Business law book mba 2 sem @ bec doms


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Business law book mba 2 sem @ bec doms

  1. 1. Business LawIndian Contract Act 1872 : Meaning and essentials of a valid contract Formation ofcontract – Performance of contract – Termination and discharge of contract – Remediesfor breach of contract – Quast contractSpecial Contracts : Indemnity of guarantee – Bailment – AgencySale of Goods Act, 1930 : Contract of sale – Conditions and warranties – Transfer ofproperty – Performance of the sale Rights of an unpaid sellerNegotiable Instruments Act, 1881 : Negotiable instruments – Parties to a negotiableinstrument – Material alteration – Crossing of cheques – Endorsement Payment andcollection of chequesIndian Partnership Act, 1932 : Meaning and test of partnership – Registration of firms– Relations of partners – dissolution of firmsArbitration Act, 1940 : Arbitration – Arbitration without intervention of court –Arbitration in suitsCarriage of Goods : Classification of Common Carriers – Rights duties and liabilities ofcommon carrier – Carriage by rail – Contract of affreightment – Charter Party – Bill ofLading – Carriage by air – Documents relating thereto – Liability of the air CarrierContract of Insurance : Basic elements – Kinds of Insurance – Fire Insurance –Marine Insurance BSPATIL
  2. 2. Lesson No. Title 1. Indian Contract Act. 1972 Special Contracts 2. Contract of Indemnity and Guarantee 3. Contract of Bailments 4. Contract of Agency 5. Sale of Goods Act. 1930 6. Negotiable Instruments Act, 1881 7. Partnership Act. 1932 8. Arbitration Act. 1940 9. Common Carriers Act 10 Contract of Insurance BSPATIL
  3. 3. LESSON 1 INDIAN CONTRACT ACT. 1872MEANINGThe law relating to the contracts is contained in the Indian Contract Act. 1872. It is thatbranch of law which lays down the essentials of a valid contract, the different modes ofdischarging the contract and the remedies available to the aggrieved parts in the caseof breach on contract. It is the most important branch of business law. It is of particularimportance to people engaged in trade, commerce and industry as bulk of theirbusiness transactions are based on contracts.A contract is an agreement made between two or more parties which the law willenforce Sec. 1 the of the Indian Contract Act defines it as “An agreement enforceableby law” Sec 10 lays down that “All agreements are contracts if they are made by thefree consent of parties competent to contract for a lawful consideration and with a lawfulobject and are not hereby – expressly declared to be void.ESSENTIALS OF A VALID CONTRACTS A valid contact must have the following essentials 1. Two parties : for a valid contract, there must be two parties 2. Offer and acceptance: There must be an offer and acceptance One party has to make an offer and the other party has to accept it. 3. Consensus-ad-idem or Identity of Minds: The parties to the contract must have agreed about the subject matter of the contract at the same time and in the same sense.Illustration: A has two houses, one at Chennai and another at Coimbatore. He hasoffered to sell one to B. B accepts thinking to purchase the house at Coimbatore, whileA, when he offers, has in his mind to dispose of house at Chennai. There is noConsensus-as-idem. 4. Consideration: It means “Something in return” Every contract must be BSPATIL
  4. 4. supported by consideration.Illustration : A offers to sell his watch for Rs. 500 to B and B accepts the offer. Thus Rs.500 is the consideration for the watch and vice-versa. 5. Capacity; The parties to the contract must be competent to contract. For example a contract by a minor is void 6. Free Consent: The consent of the parties must be free from any flow – it must not be caused by a mistake or coercion or undue influence 7. Lawful consideration: The consideration to a contract must be lawful Illustration: A promises to pay Rs. 500 – to B, in consideration of B murdering C. The consideration is illegal. 8. The objects of the contact must be lawful Illustration: A promises to pay Rs. 500 – for letting B’s house for running a brothel. The objects is illegal. Hence, the contract is void. Thus, “the essence of legal contract is that there shall be an agreement between two persons, that one of them shall do something either for the benefit of the other or for his own detriment and that these persons intend that the agreement shall be enforceable at law”CLASSIFICATION OF CONTRACTS Contracts may be classified according to their validity, formation or performance. I. Classification According to validity A contract is based on an agreement. An agreement becomes a contract when all the essential elements referred to above are present. In such a case, the contract is a valid contract. If one or more of these elements are missing, the contract is either voidable, void, illegal or unenforceable. Voidable Contract An agreement which is enforceable by law at the option of one or more of the arties thereto, but not at the option of the other or others, is a voidable contract. Sec.2(i). Example : A promises to sell his house to B for Rs. 2,00,000. His consent is obtained by use or force. The contract is voidable at the option of A. He may avoid the contract. BSPATIL
  5. 5. Void ContractA contract which is at enforceable by law is a void contract.Example : A contract enter4ed into by a minor is void.Illegal AgreementAn illegal agreement is one which is criminal is nature or which is immoral. Such an agreement is a void contract. All illegal agreements are void but all more agreements or contracts are not necessarily illegal.Unenforceable ContractAn unenforceable contract is one which cannot be enforced in a Court of aw because of some technical defect, such as absence of writing or where the remeds has been barred by lapse of time.II CLASSIFICATIONS ACCORDING TO FORMATIONContracts may be classified according to the mode of their formation as follows:Express ContractIf the terms of a contract are expressly agreed upon whether by words spoken or written at the time of the formation of the contract, the contract is said to be an express contract.Implied ContractAn implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between them. It is not the result of any express promise or promises by the parties but of their particular act.Example: A enters into a hotel and takes lunch. It is an implied contract that he has to pay the cost of lunch after taking it.III CLASSIFICATION ACCORDING TO PERFORMANCEThese may be classified as Executed contracts or Executory contracts. Unilateral BSPATIL
  6. 6. contracts or Bilateral contracts.Executed ContractsAn executed contract as one in which both the parties have performed have performed their respective obligations.Example: A agrees to supply a watch to B for Rs. 500. When A supplies the watch and B pays the price, the contracts is said to be executed.Executory ContractsAn executory contract is one in which both the parties have yet to perform their obligations. Thus in the above example, the contract is executor if A has not yet supplied the watch and B has not paid the price.Unilateral ContractA unilateral or one-sided contract is one in which only one party has to fulfil 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.Bilateral ContractA bilateral contract is one in which the obligations on the part of both the parties to the contract are outstanding at the time of the formation of the contract. In this sense, bilateral contracts are similar to executor contracts.OFFER AND ACCEPTANCEOFFERAn offer is also called a proposal. Sec. 2 (a) of the Indian Contract Act defines a proposal as, :When one person signifies to another his willingness to do or to abstain from doing anything. With a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” The person making the proposal is called the “prosper” or “offerer” and the person to whom the proposal is made is called “offeree”LEGAL RULES RELATING TO OFFER BSPATIL
  7. 7. 1. It must contain either definite terms or capable of being made definite.Montreal dfgdfgdfghgdh : It was held in this case, that a clause to favourate consider the applies that renewal is ambinguous and not binding the compans2. It must intend to give use to legal consequencesGdfgjdfkgjdflkgd : A husband promised to pay Rs. 1000/- per month to his wife,staying away from him. Held that the promise was never intended to b e enforced inlaw.3. It must be distinguished from a quotation or an invitation to offerGhdkjdfkgjdkgjdgdfgkj : P offered to buy D’s property for Rs. 6000. D replied, “Won’taccept less than 10,000” P agreed to pay Rs. 10,000. But D sold it to anotherperson. It was held that mere statement of price by D contained no implied contractto sell it at that price.A catalogue or price list or tenders invited for the supplier to goods are notproposals.4. An offer may be made to an individual or addressed to the worlds at large. An offer is called a specific offer when it is made to a particular person. Gdfgdfgdfgdfgdf fgdfgd dfgd dfg: The company has offered by advertisement, a reward of £ 100 to anybody contracting influenza after using their smoke ball according to their direction. Mrs. Carlill used it as directed but still had an attack of influenza. So, she sued for the award of £ 100. It was held that she was entitled to the award since an offer made at large, can ripen itself into a contract with anybody who performs the terms of the offer.5. An offer is different from a tender A offers to supply goods at a particular rate for a particular period from a certai9n trade. If this offer is accepted by B, it is called a tender. It becomes an acceptance only when B places an order for a part of the goods.6. An offer must be communicated to the offeree Gdfg dfgdf dfg dfg dfg : A’s nephew was missing is who was an employee of A, volunteered his services to search for the boy. Meanwhile, A had announced a reward to anybody who could trace the boy. It found the boy and brought him back to home and sued for the reward. It was held that he was not entitled to the reward as he was ignorant of the offer. Section 4 lays down that the communication of an offer is complete only when it reaches the offeree. So an offer binds the offeror only when the offeree has the BSPATIL
