FinlTypes of Contracts

8/3/2019 FinlTypes of Contracts

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Contracts:

meaning

Contracts:

meaning

A Contract is the result of Promise to do a certain

things in exchange for a promise from another person.

Contract law assures that the promise so made is

legally enforced ,if any one of the parties fails to abide

by the contract.


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The Essentialelements of validThe Essentialelements of valid

contractcontract Freeconsent

Offerand Acceptance

Capacity

Consideration

Lawful object


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Offerand AcceptanceOfferand Acceptance

Offer

Proposal is defined under section 2(a) ofthe Indian contract Act,

1872 as "when one person signifies to another his willingness to do

or to abstain from doing anything with a view to obtain the assent

ofthat other to such act or abstinence

Acceptance

Accordingto Section2(b),"Whenthepersonto whomtheproposal

ismadesignifieshisassentthereto,theproposalissaidto be

accepted."


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Lawful ConsiderationLawful Consideration

According to Section 2(d), Consideration is defined as: "When atthe desire of the promisor, the promisee has done or abstained fromdoing, or does or abstains from doing, or promises to do or abstainsomething, such an act or abstinence or promise is calledconsideration for the promise.

Competent to Contract

Section11 of The Indian Contract Actspecifiesthateverypersoniscompetentto contractprovided:

1. Heshouldnotbeaminori.e.anindividualwho hasnotattainedthe

age ofmajorityi.e.18years.2. Heshouldbe ofsoundmindwhilemakingacontract.A personwith

unsoundmindcannotmakeacontract.

3. Heisnotapersonwho hasbeenpersonallydisqualifiedbylaw.


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Capacity of parties

One of the essential of a valid contract, mentioned insection 10 is that the parties to the contract should be

competent to make the contract , according to section 11

Every person is competent to contract who is of the age of

majority according to the law he is subject, and who is ofsound mind ,and is not disqualified from contracting by

any law to which he is subject


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Types ofcontractsTypes ofcontracts

enforceability

void

Voidable

Illegal

valid

formation

Express

implied

Quasi

performance

Executed

Executory

Obligationtoperform

Unilateral

bilateral


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Onbasis ofenforceability:Onbasis ofenforceability:

y Void : As per Sec2(g) of the Act An agreement not enforceable bylaw is said to be void. An agreement to carry out an illegal act is anexample of a void contract or void agreement.

y Voidable: As per Sec 2(i) of the Act An agreement which isenforceable by law at the option of one or more of the parties-

thereto, but not at the option of the other or others, is a voidablecontract.(Eg - fraud, misrepresentation.. etc.)

y Valid: A contract that fulfills all the requirements prescribed bySection 10 of the Act is a valid agreement. In other words, where anoffer is made & is accepted in return by competent parties with free

consent for a lawful consideration in furtherance of a lawful object.y Illegal: A contract whose formation, object, or performance is so

iniquitous, against the law of the land, or contrary to public policy,that no court will entertain or enforce it. Technically, it is a 'nocontract.'


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Onthebasis of formationOnthebasis of formation

y Quasi: AQuasi contract is based on the principal of

equity(fairness, moral justice, ethics)which means no person

should be allowed to enrich himself at the expense of another.

Responsibility of finder of goods: A person who finds goods

belonging to other is supposed to return it.y Express:A contract in which all elements of a contract are

specifically stated (offer, acceptance, consideration), and the

terms are stated clearly.

y Implied: A contract in which the existence of the contract is

assumed by the circumstances of the case & things spoken orwritten , or the ordinary course of dealing.


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On the basis of performanceOn the basis of performance

y Executory:Contract under execution, or where one ormore parties have not yet performed their duties asstipulated in the contract document. An on going leaseagreement is an executory contract.

y

Executed: A contract performed fully as stipulated in thecontract document

On the basis of obligation to performy

Unilateral: Type of contract in which only one ofthe contracting parties is under an enforceable obligation.

y Bilateral:Reciprocal arrangement between two parties underwhich both parties promise to perform an act in exchange forthe other party's act. Each is an obligor on its own promise,and an oblige on the other party's promise.


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DISCHARGE ofcontractsDISCHARGE ofcontracts

y Discharge of contract means termination ofcontractual relations between parties. Acontract is said to be discharged when itceases to operate i.e. when rights and

obligations created by it come to an end.y A contract may be discharged by:

-By performance

-By agreement or consent

- By lapse of time-By operation of law

-By breach of contract


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By performance

As you might expect, once the parties have done what they promised

to do then the contract is discharged

The parties no longer have any obligations left

Performance is the most common way that a contract is dischargedPerformance should be complete, precise and according to the terms

of the agreement


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By agreement or consentA contract is an agreement; Therefore, the parties can make anew agreement to end the contract

The contract itself may contain a clause which states that the

contract will end at a certain time.

