CONTRACTS- AIBE FUNDAMENTALS

Question 1

Definition of a contract (S. 2(h))

Answer 1

“an agreement enforceable by law is a contract.”

Question 2

Section 10 of the Contract Act:

Answer 2

• Free consent of parties;
• Competence of parties to contract;
• Lawful consideration;
• Lawful object; and
• Not expressly declared void by law.

Question 3

Intention to Create Legal Obligation:

Answer 3

Though not expressly set out in the Contract
Act, it is accepted by the courts that the parties to an agreement must have the
intention to create legal obligations in order to give rise to a contract

“There are agreements between parties that do not result in a contract within the meaning of that term in our law.” (Balfour v. Balfour, [1919] 2 K.B. 571)

Illustration: In the course of a casual
conversation, A stated that he was willing to
give £100 to anyone marrying his daughter
with his consent. B married A’s daughter with
his consent, and asked for the money. The
court observed that it was not reasonable that the defendant should be bound by such
general words, and that there existed no
intention to create a legal obligation. (Weeks v.
Tybald, (1605) Noy 11)

Question 4

Formation of a Contract: Offer and
Acceptance

Answer 4

Two parties may enter into an agreement by
the communication of a proposal and its
acceptance. Such a proposal is called an ‘offer’, and once it is accepted, it becomes a promise. An assent to an offer is called an ‘acceptance’.

An offer must be distinguished from an
invitation to treat, or an invitation to make offers. Such a statement does not constitute a valid offer.

Illustration: Goods were displayed in a shop,
with the prices attached. This was held to be
an invitation to treat, and not an offer. It was
not capable of conversion into a contract by
acceptance. (Pharmaceutical Society of Great
Britain v. Boots Cash Chemists (Southern) Ltd.,
[1952] 2 Q.B. 795)

Question 5

Carlill v. Carbolic Smoke
Ball Co., [1893] 1 Q.B. 256

Answer 5

A company stated in an advertisement that it would pay £100 to anyone who caught influenza after using its smoke balls thrice daily for two weeks. The company deposited the money in a bank account to show its sincerity. A lady, relying on the advertisement, used the smoke balls for the prescribed period.

She caught influenza and sued for the reward. The company was held liable to pay, because there was an intention to create a legally binding obligation, and this was made clear to all persons in general (general offer).

Question 6

S.29 of the Contract Act states:

Answer 6

“Agreements, the meaning of which is not certain, or capable of being made certain, are void.”

Question 7

Communication of offer

Answer 7

In case of communication by a non-
instantaneous mode of communication, such
as post or email, (a) an offer is complete as
against the acceptor when the offeror puts it
in a mode of transmission outside the control
of the offeror, and (b) an acceptance is complete as against the offeror when the
acceptor puts it in a mode of transmission outside the control of the acceptor.

Question 8

How does an offer lapse

Answer 8

An offer lapses by revocation; an offer may be
revoked at any time before the acceptance is
completed as against the offeror. An
acceptance may be revoked at any time before it is complete as against the acceptor, that is, until it reaches the offeror.

Question 9

Requirements of a Valid Contract: Free
Consent

Answer 9

“Two or more persons are said to consent when they agree upon the same thing in the same sense.” (S.13, Contract Act)

If both parties to an agreement are under a
mistake as to a matter of fact essential to the
agreement, there is no meeting of minds, and
the contract is void

Note that a mistake as to a law in force in
India does not render a contract voidable;
however, a law not in force in India is treated
as a fact, and a mistake as to such a law not in
force in India would render the contract void.
(S.21, Contract Act)

Both parties to the agreement must be under
the mistake as to the essential fact; if only one
party to the agreement is under a mistake as
to a matter of fact, the agreement is not
voidable. (S.22, Contract Act)

Question 10

Free Consent

Answer 10

A contract is voidable if one of the parties has
entered into the agreement without free
consent.

S.14 of the Contract Act provides that consent
is said to be free when it is not caused by:
* Coercion;
* Undue Influence;
* Misrepresentation;
* Fraud; or
* Mistake (subject to the provisions of S.20,21, and 22 of the Contract Act.)

Question 11

Coercion

Answer 11

Coercion is the committing of, or threatening
to commit, any act forbidden by the Indian
Penal Code, 1860, or the unlawful detaining
of, or threat to detain, any property with the
intention of compelling any person to enter
into a contract. (S.15, Contract Act) Mere
economic duress, however, would not amount
to coercion.