  8. 8. knowledge of an offer.ACCEPTANCESection 2 the of the Indian Contract Act defines acceptances as. When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal when accepted becomes a promise. An offer when accepted becomes a contract.An offer can be accepted only by the persons to whom the offer is made.Boulton Vs Jones A sold his business to B. This sale is not known to V’s customers. So Jones who is a usual customer of the vendor places an order for goods with the vendor. A by name B, the new owner receives the order and supplies, the goods without disclosing the fact of sale of business to him. It was held that the price could not be recovered as the contract was not entered into with him.Essentials of Valid Acceptance1. Acceptance must be communicated in usual and reasonable manner. It may be made by express words, spoken or written or by conduct of the parties, i.e. by doing an act which amounts to acceptance according to the terms of the offer or by the offeree accepting the benefit offered by the offeror. Any method can be prescribed for the communication of acceptance. But silence can never be prescribed as a method of communication. Hence, mere mental assent without expressing it and communicating it may means of word or an act, is not sufficient. Brogden Vs Metropolitan Railway Co. The Manager of a railway company simply wrote on the proposal “approved” and kept it in a drawer. By oversight it was not communicated. It was held that the acceptance was not communicated and hence there was no contract.2. Communication of acceptance may be warved by the offeror : This rule is established in the case of Carill V’s gdfg gdfg ng gdf where the advertisement never wanted the communication apart from fulfilling the conditions of offer.3. Acceptance should be made before the offer lapses or is revoked or is received4. Acceptance must be absolute and unconditional and should correspond with the terms of the offeror. Otherwise, it amount to counter offer which may be accepted or rejected by the offeror. For example, A offeror to sell his car for S. 1 lakh B BSPATIL
  9. 9. asks for Rs. 70,000. It is not an acceptance but a counter offer only. 5. Acceptance once made, concludes the contractCONSIDERATIONConsideration means “something in return for something”. Section 2 of the IndianContract Act defined consideration thus “When at the desire of the promisor, thepromise or any other person has done or abstained from doing, or does or abstainsfrom doing, or promises to do or abstain from doing something, such act or abstinenceor promise is called a consideration for the promise.” 1. Consideration at the Desire of the Promisor Consideration must proceed at the request of the promisor. Hence acts done voluntarily or at the request of third parties do not constitute a valid consideration. Durga Prasad Vs Baldev : A built a market at the request of the Collector of the place B promised to pay. A commission on the articles sold in the market. It was held that B’s promise to pay commission did not constitute a valid consideration because A did not build the market at the request of B. 2. The Promisee or any other Person Consideration may move from the promise or any third party. Hence, a stranger to consideration can sue on the contract. 3. Has done or abstained from doing or does or abstain from doing a) Consideration may be executed, i.e. an act or forbearance made or suffered for the promise given, or b) Consideration may be executor, i.e. a promise to act or abstain from doing in future, or c) Consideration may be past, i.e. an act or forbearance already taken place before the contract was entered into 4. Something Consideration may not be adequate. But it must be real and lawful. Example : A agrees to sell a cow worth Rs. 1200 for Rs. 10. He has given his consent freely. The agreement is a contract though consideration is inadequate. BSPATIL
  10. 10. An agreement made without consideration is void. But the following are exceptions. (1) An agreement expressed in writing and registered and made on account of natural love and affection between parties standing in neat relation to each other. (2) A promise to compensate a person who has already voluntarily done something for the promisor, or (3) A promise to discharge a time-barred debt.CAPACITY TO CONTRACT The parties who enter into a contract must have the capacity to do so ‘Capacity’ meanscompetence of the parties to enter into a valid contract. According to Sec. 10, anagreement becomes a contract if it is entered into between the parties who arecompetent to contract. Thus Sec. 11 declares the following person to be incompetent tocontract. (i) Minors (ii) Persons of unsound mind, and (iii) Persons disqualified by any law to which they are subject.Incapacity to contract Fgsdklgjfdsklg asdgjsdlkgsdfg sgsdf Mental deficiencyIng incapacity arising of hdfgdf 1. Foreign Suvereigns and Ambassadors They may enter into contracts. But they cannot be sued except with the permission of the Central Government and certified by the Secretary. 2. Alien Enemy The enemy’s status is to be determined by the place at residence of the individual, but not by his nationality. If a contract is already entered into into before the declaration of war, its performance will be suspended during the period of war and in case the war continues to where period, the contract becomes void on the ground of impossibility of perticugdfgdf contract. 3. Conviet BSPATIL
  11. 11. He is no competent to contract during the period of sentence. 4. Bankrupt He cannot enter into contract and bind his property as his property shall be vested in the official receiver when he is adjudged an insolvent. 5. Artificial Person : Corporation It is a person in the eye of law. It is a legal entity. It can purchase properties enter into contracts, sue and be sued on such contracts. Its contractual capacity is limited. For example, it cannot enter into contract to marry or which is ultra vires its powers.(B) INCAPACITY ARISING FROM MENTAL DEFICIENCYA person is sand to be mentally deficient when (a) he does not attain majority. E.g. aminor or (b) he is of unsound mind. 1. When he does not attain majority: Minor A minor is a person who has not completed 18 years of age. He attain majority on completion of his 21 year in England and 18 year in India. A minor cannot enter into a valid contract. 2. When he is of Unsound Mind Section 12 lays down that : A person is said to be of sound mind for the purpose of making a contract if at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to tis effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind may mase a contract when he is of sound mind. Illustration: a patient in a lunatic asylum, who is at intervals of sound mind may contract during those intervals.MINOR IN INDIAN LAWA minor is a person who is not a major. He attains majority on completion of 21 years inEngland and 18 years in India. Even in India he attains majority on completion of 21years when his property is managed by a court of wards or a guardian. BSPATIL
  12. 12. 1. In Indian law, a contract by a minor is void. It cannot be even ratified by him after attaining majority. 2. A contract entered into by a minor by fraudulently misrepresenting his age is void. He cannot be stopped from setting up the plea of minority. 3. “Minors can have no privilege to cheat men”, though law protects them, so that people may not exploit their tender age. So, if a minor receives goods on credit while payment cannot be enforced goods can be recovered, if restitution is possible. 4. The property of the minor is liable for the necessaries supplied to him, provided the goods are suitable tot eh condition of his life and status. Even here, he is not personally liable, but his estate only is liable. 5. While a sale or mortgage by a minor is void, a sale or mortgage in favour of a minor is enforceable by him. 6. A contract by a guardian on behalf of the minor is enforceable by or against the minor, provided the guardian is competent to contract and the contract is beneficial to the minor. But he cannot purchase immovable property without obtaining the consent of the court. 7. Under Sec. 3 of the Indian Partnership Act a minor may be admitted to the benefits of partnership with the consent of all the partners.CONSENT AND FREE CONSENTConsent: It means acquiescence or act of assenting to an offer. “Two or more personsare said to consent when they agree upon the same thing in the same sense”. (Sec.13)Free Consent: Consent is said to be free when it is not caused by (1) Consent as defined in Sed. 15 or (2) Undue influence as defined in Sec. 16, or (3) Fraud as defined in Sed. 17, or (4) Misrepresentation as defined in Sec. 18, or (5) Mistake, subject to the provisions of Secs. 20, 21, and 22 (Sec. 14)When there is no consent, there is no contractExample : A is forced to sign a promissory note at the point of pistol. A knows what he issigning but his consent is not free. The contract in this case is voidable at this option. BSPATIL
  13. 13. COERCIONWhen a person is compelled to enter into a contract by the use of force by the otherparty or under a threat, “coercion” is said to be employed. Coercion is the committing, orthreatening to commit, any act forbidden by the Indian Penal Code 1860 or the unlawfuldetaining, or threatening to detain, any property, to the prejudice of any personwhatever, with the intention of causing any person to enter into an agreement.Example: a threatens to kill B if he does lend Rs. 1000 to C. B agrees to lend theamount to C. The agreement is entered into under coercion.A threat to commit suicide also amounts to coercion.EFFECT OF COERCIONWhen consent to an agreement is caused by coercion, fraud or misrepresentation, theagreement is a contract voidable at the option of the party whose consent was socaused (Sec. 19)UNDUE INFLUENCE BSPATIL
  14. 14. Sometimes a party is compelled to enter into an agreement against his will as a result ofunfair persuasion by the other party. This happens when a special kind of relationshipexists between the parties such that one party is in a dominant position to exerciseundue influence over the other.Sec. 16(1) defines : undue influence” as follows A contract is said to be induced by undue influence where the relationssubsisting between the parties are such that one of the parties is in a position todominate the will of the other and uses that position to obtain an unfair advantage overthe other.The following relationships usually raise a presumption of undue influence viz. (i) Parent and child (ii) Guardian and ward (iii) Trustee and beneficiary (iv) Doctors and patient (v) Solicitor and client, and (vi) Finance and fiancée The presumption of undue influence applies whenever the relationship between the parties is such that one of them is by reason of confidence reposed in him by the other, able to take unfair advantage over the other.EFFECT OF UNDUE INFLUENCE When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the option of the party whose consent was so obtained. Any such contract may be set aside either absolutely or if the party who is entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just and equitable (Sec. 19-A) DIFFERENCE BETWEENS COERCION AND UNDUE INFLUENCE S. No. Coercion Undue Influence 1. The consent is given under the The consent is given by a person threat of an offence who is so situated in relation to BSPATIL