Where the contract is Executory (i.e. a promise for a promise)

then it is enough consideration if each party promises to releasethe other

Where the contract is executed (i.e. where one party has

performed all or part of their obligations) then the necessary

consideration is a new contract

Or the contract may allow the parties to end the contract on

giving notice to the other party

Eg 1 months notice in contracts of employment

If there is no clause in the contract then another contract is

needed to end the first contract


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By lapse of timeThe limitation act, 1963 lays down that a contract should be performed

within a specified period, called period of limitation. If it is not performed,

and if no action is taken by the promisee within the period of limitation. He

is deprived of his remedy at law.

By operation of lawA contract may be discharged independently of the wishes of the parties,

i.e., by operation of law. This includes discharge

a) by death (in the case of contracts for personal service).

b) By insolvency.

c) By unauthorized alteration of the terns of a written agreement.

d) By rights and liabilities becoming vested in the same person


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By breach of contract

Breach of contract means a breaking of the obligation which a

contract imposes. It occurs when a party to the contract

without lawful excuse dos not fulfill his contractual obligation

or by his own act makes it impossible that he should perform

his obligation under it.

It may be due to:

Difficulty of performance

Commercial impossibility

Failure of third party

Stricks ,lockouts ,civil disturbances


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Remedies for Breach of Contract

Where one party breaches a contract then the

other party may

Claim damages

Claim payment forquantum meruit

Raise a court action for specific performance

Raise a court action for an injunction

Raise an action for the agreed contract price

Repudiate the contract

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Damages

Damages can include compensation for financial loss,

personal injury or damage to property

However, the amount of damages paid is only to

compensate the party for loss Damages are not intended as a punishment

The party who suffers loss due to the breach of contract

must try to mitigate their loss; That is, they must take steps

to try to reduce their loss, or to stop it increasing

Eg: If the buyer refuses to accept the sellers goods, the

seller can claim damages but he must also try to sell his

good to another party and get the best price for them

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Damages

Damages arising naturally

Damages in contemplation of the parties

Nominal Damages

Damages for loss of reputation

Penalty


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Quantum meruit It means that a party should be paid as much as he has earned or

deserved

EG: A company makes a contract with an author to write a book.Payment is to be made when the book is finished.

However, the company decides not to publish the book before theauthor has finished writing it

Under quantum meruit, the author could claim payment for the

research and writing which he had done before the book was cancelled

Specific Performance Specific Performance is where the court makes the party who

is in breach of contract carry out their obligations

Usually, this is only done where damages is not a sufficient

remedy

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Injunctiony This is the opposite of specific performancey

It is where a court orders one party not to break the contracty It is often used to prevent people from breaking contracts of

personal service

Action for the Agreed Pricey

In some situations, a party may sue for payment of the priceagreed in the contract rather than for damages

y This is the case with The Sale of Goods Act 1930.

Repudiationy

Repudiation means that the party who is not in breach does nothave to perform his obligations where the other party breaches acondition of the contract

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Contracts of GuaranteeContracts of Guarantee

Section 126 deals with the contract of guarantee.

As per this section contracts of guarantee is a

contract to perform the promise, or discharge theliability of a third person in case of his default.

3 parties- surety (guarantor), principal-debtor,

and creditor.


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Types of GuaranteeTypes of Guarantee

y Specific guarantee: A

specific guarantee covers only

one transaction or objective, is

limited to a certain sum of

money and is limited as to

time. Any amount paid

towards the advance by the

borrower in his debt account

with the creditor will go to

reduce the guarantors

liability.

y Continuing guarantee:

According to sec 129 of the

Indian Contract Act, it covers

a series of transactions,

subject to the limit as

mutually agree upon,

irrespective of the payments

towards the advance and

irrespective of the fluctuations

of the balance in the debtors

account between debit and thecredit.


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IndemnityIndemnity

y A contract of indemnity is one where one party promises to save the other

from loss or injury caused by the conduct of the promisor himself or of the

third party (Section 124, The Indian Contract Act).

Key Fundamentals:

y It is a promise to compensate for or security against damage, loss or injury.

y In wider sense it includes all contracts of insurance, guarantee.

Enforcement:

y A contracts of indemnity can be enforced according to its terms.

y Claim of indemnity holder can include: damages, legal costs of adjudication,

amount paid under the terms of compromise.


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LETTER OFCREDITLETTER OFCREDIT

A standard, commercial letter of credit (LC[1]) is a

document issued mostly by a financial institution, used

primarily in trade finance, which usually provides an

irrevocable payment undertaking. The letter of credit can

also be payment for a transaction, meaning thatredeeming the letter of credit pays an exporter. The

device used by the bankers to effect payment is called

the BANKERs COMMERCIAL CREDIT or

LETTEROF CREDIT. The document under a letter of

credit are bill of exchange, invoice, transport

documents.


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FEATURESFEATURES

y

It is generally used in long-distance and internationalcommercial transactions.

y A letter of credit is a document issued by a bank to a costumer.

y It is a legal document issued by the buyers bank, requesting

that any person usually seller to advance money or goods incredit.

y It is an assurance to the seller that he will receive payment on

time and for the correct amount for any goods.

y It is not a negotiable instrument and hence cannot be

transferred or exchanged.

y The buyer or the issuing bank need not to pay money in

advance to the seller.


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FinlTypes of Contracts