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Delhi

Indian Contract Act

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Published in: Law, Ethics and Communication
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Indian Contract Act is the subject of this note.

Nehal A / Delhi

1 year of teaching experience

Qualification: M.A (Amity University, Uttar Pradesh - 2015), B.B.A (Maharshi Dayanand University , Rohtak - 2013)

Teaches: Economics

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  1. Unit 1 The Contract Act 1872 BASIC DEFINITIONS (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 that other to such act or abstinence, he is said to make a Proposal (or offer); (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; [Section 2(b)] (c)The person making the proposal is called the "promisor", and the person accepting the proposal is called the "promisee", (d) 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; (e) Promises which form the consideration or part of the consideration for each other are called Reciprocal Promises; (f) Every promise and every set of promises, forming the consideration for each other, is an Agreement; [Section 2(e)] (g) An agreement enforceable by law is a Contract; [Section 2(h)] (h) An agreement not enforceable by law is said to be Void Agreement; (i) 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 or others, is a Voidable Contract; (j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable and is known as Void Contract. All contracts are agreement but all agreement are not contract According to Section 2(h) of the Contract Act, 1872 , Contract is an agreement enforceable by law. If we analyse this definition of Contract we find that it essentially consists of two elements: (1) Agreement, and (2) Its enforceability by law (1) An agreement is defined as every promise and every set of promises, forming the consideration for each other and promise is defined in section 2(b) thus : When the 1
  2. 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. Therefore, an agreement is an accepted proposal. To form an agreement, there must be a proposal or offer by one party and its acceptance by the other. Thus, Agreement = Offer + Acceptance. The essence of the agreement is the meeting of the minds of the parties in full and final agreement i.e., before there can be an agreement between two parties there must be consensus ad idem — this means that the parties to the agreement must have agreed about the subject matter of the agreement in the same sense and at the same time. Unless there is consensus ad idem, there can be no agreement. (2) Enforceability by Law: However all agreements are not contracts. Only those agreements that are enforceable by law are contracts. According to Section 10 of The Contract Act, all agreements are enforceable by law if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. To conclude, Contract = Agreement + Enforceability at Law Thus all contracts are agreements but all agreements are not contracts. ESSENTIAL ELEMENTS OF VALID CONTRACT In order to become a contract, an agreement must have following essential elements: 1. 2. 3. 4. 5. Offer and Acceptance: There must be two parties to an agreement, i.e., one party making the offer and the other party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. Intention to create legal relationship: When the two parties enter into an agreement, their intention must be to create legal relationship between them. Agreements of a social or domestic nature do not contemplate legal relationship and as such they are not contracts. Lawful Consideration: An agreement to be enforceable by law must be supported by consideration. Consideration means an advantage or benefit moving from one person to another and is generally understood in terms of quid pro quo i.e., something in return. The agreement is legally enforceable only when both the parties give something and get something in return. A promise to do something, getting nothing in return is usually not enforceable by law. Capacity of Parties or Competency: The parties to the agreement must be capable of entering into valid contract. Every person is competent to contract (a) who is of the age of majority according to the law to which he is subject, and (b) who is of sound mind, and (c) is not disqualified from contracting by any law to which he is subject. Free Consent: It is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent is 2
  3. 6. 7. 8. 9. said to be free when it is not caused by (1) coercion, or (2) undue influence, or (3) fraud, or (4) misrepresentation, or (5) mistake, Lawful Object: The object of the agreement must be lawful. In other words, it means that the object must not be illegal, immoral, opposed to public policy, etc. Agreement not declared void: The agreement must not have been expressly declared void by law in force in the country. Certainty of Meaning and Possibility of Performance: The agreement must be certain and not vague or indefinite. If it is vague and it is not possible to ascertain its meaning it cannot be enforced. The terms of the agreement must also be such as are capable of performance. An agreement to do an act impossible in itself cannot be enforced. Legal Formalities: A contract may be made orally or in written form. As regards legal effects there is no difference between a contract in writing and contract made by word of mouth. It is however in interest of parties that the contract should be in writing. There are other formalities also which have to be complied within order to make an agreement legally enforceable. In some cases the document in which the contract is incorporated is to be stamped. In some other cases, a contract besides being a written one has to be registered. Thus, where there is a statutory requirement that a contract should be made in writing or in the presence of witnesses or registered the required statutory formalities must be complied with. 3
