Indian Contract Act_final Report

8/2/2019 Indian Contract Act_final Report

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CORPORATE & ECONOMIC LAWS

PROJECT REPORT ON

Indian Contracts Act 1872

Submitted to: Dr. Devnani

Presented By: PGDM FINANCE (GROUP 2)


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ACKNOWLEDGEMENT

At the outset, we would like to express our deep sense of gratitude and sincere thanks to

Dr.Dinesh Harsolekar Director, IES Management College and Research Centre for providing an

opportunity to discover the legal aspects corporate world, from a closer perspective.

It is our profound privilege to express our sincere thanks to Dr. Devnani, Prof- In charge, who

gave us an opportunity to carry out this project and has been a constant inspiration.

We would also like to thank Dr. Devnani, for his constant support and guidance throughout the

tenure of this project without his cooperation it would have been a difficult task to accomplish

this project.

We would also like to extend our thanks to all our friends & the unseen hands that have made

this project possible.


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INDIAN CONTRACT ACT, 1872

INTRODUCTION:

This is one of the oldest in the Indian law regime, passed by the legislature of pre-independence

India and received its accent on 25th April 1872. The statute contains essential principles forformation of the contract. The law of contract does not involve or bind the state or people that

are not parties to the contract. It is therefore, said to be a part of Private Law. It contains a

number of principle subject to which the parties may create rights and duties for themselves.

Hence a contract is voluntary and requires an exercise of the will of the parties.

The term Contract means in ordinary sense, any agreement between any two persons.

For business persons, making of contract with others is a very important process to put into

effect their business plans. Those who enter into contracts expect that commitments made shall

be fulfilled. The law of contract seeks to regulate the behavior of persons who make contracts. It

also determines the circumstances under which a promise or an agreement shall be legallybinding on the person making it. It also provides remedies, which are available in the court of

law against a person who fails to fulfill his/her contract.

The law regulation to contracts is contained in the Indian Contract Act, 1872. The Act

came into force on the first day of September 1872, and it applies to the whole India expect the

State of Jammu and Kashmir. The Contract Act is not a complete and exhaustive law on all types

of contracts. It lays down general principles of contract law

THE LAW OF CONTRACT: GENERAL PRINCIPLES

As a result of increasing complexities of business environment, innumerable contracts are

entered into by parties in the usual course of carrying on their business. Contract is the most

usual method of defining the give and take rights and duties in the business transactions. Parties

to the contact are the makers of the law for themselves. They can frame any rules they desire to

the subject matter of their agreements, and the law takes cognizance of their decision unless they

are not legally prohibited.

All the agreements are not studied under the Indian Contract Act, 1872 as some of those

are not contracts. Only those agreements, which are enforceable at law, are contracts.

Agreement:[Section-2 (e)]

The act defines agreement as "Every promise & every set of promises, forming consideration

for each other is called an agreement".


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Thus offer and acceptance together constitute an agreement. An agreement is an expression of

common intentions of twoor more persons.

An agreement may or may not create legal relations or legal obligations between the parties. An

agreement which creates or in capable of creating legal relationship is only enforceable at law is

a contract.

An agreement is a wider concept of offer & acceptance together constitutes an agreement

whereas

agreement & enforceability together constitutes an agreement whereas agreement &

enforceability together constitutes a contract.

Kinds of agreement:-

Valid Agreement: A valid agreement is one which is enforceable at law. In other words,

it is an agreement which is fully operative in accordance with the intention of the parties

as it fulfills all the requirements prescribed for, a valid agreement by thy Indian Contract

Act.

Void Agreement: A void agreement is one which has no legal existence at all i.e. it is an

agreement which does not create any enforceable right or obligation & therefore at law.

Unlawful agreements are examples of void agreements. A void agreement is not

enforceable by law. Unlawful agreements are not enforceable on account of they being

opposed to public policy like agreement in restraint of trade or in restraint of marriage or

in restraint of legal proceedings.

Enforceable Agreement: An agreement enforceable by law is contract(Section 2 ( h)).

Voidable Agreement: A voidable agreement is one which is enforceable by law and is

valid agreement as long as it is not avoided i.e .challenged by the party entitled to avoid

it. A agreement induced by coercion (force), undue influence, fraud or misrepresentation

or mistake is a voidable agreement, not enforceable at law. In a voidable agreement

consent of one of the party is not free consent and the party whose consent is not free

consent is entitled to avoid the contract (challenge the contract) on the ground that his

consent was not free consent. However if he does not challenge the agreement, the

agreement would be binding on both the parties and it will be enforceable at law.

In other words voidable agreement is one which can be challenged at the option of parties

to agreement but not at the option of another.

Unenforceable Agreement: An unenforceable agreement is valid in law but is incapable

of proof because of some technical defect. For example, promissory note which is not at


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all stamped or insufficiently stamped. Law recognizes the validity of the promissory note

but cannot enforce the same due to it being not at all stamped or insufficiently stamped.

Illegal Agreement: An illegal agreement is something against the law itself. It is void-ab-initio. Illegal agreement often involves a commission of crime. They are opposed to

public morals and as such, parties to such agreements are punishable under Indian Penal

Code.

PROPOSAL/OFFER:

The Act defines Proposal as, "When a person signifies to another his willingness to do or

abstain fromdoing anything, with a view to obtaining the assent of that other to such act or

abstinence, he is said to have made proposal. ' [Section- 2(a)"]

Meaning: The word proposal means an offer. The person making the proposal is called as the

Proposer or Offerer. Presence of request, express or implied is an essential element of a valid

proposal. A contract comes into existence only when parties come to some determination with a

view to create some legal rights and ' corresponding legal duties is a preliminary step to this, it

becomes necessary for the parties, to get into communication with each other.

Thus, communication of an idea or desire to do a particular act or to abstain form .doing

something with a view to obtain consent of another person, to such idea or desire is called a

Proposal.

Thus a proposal or an offer must be made with a view to obtain consent of another person. Mere

statement of intention is not sufficient to have a proposal. If a person conveys to another that he

intends to do orhe is willing to do a particular act without any intention to have consent of that

another person it is merely a statement of his intention and such an expression cannot be called

as Proposal or/and Offer.

Classification of Offer

1. General Offer: Which is made to public in general.

2. Special Offer: Which is made to a definite person.

3. Cross Offer: Exchange of identical offer in ignorance of each other.

4. Counter Offer: Modification and Variation of Original offer.

5. Standing, Open or Continuing Offer: Which is open for a specific period of time. The offer

must be distinguished from an invitation to offer.


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DEFINATION AND MEANING OF ACCEPTANCE:-

The act defines acceptance as ''When a person to whom a proposal is made signifies his

assent there to, he is said to be accepted the Proposal."[Section 2(b)]

Thus, acceptance means to give consent to the proposal. In other words, when the person to

whom the

proposal is made signifies his consent to the proposed performance or non-performance of the

act without any condition or alteration he is said to have accepted the proposals.

The person accepting the proposal is called as an acceptor. A proposal when accepted create a set

of promise

Rules regarding acceptance:

1. Acceptance must be absolute and unqualified.

2. Communicated to offeror.

3. Acceptance must be in the mode prescribed.

4. Acceptance must be given within a reasonable time before the offer lapses.

5. Acceptance by the way of conduct.

6. Mere silence is no acceptance.

7. Offree and offerer must be consent

COMMUNITATION OF AN OFFER AND ACCEPTANCE

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 is complete, -

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; as against the acceptor, when it comes to the, knowledge, of the proposer.

