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Law of Contract

BUSINESS LAW

Law of Contract

Law of contract is embodied in the Indian Contract Act, 1872. Law of Contract is the most important branch of Business Law. It affects everybody more so trade, commerce and industry. Contracts are based on either express implied agreement. or

Law of Contract

LOC deals with promise which creates legal obligation. Promise which do not give rise to legal obligations are not contracts. E.g. A promises B to attend the dinner and fails to attend. Value called consideration is the most import aspect of a contract.

Agreement and Contract

AGREEMENT Section 2 (e) : Every promise and every set of promises, forming the consideration for each other is an Agreement. A proposal when accepted becomes a promise mere promise does not constitute an Agreement. OFFER and ACCEPTANCE together constitutes an AGREEMENT.

CONTRACT Sec 2(h) : An agreement enforceable by law is a Contract. An agreement, the object of which is to create an obligation is a Contract. Agreements which create legal relations or are capable of creating legal relations are contracts.

Essential Elements of a Valid Contract

The contract must possess the following essential elements : 1. Proposal and Acceptance. 2. Consideration Lawful consideration with lawful object. 3. Capacity of parties to contract - Competent parties. 4. Free consent. 5. An agreement must not be expressly declared to be Void. 6. Writing and Registration, if so required by law. 7. Legal relationship. 8. Certainty. 9. Possibility of Performance. 10. Enforceable by law.

Essential Elements of a Valid Contract

1. Proposal and Acceptance. Proposal : Sec. 2(a) When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Promise : Sec. 2(b) When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal when accepted, becomes a promise.

Essential Elements of a Valid Contract

Acceptance : Section 2 (b) When the person to whom a proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. The person making the proposal is called the Promisor and the person accepting the proposal is called the Promisee Sec. 2(c).

Acceptance need not always be expressed in words. Performance of the conditions of a proposal is an acceptance of the proposal. In order that there must be a binding contract, there must be absolute and unconditional acceptance of the terms of a proposal.

Essential Elements of a Valid Contract

2. Consideration Lawful consideration with lawful object. When at the desire of the promisor the 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 such act or abstinence or promise is called a consideration for the promise Sec. 2(d). Every contract consist of 2 parts : 1. Promise and 2. Consideration for the promise. Agreement without consideration is void. Every agreement of which the object or consideration is unlawful is void.

Essential Elements of a Valid Contract

The consideration or object of an agreement is unlawful if :

It is forbidden by law. Is of such a nature that, if permitted, it would defeat the provisions of any law. Is fraudulent or Involves or implies injury to the person or property of another. The Courts regards it as immoral, or opposed to public policy.

Essential Elements of a Valid Contract

3. Capacity of parties to contract - Competent parties. Sec. 11 of the Act states that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. Should be a major Should be of sound mind Should not possess any other disqualification from contracting by any law to which he is subject.

Essential Elements of a Valid Contract

4. Free consent. Two or more persons are said to consent when they agree upon the same thing in the same sense. When the minds of both the parties are directed to the same object, there is consent. Mere consent is not enough. Consent of parties must be free for e.g. it must not have been obtained by Coercion : the practice of forcing another party to behave in an involuntary manner (whether through action or inaction) by use of threats. Undue influence Fraud Misrepresentation (untrue statement) or Mistake based on the rule Ignorance to Law is no Excuse.

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2. 3. 4. 5.

Essential Elements of a Valid Contract

5. An agreement must not be expressly declared to be void. Sec. 2(g) A void agreement is not enforceable by law. It has not legal sanctity. It does not give rise to any rights and obligations. Void agreements are not enforceable by law as they are opposed to public policy like agreements in restraint of trade, or in restraint of marriage or in restraint of legal proceedings. An agreement, therefore, should not be void in order to constitute a valid contract.

Essential Elements of a Valid Contract

6. Writing and Registration, if so required by law. Oral contract is a valid contract. However, the contract must be in writing and registered, if so required by any law, for e.g. gift, mortgage, sale, lease under the Transfer of Property Act,1882, Memorandum and Articles of Association of a Company under the Indian Companies Act, contracts under sub-section (1) and (3) of section 25 of the Indian Contract Act, etc. Documents specifies under section 17 of the Indian Registration Act, 1980, are required to be registered. No particular form of writing is required to constitute a contract. Registration is compulsory in respect of certain contract under the Indian Registration Act, 1908 like mortgages, gifts, etc.

Essential Elements of a Valid Contract

7. Legal relationship. Agreements which create legal relations or are capable of creating legal relations are contracts. There must be common intention of the parties to create legal relations in order to constitute a contract. Agreements to BUY AND SELL, to MARRY, create LEGAL RELATIONSHIP and are therefore, VALID CONTRACT. Whereas INVITATION TO A DINNER, INVITATION TO STAY WITH A FRIEND, do not create legal obligation are NOT CONTRACT.

