02 Contract Law 2013

General Principles of 

Law La w of of Contract  Dr. R. Rajesh Babu

Introduction o

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Fundamental to all business/commercial transactions The Indian Contract Act,1872 creates an obligation between the parties and not against the whole world (right in personam). personam). The Act lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts like, Indemnity and Guarantee; Bailment and Pledge, and Agency Separate enactments: The Partnership Act; the Sale of  Goods Act; the Negotiable Instruments Act.

Introduction o

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Fundamental to all business/commercial transactions The Indian Contract Act,1872 creates an obligation between the parties and not against the whole world (right in personam). personam). The Act lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts like, Indemnity and Guarantee; Bailment and Pledge, and Agency Separate enactments: The Partnership Act; the Sale of  Goods Act; the Negotiable Instruments Act.

What is a Contract? • A contract is “ An agreement enforceable enforceable by law” • ‘Every promise and every set of promises, forming the consideration for each other is an agreement.

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• A promises B a laptop. B promises Rs. 10 and A agrees. Is this a contract or an Agree Agreement? ment?

• All contracts are agreements but all agreements are not contracts.

Conditions for enforceability  ‘All agreements are contracts, if they they are made  All by the free the free consent of consent of the parties competent  competent to to contract, for a lawful consideration and with a lawful object   , and are not hereby expressly  expressly  declared to be void. ’ (S. 10)

Contract: act: Essential elements of Contr 1. Off Offer er and Acceptance 2. Consideration 3. Capacity to enter into contract 4. Free consent of the parties and 5. Lawful object of the agreement

1. Offer and Acceptance • Carlill vs. Carbolic Smoke Ball Co (1892).

1.1 Specific and General Offer

• Specific Offer: • made to a specified person or a group of  persons - can be accepted only by the person to whom made.

• General Offer: made to the world at large. • can be accepted by anyone by complying with the terms of the offer.

• Offer may be express or implied

1.2 Offer vs. Invitation to offer • Taxi for hire. • Prospectus issued by a company. • Tenders - bid • Price-catalogues, price lists, quotations • Display of goods with a price-tag in a shop window.

• E-commerce – eg. www.shoppersstop.com

1.3 Acceptantce • Acceptance must be absolute and unqualified (counter-offer) • Acceptance must be communicated to the person making the offer (in the manner mentioned – eg – email/fax) • Would silence imply acceptance? Eg. Discount on DVD for CC holder. Duty to deny?

• Offer and acceptance can be revoked by notice, expiry of time (reasonable time)

1.3 The Postal Rule (mailbox rule) Day 1: Ramesh makes an offer to Suresh. Day 2: Ramesh decides to revoke the offer and puts a letter in the mail to Suresh. Day 3: Suresh puts a letter accepting the offer in the mail. Day 4: Suresh receives Ramesh's revocation letter.

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letter of revocation can be effective only when received, that is Day 4. However, a contract was formed on Day 3 when the letter of acceptance was posted. It is too late for Ramesh to revoke the offer.

Acceptance

is from the date of letter not when offeror opens. Acceptance is complete as soon as the letter is put into the box.

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Telephone, fax, telex, email?

2. Consideration 

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‘An agreement made without consideration is void…’ (Sec 25) Consideration means something which is of some value in the eye of law… Consideration must be mutual. Both parties must  receive something of value. Involvement of money is not required. It may be: 

the promisee has done or abstained from doing; or

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promises to do or abstain from doing;

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Including - forbearance, deteriment, loss or responsibility given, suffered or undertaken

2.1 Movement of consideration 

Consideration must move from the promisee. If consideration moves from a third party? Consideration need not be ‘adequate’:  A contract to sell horse worth Rs. 50000 for Rs. 1000?  Whether consent is freely given? – coercion, fraud, mistake!  Forbearance to sue! Sufficient consideration? BUT consideration must be ‘sufficient’, i.e. not:  performance of a public duty or a duty imposed by law  performance of a previous contractual obligation 

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Promise to pay less than amount due – no consideration.  Part payment as full discharge.

2.2 Consideration 

Not illusory: An agreement will not be enforced if the consideration is so vague as to be illusory. o

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Eg. A promises to give B his Rolls Royce car if he fetch it from garage Vijaya Minerals Pvt. Ltd v. Bikash Chandra Deb (1996): Agreement to sell manganese and iron ore – price in agreement only 16% of the current market  value. Bank of India v. Swaranakar (SC 2003) – Agreement  against revocation – VRS – once applied cannot  withdraw – ‘promise to keep an offer open needs consideration to make it binding…’

2.3 Exceptions to consideration Mutual love and affection- Any agreement, made

without consideration, is valid if it is made on account  of natural love and affection between the parties, standing in near relation to each other, provided it is expressed in writing and it is registered under the law.