Question 12

Undue Influence

Answer 12

A contract is said to be induced by undue
influence where the relations subsisting
between the parties are such that one of the
parties is in a position to dominate the will of
the other and uses that position to obtain an
unfair advantage over the other party. (S.16(1), Contract Act)

S.16(2) of the Contract Act provides that a
person is in a position to dominate the will of
another where:
* A person holds a real or apparent authority
over the other, or is in a fiduciary relation
with the other person; or
* A person makes a contract with a person
whose mental capacity is temporarily or
permanently affected because of age,
illness, or mental or bodily distress.

Question 13

Fraud

Answer 13

Fraud means and includes any of the
following acts committed by a party to a
contract, or with her connivance, or by her
agent, with intent to deceive the other party
or her agent, or to induce him to enter into a
contract:

• stating facts which are not true with
  knowledge of their falsity;
• actively concealing a fact by a person
  having knowledge or belief of that fact;
• making a promise without any intention of
  performing it;
• doing any act fitted to deceive; or
• doing any act which the law specially
  declares to be fraudulent.

Question 14

(S.17, Contract Act)

Answer 14

Mere silence as to facts likely to affect the
willingness of a party to enter into a contract is not fraud unless the circumstances of the
case are such that, regard being had to them, it is the duty of the person keeping silent to
speak, or unless the silence, by itself, is
equivalent to speech.

A contract is voidable for fraud only if it was
the fraud which caused the other party to
enter into the agreement.

Question 15

Misrepresentation

Answer 15

Misrepresentation means and includes:

• the positive assertion, in a manner not
  warranted by the information of the person
  making it, of that which is not true although the person making the statement
  believes it to be true;
• any breach of duty done without an intent
  to deceive which gives an advantage to the
  person making it, or to persons claiming
  under her, by misleading another person to
  her prejudice or to the prejudice of any
  persons claiming under her; or
• causing, however innocently, a party to an
  agreement to make a mistake as to the
  substance of the subject matter of the
  agreement. (S.18, Contract Act)

Question 16

Difference between Misrepresentation and Fraud

Answer 16

A contract is voidable only if the misrepresentation was such as to cause the
other party to enter into the contract.
Although misrepresentation and fraud are
similar in that both are based on a false
representation, the difference between the two is that in the case of misrepresentation, the person making the statement believes it to be true, whereas in the case of fraud, the person making the representation does not believe it to be true.

Question 17

Requirements of a Valid Contract:
Competence of Parties

Answer 17

The following persons are not competent to
enter into a contract (S.11, Contract Act):

• Minors;
• Persons of unsound mind; and
• Persons disqualified from contracting by
  any law to which they are subject.

Question 18

Minors

Answer 18

An agreement entered into with a minor is
void ab initio. However, minors can enforce contracts made in their favour for valuable consideration, because although they cannot incur liability, they are not debarred from acquiring title to anything valuable.

Question 19

S.68 of the Contract Act

Answer 19

“If a person incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by any person with the necessities 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.”

Question 20

Persons of Unsound Mind

Answer 20

Contracts with persons of unsound mind are
absolutely void. S.12 of the Contract Act
defines ‘sound mind’ for the purposes of
entering into a contract: if, at the time of
entering into a contract, a person is capable of understanding it, and of forming a rational
judgement as to its effect upon that person’s
interests, the person is of sound mind for the
purposes of contracting.

Question 21

Persons Disqualified from Contracting by any Law to which they are Subject

Answer 21

In certain cases, some persons are specifically
barred from entering into contracts of some
kinds by the law that governs them. In such
cases, any such contract would be void. For
example, corporations derive their power
from Charters, Statutes, or Acts which create
them. If a corporate enters into a contract
beyond the scope permitted in such Charter,
Statute, or Act, the contract would be void.

Question 22

Requirements of a Valid Contract: Lawful
Consideration

Answer 22

Consideration is defined in S.2(d) of the
Contract Act. The definition provides that in
the first place, the act or abstinence which is to be a consideration for the promise should be done at the desire of the promisor; secondly, that it should be done by the promisee or any other person; and lastly, that the act or abstinence may have been already executed or is in the place of being done or may be still executory (to be performed in the future.)

Consideration need not be adequate, or equal
in value to the promise; all that is required is
that it have some value in the eyes of the law,
and cause some incremental change in the
position of the receiver.

