contract laws

8/2/2019 Contract Laws

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CONTRACT LAWSMDP 2011

ByV R K Murty



CONTRACT LAWS & CLAIMS

Introduction: Contracts are legally enforceable

documents and hence the conditions andprovisions made should conform to IndianContract Act 1872.Similarly disputes can bereferred to conciliation or arbitration under theprovisions of Arbitration and conciliation Act1996. These acts should be thoroughlyunderstood by the executives operatingcontracts. In addition they should also beconversant with labour, environmental,municipal and tax laws




Indian Contract Act 1872(Sections 1 – 266)

Chapters (I-XI) Operative sections 190Chapter I(S. 3-9): Of communication,acceptance and revocationChapter II (S.10-30): Of contracts,voidable contracts and voidagreementsChapter III (S.31-36): Of contingent

contractsChapter IV (S.37-67): Of the performanceof contracts




Indian Contract Act 1872(Sections 1 – 266)Chapters (I-XI) Operative sections 190Chapter V (S.68-72): Of certain relationsresembling those created by contract

Chapter VI (S.73-75): Of theconsequences of breach of contractChapter VII (S.76-123): Sale of goods

(Repealed)Chapter VIII (S.124-127): Of indemnityand guarantee



CONTRACT LAWS

Indian Contract Act 1872(Sections 1 – 266)Chapters (I-XI) Operative sections 190Chapter IX (S.148-181): Of bailmentChapter X (S.182-238): AgencyChapter XI (S.239-266): Of partnership(Repealed)




S.2- Interpretations:Proposal: When one person signifies to another hiswillingness to do or abstain from doing anything, with aview to obtaining the assent of that other to such act orabstinence, he is said to make a proposal (Tender)Promise: When the person to whom the proposal ismade signifies his assent thereto, the proposal is said tobe accepted. A proposal, when accepted, becomes apromise (Acceptance)Agreement: Every promise or set of promises, formingthe consideration for each other, is an agreementContract: An agreement enforceable by law is a contract




S.2- Interpretations:Void agreement: An agreement not enforceable by law.A contract which ceases to be enforceable by lawbecomes void when it ceases to be enforceableVoidable contract: An agreement which is enforceable bylaw at the option of one or more parties thereto, but notat the option of the other or others is a voidable contract

S.3 – Communication, acceptance andrevocation:

Communication when complete: Communication of aproposal is complete when it comes to the knowledge ofthe person to whom it is made




Chapter IS.3 – Communication, acceptance and revocation:

Communication when complete: Communication of anacceptance is complete as against the proposer when itis put in a course of transmission and as against theacceptor, when it comes to the knowledge of theproposerCommunication of revocation is complete as against theperson who makes it when it is put into a course oftransmission and as against the person to whom it ismade, when it comes to his knowledge




S.10: Essentials of a valid contract: Chapter IIFree consent of partiesLawful considerationLawful objects (Not forbidden by law, Would not defeatprovisions of law, Not fraudulent, does not involve orimply, injury to the person or property of another, Notconsidered immoral by court or not against public policy)Two partiesReciprocity as to the binding nature of agreement andthe languageCompetency – Majority as per law, Sound mind, Notdisqualified by lawIn writing




S.10 - Void agreements:A contract with a minorA contract with a person of unsound mindBoth parties are under mistake to matter of fact (S.20)E.g. A, being entitled to an estate for the life of B, agreesto sell it to C. B was dead at the time of agreement, butboth parties were ignorant of the fact. The Agt. is voidA contract with unlawful object (S.24) E.g. A promises Bto drop a prosecution which he has instituted against Bfor robbery, and B promises to restore the value of the

things taken. The Agt. Is void since its object is unlawful.Agreement in restraint of marriage (S.26)




S.23 - Void agreements:Agt. Is forbidden by lawCourt regards it immoral or opposed to public policy

S.25. – Agreement without consideration , void unless:- It is in writing and registered- Or is a promise to compensate for something done- Or is a promise, to pay a debt barred by limitation

E.g. A promises, for no consideration, to give to BRs.1000.This is a void agreement.

A agrees to sell a horse worth Rs.1000 for Rs.10. A‟s consent to the agreement was freely given. Theagreement is a contract notwithstanding theinadequacy of the consideration.