Essential Elements of a Valid Contract

8. Certainty. The terms of a contract should be clear and not vague. Contracts which are vague cannot be enforce. Such a contract can be avoided by showing that there is ambiguity. In such a case there is nothing which either part can enforce.

Essential Elements of a Valid Contract

9. Possibility of Performance. Contracts based on impossibility of performance are not valid. The contract must be capable of being performed. E.g. A promises to share with B 50% of the treasure, if B creates a treasure by magic. Such agreements are incapable of performance and therefore VOID.

Essential Elements of a Valid Contract

10. Enforceable by law. A contract in order to be valid must be enforceable by law which element distinguishes agreement and contract. If it is enforceable by law, it is a contract, otherwise it is an agreement. The aggrieved party should be able to obtain relief through law in the event of breach of contract. An agreement can also be inferred from correspondence exchanged between the parties..

Agreement

Section 2 (e) of the Indian Contract Act defines an Agreement : Every promise and every set of promises, forming the consideration for each other is an agreement. A proposal when accepted becomes a promise mere promise does not constitute an Agreement. OFFER and ACCEPTANCE together constitutes an AGREEMENT. The promisor makes a proposal and a promisee accepts the proposal. Both promisor and promisee promise to perform their part of reciprocal promises. This set of promises constitute an Agreement.

Kinds of Agreement

1. Valid Agreement : Enforceable by law. 2. Void Agreement : Not enforceable by law. Unlawful agreement opposed to public policy like agreements in restraint of trade or restraint of marriage. 3. Enforceable Agreement : An agreement enforceable by law is a contract. 4. Voidable Agreement : Agreement which is enforceable by law at the option of one or more of the parties thereto but not at the option of the other. A voidable Agreement is valid so long as it is not avoided by the party entitled to do so. E.g. Agreement induced by fraud, undue influence or misrepresentation are voidable agreements. If not avoided by the person whose consent is so caused by fraud, it becomes valid and binding contract.

Kinds of Agreements

5. Unenforceable Agreement : It is valid in law but is incapable of proof because of some technical defect. E.g. A promissory note not stamped. Law will recognize but cannot enforce. 6. Illegal Agreement : Agreement totally against the law. Nothing is recoverable. It is void-ab-initio. They are opposed to public morals and punishable under IPC. They are forbidden by law while void agreement may not be. EVERY ILLEGAL AGREEMNT IS VOID but Every Void Agreement may not be illegal.

Contract and Kinds of Contract

Sec 2(h) : An agreement enforceable by law is a CONTRACT. An agreement, the object of which is to create an obligation is a contract.

There are 13 kinds of contract :


1. Voidable contract : An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other , is a voidable contract. Free consent which is the essential element of contract is missing. The person who was forced to sign can avoid the contract. (Fraud, misrepresentation, undue influence).

Contract and Kinds of Contract

2. Void contract : A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. A void contract is a nullity from its inception. Contract can be valid when entered but subsequently due to change in the circumstance become void. Void contracts are no contract. 3. Unenforceable Contract : An unenforceable contract is a valid contract in law, but is incapable of proof, and therefore cannot be enforced in a Court of Law. 4. Executed Contract : Where both parties have performed their obligation. Even one party has performed his share and the other is still under an outstanding obligation to perform his promise. 5. Executory Contract : Where neither party has performed his share of obligation. This does not effect the validity of the contract.

Kinds of Contract

6. Express Contract : When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation. 7. Implied Contract : The terms of a contract is inferred from the conduct or dealings between the parties. E.g. A boards a bus. It is implied the A promise to purchase a ticket. 8. Quasi-Contract : Certain relations between the parties resemble those created by contract law requires a person who receives the benefit to pay or compensate the person giving the benefit, even though he receives the benefit without any contract. There is no contract in fact but is created by law. Such a contract created by law is called Quasi Contract. They are called Construction Contracts under English law.

Certain Relations resembling those created by Contract - Quasi contract

A Quasi contract is an obligation which is treated as contractual by law. Quasi contracts are called implied contracts. There are some obligations which resemble those created by contracts. The essentials of formation of a contract are absent and as such they are called quasi contracts. The person who receives the benefit, law requires him to pay or compensate the person giving the benefit.

E.G. : A a tradesman, leaves goods at Bs house by mistake. B treats the goods as his own. He is bound to pay A for them.