The communication of a revocation is complete, -


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as against the person who makes it, 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, when it comes. to his knowledge.

Illustrations

(a) A proposes, by letter, to sell a house to B at a certain price. The communication of the

proposal is complete when B receives the letter.

(b) B accepts A's proposal by a letter sent by post. The communication of the acceptance is

complete, as against A when the letter is posted as against B, when the letter is received by A.

(c) A revokes his proposal by telegram. The revocation is complete as against A when the

telegram is dispatched. It is complete as against B when B receives it. B revokes his acceptance

by telegram. B's revocation is complete as against B when the telegram is despatched, and as

against A when it reaches him.

REVOCATION OF AN OFFER AND ACCEPTANCE

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.

A proposal is revoked -

(1) by the communication of notice of revocation by the proposer to the other party;

(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is soprescribed, by the lapse of a reasonable time, without communication of the acceptance;

(3) by the failure of the acceptor to fulfill a condition precedent to acceptance; or

(4) by the death or insanity of the proposer, if the fact of the death or insanity comes to the

knowledge of the acceptor before acceptance.

CONTRACT [Section 2 (h)]

The Indian contract Act defines contract as "An agreement enforceable at law".

Thus contract is an agreement the object of which is to create legal relationship. A contract

therefore


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is an agreement which either creates or is capable of creating legal rights and corresponding legal

duties which are enforceable at law.

According to Indian Contract Act all agreements are contract if they are made with free consent

of the parties competent to contract, for lawful consideration and with lawful object, provided the

agreement is not expressly declared to be void. In other words an agreement in order to

constitute a valid contract must fulfill the following conditions:-

1. Parties to the agreement must be competent.

2. Parties to the agreement must exercise free consent.

3. The agreement must be for lawful consideration with lawful object.

4. The agreement must not have been expressly declared to be void under any law for the

time being in force in India.

Thus an agreement which fulfill all the above requirements is called a contract, because onlywhen an

agreement fulfills the above conditions it is enforceable-at law. However, if one of the conditions

is not fulfilled the agreement merely remains an agreement but does not become an agreement

enforceable at law and therefore it cannot be, called a contract. In other words all agreements are

not contracts but all contracts are agreement.

ESSENTIALS ELEMENTS OF A VAILD CONTRACT.

According.to section 10, "All agreement are contracts if they are made .by the free ' consent of

the parties competent to contract, for a lawful consideration and with a' lawful consideration and

with a lawful object and are not hereby expressly declared to. be void."

The analysis of the provisions of Section 10 shows that a valid contract must have following

certain essential elements. They are:-

1. Proper offer and its proper Acceptance.

2. Intention to create legal relationship.

3. Free consent.

4. Capacity to contract.

5. Lawful consideration.6. Lawful object.

7. Agreement not expressly declared void.

8. Certainty of meaning.

9. Possibility of performance.

10. Writing and Registration


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o Proper offer and its proper Acceptance: There must be two parties -one making

the offer and the other accepting it. Such offer and acceptance must be valid. An

offer to be valid must fulfill certain conditions, such as it must intend to create

legal relations, its terms must be certain , it must be communicated to the personto whom it is made, etc. An acceptance to be valid must fulfill certain conditions,

such as it must be absolute and unqualified, it must be made in the prescribed

manner etc.

o Intention to create legal relationship: There must be an intention among the

parties to create legal relationship. In case of social or domestic agreements, the

usual presumption is that the parties do not intend to create legal relationship but

in commercial or business agreements the usual presumption is that the parties

intend to create legal relationship unless otherwise agreed upon.

o Free Consent: There must be free consent of the parties to the contract.

According to section l3, consent is said to be free when it is not caused by

(i)Coercion.(ii)Undue influence (iii)Fraud (iv) Misrepresentation, (v) Mistake. If

the consent of the parties is not free, then no valid contract comes into existence.

o Capacity of Parties: Competent Parties: The parties to an agreement must be

competent to contract. In other words they must be capable of entering into a

contract, According Section 11 of Indian contract Act,1872, "Every person is

competent to contract who is of the age of majority according to law and who isof sound mind and not disqualified from contracting by any law to which he is

subject".

o Lawful Consideration: An agreement must be supported by lawful

consideration. Consideration means something in return.1 According to section 23

of the Indian contract Act, 1872, "Consideration is considered lawful unless it is

forbidden by law or is fraudulent or involves or implies injury to the person or

property of another or it immoral or is opposed to public policy.

o Lawful Object: The object of an agreement must be lawful.

o Agreement not Expressly Declared Void: A void agreement is not enforceable

by law. It does not give rise to any rights and obligation. Void agreements are

not enforceable by law as they are opposed to public policy like agreement in

restraint of marriage, agreement in restraint of legal proceeding, agreement in


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restraint of trade and agreement by way of wager haven been expressly declared

void. (Section 24 to 30).

o Certainty of Meaning: The terms of the contract must be certain and clear. In

other words, the contract must not be vague. Contracts which are

vague cannot be enforced. According to section 29 of the Indian contract Act.

1872, agreements the meaning of which is not certain or capable of being made

certain are void.

o Possibility of Performance: The terms of the agreement must be such as are

capable of performance. According to section 56, "An agreement to do an

impossible act is Void". Contracts based on impossibility of performance are not

valid. For example, X promises to share with Z 60% of the treasure, if Z creates a

treasure by magic.

o Writing and Registration: Oral contract is a valid contract. However, the

contract must be in writing and registered, if so required by any law, for example,

gift, mortgage, sale, lease under the Transfer of Property Act, 1882, MOA and

AOA of a company are required to be registered under the companies act.

Documents specified under section 17 of the Indian Registration Act, 1908 are

required to be registered. No particular form of writing is required to constitute a

contract. Intentions of the parties to enter into a particular contract must be there.

The agreement must comply with the necessary formalities as to writing,

Registration, stamping etc., if any required in order making it enforceable by law.

KINDS OF CONTRACT

On the basis of validity:

1. Valid contract: An agreement which has all the essential elements of a contract is called a

valid contract. A valid contract can be enforced by law.

2. Void contract[Section 2(j)]: A void contract is a contract which ceases to be enforceable by

law. A contract when originally entered into may be valid and binding on the parties. It may

subsequently become void. -- There are many judgments which have stated that where any crime

has been converted into a "Source of Profit" or if any act to be done under any contract is

opposed to "Public Policy" under any contract -- than that contract itself cannot be enforced

under the law-


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3. Voidable contract[Section 2(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 other or others, is a voidable contract.

If the essential element of free consent is missing in a contract, the law confers right on the

aggrieved party either to reject the contract or to accept it. However, the contract continues to be

good and enforceable unless it is repudiated by the aggrieved party.

4. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature that, if

permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury

to a person or property of another, or court regards it as immoral or opposed to public policy.

These agreements are punishable by law. These are void-ab-initio.

All illegal agreements are void agreements but all void agreements are not illegal.

5. Unenforceable contract: Where a contract is good in substance but because of some

technical defect cannot be enforced by law is called unenforceable contract. These contracts are

neither void nor voidable.

On the basis of formation:

1. Express contract: Where the terms of the contract are expressly agreed upon in words

(written or spoken) at the time of formation, the contract is said to be express contract.

2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the

parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise

than in words, promise is said to be implied.