S.27 - Void agreements: Agt. in restraint of trade: Agreement in restraint of tradecannot be enforced unless it is reasonable.E.g. A contract merely to avoid competition is void.

An agreement not to carry on similar business inadjoining premises is a reasonable restriction - AIR1980 Raj 155.An agreement with an employee not to give serviceor advice to any other person or company during the

continuance of employment for 11 years is not inrestraint of trade




S.29 - Void agreements:Agt. Void for uncertainty: Agreements, the meaning ofwhich is not certain, or not capable of being madecertain, are void.E.g. A agrees to sell to B “ a hundred tons of oil”. Thereis nothing whatsoever to show what kind of oil was

intended. The agreement is void for uncertainty. A agrees to sell to B “my white horse for rupees fivehundred or rupees one thousand”. There is nothing toshow which of the two prices was to be given. The

agreement is void.




S. 14 to19 : Voidable contracts:Coercion – E.g. A, on board of an English ship on thehigh seas, causes B to enter into an agreement by anact amounting to criminal intimidation under IPC. Aafterwards sues B for breach of contract at CalcuttaUndue influence – E.g. A, a man enfeebled by disease

or age, is induced, by B‟s influence over him as hismedical attendant, to agree to pay an unreasonable sum for his professional services. B employs undue influenceFraud – Suggestion, as a fact, of what is not true; Active

concealment of fact; Promise made without any intentionof performing; Any other act fitted to deceive; Any act oromission as the law declares as fraudulent




S. 14 to19 : Voidable Contracts:

Fraud – E.g. A sells, by auction, to B, a horse which Aknows to be unsound. A says nothing to B about thehorse‟s unsoundness. This is not fraud in A. B is A‟s daughter and has just come of age. Here therelation between the parties would make it A‟s duty to tellB if the horse is unsound.Misrepresentation – A positive assertion, in a manner notwarranted by the information of the person making it, of

that which is not true; A breach of duty which, without anintent to deceive; To make a mistake as to the substanceof the thing which is the subject of agreement




S. 14 to19 : Voidable Contracts:Misrepresentation – E.g. A fraudulently informs B hat A‟sestate is free from encumbrance. B thereupon buys theestate. The estate is subject to mortgage. B may eitheravoid the contract, or may insist on its being carried outand the mortgage debt redeemed.




Chapter - IIIS. 36. Contingent contracts – Agreements contingent on

impossible event void:E.g. A agrees to pay B rupees 1000 if two straight linesshould enclose a space.

A agrees to pay B rupees 1000 if B will marry A‟s

daughter C. C was dead at the time of agreement. Theagreement is void.




Chapter IV – Of the Performance of contracts:S. 37. Obligation of parties to contracts: The parties to a

contract must either perform or offer to perform, theirrespective promises , unless such performance isdispensed with or excused under the provisions of theAct. Promises bind the representatives of the promisors

in case of the death of such promisors, unless a contraryintention appears from the contract.E.g. a) A promises to deliver goods to B on a certain day

on payment of Rs.1000. A dies before that day. A‟srepresentatives are bound to deliver the goods to B, andB is bound to pay A‟s representatives. b) A promises to paint a picture for B by a certain day, ata certain price. A dies before the day. The contractcannot be enforced either by A‟s representatives or by B




Chapter IV – Of the Performance of contracts:S. 38. Effect of refusal to accept offer of performance:

Where a person has made an offer of performance to thepromise, and the offer has not been accepted, thepromisor is not responsible for non-performance. Everysuch offer must fulfill the following conditions:

• It must be unconditional• It must be made in proper time and place• The promisee must have reasonable opportunity of

seeing that the thing offered is the thing which the

promisor is bound by his promiseE.g. A contracts to deliver to B at his warehouse on the1 st March 2008, 100 bales of cotton of a particularquality. A must bring cotton to B‟s warehouse, on the

appointed day that B may have reasonable opportunityto check ualit and number of bales



CONTRACT LAWS & CLAIMSChapter IV – Of the Performance of contracts:

S. 39. Effect of refusal of party to perform promise wholly: When a party to a contract has refused to perform hispromise in its entirety, the promisee may put an end tothe contract.E.g. a) A singer enters into a contract with B, the theatremanager, to sing at his theatre two nights every weekduring the next two months and B engages to payRs.100 for each night‟s performance. On the sixth nightA willfully absents. B is at liberty to put an end to thecontract.b) A singer enters into a contract with B, the theatremanager, to sing at his theatre two nights every weekduring the next two months and B engages to payRs.100 for each night‟s performance. On the sixth nightA willfully absents. A sings on the seventh night. Bsignifies his acquiescence in the continuance of contract.