  4. Some of the essential elements of valid contract are explained in detail herein below: ESSENTIAL ELEMENTS OF VALID CONTRACT 1. OFFER AND ACCEPTANCE A. Offer An offer is not only one of the essential elements of a contract but is the basic building block also. Essentials of Valid Offer 1. 2. 3. 4. 5. 6. 7. 8. The terms offer must be definite, unambiguous and certain and not vague. In law, the offer must be capable of being accepted and giving rise to legal relationship. Offer must result in valid contract when it is accepted. Communication of offer is essential. Offeree must have knowledge of offer before he can accept it. If the offer is lost on the way in transit it is no offer. Offer cannot contain a term the non-compliance of which may be assumed to amount to acceptance. For eg., the offeror cannot say that if offeree does not accept the offer in 2 days offer would be deemed to be accepted. Offer must be made with intention to create legal relationship. Offer must be with the intention of obtaining assent thereto and not merely with view to disclosing intention of making offer. If a person makes a statement without intention to create binding obligation this does not amount to offer — it is mere declaration of intention to offer or an announcement. Such declaration only means offer will be made or invited in future and not that offer is made now. Offer must also be distinguished from mere invitation to offer. Where two parties make identical offers to each other, the offers are cross offers and does not amount to contract. B. Acceptance It is the act of assenting to offer by the offeree. Essentials of Valid Acceptance 1. 2. 3. 4. 5. 6. It must be absolute and unqualified and according to exact terms of offer. It must be communicated to the offeror. A mere mental acceptance is no acceptance. Acceptance of offer cannot be implied from silence of offeree or his failure to reply, unless offeree has by previous conduct indicated that his silence means acceptance. It must be according to mode if any prescribed by offeror or reasonable mode (when no mode is prescribed. Acceptance must be given within time specified or reasonable time. It must be made before offer lapses or terminates, or is revoked or withdrawn. When offer is made to a particular person it can be accepted by him alone — if accepted by any other person there is no valid acceptance. In case of general offer acceptance can be by any member of public. 4
  5. C. Communication of Offer, Acceptance and Revocation Communication of proposal when complete :The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance when complete: i) As against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor; ii) As against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete As against the person who makes it (i.e., offeror) , when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made (i.e., acceptor), when it comes to his knowledge. Revocation of proposals and acceptances A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance, is complete as against the acceptor, but not afterwards. 2. CONSIDERATION Consideration is the price for which the promise of the other is bought and promise thus given for value is enforceable. An agreement without consideration is not enforceable and therefore is void. Essentials of Valid consideration 1. 2. 3. 4. 5. Consideration must move at the desire of the promisor. An act done voluntarily or at the desire of the third party does not amount to valid consideration for contract. Consideration may move from promisee or any other person. Consideration may be past, present or future. However, past consideration is good consideration only if it is done at or given at the desire of the promisor. Consideration need not be adequate but it must be real and competent i.e., it must be of some value in the eyes of law. Consideration must not be unlawful i.e, should not be forbidden by law; or of such a nature that, if permitted, it would defeat the provisions of any law; or fraudulent; or involve or imply an injury to the person or property of another; or regarded as immoral by the Court, or opposed to public policy. Exceptions to rule "No Consideration No Contract" An agreement made without consideration is void, unless 5
  6. 1) Agreement without consideration void, unless it is in writing and registered(Natural Love and Affection).—lt is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other, 2) Or is a promise to compensate for something done (Past Voluntary Service).— It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, or unless. 3) Or is a promise to pay a debt barred by limitation law(Time Barred Debt).— It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. 4) Completed Gifts: Nothing shall affect the validity, as between the donor and donee, of any gift actually made. 5) Agency: No consideration is required in case of an agreement between principal and agent i.e., no consideration is required to create an agency 3. CAPACITY TO CONTRACT Who are competent to contract? 