indian contract act

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Amity School of Business

Amity School of BusinessBBA, III SEMESTER

Business Law

Maninder Jeet and Nidhi Gupta

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MODULE- II

INDIAN CONTRACT ACT, 1872

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Amity School of BusinessIndian Contract Act, 1872

• The Indian Contract Act extends to the whole of India (except the State of Jammu and Kashmir) and it came into force on the first day of September 1872

• The law of contract is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding on them.

• The Act deals with:

1. The general principles of the law of contract

2. Some special contracts.

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Amity School of BusinessWHAT IS A CONTRACT?

Section 2(h)-An agreement enforceable by law is a contract.

Thus for the formation of a contract there must be

• an agreement

• the agreement should be enforceable by law

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The definition of Contract u/s2(h) emphasis

• an agreement enforceable by law

• Consensus-ad-idem Exceptions

• Rights & duties social & domestic

Agreements

Contract = Agreement + Enforceability at Law

“All contracts are agreements but all agreements are not contracts”

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ESSENTIAL ELEMENTS OF A VALID CONRACT

1. Offer and its acceptance 2. Free consent of both parties 3. Mutual and lawful consideration for agreement 4. It should be enforceable by law- intention

should be to create legal relationship. 5. Parties should be competent to contract 6. Object should be lawful 7. Certainty and possibility of performance 8. Contract should not have been declared as

void under Contract Act or any other law

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Amity School of BusinessCLASSIFICATION OF CONTRACT

Contracts may be classified according to theirI. Validity.II. Formation.III. Performance.

I. According to validity: a. Valid.b. Void.c. Voidable.d. Illegal & unenforceable.

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Amity School of BusinessContd-

II. According to formation:a. Express contract.b. Implied contract.III. According to performance:a. Executed contract.b. Executory contract.c. Unilateral contract.d. Bilateral contract

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Amity School of Business1.Offer or Proposal and Acceptance

• Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. An offer is an indication by one person ("offerer") to another ("offeree") of the offerer's willingness to contract on certain terms without further negotiations. A contract is then formed if there is express or implied agreement. A contract is said to come into existence when acceptance of an offer has been communicated to the offerer by the offeree.

• For the formation of a contract the process of proposal or offer by one party and the acceptance thereof by the other is necessary. This generally involves the process of negotiation where the parties apply their minds make offer and acceptance and create a contract.

• 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 or offer.

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Amity School of BusinessRules of Offer

• Offer must create legal relationship.• Offer must be definite & certain.• Offer must be communicated.• Offer must be made with a view to

obtaining the assent.• Offer should not contain a term the non-

compliance of which may be assumed to amount to acceptance.

• A statement of price is not an offer.

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Amity School of BusinessAcceptance

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

Rules of acceptance• It must be absolute and unqualified.• The acceptance must be communicated. Carlill v.

Carbolic Smoke Ball Co • An offer can only be accepted by the offeree, that is, the

person to whom the offer is made. • An offeree is not bound if another person accepts the

offer on his behalf without his authorization.• It must be according to the mode prescribed and must

be given within a reasonable time.• Silence cannot be construed as acceptance. Felthouse

v. Bindley

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Amity School of BusinessRevocation or Lapse of offer

• By communication of notice

• By lapse of time

• By non-fulfillment of a condition

• By death or insanity of the offeror

• If offer is not accepted in usual manner

• Counter offer is made

• If law is changed

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Amity School of BusinessWHO CAN ENTER INTO A CONTRACT?

A person who is of the age of majority according to the law to which he is subject is of sound mind ? A person is said to be of sound mind for the purpose of

making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests.

is not disqualified from contracting by any law to which he is subject is competent to contract.

Therefore a minor is not competent to contract and an agreement by a minor is void ab initio. He can not ratify an agreement on attaining the age of majority and validate the same. (Void ab initio means it has at no time had any legal validity).

