Contract act


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Contract act

  1. 1. Legal Aspects of Business
  2. 2. CONTRACT <ul><li>A contract is an agreement made between two or more parties which the law will enforce. </li></ul><ul><li>“ A Contract is an agreement enforceable by law. ” sec 2(h) </li></ul><ul><ul><li>CONTRACT = AGREEMENT + ENFORCEABILITY </li></ul></ul>
  3. 3. AGREEMENT <ul><li>“ Every promise and every set of promises, </li></ul><ul><li>forming consideration for each other. ” </li></ul><ul><li>sec 2(e) </li></ul><ul><ul><li>Agreement = Offer + Acceptance </li></ul></ul>
  4. 4. CONSENSUS AD IDEM <ul><li>The essence of an agreement is the Meeting of the Minds of the parties in full and final agreement . </li></ul><ul><li>An agreement, to become a contract, must give rise to a Legal Obligation . </li></ul>OBLIGATION
  5. 5. An Offer <ul><li>“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.” – Sec 2(a) </li></ul>
  6. 6. An Acceptance <ul><li>“When a person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” – Sec 2(b) </li></ul>
  7. 7. Some vital points : <ul><li>All contracts are agreements but all agreements are not contracts. </li></ul><ul><li>A legal obligation having its source in an agreement only will give rise to a contract. </li></ul><ul><li>Law of contracts creates rights in personam nor rights in rem . </li></ul>
  8. 8. Agreement Vs Contract <ul><li>An agreement is a promise or set of promises (s). A contract is essentially an agreement, i.e., a promise or set of promise (s). </li></ul><ul><li>Differences </li></ul><ul><li>Enforceability – </li></ul><ul><ul><li>An agreement may or may not be enforceable at law. For example, social agreements are generally not enforceable while business agreements are enforceable at law. </li></ul></ul><ul><ul><li>A contract is an agreement which is enforceable at law. </li></ul></ul><ul><li>Effect – </li></ul><ul><ul><li>An agreement is not always a binding on the concerned parties. </li></ul></ul><ul><ul><li>A contract is always concluded and binding on the concerned parties, </li></ul></ul><ul><li>Scope – </li></ul><ul><ul><li>All agreements are not contracts. </li></ul></ul><ul><ul><li>All contracts are agreements. </li></ul></ul>
  9. 9. ESSENTIALS OF VALID CONTRACT <ul><li>Offer and acceptance </li></ul><ul><li>Intention to create legal relationship </li></ul><ul><li>Lawful consideration </li></ul><ul><li>Capacity of parties </li></ul><ul><li>Free and genuine consent </li></ul><ul><li>Lawful object </li></ul><ul><li>Agreement not declared Void </li></ul><ul><li>Certainty & possibility of performance </li></ul><ul><li>Legal formalities </li></ul>
  10. 10. CLASSIFICATION OF CONTRACTS <ul><li>Classification according to validity : </li></ul><ul><ul><li>Valid Contract - According to section 2(i), it is”an agreement enforceable by law”, an agreement becomes enforceable by law when all the essential elements of a valid contract </li></ul></ul><ul><ul><li>Void contract - Section 2(j) defines: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.” </li></ul></ul><ul><ul><li>Voidable contract- According to section 2(i), “an agreement which” is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” </li></ul></ul><ul><ul><li>Unenforceable contract - An unenforceable contract is one which is valid in itself, but is not capable of being enforced in a court of law because of some technical defect such as absence of writing, registration, requisite stamp, etc., or time barred by the law of limitation. </li></ul></ul><ul><li>Classification according to formation </li></ul><ul><ul><li>Express contract - Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written, it is an express contract. </li></ul></ul><ul><ul><li>Implied contract - Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it is an implied contract. </li></ul></ul>
  11. 11. A note in addition : Illegal Vs Void <ul><li>Similarities - </li></ul><ul><ul><li>These agreements are not enforceable at law. </li></ul></ul><ul><li>Differences - </li></ul><ul><ul><li>Scope – </li></ul></ul><ul><ul><ul><li>The illegal agreements are narrower in scope. All illegal agreements are void. </li></ul></ul></ul><ul><ul><ul><li>The void agreements are wider in scope. An agreement may be void because of a reason other than illegality. </li></ul></ul></ul><ul><ul><li>Effect on collateral transaction – </li></ul></ul><ul><ul><ul><li>Collateral transaction of an illegal contract also becomes illegal and contract cannot be enforced. </li></ul></ul></ul><ul><ul><ul><li>Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law. </li></ul></ul></ul><ul><ul><li>Punishment – </li></ul></ul><ul><ul><ul><li>Parties may be punished for making illegal agreement. </li></ul></ul></ul><ul><ul><ul><li>Being void does not make a contract punishable. </li></ul></ul></ul>