3. Tacit contract: Tacit contracts are Implied contract in itself. e.g., taking ticket in the bus,during journey.

4. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not

contracts as there is no intention of parties to enter into a contract. It is legal obligation which is

imposed on a party who is required to perform it. A quasi contract is based on the principle that a

person shall not be allowed to enrich himself at the expense of another.

On the basis of performance:

1. Executed contract: An executed contract is one in which both the parties have performed

their respective obligation.

2. Executory contract: An executory contract is one where one or both the parties to the

contract have still to perform their obligations in future. Thus, a contract which is partially

performed or wholly unperformed is termed as executory contract.


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3. Unilateral contract: A unilateral contract is one in which only one party has to perform his

obligation at the time of the formation of the contract, the other party having fulfilled his

obligation at the time of the contract or before the contract comes into existence.

4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to

the contract is outstanding at the time of the formation of the contract. Bilateral contracts are alsoknown as contracts with executory consideration.


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DISTINGUISHED BETWEEN AGREEMENT AND CONTRACT:

Agreement

Contract

Offer and acceptance together

constitute an agreement.Agreement and enforceability together

constitute a contract.

Every promise and every set of promise

forming consideration for each other is

an agreement.A contract is an agreement enforceable by law.

Agreement may not create any legal

obligation. All agreements are not

contracts.

A contract necessarily creates a legal

obligation. All contracts are agreements.

An agreement is a wider concept.Contract is a specie of an agreement.

Agreement is not a concluded or a

binding contract. Contract is concluding and binding.


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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 or constituted by law is called Quasi Contract.

In Quasi Contracts, obligation between the parties is not contractual but one which is treated as

contractual by law. These obligations are therefore, implied by law. Quasi contracts are called

implied contracts also. These are implied because they are such obligations which resemble

those created by contracts. The essentials for formation of a contract are absent but as the results

resemble those of a contract, they are called Quasi Contracts. They are called Construction

Contracts under English law. Indian law terms Quasi Contracts as Certain relations resembling

those created by contract.

Law, in such cases, places the parties in the same position as they would have been if there was a

contract in fact, between them. Second part of section 73 of the Act gives the right to the injured

party in the following words:

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.

It will thus be observed that Quasi Contracts cannot strictly be called contracts but they create

certain obligations and are therefore, treated as contracts by law. The aggrieved party is placed in

the same position as if the actual contract exists, on the footing that such obligations must be

fairly compensated.

Types of Quasi Contracts

Sections 68 to 72 of the Act lay down the law regarding such obligations:

1. Claim for supply of necessaries to person incapable of contracting (Sec.68): If a person

incapable of entering into a contract or any one who is legally bound to support, is supplied by

another person with necessaries suited to his condition in life, the person who has furnished suchsupplies is entitled to be reimbursed from the property of such incapable person.

Illustrations:

(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be

reimbursed from Bs property. (b) A supplies the wife and children of B, a lunatic, with

necessaries suitable to their condition in life. A is entitled to be reimbursed from Bs property.


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Necessaries must be supplied to a person incapable of contracting or on his account, like a minor,

lunatic, wife or daughter of a lunatic, or a minor, and others disqualified from contracting by law

to which they are subject. A married woman has a right to be legally supported by her husband.

If necessaries are supplied to her by any person, such a person has a right to be reimbursed.

Necessaries are as such is a mixed question of fact and law in each case. Things suited to theconditions of incompetent parties, can be classified as necessaries. Necessaries include articles

required to maintain a particular person in the state and degree in the life in which he is. Things

necessary are those without which an individual cannot reasonably exist. Loan to a minor to save

his property from sale in execution of a decree is a necessity. Debt incurred for performing

funeral obligations of the father of a minor is a necessity.

Even money advanced for purchase of necessaries can be claimed. The price paid for supply of

such necessaries should be reasonable. The incapable person is not personally liable. Only his

property is liable for necessaries. The liability is quasi contractual in nature, as he is incapable of

giving his consent.

2. Reimbursement of money paid, in which he is interested: (Sec.69): 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.

Illustration:

B holds land in Bengal, on a lease granted by A, the Zamindar. The revenue payable by A to the

Government being in arrears, his land is advertised for sale by the Government. Under the

revenue law, the consequences of such sale will be the annulment of Bs lease. B to prevent the

sale and the consequent annulment of his own lease pays to the government the sum due from A.A is bound to make good to B the amount so paid.

3. Obligation of person to pay for enjoying benefit of non-gratuitous act: (Sec.70): Where a

person lawfully does anything to another person, or delivers anything to him not intending to do

so gratuitously and such other person enjoys the benefit there of, the latter is bound to make

compensation to the former in respect of or to restore the thing so done or delivered.

Illustration:

(a) 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.

4. Responsibility of finder of goods: (Sec.71): 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 a person to whom money is paid or thing delivered by mistake or under

coercion: (Sec. 72): A person to whom money has been paid, or anything delivered by mistake

or under coercion, must repay or return it.


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Illustration:

A and B jointly owe Rs. 100 to C. A alone pays the amount to C, and B not knowing this fact,

pays Rs.100 over again to C. C is bound to repay the amount to B.


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CONSIDERATION:- S/2(d)

.

The Indian Contract Act, define.-: consideration as "When, at the desire of the promiser the

promisee or any other person ,

(i) has done or abstained prom doing

(ii) does or abstain form doing or

(iii) promises to do or abstain from doing something, such art or abstinence or promise is

called consideration 'for the promise".

Meaning of Consideration:-

Consideration is the price for which the promise of another person is bought. A promise given

for value is only enforceable it law-.'An agreement, without consideration is treated as a voidagreement. An analysis of any contract will show that, it consists of2 separate parts i.e. promise

on one hand and consideration for promise on the other hand.

A person who gives promise to do or abstain from doing something as a legal duty

usually does so as written or equivalent to some benefits accuring to him or written or equivalent

to some loss /damage or inconvenience that may or may not have been caused to another person

in respect of the promise given. The benefit so received or loss, damage or inconvenience so

caused is regarded in law as consideration for the promise.

Consideration is the backbone and a very important element, of any contract to create legalrights and duties between the parties .law has no means nor does it offer any remedy to compel a

party to perform his promise under an agreement which is made without consideration. A

promise or an agreement without consideration is null & void and not enforceable at law,

"EX NUDO PACTO NON ORITUR ACTIO".

That is, ''Out of a bare promise no cause of action can arise".

It means from a mere promise no right of action arises. Thus a promise in order to be enforceablemust have Consideration. Consideration can only establish legal rights between the parties. Thus

as a rule an agreement without consideration is void.

A promise to abstain from exercising an enforceable right is good consideration. However a

promise to do something which a person is already bound to do by law is no consideration at all.

ESSENTIAL REQIUREMENTS OK A VALID CONSIDERATION:-


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1. Consideration must move only at the desire of the promisor: In order to have valid

consideration, it is necessary that the act done or agreed to be done by another must be

done at the desire of the promisor. This desire or request need not be expressed. It can be

implied. Thus an act done or services rendered voluntarily would not constitute

consideration.

1- Consideration may move form the promisee or form any other person; For a valid

consideration it is sufficient if

the act or abstinence or the promise constituting consideration was done or given at the

request of the promisor.

It is not necessary that the promise himself should be benefited by the consideration. A

stranger to the contract can enforce a contract in certain cases namely when he is a

beneficiary for e.g. Mr. A agreed to gift his property in favour of Mr. B on a promise

from Mr. B to pay RS. 10,000 every month to the daughter of Mr.A . In this exampledaughter of Mr. A who is a stranger to the contract can enforce the contract as she is a

beneficiary to the contract. Though no consideration has moved from her side, it is

sufficient that Mr, A gave a promise in return for Mr. B's promise.

