business law (contract+act+1932)

8/6/2019 BUSINESS LAW (Contract+Act+1932)

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INDIAN CONTRACT ACT, 1872


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Introduction

The English Connection:

Common law:precedents & customs.

Equity: natural justice.

Pacta sunt servanda: agreements must be honored.

Stare decisis: settled law should not be disturbed.


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Essential elements of a valid

contract: (Sec. 10)

1. Agreement - Offer & acceptance

2. Legal consequences - rights & obligations

3. Capacity of the contracting parties

4. Consideration5. Legal object

6. Free consent

7. Certainty

8. Possibility of performance

9. Writing & registration

10. Not expressly declared to be void.


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Offer: Sec.2(a)

y Essentials of offer:

It must be an expression of the willingness to do or

abstain from doing something.

Such expression must be to another person.

Such expression must be made with the intention to obtain

the assent of the other person to such an act or abstinence.


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Types of Offers

y Specific Offer : Offer to definite person or group ofperson.

y General Offer: Offer to the public at large.

y Implied Offer : Offer by the conduct or fromcircumstances.

y What is difference between offer and invitation tooffer?


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Essentials regarding a valid offer:

Offer may be express or implied.

Must give rise to legal consequences & be capable of creatinglegal relationship.

Terms must be certain & not vague.

May be specific or general. Must not be an invitation to offer.

Can be made subject to any terms & conditions.

Must be communicated to offeree.

Invitation to offer, cross offers & counter offers.

Communication of special terms

Prescribed mode of acceptance.


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Lapse & revocation of an offer:

Lapse of stipulated or reasonable time.

Acceptance not in prescribed mode.

Rejection.

Death or insanity of offeror or offeree before acceptance.

Revocation.

Non-fulfillment of condition precedent.

Subsequent illegality or destruction of subject-matter.


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Free consent: Sec 14

y Coercion

y Undue influence

y Misrepresentation

y Fraud

y Mistake


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Coercion: Sec 15

y Committing or threatening to commit any act forbidden by the IPC with anintention to cause any person to enter into an agreement.

y The unlawful detaining or threatening to detain, any property with anintention to cause any person to enter into an agreement.

y The act constituting coercion, may be directed at any person & notnecessarily at the other party to the agreement.

y It does not matter whether the IPC is or is not in force where the coercionis employed. If suit is filed in India the said provision will apply.


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Effects of Coercion:

y Voidable

y Sec 64

y The party exercising coercion exposes himself to criminal liability

under the IPC, besides an action in contract.

y Burden of proof lies on the party who wants to set aside the

contract on the plea of coercion.


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Undue Influence: Sec 16

y Acontract is said to be induced by undue influence when the

relation subsisting between the parties is such that one of the

parties is in a position to dominate the will of the other and he

uses this position to obtain an unfair advantage over the other.


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Contd..

y Undue influence implies mental & moral coercion in such a way

that the consent given is not free.

y The person in a position to dominate the will of the other need not

be a party to the contract or be benefited by the contract; it issufficient if the third party benefits as long as he is interested in

the third party.

y Unreasonable bargains, high prices, high rate of interest etc are

instances of circumstances when undue influence is presumed.


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No presumption of undue influence:

y In the following cases law does not presume undue influence

& the burden of proof lies on the party alleging that undue

influence existed:

y

Mother & daughtery Grandson & grandfather

y Husband & wife

y Creditor & debtor

y Landlord & tenant.


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Effects ofUndue Influence:

y Voidable

y Sec. 64: Court has the discretion to direct the aggrieved party to

refund the benefit in part or in whole or set aside the contract

without any direction for refund of benefit.y There is no criminal liability in case of undue influence.


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Misrepresentation:

y Arepresentation means a statement of fact made by one partyto the other either before or at the time of contract, relating tosome matter essential to the formation of the contract, with anintention to induce the other party to enter into a contract.

y It may be expressed by words spoken or written or implied fromthe acts or conduct of the parties.

y In law, a representation when wrongly made without anintention to deceive the other party is known asmisrepresentation.


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Sec 18:

y Positive assertion of unwarranted statements of material facts

believing them to be true.

y Where a statement when made was true but subsequently before it

was acted upon, it became false to the knowledge of the personmaking it , then a duty is cast upon the person to disclose the

change of circumstances to the other party.

y Causing mistake about the subject matter innocently.