Promise to compensate for something done : Any

agreement, made without consideration, is valid if it is a promise to compensate a person, who has already voluntarily done something for the person making the promise.

Promise to pay a debt, barred by Limitation law:

Any promise, made in writing and signed to pay a debt, is binding on the person signing it even though it  may be barred by the law of limitation.

2.4 Test cases 1. A, promises, for no consideration, to give to B Rs 1000. 2. A, for natural love and affection, promises to give his son, B, Rs. 1000. 3. A, finds B’s purse and give it him. B promises to give Rs. 50. 4. A owes B Rs. 1000, but the debt is barred by limitation Act. A signs a written promise to pay B Rs. 500. 5. Agreement to swim and cross Ganga for Rs. 1000.

3. Free and Genuine Consent  Two

or more people are said to consent when they agree upon the same thing in the same sense. However, if the consent is obtained through: 

Coercion

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undue influence (dominate the will of the other and obtain unfair advantage)

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fraud

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misrepresentation

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mistake Contract induced due to coercion, fraud, or misrepresentation is voidable. Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void

• Workmen of Appin Tea Estate vs. Industrial Tribunal (1966): The demand of the workers for bonus was accepted after a threat of strike. The question was, whether such a decision between the Union of the workers and the Indian Tea Association could be declared void on the ground that there was coercion? • It was held that because of the doctrine of collective bargaining under the Industrial Dispute Act the demand of the workers could be backed by a threat  of strike. Such a threat was neither a threat to commit  an offence under the IPC, nor was it unlawful detaining or threatening to detain any property and hence it did not amount to coercion, and as such the agreement was valid.

• Shri Krishan Vs. Kurushetra University 1976 SC, ShriKrishan, acandidate for the LL.B. Part I exam, who was short in attendance, did not mention that fact  in the admission form for the exam. Neither the Head of the law department nor the University authorities made proper scrutiny to discover the truth. Has he committed fraud? • It was held by the Supreme Court that there was no fraud by the candidate and the University had no power to withdraw the candidature of the candidate. • Silence is no fraud

4. Parties competent to contract  The following persons are incompetent to contract  

Minors

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Persons of unsound mind

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Persons disqualified by law to which they are subject  (insolvent)

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According to the Law, a person is of sound mind for the purpose of contracting if at the time of contracting, he is capable of understanding the contract and capable of  making a rational judgment as to the effects of the contract upon his interests.

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In India, a contract done by a minor or person of  unsound mind is absolutely void ab initio.

5. Lawful object  

The object is unlawful if  It is

forbidden by law,

Is of such a

nature if permitted it would defeat the provisions of any law, It is fraudulent  The court regards it immoral, The court regards it opposed to public policy. 

Thus every agreement of which the consideration or object is unlawful is void.

Dixon v Francis [1956-60] o

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The Appellant agreed that the Respondent would have the right to live in her house and occupy the garage free of cost “so long as he and his wife live together in peace”. Is this agreement valid or void for uncertainty? Held: In order to constitute a valid contract the parties must so express themselves that their meaning can be determined with a reasonable degree of certainty. The words “so long as he and his wife live together in peace” are uncertain and the proviso is void. The language used was so obscure and so incapable of  any definite or precise meaning that the court is unable to attribute to the Parties any particular contractual intention.

Classification according to validity • Voidable contract: An agreement  enforceable by law at the option of one or more of the parties thereto., but not at the option of the other. • Eg: Consent obtained by force. • Void agreement: An agreement not  enforceable by law is void. • Void contract: A contract ceases to be enforceable by law becomes void when it  ceases to be enforceable .

Void Agreements o

Agreement without consideration is void

Agreement in restraint of marriage is void o Agreement in restraint of trade o Non-compete Agreements? o partial and not total; unreasonable; public interest  o Agreement in restraint of legal proceedings o Agreements by way of  wager/ bet. Wager contract is one in which parties professing opposing views on the result of an uncertain event , mutually agree that  depending on the outcome of such event, one will pay or hand over a sum of money or other stake. o

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Section 294-A , IPC 

Agreements by way of wager, void :S. 30 •  Subhash K. Manwani v. State of MP (2000) MP HC... “….to treat an agreement by way of wager as void, is that the law discourages people to enter into games of  chance and make earning by trying their luck instead of  spending their time, energy and labour for more  fruitful and useful work for themselves, their family and  society .”