Types of Quasi Contract

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The Indian Contract Act recognizes the following types of Quasi Contract : Where a person supplies necessaries to a person incapable of contracting, he is entitled to be reimbursed from the property of such incapable person. A person who is interested in the payment of money which another is bound by law to pay is entitled to be reimbursed by the other. When a person lawfully does anything not intending to do so gratuitously and other person enjoys benefit thereof, the latter is bound to make compensation to the former. A person who finds the goods belonging to another is subject to the same liabilities as a bailee of goods. He is entitled to retain the goods until he receives the lawful charges or compensation but he cannot sue for such compensation. A person to whom money has been paid or anything delivered by mistake or under coercion, must repay or return it.

Quasi Contract

1. Quasi contract is an obligation resembling that created by a contract. 2. There is no agreement at all. 3. Essentials for formation of a contract are absent. 4. A quasi-contract resembles a contract. It is not a full fledged contract. 5. It is an implied contract, but its results resemble those created by a contract.

Kinds of Contract Contingent Contract

Sec. 31 : Contingent Contract A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
E.g. A contract to pay B Rs. 10,000/-, if Bs house is burnt.

Characteristics of Contingent Contract : 1. There should be existence of a contingency happening or non-happening of some event in future. 2. Contingency must be uncertain. 3. The event must be collateral for example, incident to the contract.

Kinds of Contract Contingent Contract

1. It is not necessary that there should be mutual promises. For e.g. insurance contracts, contracts of indemnity and guarantee. 2. Determination of an uncertain event is not the sole condition of the C.C. 3. A contingent contract is not void. 4. The parties are interested in the occurrence or nonoccurrence of the event. 5. The future event is merely collateral or incidental to the contract.

Rules regarding enforcement of Contingent Contract

1. Contingent contract to do or not to do anything if in uncertain future event happens can be enforced only when that event happens. 2. C.C. to do or not to do anything if an uncertain future event does not happen can be enforced only when the happening of the event becomes impossible. 3. A Contract contingent based on the act of the person at an unspecified time at future event shall be considered impossible when such person does anything which renders the act impossible. 4. Contract contingent to do or not to do anything if a specified uncertain event happens within a fixed time would become void if such an event does not happen or becomes impossible at the expiration of the time fixed.

Kinds of Contract Rules regarding enforcement of Contingent Contract

5. Contracts continent to do or not to do anything if a specified uncertain event does not happen within a fixed time can be enforced when such event has not happened or shall not happen within the time fixed. 6. Agreements contingent to do or not to do anything based on impossibility of the event are void. 7. All contingent contracts are not wagers.

Wagering Contract

1. It is agreement by mutual promises each of them conditional on the happening or not happening of an unknown event. 2. There must be determination of an uncertain event as the sole condition of the contract. 3. Wagering contract is void 4. The parties are not interested in the occurrence or non-occurrence of the event. 5. The future event is the sole determining factor of the contract.

Kinds of Contract

10. Contracts of Record : A contract of record is one which is taken on the records of a Court. E.g. Judgement of a Court. 11. Speciality Contract : Contract which is in writing, signed, sealed and delivered by the parties. It is also called contract under seal. Consideration is not necessary in a speciality contract. 10. Simple Contract : Is not under a seal. It requires consideration. Are spoken or written Agreement. Contracts of Record and Speciality Contracts are also know as Formal Contracts.

Kinds of Contract

Contracts of Record, Speciality and Simple is under the English Law. Indian Law does not recognise contracts without consideration. All contracts must have consideration in order to be valid, subject to exception under section 25.(natural love, affection, voluntary services)

13. Statutory Contract : When all or some of the terms and conditions of a contract are statutory then the entire contract. Or to that extent, as the case may be would ne regarded as statutory contract.

Which Agreements Are Contracts

Section 10 of the Act lays down that, All agreements are contract, if all the following are elements are present : 1. 2. 3. 4. Competent parties. Free consent. Lawful consideration with a lawful object. Must not be declared to be void.

Agreement and Contract

1. Offer and acceptance together constitute and Agreement. Agreement and enforceability together constitute a Contract. 2. Every promise and every set of promises forming consideration for each other is an agreement. A contract is an agreement enforceable by law. 3. Agreement may not create any legal obligation. All agreements are not contract. Contract has legal obligation. 4. Agreement is a wider concept. Contract is a specie of Agreement.

5. Contract is concluding and binding. Agreements are not.

Proposal

Section 2 (a) : When one person signifies to another his willingness to do or to 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. Every contract to be valid should begin with a proposal. Proposer or Promisor : A person making a proposal. Promisee : The person who accepts the proposal or offers his assent to it.
A proposal under the Indian Contract Act is synonymous with the term Offer under English law.

