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MEANING &
ESSENTIALS OF A VALID CONTRACT
By:
Naveen Singhvi,
Deputy Director of Audit
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CONTRACT : AN OVERVIEW
o Function of Contracts:
o Fundamental to business,
o Creates rights and duties between parties,
o Provides stability and predictability.
o Parties are Promisor (makes the promise) andPromisee (accepts the promise).
o Good faith in commercial agreements.
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CONTRACT : DEFINITION
o Agreement that can be enforced in a
court of law,
o Formed by two or more parties,
o Failure to perform results in breach and
damages,
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CONTRACT : CLASSIFICATION
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CONTRACT : CLASSIFICATION
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VALID CONTRACT : ESSENTIALS
o Offer and Acceptance,
o Contractual capacity,
o Free Consent,
o Consideration,
o Legal Purpose,
o Agreement in Written.
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OFFER AND ACCEPTANCE
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OFFER AND ACCEPTANCE
o First essential of a valid contract is
agreement,
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ACCEPTANCEOFFER
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OFFER : AN OVERVIEW
o When a person makes an offer/
proposal, he signifies to another his
willingness to do or to abstain from
doing something,
o Offer must be given with an intention to
create a legal relationship,
o There is a clear cut difference between
offer and invitation to make an offer,
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OFFER : AN OVERVIEW
o Expression of Opinion, Preliminary
Negotiations etc are not offers,
o Offer must be definite,
o Offer must be communicated,
o Mere statement of price of a piece is
not an offer,
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ACCEPTANCE : AN OVERVIEW
o When a person made a proposal to
another and the proposal is assented
there to, it is called acceptance,
o Voluntary act by the Offeree that shows
assent to terms of original offer,
o Mirror Image Rule:
o Offeree must unequivocally accept
offer,
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ACCEPTANCE : AN OVERVIEW
o Additional terms may be considered a
counteroffer,
o Acceptance must be given as per the
mode prescribed by the offerer,
o Acceptance must be given before the
lapse of time or within reasonable time,
o Acceptance may be given by any
person in case of general offer.
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ACCEPTANCE : AN OVERVIEW
o Acceptance must be communicated,
o Mental acceptance is no acceptance
or acceptance must not be derived
from silence,
o Acceptance must not be precedent to
offer.
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CONTRACTUAL CAPACITY
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CONTRACTUAL CAPACITY : AN OVERVIEW
o The condition for a person to enter
into contract :
o He/She must be major,
o He/She must be of sound mind,
o He/She must not be disqualified by any
other law.
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FREE CONSENT
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FREE CONSENT : AN OVERVIEW
o Two or more persons are in consent
when they agree upon the same thing in
the same sense,
o Consent is free when it is not caused by:
o Coercion,
o Undue influence,
o Fraud,
o Misrepresentation,
o Mistake.
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FREE CONSENT : AN OVERVIEW
o A has two cars, one blue and other red. Hewants to sell his blue car. B who knows ofonly As red car, offer to purchase As carfor 20000 Dollars. A accept the offerthinking that it is for his blue car. This isno consent because both the parties arenot understanding the same things in thesame sense.
o If B goes to A and on the point of pistolasks A to sell his red car for sum of 20000Dollors to him, there is consent becauseboth are understanding that red car is thesubject matter of the consent, but theconsent is not free because it has beenobtained by Coercion.
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NO FREE CONSENT : COERCION
o Committing or threaten to commit any
act forbidden by law of the land or
unlawful detaining or threating to
detaining any other persons property with
a view to enter into an agreement,
o The threat amounting to coercion need
not necessarily be from a party to
contract , it may also proceed from a
stranger to the contract.
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NO FREE CONSENT : UNDUE INFLUENCE
o A contract is said to be induced by
undue influence where:
o 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,
o uses that position to obtain an unfair
advantage over the other.
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NO FREE CONSENT : UNDUE INFLUENCE
o The person deemed to be in position to
dominate the will of the other:
o Where he holds a real or apparent
authority over the other like master
and Servant, child and parents, etc,
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NO FREE CONSENT : UNDUE INFLUENCE
o Where he stand in a fiduciary
relationship (Mutual trust and
confidence) like religious guru and
follower, lawyer and clients, etc,
o Where he makes a contract with a
person whose mental capacity is
temporarily or permanently affected
by reason of age, illness or mental or
body distress.
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NO FREE CONSENT : FRAUD
o It means and includes any of those actscommitted by a party to contract,
o or with his connivance.
o or by his agent,
o With an intent to deceive or induce aperson to enter a contract:
o The suggestion that a fact is true whenit is not true and the person making itdoes not believe in it to be true,
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NO FREE CONSENT : FRAUD
o The active concealment of a fact by aperson having knowledge or belief ofthe fact,
o A promise made without any intentionof performing it,
o Any other act fitted to deceive,
o Any such act or omission as the lawspecially declares to be fraudulent.
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FRAUD : ESSENTIALS
o There must be a representation orassertion and it must be false,
o The representation must relate to a fact,
o The representation must have beenmade with the intention of inducing theother party to act upon it,
o The representation must have beenmade with a knowledge of its falsity,
o The other party must havesubsequently suffered some loss.
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NO FREE CONSENT : MISREPRESENTATION
o There is misrepresentation:
o When a person positively asserts a factis true when his information does notwarrant it to be so, though he believes itto be true,
o When a party causes howeverinnocently the other party to theagreement to make a mistake as to thesubstance of the thing which is thesubject of the agreement.
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DIFFERENCE IN FRAUD & MISREPRESENTATION
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Nature Fraud Misrepresentation
Intention to
DeceiveExists Doesnt Exist
Consequence
Damage can be
available to the
affected party for the
loss suffered
No such damage are
available
Defense
The guilty party does
not have any defense
in its favor
The guilty party have
defense in its favor
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M was a marriage broker who gave Y thephotograph of a man and told him that theman was young and rich. Y conveyed thesame to his daughter who agreed for theproposal. But on the day of marriage it wasdiscovered that the man was of the age of60.
There is fraud between M and Y, whereas theis misrepresentation between Y and hisdaughter.
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DIFFERENCE IN FRAUD & MISREPRESENTATION
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NO FREE CONSENT : MISTAKE
o It means an error in understanding thefact relevant for formation of a contract,
o Where both the parties to an agreementare under a mistake as to a matter offact essential to the agreement, theagreement is void,
o Ex: A agrees to buy from B a certainhorse. It turns out that the horse wasdead at the time of the bargain, thoughneither party was aware of the fact. Theagreement is void.
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CONSIDERATION
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CONSIDERATION : OVERVIEW
o When at the desire of the promisor,
o promisee or any other person has done
or abstained from doing or does or
abstains from doing or promises to do or
to abstain from doing something,
o such an act or abstinence or promise is
called a consideration for the promise,
o Consideration is value given in return for a
promise,
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CONSIDERATION : OVERVIEW
o That is bargained-for-exchange between
the parties,
o Consideration need not be adequate
/sufficient,
o Consideration must be real and not illusory,
o It must not be illegal, immoral or opposed
to public policy.
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LEGAL PURPOSE
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LEGAL PURPOSE : OVERVIEW
o If the object of an agreement is the
performance of an unlawful act, the
agreement is unenforceable.
o A contract would be valid only if the
object and the consideration are legal.
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UNLAWFUL AGREEMENTS
o An agreement forbidden by law,
o An agreement defecting any provisionsof law,
o An agreement opposed to publicpolicy,
o An immoral agreement,
o A fraudulent agreement,
o An agreement creating damage toperson or property,
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OPEN HOUSE
DOUBTS/QUESTIONS/COMMENTS
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