  15. 15. another that the other person is in a position to dominate his will 2. Coercion is mainly of a physical Undue influence is of moral character. It involves mostly use character. It involves use of moral of physical or violent force. force or mental pressure. 3. There must be intention of Here the influencing party uses its causing any person to enter into position to obtain an unfair an agreement advantage over the other party 4. It involves a criminal act No criminal act is involvedMISREPRESENTATION AND FRAUDMISREPRESENTATIONMisrepresentation is a false statement which the person making it honestly believes tobe true or which he does not know to be false. It also includes non-disclosure of amaterial fact or facts without any intent to deceive the other party.Sec. 18 defines “misrepresentation” According to it, there is misrepresentation (1) When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes is to be true. (2) When there is any breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice. (3) When a party causes, however innocently, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement.FRAUDFraud exists when it is shown that a false representation has been made (a) knowingly,or (b) without belief in its truth, or (c) recklessly, not caring whether it is true or false,and the maker intended the other party to act upon it.MISTAKE OF LAWMistake of law be (1) mistake of law of the country or (2) mistake of law of a foreigncountry. 1. Mistake of law of the country: Ignorantta juris non exerts Ex. Ignorice of laws is no exclause : is a well settled rule of law. A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of law. A BSPATIL
  16. 16. mistake of law is, therefore, no excuse, and the contract cannot be avoided. Example: A and B enter into a contract on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. This contract may be voidable. 2. Mistake of law of a foreign country: Such a mistake is treated as mistake of fact and the agreement in such a case is void. (Sec. 21)MISTAKE OF FACTMistake of fact may be (1) a bilateral mistake, or (2) a unilateral mistake 1. Bilateral Mistake Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake. In such a case the agreement is void (sec. 20). The following two conditions have to be fauced for the application of Sec. 20. (i) The mistake must be mutual i.e. both the parties should misunderstand each other and should be at a cross-purposes. Example: A agreed to purchase B’s motor-car which was lying in B’s garage. Unknown to either party, the car and garage where completely destroyed by fire a day earlier. The agreement is void (ii) The mistake must relate to a matter of fact essential to the agreement. As to what facts are essential in an agreement will depend upon the nature of the promise in each case. Example: A man and a woman entered into a separation agreement under which the man agreed to pay a weekly allowance to the woman mistakenly believing themselves lawfully married leld the agreement was void as there was mutual mistake on a point of fact which was material to the existence of the agreement.The various cases which fail under bilateral mistake are as follows:Mistake as to the Subject – Matter:Where both the parties to an agreement are working under a mistake relating to thesubject-matter, the agreement is void. Mistake as to the subject-matter covers thefollowing cases. BSPATIL
  17. 17. (1) Mistake as to the existence of the subject-matter: If both the parties believes the subject-matter of the contract to be in existence, which in fact at the time of the contract is non-existent, the contract is void. Example: A agrees to buy from B a certain goat. It turns out that the goat was dead at the time of the bargain, though neither parts was aware of the fact. The agreement is void.(2) Mistake as to the identity of the subject-matter: It usually arises where one party intends to deal in one thing and the other intends to deal in another. Example: W agreed to buy from R a cargo on cotton to arrive ex-peerless from Bombay”. There were two ships of that name sailing from Bombay, one sailing in October and the other in December. W meant the former ship R meant the latter. Held, there was a mutual or a bilateral mistake and there was no contract.(3) Mistake as to the quality of the subject-matter: If the subject matter is something essentially different from what the parties thought it to be the agreement is void. Example: A sells to B a prece of silk B thinks that it is foreign silk. A knows that B thinks so but knows that it is Indian silk only.(4) Mistake as to the quantity of the subject-matter: If both the parties are working under a mistake as to the quantity of the subject-matter the agreement is void. Example: A silver bar was sold under a mistake as to its weight. There was a difference in value between the weight of the bar as it was and as it was supposed to be Held the agreement was void.(5) Mistake as to the title to the subject-matter: If the seller as selling a thing which he is not entitled to sell and both the parties are acting under a mistake, the agreement is void. Example: A person took a lease of a fishery which, unknown to either party already belonged to him. Held, the lease was void. BSPATIL
  18. 18. (6) Mistake as to the price of the subject-matter: if there is a mutual mistake as to the price of the subject-matter, the agreement is void. Example: C wrote to D offering to sell certain property for Rs. 15,000. He had earlier declined an offer from D to buy the same property for Rs. 20,000. D who knew that his offer of Rs. 15,000 was a mistake for Rs. 25,000, immediately accepted the offer. Held, D knew perfectly well that the offer was made by mistake and hence the contract could not be enforced.Mistake as to the Possibility of Performing the ContractConsent is nullified if both the parties believe that in agreement is capable of beingperformed when in fact this is not the case. The agreement, in such a case, is void onthe ground of impossibility.Impossibility may be— (i) Physical Impossibility Example: A contract for the hire of a room for witnessing the coronation procession of Edward VII was held to be void because unknown to the parties the procession had already been cancelled. (ii) Legal Impossibility: A contract is void if it provides that something shall be done which cannot, as a matter of law be done. 2. Unilateral Mistake When in a contract only one of the parties is mistaken regarding the subject matter or in expressing or understanding the terms or the legal effect of the agreement the mistake is a unilateral mistake. According to Sec. 22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. A unilateral mistake is not allowed as a defence in avoiding a contract unless the mistake is brought about by the other party’s fraud or misrepresentation. Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a defence. LEGALITY OF OBJECT BSPATIL
  19. 19. A contract must have a lawful object. The word object means purpose of design. Insome cases consideration for an agreement may be lawful but the purpose for whichthe agreement is entered into may be unlawful. In such cases the agreement is void. Assuch both the object and the consideration of an agreement must be lawful otherwisethe agreement is void.The consideration or object of an agreement is unlawful 1. If the object is forbidden by law Example: A promise to obtain for B an employment in the public service and 18 promises to pay Rs. 1,00,000 to A. the agreement is void, as the consideration is unlawful. 2. If the object is permitted, it would defeat the provisions of any law Example: N agreed to enter a company’s service in consideration of a weekly wage of Rs. 75 and a weekly expense allowance of Rs. 25. Both the parties knew that the expense allowance was a device to evade tax. Held the agreement was unlawful. 3. If the object is fraudulent: An agreement which is made for a fraudulent purpose is void. Thus an agreement in fraud of creditors with a view to defeating their rights is void. 4. If the Court regards the object as immoral Example: A agrees to let her daughter to B for concubinage (state of living together as man and wife without being married. The agreement is unlawful, being immoral. 5. Where the Court regards it as opposed to public policy.UNLAWFUL AND ILLEGAL AGREEMENTSAn unlawful agreement is one which, like a void agreement, is not enforceable by law.An illegal agreement is not only, void as between the immediate parties but has furthereffect that the collateral transactions to it also become tainted with illegality.Example: T lends Rs. 50,000 to B to help him to purchase some prohibited goods fromT, an alien enemy. If B enters into an agreement with T, the agreement will be illegaland the agreement between B and T shall also become illegal, because it is collateral to BSPATIL
  20. 20. the main transaction. T cannot, therefore, recover the amount.AGREEMENTS OPPOSED TO PUBLIC POLICYAn agreement is said to be opposed to public policy when it is harmful to the publicwelfare. Some of the agreements which are opposed to public policy and are unlawfulare as follows. 1. Agreements of trading with enemy: An agreement made with an alien enemy in time of war is illegal on the ground of public policy. 2. Agreement to commit a crime: Where the consideration in an agreement is to commit a crime, the agreement is opposed to public policy. The Court will not enforce such an agreement. 3. Agreements which interfere with administration of police: An agreement, the object of which is to interfere with the administration of justice is unlawful, being opposed to public policy. It may take any of the following forms. (a) Interference with the course of justice: An agreement which obstructs the ordinary process of justice is unlawful. (b) Stifling prosecution: It is in public interest that if a person has committed a crime, he must be prosecuted and punished. (c) Maintenance and champerty: Maintenance’ is an agreement to give assistance, financial or otherwise, to another to enable him to bring or defend legal proceedings when the person giving assistance has got no legal interest of his own in the subject-matter. 4. Agreements in restraint of legal proceedings : Sec. 28 which deals with these agreements. (a) Agreements restricting enforcement of rights: An agreement which wholly or partially prohibits any party from enforcing his rights under or in respect of any contract is void to that extent. (b) Agreements curtailing period of limitation: Agreements which curtail the period of limitation prescribed by the Law of Limitation are void because their object is to defeat the provisions of law. 5. Trafficking in public offices and rules: Agreements for the sale or transfer of public offices and titles or for the procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for monetary consideration are unlawful being BSPATIL
