Commercial Contracts

DefinitionInsurance Contract between 2 parties

Insurance ContractContract between 2 parties whereby one party called insurer undertakes in exchange for a fixed sum called premium to pay the other party called insured, a fixed amount of money on the happening of a certain eventSection 10 of Indian Contract Act 1872- All agreements are contracts if they are made by free consent of the parties, competent to the contract, for a lawful consideration and with a lawful object and which are not hereby declared to be void.

Insurance ContractThe Insurance contract involvesElements of a general contractElements of Special contract relating to insurance

Elements of a General ContractAgreement (Offer and Acceptance)Offer can be made by both sides, mainly from insuredAcceptance by both parties is necessaryIn insurance, publication of prospectus, canvassing of the agents, advertisements are all invitations to offerContracts can be oral or they can be written

Oral Contracts

Avoid oral handshake contractsOral contracts can be binding but terms are difficult to proveCommon in small businessesExcuses for Oral Contracts: (i) too busy; (ii) trust the other party; (iii) too complicated; (iv) other party will not agree to written contractOral contracts may be unenforceable, particularly where the contract concerns (i) sale of land, (ii) divorce agreements, and (iii) long term exchanges of services/goods

Written ContractsInterests of a business can be protected by written contractsWritten contracts can reduce/eliminate confusion as to terms with vendors, clients, partners, employees and investorsBusiness contracts should be complete, clear and cover all the interests

ConsiderationIt is anything of value in the common sense, promised to another when making a contract. It can take the form of money, physical objects, services, promised actions, or even abstinence from a future action. In common law consideration it is a prerequisite that both parties offer some consideration before a contract can be thought of as binding. The court is more concerned about the presence of consideration rather than the adequacy of the consideration

In case of Life Insurance, the first premium must be paid before the contract will take effect, and thats why only the first premium constitutes the considerationThe premiums subsequent to the first are not part of legal consideration but are conditions precedent to the continuance of the contractFPR is the proof of commencement of risk, they the FPR is issued, the risk commences.Freelook period

ExamplesA signs a contract to buy a car from B for $5,000, A's consideration is the $5,000, and B's consideration is the car.Additionally, if A signs a contract with B such that A will paint B's house for $500, A's consideration is the service of painting B's house, and B's consideration is $500 paid to A.In case of Insurance Contract, premium is the consideration for the insured, and sum assured, for the insurer.

Lawful ObjectObject of an agreement is lawful, unless -It is forbidden by law;Or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; of involves or implies, injury to the person or property of another; or theCourt regards it as immoral, or opposed to public policy.In each of these cases, object of an agreement is said to be unlawful. Every agreement of which the object is unlawful is void.

Lawful ObjectThe relationship between policy holder and subject matter should be legalThe contracts involving wagering i.e. betting are composed of speculative risk which is opposed to the concept of insurable riskThe insured must be in a relationship with the subject matter whereby he is benefited from its safety and well-being and would be prejudiced by its loss or damage

ExamplesA promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful. A promises to obtain for B an employment in the public service, and B promises to pay 1, 000 rupees to A. The agreement is void, as the consideration for it is unlawful.

Legal Capacity to ContractCompetency of PartiesThe essential element of a valid contract is that parties to, must be legally competent to contract. Every person is competent to contract:Who is the age of majority according to lawWho is of sound mindWho is not disqualified from contracting by any law

Competency of PartiesMinor:A minor is not competent to contractIn case of life insurance, risk on the life of the insured child only begins when child attains a specified age. This specified age when risk commences is called date of commencement of riskDeferment periodThe time gap between date of commencement of policy and date of commencement of riskExample: If a child is of 6 years, and risk commences at age 15 years, deferment period is = 9 yearsb) There is not insurance cover during deferment period. If child dies during this period, all premiums are returned..

Competency of Partiesd) Deferred Date: The date on which risk will commence at the end of deferment period is the deferred date. Example: Child age is 6 years on 1.1.2009 Date of commencement of risk=15 years Therefore deferred date is 1.1.2018The risk automatically commences on the deferred date without any medical examination.e) Vesting: A) These policies have conditions where title automatically passes on to the insured child on his attaining the age majority. This process is called Vesting. B) The policy anniversary after attaining the age of majority (i.e. 18) or any later date as may be chosen is called the vesting age. The vesting age cannot be earlier than 18.C) After vesting, the policy becomes a contract between the insurer and the insured person (Child)

Competency of PartiesPerson of Unsound Mind (Mentally Incompetent):a) A person of unsound mind is not competent to enter into a contract.E.g. Lunaticb) If a person at the time if entering into contract is capable of understanding it and of forming a rational judgement as to its effect upon his interests is a person of sound mind.c) A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is sound mind. A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind.d) When an originally valid contract has been entered into, it will not be affected by one of the parties becoming lunatic afterwards.

Competency of PartiesPersons Disqualified By Lawa) A person who is disqualified by law cannot enter into contract. E,g Criminal, Insolvent, Alien Enemy.

Free ConsentConsent: Two or more person are said to consent when they agree upon the same thing in the same senseConsent is said to be free when it not caused by coercion or undue influence or fraud or misrepresentation or mistake.Elements Vitiating free ConsentCoercion: "Coercion" is the committing, or threating to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, and property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.Undue 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

Free ConsentFraud: "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract;the suggestion as a fact, which is not truethe active concealment of a fact a promise made without any intention of performing it;any other act fitted to deceive;any such act or omission as the law specially declares to be fraudulent.

Free Consent"Misrepresentation" means and includes -It means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation.

Consensus ad idemmeeting of the minds n. when two parties to an agreement (contract) both have the same understanding of the terms of the agreement. Such mutual comprehension is essential to a valid contract. It is provable by the express provisions of a written contract, without reference to any statements or hidden thoughts outside the writing. There would not be a meeting of the minds if Bill Buyer said, "I'll buy all your stock," and he meant shares in a corporation, and Sam Seller said, "I'll sell all my stock to you," and meant his cattle.

Void and VoidableThe term void and voidable are used interchangeablyA contract that is void is not contract at all but simply an agreement without legal effectA void contract cannot be forced by either partyA voidable contract, is an agreement that, for a reason satisfactory to the court may be set aside by one of the parties. It is binding unless a party with a right to void it decides to do so. E.g. if the insured fails to comply with the condition of the agreement, the company may elect to fulfill its part of the contract or may elect to void it and revoke coverage.