Question 23

The Doctrine of Privity

Answer 23

A contract cannot confer rights or impose
obligations under it on any person except the
parties to it. A third person cannot be entitled
to demand performance of the contract.

Question 24

There are certain exceptions to the rule of
privity, such as:

Answer 24

• Covenants running with land: A person who purchases land with notice that the owner of the land is bound by certain duties created by an agreement or covenant
  affecting the land shall be bound by them,
  although such purchaser was not a party to
  the agreement.
• Trust of charge: A person in whose favour a charge or other interest in some specific property has been created may enforce it, even though such person was not a party to the contract.
• Acknowledgement of estoppel: Where, by the terms of a contract, a party is required to make a payment to a third person, and the party acknowledges it to that third person, a binding obligation is incurred towards that third person.

Question 25

Doctrine of Privity v Privity of Consideration

Answer 25

The doctrine of privity of contract must not be confused with the concept of privity of consideration. While parties to a contract cannot confer rights or impose obligations under it on any third person, S.2(d) implies that as long as there is consideration for a promise, it is immaterial if a third party has provided it.

Question 26

Promissory Estoppel

Answer 26

The requirement in the normal course is that there must be an exchange of promises. The law also recognises unilateral promises. In such cases, the promisee is not bound to act, but if the promisee carries out the act desired by the promisor, the promisee can hold the promisor to her promise. The promisor is now estopped from claiming that there is no consideration. This is the doctrine of promissory estoppel.

Question 27

Requirements of a Valid Contract: Lawful Object

Answer 27

“The consideration or object of an agreement is lawful, unless- It is forbidden by law; or is of such a nature that, if permitted, would defeat the provisions of any law, or is fraudulent; or involves or implies any injury to the person or property of another; or the court regards it as immoral, or opposed to public policy.”

Question 28

Agreements Opposed to Public Policy

Answer 28

An agreement that tends to be injurious to the public or against the public good is void as being contrary to public policy.

Question 29

Requirements of a Valid Contract: Not Expressly Declared Void

Answer 29

Certain agreements are specifically or expressly declared void by the Contract Act. These are: * Agreements of which the consideration or object is unlawful (Ss.23 and 24); * Agreements without consideration (S.25); * Agreements in restraint of marriage (S.26); * Agreements in restraint of trade (S.27); * Agreements in restraint of legal proceedings (S.28); * Agreements which are uncertain and ambiguous (S.29); * Agreements by way of wager (S.30); * Agreements to do impossible acts (S.56). Every agreement in restraint of the marriage of any person, other than a minor, is void. The restraint may be general or partial, but in either case, the agreement is void. An agreement in restraint of trade, whether the restraint is general or partial, qualified or not, is void.

Question 30

An agreement by way of a wager is void, subject to certain exceptions

Answer 30

The word ‘wager’ means ‘a bet’. It is a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event. Though a wagering agreement is void and unenforceable, it is not forbidden by law, and therefore transactions collateral to the main transaction are enforceable.

Question 31

Distinction between Illegal and Void Agreements

Answer 31

An illegal transaction is one which is actually forbidden by law. A void agreement may not be forbidden; all that is said is that if it is made, the courts will not enforce it. Every illegal contract is also void, but a void contract is not necessarily illegal. In both cases, however, the main or primary agreement is unenforceable. A collateral transaction to the main agreement is, however, enforceable if the main agreement is void but not illegal

Question 32

Doctrine of Severability

Answer 32

Sometimes, certain parts of a contract may be lawful in themselves, whereas other parts are not. In such cases, the general rule is that: “...where you cannot sever the illegal from the legal part of a convenance, the contract is altogether void; but where you can sever them, whether the illegality be caused by statute or the common law, you may reject the bad part and retain the good.” (Pickering v. Ilfracombe Railway Co., (1868) LR 3 CP 235.)