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. In other words, the following persons are incompetent to contract: 1. a) Minors b) Persons of unsound mind c) Persons disqualified from contracting by any law to which they are subject. Minors: (i) (ii) (iii) (iv) (v) An agreement with or by minor is void ab initio. Minor can be promisee or beneficiary i.e., minor may make contract but is not bound by the contract. His agreement cannot be ratified by him on attaining majority. Minor is liable for 'necessaries' supplied or necessary services rendered to him or anyone he is legally bound to support. 'Necessaries' Goods which are necessary or suitable to position and financial status of minor and to his actual requirement at the time of sale and delivery. It includes necessary services — education, training,etc. it is only property of minor which is liable. He is not personally liable. He cannot enter into partnership but may be admitted to benefits of partnership with consent of all partners. 6
  7. 2. 3. (vi) He can be an agent and bind the principal but has no personal liability. (vii) He can always plead minority / No estoppels against minor. (viii) If he has received any benefit under the void agreement he cannot be asked to pay for it. (ix) He cannot be adjudged insolvent. (x) His parents or guardian are/is not liable for the contract entered into by him, even though the contract is for the supply of necessaries to him. But if the minor is acting as an agent for the parents or guardian, the parents or guardian shall be liable under the contract. Persons of Unsound mind: What is a sound mind for the purposes of contracting? A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of 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. Disqualified by law to contract: (i) Alien Enemy (ii) Convict — during the period he undergoes punishment. (iii)lnsolvent- during insolvency period until discharged by court (iv)Foreign sovereign and diplomats (v) Corporation (vi)Married women 4. FREE CONSENT One of the essential elements of a valid contract is that there should be free consent of the concerned parties to the contract. Consent means an act of assenting to offer. Two or more persons are said to consent when they agree upon the same thing in the same sense. Consent is said to be free when it is not caused by (1) coercion, or (2) undue influence, or (3) fraud, or (4) misrepresentation, or (5) mistake, 1. Coercion: "Coercion" is the committing or threatening to commit, any act forbidden by the Indian Penal_Code (45 of 1860), or the unlawful detaining, or 7
  8. 2. 3. threatening to detain, any property, to the_prejudice of any person whatever, with the intention of causing any person to enter into an_agreement. Undue Influence: (1) A contract is said to be induced by "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. (2) A person is deemed to be in a position to dominate the will of another (a) Where he holds a real or apparent authority over the other, or where he stands in a_fiduciary relation to the other; or (b) Where he makes a contract with a person whose mental capacity is temporarily or_permanently affected by reason of age, illness, or mental or bodily distress. (3) Where a person, who is in a position to dominate the will of another, enters into a contract_with him, and the transaction appears, on the face of it or on the evidence adduced, to be _ unconscionable, the burden of proving that such contract was not induced by undue_influence shall lie upon the person in a position to dominate the will of the other. Illustrations (a) A, having advanced money to his son, B, during his minority, upon B' s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. Fraud "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (1) The suggestion, as a fact, of that which is not true by one who does not believe it to be true; (2) The active concealment of a fact by one having knowledge or belief of the fact; (3) A promise made without any intention of performing it; (4) Any other act fitted to deceive; (5) Any such act or omission as the law specially declares to be fraudulent. Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. Illustrations 8
  9. (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A. (b) B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse is unsound. (c) B says to A - "If you do not deny it, I shall assume that the horse is sound". A says nothing. Here, A's silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B. 4. Misrepresentation "Misrepresentation" means and includes (1) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him (3) Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. 5. Mistake Mistake means an erroneous belief about something. Mistake can be - (a) Mistake of law, or (b) Mistake of fact. (a) Mistake of law : When a party enters into a contract, without the knowledge of law in the country, the contract is affected by such mistake but it is not void. A contract is not voidable because it was caused by a mistake as to any law in force in India. The reason here is that ignorance of law is not an excuse at all. However if a party is induced to enter into a contract by the mistake of law then such a contract is not valid. (b) Mistake of fact: Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Explanation : An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. Contract caused by mistake of one party as to matter of fact: A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. Voidability of agreements without free consent When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. 9