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Effects ofmisrepresentation:

y Voidable

y May choose to rescind the contract or

y Affirm the contract & insist that he be put in a position in which

he would have been, if the representation made had been true.y The remedy is lost if the other party had sufficient means of

discovering the truth with ordinary diligence.


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Fraud: Sec 17

y Fraud means & includes any of the following acts committed bya party with an intention to deceive or induce the other party toenter into a contract:

1. Afalse statement made intentionally is fraud

2. Active concealment of a material fact by a person havingknowledge of the fact is fraud. However, mere non-disclosure isnot a fraud, if there is no duty to disclose.

3. Apromise made without an intention of performing it.

4. Any cat or omission declared by law to be fraudulent.

5. Any other act fitted to deceive.


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Effects of fraud:

y Right to rescind the contract.

y Affirm the contract and ask for restitution, i.e., to be put in a

position, he would have been, if the statement made had been true.

y The aggrieved party can also claim damages.y Fraud by a stranger to the contract does not affect the contract.


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Action for fraud:

y Fraudulent statement must be instrumental in inducing the partyto enter into a contract.

y The plaintiff must have been actually deceived by the fraudulentstatement.

y No action will lie if the plaintiff does not sustain any loss orinjury.

y The contract is notVoidable if the party had enough means at itsdisposal to discover the truth with ordinary diligence.


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Loss of right of rescission:

y Affirmation: where the aggrieved party after becoming aware of

his right to rescind the contract, chooses to affirm it, either by

express words or through his conduct, which shows an intention

to affirm it, loses his right to rescind the contract.y Restitution not possible: where the party seeking to rescind the

contract is not in a position to restore the benefits received

under the contract, cannot exercise his right of rescission.


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Contd..

y Lapse of time: where the aggrieved party fails to exercise his rightof rescission promptly, may lose his right to rescind the contract.

y Right of third parties: where third parties acquire bona fide rights

in the subject matter of the contract, before it can be rescinded,then such rights are valid against the aggrieved party and the right

to rescind will no longer be available.


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Mistake:

y Mistake of law:

1. Mistake of law of the country.

2. Mistake of foreign law.

y Mistake of fact:

1. Bilateral mistake

2. Unilateral mistake


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Mistake of law:

y Mistake of law does not give right to the parties to set aside thecontract & hence such a contract is notVoidable. This is based onthe maxim Ignorantia juris non-excusat . Hence no relief can begranted on the grounds of mistake of law.

y However, if one of the parties makes a mistake of law, through theinducement, whether innocent or otherwise, of the other party,then the contract may be avoided.


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Mistake of foreign law:

y Mistake of foreign law stands on the same footing as mistake of

fact. Here the agreement is void in case of bilateral mistake only.


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Bilateral mistake:

y Where the parties to an agreement misunderstood each other & are

at cross purposes, there is a bilateral mistake.

y In this case there is no agreement as there is no consensus and

hence the agreement is void.y In case of bilateral mistake of an essential fact, the agreement is

void ab initio.


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Essentials of bilateral mistake:

y The mistake must be mutual, i.e., both the parties must

misunderstand each other so as to nullify consent.

y Mistake must relate to some fact and not an opinion.

y The fact must be essential to the agreement: mistake as to theexistence, identity, title, quantity, quality of the subject-matter of

the contract.


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Unilateral mistake:

y Where only one of the contracting parties is under a mistake, as to thematter of fact essential to the contract, it is a unilateral mistake.

y

In case of unilateral mistake the contract is:1. Valid: if the mistake is caused due to ones own neligence or lack ofreasonable care.

2. Voidable: if the mistake is caused by fraud, misrepresentation, etc.

3. Void ab initio: where the mistake is with regard to the identity of a

person & where such identity is crucial to the agreement or the mistakeis with regard to the nature of a written document


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Consideration: Sec2(d)

Essentials of consideration:

Consideration must move at the desire of offeror.

May move from offeree or any other person.

Stranger to a contract cannot sue; except in case of trustcreated, an addressee of an insured article; familysettlement.

May be past, present or future.

Must be of some value. Must be real.


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Capacity of parties: (Sec 11)

y Minor :

y Void & inoperative

y No restitution

y Beneficial agmts are valid

y No ratification on attaining the age of majority.y Rule of estoppel does not apply.

y Minors liability for necessaries.

y Specific performance.

y Minor partner

y Minor agent

y Minor & insolvency


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Unsound mind: Sec 12

y Usually of sound mind.

y Usually of unsound mind

y Causes:

y idiocy

y Lunacy

y Drunkenness

y Hypnotism

y Mental decay

y

Effects:y Void & inoperative

y Similar to agreements entered into by minors.