Question 33

Quasi Contracts

Answer 33

Certain situations in law as well as justice require that a person be required to conform to an obligation, without having violated any contractual term or committing a tort. Such obligations are called quasi-contractual obligations, because they do not arise out of any actual agreement. They are not based on the consent of the party, and their classification as quasi-contractual emphasises their remoteness from the genuine conception of a contract. Quasi-contractual obligations are based upon the principle that law as well as justice should try and prevent unjust enrichment, or to prevent a person from retaining the money of, or some benefit derived from, another, which it is unconscionable for that person to keep. The following essentials have to be proved in an action for unjust enrichment: * The defendant has been 'enriched' by the receipt of a 'benefit'; * That this enrichment is 'at the expense of the plaintiff'; and * That the retention of the enrichment is unjust. (Mahabir Kishore v. State of M.P., AIR 1990 SC 313)

Question 34

Performance of Contracts

Answer 34

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 Contract Act, or of any other law. Unless a contrary intention appears from the contract, the representatives of a party are bound by the party’s promises in case of death. A contract to perform personal services, however, such as an agreement with an artist to paint one’s portrait, would not bind the representatives of the promisor. (S.37, Contract Act)

Question 35

Khardah Co. Ltd. v. Raymon & Co. (India) (Pvt.) Ltd., AIR 1962 SC 1810)

Answer 35

A party may assign any benefits under a contract to another person, unless the contract is of a personal nature, or unless the contract prohibits such an assignment. A party may assign duties under a contract to another person with the consent of the other party to the contract, but this would amount to a novation, that is, the substitution of the existing contract with a new one.

Question 36

(Ss.40-43, Contract Act)

Answer 36

Performance by a third party is acceptable if the promisee has accepted such performance. In the case of joint promisors, all the joint promisors are jointly and severally liable for performance, and the promisee can take an action against any or all of the joint promisors for performance. If one promisor has discharged the obligation under the contract, the promisor can ask for contribution from the other joint promisors

Question 37

Offer to Perform (Tender)

Answer 37

If a party offers to perform the contract, and the offer of performance (tender) has not been accepted, the party is not responsible for non- performance, and the party’s rights under the contract are not lost, provided: * the offer is unconditional; * the offer is made at the proper time and place; and * the offer is made in such a manner that the person to whom it is being made has a reasonable opportunity of ascertaining that the person making it is able and willing there and then to do the whole of what that person is bound by her promise to do. (S. 38, Contract Act)

Question 38

Anticipatory Breach

Answer 38

When a party refuses to perform, or has disabled himself from performing her promise in its entirety, the other party may put an end to the contract unless she has, by words or conduct, signified acquiescence to the continuation of the contract. (S.39, Contract Act)

Question 39

Time, Place, and Mode of Performance

Answer 39

If no time for performance is specified, a contract must be performed within a reasonable time. (S.46, Contract Act) If the parties intended that time should be of the essence of the contract, a failure to perform at the specified time would give the promisee the right to rescind the contract. (S.18, Contract Act) Generally speaking, time is presumed to be of the essence in the case of commercial contracts. Parties may, however, indicate clearly whether or not time is of the essence in any contract, and this intention would determine whether time is of the essence.

Question 40

(S.50, Contract Act)

Answer 40

Performance may be made in any manner or at any time which the promisee prescribes or sanctions.

Question 41

Impossibility and Frustration

Answer 41

An agreement to do an act impossible in itself is void. (S.56, Contract Act) Where, however, one person has promised to do something which she knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non- performance of the contract. If the performance of a promise becomes impossible for any reason which the promisor could not prevent, or unlawful, after the contract is made, the contract becomes void when the act becomes impossible or unlawful. This is the doctrine of frustration. The performance of a contract must become impossible or unlawful for the doctrine of frustration. A contract cannot be regarded as impossible merely because it is more difficult to perform than anticipated, or less remunerative.

Question 42

‘force majeure’

Answer 42

Parties may insert a ‘force majeure’ clause in the contract, specifying events over which neither party may have any control, and the occurrence of which would excuse performance. Such clauses may include events which are not normally considered as leading to impossibility under the law, such as strikes, floods, or riots.

Question 43

Novation

Answer 43

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. There cannot, however, be a novation unless all the parties to the original contract assent to it. (S.62, Contract Act)

Question 44

Release, Waiver, Accord and Satisfaction

Answer 44

A promisee may dispense with or remit, either wholly or in part, the performance of the promise made to him, or extend the time for its performance, or may accept instead of the original promise, any satisfaction she thinks fit. (S.63, Contract Act)

Question 45

Consequences of Rescission, and of a Contract Becoming Void

Answer 45

When a voidable contract is rescinded, the other party need not perform any promise contained in the contract, and the party rescinding the contract must return to the other party any benefit received under it. (S.64, Contract Act) If an agreement is discovered to be void, or if it becomes void, for example, due to frustration, any person who has received some advantage under the agreement must return it or compensate the person from whom the advantage was received. (S.65, Contract Act)