2- Consideration may be either a positive act or negative act or a promise given to the

effect: In other words consideration may be either to do something or not to do something

or a promise to that effect.

3- . Consideration may be past, present or" future:-. A valid consideration may be past,

present,future. In other words as per the definition of consideration a past act is also a

sufficient consideration. It need not necessarily be a present or a future act. A promise

given by a person to compensate for the past act already performed by another is valid

promise enforceable at law as the past act is treated as valid consideration by the contract

act for eg. Mr. A promised to pay RS. 10,000 to Mr. B having found out a valuable article

cost by Mr. B. this is an e.g. of past conduct.

The definition also suggests that the consideration may be present consideration or it may be

future consideration for e.g. Mr. A sold an derived certain goods to Mr. B and Mr. B paid RS

20,000 against the said goods to Mr. A. this is an e.g. of present consideration. Similarly for e.g.

Mr. A delivered goods to MR. B against the promise given by Mr. B to Mr: A to pay the price of

the goods after 3 months. This is an example of future consideration.


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1. Consideration must not be unlawful and illegal:- To have a valid consideration the act or

the promise must be lawful. It is unlawful and illegal if it is forbidden by Indian Penal

code or by any other law or it is of such nature that if permitted it would defeat the

provisions of any law in force. Consideration is void if it is for any immoral purposesimilarly; consideration is void if it is opposed to public policy.

2. Consideration must be real and not illusion:- Consideration is not real when it exists

merely in words without any intention of performing it. It is an illusion when it is

physically or legally impossible to perform. For e.g. Mr. A promised to Mr. B to put life

into the dead body of father of Mr. B. Mr. B promised to pay RS. 2,00,000/- to Mr. A.

This is an example of consideration which is void being illusion.

3. Consideration need not be adequate:- Consideration need not be adequate however it

should be of some value in the eyes of law. Law will not enforce a promise given for

nothing. It is for the parties to decide adequacy of consideration and the court will not sit

to decide adequacy of consideration. However under certain - circumstance inadequate

consideration may be taken as one of the ground or as an evidence to prove that the

consent of the party was not free consent.

Exceptions to the rule that, the agreement without, consideration is void-

1 An agreement made out natural love and affection:- An agreement made out of natural

love and affection between the parties standing in near relations to each other is a valid

agreement enforceable at law even if it is without consideration provided it- is in writing.

Following persons are generally said to be related to each other act of natural love and

affection by the contract act viz. father and son, brother and sister, mother and daughter,

husband and wife etc.

2 An agreement to pay time barred debts:- A promise or an agreement without any fresh

consideration to pay the debts barred by law of limitation is enforceable provided it is inwriting and signed by the/debtor or his duly authorized agent.

3 Agreement of gift:-An agreement which is entered into to give gift is valid agreement

enforceable at law and it does not require any consideration. However when a gift is in

respect of immovable property. The agreement must be in writing and must be registered.


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4 An agency agreement: - An agreement whereby an agency is created is a valid agreement

enforceable at law even when there is no consideration.

Free consent

Definition of free consent:-

Free consent is an important ingredient of a valid agreement. Absence of free consent of the

parties makes the agreement violable.

The word consent is defined as "Toagree upon the same thing in same sense."

Thus consent, is must to have an agreement if there is no consent then there is no agreement

therefore it is essential that both the parties agree upon the same thing in same sense.

When parties agree to the something in same sense they are said to be at ad-idem the parties are

not at ad-idem on the subject matter about which they are negotiating there can be no agreement

between them for e.g. A document was put before an old illiterate man who was falsely

represented that the document was a document of guarantee whereas infact it was a bill of

exchange. It was held, that the old man is not liable on bill of exchange since parties were riot at

ad-idem.

Thus, when there is no consent there is no agreement. However - to create a contract mere

consent is not sufficient-but there should be free consent of the parties to the agreement.

Consent is said to be not free consent. When it would not have been given but, for the

existence of coercion,Undue influence, misrepresentation or mistake.

When there is no consent there is no agreement. However when there is consent but not free

consent the agreement is voidable at the option of the party whose consent was not free consent.

In other words a party whose consent is not free consent can avoid the agreement by challenging

the agreement, in the court of law and if it is proved that the consent of the party was not freeconsent he will be relieved form the obligations under the agreement and the agreement will be

set aside. At the same time he is entitled to get back what he had parted or delivered under the

agreement.


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COERCION

The Indian Contract Act. defines coercion as "Committing or threatening to commit an act

forbidden by Indian Penal code or unlawfully detaining or threatening to detain the property

of another to the prejudice of any person whatever with an intention to induce another person

to enter into an agreement,".

Coercion is simple words means force but under Indian contract act coercion is either actually

committing an act or giving threats to commit an act which is an offence under Indian penal

Code.

As per the Indian contract act coercion also includes any act of unlawfully detaining the property

or giving threats to detain the property of another person with an intention to force another

person to enter into a contract. Thus, coercion includes physical compulsion, fear, force or any

act or threat which is an offence under Indian penal code provided the act is done or threat is

given with an intention to force another person to give consent for an agreement. However it isnot necessary that Indian penal code should be in force at the place where such act is done or

threat is given.

Thus, when the consent of another person is obtained by coercion, such aparty is entitled to have

the agreement, set aside on the ground that his consent is not free consent and the agreement is

voidable. It is for the party whose consent is so obtained has to prove that his consent was

obtained by coercion. Such a party is not only entitled to have the agreement set aside but is also

entitled to get back what he had parted or delivered under the contract for which his consent was

obtained by coercion.

UNDUE INFLUENCE:-'

A contract is said to be induced by undue influence when the relations existing between the

parties are such

that one of the person is in a position to dominate the will of another and he uses that position to

obtain advantage over another.

Thus, consent is said to be affected by undue influence.When aperson who is in a dominating

position takes undue advantage of his dominating position by actually using that position over

another. A person is seemed to be in dominating position under the following circumstances.

1. When he is having real or apparent authority over another for e.g. father and son, advocate and

client, doctor and patient, teacher and student etc

2. When he stands in fiduciary positional (the position of a trustee) for e.g. Guardian and ward,

directors and shareholders etc.


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3. When he enters into a contract with a person whose mental capacity is permanently or

temporarily-affected by reason of old age, illness, mental or bodily distress.

Thus, undue influence is an unbelievable use of power arising out of certain circumstances or

relations. The provisions of the Indian contract act. empowers the court, to protect a person from

being forced or misled by aperson standing in a dominating position.

When consent to an agreement is obtained by undue influence agreement is voidable at the

option of the person whose consent was so obtained. The party whose consent is obtained by

undue influence is not only entitled to have a contract set aside but is also entitled to get hack

what he had paid or delivered under the contract.

The burden of proof that the agreement, was not caused by undue influence lies heavily on the

person benefiting by the agreement i.e. when a person who is in a domination position enters into

a contract with another and the contract appears on the face of it to have been caused by undue

influence, the burden of proof that the contract was not induced by undue influence shall be onthe person who is in a position to dominate the will of another.

A person who stands in n dominating position and who is said to have obtained consent by undue

influence should in order to prove that the consent was free consent and that it was not obtained

by undue influence will have to show that the agreement was duly explained and interpreted and

the person understood the agreement and he had independent advise and he signed the agreement

at his own will and desire.