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Disqualified persons:

y Alien enemies

y Foreign sovereigns & ambassadors

y Convicts

y Married women

y Insolvents


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Quasi contracts: [Sec 68-72]

y In case of quasi contracts there is no offer, acceptance or consensus;in fact there is no intention on the part of either parties to enterinto a contract; still the law, from the conduct & relationship

between the parties, implies a promise, imposing obligation on oneparty & conferring a right in favor of the other party. Thus undercertain special circumstances, obligations resembling those createdby a contract are imposed by law although the parties have never

entered into a contract.


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Performance of contract:

y Under a contract legal obligations are created, which

both the parties to a contract are under a duty to fulfill.

Fulfilling of such legal obligations, or performance ofthe promise under a contract by both the parties is

known as performance of a contract.

yPerformance of all the obligations arising out of a

contract, by all the parties to a contract is the normal& natural mode of discharging a contract.


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Rules regarding performance:

y Only the promisee can demand performance of the

promise under a contract, a third party cannot demand

performance, even though it was made for his benefit.yA contract involving personal skill, taste etc., must be

performed by the promisor itself. Where it appears from

the nature of the contract, that the parties intend that the

promise of the contract should be performed by thepromisor itself; then it must be performed by the

promisor only.


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Contd..

y Where a contract is of an impersonal nature, then eitherthe promisor himself or his agent may perform thecontract.

y Where death of the promisor occurs, before theperformance of the contract, then in such case theliability of performance falls on his legalrepresentatives; unless a contrary intention appearsfrom the contract.

y Where a promisee accepts performance of the promisefrom a third person, however afterwards he cannotenforce it against the promisor.


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Performance of joint promises:

y Where several joint promisors with a single promisee.

y Where a single promisor makes a promise with several

joint promisees.

y Where several joint promisors make a promise withseveral joint promisees .


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Discharge of contract:

y Discharge of a contract refers to a process, bywhich the rights and obligations arising out of acontract come to an end. Thus, discharge of acontract means termination of a contract.

y A contract may be discharged in any of thefollowing ways:


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Contd..

1. By performance

2. By mutual consent or agreement

3. By subsequent or supervening impossibility or

illegality4. By lapse of time

5. By operation of law

6.By breach of contract.


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Discharge bymutual consent oragreement:

y Novation:when a new contract is substituted for anexisting contract, either between the same parties ordifferent parties, the consideration for such contract being

the discharge of the old contract.y Where the contract is between same parties, then the nature

of the obligations must be altered substantially or else itshall amount to alteration & not novation.

y Novation cannot be compulsory, it has to be with the

mutual consent of all the parties.y The new contract must be valid & enforceable, if it suffers

from any legal flaw, then the original contract shall revive.


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Breach of contract:

y Breach of contract brings an end to the obligationsarising out of a contract, and hence the contractstands discharged.

yThe aggrieved party can sue for damages.

y Breach of contract may be anticipatory or actual.


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Anticipatory breach:

y Such a breach occurs before the time stipulated forperformance has arrived.

y Anticipatory breach may be express or implied.

y The aggrieved party may sue the other party forbreach, immediately or wait until the due datearrives and then sue.

y Where he chooses to wait until the due date, thecontract remains in operation and the other partymay either perform his part of the contract or takeadvantage of any supervening impossibility.


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Actual breach:

y Actual breach occurs when a party fails to performhis obligations upon the date fixed for performanceof contract.

yThere can be no actual breach so long as the time forperformance has not yet arrived.

y The aggrieved party may sue for damages.


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Remedies for breach of contract:

y Rescission of contract

y Suit for damages

y Suit upon quantum meruit

y Suit for specific performance

y Suit for an injunction


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Alteration:

y Alteration of a contract refers to change in one ormore of the material terms of a written contract.

y Where such alteration takes place with mutualconsent, then the original contract is discharged &the new altered contract comes into existence.

y The alteration should be material & alter the legaleffect of the contract, mere correction of clericalerrors does not amount to alteration.


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Kinds of damages:

y Ordinary or compensatory damages

y Special damages

y Exemplary or punitive damages

y Nominal damages


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OrdinaryDamages:

y Ordinary damages are restricted to direct orproximate consequences of breach of contract.

y They arise naturally & directly in the usual courseof things from breach of contract.

y Remote & indirect losses are not considered.

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