  21. 21. opposed to public policy. Example: R paid a sum of Rs, 2,50,000 to A who agreed to obtain a seat for R’s son in a Medical College. On A’s failure to get the seat, R filed a suit for the refund of Rs. 2,00,000. Held, the agreement is void on the ground of public property.6. Agreements tending to create interest opposed to duty: If a person enters into an agreement whereby he is bound to do something which is against his public or professional duty the agreement is void on the ground of public property.7. Agreements in restraint of paternal rights: A father, and in his absence the mother, is the legal guardian of his/her minor child. This rights of guardianship cannot be bartered away by any agreement.8. Agreements restricting personal liberty: Agreements which unduly restrict the personal freedom of the parties to it are void as being against public policy.9. Agreements in restraint of marriage: Every agreement in restraint of the marriage of any person, other than a minor, is void (Sec. 26). This is because the law regards marriage and married status as the right of every individual.10. Marriage brokerage or brocage agreements: An agreements by which a person for a monetary consideration, promises in return to procure the marriage of another is void being opposed to public policy.11. Agreements interfering with marital duties: Any agreement which interferes with the performance of marital duties is void being opposed to public policy. Such agreements have been held to include the following. (a) A promise by a married person to marry during the lifetime or after the death of spouse. (b) An agreement in contemplation of divorce e.g. an agreement to lend money to a woman in consideration of her getting a divorce and marrying the lender. (c) An agreement that the husband and wife will always stay at the wife’s parents’ house and that the wife will never leave her parental house.12. Agreements to defraud creditors or revenues authorities: An agreement the object of which is to defraud the creditors or the revenue authorities is not enforceable being opposed to public policy.13. Agreements in restraint of trade: An agreement which interferes with the liberty of a person to engage himself in any lawful trade profession or vocation is called an BSPATIL
  22. 22. agreement in restraint of trade. VOID AGREEMENTSA void agreement is one which is not enforceable by law [Sec. 2 ] Such an agreementdoes not give rise to any legal consequences and exaused ab initio.The following agreements have been expressly deciared to be void by the Contract Act. 1) Agreements by incompetent parties (Sec. 11) 2) Agreements made under a mutual mistake of fact [Sec. 20]. 3) Agreements the consideration or object of which is unlawful (Sec. 23) 4) Agreements the consideration or object of which is unlawful in part (Sec. 24) 5) Agreements made without consideration (Sec. 25) 6) Agreements in restraint of marriage (Sec. 26). 7) Agreements in restraint of trade (Sec. 27) 8) Agreements in restraint of legal proceedings (Sec. 28) 9) Agreements the meaning of which is uncertain (Sec. 29) 10)Agreements by way of wager (Sec. 30) 11)Agreements contingent on impossible events (Sec. 36) 12)Agreements to do impossible acts (Sec. 56) 13)In case of reciprocal promises to do things legal and also other things illegal, the second set of reciprocal promises is a void agreement (Sec. 57)WAGERING AGREEMENTS OR WAGER A wager is an agreement is an agreement between two parties by which one promises to pay money or money’s worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the event does not happen. Thus if A and b enter into an agreement that A shall pay B Rs. 100 if it rains on Monday, and that B shall pay A the same amount if it does not rain, it is a wagering agreement. BSPATIL
  23. 23. Essentials of Wagering Agreement: (1) Promise to pay money or money’s worth: The wagering agreement must contain a promise to pay money or money’s worth. (2) Uncertain event: The promise must be conditional on an event happening or not happening. (3) Each party must stand to win or lose: Upon the determination of the contemplated event, each party should stand to win or lose. (4) No control over the event: Neither party should have control over the happening of the event one way or the other (5) No other interest on the event: Neither party should have nay interest in the happening or non-happening of the event other gdfgjdg sum or stake he will with or lose CONTINGENT CONTRACTS‘Contingent’ means that which is dependent on something else. A Contingent Contractis a contract to do or not to do something, if some event collateral to such contract, doesor does not happen (Sec. 31). For example, goods are sent on approval the contract isa contingent contract depending on the act of the buyer to accept or reject the goods. There are three essential characteristics of a contingent contract. 1. Its performance depends upon the happening or non-happening in future of some event. It is this dependence on a future event which distinguishes a contingent contract from other contracts. 2. The event must be uncertain. If the event if bound to happen, and the contract has got to be performed in any case it is not a contingent contract 3. The event must be collateral, i.e. incidental to the contract Contracts of insurance, indemnity and guarantee are the commonest instances of a contingent contract.RULES REGARDING CONTINGENT CONTRACTS 1. Contingent contracts dependent on the happening of an uncertain future event cannot be enforced until the event has happened. If the event becomes impossible, such contracts become void (Sec. 32) Example: A contracts to pay B a sum of money when B marries C. C dies without BSPATIL
  24. 24. being married to B. The contract becomes void.2. Where a contingent contract is to be performed if a particular event does not happen, its performance can be enforced when the happening of that event becomes impossible. (Sec. 33) Example: A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.3. If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, of otherwise than under further contingencies (Sec. 34) Example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must not be considered impossible, although it is possible that D may die and that C may afterwards marry B.4. Contingent contracts to do r onto to do anything, if a specified uncertain event happens within a fixed time, become void if the event does not happen or its happening becomes impossible before the expiry of that time. Example: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year and becomes void if the ship is burnt within the year.5. Contingent agreements to do or not to do anything, if an impossible event happens are void, whether or not the fact is known to the parties (Sec. 36). BSPATIL
  25. 25. PERFORMANCE OF CONTRACTPerformance of a contract takes place when the parties to the contract fulfil theirobligations arising under the contract within the time and in the manner presented.OFFER TO PERFORMSometimes it so happens that the promisor offers to perform him obligation under thecontract at the proper time and place but the promise does not accept the performance.This is known as “attempted performance” or “tender”.REQUISITES OF A VALID TENDER 1. It must be unconditional. It becomes conditional when it is not in accordance with the terms of the contract. 2. It must be of the whole quantity contracted for or of the whole obligation. A tender of an installment when the contract stipulates payment in full is not a valid tender. 3. It must be by a person who is in a position, and is willing, to perform the promise. 4. It must be made at the proper time and place. A tender of goods after the business hours or of goods or money before the due date is not a valid tender. 5. It must be made to proper person, i.e. the promise or his duly authorized agent. It must also be in proper form. 6. It may be made to one of the several joint promises. In such a case it has the same effect as a tender to all of them. 7. In case of tender of goods, it must give a reasonable opportunity to the promise for inspection of goods. 8. In case of tender of money, the debtor must make a valid tender in the legal tender money.RECIPROCAL PROMISESPromises which form the consideration or part of the consideration for each other arecalled: reciprocal promises” [Sec. 2(f)]. Where, for example: A promises to do or not todo something and consideration of B is promise to do or not to do something thepromises are reciprocal. BSPATIL
  26. 26. These promises have been classified is follows: (1) Mutual and Independent: Where each party must perform his promise independently and irrespective of the fact whether the other party has performed or is willing to perform his promise or not the promises are mutual and independent. Example: In a contact of sale, B agrees to pay the price of goods on of instant. S promises to supply the goods on 2nd instant. The promises are mutual and independent. (2) Conditional and Dependent: Where the performance of the promise by one party depends on the prior performance of the promise by the other party the promises are conditional and dependent. Example: A promises to remover certain debris lying in front of B’s house provided B supplies him with the cart. The promises in this case are conditional and dependent. A need not perform his promise if B fails to provide him with the cart. (3) Mutual and Consent: Where the promises of both the parties are to be performed simultaneously they are said to be mutual and concurrent. The example of such promises may be sale of goods for cash.Rules Regarding Performance of Reciprocal Promises 1) Simultaneous performance of reciprocal promises 2) Order of performance of reciprocal promises 3) Effect of one party preventing another from performing promise 4) Effect of default as to promise to be performed first. 5) Reciprocal promise to do things legal and also other things illegalTIME AS THE ESSENCE OF THE CONTRACTThe expression “time is of the essence of the contract “ means that a breach of thecondition as to the time for performance will entitle the innocent party to consider the BSPATIL