CAPACITY TO CONTRACT

Who is competent to contract? As per section 11 of the Indian Contract Act

(a) Every person who has attained the age of majority,

(b) Who is of sound mind and

(c) Is not otherwise disqualified from contracting is competent to contract.

(a) Age of majorityIn India, the age of majority is regulated by the Indian Majority Act.

Every person domiciled in India attains majority on the completion of 18 years of age.

(b) Sound mindAs per section 12 --A person is of sound mind if at the time when he

makes it, he is capable of understanding it and of forming a rational judgement as to its


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effect upon his interests. Section further lays down that 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 cannot make a contract when he is of unsound

mind.

(A) Position of Minors agreement

1. An agreement made with minor is altogether voidThe word void means void as against

the minor. Contract with or by a minor is altogether void. The Act provides that a person who

is a major is competent to contract. An agreement by a minor involves a promise on his part and

he is incapable of giving a promise imposing a legal obligation. Therefore, the agreement with

the minor is void ab initio

Mohribibee V Dharmodas Ghose illustrates this point.

In this case a minor has mortgaged his house in favour of B to secure a loan of Rs. 20000/- As

part of this amount Rs. 10500/- was advanced to A, a minor by B. A the minor sued for the

cancellation of the mortgage on the ground that he was minor when he executed the mortgage. It

was held that mortgage was void and was cancelled. Privy council which decided the case held

that the minors agreement is void. There is no question of refunding the amount. In this case B

who advanced money was aware that A was minor. Court held that if A the minor is directed to

refund the amount, then this is tantamount to enforce an agreement which is void.

2. Minor can be a beneficiaryThough a minor is not competent to contract. There is nothing,

which prevents him from making the other party bound to the minor. Thus minor though

incompetent to contract may accept a benefit. A promissory note executed in favour of a minor is

not void and can be sued upon by him. In the case

Raghavachariah Vs. Srinivas it was held that a mortgage executed in favour of minor and minor

can a get a decree for its enforcement. A minor under a contract of sale delivered goods to the

buyer. Minor can maintain a suit for the recovery of price. 3. Minor can always plead minority

:- A minors agreement is void. Any money advanced to a minor on a promissory note orotherwise, cannot be recovered. Even when a minor procures a loan by falsely representing that

he is full age, he can plead his minority in a suit intended to recover the amount from him (minor

the suit against him will be dismissed)

Applicability of Doctrine of Restitution :-

Following observations are important in this connection :-


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(a) If an infant obtains property by misrepresenting his age, he can be compelled to restore it but

only so long as the same is traceable in his possession. This is known as the equitable doctrine of

restitution.

(b) But where the infant has sold the goods, he cannot be made to repay the value of the goods

because that would amount to enfocing a void agreement.

(c) Again the doctrine of restitution is not applied where the infant has obtained cash instead of

goods. The well-known authority on this point is Leslie Ltd. Vs. Sheill. Lord Summer who

delivered the judgement pointed out that the minor might have spent the money as his own, there

was no chance of tracing it and no possibility of restoring the very thing got and the court would

not pass a personal decree against the minor.

(d) A minor had fraudulently mortgaged and sold certain properties. He invokes the aid of the

court for the cancellation of his contract. Thus he is the plaintiff. The court may grant relief and

may compel him to restore all benefits obtained by him under the contract or make suitablecompensation to the other party. Reason is simple. He who seeks justice must do justice.

The principle of restitution is contained in Section 33 of the Specific Relief Act.

The net result may be stated in the following two propositions :-

(I) Where void agreement has been cancelled at the instance of the party thereto, the court may

require him to restore such benefits as he has received and to make any compensation to the

other party which justice may require.

(II) Where the minor (defendant) successfully resists any suit on the ground that the contract by

reason of his being incompetent is void against him, he may be required to restore the benefits, if

any, obtained by him but only to the extent to which he or his estate has benefited thereby.

4. Ratification on attaining majority is not allowedAs a minors agreement is void he cannot

validate it by ratification on attaining majority. For instance, a minor borrows money and

executes a promissory note. On attaining majority, he executes a fresh promissory note in

substitution of the one executed as a minor. The second promissory note is void as it is without

consideration.

5. Contract by guardianhow far enforceable Though a minors agreement is void. His

guardian can, under certain circumstances enter into a valid contract on the minors behalf.Where the guardian makes a contract for the minor and which is within his {guardian}

competence and which is for the benefit of the minor. Such a contract is valid which minor can

enforce. For instance a guardian can make an enforceable contract of marriage for a minor. It is

customary among most of communities in India for parents to arrange marriages between minor

children and the law has to adapt itself to the habits and customs of the people. Similarly, when

the father of the bridegroom contracts with the father of the bride to pay the bride an allowance


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the bride can sue her father-in-law to recover arrears of the allowance. But all contracts made by

guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power

to bind the minor by a contact. In the case of Raj Rani V Prem AdibThe plaintiff is minor

who was allotted by the defendant, a film producer the role of an actress in a particular film., The

agreement was made with her father. The defendant subsequently allotted that role to another

artiste and terminated the contract with the plaintiffs father. The Bombay High Court held that

neither she nor her father could file the suit on the promise. It was a contract with the plaintiff,

and she being a minor Therefore, it was a nullity If it was a contract with her father, it was void

for being without consideration. The promise of a minor girl to serve being not enforceable

against her cannot furnish any consideration for the defendants promise to pay her a salary.

6. Liability for necessariesHowever, the contract with minor for necessaries is valid and

minors property is liable. This is illustrated in Section 68 of the act to the effect 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. Thus any

person would be entitled to reimbursement out of the minors estate, for necessaries supplied to

him or to his family whom he is bound to support A minor cannot be held personally liable for

necessaries but his property is liable. What is necessary ? Necessaries as defined by the English

Sale of Goods Act, mean goods suitable to the condition in the life of infant as required by him at

the time of sale and delivery. It includes not only food and clothing and housing but also includes

the education and the instruction needed. Necessaries also include services offered. Articles of

mere luxury offered are always excluded though luxurious articles of utility are in some and

relevant appropriate cases may be allowed. Even the money advanced to buy the goods and

services necessary are also included and covered. As is clear from the above discussion, the termnecessary is a relative fact to be determined with reference to the fortune and circumstances of

the particular minor. The infants need of things may also sometimes depend upon the peculiar

circumstances under which they are purchased and the use to which they are put. For instance,

articles purchased by an infant for his wedding may be deemed necessary, while under ordinary

circumstances the same articles may not be so considered.

Example:- A minor who was a student brought 11 fancy coats from N. He was at that time

adequately provided with clothes. Held, not a single coat was a necessity. His properties could

not therefore, be attached for its payment. It is immaterial whether the other party knows this or

not (Nash V. Inman)

(B) Contract by a person of unsound mindA person of unsound mind is incapable of entering

into a contract. An agreement by a person who is not of sound mind is void. However, such a

person can enter into a valid contract during an interval of lucidity.

Unsoundness of mind is one who is -(i) Incapable of understanding the contract


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(ii) and of forming a rational judgement as to its effect upon his interest.

Idiots, lunatics and drunken persons are examples of those having an unsound mind. Where a

person is usually of sound mind, but occasionally becomes a person of unsound mind cannot

enter into greement when he turns unsound. Similarly, a person who is unsound mind can make

a contract when he turns sound mind. For example a patient in a lunatic asylum, who is atintervals of sound mind may contract during such intervals.