Chapter IV – Of the Performance of contracts:S.42. Devolution of joint responsibilities: When two or more

persons have made a joint promise, then, unless acontrary intention appears by the contract, all suchpersons, during their joint lives, and, after the death ofany of them, his representative jointly with the survivor orsurvivors, and after the death of last survivor, therepresentatives of all jointly, must fulfill the promise.

S.43. Any one of joint promisors may be compelled toperform: In the absence of express agreement to thecontrary, the promisee may compel any one or more

such joint promisors to perform.E.g. A,B and C jointly promise to pay D, 3000 rupees. Dmay compel A or B or C to pay him 3000 rupees.




Chapter IV – Of the Performance of contracts:S.50. Performance in manner or at time prescribed or

sanctioned by promisee:S.51. Promisor not bound to perform, unless reciprocal

promisee ready and willing to perform:S.52. Order of performance of reciprocal promises:

S.53. Liability of party preventing event on which contract isto take effect:S.54.Effet of default as to that promise which should be

performed first contract consisting of reciprocalpromises:

E.g. A contracts with B to execute certain building. B was tosupply steel and cement. B fails to supply. A need notexecute the work. B is bound to make compensation to A




Chapter IV – Of the Performance of contracts:S.55. Effect of failure to perform at fixed time, in contract in

which time is essential: When a party to a contractpromises to do a certain thing at or before a specifiedtime and fails to do any such thing at or before aspecified time, the contract, or so much of it as has not

been performed, becomes voidable at the option of thepromisee, if the intention of the parties was that timeshould be essence of contract.Effect of such failure when time is not essential: If it was

not the intention of the parties that time should beessence of contract, the contract does not becomevoidable by the failure to do such thing at or before thespecified time, but the promisee is entitled tocompensation from the promisor for any loss occasioned




Chapter IV – Of the Performance of contracts:S.55. Effect of acceptance of performance at a time other

than that agreed upon: If, in case of a contract voidableon account of the promisor‟s failure to perform hispromise at the time agreed, the promisee acceptsperformance of such promise at any time other than that

agreed, the promisee cannot claim compensation for anyloss occasioned by the non performance of the promiseat the time agreed, unless, at the time such acceptance,he gives notice to the promisor of his intention to do so.




Chapter IV – Of the Performance of contracts:S.56. Agreement to do impossible act:E.g. a) A agrees with B to discover treasure by magic.

b) A and B contract to marry each other. Before thetime fixed for the marriage A goes mad.

S.62. Effect of novation, recession and alteration ofcontract: If the parties to a contract agree tosubstitute a new contract for it, or to rescind or alter it,the original contract need not be performed




Chapter IV – Of the Performance of contract:S.63. Promisee may dispense with or remit performance of

promise: A promisee may dispense with or remitwholly or part, the performance of promise or extendtime. E.g. A promises to paint a picture for B. B

afterwards forbids him to do so. A is no longer boundto perform.

S.67. Effect of neglect of promisee to afford promisorreasonable facilities: The promisor is excused by

neglect or refusal of the promisee.E.g. A contracts with B to repair B‟s house. B refuses to show the places which require repair. A is excusedfor the non performance of contract.




Chapter VI Of the consequences of breach of contract:S.73. Compensation for loss or damage caused by breach of

contract: When a contract is broken, the party who suffers bysuch breach is entitled to receive, from the party who hasbroken the contract, compensation for any loss or damagecaused to him thereby, which naturally arose in the usual

course of things from such breach, or which the parties knewwhen they made the contract, to be likely to result from thebreach of it.Such compensation is not to be given for any remote and

indirect loss of damage sustained by reason of the breachE.g. a) A contracts to repair B‟s house in a certain manner, and

receives payment in advance. A repairs the house, but notaccording to the contract. B is entitled to recover from A the

cost of making the repairs conform to the contract




Chapter VI - Of the consequences of breach of contractS.73. Compensation for loss or damage caused by breach of

contract:E.g. b) A builder, contracts to construct a house by 1 st January

in order that B may be given possession of it at that time toC, to whom B has contracted to let it. A is informed of thecontract between B and C. A builds the house so badly that,before 1 st of January, it falls down and has to be rebuilt by B,who in consequence loses rent which he was to receive, andis obliged to make compensation to C for the breach of

contract. A must make compensation to B for the cost ofrebuilding the house, for the rent lost, and for thecompensation made to C.




