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  1. 1. INDIAN CONTRACT ACT 18721 08/30/12
  2. 2. Introduction Law of contract – Foundation upon which the superstructure of modern business is built Business – promise made between parties – performance follows later Breaking of a promise – without incurring liability – endless complications2 08/30/12
  3. 3. Indian Contract Act Law of contract lays down legal rules relating to promises , their formation, performance and enforcement. These rules are not only applicable to business community but others3 08/30/12
  4. 4. Indian Contract Act4 08/30/12
  5. 5. CONTRACT Sec 2(h) “An agreement enforceable by law is a contract”5 08/30/12
  6. 6. Proposal When one person signifies to another his willingness to do or abstain from doing anything with a view to obtain his assent on such act or abstinence, he is making proposal. A goes to a hotel and orders tea. He is making proposal.6 08/30/12
  7. 7. Acceptance When one person signifies his assent thereto on the proposal made he is said to accept the proposal. When A orders tea and B supplies tea it is understood that the proposal made by A is accepted by B7 08/30/12
  8. 8. Promise When a person to whom proposal is made signifies his assent thereto, the proposal is said to be accepted. An accepted proposal is known as a promise. When A asks B to lend him a book and B gives his assent to lend him a book . This is a promise i.e. Proposal by A to lend the book Acceptance by B by lending the book8 08/30/12
  9. 9. Consideration Something in return. A offers B to sell his car at Rs.1,00,000 /- B accepts the same. Now for A consideration is Rs.1,00,000/- and for B consideration is a Car. Until and unless there is no consideration there cannot be an agreement.9 08/30/12
  10. 10. Agreement When the proposal is accepted it becomes promise and the promise, when accompanied with consideration it becomes agreement. A offers to sell his car for Rs.1,00,000/- to B. B accepts his offer. This offer after acceptance becomes promise and this promise is treated as an agreement between A & B.10 08/30/12
  11. 11. Enforceability An agreement is said to be enforceable by law if it creates legal obligation. Obligation is a legal tie which imposes upon determinate person or persons the necessity of doing or abstaining from doing a definite act or acts If an agreement is incapable of creating a duty enforceable by law, it is not a contract.11 08/30/12
  12. 12. CONTRACT Proposal + Acceptance = Promise. Promise + Consideration = Agreement. Agreement + Enforceability = CONTRACT.12 08/30/12
  13. 13. Contract Act “All contracts are agreement but all agreements are not contracts”. Agreements of moral, religious or social nature are not contracts  they are not likely to create a duty enforceable by law parties never intend to create a legal obligation.13 08/30/12
  14. 14. Contd - Ex; X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for the dinner. Can he take his friend to Court???? X cannot go to the court to claim his loss. A father promises to pay his daughter Rs 1000 as pocket allowance. Later he refuses to pay. Can the daughter recover the Amount??? The daughter cannot recover as its is a domestic agreement and there is no intention on the part of the parties to create legal relations14 08/30/12
  15. 15. Case Balfour vs Balfour [(1919) 2 K.B. 571] A promise by the husband to pay his wife 30 pounds every month . Later Husband refuses to pay. Wife goes to court. Held: unenforceable as parties never intended it to be bound by legal obligations.15 08/30/12
  16. 16. contd  In commercial or business agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends to create legal relationship, hence is a contract, provided other requisites of a valid contract are present. But if the parties have expressly declared their resolve is not to create a legal obligation, even a business agreement does not amount to a contract.16 08/30/12
  17. 17. Case Rose&Frank Co. vs Corruption Bros [1925 AC 445] There was an agreement between R company and C company by means of which the former was appointed as the agent of the latter. One clause in the agreement was: ”This agreement is not entered into….as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts.” HELD - There was no binding contract as there was no intention to create legal relationship17 08/30/12
  18. 18. Distinction between an agreement and a contract Agreement Contract ◦ Offer and its acceptance ◦ Agreement and its constitute an agreement enforceability constitute a ◦ An agreement may or may not contract create a legal obligation ◦ A contract necessarily create a ◦ Every agreement need not legal obligation necessarily be a contract ◦ All contracts are necessarily ◦ Agreement is not concluded agreements. or binding contract ◦ Contract is concluded and binding on the concerned parties18 08/30/12
  19. 19. Classification of ContractEnforceabilty Method of Extent of Creation execution Valid Express Executed Voidable Implied Executory Void unenforceable Illegal19 08/30/12
  20. 20. CONTRACTS ON THE BASIS OF CREATION EXPRESS IMPLIED CONTRACT CONTRACT Express contract is one An implied contract is which is made by the one which is inferred words spoken or from the conduct of a written. person or circumstances of a particular case20 08/30/12
  21. 21. CONTRACTS ON THE BASIS OF EXECUTION EXECUTED EXECUTORY PARTLY CONTRACT CONTRACT EXECUTED & EXECUTORY CONTRACT It is a contract where It is a contract where It is a contract where both the parties to both the parties to one of the parties to the contract have the contract have still the contract has fulfilled their to perform their fulfilled his respective respective obligation and the obligations under the obligations other party has still contract to perform his obligation21 08/30/12