  12. 12. <ul><li>Classification according to performance </li></ul><ul><ul><li>Executed contract – a contract where both the parties have duly fulfilled their obligations in the contract. </li></ul></ul><ul><ul><li>Executory contract – a contract where the work is not wholly performed or in which something still remains to be done. </li></ul></ul><ul><ul><ul><li>Unilateral contract – a contract wherein at the conclusion of the contract there is an obligation yet to be performed on the part of one party only. </li></ul></ul></ul><ul><ul><ul><li>Bilateral contract - a contract where there is obligation on the part of both to do or to refrain from doing the particular thing. These are similar to executory contracts. </li></ul></ul></ul><ul><li>Classification according to English Law </li></ul><ul><ul><li>Formal contract </li></ul></ul><ul><ul><li>Simple contract </li></ul></ul>CLASSIFICATION OF CONTRACTS
  13. 13. Free Consent <ul><li>Consent is said to be free when it is not caused by any of the following : </li></ul><ul><ul><li>Coercion (sec 15) </li></ul></ul><ul><ul><li>Undue Influence (sec 16) </li></ul></ul><ul><ul><li>Fraud (sec 17) </li></ul></ul><ul><ul><li>Misrepresentation (sec 18) </li></ul></ul><ul><ul><li>Mistake (sec 20 & 21) </li></ul></ul>
  14. 14. Coercion (sec 15) <ul><li>Coercion is the commitment of threatening to commit any act forbidden by the Indian penal code or unlawful detaining or threatening to detain any property to the prejudice of any person whatever with the intention of causing the person to enter into an agreement. </li></ul><ul><ul><li>Effect of coercion : </li></ul></ul><ul><ul><ul><li>An agreement under coercion is voidable at the option of the party whose consent was so obtained. </li></ul></ul></ul>
  15. 15. Undue Influence (sec 16) <ul><li>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 . </li></ul><ul><li>Ability to dominate the will of other party : </li></ul><ul><ul><li>Such a will is said to exists where a person - </li></ul></ul><ul><ul><ul><li>Holds a real and apparent authority over the other eg, Income tax authority and assessee, police and accused </li></ul></ul></ul><ul><ul><ul><li>Stands in a fiduciary relation (relation of trust and confidence) </li></ul></ul></ul><ul><ul><ul><ul><li>Eg. Solicitor and client, spiritual guru and devotee, husband and wife </li></ul></ul></ul></ul><ul><ul><ul><li>Makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress </li></ul></ul></ul><ul><ul><ul><li>The following relationships raise the assumptions of undue influence : </li></ul></ul></ul><ul><ul><ul><ul><li>Parent and child </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Guardian and ward </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Trustee and beneficiary </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Religious advisors and devotees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Doctor and patient </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Solicitor and client </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Fiancé and fiancée </li></ul></ul></ul></ul>
  16. 16. <ul><li>Burden of proof: </li></ul><ul><ul><li>The plaintiff who wants to avoid the contract entered into under undue influence has to establish that </li></ul></ul><ul><ul><ul><li>The other party was in a position to dominate the will </li></ul></ul></ul><ul><ul><ul><li>The other party actually used the influence to obtain the consent on the contract </li></ul></ul></ul><ul><ul><ul><li>The contract is unreasonable </li></ul></ul></ul><ul><li>Effect of undue influence : </li></ul><ul><ul><li>Contract is voidable at the option at the party whose consent is not free </li></ul></ul>
  17. 17. Fraud (sec 17) <ul><li>Fraud means and includes any of the following acts committed by a party to a contract or connivance or by his agent with the intent to deceive or to induce a person to enter into a contract . </li></ul><ul><ul><li>The suggestion that a fact is true when it is not true and the person making the suggestion does not believe it to be true. </li></ul></ul><ul><ul><li>The active concealment of a fact by a person having knowledge or belief of the fact </li></ul></ul><ul><ul><li>A promise made without any intention of performing it </li></ul></ul><ul><ul><li>Any other act aimed to deceive </li></ul></ul><ul><ul><li>Any such act of omission as the law specially declares to be fraudulent </li></ul></ul>