  27. 27. breach as a repudiation of the contract.Sec. 55 deals with the question of “time as the essence of the contract” and provides. 1. When time is of the essence: In a contract, in which time if of the essence of the contract, if there is a failure on the part of the promisor to perform his obligation within the fixed time. The contract (or so much of it as remains unperformed becomes voidable at the option of the promise (Sec. 55 para 1). If, in such a case the promise accepts performance of the promise after the fixed time, he cannot claim compensation for nay loss occasioned by the non-performance of the promise at the agreed time. But if at the time of accepting the delayed performance he gives notice to the promisor of his intention to claim compensation, he can do so (Sec. 55 para 3) In commercial or mercantile contracts which provide for performance within a specified time, time is ordinarily of the essence of the contract. This is so because businessmen want certainty. Example: In a contract for the sale or purchase of goods the prices of which fluctuate rapidly in the market, the time of delivery and payment are considered to be of the essence of the contract. 2. When time is not of the essence: In a contract, in which time is not of the essence of the contract, failure on the part of the promisor to perform his obligation within the fixed time does not make the contract voidable, but the promise is entitled to compensation for any loss occasioned to him by such failure (Sed. 55 para 2) Intention to make time as the essence of the contract, if expressed in writing, must be in a language which is unambiguous and unmistakable. The mere fact that a certain time is specified in a contract for the performance of a promise does not necessarily make time as the essence of the contract. If the contract includes clauses providing for extension of time in certain contingencies or for payment of fine or penalty for every day or week the work undertaken remains unfinished on the expiry of time provided in the contract, such clauses are construed as rendering ineffective the express provision relating to the time being of the essence of the contract. BSPATIL
  28. 28. TERMINATION AND DISCHARGE OF CONTRACTDischarge of contract means termination of the contractual relationship between theparties. A contract is said to be discharged when it ceases to operate, i.e. when therights and obligations created by it come to an end.A contract may be discharged 1. By Performance 2. By Agreement or Consent 3. By impossibility 4. By Lapse of Time 5. By operation of Law 6. By Breach of Contract 1. Discharge by Performance Performance means the doing of that which is required by a contract. Discharge by performance takes place when the parties to the contract fulfill then obligations arising under the contract within the time and in the manner prescribed. Performance of a contract is the most usual mode of its discharge. It may be (1) Actual Performance: When both the parties perform their promises the contract is discharged. Performance should be complete precise and according to the terms of the agreement. (2) Attempted Performance or Perfer: Tender is not actual performance but is only an after to perform the obligation under the contract. 2. Discharge by agreement or consent (a) Sec. 62 lays down that if the parties to a contract agree to substitute a new contract for it or to rescind or to alter it the original contract is discharged and need not be performed. The various cases of discharge of contract by mutual agreement are dealt with in Sec. 62 and 63 are given below. Rescission Sec. 62: Novation takes place when a new contract is substituted for an existing one between the same parties. Example: A owes money to B under a contract. It is agreed between A, B and C BSPATIL
  29. 29. that B shall henceforth accept C as his debtor, instead of A. the old debt of A to Bis at an end and a new debt from C to B has been contracted.(b) Rescission Sec. 62: Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur(i) By mutual consent of the parties or(ii) Where one party fails in the performance of his obligation in such a case the other party may rescind the contract without prejudice to his right to claim compensation for the breach of contract.Example: A promises to supply certain goods to B six months after date. By thattime, the goods go out of fashion. A and B may rescind the contract.(c) Alteration (Sec 62): Alteration of a contract may take place when one or more of the terms of the contract is are altered by the mutual consent of the parties to the contract. In such a case, the old contract is discharged. Example: A enters into a contract with B for the supply of 100 bales or cotton at his Godown No. 1 by the first of the next month. A and B may after the terms of the contract by mutual consent.(d) Remission Sec. 63) Remission means acceptance of a lesser fulfilment or the promise made, i.e. acceptance of a lesser sum than what was contracted for the discharge of the whole of the debt. Example: A owes B Rs. 50,000. A pays to B and B accepts in satisfaction of the whole debt. Rs. 20,000 paid at the time and place at which Rs. 50,000 were payable. The whole debt is discharged.(e) Waver: Waver takes place when the parties to a contract agree that gdfsg shall no longer be bound by the contract. This amounts to a mutual thandonment at rights by the parties to the contract.(f) Merger: Merger tales place when an inferior right accuring to a party under a contract merger into a superior right accruing to the same party under the same on some other contract. Example: P holds a property under a lease. He later buys the property. His rights as a lessee merge into his rights as an owner. BSPATIL
  30. 30. 3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule is based on the following maxims: 1. Impossibility existing of the time of agreement: Sec. 56 lays down that can agreement to do an impossible act itself is void”. This is known as pre-contractual or initial impossibility. 2. Impossibility arising subsequent to the formation of contract: Impossibility which arises subsequent to the formation of a contract (which could be performed at the time when the contract was entered into) is called post-contractual or supervening impossibility.Discharge by Supervening Impossibility A contract is discharged by supervising impossibility in the following cases 1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent to its formation, is destroyed without any fault of the parties to the contract, the contract is discharged. Example: C let a music hall to T for a series of concerts on certain days. The hall was accidentally burnt down before the date of the first concert. Held the contract was void. 2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a contract is entered into between two parties on the basis of a continued existence or occurrence of a particular state of things. If there is any change in the state of things which ought to have occurred does not occur, the contract is discharged. Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. 3. Death or Incapacity for personal service: Where the performance of a contract depends on the personal skill or qualification of a party, contract is discharged on the illness or incapacity or death of that party. The man’s life is an implied condition of the contract. BSPATIL
  31. 31. Example: An artist undertook to perform at a concert for a certain price. Before she could do so, she was taken seriously ill. Held she was discharged due to illness. 4. Change of law: When subsequent to the formation of a contract change of law takes place, and the performance of the comerge becomes impossible the contract discharged. Example: D enters into a contract with P on 1 st March for supply of ghdkjfg imported goods in the month of September of the same year in June gdfg fgdf Parliament the import of such goods is banned. The contract is discharged. 5. Outbreak of war : A contract entered into with an after enems during war is unlawful and therefore impossible for performance. Contracts entered into before the outbreak of war are suspended during the war and may be revived after the war is over.4. DISCHARGE BY LAPSE OF TIME The Limitation Act 1963 laws down that a contract should be performed within aspecific period called period of limitation. If it is not performed and if no action is takenby the promise within the period of limitation he is deprived of his remedy at law. Forexample the price of goods sold without any stipulation as to credit should be paidwithin three years of the delivery of the goods. If the price is not paid and creditor doesnot file a suit against the buyer for the recovery of price within three years the debtbecomes time-barred and hence irrecoverable.5. DISCHARGE BY OPERATION OF LAW A contract may be discharged by operation of law. This includes discharge (a) By Death: In contracts involving personal skill or ability, the contract is terminated on death of the promissory. In other contracts the rights and liabilities of a deceased person pass on to the legal representatives of the deceased person. (b) By Merger: When an inferior right accruing to a party merges into a superior rights accruing to the same party under the same or some other contract the inferior right accruing to the party is said to be discharged. (c) By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his adjudication. BSPATIL