Chapter VI - Of the consequences of breach of contract:S.73. Compensation for loss or damage caused by breach of

contract:E.g. c) A contract to buy B‟s ship for Rs.10 crores, but breaks

his promise. A must pay to B, by way of compensation, theexcess, if any, of the contract price over the price which Bcan obtain for the ship at the time of the breach of promise.

d) A contracts to deliver 50 tons of saltpeter to B on thefirst of January, contracts to sell the saltpetre to C at a pricehigher than the market price on the 1 st of January. A breaks

the promise. In estimating the compensation payable by A toB, the market price on the 1 st of January, and not the profitwhich would have arisen to B from the sale to C, is to betaken into account.




Chapter VI - Of the consequences of breach of contract:S.73. Compensation for loss or damage caused by breach of

contract:E.g. e) A contracts to sell and deliver 500 bales of cotton to B

on a fixed day. A knows nothing of B‟s mode of business. Abreaks his promise, and B, having no cotton, is obliged toclose his mill. A is not responsible for the loss caused to B bythe closing of the mill.

Quantum of damage: When the plaintiff fails to prove actualloss , nominal damage may be recovered. (AIR 1956 Cal 41)

The plaintiff must prove the quantum of damage sustainedby him. (AIR 1962 SC 366)The court is not bound to award compensation on the ratestipulated in the contract (AIR 1963 SC 1405)




Chapter VI - Of the consequences of breach of contract:S.74. Compensation for breach of contract where penalty

stipulated for: When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if a contract contains any other stipulation by way of penalty, the party complaining of the breach is

entitled, whether or not actual damage or loss is proved tohave been caused thereby, to receive from the party whohas broken the contract reasonable compensation notexceeding the amount so named for.

E.g. A contracts with B to pay B Rs.1,000 if he fails to pay BRs.500 on a given day. B fails to pay Rs.500 on that day. Bis entitled to recover from A such compensation, notexceeding Rs.1,000, as the court considers reasonable.




Chapter VI - Of the consequences of breach of contract:S.74. Distinction between liquidated damages and penalty: The

essence of penalty is a payment of money stipulated in thecontract as in „ terrorem ‟. On the other hand, the liquidateddamage is a genuine covenanted pre-estimate of damage.When there is no evidence that the amount specified in the

contract as damage unreasonable, unconscionable orexcessive, the agreement estimating damage is itselfevidence and even in the absence of other evidence it maybe considered sufficient. (AIR 1981 Ori. 206, AIR 1978 Cal559)In case of forfeiture of earnest money , if the amount isreasonable it is not penalty and Section 74 is not attracted.When the amount is excessive it is penalty and consequentlysection 74 is attracted. (AIR 1977 SC 1986; AIR 1981 Cal)




Chapter VI - Of the consequences of breach of contract:S.74. Distinction between liquidated damages and penalty:

When the amount stipulated is found not liquidated damagesbut penalty, the court is not bound to award the stipulatedpenalty but only reasonable compensation. (AIR 1963 SC1405)

Security deposit cannot be forfeited on the ground of defaultunless the loss was caused on account of default (AIR 1973SC1098)When the consideration for agreement was Rs.60,000 and

damages for Rs.50,000 was recoverable under the contractfor breach it amounts to penalty and cannot be recoveredexcept on proof of actual damage (AIR 1979 MP 66)




Chapter X - Agency:

S.190. When agent cannot delegate: An agent cannot lawfullyemploy another to perform acts which he has expressly orimpliedly undertaken to perform personally

S.196. Ratification: Where acts are done by one person onbehalf of another but without his knowledge or authority, hemay elect to ratify or to disown such acts.

S.201. Termination of agency:• Terminated by the principal

• Agent renouncing• Business of agency completed• Principal or agent dying or becoming of unsound mind• Principal being adjudicated insolvent

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