Part1 consideration and_alteration_of_contracts

TMH Copyright © 2010

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TMH Copyright © 2010

Chapter 19 to 23 Consideration

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Case: Agreements and Contracts

• Vishal is setting up an industry. Towards this, he has to hire the services of information technology consultants to develop software. Explore the following four different agreements between Vishal and the consultants and decide whether these are contracts or not. In other words, identify the consideration for both the parties.

3TMH Copyright © 2010

• Agreement 1: Rajesh will prepare a software for a fee of Rs one lakh.


cont…

cont…

• Agreement 1: Rajesh will prepare a software for a fee of Rs one lakh.

• Consideration for Vishal: Software• Consideration for Rajesh: Rs. 1 Lakh


cont…

• Agreement 2: Ramesh will prepare a software. Vishal in turn will give him his laptop.


cont…

• Agreement 2: Ramesh will prepare a software. Vishal in turn will give him his laptop.

• Consideration for Vishal: Software• Consideration for Ramesh: Laptop


cont…

• Agreement 3: Mana will prepare a software for Vishal. Vishal will in turn give him the right to use the computer facilities at his office for one year.


cont…

• Agreement 3: Mana will prepare a software for Vishal. Vishal will in turn give him the right to use the computer facilities at his office for one year.

• Consideration for Vishal: Software• Consideration for Mana: Right of access to computer

facilities


cont…

• Agreement 4: Ria will prepare a software for Vishal. Vishal in return will prepare an architectural plan for a house for Ria.


cont…

• Agreement 4: Ria will prepare a software for Vishal. Vishal in return will prepare an architectural plan for a house for Ria.

• Consideration for Vishal: Software• Consideration for Ria: Architectural plan


Summary

• Consideration is the benefit to the party which can be in cash or kind; a good or a service; tangible or intangible. The key issue is does it lead to a benefit to the party.


Case: Crossing the Ganges

• Ramesh challenged Akash, “I will give you Rs. 1000 if you swim across this river.” Ramesh took out money from his pocket and announced, “Here is the money.” Akash took the challenge and swam across the river. Akash is demanding the promised money while Ramesh refuses to give the promised money.

– Is there an agreement between the parties?– What is the consideration for the parties?– Should this agreement be enforced?


Summary

• The British courts defined consideration as:

– ‘rights, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’


Case

• Agreement 1: Genset Ltd. has hired an office premises from Sushil. Under the hiring agreement, Shushil will not initiate court proceedings for evicting him for three years. Genset Ltd. will pay Rs. 3 lakhs.


Case

• Agreement 1: Genset Ltd. has hired an office premises from Sushil. Under the hiring agreement, Shushil will not initiate court proceedings for evicting him for three years. Genset Ltd. will pay Rs. 3 lakhs.

• Consideration for Genset: Restraint on Sushil from taking up court proceedings

• Consideration for Shushil: Rs. 3 Lakhs


Case

• Agreement 2: Vishal has written a book advocating a new way of organising business. He is finding it difficult to get a publisher to publish the book. Fabel Publishers Ltd. agreed to publish the book. The arrangement was that Vishal will give them the typescript as well as Rs. 50,000 for publishing the book. There was no provision on Vishal getting royalties on future sell of the books.


Case

• Agreement 2: Vishal has written a book advocating a new way of organising business. He is finding it difficult to get a publisher to publish the book. Fabel Publishers Ltd. agreed to publish the book. The arrangement was that Vishal will give them the typescript as well as Rs. 50,000 for publishing the book. There was no provision on Vishal getting royalties on future sell of the books.

• Consideration for Vishal: Undertaking of Fabel to publish the book.

• Consideration for Fabel: Rs. 50,000 and copyright in the typescript


Case

• Agreement 3: Castel Ltd. has an agreement with Ria, its brand endorsement personality, that she would not appear for any rival company. Castel Ltd. would pay her Rs. 5 lakhs for this.


Case

• Agreement 3: Castel Ltd. has an agreement with Ria, its brand endorsement personality, that she would not appear for any rival company. Castel Ltd. would pay her Rs. 5 lakhs for this.

• Consideration for Castel: Restraint on Ria from appearing for rival company.

• Consideration for Ria: Rs. 5 lakhs


Case

• Agreement 4: In a fair, a soft drink company had put up a stall where anyone who could drink its 300 ml bottle of a carbonated drink in less than 30 seconds would be given a free glass bearing the company’s logo.