  10. A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true. Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable. Power to set aside contract induced by undue influence. When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely, or, if the party who was entitled to avoid it has received any benefit there under, upon such terms and conditions as to the Court may seem just. 5. VOID AGREEMENTS One of the essential elements of an enforceable agreement i.e. a contract is the lawfulness of the object. Behind any enforceable agreement there is an intention to create legal relationship which implies that there is some transaction. The object of such transaction should be lawful, else agreements shall not be enforceable by law. i) Agreement in restraint of marriage void Every agreement in restraint of the marriage of any person, other than a minor, is void. ii) Agreement in restraint of trade void Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception . One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business, therein. Provided that such limits appear to the Court reasonable, regard being had to the nature of the business. iii) Agreements in restraint of legal proceedings void Every agreement, (a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or 10
  11. (b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent. iv) Agreements void for uncertainty Agreements, the meaning of which is not certain, or capable of being made certain, are void. Illustrations (a) A agrees to sell to B "a hundred tons of oil". There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. (b) A agrees to sell to B one hundred tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void. (c) A, who is a dealer in coconut oil only, agrees to sell to B "one hundred tons of oil". The nature of A's trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut oil. (d) A agrees to sell to B "my white horse for rupees five hundred or rupees one thousand". There is nothing to show which of the two prices was to be given. The agreement is void. v) Agreements by way of wager void Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to a person to abide by the result of any game or other uncertain event on which any wager is made. 11
  12. THE PERFORMANCE OF CONTRACTS Every Contract creates certain obligation on each of the parties involved in it. When both the parties to the Contract fulfill their obligations towards each other, the contract is said to be performed. Obligation Of Parties To Contracts 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 this Act, or of any other law. Promises bind the representatives of the promisor in case of the death of such promisor before performance, unless a contrary intention appears from the contract. OFFER TO PERFORM Sometimes it do happens that the promisor offers to perform his obligation under the contract at the proper time and place but the promisee does not accept the performance. This is known as tender of performance or offer to perform. Effect Of Refusal To Accept Offer 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. Requisites of a Valid Tender (i) It must be unconditional (ii) It must be of the whole quantity contracted for or of the whole obligation. (iii)lt must be by a person who is in a position and willing to perform a promise. (iv)lt must be made at a proper time and place. A tender of goods after the business hours or of goods or money before the due date is not a valid tender. (v) It must be made to proper person, i.e., the promisee or his duly authorized agent. It must also be in proper form. (vi)lt may be made to one of the several joint promises. (vii) the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do: (viii) In case of tender of goods, if the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. 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, his acquiescence in its continuance. 12
  13. PERSON BY WHOM PROMISE IS TO BE PERFORMED 1. 2. 3. 4. 5. Promisor himself :lf it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor Agent: Where personal consideration is not the foundation of the contract, the promisor or his representative may employ a competent person to perform it. Legal Representative: A contract which involves the use of personal skill or is founded on personal considerations comes to an end on the death of the promisor. As regards any other contract, the legal representatives of the deceased promisor are bound to perform it unless a contrary intention appears from the contract. Third persons: When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. Joint Promisors: DEVOLUTION OF .JOINT LIABILITIES When two or more persons 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. Any One Of Joint Promisors May be Compelled To Perform When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise. 1. Each promisor may compel contribution 2. A joint promisor compelled to perform may claim contribution: 3. Sharing of loss by default in contribution Effect Of Release Of One Joint Promisor Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee does not discharge the other joint promisor or joint promisors; neither does it free the joint promisor so released from responsibility to the other joint promisor or joint promisors. DEVOLUTION OF JOINT RIGHTS When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased person jointly with the survivor or survivors, and. after the death of the last survivor, with the representatives of all jointly. TIME AND PLACE FOR PERFORMANCE 13
