Rights to be subrogated. ± Rights to claim indemnity

± AGAINST THE CREDITOR

± AGAINST CO SURETIES

± Co-sureties are equally liable.

DISCHARGE OF SURETIES



DISCHARGE OF SURETIES

± BY NOTICE OR DEATH. ± VARIATIONS IN TERMS OF THE ORIGINAL

CONTRACT BETWEEN THE PRINCIPAL DEBTORAND THE CREDITOR.

KINDS OF GUARANTEE



KINDS OF GUARANTEE

KINDS OF GUARANTEE



KINDS OF GUARANTEE



KINDS OF GUARANTEE

KINDS OF GUARANTEE



KINDS OF GUARANTEE