Case

• Agreement 4: In a fair, a soft drink company had put up a stall where anyone who could drink its 300 ml bottle of a carbonated drink in less than 30 seconds would be given a free glass bearing the company’s logo.

• Consideration for participants: Glass

• Consideration for the company: Suffering of the participants drinking 300 ml in 30 seconds.


Case

• Agreement 5: Two television companies, Morley Ltd. and Castle Ltd. came up with an agreement that Morley Ltd. would not telecast films on Saturdays and Caste Ltd. would not telecast sporting events on Sunday.


Case

• Agreement 5: Two television companies, Morley Ltd. and Castle Ltd. came up with an agreement that Morley Ltd. would not telecast films on Saturdays and Caste Ltd. would not telecast sporting events on Sunday.

• Consideration for Morley: Restraint on Castle

• Consideration for Castle: Restraint on Morley


Ad Agency

• A company commissioned an advertisement agency to produce a 30 second video clip for its product. The ad agency was to be paid a consolidated sum of Rs. 8 lakhs for the clip. The company had mentioned, in detail, the message to be delivered by the film. The ad agency delivered the film to the commission. The company was fully satisfied with the clip. The ad agency was to be paid its consideration a week later. The clip was telecast. Explore the following situations:


cont…

• The advertisement was a huge success. It readily resulted in soaring up of sales. As a result, the ad agency is demanding Rupees 15 Lakhs.


cont…

• This was the first production the ad agency had done. Following the success of the advertisement, the ad agency got several new projects. The company insists that as it has given this break to the ad agency, the ad agency should charge the company only Rs. 5 lakhs.


cont…

• The advertisement failed to take off. The company is refusing to pay Rs. 8 lakhs to the ad agency.


Summary

• Consideration is the exact and immediate benefit or detriment to the parties.


Case: Undervalued Sale

• A person contracted to sell a treadmill for a very low price of Rs. 5000. He could have got Rs. 50,000 for the treadmill. He settled for a low price as he was in a hurry to move to another city. The person refused to perform the contract and claimed it was not valid as the consideration was not adequate.


Summary of Points

• Consideration can be a benefit or detriment.

• Consideration is the exact benefit to be transacted or detriment suffered and should be distinguished from its consequences.

• The benefit or detriment does not have to be adequate.


Case

• Bikash Chandra Deb, a land owner in Keonjhar district, Orissa reached an agreement with Vijaya Minerals Pvt. Ltd. for the sale of Manganese and Iron ore. The written agreement provided the price at which ores were to be sold. It was a long term contract but did not provide for price variation.

Mr. Deb refused to supply the ore and the company came before the court for the enforcement of the contract. Mr. Deb contended that the price was grossly inadequate, barely 16% of the market selling prices. In fact, according to him, the price did not even meet the costs of extraction.


Case

• A cold drink manufacturing company came up with a scheme where a person could send 6 crown caps of its brands and collect a gift of a free glass bearing the logo of the company. The company on receiving the crown caps would throw it away. The scheme had an overwhelming response. The company refused to honour its commitment by claiming that it had no contractual obligations as the crown caps were worthless.


Case: Shares on Offer

• Abhijit offered to sell 30 shares of a company to Suman for Rs. 2 lakhs. Suman said, “I will decide and let you know tomorrow. But you cannot revoke the offer in this while.” Abhijit said, “Fine.” Later, Abhijit revoked the offer.

• 1. How many distinct offers are there between Abhijit and Suman? Identify each offer.

• 2. How many agreements are formed between Abhijit and Suman?

• 3. Has an enforceable contract been formed between the parties?


Northline Ltd.

• Northline Ltd. sells products directly to the customers through its catalogues. The product is delivered by courier. It has the following clauses in its General Conditions of Contracts:

• Every communication or information on our products and services constitute an “invitation to offer”. Order of purchase put on us would constitute “offer”.

• An ‘offer’ once placed cannot be withdrawn.


cont…

• The goods corresponding to the offer accepted by us would be delivered by courier within two weeks.

• The buyer would pay the price for the ordered goods at the time of delivery by courier.


House for Sale

• Raman offered to sell his house to Deep for 14 lakhs. Raman was not to withdraw the offer for 10 days. For this, Deep was to pay him Rs. 10,000.