Essentials of a Valid Proposal

1. There must be an expression of willingness. 2. The proposer cannot dictate terms. 3. The offer must be intended to create a legal obligation. Kalai Haldar v. Sheikh : A invited B for dinner. On Bs failure to attend, A filed a suit against B for the price of the non-consumed food. As suit was dismissed. The invitation to dinner has no legal relation. 4. A mere statement of intention does not constitute a binding promise. Spencer v. Harding : A invited tenders for the sale of his house but did not undertake to sell to the highest bidder. B sends a tender expressing his willingness to pay Rs. 10K, C & D offers to pay Rs. 11K & 12K.

Essentials of a Valid Proposal

It will be observed here that A made no offer or proposal. He merely invited offers from B, C, D which A may or may not accept. 5. The words used must apply to definite persons to create legal relations. The offer must be made to a definite person. 6. The terms of offer must be certain and unambiguous. 7. An offer can be express or implied from the circumstances. E.g. buying ticket. 8. An offer must be communicated to an offeree. A person cannot accept an offer unless he knows of the existence of the offer. e.g. Where S offered a reward to anyone who returned his lost dog and F brought the dog without the knowledge of the offer, it was held F cannot succeed.

Essentials of a Valid Proposal

9. An offer may be conditional which is clearly communicated. 10. The person making it should intend to be bound by it as soon as it is accepted by the other. Offer can be withdrawn before it is accepted.
Test to be applied to confirm it is a valid proposal :

1. There must be intention of the proposer to create a legal obligation. 2. Offer must be actually communicated.

Proposal

Counter Offer : It is a rejection of the original offer and making a new offer. The new offer is called a counter offer. It needs a fresh renewal.

Auction Sales : The rules which apply to the proposal govern the auction sales. An offer in auction sales can be revoked at any time before acceptance. In case of court auction the bidder can withdraw his offer before it is accepted by the Court. In case of death before acceptance by court the bid stand revoked.

Proposal

Standing or open offer : It is a mere invitation to invite offers like advertisements, window displays, etc. The person placing the tender in fact offers and it is for the person who has invited the tender to accept or refuse the offer. Offer and Invitation to Offer : In an offer, a person does not reserve to do some further act before being bound by his offer, while in an Invitation to offer, the person reserves his right to accept or to do some further act before being bound by it.

Acceptance

Acceptance : Section 2 (b) When the person to whom a proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. The person making the proposal is called the Promisor and the person accepting the proposal is called the Promisee -Sec. 2(c). Acceptance need not always be expressed in words. Performance of the conditions of a proposal is an acceptance of the proposal. In order that there must be a binding contract, there must be absolute and unconditional acceptance of the terms of a proposal.

Essentials of a Valid Acceptance

1. Acceptance must be absolute and unqualified. 2. Must be expressed in usual and reasonable manner. 3. Mental acceptance is not sufficient. There must be some external manifestation (overt act) of that intent by speech, writing or other act. 4. It must be communicated to the offerer. 5. It must be the acceptance of all the terms. 6. It need not always be expressed in words. Performance of the conditions of a proposal is an acceptance. 7. It must be accepted by a certain person. 8. Offeree must have the knowledge of the proposal. 9. It must be given within a reasonable time. 10. It must be given before the offer lapses.

Acceptance

Promise Sec. 2 (b) : A proposal when accepted becomes a promise. Promise can be express or implied. Express Promise : Is one which is made by words, written or spoken. Implied Promise : Is one which arise from conduct. e.g. when a person enters into a restaurant, he impliedly promises to pay for the eatables consumed by him.

Consideration and Legality of the object and Consideration

Sec. 2(d) Consideration : When at the desire of the promisor, the promisee or any other person (i) has done or abstained from doing or (ii) does or abstains from doing or (iii) promises to do or abstains from doing something, such act or abstinence or promise is called a consideration for the promise. Every contract consists of two parts (i) Promise and (ii) consideration for the promise. Consideration may be to do something or to refrain from doing something. A promise to do or refrain to do something may be in return for benefit received or the loss, damage or inconvenience caused. Agreement without consideration is Void.

Essentials of a Valid Consideration

1. Consideration must move at the desire of the promisor. 2. Consideration may move from the promisee or any other person. ( Stranger to a contract ). Stranger to a consideration may maintain a suit. However, under the English Law a person not a party to the Agreement cannot sue on the agreement. In India a stranger to consideration may enforce a contract but not a stranger to a contract. A contract by a beneficiary is enforceable, though beneficiary is not a party to the contract. E.g. A gifted certain property to her daughter with a condition she should pay an annuity to As brother B. The daughter failed to do so, B sued the daughter. It was held that stranger to a consideration may maintain a suit.