  14. 1. Time for performance of promise, where no application is to be made and no time is specified : Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time. Explanation: The question "What is a reasonable time" is, in each particular case, a question of fact. 2. Time and place for performance of promise, where time is specified and no application to be made: When a promise is to be performed on a certain day, and the promisor has undertaken to perform it without application by the promisee, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. 3. Application for performance on certain day to be at proper time and place: When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business. Explanation: The question "What is a proper time and place" is, in each particular case, a question of fact. 4. Place for performance of promise, where no application to be made and no place fixed for performance.•, When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such place. 5. Performance in manner or at time prescribed or sanctioned by promisee•, The performance of any promise may be made in any manner, or at any time which the promisee prescribes or sanctions. RECIPROCAL PROMISES: Promises which form the consideration or part of the consideration for each other are called reciprocal promises. For eg., A promises to do or not to do something in consideration of the B' s promise to do or not to do something, the promises are reciprocal. Rules Regarding Performance Of Reciprocal Promises 1. Promisor not bound to perform unless reciprocal promisee ready and willing to perform 2. Order of performance of reciprocal promises Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and, where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires. 3. Liability of party preventing event on which the contract is to take effect When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract. 14
  15. 4. Effect of default as to that promise which should be first performed, in contract consisting of reciprocal promises. : When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract. TIME AS THE ESSENCE OF THE CONTRACT When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract. Effect of such failure when time is not essential—lf it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. Effect of acceptance of performance at time other than that agreed upon.—lf, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than that agreed, the promisee cannot claim compensation for any loss occasioned by the non- performance of the promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so. 15
  16. DISCHARGE OF CONTRACT Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate i.e., when the rights and obligations created by it come to an end. A contract may be discharged 1. By Performance 2. By agreement or Consent 3. By impossibility of performance 4. By lapse of time 5. By operation of law 6. By breach of contract Discharge by Performance: Performance of a contract is the most usual mode of its discharge. It may be 1. 2. i) ii) Actual performance: When both the parties perform their promises the contract is discharged. Performance should be complete, precise and according to the terms of the agreement Attempted performance: Where the promisor offers to perform the obligation, but the promisee refuses to accept the performance, tender is equivalent to actual performance Discharge By Agreement or Consent; As it is the agreement of the parties, which binds them, so by their further agreement or consent the contract may be terminated. The various cases of discharge of contract by mutual agreement are as follows: a) Novation: Novation takes place when a new contract is substituted for an existing one between the same parties, or (ii) a contract between two parties is rescinded in consideration of a new contract being entered into on the same terms between one of the parties and the third party The consideration for the new contract is the discharge of the old contract. Novation should take place before the expiry of the time of the performance of the original contract. If it does not. It would be a breach of the contract b) Alteration: Alteration of a contract may take place when one or more of the terms of the contract are is/ are altered by the mutual consent of the parties to the contract. In such a case the old contract is discharged c) Recission; Recission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur- i) by mutual consent of the parties ii) where one party fails in the performance of his obligation, in such case the other party may rescind the contract without prejudice to his right to claim compensation for the breach of the contract 16
  17. 3. d) Remission: Remission means acceptance of a lesser fulfillment of the promise made. Eg., acceptance of the lesser sum than was contracted for, in discharge of the whole of the debt. e) Waiver: Waiver takes place when the parties to the contract agree that they shall no longer be bound by the contract. This amounts to mutual abandonment of the rights by the parties to the contract. f) Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a superior right accruing to the party under some other contract. Discharge by impossibility of performance: If an agreement contains an undertaking to perform an impossibility, it is void ab initio. Impossibility of performance of contract may fall into either of the following categories: (i) Impossibility existing at the time of agreement: According to Sec. 56 para 1, an agreement to do an act impossible in itself is void' This is known as pre- contractual or initial impossibility. The fact of impossibility may be a) known to the parties or (ii) unknown to the parties (ii) Impossibility arising subsequent to the formation of the contract; Impossibility which arises subsequent to the formation of a contract(which could be performed at the time the contract was entered into) is called post- contractual or supervening impossibility. In such case the contract becomes void when the act becomes impossible or unlawful,. Discharge By Supervening Impossibility: (In England, the Doctrine of Frustration is the parallel concept of supervening impossibility. ) A contract is discharged by supervening impossibility in following cases: 1. 