• Mana offered to sell his house to Ajit for 14 lakhs. Mana was not to withdraw the offer for 10 days. and Ajit was not to prospect to buy or receive any offer from others.

Is there an enforceable contract in the above situations?


Judgement: Bank of India

• It is a rule of English law that a promise to keep an offer open needs consideration to make it binding and would thus only become so if the offeror gets some benefit, or the offeree incurs some detriment, in respect of the promise to keep the offer open. The offeree in such a case is said to 'purchase an option,' that is, the offeror, in consideration usually of a money payment, sometimes nominal, makes a separate contract not to revoke the offer during a stated period. The position is similar where the offeree expressly or impliedly promises to do or refrain from doing something in exchange for the offeror's promise not to revoke the offer.


cont…

• The scheme floated by the State Bank of India contained a clause (Cl. 7) laying down the mode and manner in which the application for voluntary retirement shall be considered. The relevant clause as referred to herein before creates an enforceable right. In the event the State Bank failed to adhere to its preferred policy, the same could have been specifically enforced by a Court of law. The same would, therefore, amount to some consideration.


Time Barred Offer

• A tender was submitted on the condition that it would be valid and not withdrawn for 30 days. The applicant withdrew the tender in 10 days. The earnest deposit was forfeited.


NHAI v. Ganga Enterprises

The National Highway Authority of India issued a tender notice calling for tenders for collection of toll on a portion of the highway running through Rajasthan. The last date of submission of bid was 31st July, 1997. Two types of securities had to be furnished, a bid security for Rs. fifty lakhs and performance security for Rupees Two crores. Clause 7.1 to 8

was on bid security. It provided as follows:


cont…

• 7. Bid Security

• 7.1. The bidder shall furnish, as a part of his bid, a Bid Security in an amount of Rs. 50 lakhs (Rupees Fifty Lakhs only), or an equivalent amount in a freely convertible currency. The Bid Security shall, at the bidder's opinion, be in the form of a Bank Draft, or Guarantee from a Bank located in India. The Bank Guarantee shall be in the Form of Bank Guarantee for Bid Security included herein, valid of 150 days after the last for submission of the bid.


cont…

• 7.2. A bid not accompanied by an acceptable bid security shall be rejected by National Highways Authority of India as non-responsive.

• 7.3. The Bid Security of unsuccessful bidders will be returned by National Highways Authority of India as promptly as possible but not later than 30 days after the expiration of the period of bid validity.


cont…

The tender had provided for a validity of 120 days. This period was to come to an end on November 28, 1997. In August the technical bids were opened. In September the financial bids were opened and M/s Ganga Enterprises was found to be the highest bidder. M/s Ganga Enterprises withdrew its bid on 21st November, 1997. The Highway Authority accepted the withdrawal, it forfeited the fifty lakhs earnest money. M/s Ganga Enterprises moved the High Court of Delhi.


Delhi High Court

• To have an enforceable contract there must be an offer and unconditional acceptance. A person who makes an offer has the right of withdrawing it before acceptance. Until the offer is accepted unconditionally it creates no legal right and the bid can be withdrawn at any time. Once it is held that there is no completed contract between the parties no further question can arise.


cont…

• There can be no breach of contract. … The petitioner was entitled to withdraw the bid because the prohibition against withdrawal does not have the force of law and there was no consideration to bind him down to the condition. In the present case there was no acceptance by respondent No.2 on the date of withdrawal of the bid by the petitioner. In the circumstances the invocation and encashment of the bank guarantee is illegal and void and is liable to be set aside.


Krishnaveni v. Panchayat, Darsi

• … an offer made containing a promise not to revoke it and keep it open does not prevent the offerer from revoking the offer, for normally such a promise is unsupported by any consideration. But, if a promise to keep the offer open is supported by consideration, the offerer is bound by the promise and cannot revoke the offer. It is on this principle that a condition in the tender that the tender cannot be withdrawn before it is accepted is invalid and does not prevent a tenderer to withdraw his bid before its acceptance.


Parties to a Contract

• Case 1: B and C get into an agreement where B will transfer the ownership of his laptop to C and C will pay Rs. 25,000 to B.

• Case 2: B and C get into an agreement where B will transfer the ownership of his laptop to A and C will pay Rs. 25,000 to B. B delivered the laptop to A but C refused to pay B.