The following persons are therefore incompetent to contract• Minors• Persons of unsound mind• Persons disqualified by law to which they are subject

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Amity School of BusinessMinors and Contractual Capacity

• An agreement with or by a minor is void• Can be a promissee or a beneficiary• NO ratification of agreement on the age of majority• There can be no claim for compensation from a minor• Minor can always plead minority• Liability - for necessities, the item contracted for must

be necessary for minor’s existence, the value must be up to that of the current standard of living or financial/social status (not excessive in value),

-for tort or a civil wrong.• Can act as a agent• Cannot be a partner in a firm or adjudged insolvent

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Amity School of BusinessOthers and Contractual Capacity

• Insanity, mental illness, or mental/medical condition • Drunkenness/drug abuse • Bankruptcy • Enemy aliens and/or terrorists • Convict• Foreign sovereigns & accredited representatives of a foreign state• Business entitiesCorporations

– The extent of an artificial person's capacity depends on the law of the place of incorporation and the enabling provisions included in the constitutive documents of incorporation. The general rule is that anything not included in the corporation's capacity is unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected.

Insolvency – When a business entity becomes insolvent, an administrator, receiver, or other similar legal

functionary may be appointed to determine whether the entity shall continue to trade or be sold so that the creditors may receive all or a proportion of the money owing to them. During this time, the capacity of the entity is limited so that its liabilities are not increased unreasonably and to the detriment of the existing creditors.

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Amity School of BusinessConsideration

• Consideration is a central concept in the Indian contract act:

It is value paid for a promise or the inducement, price or motive that causes a party to enter into an agreement or contract. Consideration is needed for a valid contract.

An example; If you sign a contract with a man, agreeing to buy his car for an amount of money, his consideration is the car, which he promises to give to you. Your consideration is the money that you pay for the car. However, a contract saying that he would give you his car for nothing would not be valid per se, because you aren't giving him any consideration.

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Amity School of BusinessLegal Rules for Consideration

1. Moved at the desire of the promisor2. It may be moved from promisee or any other person3. It may be an act ,abstinence or forbearance or a return promise4. It may be past , present or future 5. It need not be adequate6. It must be real and not illusory7. It must be something which the promisor is not already bound to do8. It must not be illegal ,immoral or opposed to public policy

STRANGER TO CONTRACT CANNOT SUE -DOCTRINE OF PRIVITY OF CONTRACT

Only parties to contracts should be able to sue to enforce their rights or claim

damages as such. However the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.

Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.

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Amity School of BusinessCommon law exceptions

There are exceptions to DOCTRINE OF PRIVITY OF CONTRACT These are:1. Collateral Contracts (between the third party and one of the contracting parties) 2. Trusts (the beneficiary of a trust may sue the trustee to carry out the contract) 3. Land Law (restrictive covenants on land are imposed upon subsequent purchasers

if the covenant benefits neighboring land) 4. Agency and the assignment of contractual rights are permitted. 5. Marriage settlement ,partition ,family arrangements.There are exceptions to -A CONTRACT IS VOID WITHOUT

CONSIDERATION1. Love and affection2. Compensation for voluntary services3. Payment for time barred debt4. Completed gift5. Charitable subscription

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Amity School of BusinessFREE CONSENT IN INDIAN CONTRACT

ACT

• “Consent” defined. U/S13. Two or more persons are said to consent when

they agree upon the same thing in the same sense.• “Free consent” defined. U/S14. Consent is said to be free when it is not caused

by—(1) coercion, as defined in section 15, or(2) undue influence, as defined in section 16, or(3) fraud, as defined in section 17, or(4) misrepresentation, as defined in section 18, or(5) mistake, subject to the provisions of sections 20, 21 and

22.

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Amity School of BusinessFREE CONSENT OF PARTIES

Consent is said to be free if it is not caused by-

• Coercion ? Consent is said to be caused by coercion when it is obtained by pressure exerted by either committing or threatening to commit an act forbidden by the Indian Penal Code or unlawfully detaining or threatening to detain any property.

• Undue influence ? A contract is said to be induced by "undue influence" where the relation 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.

• Fraud ? Means and includes the following acts done with the intention to deceive or to induce a person to enter into a contract. (a) the suggestion that a fact is true when it is not true and the person making the suggestion does not believe it to be true (b) active concealment of a fact by a person who has knowledge or belief of the fact, (c) promise made without the intention of performing it.