  18. 18. Fraud <ul><li>There should be a suggestion as to a fact </li></ul><ul><li>The fact suggested should not be true </li></ul><ul><li>The suggestion should have been made by the person who does not believe it to be true </li></ul><ul><li>The suggestion should have been made by the person with an intention of inducing the other party to enter into the contract </li></ul><ul><ul><li>Contracts of Uberrimae Fidei : </li></ul></ul><ul><ul><ul><li>Contracts on which law imposes a special duty to act with utmost faith to disclose all material information. eg. Contracts of insurance, Company prospectus inviting public to subscribe for shares, contract of sale of land, contract of family arrangements </li></ul></ul></ul><ul><li>Effects of fraud: </li></ul><ul><ul><li>Voidable contract </li></ul></ul>
  19. 19. Misrepresentation (sec 18) <ul><li>Misrepresentation is the innocent or unconscious presentation of wrong facts by one party which are taken into account by the other party before entering into a contract. </li></ul><ul><ul><li>Sec 18 defines misrepresentation to be existing </li></ul></ul><ul><ul><ul><li>When a person positively asserts that a fact is true when his information does not warrant it to be, though he believes it to be so . </li></ul></ul></ul><ul><ul><ul><li>The misrepresentation should be made before the conclusion of the contract and with the intention of inducing the other party to act upon it </li></ul></ul></ul><ul><ul><ul><li>The other party should have acted upon the misrepresentation </li></ul></ul></ul><ul><li>Consequences : </li></ul><ul><ul><li>The aggrieved party may avoid or rescind the contract or accept the contract while insisting that he shall be placed in the position in which he would have been if the representation made had been true. </li></ul></ul>
  20. 20. Mistake (sec 20 and 21) <ul><ul><ul><ul><li>Mistake may be of two types : </li></ul></ul></ul></ul><ul><li>Mistake of Law </li></ul><ul><ul><ul><li>Ignorance of law is no excuse </li></ul></ul></ul><ul><ul><ul><li>(ignorantia juris non-excusat) </li></ul></ul></ul><ul><ul><li>Mistake of law : </li></ul></ul><ul><ul><ul><li>Mistake of the law of the country </li></ul></ul></ul><ul><ul><ul><li>Mistake of foreign law </li></ul></ul></ul><ul><ul><ul><li>Mistake of private rights </li></ul></ul></ul><ul><li>Mistake of fact </li></ul><ul><ul><li>Mistake of foreign law and mistake of private rights are treated as mistake of facts and may be declared as void. </li></ul></ul>
  21. 21. Bilateral Mistake <ul><li>Bilateral Mistake </li></ul><ul><ul><ul><li>As per sec 20 where both the parties to an agreement are under a mistake as to the matter of fact essential to the agreement . Such a contract is declared as void. </li></ul></ul></ul><ul><ul><ul><li>An agreement is void on ground of mistake if : </li></ul></ul></ul><ul><ul><ul><ul><li>The mistake is mutual </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The mistake relates to a matter of fact essential to the agreement. </li></ul></ul></ul></ul><ul><ul><li>Bilateral mistake may be : </li></ul></ul><ul><ul><ul><li>Mistake as to subject matter </li></ul></ul></ul><ul><ul><ul><li>Mistake as to the possibility of performance </li></ul></ul></ul>
  22. 22. <ul><li>Mistake as to subject matter : </li></ul><ul><ul><li>Mistake regarding existence </li></ul></ul><ul><ul><li>Mistake regarding identity </li></ul></ul><ul><ul><li>Mistake regarding title </li></ul></ul><ul><ul><li>Mistake regarding price </li></ul></ul><ul><ul><li>Mistake regarding quantity </li></ul></ul><ul><ul><li>Mistake regarding quality </li></ul></ul><ul><li>Mistake as to possibility of performance </li></ul>
  23. 23. Mistake of fact <ul><li>Unilateral mistake : </li></ul><ul><ul><ul><li>Where one of the parties to the contract is under a mistake it is called Unilateral mistake. The one sided mistake with regard to either the subject matter, terms of contract or legal implications of the contract </li></ul></ul></ul><ul><ul><li>Effect : </li></ul></ul><ul><ul><ul><li>Sec 22 provides that a contract is not voidable merely because it is caused by one of the parties to it being under a mistake of fact. </li></ul></ul></ul><ul><ul><ul><li>In the following cases unilateral mistake will render a contract void : </li></ul></ul></ul><ul><ul><ul><ul><li>Identity of persons contracted with </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Nature of contract or character of document that is being signed </li></ul></ul></ul></ul>