  22. 22. Contracts on the basis of enforceability Valid Contract A contract which satisfies all the conditions prescribed by law is a valid contract Void Contract A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable Void Agreements An agreement not enforceable by law is said to be void Voidable Contract A voidable contract is one which can be set aside or repudiated or avoided at the option of the aggrieved party Illegal Agreement An illegal agreement is one the object of which is unlawful Unenforceable Contract The contract which is actually valid but cannot be enforced due to technical defect22 08/30/12
  23. 23. Essential elements of a valid contract  Proper offer and its proper acceptance  Intention to create legal relationship  Free Consent  Capacity to contract  Lawful consideration  Lawful object  Agreement not expressly declared void  Certainty of meaning  Possibility of performance  Legal formalities23 08/30/12
  24. 24. Offer / PROPOSAL When one person signifies to another his willingness to do or abstain from doing anything with a view to obtain his assent on such act or abstinence, he is making proposal.24 08/30/12
  25. 25. OFFER25 08/30/12
  26. 26. Contd26 08/30/12
  27. 27. Types of offer27 08/30/12
  28. 28. Legal rules as to offer28 08/30/12
  29. 29. Contd- Intention to create legal relationship An offer must be such that when it is accepted it will create a legal relationship Certain and unambiguous terms If the terms of the offer are vague or indefinite, its acceptance cannot create any contractual relationship.29 08/30/12
  30. 30. Contd - Different from a mere declaration of intention Mere declaration of intention indicates that an offer will be made or invited in the future A declaration of intention by a person does not give right of action to another.30 08/30/12
  31. 31. Case Harrison vs Nickerson An auctioneer advertised in a newspaper that a sale of office furniture would be held. A broker came from a distant place to attend that auction, but all the furniture was withdrawn. The broker thereupon sued the auctioneer for his loss of time and expenses. Held - A declaration of intention to do a thing did not create a binding contract with those who acted upon it, so that the broker could not recover.31 08/30/12
  32. 32. Contd - Different from an invitation to offer In an invitation to offer the person making an invitation invites others to make an offer to him It is prelude to an offer inviting negotiations or preliminary discussions Case –  Pharmaceutical Society of Great Britian vs Boots cash chemists Ltd (1953) 1 QB 401  Harvey vs facey32 08/30/12
  33. 33. Contd- Offer must be communicated An offer must be communicated to the person to whom it is made. An offer is complete only when it is communicated to the offeree Acceptance is not possible unless offer is brought to the knowledge of the offeree ie, One can accept the offer only when he knows about it. Acceptance in ignorance of offer confers no right. ie, An offer accepted without its knowledge does not confer any legal rights on the acceptor. Case: Lalman Shukla vs Gauri Dutt33 08/30/12
  34. 34. Contd - No term of non-compliance of which amounts to acceptance The offer must not contain a term, the non-compliance of which amount to acceptance Ex: A offers by post to sell his horse to B for Rs 2000. He writes, “ If you do not reply, I shall assume you have accepted the offer.” There would be no contract even if B does not reply34 08/30/12
  35. 35. Contd While making the offer, the offeror cannot say that if the offer is not accepted before a certain date, it will be presumed to have been accepted Communication of special terms or standard terms of contract Special terms of the offer must also be communicated along with the offer. If the special terms of the offer are not communicated, the offeree will not be bound by those terms.35 08/30/12
  36. 36. Acceptance Acceptance means giving consent to the offer. It is an expression by the offeree of his willingness to be bound by the terms of the offer.  Sec 2(b) – “ A proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto. A proposal when accepted becomes a promise.” Acceptance is the consent given to offer.36 08/30/12
  37. 37. Contd- Who can accept In case of a specific offer – To be accepted by that definite person or that particular group of persons to whom it has been made and non else. In case of general offer –  An offer made to the world at large or public in general can be accepted by any person having the knowledge of the offer by fulfilling the terms of the offer.(Carlil v. Carbolic Smoke Ball Co.)37 08/30/12
  38. 38. Contd - How to make acceptance – Express acceptance – An express acceptance is one in which is made by words spoken or written Implied acceptance –  An implied acceptance is one which is made otherwise than in words. It is inferred from the conduct of the parties or the circumstances of a particular case38 08/30/12
  39. 39. Legal rules of valid acceptance39 08/30/12
  40. 40. CAPACITY OF PARTIES Sec.11 says “Every person is competent to contract who is of age of majority according to the law to which he is subject, And who is of sound mind, And who is not disqualified from contracting by any law to which he is subject. ” Thus, all the three tests must be applied to determine whether a person is competent to contract or not40 08/30/12
  41. 41. Who is a MINOR ? A minor is a person who has not attained majority. According to Section 3 of the Indian Majority Act,1875, a person is deemed to have attained majority as under: Where a guardian of a On completion of 21 years minor’s person or property is appointed under the Guardian and Wards Act Where minor’s property has On completion of 21 years passed under the superintendence of the court of wards In other cases On completion of 18 years41 08/30/12
  42. 42. Who is a Person of Unsound Mind? According to Sec 12 of the Indian Contract Act, “A person is said to be of sound mind for the purpose of making contract, if at the time when he makes it, is capable – •To understand terms of contract •To form rational judgment to its effect upon his interests”42 08/30/12
  43. 43. Persons disqualified by law43 08/30/12