An illustration is the decision of the Patna High Court in Inder Singh V Parmeshwardhari Singh.

A property worth about Rs. 25000/- was agreed to be sold by a person for Rs. 7,000/- only. His

mother proved that he was a congenital idiot incapable of understanding the transaction and that

he mostly wandered about. A person to all appearances behave in a normal fashion, but at the

same time he may be incapable of forming a judgement of his own.

The liability for necessaries of life supplied to persons of unsound mind or to whom he is legally

bound to support is the same as of minors. (Section 68)

(C) Contract by disqualified persons Besides minors and persons of unsound mind, there are

also other persons who are disqualified from contracting, partially or wholly. Contracts by such

person and with such persons are void. If, by any provincial legislation, person is declared

disqualified proprietor, he is not competent An alien enemy during war cannot enter into a

contract with an Indian subject. He cannot sue in Indian Courts without a licence from the

Central Government Contracts made before the war may either be suspended or disallowed if

they are against the public policy or if their performance would benefit the enemy. Similarly, a

statutory corporation cannot enter into a contract which is ultra vires its memorandum. Likewise,

municipal bodies are disqualified from entering into contracts which are not within theirstatutory powers. Sovereign States, Ambassadors and Diplomatic Couriers enjoy certain special

privileges with the result that they cannot be legally proceeded against in Indian Courts and

Indian Citizen has to obtain a prior sanction of the Central Government to enable himself to sue

them in our law courts. However, they can, at their will enter into contracts which may be

enforceable in Indian Courts.

Insolvents : When a debtor is adjudged insolvent, his property vested in the official receiver or

the official assignee. As such the insolvent is deprived of his power to deal in that property It is

only the official receiver or the official assignee who can enter into contract in respect of that

property and can sue and be sued on his behalf.

Convict :- A convict while undergoing imprisonment is incapable of entering into contract. This

incapacity to contract comes to an end when the period of sentence expires or when he is

pardoned.


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PERFORMANCE OF CONTRACTS

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 promisors in case of the death of such

promisors before performance, unless a contrary intention appears from the contract.

For eg:

A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that

day. A's representatives are bound to deliver the goods to B, and B is bound to pay the Rs. 1,000

to A's representatives

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

Every such offer must fulfill the following conditions:-

1) it must be unconditional;

2) it must be made at a proper time and place, and under such circumstances that 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

3) 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. An offer to one of several joint promisees has the same

legal consequences as an offer to all of them

For Eg:-

A contracts to deliver to B at his warehouse, on the 1st March, 1873,100 bales of cotton of a

particular quality. In order to make an offer of a performance with the effect stated in this

section, A must bring the cotton to B's warehouse, on the appointed day, under such


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circumstances that B may have a reasonable opportunity of satisfying himself that the thing

offered is cotton of the quality contracted for, and that there are 100 bales.

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

For Eg:-

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two

nights in every week during the next two months, and B engages to pay her 100 rupees for each

night's performance. On the sixth night A willfully absents herself from the theatre. B is at

liberty to put an end to the contract

Person by whom promise is to be performed

If 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. In other cases, the promisor or his representatives may employ a

competent person to perform it

For Eg:-

A promises to pay B a sum of money. A may perform this promise, either by personally paying

the money to B or by causing it to be paid to B by another; and, if A dies before the time

appointed for payment, his representatives must perform the promise, or employ some proper

person to do so.

Time for performance of promise, when 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 areasonable time.

Explanation.- The question "what is a reasonable time" is, in each particular case, a question of

fact.


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Time and place for performance of promise, where time is specified and no application to

be made

When 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 theplace at which the promise ought to be performed.

For Eg:-

A promises to deliver goods at B's warehouse on the first January. On that day A brings the

goods to B's warehouse, but after the usual hour for closing it, and they are not received. A has

not performed his promise.

Performance of reciprocal promises

Promisor not bound to perform, unless reciprocal promisee ready and willing to perform. When a

contract consists of reciprocal promises to be simultaneously performed, no promisor needperform his promise unless the promisee is ready and willing to perform his reciprocal promise.

For Eg:-

A and B contract that A shall deliver goods to B to be paid for by B on delivery. A need not

deliver the goods, unless B is ready and willing to pay for the goods on delivery.

B need not pay for the goods, unless A is ready and willing to deliver them on payment.

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.

For Eg:-

A and B contract that A shall build a house for B at a fixed price. A's promise to build the house

Must be performed before B's promise to pay for it


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Void Agreement:A void agreement is one which has no legal existence at all i.e. it is an agreement which

does not create any enforceable right or obligation & therefore at law. Unlawful agreements

are examples of void agreements. A void agreement is not enforceable by law. Unlawfulagreements are not enforceable on account of they being opposed to public policy like

agreement in restraint of trade or in restraint of marriage or in restraint of legal proceedings.

Wagering agreement :

Wagering agreement consists of promises to give money or moneys worth upon the

determination or ' ascertainment of an uncertain, event. In other words wagering agreement is

one by which two or more persons holding opposite views in respect, of future issue which is an

uncertain event or in respect of an unascertained past event mutually agree that depending upon

the determination or ascertainment of the uncertain event one shall win from another and that

another shall pay or hand over to him a sum of money or moneys worth. Thus, in wagering

agreement neither of the contracting party has any personal interest in the subject matter of the

contract i.e. in the uncertain event itself for e.g Mr. A and Mr. B agreed that if it rains tomorrow

Mr. A will pay RS. 1000/- to Mr. B and if it does not rain tomorrowMr B will pay Rs.1000/- to

Mr A. This is an example of wagering agreement. The event whether it will rain tomorrow or notis uncertain event Neither of the party have any control over the event nor thev have any

personal interest in the event itself. The agreement also involves mutual chance of gain and loss.

Thus wagering agreement is an agreement between the parties to the effect, that if an agreed

uncertain event happens one party shall pay a certain sum of money to another and in the

contrary i.e. the uncertain event not happening another shall pay to first. In other words an

agreement which has following features is called a wagering agreement.

1. A promise must be conditional i.e. dependent upon happening or non-happening of an

uncertain future event or it may be conditional as to ascertainment of a past uncertain

event.

2. Parties to the agreement should have no controlover the happening or non-happening of

the event nor the parties to the agreement should have any personal interest in the

uncertain-event.
http://co.nditionaj.as/http://co.nditionaj.as/http://conlr.nl/http://conlr.nl/http://conlr.nl/http://co.nditionaj.as/


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3. There must be Mutual Chance of gain and loss i.e. gain if one must

be the

loss of another.

4. Promise must be to pay money or moneys worth.

The agreement by way of wager is a void agreement as per the Indian contract act and no suit

can be filed to enforce any right arising out of wagering agreement.

Following are some of the agreement or transaction which are similar to wagering agreement

but are not called wagering agreement and are enforceable at law:- -

1. Share market transactions

2. Horse racing

3. Lottery tickets

4. Games of skill and athletic

5. Insurance contract: In an insurance contract there is always an insurable interest i.e.

Parties are interested in the subject matter for which the insurance is taken whereas there is no

such insurable interest in wagering agreement and neither of the parties to the contract has any

personal interest in the event itself.

Contingent contract:

Section 31. "Contingent contract" defined

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.

Section 32. Enforcement of Contracts contingent on an event happening

Contingent contracts to do or not to do anything in an uncertain future event

happens, cannot be enforced by law unless and until that event has happened. If the

event becomes impossible, such contracts become void.

