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F:\Haider\Valid Contract

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vaid contract

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  • 1. The Law of Contract 1872 Meaning and source of Mercantile Law The Law of Contract One of the most important part of Mercantile law in India is the Law of Contract. This law determines the areas covered by the parties who enter into a contract. Meaning and source of Mercantile law Mercantile law is a part of civil law. It governs and regulates the trade and commerce in the country. Mercantile law deals with the needs of a business man. What is law and how it come into existence? It is desired to know why we need law before we learning the meaning of the word “Law”. We need law to preserve peace and orderliness of every society. So law is required by the society. Function of Contracts  Creates rights and duties between parties.  Ensures compliance with a promise  Provides stability and predictability for buyers and sellers in the marketplace Parties:  Promisor (makes the promise)  Promisee (accepts the promise)  The Offeror (makes the offer)  The Offeree (accepts the offer). Definition of Contract Some definitions are as follows: Pollack: “Every agreement and promise enforceable at law is a contract.”
  • 2. Sir William Anson: “An agreement enforceable by the law made between two or more persons, by which rights are acquired by one or more to acts or forbearance on the part of others or others.” Sec. 2(h) of Contract Act provides “An agreement enforceable by law is a contract.” Thus a contract consists of two elements: (a) An agreement (b) The agreement must be enforceable by law. 1. Agreement Section 2(e) defines agreement as, “Every promise and set of promises, forming the consideration for each other, is an agreement.” Section 2(b) defines promise 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.” A promise comes into existence when one party makes a proposal the other party and that other party gives his consent. Therefore, a contract is an agreement: an agreement is a promise and a promise is an accepted proposal. Example A offers to sell his car to B for Rs. 8 Lac. B gives acceptance. It is an agreement. 2. Enforceability An agreement is enforceable if it is recognized by courts. In order to be enforceable by law, the agreement must create legal obligations between the parties. Thus, the term agreements is a wider than a contract. “All contracts are agreements but all agreement are not contracts.” Agreements are of two types: (a) Social agreements Social agreements are not enforceable because they do not create legal obligations between the parties. In such agreements the parties do not intend to create legal relations. (b) Legal agreements Legal agreements are enforceable because they create legal obligations between the parties. In such agreements the parties intend to create legal relations. All business agreements are contracts as there is an intention to create legal obligations.
  • 3. Examples (a) A invites B to dinner. B accepts the invitation but does not attend. A cannot sue B for damages. It is a social agreement. (b) A promises to sell his car to B for Rs. 2 Lac. It is a legal agreement because it creates legal obligations. This agreement is a contract. Requirements of a Contract A valid, enforceable contract includes:  Agreement. A legal offer and an acceptance  Consideration. Something of value given or promised to convince a party to agree to the deal.  Capacity. Both parties must be legally competent (i.e. intoxication, mentally competent)  Legality. Contract’s purpose must be to accomplish some goals that is legal and not against public policy. Essentials of a Valid Contract A contract is an agreement that can be enforceable by law. An agreement is an offer and its acceptance. An agreement which can be enforceable by law must have some essential elements. According to Section 10 "All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void" As per the above section, a contract must have the following elements. 1. Proper offer and it’s acceptance 2. Intention to create legal relationship. 3. Lawful consideration 4. Capacity of parties to contract 5. Free Consent 6. Lawful object 7. Legal formalities
  • 4. 8. Certainty of meaning. 9. Possibility of performance 10. Agreement not expressly declared void Proper offer and it’s acceptance: For an agreement, there must be a lawful offer by one party and lawful acceptance of that offer from the other party. The term lawful means that the offer and acceptance must satisfy the requirements of Contract Act. Example A says to B that he will sell his cycle to him for Rs. 2000. This is an offer. If B accepts this offer, there is an acceptance. An offer requires:  Reasonably definite terms.  Communication to Offeree. Modes of Offer  Time table  Tenders and Auctions [Harris v Nickerson]  Restaurant menu card  ATM or vending machines Termination of Offer.  Time lapses, offer expires  By Act of the Parties.  Destruction of Subject Matter  Revocation by Offeror (unless irrevocable).  Rejection by Offeree (or counteroffer).  Operation of Law (destruction, death). Acceptance This will normally mean that the offer is no longer available to anyone else, as the stock may be exhausted, such as where a person has a bicycle for sale.