  32. 32. (d) By Authorised Alteration of the terms of a written agreement: Where a party to a contract makes any material alteration in the contract without the consent of the other parts, the other parts can avoid the contract. A material alteration is one which changes in a significant manner the legal identity or character of the contract or the rights and liabilities of the parties to the contract. (e) B y Rights and Liabilities becoming visited of the dfgdfg Person: Where the rights and liabilities under a contract vested in the same person for example when a bill gets into the hands of the acceptor, the other parties are discharged. 6. DISCHARGE BY BREACH OF CONTRACT Breach of contract means a breaking of the obligation which a contract imposes. It occurs when a party to the contract without lawful excuse does not fulfil his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. It confers a right of action for damages on the injured party. REMEDIES FOR BREACH OF CONTRACTWhen a contract is broken, the injured party has one or more of the following remedies: 1. Rescission of the contract 2. Suit for damages 3. Suit upon quantum meruit 4. Suit for specific performance of the contract 5. Suit for injunction 1. RESCISSION When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case, be is absolved of all his obligations under the contract. Example: a promises B to supply 10 bags of cement on a certain day. B agrees to pay the price after the receipt of the goods. A does not supply the goods. B is discharged from liability to pay the price. The Court may grant rescission. BSPATIL
  33. 33. (a) Where the contract is voidable by the plamtiff of (b) Where contract is unlawful to fgdfg but apparent off its face and the defendant is more to blame thatn the gdfgdfWhen a party treats the contracts as rescinded be makes himself liable to restgdf anybenefits he has fgdfg of under the contract to the party from whom such benefits werereceived. But if a person rightfully rescinds a contract he is entitled to compersation forany damage which he has sustained through non-fulfilment of the contract by the otherparty. 2. DAMAGES Damages are a moctars compensation allowed to the injured party by the Court for the loss or injurs suffered by him by the breach of a contract. The object of awarding damages for the search of a contract is to put the injured party in the same position, so far as money am the it, as if he had not been injured, i.e. in the position in which he would have been had there been performance and not breach. This is called the doctrine of restitution. The rules relating to damages may be considered as under 1. Damages arising naturally – Ordinary damanges When a contract has been broken, the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. This means that the damages must be the proximate consequence of the breach of contract. These damages are known as ordinary damages. Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. 1000 per quintal, the price to be paid at the time of delivery the price of wheat rises to Rs. 1200 per quintal and A refuses to sell the wheat B can claim damages at the rate of Rs. 200 per quintal. 2. Damages in contemplation of the parties – Special damages Special damages can be claimed only under the special circumstances which would result in a special loss in case of breach of a contract. Such damages knows as special damages cannot be claimed as a matter of right. BSPATIL
  34. 34. Example: A. a builder, contracts to erect a house for B by the 1 st of January. The order that B may give possession of it at that time to C to whom B has contracted to hfdg it. A is informed of the contract between B and C. A builds the house so badly that before the 1st January, it falls down and has to be rebuilt by B fgdfg vonsequence loses the rent which be was to have received from C, and gdfgdfgdf to make compensation to C fvor the breach of the contract. A must make cgdfgdfgd to gdfg for the cost of rebuilding the house for the rent lost, and for the compensation made to.3. Vindictive or Exemplary damages Damages for the breach of a contract are given by way of compensation for loss suffered, and not by way of punishement for wrong inflicted. Hence vindictive or exemplary’ damages have no place in the law of contract because they are punitive involving punishment by nature. But in case of (a) breach of a promise to marry and the dishonor of a cheque by a banker wrongfully when he possesses sufficient funds by the credit of the customer, the Court may award exemplary damages.4. Nominal damages Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages recoverable by him are nominal. These damages merels acknowledge that the plaintiff has proved his case and won. Example: A firm consisting of four partners employed B for a period of two years. After six months two partners rebred the business being carried on by the other two B declined to be employed under the continuing partners. Held, he was only entitled to nominal damages as he had suffered no loss.5. Damages for loss of reputation Damages for loss of reputation on case of breach of a contract are generally not recoverable. An exempuon to this rule exists in the case of a banker who wrongfully refuses to honour a customer’s cheque. If the customer happens to be a tradesman, he can recover damages in respect of any loss to his trade reputation byh the breach. And the rule of law is the smaller the amount of the cheque dishonoured the larger the amount of damages awarded. But if the customer is not a tradesman be can recover only nominal damages.6. Damages for inconvenience and discomfort BSPATIL
  35. 35. Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is that the measure of damages is not affected by the motive or the manner of the breach. Example: A was wrongfully dismissed in a harsh and humiliating manner by from his employment. Held (a) A could recover a sum representing his wages for the period of notice and the commission which he would have earned during that period but (b) he could not recover anything for his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him to obtain employment.7. Mitigation of damages It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. He cannot claim to be compensated by the party in default for loss which the ought reasonably to have avoided. That is he cannot claim compensation for loss which is really due not to the breach, but due to his own neglect to mitigate the loss after the breach.8. Difficulty of Assessment Although damages which are incapable of assessment cannot be recovered the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them. The Court must do its best estimate the loss and a contingences may be taken into account. Example: H advertised a beauty competition by which gfdgfk of certain newspapers were to select fifty ladies. He himself was to select twelve out of these fifty. The selected twelve were to be provided theatrical encagements. C was one of the fifty and by H’s breach of contract she was not present when the final section was made. Held C was entitled to damages although it was difficult to assess them.9. Cost of Decree The aggrieved party is entitled in addition to damages to get the cost of getting the decree for damages. The cost of suit for damages is in the discretion of the Court.10. Damages agreed upon in advance in case of breach BSPATIL
  36. 36. If a sum is specified in a contract as the amount to be paid in case of its gdfgdf or if the contract contains any other stipulation by way of gdfgdfg dfg failure to perform the obligations the aggrieved party is entiled to gfdgd from the gdfgd has broken the contract a reasonable compensation not exceeding the fgdfg named. Example: A contracts with B to pay Rs. 1000 if he fails to pay gdfgdf g given day. B is entitled to recover from A such compensation not exceeding Rs. Dfgd as the Court considers reasonable.Liquidated Damages and PenaltySometimes parties to a contract stipulate at the time of its formation that on the breachof the contract by either of them a certain specified sum gdfgd be payable as damages.Such a sum may amount to either liquidated damages or a penalty. Liquidated damagesrepresent a sum fixedc or ascertained by the parties in the contract which is a fair andgenuine pre-estimate of the probable loss that gdfg fgd fg as a result of the breach. If ittakes place. A penalty is a sum named in the contract at the time of its formation, whichis dispropoetionate to the damages likely to fdgdfgd as a result of the breach. It is fixedup with a view to securing the performance of the contract.Payment of InterestThe largest number of cases decided under Sec. 74 relate to stipulation if a contractproviding for payment of interest. The following rules are observed with regard topayment of interest. 1. Payment of interest in case of default. 2. Payment of interest at higher rate a. From the date of the bond, and b. From the date of default 3. Payment of compound interest on default a. At the same rate as simple interest and b. At the rate higher than simple interest 4. Payment of interest at a lower rate, if interest paid on due date. 3. QUANTUM MERUIT The phrase quantum meruit ghdfgfdgh much as earned. A right to sue on a quantum meruit arises where a ggdfg performed by one party has become BSPATIL
  37. 37. discharged to the breach of the contract dghdfghdf party.4. SPECIFIC PERFORMANCE In certain cases of breach of contract damages are not an adequate remedy. The Court may, in such cases direct the party in breach to carry out his promise according to the terms of the contract. Some of the cases in which specific performance of a contract may in discretion of the Court be enforced are as follows: (a) When the act agreed to be done is such that compensation in money for its non performance is not an adequate relief. (b) When there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done. (c) When it is probable that the compensation in money cannot be got for the non-performance of the act agreed to be done.5. INJUNCTION Where a party is in breach of a negativbe term of a contract the where gdfg is doing something which he promised not to do, the Court may be issuing an order restrain him from doing what he promised not to do. Such an order of the Court is known as injunction’. Example: W agreed to sing at L’s theatre, and during a certain period to sing nowhere else. Afterwards W made contract with Z to sing at another theatre and refused to perform the contract with L. Held, W could be restrained by injunction from singing for Z. BSPATIL