  24. 24. Void Agreements <ul><li>Agreements by incompetent parties (sec 11) </li></ul><ul><li>Agreements made under a mutual mistake of fact (sec 20) </li></ul><ul><li>Agreements the object or consideration of which is unlawful (sec 23) </li></ul><ul><li>Agreements the object or consideration of which is unlawful in part (sec 24) </li></ul><ul><li>Agreements made without consideration (sec 25) </li></ul><ul><li>Agreements in restraint of marriage (sec 26) </li></ul><ul><li>Agreements in restraint of trade (sec 27) </li></ul><ul><li>Agreements in restraint of legal proceedings (sec 28) </li></ul><ul><li>Agreements the meaning of which is uncertain (sec 29) </li></ul><ul><li>Agreements by way of wager (sec 30) </li></ul><ul><li>Agreements to do impossible acts (sec 56) </li></ul>
  25. 25. Exceptions to the Agreements in restraint of trade <ul><li>Sale of goodwill. The seller of the ‘goodwill’ of a business can be restrained from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided the restraint is reasonable in point of time and space (Exception to Sec. 27). </li></ul><ul><li>Partners’ agreements. An agreement in restraint of trade among the partners or between any partner and the buyer of firm’s goodwill is valid in certain circumstances. </li></ul><ul><li>Trade combinations. An agreement, the primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or manufacturers e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion, does not amount to a restart of trade and is perfectly valid </li></ul>
  26. 26. Restitution (sec 64 & 65) <ul><li>Restitution implies restoration or return. </li></ul><ul><ul><li>Sec 65 gives a right of restitution under two circumstances : </li></ul></ul><ul><ul><ul><li>When an agreement is discovered to be void </li></ul></ul></ul><ul><ul><ul><li>When a contract after its formation becomes subsequently void </li></ul></ul></ul><ul><ul><li>Sec 65 does not apply to persons who are wholly incompetent to enter into contract. </li></ul></ul><ul><ul><li>Sec 65 does not apply to agreements which were known to be void when they were entered into. </li></ul></ul>
  27. 27. Performance of Contract <ul><li>A contract is entered into with the object that it will be performed. </li></ul><ul><li>The parties to a contract must either perform or offer to perform their respective promises unless such performance is dispensed with or excused. (sec 37) </li></ul><ul><li>Performance may be : </li></ul><ul><ul><li>Actual Performance </li></ul></ul><ul><ul><li>Attempted performance – when one of the parties to the contract offers to perform the contract but the other party does not accept it, there is an attempted performance. </li></ul></ul>
  28. 28. Tender (an attempted performance) <ul><li>Section 38 specifies that where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. </li></ul><ul><ul><li>Certain essentials of a valid tender: </li></ul></ul><ul><li>It must be unconditional </li></ul><ul><li>It must be made at proper time and place. </li></ul><ul><li>It must be made by the person who is able and willing. </li></ul><ul><li>In case of tender of goods it must be for the quality/quantity of goods agreed upon. </li></ul><ul><li>In case of tender of goods reasonable opportunity must be given to the promisee to examine the goods. </li></ul><ul><li>It must be made to the promisee or his authorized agent. </li></ul>
  29. 29. Who must perform the promise? <ul><li>By the promisor himself (para 1 of sec 40) </li></ul><ul><li>By the agent (para 2 of sec 40) </li></ul><ul><li>By the legal representative (sec 37) </li></ul><ul><li>By the third parties (sec 41) </li></ul><ul><li>By Joint promisors (sec 43) </li></ul>
  30. 30. Who can demand performance ? <ul><li>The promisee can demand performance. </li></ul><ul><li>In case of death of promisee the legal representative of the person can demand performance. </li></ul><ul><li>In case of joint promisee then the right to demand performance is to be exercised jointly. </li></ul>
  31. 31. Time and place of performance <ul><li>Where no time for performance is fixed and the performance is to be done without any request of the promisee, the promise is to be performed within a reasonable time. </li></ul><ul><ul><ul><li>The question what is a reasonable time is in each particular case, a question of fact. Sec 46 </li></ul></ul></ul><ul><li>When a promise is to be performed on a certain day and the promisor has undertaken to perform it without request by the promise then the promisor can perform the obligation within the official hours of business on such day and at the place stated. Sec 47 </li></ul><ul><li>When a promise is to be performed on a certain day at the request of the promisee, the promisee must apply for performance at a proper place and within usual hours. Sec 48 </li></ul><ul><li>When a promise is to be performed without request by the promisee and no place is fixed for its performance it is the duty of the promiser to apply to the promisee to appoint a reasonable place for the performance of the promise and to perform it at such place. Sec 49 </li></ul><ul><li>The performance of the promise may be made in any manner or at any time which the promisee prescribes or sanctions. Sec 50 </li></ul>