  • 5. Refusal An offeree may refuse an offer, in which case the offer ends, so it cannot be accepted later by the offeree. Counter-offer Sometimes a reply from an offeree comes in the form of a new proposal, or counter-offer. It may simply be that the offeree is not happy with one or more of the terms and makes changes accordingly. Since this is not an agreement to all the terms of the offer, it is not acceptance, and is known as a counter-offer. It is really a new offer, which is then open to acceptance or termination in some other way. The effect of a counter-offer is to destroy the original offer. This can be seen in the following case. Communication of Acceptance.  Authorized Means of Communication is either express or implied by form of offer (e.g., U.S. mail, fax, email). “Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to Offeror in the form it was received, unless offer requires a different method (e.g., Fed-Ex, or receipt by Offeror). Offer and Acceptance: Where the contract is made?  It determines the time of forming the contract  It stipulates the jurisdiction of the court; and  It affixes the rights and obligations of parties.  Is the contract complete at the instance and place of the acceptor or offeror? Intention to create legal relationship: The parties entering into a contract must have an intention to create a legal relationship. If there is no intention to create a legal relationship, that agreement cannot be treated as a valid contract. Generally there is no intention to create a legal relationship in social and domestic agreements. Invitation for lunch does not create a legal relationship. Certain agreements and obligation between father and daughter, mother and son and husband and wife does not create a legal relationship. An agreement wherein it is clearly mentioned that "This agreement is not intended to create formal or legal agreement and shall not be subject to legal jurisdiction in the law of courts." cannot be treated as a contract and not valid. Examples (a) A father promises to pay his son Rs. 500 as pocket money. Later, he refuses to pay. The son cannot recover as it is a social agreement.
  • 6. (b) A offers to sell his watch to B for Rs. 200. B agrees to buy. It is a contract as it creates legal relationship. Lawful consideration: An agreement must be supported by a consideration of something in return. That is, the agreement must be supported by some type of service or goods in return of money or goods. However, it is not necessary the price should be always in terms of money. It could be a service or another goods. Suppose X agrees to buy books from Y for $50. Here the consideration of X is books and the consideration of Y is $50. It can be a promise to act (doing something) or forbearance (not doing something). The consideration may be present, future or can be past. But the consideration must be real. Example If John agrees to sell his car of $ 50000 to Peter for $20000. This is a valid contract if John agrees to sell his car not under any influence or force. It can be valid only if the consideration of John is free. An agreement is valid only when the acts are legal. Illegal works like killing another for money, or immoral works or illegal acts are cannot be treated as a valid agreement. So, illegal works will not come under the contract act. Exceptions to Consideration  Law of Trust/ Insurance Klause Mittelbachert v East India Hotels [pilot, head injuries during a dive at the swimming pool, contract between Lufthansa and hotel Oberoi, can the pilot claim damages, though the consideration was not moving from him ?]  Conduct, Acknowledgment or Admission Narayani Devi v Tagore Commercial Corporation [If the defendants start the payment and then withdraws]  Provision for marriage expenses or maintenance under family arrangement/ Veeramma v Appayya [daughter agreed to take care of the father for which the father promised to convey property to her. Later when the father refused, the daughter sued successfully. Sundaraja Aiyangar v Lakshmiammal [partition deed between brothers to provide for marriage expenses of the sister, is enforceable by the sister]  Subscription for a charitable purpose
  • 7. Kedar Nath v Gorie Mahomed When Agreement without consideration is valid  Natural love and affection  Compensation for past voluntary services  Promise to pay a time barred debt  Creation of Agency does not require consideration PRIVITY DOCTRINE  trust Used in states that don’t accept Restatement of Torts  Established in Ultramares Corp v. Touche (1931)  Auditors liable to 3rd parties for fraud  Reaffirmed in Credit Alliance  Established linkage test to link auditor to plaintiff. Capacity of parties to contract: Parties entering into an agreement must be competent and capable of entering into a contract. If "A" agrees to sell a Government property to B and B agrees to buy that property, it could not treated as a valid agreement as A is not authorized or owner of the property. If any of the party is not competent or capable of entering into the agreement, that agreement cannot be treated as a valid contract. According to Section 11 of the Act which says that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. So it is clear that the party must be of sound mind and of age to enter into a valid agreement which can be treated as a valid contract. Examples (a) M, a person of unsound mind agrees to sell his house to S for Rs. 2 Lac. It is not a valid contract because M is not competent to contract. (b) A, aged 20 promises to sell his car to B for Rs. 3 Lac. It is a valid contract because A is competent to contract. Free Consent: Consent means that the parties must agree upon the same thing in the same sense. For a valid contract, it is necessary that the consent of parties must be free. Consent is free when it is not obtained by coercion, undue influence, fraud, misrepresentation or mistake. If the consent of either of the parties is not free, the agreement cannot become a contract. (Sec. 14)
  • 8. Example A compels B to enter into a contract on the gun point. It is not a valid contract as the consent of B is not free. Effect of Coercion 1. Contract is Voidable A contract to which the consent is obtained by coercion is voidable at the option of the party whose is so obtained. (Section 19). 2. Restoration of Benefit. If the aggrieved party rescinds the contract, he must restore any benefit received by him under the contract to the person from whom such benefit was received. (Section 64) Effect of Undue Influence 1. Contract is Voidable When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. (Section 19-A) 2. Discretion of the Court 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. (Section 19-A) Illustration A, a money lender, advances Rs. 1,000 to B, an agriculturist, and by undue influence induces B to executes a bond for Rs. 2,000 with interest at 6 percent per month. The court may set the bond aside, ordering B to repay Rs. 1,000 with such interest as may seem just. Effect of Fraud 1. Contract is Voidable When consent to an agreement is caused by fraud, the agreement is a contract voidable at the option of the party whose consent was so caused. (Section 19)