Section 33. Enforcement of contract contingent on an event not happening

Contingent contracts to do or not to do anything if an uncertain future event does

not happen, can be enforced when the happening of that event becomes impossible,

and not before.

Section 34. When event on which contract is contingent to be deemed impossible, if

it is the future conduct of a living person

If the future event on which a contract is contingent is the way in which a person will


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act at an unspecified time, the event shall be considered to become impossible when

such person does anything which renders it impossible that the should so act within

any definite time, or otherwise than under further contingencies.

Section 35. When contracts become void, which are contingent on happening of

specified event within fixed time

Contingent contracts to do or not to do anything, if a specified uncertain event

happens within a fixed time, become void, if, at the expiration of the time fixed, such

event has not happened, or if, before the time fixed, such event becomes impossible.

When contracts may be enforced, which are contingent on specified event not

happening within fixed time : Contingent contract tutu or not to do anything, if a

specified uncertain event does not happen within a fixed time, may be enforced by

law when the time fixed has expired and such event has not happened, or before the

time fixed has expired, if it become certain that such event will not happen.

Section 36. Agreements contingent on impossible event void

Contingent agreements to do or not to do anything, if an impossible event happens,

are void, whether the impossibility of the event is known or not to the parties to

agreement at the time when it is made.

Breach of contract:

Section 73. Compensation of loss or damage caused by breach of contract

When a contract has been broken, the party who suffers by such breach is entitled to receive,

form the party who has broken the contract, compensation for any loss or damage caused to him

thereby, which naturally arose in the usual course of things from such breach, or which the

parties knew, when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss of damage sustained by

reason of the breach.

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.


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Explanation : In estimating the loss or damage arising from a breach of contract, the means

which existed of remedying the inconvenience caused by non-performance of the contract must

be taken into account.

Section 74. Compensation of 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 in

case of such breach, 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.]

Exception.When any person enters into any bail-bond, recognizance or other instrument of

the same nature or, under the provisions of any law, or under the orders of the 2[Central

Government] or of any 3[State Government], gives any bond for the performance of any public

duty or act in which the public are interested, he shall be liable, upon breach of the condition of

any such instrument, to pay the whole sum mentioned therein.

Explanation. A person who enters into a contract with Government does not necessarily

thereby undertake any public duty, or promise to do an act in which the public are interested.

Section 75. Party rightfully rescinding contract, entitled to compensation

A person who rightfully rescinds a contract is entitled to consideration for any damage which he

has sustained through the no fulfillment of the contract.

Illustration tc "Illustration"

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in

every week during the next two months, and B engages to pay her 100 rupees for each nights

performance. On the sixth night, A wilfully absents herself from the theatre, and B, in

consequence, rescinds the contracts. B is entitled to claim compensation for the damage

which he has sustained through the non-fulfilment of the contract.


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Discharge of the contract

Discharge by performance

Where the parties precisely and completely perform their contractual obligations, the contract

will be discharged by performancebut a discharge by performance may still occur wheredeviations in performance are microscopic (the de minimis rule).

Where a partys obligation is to pay a stipulated amount, payment of that amount will constituteprecise and complete performance by him.

Where the contract does not stipulate a completion date for performance, performance must be

completed within a reasonable time. Failure to do so will constitute breach of contract.

Where a time for performance is stipulated, the ability to discharge the contract for failure toperform on time will depend on whether or not time is of the essence of the contract.

Attempted performance is known as tender, and the effect of a tender depends on whether the

tender was the payment of a sum of money or the performance of some other act.

Discharge by agreement

A contract may be brought to an end by the mutual consent of the parties.

A party will need to provide consideration for the other partys promise to discharge in order to

be discharged by agreement (unless the agreement to discharge is executed by deed).

The formalities that apply to the creation of a contract do not apply to its discharge, unless the

discharge is partial, in which case, it will be required to comply with the relevant formality.

Discharge by breach Breach of contract occurs where a party to a contract, without lawfulexcuse, fails to perform its contractual obligations or performs them in a defective manner.

There are four types of breach: renunciation;incapacitation;anticipatory breach;

defective performance.

Subject to an effective exclusion clause, a breach of contract always entitles the nonbreachingparty to damages.

If the breach is repudiatory, the nonbreaching party is entitled (subject to an exclusion clause)to terminate the contract. Renunciation, incapacitation, and anticipatory breach are allrepudiatory breaches.

Where performance is defective, the right to terminate the contract will depend upon the type of

term breached. The three types of term are conditions, warranties, and innominate terms. A termcan be classified by statute, judicial precedent, orby the parties intentions as expressed in thecontract, or inferred from the subject matter and surrounding circumstances.

Breach of a condition allows the non breaching party to terminate the contract and claim

damages. Breach of warranty allows the recovery of damages only. Breach of an in nominate

term will provide a right to terminate where the breach deprives the non breaching party ofsubstantially the whole benefit of the contract.

Instead of terminating the contract, the non breaching party may affirm the breach and continuewith the contract.

Liability or a remedy for breach of contract can be excluded or limited by an exclusion clause


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Discharge by frustration

Frustration provides the parties with a lawful excuse for breaching their contractual obligations

where an event occurred that was outside of their control.

The frustrating event must be supervening (that is, it must occur after the contract was formed).

Frustrating events include performance of the contract becoming physically impossible, wherea common and fundamental assumption of the parties is destroyed, where performance becoming

illegal, where something essential to performance becomes unavailable, and where performance

becomes radically different from that for which the parties contracted.

Frustration cannot be claimed where the contract expressly provides for what should occur inthe event of a frustrating event, or where the frustrating event is foreseen or is foreseeable. A

party cannot rely on a frustrating event that was its own fault. Frustration causes the contract to be discharged automatically. Any money payable ceases to be payable.

Any money paid can be recovered, although this may be offset against any expenses incurred by the other

party. Any party that gained some form or valuable benefit may have to pay a sum for such benefit.


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CONTRACTS OF INDEMNITY

A contract by which one party promises to save the other from loss caused to him by the conduct

of the promisor himself or by the conduct of any other person, is called a contract of indemnity (Section124)

It is entered into with the object of protecting the promises against anticipated loss. The

contingency upon which the whole contract of indemnity depends is the happening of loss.

For example: - P contracts to indemnify Q against the consequences of any proceeding which Rmay take against Q in respect of a certain sum of Rs. 200. This is a Contract of Indemnity: P is

called the indemnifierand Q theIndemnity-holder.

Characteristics

Characteristics (or the requisites) of a Contract of indemnity are as follows :

l. A contract of guarantee must satisfy all the essential elements of a contract. For example, theobject must be lawful, there must be free consent etc.

2. The Contract may be express or implied. An express contract is by word or by writing. An

implied contract of indemnity comes from the circumstances of the` case or the relationship

between the parties.

3. Section 69 implies a promise to indemnify

Definition not exhaustive

Section 124 of the Indian Contract Act does not give an exhaustive definition of contracts of

indemnity. This section Includes

(i) Only express promises to indemnify and

(ii) Only those cases where the loss arises from the conduct of the promisor or of any otherperson.

It does not include

(i) Implied promises to indemnify and

(ii) Cases where loss arises from accidents and events not depending on the conduct of any

person.