  38. 38. QUASI CONTRACTS Under certain circumstances, a person may receive a benefit to which the law regards another person as better entitled, or for which the law considers he should pay to the other person, even though there is no contract between the parties. Such relationships are termed quasi-contracts, because, although there is no contract or agreement between the parties, they are put in the same position as if there were a contract between them. A quasi-contract rests on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another. The principle of unjust enrichment requires:  That 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. Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi- contract, on the other hand, is created by law.KINDS OF QUASI-CONTRACTS 1. SUPPLY OF NECESSARIES (Sec. 68) If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another 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. Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property. 2. PAYMENT OF INTERESTED PERSON (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. Example: P left his carriage on D’s premises. D’s landlord seized the carriage as distress for rent. P paid the rent to obtain the release of his carriage. Held, P could recover the amount from D. The essential requirements are as follows: (a) The payment made should be bonafide for the protection of one’s interest. BSPATIL
  39. 39. (b) The payment should not be voluntary one.(c) The payment must be such as the other party was bound by law to pay.3. OBLIGATION TO PAY FOR NON-GRATUITOUS ACTS (Sec. 70)When a person lawfully does anything for another person or delivers anything tohim, not intending to do so gratuitously, and such other person enjoys the benefitthereof, the latter is bound to make compensation to the former in respect of, or torestore, the thing so done or delivered.Example: a, a tradesman, leaves goods at B’s house by mistake. B treats the goodsas his own. He is bound to pay for them to A.Before any right of action under Sec. 70 arises, three conditions must be satisfied.(a) The thing must have been done lawfully.(b) The person doing the act should not have intended to do it gratuitously(c) The person for whom the acts is done must have enjoyed the benefit of the act.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. He is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value. he must also take all necessary measures to trace its owner. If he does not, he will be guilty of wrongful conversion of the property. Till the owner is found out, the property in goods will vest in the finder and he can retain the goods as his own against the whole world (except the owner).Example: F picks up a diamond on the floor of S’s shop. He hands it over to S to keep it till true owner is found out. No one appears to claim it for quite some weeks in spite of the wide advertisements in the newspapers. F claims the diamond for S who refuses to return. S is bound to return the diamond to F who is entitled to retain the diamond against the whole world except the true owner.The finder can sell the goods in the following cases: • When the thing found is in danger of perishing. • When the owner cannot, with reasonable diligence, be found out. BSPATIL
  40. 40. • When the owner is found out, but he refuse to pay the lawful charges of the finder, and • When the lawful charges of the finder, in respect of the thing found amount to two-thirds of the value of the thing found. (Sec. 169)5. MISTAKE OR COERCION (Sec. 72)A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it to the person who paid it by mistake or under coercion. The word ‘coercion’ is used in Sec. 72 in its general sense and not as defined in Sec. 15.Example: 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 pay the amount to B.QUANTUM MERUIT‘Quantum meruit’ literally means ‘as much as earned’ or as much as it merited’. When a person has done some work under a contract, and the other party repudiates the contract, or some event happens which makes the further performance of the contract impossible, them the party who has performed the work can claim remuneration for the work he has already done. Likewise, where one person has expressly or impliedly requested another to render him a service without specifying any remuneration, but the circumstances of the request imply that the service is to be paid for, there is implied a promise to pay quantum meruit, i.e. so much as the party rendering the service deserves. The right to claim quantum meruit does not arise out of contract as the right to damages does, it is a claim on the quasi-contractual obligation which the law implies in the circumstances.The claim for quantum meruit arises only when the original contract is discharged. If the original contract exists, the party not in default cannot have quantum meruit remedy, he has to take resort to remedy in damages. Further the claim for quantum meruit can be brought only by the party who is not in default.The claim for quantum meruit arises in the following cases(a) When an agreement is discovered to be void (Sec. 65)(b) When something is done without any intention to do so gratuitously (Sec. 70) BSPATIL
  41. 41. (c) When there is an express or implied contract to render services but there is no agreement as to remuneration (d) When the completion of the contract has been prevented by the act of the other party to the contract (e) When a contract is divisible (f) When an indivisible contract is completely performed but badly.Review Questions 1. Define contract. What are the essentials of a valid contract? 2. What are legal rules relating to offer? 3. What are the rules relating to consideration? 4. Discuss the nature of contract entered into with minors. 5. What are the different modes of discharging the contract? 6. What are the remedies for breach of contract? 7. What are quasi-contracts? Enumerate the instances of quasi-contracts laid down under the Act. BSPATIL
  42. 42. SPECIAL CONTRACTS LESSON – 2 INDEMNITY AND GUARANTEEDEFINITIONSection 124 of the Indian Contract Act defines it as “a contract by which one partypromises to save the other from loss caused to him by the conduct of the promisorhimself or by the conduct of any other person”. The person who promises is called theIndemnifier and the person to whom the promise is made is called the Indemnified orIndemnity Holder.Illustration: A promises not to construct buildings on a particular site so as to preventlight and air to B’s house and in case of breach of such promise, to indemnify for theconsequent loss.This is a contract of indemnity. A contract of insurance is also a contract of indemnity.RIGHTS OF AN INDEMNITY HOLDERHe is entitled to recover—  All damages  All costs which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnity applies, and  All sums which he may have paid under the terms of any compromise of any such suit provided, such compromise was not contrary to the orders of the promisor and was prudent or the promisor authorizes him to compromise the suit.CONTRACT OF GUARANTEESection 126 of Indian Contract Act defines it as “a contract to perform the promise, ordischarge the liability, of a third person in case of his default”. The person who gives theguarantee is called the “surety”, the person in respect of whose default, the guarantee isgiven is called the “principal debtor”, and the person to whom the guarantee is given iscalled the “creditor”.Illustration: A purchases goods from B on credit. C agrees to stand as a surety whichmeans that if A does not pay the price of the goods, he will pay. Here, A is the principal BSPATIL
  43. 43. debator, B is the creditor and C is the surety or guarantee. Distinction between Contract of Indemnity and Contract of Guarantee Contract of Indemnity Contract of Guarantee1 There are two parties, namely There are three parties, viz the principal Indemnifier and the debtor, the creditor and the surety Indemnified.2 The liability of the Indemnifier is The liability of the surety is subsidiary primary3 The liability of the Indemnifier is The liability of the surety is subsisting contingent4 The Indemnifier cannot sue the The surety can sue the principal debtor third party in his name even in his own name after paying the creditor after making good the loss unless there is an assignment in his favour from the indemnified.RIGHTS OF SURETYRights against the Principal Debtor 1) After discharging the liability of the principal debtor, the surety is entitled to all those rights which the creditor himself exercises against the principal debtor. This right of the surety is called “subrogation”. Illustration: The right of the creditor to receive dividends from the official assignee when the principal debtor becomes bankrupt, can be exercised by the surety. 2) The surety can proceed against all those securities of the principal debtor, which the creditor himself can proceed against. 3) The surety is entitled to be indemnified for all payments rightfully made by him. Illustration: B is indebted to C, and A is surety for the debt. C demands payment form A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs as well as the principal debt. BSPATIL
  44. 44. Rights against the Creditor 1) The surety may require the creditor to sue the debtor. But he cannot compel the creditor to do so. 2) In the case of fidelity contracts, he can insist upon the creditor to dispense with the services of the principal debtor when his dishonesty is established. 3) He can claim set off or counter-claim which the principal debtor could have obtained against the creditor. 4) On payment of the guaranteed debt, ha can require the creditor to assign to him all the securities held by the creditor in respect of the debt. If the creditor loses or parts with such securities without the consent of the surety, the surety is discharged to the extent of the value of the security. Illustration: C advances to B, his tenant, Rs. 2000 on the guarantee of A. C has also a further security for the sum of Rs. 2000 by mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.Rights against the Co-Sureties 1) All the sureties shall bear equally, the loss caused by the insolvency of the principal debtor. If one of them bears the entire loss in the first instance he can claim contribution from other co-sureties. 2) Where the co-sureties agreed to become liable in different sums, they should contribute, according to English Law, proportionately. Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and 40,000 respectively, as sureties for D’s liability. D’s indebtedness was Rs. 30,000. A,B and C would contribute in the ratio of 1 : 2 : 4. But according to Indian Law they shall bear such loss equally but not exceeding the sums which they have agreed to pay. So, A, B and C will have to pay Rs. 10,000 each.SURETY DISCHARGED FROM LIABILITY 1. The surety is discharged from liability if the contract of guarantee becomes void or voidable, on the ground of misrepresentation by the creditor with regard to a material circumstance, or on the ground that the guarantee was given on condition that another person will join as a co-surety and that such other person has not joined as such. BSPATIL