2. 3. 4. 5. Destruction of subject matter of the contract without any fault of the parties to the contract. Non-existence or non-occurrence of a particular state of things on the basis of which a contract is entered into between two parties Death or incapacity for personal service: Where the performance of a contract depends on the personal skill or qualification of a party, the contract is discharged on the illness or on capacity or death of that party. Change of Law: When subsequent to the formation of the contract, a change of law takes place or the government takes some power under some ordinance or some special act, so that the performance of the contract becomes impossible, the contract is discharged. Outbreak of war: a contract entered into with an alien enemy during war is unlawful and therefore impossible to perform. Contracts entered into before outbreak of war are suspended during the war and may be revived after the war is over. In the following cases, a contract is not discharged on the ground of supervening impossibility: 17
  18. 1. 2. 3. 4. 5. Difficulty of performance; A contract is not discharged by the mere fact that it has become more difficult of performance due to some uncontemplated events or delays Commercial Impossibility: A contract is not discharged merely because expectation of higher profits is not realized, or the necessary raw material is available at a higher price because of the outbreak of war, or there is a sudden depreciation of currency. Impossibility due to failure of third person: Where a contract could not be performed because of the default by a third person on whose work the promisor relied, it is not discharged. Strikes, lock-out and civil disturbance; Events such as these do not discharge the contract unless the parties have specifically agreed in this regard at the tm of formation of the contract. Failure of one of the objects; When a contract is entered into for several objects, the failure of one of them does not discharge the contract. 4. 5. 6. Discharge by Lapse of time: The 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 not action is taken by the promisee within the periods of limitation, he is deprived of his remedy at law. In other words we may say the contract is terminated. Discharge by operation of Law: A contract may be discharged independently of the wishes of the parties i.e., by operation of law. This includes discharge- a) By death In contracts involving personal skill or ability, the contract is terminated on death of the promisor. b) By merger c) By insolvency: when a person is adjudged insolvent , he is discharged from all liabilities incurred prior to his adjudication Discharge by Breach of Contract: Breach of contract means a breaking of the obligation the law imposes. Breach of contract may be- i) ii) Actual breach of contract: It may occur (a) at the time when performance is due or (b) during the performance of the contract Anticipatory or constructive breach of contract: It occurs when a party repudiates his liability or obligation under the contract before the time for performance arrives 18
  19. REMEDIES FOR BREACH OF CONTRACT: A remedy is the means given by law for the enforcement of a right. When a contract is broken, the injured party (i.e., the party who is not in breach) has one or more of the following remedies: 1. 2. 3. 4. Rescission of the contract: When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case, he is absolved of all his obligations under the contract. When a party treats the contract as rescinded, he makes himself liable to restore any benefits he has received under the contract to the party from whom such benefits were received.. but if a person rightfully rescinds a contract he is entitled to compensation for any dmage which he has sustained through non-fulfillment of the contract by the other party. Specific Performance: In certain cases of breach of contract, where damages are not an adequate remedy, the court may direct the party in breach to carry out his performance according to the terms of the contract. Some of the cases in which the specific performance of a contract may, in the discretion of the court, be enforced as follows: i) ii) iii) When the act agreed to be done is such that compensation in money for its non-performance is not an adequate relief When there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done When it is probable that the compensation in money cannot be got for the non-performance of the act agreed to be done Specific performance will not be granted where- a) b) c) d) e) f) g) Iniunction: damages are an adequate remedy the contract is not certain or is inequitable to either party the contract is in its nature revocable the contract is made by trustees in breach of their trust the contract is of personal nature the contract is made by company in excess of its powers as laid down in its memorandum of association the court cannot supervise its carrying out. Where a party is in breach of a negative term of a contract (ie., 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. Damages: Damages are monetary compensation allowed to the injured party by the court for the loss or injury suffered by him by the breach of a contract. The object of awarding damages for the breach of a contract is to put the injured party in same position, so far as money can do it, as if he had not been injured. 19