  44. 44. CONSIDERATION Sec. 2(d) of the Indian Contract Act defines consideration as under : “when at the desire of promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing , or promises to do or abstain from doing something, such act or abstainence or promise is called a consideration for the promise"44 08/30/12
  45. 45. Essential elements of valid Consideration i. It must move at the desire of promisor ii. It may move from any person iii. It may be past, or present, or future iv. It must be of some value v. It must be real and not illusory vi. Something other than promisor’s existing Obligation45 08/30/12
  46. 46. CONSENT Sec.13 says “Two or more persons are said to consent when they agree on same thing in same sense” In English Law, this is called ‘consensus-ad-adem’46 08/30/12
  47. 47. FREE CONSENT According to Sec.14 consent is said to be free when it is caused by a)Coercion, or b)Undue influence, or c)Fraud, or d)Misrepresentation, or e)mistake47 08/30/12
  48. 48. COERCION Coercion means compelling a person to enter into a contract under a pressure or a threat. According to Section15, a contract is said to be caused by coercion when it is obtained by— i.Committing an act which is forbidden by the Indian Penal Code; or ii.Threatening to commit any act which is forbidden by Indian Penal Code; or iii.Unlawful detaining of any property; or iv.Threatening to detain any property.48 08/30/12
  49. 49. Undue Influence The term ‘undue influence’ means dominating the will of other person to obtain an unfair advantage over the other Sec 16(1) says a contract is influence by undue influence— a)Where the relations subsisting between the parties are such that one of the is in position to dominate the will of another, and b)The dominant party uses that position to obtain an unfair advantage over the other49 08/30/12
  50. 50. Fraud The term fraud means a false representation of fact made willfully with a view to deceive the other party. Essential elements of fraud : I.By a party to a contract II.False representation III.Representation as to fact IV.Actually deceived V.Suffered loss50 08/30/12
  51. 51. Misrepresentation The term ‘misrepresentation’ means a false representation of fact made innocently or non-disclosure of a material fact without any intention to deceive the other party.51 08/30/12
  52. 52. MISTAKE A mistake is said to have occurred where the parties intending to do one thing by error do something else.52 08/30/12
  53. 53. Void Agreements According to Sec2(g) of Indian Contract Act, 1872, a void agreement is an agreement which is not enforceable by law. The agreements which are not enforceable by law right from the time when they are made, are void -ab-initio53 08/30/12
  54. 54. Types of agreements expressly declared void 1. Agreements by or with persons incompetent to contract 2. Agreements entered into through a mutual mistake of fact between the parties. 3. Agreement, the object or consideration of which is unlawful 4. Agreement, the consideration or object of which is partly unlawful 5. Agreement made without consideration. 6. Agreement in restraint of marriage 7. Agreement in restraint of trade 8. Agreements in restraint of legal proceedings 9. Wagering agreements 10.Impossible agreements 11.An agreement to enter into an agreement in the future54 08/30/12
  55. 55. Wagering agreements An agreement between two persons under which money or money’s worth is payable, by one person to another on the happening or non-happening of a future uncertain event is called a wagering event. Such agreements are chance oriented and therefore, completely uncertain55 08/30/12
  56. 56. Contigent contracts Contigent contracts is a contract to do or not to do something if some events collateral to such contract, does or does not happen Insurance contract provides best example of contigent contract56 08/30/12
  57. 57. Distinction between a wagering agreement and contingent contracts Basis of distinction Wagering Contingent agreement contract Reciprocal promise It consist of reciprocal It may or may not pronise consist of reciprocal promise Void/ valid It is void It is valid Main/ collateral Future event is Future event is future events essential to contract collateral to contract nature It is always of It may not be of a contingent nature wagering nature Interest of parties Its parties have no Its parties may have other interest in the other interest as well subject matter of the agreement except winning or losing of wagering amount57 08/30/12
  58. 58. Breach of contract A breach of contract occurs if any party refuses or fails to perform his part of contract or by his act makes it impossible to perform his obligation under the contract. In case of breach, the aggrieved party(i.e. the party not at fault) is relived from performing his obligation and gets a right to proceed against the party at fault.58 08/30/12
  59. 59. Types of breach Anticipatory breach Actual breach Anticipatory breach occurs when Actual breach may take place the party declares his intention of when non performing the contract •The party to the contract refuses before the performance is due or fails to perform his part at the time fixed for performance •Party has performed a part of contract and then refuses or fails to perform the remaining part of contract.59 08/30/12
  60. 60. Remedies for breach of contract60 08/30/12
  61. 61. Quasi contract A quasi contract is not a contract at all because one or other essential for the formation of a contract is absent It is a law upon a person for the benefit of another even in the absence of a contract. It is based on the principle of equity, which means no person shall be allowed to unjustly enrich himself at the expense of another such obligations are called quasi contracts or implied contracts because the outcome of such obligation resemble those created by a contract.61 08/30/12
  62. 62. Kinds of quasi contracts62 08/30/12
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