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Rights of the Indemnity-holder

Section 125 of the Contract Act lays down that the indemnity-holder is entitled to get from the

indemnifier:

1. All damages which he may be compelled to pay in any suit in respect of any matter to which

the promise to indemnify applies;

2. All costs which he may be compelled to pay in such suits (provided he acted prudently or with

the authority of the indemnifier);

3. All sums which he may have paid upon compromise of such suit (provided the compromise

was prudent or was authorized by the indemnifier).

Comments:

It has been held that the rights of the Indemnity holder, under Section 125, are not exhaustive.

The indemnity holder may be entitled to other equitable reliefs also.

Bombay and Nagpur High Courts have held the indemnifier will be liable only after the actual

loss was incurred. But according to the High Courts of Calcutta, Madras and Allahabad, the

indemnity-holder can compel payment from the indemnifier even before he (the indemnity-holder) has met his liability. Osman Jamal & Sons v. Gopal.

CONTRACTS OF GUARANTEE

Definition

A contract of guarantee is a contract to perform the promise or discharge the liability, of a third

person in case of his default.-Sec. 126.

P lends Rs. 5,000 to Q and R promises to P that if Q does not pay the money R will do so. This is

contract of guarantee. Q is called the Principal Debtor, P the Creditor, and R the Guarantor or

the Surety.

Classification

Contracts of guarantee may be of three types:

(1) For payment to the Creditor to the Principal Debtor by the Guarantor ;

(2) Payment of price for goods sold, and


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(3) Fidelity guarantee

I.e. to discharge the liability of a person for good conduct of a service-holder.

A contract of guarantee may be for

(1) A future debt or obligation or for

(2) An existing debt.

A guarantee can also be

(1) A Simple Guarantee or

(2) A Continuing Guarantee

Essentials of a Valid Guarantee

1. A contract of guarantee must satisfy all the essential elements of a contract. (For example, the

object must be lawful; there must be free consent etc.) But the following points are to be noted.

2. A contract of guarantee may be either oral or written. Sec 126.

3. In a contract of guarantee there are three parties i.e., the creditor, the principal debtor and the

surety. All the parties must join the contract.

4. In a contract of guarantee, the primary liability is that of principal debtor. The liability of

surety arises only when there is a default of the principal debtor. Therefore, the liability of thesurety is secondary.

5. In a contract of guarantee the principal debtor may be a minor. In this case the surety is liableto pay even though the minor may not be. The contract will be enforced as between the surety

and the creditor.

6. Consideration: In a contract of guarantee, the consideration received by the principaldebtor is

taken to be sufficient consideration for the surety. Anything done, or any promise made, for the

benefit of the principal debtor may be sufficient consideration to the surety for giving

guarantee.-Sec.127.Examples:

(i) B requests P to sell and deliver to him goods on credit. P agrees to do so, provided C willguarantee the payment of the price of goods. C promises to guarantee the payment in

consideration of Ps promise to deliver the goods. This is a sufficient consideration for Cspromise.
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(ii) P sells and delivers goods toB. Cafterwards requests P to forbear to sue B for the debt for a

year and promises that if he does so, C will pay for them in default of payment byB, P agrees to

forbear as requested. This is a sufficient consideration for Cs promise.

(iii) P sells and delivers goods toB. Cafterwards, without consideration agrees to pay for them

in default of B. The agreement is void.

Contracts of Guarantee which are invalid

A contract of guarantee is invalid in the following cases :

1. Misrepresentation: Any guarantee which has been obtained by means of misrepresentationmode by the creditor, or with his knowledge and assent, concerning a material part of the

transaction, is invalid.-Sec. 142.

2. Concealment:Any guarantee which, the creditor has obtained by means of keeping silence as

to material circumstances is invalid. Sec.143. Examples:

(a) D engagesB as clerk to collect money for him.B fails to account for some of his receipts, andD in consequence calls upon him to furnish security for his duly accounting. C gives his

guarantee for Bs duly accounting. D does not acquaint C with Bs previous conduct. B

afterwards makes default. The guarantee is invalid.

(b) G guarantees to C payment for iron to be supplied by him to B to the amount of 2000 tons. Band C have privately agreed thatB should pay five rupees per ton beyond the market price, suchexcess to be applied in liquidation of an old debt. This agreement is concealed from G. G is not

liable as a surety.

3. When Co-surely does not join: Where a person gives a guarantee upon a contract that the

creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is

not valid if that other person does not join.-Sec. 144.

4. Lack of essential elements: A contract of guarantee is invalid if it lacks one or more of the

essential elements of a contract (e.g., if there is want of free consent or if the object is illegal).

DIFFERENCES BETWEEN INDEMNITY AND GUARANTEE

1. In a contract of indemnity, there are two parties: the indemnifier and the indemnity-holder. In

a contract of guarantee there are threeparties: the creditor, the principal debtor, and t surety.

2. In a contract of indemnity it is necessary to have only one contract, i.e., between the

indemnity-holder and the indemnifier; in a contract of guarantee it is necessary to have threecontracts, between the parties, i.e., between the creditors, the principal debtors and the surety.


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3.in a contract of indemnity, the liability of the indemnifier is primary ; in a contract of

guarantee, the liability of the surety is secondary i.e., the surety is liable only if the principaldebtor fails to perform his obligations.

4. In a contract of guarantee there is an existing debt or duty, the performance of which is

guaranteed by the surety. In a contract f indemnity, the liability of the indemnifier arises only onthe happening ofa contingency.

5. In a contract of indemnity the indemnifier can sue only the indemnity older for his loss,

because there is no contract between the indemnified and other parties unless there is an

assignment on his favour; in a contract of guarantee the surety can proceed against principaldebtor.

6. in a contract of guarantee the surety, after he discharges the debt owing to the creditor, canproceed against the principal debtor; in a contract of indemnity the loss falls on the indemnifierexcept in certain special cases.

CONTINUING GUARANTEE

Definition

A guarantee which extends to a series of transactions is called a Continuing Guarantee (Sec.129). A guarantee covering a single transaction may be called a Simple -Guarantee or SpecificGuarantee.

Examples:

(i) D. in consideration that Q will employ C in collecting the rents/ of Bs zamindari, promises Bto be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of

those rents. This is a continuing guarantee.

(ii) P guarantees payment to B a tea dealer, to the amount ofRs. 100 for any tea he may from

time to time supply to C. B supplies C with tea to the value of Rs. 1000 and C pays B for it.

After-ward B supplies C with tea to the value ofRs. 2000. C fails to pa The guarantee given by Pwas a continuing guarantee, and is accordingly liable toB to the extent ofRs. 1000.

(iii) P guarantees payment toB of the price of five sacks of flour o be delivered by B to C to bepaid for in a month.B delivers re sacks to C. C pays for them. AfterwardsB delivers four sack to

C. which C does not pay for. The guarantee given by P was, of a continuing guarantee, andaccordingly he is not liable for the rice of the four sacks.

How a Continuing Guarantee is Revoked

A continuing guarantee is revoked under the f owing circumstances.


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I. By notice of revocation by the surety: The notice operates to revoke the suretys liabilities as

regards transaction is entered into after the notice. He continues to be liable for transactionsentered into prior to the notice.-Sec. 130.

2. By the death of the surety: The death of the surety operates, in the absence of a contract to the

contrary, as a revocation of a continuing guarantee, so far a regards future transactions.-Sec.131

The estate of the surety is liable for all transactions entered into prior to the death of the surety

unless there was a contract to the contrary. It is not necessary that the creditor must have notice

of the death.

A continuing guarantee is terminated