• Exceptions: (1) Horse racing; (2) Prize competitions : The Prize Competitions Act, 1955; (3) contests, where the results are based predominantly on skill, rather than on mere chance; (4) Lotteries sanctioned by specific legislation.…

Prenuptial Agreements

Privity of Contract • Only a Party to a Contract (not a stranger) can sue on it. The contract can confer rights or impose obligations only on the parties to the contract. There are two aspects of this doctrine. 1.Only parties to the contract are entitled under it. • Rights or benefits may be conferred upon a third party but such a third party can neither sue under the contract nor rely on defenses based on the contract. 2.Secondly the parties to a contract cannot impose liabilities on a third party

Exceptions to Privity Rule… •  Agency: The rule here is that if one of the contracting parties contracts as an agent, then either the agent or the principal, but not both, can sue to enforce the contract. • Trusts: The law of trusts can enable a third party beneficiary to initiate action that will enforce the promisor’s obligation. • Consumer contacts

Conclusion of a Contract : Discharge, Frustration, Breach and Damages

Discharge of a contract  It means that the contract has been performed and is no longer a pending legal obligation. A contract may be discharged by: 1. Performance 2. Termination by time 3. Mutual agreement - by novation, alteration or recession (Sec.62), remission or waiver (Sec.63). 4. Operation of law 5. Impossibility of performance (ss 37-67) 6. Breach of contract 

3. Discharge by Mutual Agreement  • Parties are free to mutually abandon, modify or rescind the contract and the original contract  need not be performed. Sec. 62 (i) Novation … - replacing party/contract (substantial alteration)

(ii) Rescission: - discharge of both parties from the obligations of a contract by agreeing to rescind the contract.

(iii) Alteration … must be a “material alteration”

• Remission or waiver:  A owes B 27 lakhs. A pays Rs. 20 lakhs and B accepts in satisfaction of his full claim on A.

4. By operation of law 1. Material alteration; 2. Merger of an inferior contract into a superior contract; 3. Discharge of an insolvent; 4. When rights and liabilities under the same contract become vested in the same person

5. Impossibility or Frustration of  Contract: Legal Excuses • The general rule followed in most  jurisdictions is that performance under a contract will only be excused in “extreme” circumstances or when the performance falls under a legally recognized excuse from performance. • Impossibility; Subsequent Illegality; Acts of  God/Nature; Death of a Party; Destruction; War

• Contract not frustrated by mere commercial difficulty: Merely because the procurement of  the goods becomes difficult because of a strike in the mill, or there is a rise in prices, or a person will not be able to earn the expected amount of  profits, is not enough to frustrate the contract. • Benefits from void contracts: “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement  or contract is bound to restore it, or to make compensation for it, to the person from whom he received it”

5.1 Impossibility of Performance or Frustration of contract  • Initial impossibility: “An agreement to do an act  impossible in itself is void” • A agrees B to discover treasure by magic. The agreement is void. The performance of the agreement being

impossible, the agreement is void.

• Subsequent Impossibility: Performance of  contract was quite possible when it was made, but some subsequently event rendered its performance impossible or unlawful. • A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract become void when war is declared.

6. Breach or non-Performance of  contract  Breach of contract is failure of a party to perform his obligations under a contract. When one party commits a breach, the other party can claim damages or specific performance. The breach of contract may be:

• Actual breach of contract, or • Anticipatory or constructive breach of contract .

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‘when a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety’

6.1 Effect of anticipatory breach • Case: In Frost Vs. Knight (1872) the defendant  promised to marry the plaintiff on the defendant’s father’s death. While defendant’s father was, still alive, he renounced the contract. The plaintiff did not wait till the defendant’s father’s death and immediately sued him, and she was successful in her action. • The aggrieved party may decide to ignore the anticipatory breach, and wait for the due date. • Doctrine of anticipatory breach does not  apply to promises to pay debts under promissory notes and bonds.

6.2 Remedies for breach of contract  The aggrieved party may:

• Cancel the contract which will relieve him from all contractual obligations (rescission) • Cover and receive damages. • Demand specific performance • Demand injunction. • Recover any consideration given to the breaching party (restitution) • Recover proportionate payment for the work  done (Quantum Meruit ).

7. Damages/Compensation for breach Damages are monitory compensation for the losses suffered or gains prevented due to the breach. Types of Damages:

• Vindictive or exemplary damages - punitive damages. e.g.. for dishonor of cheque. • Compensatory damages- general damages and special damages. • Nominal damages • Liquidated damages and penalty • Civil jail?

Remoteness of damage Hadley vs. Baxendale rule • On the breach of a contract such damages can be recovered, • (1) as may fairy and reasonably be considered arising naturally, i.e., according to the usual course of things from such breach, OR • (2) as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract. • The principle stated in the two branches of the rule is virtually the rule of  “reasonable foresight.” The liability of the party making the breach of  contract depends on the knowledge, imputed or actual, of the loss likely to arise in case of breach of contact.

Suit for specific performance • The Specific Relief Act, 1877 gives the court  discretionary powers to order specific performance instead of or in addition to damages. The powers are subject to Sec.14 of the Specific Relief Act, 1877. Suit for injunction:

• Injunction is an order of the court restraining a person from doing something which he promised not to do. This remedy is available where the contract contains a negative stipulation.