  • 9. 2. Restitution of Position. The party whose consent was caused by fraud may insist that the contract shall be performed, and that he shall be put in the same position in which he would have been if the representation mads had been true. (Section 19). 3. Suit for Damages. The aggrieved party can sue for damages. 4. Restoration of Benefit. If the aggrieved party rescinds the contract, he must restore any benefit received by him under the contract to the person from whom such benefit was received. . (Section 64). Effect of Misrepresentation. 1. Contract is Voidable When consent to an agreement is caused by misrepresentation, the agreement is a contract voidable at the option of the part6y whose consent was so caused. (Section 19). 2. Restitution of Position. The party whose consent was caused by misrepresentation may insist that he shall be put in the same position in which he would have been if the representation made had been true. (Section 19). 3. Restoration of Benefit. If the aggrieved party rescinds the contract, he must restore any benefit received by him under the contract to the person from whom such benefit was received. (Section 64). Mistake  A state of affairs in which a party (or both parties) has formed an erroneous opinion as to identity of subject matter, or some other important term.  Contract does not express their true intentions. Types of Mistake 1. Mistake of law 2. Mistake of fact
  • 10. Mistake of Law  Presumed to know the law  Usually no relief provided  Exception: if statute provided for recovery Mistake of Fact  Mistake as to the existence of the subject matter of the contract or the identity of a party Court may provide relief  Mistake as to subject matter of contract  General rule contract is void  Mistake as to identity of the Party  Depends if the identity of the person is an essential element of the agreement  If essential may not be enforceable  If not essential – it will be enforceable  Non Est Factum • A defense that may allow illiterate or infirm persons to avoid liability on a written agreement if they can establish that they were not aware of the true nature of the document, and were not careless in execution • Narrow form of mistake • Applies only to type of agreement being signed not to the terms of the agreement Unilateral and Mutual Mistake  Unilateral Mistake  A mistake by one party to the agreement  Mutual Mistake  A mistake where both parties have made mistaken assumptions as to the subject matter of the agreement o Can be same mistake or different mistakes
  • 11.  Courts will not enforce agreements when the other party is aware of the mistake being made. Lawful Object: The objective of the agreement must be lawful. Any act prohibited by law will not be valid and such agreements cannot be treated as a valid contract. Example: A rents out his house for the business of prostitution or for making bomb, the acts performing there are unlawful. Hence such agreement cannot be treated as a valid contract. Therefore the consideration as well as the object of the agreement should be lawful. Legal formalities: The contract act does not insist that the agreement must be in writing, it could be oral. But, in some cases the law strictly insist that the agreement must be in writing like agreement to sell immovable property must be in writing and should be registered under the Transfer of Property Act, 1882. These agreement are valid only when they fulfill the formalities like writing, registration, signing by the both the parties are completed. If these legal formalities are not completed, it cannot be treated as a valid contract. Examples (a) The Transfer of Property Act requires that contracts of sale, lease or mortgage of immovable property must be written on stamp paper, made in the presence of witnesses, and must be registered. (b) The Companies Ordinance 1984 requires that a Memorandum of Association and an Articles of Association must be printed and signed by each subscriber in the presence of at least one witness. Certainty of meaning: Wording of the agreement must be clear and not uncertain or vague. Suppose John agrees to sell 500 tones of oil to Mathew. But, what kind of oil is not mentioned clearly. So on the ground of uncertainty, this agreement stands void. If the meaning of the agreement can be made certain by the circumstances, it could be treated as a valid contract. Example If John and Mathew are sole trader of coconut oil, the meaning of the agreement can be made certain by the circumstance and in that case, the agreement can be treated as a valid
  • 12. contract. According to Section 29 of the Contract Act says that Agreements, the meaning of which is not certain or capable of being made certain, are void. Possibility of performance: As per section 56, if the act is impossible of performance, physically or legally, the agreement cannot be enforced by law. There must be possibility of performance of the agreement. Impossible agreements like one claims to run at a speed of 1000km/hour or Jump to a height of 100feet etc. would not create a valid agreement. All such acts which are impossible of performance would not create a valid contract and cannot treated as a valid contract. In essence, there must be possibility of performance must be there to create a valid contract. Examples (a) A agrees with B to discover a treasure by magic, the agreement is not enforceable. (b) A agrees with B to put life into B’s dead brother. The agreement is void as it is impossible to perform. Agreement not expressly declared void: Section 24 to 30 specify certain types of agreement which have been expressly declared void. Example Restraint of marriage which has been expressly declared void under Section 26. If John promises to pay $50 to Mary if she does not marry throughout her life and Mary promise not to marry at all. But this agreement cannot be treated as a valid contract owing to the fact that, under section 26 restraint of marriage expressly declared void. Some of the agreement which have been expressly declared void are agreement in restraint of legal proceedings, agreement in restraint of trade, agreement in restraint of marriage and agreement by way of wager. Most important essentials of a valid contract are mentioned above. These elements should be present in a contract to make it a valid contract. If any one of them is missing we cannot treat that agreement as a valid contract.