• Case 3: B and C get into an agreement where A will transfer the ownership of his laptop to C and C will pay Rs. 25,000 to B.


Case: Three Party Contract

• B and C get into an agreement where B will write a book for C and C will pay Rs. 10,000 to A. B wrote a book for C but C failed to give the money to A. A is claiming to recover Rs. 10,000 from C.

• Decide.


Case: Book Writing Project

• A, B and C get into an agreement. Under the agreement, B will write a book for C, and C will pay Rs. 10,000 to A. B wrote a book for C but C failed to give the money to A. A is claiming to recover Rs. 10, 000 from C.


Case: Dunlop Tyres

• Dunlop Pneumatic Tyre Co. Ltd. had a price list for its products. It sold tyres, with discounts, to Dew & Co. The contract also required that Dew & Co. do not re-sell the tyres at below the scheduled price. In the event of a sale to a trade customer, Dew & Co. would take a written undertaking that the tyres would not be further re-sold at below the scheduled price. Dew and Co. sold the tyres to Selfridge & Co. Ltd. Selfridge gave a written undertaking that it would not sell to the customers, those tyres at below the scheduled price. Further, it undertook to pay £5 for each tyre sold in breach of this contract, to Dunlop Limited. Selfridge sold some of the tyres at below the scheduled price to its customers. Dunlop moved the court to restrain Selfridge and claim damages.


Judgement: Dunlop Case

• In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a right conferred on a stranger to a contract as a right to enforce the contract …A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor's request.


Summary

• The position of British law:

• 1. Strangers to a contract have no rights even if the contract is for their benefit.

• 2. Consideration must move from the person who is claiming rights in a contract. It is not adequate for the consideration to move from another person.


Indian Law on Privity

• The Indian law has retained that strangers to a contract have no rights even if the contract is for their benefit.

• The Contract Act, however, has dispensed the requirement that the consideration must move from a party to a contract to claim benefit. It can come from ‘any person’.

•


Case: Book Writing Project

• A, B and C get into an agreement. Under the agreement, B will write a book for C, and C will pay Rs. 10, 000 to A. B wrote a book for C but C failed to give the money to A. A is claiming to recover Rs. 10, 000 from C.

• In the British law A has no rights as no consideration has moved from him.

• In the India law A has rights as C has received consideration, even if it is not from A.


Case: Distribution Channel

• M is a manufacturer, supplying its goods to the distributor D, who in turn sells it to the wholesaler W. The wholesaler sells it to the retailer R who sells an article to a buyer B. The goods bought by B has a manufacturing defect.

• B claims against the manufacturer in a court.

• Decide.


Case: Distribution Channel

• M is a manufacturer, supplying its goods to the distributor D, who in turn sells it to the wholesaler W. The wholesaler sells it to the retailer R who sells an article to a buyer B. The goods bought by B has a manufacturing defect.

• B claims against the manufacturer in a court. Decide.

• B can have claims only against R as B is not privy to the others including the manufacturer, M.


Case: Deficient Banking Service

• S receives a cheque from a person towards payment for goods supplied. The service provided by the bank in encashing the cheque is deficient and inadequate.

• S moves against the court against the deficient service of the bank. Decide.


Case: Deficient Banking Service

• S receives a cheque from a person towards payment for goods supplied. The service provided by the bank in encashing the cheque is deficient and inadequate.

• S moves against the court against the deficient service of the bank. Decide.

• S has no claims against the banks as he is not privy to the bank.


Alteration of Contracts


Duty to Third Party

• X and Y live in two different flats in the same building. There was a power failure. X got in a contract with an electrician that he would fix the problem by the end of the day for Rs. 500. Y knew of the contract between the electrician and X. Y approached the electrician and got in an agreement that the electrician would fix the problem by the end of the day and Y would pay him Rs. 300 for it. Thus, there are three parties and two contracts. Identify the consideration for the parties in the two contracts. Is the second contract enforceable? Why would Y get in a contract of this nature?


Sale through Agent

• B gets into an agreement with M, through an agent, to buy goods for Rs. 20 lakhs. The agent learns that B may breach the contract. The agent gets in an agreement with B that if he performs the contract, he would give him Rs. 40,000.

• Is the agreement enforceable?