Essentials of a Valid Consideration

3. Consideration may be past, present or future. 4. Consideration may be an act of doing or abstaining from doing something or it may be an act of forbearance or abstinence. 5. Consideration need not be adequate. 6. Consideration must be real and not illusory. 7. Consideration must not be unlawful, illegal, immoral or opposed to public policy. 8. Performance of existing obligation is no consideration. 9. Forbearance to sue is a good consideration. E.g. wife not demanding maintenance allowance, inspite of the promise made by her husband.

Importance of Consideration

Consideration is the most essential element of the contract to create legal rights between the parties. The further evidence of intention of parties is supplied by consideration. From a bare promise, no right of action can arise. (Ex-Nudo-Pacto-Non-Oritur Actio)

e.g. If A promises to pay B Rs. 1,000 without any return, this constitutes a bare promise and gives no right of action.

When an agreement without consideration is Valid

Exception to the General Rule that an agreement without consideration is void.

1. Agreement made on account of natural love and affection. 2. Promise to compensate for past voluntary services. 3. Promise to pay a time-barred debt. 4. Agreement to create an agency. 5. Gift.

Kinds of Consideration

1. Executed consideration : An executed consideration is something actually done, forborne or suffered with the making of the contract. One party has already performed his part of promise. 2. Executory consideration : A promise in future is executory consideration. Both parties yet to perform. 3. Past consideration : It is something wholly done, suffered before making the agreement. Act done without any promise. 4. Unlawful consideration : Forbidden by law. 5. Unreal or Illusory consideration :Where it is physically or legally impossible to perform a promise, consideration is unreal.

Unlawful Consideration

1. 2. 3. 4. 5.

All Agreement are contracts if made for lawful consideration and with lawful object. A consideration or an object is lawful unless : It is forbidden by law Is of such nature that if permitted it would defeat the provisions of any law Is fradulent Involves or implies injury to the person or property of another. Court regards it as immoral or opposed to public policy.
Immoral Agreement : All agreements in violation of morality and founded upon considerations contrary to public morals are void.

Agreement against Public Policy

An agreement harmful to public welfare or interest is void as being against public policy. What is against public policy depends on the circumstances of each case. Public policy cannot be precisely defined. The following agreements have been held to be against public policy. 1. Trading with an enemy. 2. Champerty and maintenance contract. Where a person bargains for a share in the proceeds to be ultimately decree in a suit in return for assisting another to bring an action is known as champerty 3. Stifling prosecutions. : An agreement not to prosecute an offender.

Agreement against Public Policy

4. Marriages brokerage agreements. 5. Agreements interfering with administration of justice 6. Agreements tending to create interest against duty : Public servant on agreement signed performs duty against the public duty. 7. Agreements as regards sale of public offices : Corrupt public officer. 8. Agreements tending to create monopoly. 9. Waiver of illegality. 10. Agreements in restraint of marriage. 11. Agreement in restraint of trade. 12. Agreement between pleader and client. 13. Agreement in restrain of legal proceeding.

Agreement against Public Policy

14. Agreements to defraud creditors. 15. Agreement not to bid. The consideration or object of an agreement may be unlawful in part only. If any part of a single consideration for one or more objects or any one of several considerations in a single object is unlawful, the entire agreement is void. Agreements, the consideration or object is unlawful in part : The agreement is void part of a single consideration is unlawful.

Capacity to Contract

Sec. 10 : An agreement becomes a contract if it is entered into between the parties who are competent to contract. Every person is competent to contract : (i) who is of the age of majority according to the law to which he is subject. (ii) who is of sound mind and (iii) who is not disqualified from contracting by any law to which he is subject.

Contract by a minor : A minor is a person who has not completed his 18 years of age. Where the guardian of the minors person or property is appointed, the minority continues till 21 years.

Rules relating to minors contract

1. Minors contract is absolutely void. A minor as such is incompetent to contract and give his consent thereto. He can neither sue nor be sued upon. 2. There can be no specific performance of such a contract. 3. Minors contract cannot be made valid by subsequent ratification. 4. A minor falsely representing his age as a major cannot be sued. He can plead minority as a defence. The infant is not estopped from setting up infancy. 5. An agreement by a guardian on behalf of a minor is valid. 6. Minor cannot be adjudged insolvent. 7. Minors marriage contracted by the parents and guardians is valid.

When can a minor contract

1. He can be a promisee or a transferee. Law does not regard the minor as incapable of accepting benefit. 2. He can act as an agent, but is not liable to the principal for his act. 3. He may be admitted to the benefits of partnership with the consent of the other partners. 4. The person who supplied necessaries to the minors dependents whom the minor is bound to support, is entitled to be reimbursed from the properties of such a minor.