  32. 32. Discharge of Contract <ul><li>Discharge of contract means termination of rights and obligations arising out of a contract. </li></ul><ul><ul><li>By Act of the parties </li></ul></ul><ul><ul><li>By Operation of law </li></ul></ul><ul><li>A contract may be discharged in any of the following ways : </li></ul><ul><ul><li>By Performance (sec 37) </li></ul></ul><ul><ul><li>By death (sec 37) </li></ul></ul><ul><ul><li>By tender (sec 38) </li></ul></ul><ul><ul><li>By breach of contract (sec 39) </li></ul></ul><ul><ul><li>By impossiblity (sec 56) </li></ul></ul><ul><ul><li>By non existence of a state of things </li></ul></ul><ul><ul><li>By agreement : </li></ul></ul><ul><ul><ul><li>Novation </li></ul></ul></ul><ul><ul><ul><li>Rescission </li></ul></ul></ul><ul><ul><ul><li>Alteration </li></ul></ul></ul><ul><ul><ul><li>Remission </li></ul></ul></ul><ul><ul><ul><li>Waiver </li></ul></ul></ul><ul><ul><ul><li>Merger </li></ul></ul></ul>
  33. 33. <ul><li>Discharge by performance </li></ul><ul><ul><li>Actual performance </li></ul></ul><ul><li>Discharge by death </li></ul><ul><ul><li>Contracts of personal nature comes to an end by the death of promisor. </li></ul></ul><ul><li>Discharge by tender </li></ul><ul><ul><li>The promisor is discharged if the promisee doesn't accept the performance. </li></ul></ul>
  34. 34. <ul><li>Discharge by breach </li></ul><ul><ul><li>Actual Breach – when the party refuses to perform the contract on the date of contract. The promisee is discharged but not the promisor. </li></ul></ul><ul><ul><li>Anticipated Breach – It takes place before the date of actual performance. </li></ul></ul><ul><ul><ul><li>Express </li></ul></ul></ul><ul><ul><ul><li>Implied </li></ul></ul></ul><ul><li>Discharge by Impossibilty </li></ul><ul><ul><li>Impossibilty existing at the time of formation of contract </li></ul></ul><ul><ul><ul><li>Known to the parties – void ab initio </li></ul></ul></ul><ul><ul><ul><li>Unknown to the parties – Void on the ground of mutual mistake </li></ul></ul></ul><ul><ul><li>Impossibilty arising subsequent to the formation of the contract </li></ul></ul><ul><ul><ul><li>By death of party </li></ul></ul></ul><ul><ul><ul><li>By destruction of subject matter </li></ul></ul></ul><ul><ul><ul><li>Object becoming illegal or unlawful </li></ul></ul></ul><ul><ul><ul><li>Out-break of war </li></ul></ul></ul><ul><ul><ul><li>By non-existence of a state of things the continued existence of a state formed the basis of contract. </li></ul></ul></ul>
  35. 35. <ul><li>Discharge by agreement : </li></ul><ul><ul><li>Novation : A novation takes place when parties to a contract agree to substitute a new contract in place of an old one either between the old parties or the new parties with the consent of the parties to the contract. (sec 62) </li></ul></ul><ul><ul><li>Rescission : It means cancellation of all or some of the terms of contract or one party fails to perform the contract and other party rescinds the contract. </li></ul></ul><ul><ul><li>Alteration : Changing material terms of the contract eg. Ate or amt to be paid. </li></ul></ul><ul><ul><ul><li>Bilateral alteration </li></ul></ul></ul><ul><ul><ul><li>Unilateral alteration </li></ul></ul></ul><ul><ul><li>Remission – Exempting the party to perform the contract. It may be full or partial. </li></ul></ul><ul><ul><li>Waiver – Refers to the giving up or foregoing certain rights . Its same as remission </li></ul></ul><ul><ul><li>Merger – When inferior rights of a person under a contract merge with the superior rights under a new contract, the contract with inferior rights will come to an end. </li></ul></ul>
  36. 36. Remedies for breach of contract <ul><li>Right of rescission </li></ul><ul><li>Right to claim compensation or damages </li></ul><ul><ul><ul><li>Ordinary damages </li></ul></ul></ul><ul><ul><ul><li>Special damages </li></ul></ul></ul><ul><ul><ul><li>Vindictive or exemplary damages </li></ul></ul></ul><ul><ul><ul><li>Nominal damages </li></ul></ul></ul><ul><ul><ul><li>Damages for personal inconvenience and discomfort </li></ul></ul></ul><ul><li>Quantum Meruit </li></ul><ul><li>Special performance </li></ul><ul><li>Injunction order </li></ul><ul><li>Restitution </li></ul><ul><li>Cancellation or rectification </li></ul>