Question 46

Consequences of Breach: Specific Performance (S 10 of Specific Performance Act)

Answer 46

In certain situations, a party takes an action against the party who has breached a contract, to compel the breaching party to perform its obligations under the contract. This is called ‘Specific Relief’, and the law relating to such remedies is to be found in The Specific Relief Act, 1963 (“the Specific Relief Act”). The specific performance of any contract may, at the discretion of the court, be enforced: * when there is no standard to ascertain the actual damage caused by the non- performance of the act agreed to be done; or * when the act agreed to be done is such that monetary compensation for its non- performance would not be adequate relief.

Question 47

Unless otherwise proved, it is assumed (S 10 of Specific Performance Act)

Answer 47

* that the breach of a contract to transfer immovable property cannot be adequately relieved by monetary compensation; and * that the breach of a contract to transfer movable property can be relieved by monetary compensation, except where: * the property is not an ordinary article of commerce, or is of special value of interest to the plaintiff, or consists of goods that are not easily obtainable in the market; and * the property is held by the defendant as the agent or trustee of the plaintiff. (Explanation to S. 10, Specific Relief Act)

Question 48

As a general rule, a court will not compel specific performance of a contract, unless:

Answer 48

* A party to a contract is unable to perform the whole of her part of it, but the part which must be left unperformed bears only a small proportion to the whole in value, and can be compensated by way of money; in such a case, the court may, at the suit of either party, order the specific performance of that part of the contract which can be so performed, and order monetary compensation for the remaining part; * A party to a contract is unable to perform the whole of her part of it, and the part which must be left unperformed: * forms a considerable part of the whole, in which case, the court may order specific performance if the other party pays or has paid the agreed consideration for the whole of the contract, reduced by the consideration for the part which must be left unperformed; * cannot be compensated by way of money, in which case the court may order specific performance if the other party pays or had paid the consideration for the whole of the contract without any abatement; but in either case, the other party must relinquish all claims to the remaining part of the contract and all right to compensation, either for the deficiency or for the loss or damage sustained through the default of the defendant.

Question 49

(S.12, Specific Relief Act)

Answer 49

A part of a contract, taken by itself, can and ought to be specifically performed, and that part stands on a separate and independent footing from another part of the same contract which cannot or ought not to be specifically performed, in which case, the court will order specific performance of the part which can and ought to be specifically performed.

Question 50

Contracts which cannot be Specifically Enforced

Answer 50

The following contracts cannot be specifically enforced: * Where monetary compensation is adequate relief for non-performance; * A contract which runs into such numerous details or which is so dependant on the personal qualifications or will of the parties, or is otherwise from its nature such that the court cannot enforce the specific performance of its material terms; and * A contract which is in its nature determinable.

Question 51

Employment Contracts

Answer 51

Contracts which depend on the will of the parties are usually contracts of service (‘Employment Contracts’), where a particular quality or ability, possessed by a person for which the contract is entered into, depends upon that person’s willingness or state of mind. If such contracts are specifically enforced, they may not obtain the results originally intended.

Question 52

A court may not, for example, decree specific performance where:

Answer 52

* The terms of the contract, or the conduct of the parties, or the circumstances under which the parties entered into the contract, though not voidable, were such that they gave the plaintiff an unfair advantage over the defendant; or * The performance of the contract would involve some hardship on the defendant which the defendant did not foresee, but which would not involve any such hardship on the plaintiff; or * The defendant has entered into the contract under circumstances, which though not voidable, would make it inequitable to enforce specific performance. (S.20, Specific Relief Act)

Question 53

The Supreme Court held that there are two principles on which damages are calculated in the case of breach of contract of sale of goods.

Answer 53

“The first is that he who has proved a breach of a bargain to supply what he has contracted to get, is to be placed so far as money can do it in as good a situation as if the contract had been performed; but this principal is qualified by a second which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.”

Question 54

Penalty and Liquidated Damages

Answer 54

If a contract stipulates a sum to be paid if there is a breach, or contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage is proved to have been caused by the breach, to receive reasonable compensation not exceeding the amount named or as the case may be, the stipulated penalty. However, even in a case where the losses resulting from the breach are more than the liquidated damages, the plaintiff cannot recover an amount higher than the liquidated damages. (S.74, Contract Act)