  20. I.e., in the position in which he would have been had there been performance and not breach. The foundation of the law of damages is found in the judgment in the case of Hadley v Baxendale wherein it was held: " Where 2 parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both the parties at the time taey made the contract, as the probable result of the breach of it.' Section 73 of the Contract Act which deals with "Compensation for loss or damage caused by breach of contract" is based on the judgement in above case. The rules relating to damages are as follows: 1. 2. 3. 4. 5. 6. Damages arising naturally — ordinary damages: When a contract has been broken, the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. This means that he damages must be proximate consequence of the breach of contract. These damages are known as ordinary damages. In contract of sale of goods, the measure of damages on the breach of the contract is the difference between the contract price and the market price of such goods on the date of the breach. Under section 73, compensation is not to be given for any remote or indirect loss or damages sustained by reason of breach.. Special Damages: Damages other than those arising from the breach of a contract may be recovered if such damages may reasonably be supposed to have been in the contemplation of both the parties as the probable result of the breach of the contract. Such damages known as special damages, cannot be claimed as a matter of right. These can be claimed only if the special circumstances which would result in a special loss in case of breach of contract are brought to the notice of the other party. Vindictive or Exemplary Damages: Although vindictive or exemplary damages have no place in law of contract because they are punitive by nature, but in case of a breach of promise to marry and dishonour of cheque by a banker wrongfully when he possesses sufficient amount to the credit of the customer, the court may award exemplary damages. Nominal damages: Where the injured party has not infact suffered any loss by reason of the breach of contract, the damages recoverable by him are nominal i.e., very small Damages for loss of reputation: Damages for loss of reputation in case of breach of contract are generally not recoverable. An exception to this rule exists in the case of a banker who wrongfully refuses to honour a customer's cheque. Damages for inconvenience and discomfort: Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is 20
  21. 7. 8. 9. that the measure of damages is not affected by the motive or the manner of the breach. If, however, the inconvenience or discomfort caused by a breach is substantial, the damages can be recovered on the ground of fairness. Mitigation of damages; It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. He cannot claim to be compensated by the party in default for the loss which he ought reasonable to have avoided. Difficulty of assessment: Although damages which are incapable of assessment cannot be recovered, the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them. Cost of decree: The aggrieved party is entitled, in addition to damages, to get the cost of getting the decree for damages; the cost of suit for damages is in the discretion of the court. 5. Liquidated Damages and Penalty: Compensation for breach of contract where penalty stipulated for: When a contract has been broken, if a sum is named in the contract as the amount to be paid incase of such breach (liquidated damages), or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Quantum Meruit: The phrase 'quantum merit' literally means as much as earned. A right to sue on quantum merit arises where a contract, partly performed by one party, has become discharged by the breach of the contract by the other party. The right is found not on the original contract which is discharged or is void but on an implied promise by the other party to pay for what has been done. 21
  22. OUASI CONTRACTS 1. Claim For Necessaries Supplied To Person Incapable Of Contracting, Or On His Account If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. 2. Reimbursement Of Person Paying Money Due By Another In Payment Of Which He Is Interested A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. 3. Obligation Of Person Enioying Benefit Of Non-Gratuitous Act Where a person lawfully does anything for another person/or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. 4. Responsibility Of Finder Of Goods A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee. 5. Liability Of Person To Whom Money Is Paid, Or Thing Delivered By Mistake Or Under Coercion A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Illustrations A and B jointly owe 100 rupees to C. A alone pays the amount to C, and B, not knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount to B. Compensation for failure to discharge obligation resembling those created by contract.—When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. 22

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