  45. 45. Illustration: A engages B as clerk to collect money for him. B fails to account for some of his receipts and A in consequence, calls upon him to furnish security for his accounting. C gives his guarantee for B’s accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid. 2. The surety is discharged by revocation as to future transaction in case of continuing guarantee. 3. The surety is discharged a. By variance of contract: Any variance in the terms of the contract between the principal debtor and the creditor without the surety’s consent discharges the surety. Illustration: C, contracts to lend B Rs. 5000 on the 1st of March. A guarantees repayment. C pays Rs. 5000 to B on the 1st of January. A is discharged from his liability, as the contract has been varied in as much as C might sue B for the money before the 1st of March. b. By release or discharge of principal debtor: The surety is discharged by any contract between the principal debtor and the creditor by which the principal debtor is discharged or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.Illustration: A, contracts with B for a fixed price to build a house for B within astipulated time, B supplying the necessary timber. C guarantees A’s performance ofthe contract. B omits to supply the timber. C is discharged from his surety ship. c. By composition with debtor: The surety is discharged when the principal debtor and creditor enter into a contract by which the creditor (1) composition with or (2) promises to give time or (3) promises not to sue the principal debtor. d. By act or omission impairing surety’s remedy: The surety is discharged if the creditor does any act inconsistent with the rights of the surety or omits to do any act which his duty to surely requires him to do.Illustration: A puts M as apprentice to B, and gives a guarantee in B for M’s fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised and M embezzles. A is not liable to B on his guarantee. BSPATIL
  46. 46. e. Loss of security: the surety is discharged if the creditor losses or parts with the securities belonging to the principal debtor, without the consent of the surety.The surety is not discharged in the following cases: 1. A surety is not discharged when a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor. Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. A is not discharged. 2. Mere forbearance on the part of the creditor to sue the principal debtor does not discharge the surety. Illustration: B owes C, a debt guaranteed by A. The debt becomes payable C does not sue B for a year after the debt has become payable. A is not discharged from his liability. 3. Release of one co-surety does not discharge the other. BSPATIL
  47. 47. LESSON – 3 CONTRACTS OF BAILMENTSSection 148 of the Indian Contract Act defines that “a bailment is the delivery of goodsby one person to another for some purpose, upon a contract that they shall when thepurpose is accomplished, be returned or otherwise disposed of according to thedirections of the person delivering them.” The person delivering the goods is called the“bailor”. The person to whom they are delivered is called the “bailee”.Essentials of Bailments 1. There must be delivery of goods: Such delivery may be actual or constructive. 2. The delivery must be made for some specific purpose. 3. The delivery must be made on condition that the goods shall be returned in specific when the purpose is over, or disposed of according to the direction of the bailor. 4. Only possession but not the ownership of the goods is transferred. Examples: Delivery of a radio for repair.DUTIES OF A BAILEE 1. To take reasonable care of the goods bailed to him Section 151 lays down that in all cases of bailment the bailee should take that much of care which an ordinary prudent man would take of his own goods under similar circumstances. Section 152 lays down that the bailee is not responsible, in the absence of any special contract, for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care described above. Illustration: A gives to B, to be made into an ornament. B keeps them in a safe where he usually keeps his own valuables. B is not liable if the goods are lose by him. 2. Not to make unauthorized use of goods bailed The bailee should not make use of goods for purposes inconsistent with the terms of the contract. If he does so, the bailor is entitled to terminate the contract and claim damages, if any. Illustration: A lends a horse to B for his own riding only. B allows C, to ride the horse. BSPATIL
  48. 48. C rides carefully but the horse accidentally falls and is injured. B is liable to compensate A for the injury caused to the horse.3. Not to mix the goods of the bailor with his own goodsa) If a bailee mixes the goods of the bailor with his own goods with the consent of the bailor, both the bailor and the bailee shall have proportionate interest in the mixture.b) If the goods mixed by the bailee without the consent of the bailor and the goods are separable, the bailee is bound to bear the expenses of separation and pay damages if any.c) If the goods are mixed by the bailee without the consent of the bailor and the goods are inseparable, the bailee should compensate the bailor for the loss of goods.Illustration: A bails a barrel of Cape flour worth Rs. 45 to B. B without A’s consent, mixes the flour with country flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour.4. Not to set up adverse titleThe bailee should not deny the bailor’s title. He should not set up his own title or that of a third party.5. To return the goods bailedThe bailee should return goods bailed, to the bailor when the fixed period is over or when the purpose is accomplished. The bailee should also deliver any increase or profit which may have accrued from the goods bailed.Illustration: A leaves a cow in the custody of B to be taken care of The cow has a calf B is bound to deliver the calf as well as the cow to A.DUTIES OF A BAILOR1. To disclose the faults in the goods bailedThe bailor should disclose to the bailee, faults in the goods bailed, of which he is aware. If he does not disclose, he will be liable for the loss resulting therefrom.Illustration: A lends a horse which he knows to be vicious to B. He does not disclose this fact. The horse runs away. B is thrown down and injured. A is responsible to BSPATIL
  49. 49. B for damages sustained. 2. To bear extra-ordinary expensesWhile the ordinary expenses are payable by the bailee, extra-ordinary expenses shallbe borne by the bailor.Illustration: Where a horse is lent for a journey, the bailee shall bear the expenses offeeding the horse. But in case of the horse becoming sick, the bailor shall have to bearthe necessary expenses for its recover. 3. Responsibility for want of title The bailor is responsible to the bailee for any loss sustained by he latter by the reason, that the bailor was not entitled to make the bailment or to receive back the goods or to give directions respecting them. RIGHTS OF BAILOR 1. He is entitled to the increase or profit from goods bailed 2. In the case of gratuitous loan, the lender may require the goods to be returned, even though he lent it for a fixed period for specific purpose. But if such a request causes loss to the bailee exceeding the benefit he derives, the bailor should indemnify the borrower. 3. The bailor is entitled to terminate the contract when the bailee does any act inconsistent with the terms of bailment. Illustration: A gives a horse to B for hire for his own riding. B drives the horse in his carriage. The bailment can be terminated at the option of A.LIEN Lien is a right of a person, who has possession of goods of another, to return such possession until a debt due to him has been discharged. This right is called a “Possessory lien”. Lien is of two kinds: 1. Particular lien, and 2. General lien 1. A Particular Lien is one which is available only against that property in respect of which the skill and labour are exercised or any expenses are incurred. BSPATIL
  50. 50. Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain the watch till he is paid for the services rendered. The bailees, repairers and unpaid vendors of goods are entitled to particular lein. 2. A General Lien is the right to retain the property of another for a general balance of accounts. Bankers, can exercise this right for any debt due to them.The duties and rights of A finder of lost goodsA person who finds an article need not take charge of it. But if he takes them into hispossession, be becomes a bailee.Duties and Rights 1. He must take as much care of the goods as an ordinary prudent man would, under similar circumstances, take of his own goods. 2. He cannot sue for remuneration for trouble and expense incurred by him to preserve the goods or to find out the owner of the goods. 3. He may exercise particular lien against the goods for such remuneration. 4. If a reward has been offered for the return of the goods, he can sue for such reward. 5. If the goods are the subject of the sale and if the owner is not found or when found refuses to pay the lawful charges, the finder may sell the goods. a. When the goods are about to perish or b. When they lose the greater part of their value of c. When lawful charges amount to two-thirds of their valuePLEDGEA pledge is a “bailment of goods as security for payment of a debt or performance of apromise”. The bailor is called the “pawnor” and the bailee is called the “pawnee”. In thecase of pawn, there is no transfer of property in goods. Only possession of the goods istransferred. Hence, it is different from mortgage. Pawn is also different from lien, as inthe case of lien, there is not power to sell the article while a pawnee can sell, subject tosome conditions. BSPATIL
  51. 51. Rights of PawnorEven after the expiry of a stipulated period, he may redeem the goods pledged at anysubsequent time before the actual sale of the goods pledged. But he must payexpenses which may have arisen from his default.Rights of Pawnee 1. He can retain the goods pledged until he recovers the debt, interest and other expenses incidental to possession or preservation of the goods. 2. He cannot retain the goods for debts other than those for which pawn is made. 3. He is entitled to receive extra-ordinary expenses incurred for the preservation of goods. 4. If the pawnor makes a default, the pawnee may a. Bring a suit upon the debt or promise and b. Retain the goods pledged or c. Sell the goods by giving a reasonable notice of sale to the pawnor. If the proceeds of such are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the balance to the pawnor. BSPATIL