• Misrepresentation ? When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true, it is misrepresentation. A breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice is also a misrepresentation.

• Mistake ? Where both parties to an agreement are under a mistake as to a matter of fact and law, essential to the agreement, the agreement is void. An erroneous opinion as the value of the thing, which forms the subject matter of the agreement, is not deemed as mistake as to a matter of fact. Unilateral mistake, i.e. the mistake in the mind of only one party does not affect the validity of the contract

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Amity School of BusinessLAWFUL OBJECT

Object or consideration is unlawful if (1) It is forbidden by law, (2) Is of such a nature if permitted it would defeat the provisions of any law,(3) It is fraudulent,(4) The court regards it immoral,(5) The court regards it opposed to public policy.

Every agreement of which the consideration or object is unlawful is void.

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Amity School of BusinessVoid agreements

Void agreements - An agreement not enforceable by law is said to be void. [section 2(g)]. - - Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all.

Following are void agreements –. Agreement by incompetent party (section 11) • Both parties under mistake of fact (section 20) • Unlawful object or consideration (section 24)• Agreement without consideration (section 25) • Agreement in restraint of marriage (section 26) • Agreement in restraint of trade (section 27) • Agreement in restraint of legal proceedings (section 28) • Uncertain agreement (section 29) • Wagering agreement (section 30) • Agreement to do an impossible Act (section 56).

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Amity School of BusinessPerformance of contract

Obligation of parties to contracts. U/S 37 The parties to a contract must either perform, or offer to perform, their

respective promises, unless such performance is dispensed with or ex cused under the provisions of this Act, or of any other law.

Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.

Tender of performance. Where a promisor has made an offer of performance to the promisee, and

the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.

Effect of refusal of party to perform promise wholly. When a party to a contract has refused to perform, or disabled himself from

performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct.

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• Person by whom promises is to be performed

If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contain in it should be performed by the promisor himself, such promise must be performed by the promisor.In other cases, the promisor or his representative may employ a competent person to perform it.

• Effect of accepting performance from this person

When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.

• Devolution of joint liabilities Sec. 42-44

When two or more person have made a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor the representatives of all jointly, must fulfill the promise.

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Amity School of BusinessDischarge of contract

• BY PERFORMANCE

• BY MUTUAL CONSENT

• LAPSE OF TIME

• OPERATION OF LAW

• IMPOSSIBILITY OF PERFORMANCE

• BREACH OF CONTRACT

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Amity School of BusinessBREACH OF CONTRACT

• The parties to a contract must either perform or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of the Act, or any other law.Promises bind the representatives of the promisor in the case of death of such promisor before performance, unless a contrary intention appears from a contract.

• In a contract the agreement being enforceable by law, each party to the contract is legally bound to perform his 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.

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Amity School of BusinessREMEDIES

When a party to the contract makes a breach of contract, there are five possible alternatives available to the other party.

• Rescind the contract• Sue for damages• Specific performance• Quantum meruit• Injunction

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DAMAGES: Types of damages/compensation are-Ordinary- includes direct loss incurred by the party.Special- Damages under special circumstances or indirect lossExemplary- Are a kind of punishment as in case of cheque dishonour Nominal- Very small in amount given only to recognise the right of party.

SPECIFIC PERFORMANCESpecific performance means actual execution of the contract as agreed

between the parties. • When there exists no standard for ascertaining the actual damage

caused by the non-performance of the act agreed to be done; or • When the act agreed to be done is such that compensation in money

for its non-performance would not afford adequate relief.

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Quantum meruit’ means ‘as much as earned’. A contract may come to end by * breach of contract * contract becoming void or * Voidable contract avoided by party. In such case, if a party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. - - The principle is that even when contract comes to a premature end, the party should get amount proportional to the work done/services provided/goods supplied by one party. One party should not get enriched at the cost of other

Injunction: where a party is in breach of a negative term of a contract (i.e. where he is doing something which he promised not to do), the court may by issuing an order, restrain him from doing what he promised not to do. Such an order of the court is known as Injunction.