Capacity to Contract

Contracts by person of unsound mind cannot be a valid contract. He is incompetent to contract. Contract by a drunkard is absolutely void and cannot be ratified. Contract with a parda-nishin women : A parda-nishin woman is one who is obliged to observe complete seclusion. She is open to undue influence, and therefore, unable to exercise her independent understanding. She is incapable of entering into a contract unless it is established that the contract was explained to and understood by her. Contract by Married woman : She can enter into a valid contract provided she is a major and does not suffer from any disability.

Capacity to Contract

Contracts by corporation : A corporation being an artificial person can enter into a contract through its human agency within its necessary or natural and express or legal limitations. Contracts by insolvents : An insolvent cannot enter into a contract. Unless he obtains an order of discharge, his property vests in the hands of an Official Assignee or Official Receiver.

Void Agreement & Kind of Void Agreement

Sec. 2 (g) : A void agreement is not enforceable by law. It has no legal existence. Kinds of Void Agreement : 1. Agreement made by incompetent person. 2. Agreement made under mutual mistake as to a matter of fact. 3. Agreement made under mistake as to law not in force in India. 4. Agreement, the consideration or object of which is unlawful. 5. Agreement, the consideration or object of which is unlawful in part. 6. Agreement made without consideration.

Kind of Void Agreement

7. Agreement in restraint of marriage : are void (other than minor). 8. Agreement in restraint of trade. 9. Agreement in restraint of legal proceedings. 10. Uncertain Agreement. 11. Contingent Agreement. 12. Agreements contingent on an impossible event are void. 13. Agreements to do an impossible act are void. 14. Agreements to do an act which subsequently becomes impossible are void. 15. Wagering Agreement

Wagering Agreement (Void)

Wager is an agreement between two parties to the effect that if a given uncertain event happens, one party shall pay a certain sum to the other and in the contrary event, the other party shall pay to the first. In such an agreement, one party is to win and the other is to lose upon a future event which is uncertain. The promise is conditional on the happening or not happening of an uncertain event and there is a mutual chance of gain or loss on determination of uncertain event. (Exception) However agreement to contribute towards prize sum of money value of Rs. 500 or more to be awarded to the winners of horse-race, insurance contract, share market, games of skill, are valid agreements.

Essential of Wager (Void Agreement)

1. The promise must be conditional on a happening or not happening of an uncertain event. 2. There must be mutual chance of gain or loss on the determination of an uncertain event. 3. The promise must be to pay money or moneys worth. 4. Neither party should have any interest or control in the happening or non-happening of the event. 5. Neither party should intend to perform the contract itself, but only to pay the differences

Void Agreement

Impossibility and frustration of the Contract : Impossibility may exist at the time of the contact or may arise subsequently. It may be physical or legal impossibility. In either case, the agreement is void. The impossibility of performance must be in respect of a term of a contract. If the contract can be performed in any other manner, the contract is not frustrated. Impossibility does not include commercial impossibility. The instances of impossibility of performance are : 1. When the subject matter of the contract ceases to exist, 2. When the performance of the contract becomes impossible.

Void Agreement - Restitution

3. When the object or event contemplated by the parties does not occur or where the Government legislation interferes with the performance of the contract. 4. When the act becomes unlawful. Restitution : means Restoration. When the agreement becomes void, the party who has received any benefit must restore it to the other party or make compensation for it. When a person opts to treat the contract as voidable or rescinds it, the other party need nor perform any promise. The party rescinding the contract shall restore any benefit, if he has received, to the person, from whom it was received. The whole contract can be repudiated and not part of it.

Communication

An offer or proposal in order to be complete must be communicated. The communication of proposal, acceptance of the proposal and revocation of proposal and acceptance is deemed to be made by any act or omission. Communication of Proposal : is complete when it comes to the knowledge of the person to whom it is made. Communication of Acceptance : is complete as against the proposed, when it is put in the course of transmission to him so as to be out of power of the acceptor, as against the acceptor, it is complete when it comes to the knowledge of the proposer.

Communication

Revocation of Proposal : Proposal may be revoked any time before the communication of its acceptance is complete as against the proposer but not afterwards. A proposal is revoked : 1 By communication of notice of revocation. 2 By lapse of time. 3 By failure of the acceptor to fulfill a condition. 4 By death or insanity of the proposer. Revocation of Acceptance : May be done at anytime before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Communication

Communication of Revocation is complete : 1. As against the person who makes it, when it is put in the course of transmission to the person to whom it is made so as to be out of power of the person who makes it. 2. As against the person to whom it is made when it comes to his knowledge. Acceptance and revocation through post : A proposal can be accepted and revoked through post, by letter by telegram. Time is given to acceptor to revoke his acceptance before his letter of acceptance reaches the proposed. In order to bind the proposer by acceptance, the letter must be correctly addressed, stamped and posted.