Modification of Contract

• Employer: BGL Ltd. an internet technology company, BGL Ltd., got in a contract with a contractor C, to get an office furnished on 2nd of the month. The contractor was to make 20 work stations, as provided in the design. The work was to be completed by 30th of the month. BGL was to pay Rs. 30 lakhs for the job. Consider the following different situations based on the above contract. For each situation, find the consideration for the parties and decide whether there is an enforceable agreement.


• Situation 1: On 2nd afternoon, after the contract was signed, BGL informed the contractor that they were developing the premises in anticipation of getting an assignment. They have learnt that the assignment was not coming to them. In this context, BGL suggested to the contractor that they should not go ahead with the contract. The contractor responded that it was fine with him.


• Situation 2: The contractor completed the work on 20th. BGL was yet to pay the contractor. The parties mutually agreed to terminate the contract.

• Situation 3: On 2nd afternoon, after the contract was signed, BGL suggested to the contractor not to go ahead with the contract. The contractor responded that this was a breach of contract on their part and claimed damages from them.


• Situation 4: On 8nd afternoon, BGL suggested to the contractor not to go ahead with the contract. The contractor responded that it was fine with him. He will use the material elsewhere.

• Situation 5: On 4th BGL paid 3 lakhs to the contractor. On 8nd afternoon, BGL suggested to the contractor not to go ahead with the contract. The contractor responded that it was fine with him. The contractor would keep the 3 lakhs given to him.


• Situation 6: On 8th, BGL asked the contractor to complete the work by 15th of the month as opposed to 30th. The contractor agreed to it.

• Situation 7: On 3rd, BGL asked the contractor to complete the work by 15th of the month as opposed to 30th and BGL would pay additional Rs. 2000 for it. The contractor agreed to it.


• Situation 8: On 20th the contractor told the BGL that it was financially infeasible for him to complete the work for 30 lakhs. BGL agreed to pay 35 lakhs instead.

• Situation 9: On 2nd afternoon, the parties decided that the contractor instead would make an auditorium in another building according to the design given by BGL. The auditorium would be completed in three months. BGL would pay a total of 40 lakhs to the contractor.


• Situation 10: By 12th, the contractor had done one-third of the work. The parties decided that the contractor instead would make an auditorium in another building according to the design given by BGL. The auditorium would be completed in three months. BGL would pay a total of 40 lakhs to the contractor.


Extra Charge

• S entered in a contract to fabricate and sell a machinery for Rs. 55 lakhs. A week before scheduled delivery, he expressed inability to supply at the price as the input costs had gone up. The buyer agreed to pay Rs. 65 lakhs instead. However, after the machine was delivered, he paid only Rs. 55 lakhs and refused to pay the balance. A dispute developed between the parties. Decide.


Missing Nephew

• Lalman, the munim, found the missing boy but Gauri Dutt refused to pay the promised Rs. 501.


Work Contract

• The parties were in dispute over a work contract. The parties signed a contract which required the contractor to pay Rs. 1 lakh to A in one month of signing of the settlement. The last clause of the settlement read:

– The contract stands finally concluded in terms of the settlement and no party will have further or other claim against the other.

• The contractor failed to pay the agreed sum.


Part-paid Seller

• The buyer B, having received the goods, owes the seller S, Rs. 15,000 under the contract. The buyer tells the seller that he cannot afford to pay Rs. 15,000. He will pay him only Rs. 10,000. Y accepts this and receives Rs. 10,000. Thereafter, Y demands the remaining Rs. 5,000.


Part-payment of Debt

• X owes Rs. 50,000 to Y. The sum is payable on Monday, in Delhi. X and Y reach an agreement where Y agrees to accept Rs. 30,000 on Monday in Delhi as full and final settlement of the debt. Having received Rs. 30,000, Y moves the court to recover the remaining Rs. 20,000. What is the consideration for the parties? How does X benefit with the agreement? What is the benefit to Y from the agreement? Is the agreement enforceable?


Delayed Payment of Debt

• X owes Rs. 20,000 to Y. The sum is payable by 10th of June, in Mumbai. X and Y reach an agreement on May 15, where Y agrees to accept the money by 10th of October. On May 20, Y informs that he is not bound by the agreement. The money should be paid by June 10. What is the consideration for the parties? Is the agreement enforceable?


Section 63

• 63. Promise may dispense with or remit performance of promise.- Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.

• Illustration (b) A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged.


Part1 consideration and_alteration_of_contracts

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