The Performance of Contracts & Appropriation of Payment

Sec. 37 : Who must perform. Parties to the contract must perform their respective promises. Parties are excused from performance when such performance is excused under any provision of the act or under any other law. In case of personal contract, the promises are to be performed by - the promisor personally. In case of non-personal contracts by - the promisor personally or by - a third person on behalf of the promisor and - in the event of the death of the promisor by his legal representatives. In case of Joint Promisors by everyone, third person or their legal representative.

Tender of Performance

Tender of Performance is an Offer of Performance: Essentials of a valid tender : 1. It must be unconditional. e.g. A offers to give his house to B, if C permits. This is a conditional offer and therefore not a valid tender. 2. It must be made by the promisor or his representative. 3. It must be made at a proper and reasonable time and place. 4. It must offer reasonable opportunity to ascertain that a person is willing to fulfill his promise. 5. It must offer reasonable opportunity to see that the thing offered is what the promisor is bound to deliver.

The Performance of Contracts & Appropriation of Payment

6. In case of joint promise, offer by one or more joint promisors is sufficient. 7. It must be made to the promisee of his agent. In the event of refusal to accept the offer of performance, the other party is excused from performing his part of the promise. He also can claim his rights under the contract. The promisor or the promisee may waive the right of rescinding the contract. A person who rightly rescinds the contract is entitled to compensation. e.g. A singer after entering into a contract for performing for 6 days, fails to perform on the last day. The Manager can claim damage from the singer for the last day.

The Performance of Contracts & Appropriation of Payment

Assignment of Contract : An obligation of the party to a contract may be :

1) Personal Obligation : Wherein the promisor must perform it in person. (marriage)


2) Impersonal Obligation : The corresponding right is assignable. (debts taken by a person) The assignment may be by 1. Act of Parties or 2. By Operation of Law. (death, insolvency)

Joint Rights

Joint Rights and Joint Liabilities : Where there are more than one promisor and more than one promisee, the question of joint rights or joint liabilities arises. In case of Joint Rights : The right to claim performance rests with all the joint promisees during their joint lives. After the death of any one of them, it rests with the representatives of such deceased person jointly with the survivor of survivors.

Joint Liabilities

In case of Joint Liabilities rules are : 1. All persons during their joint lives are jointly liable and after death of any of them, his representatives jointly will the survivors. 2. The promisee may compel any one or more of the joint promisors to perform the whole of the promise. 3. Each of the two or more joint promisors may compel several other joint promisors to contribute equally. 4. If two or more joint promisors make default; the remaining joint promisors must bear the loss. 5. A release of any of the joint promisors by the promisee does not discharge the other joint promisors.

The Performance of Contracts & Appropriation of Payment

Time and Place of Performance : Where no time is specified, act must be performed within a reasonable time. Where time is specified, the promisor may perform it at any time during the usual hours of business on such day and at such place, at which the promise ought to be performed. The performance of any promise may be made in any manner or at any time which the promisee prescribes or sanctions. Time as essence of the Contract : Where time is essential and the party fails to do any such thing at or before the specified time, the contract becomes voidable at the option of the promisee.

The Performance of Contracts & Appropriation of Payment

Where time is not essential, the contract does not become voidable, but the promisee is entitled to compensation for any loss suffered by hm. Whether time is the essence of the contract or not depends on the intention of the parties or the terms of the contract. If the promisee accepts performance at any time other than that agreed, the promisee can claim compensation only if he has given notice of his intention to do so to the promisor.

The Performance of Contracts & Appropriation of Payment

Performance of reciprocal Promises : Promises which form consideration or part of the consideration for each other are called reciprocal promises. Reciprocal promises must be simultaneously performed. If the order in which reciprocal promises are to be performed is specified, they shall be performed in that order. In case of dependent promises, where one cannot be performed till the other is performed, its performance cannot be claimed till the other has been performed. When one party to a contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented.

The Performance of Contracts & Appropriation of Payment

Where persons reciprocally promise firstly to do certain things which are legal and secondly certain things which are illegal, the first set of promises is a contract, but the second set is a void agreement. Performance of alternative promises : In case of alternative promises, one branch of which is legal and the other illegal, the legal branch alone can be enforce.

Rules of Appropriation of Payment

Appropriation means Application of payments. 1. The debtor has a first right to intimate appropriation of a debt at the time of payment. The creditor, if he accepts, shall then apply the payment accordingly. 2. If the debtor fails to exercise his right the right then devolves on the creditor to appropriate the payment to any lawful debt though barred by the law of limitation. 3. If the creditor also fails to exercise his right, the appropriation will be done in order of time. 4. In case of debts of equal standing each will be appropriated proportionately. The above rules of appropriation of payments would apply to separate and distinct debts and not where there is only one debt though payable by installment.

Discharge of Contract

Discharge of Contract means termination of contract. By discharge, the rights and obligation of the parties come to an end. The discharge of contract could be in any of the following ways : 1. By performance. 2. Death of the promisor discharges the contract of personal skill or ability. 3. Where on party refuses to accept the offer of performance, the other party is discharge. 4. By breach of contract : Breach of contract may be actual breach or anticipatory breach. When on party fails or refuses to perform his obligation, during the performance of the contract, actual breach result.

Discharge of Contract

When a party to a contract refuses to perform his part of the contract before the actual time of performance of the contract is due, it is anticipatory breach of contract. Incase of anticipatory breach, the aggrieved party may either rescind the contract immediately or treat the contract as still operative and wait till the contract is to be executed.
Measure of Damage : If the contract is repudiated immediately, the damages will be measured by difference of price prevailing on the date of breach and the contract price. If the contract is kept alive, the damages will be measured by the difference between the contract price prevailing on the date fixed for the performance.

Discharge of Contract

5. By impossibility of performance. 6. The contract may be discharged by mutual express or implied agreement between the parties in any of the following ways : (i) By novation, i.e. by substituting a new contract in place of the original one or substituting new parties for the old ones, (ii) by accord and satisfaction : A owes B Rs. 1000, B agrees to accept Rs. 750 in full satisfaction (accord), Payment of the same is satisfaction (iii) by remission and waiver : means abandoning the rights. (iv) by rescission : It may occur by mutual consent or when one party fails to perform his obligation the other party rescind the contract. It cannot be of one part the entire contract must be rescinded.

Discharge of Contract

7. When the promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused or discharge. E.g. A contracts with B to repair Bs house. B neglects or refuses to point out to A the places in which the house requires repair. A is excused. 8. By Operation of Law : (i) insolvency or bankruptcy (ii) merger of superior rights into inferior rights. E.g. bank debt. 9. Where the contract is materially altered by one party without the consent of the other, the contract is discharged. 10. By lapse of time.

Breach of Contract

Remedies to aggrieved party : 1. Suit for Specific performance. : Court directs party to perform the promise as per the terms of the contract. 2. Suit for injunction : Order of the court directing a person to do or refrain from doing some act, which is the subject matter of the contract and which a party undertakes to do or not to do. It is used means of enforcing a contract. 3. Suit for damages, for the loss sustained. 4. Quantum Meruit : as much as earned or deserved or as much as is merited

Breach of Contract

Quantum Meruit : A person can under certain circumstances claim payment for the work done or goods supplied without any contract or under a contract which is discharged by the breach of the other party. Where there is no contract executed but one party has either done some work or supplied goods, its natural he should be compensated. It is base on implied promised by the other party to pay for what has been done. Under Quantum Meruit either party may sue the other on an implied contract to pay for the work done.

Breach of Contract

Case : Sumpter v. Hedges : the plaintiffs agreed to erect certain buildings but failed to complete the contract. The defendant completed the bldg himself, using the material left on the site by the plaintiff. It was held that the plaintiff could not recover for the work done, but he was entitled to recover the value of the materials used. The Claim or quantam meruit can only arise from a request of services and acceptance of such services by the party. It does not arise out of the contract as the right to damages does.

Breach of Contract

Doctrine of Quantam meruit applies to following cases: 1. In case of non-gratuitous acts. 2. Where part is performed and remaining part is prevented from being performed because of the breach committed by the other party, or where the party abandons the contract and the contract is discharged.s 3. Where a contract is discovered to be void. Compensation is at the market price of the goods supplied. Where the bldg contractor has done extra work, above the work mentioned in the contract he is entitled to be paid for the extra work at market rate. However quantum meruit to be awarded only only if the contract does not provide a fixed price for the work done.

Penalty & Liquidated Damages

Penalty : When the sum mentioned is extravagant and fixed by way of punishment with the intention to secure the performance and is greater than the genuine estimate of loss. Liquidated damages : Is fixed by the parties on the basis of reasonable and fair calculation after making a genuine pre-estimate of the actual loss.

In case of penalty only reasonable amount can be recovered while in case of liquidated damages the whole sum is recoverable. In India there is no distinction between penalty and liquidated damages, the Courts award only a reasonable compensation.

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