DEFENITION OF CONTRACT

Sec 2(h) of Indian contract act 1872 defines a contracts as an agreement enforceable by law. Sec 2(e) defines agreement as every promise and set of promises forming consideration for each other. Sec 2(b) defines promise as , when the person to whom proposal is made signifies his assent called promise. A proposal when accepted become promise.

Essential of a valid contract (sec 10)

Agreement 2. Intention to create legal relationship 3. Free consent 4. Lawful consideration 5. Lawful object 6. Possibility of performance 7. Necessary legal formalities
1.

Formation of a valid Contract

Offer & Acceptance

At the inception of every agreement, there must be a definite offer by one person to another person and its qualified acceptance by the person to whom the offer is made. For example : A says to B, Will you purchase my car for Rs 5000? A person making the offer is known as the offeror, proposer and the person to whom it is made is called the offeree or proposee (sec 2(c))

Legal rules to offer

1. Offer must be capable of being accepted. 2. Offer must be communicated.

3. Offer must be made with a view to

obtaining the assent. 4. Offer should not contain a term, non compliance of which may be assumed to amount to acceptance. 5. A statement of price is not an offer.

Acceptance sec 2(b)

Acceptance is the act of assenting by the offeree to an offer. It is manifestation by the offeree of his willingness to be bound by the terms of the offer. This means when the offeree signifies his assent to the offer, the offer is said to be accepted. An offer when accepted becomes a promise.

Legal rules to acceptance

1. It must be absolute and unqualified, i.e., it

2.
3. 4. 5.

6.

must be conform with the offer (sec.7(1)) It must be communicated to the offeror. It must be given within reasonable time. It must be given by the parties to whom offer is made. It can not be implied from silence. It must be according to mode prescribed ( sec 7(2))

CONSIDERATION(sec 2d)
Something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. A consideration in sense of the law may consist either in some right, interest, profit or benefit. Example: A agrees to sell his car to B for Rs. 50,000. car is the consideration for B and price is the consideration for A.

Legal rules to consideration

1. 2.

3.
4. 5.

6.
7.

It must move at the desire of the promisor. It may move or supplied by the promisee. Consideration need not to be adequate. Consideration must be real. It may be past, present or future. It must not be illegal, immoral or opposed to public policy. It must be something which the promisor is not bound to do.

Capacity to contract
Sec 11 Every person is competent to contract who a) is of the age of majority according to law to which he is subject. b) Is of the sound mind c) Is qualified from contracting by law Thus sec 11 declares the following persons to be incompetent to contract: 1. Minor 2. Person of unsound mind 3. Person disqualified by law

MINORS
According to sec 3 of the Indian Majority Act, 1875, a minor is a person who has not completed eighteen years of age. In the following two cases, he attains majority after twenty one years of age: 1. Where a guardian of a minors person or property has been appointed under the guardians and wards Act, 1890 or 2. Where the superintendence of a minor property is assumed by a court of wards.

Minors agreement
1. 2. 3. 4.

5. 6.

An agreement with or by a minor is void and inoperative ab initio. He cab be a promisee or beneficiary. His agreement can not be rectified by him on attaining the age of majority. If he has received any benefit under a void agreement, he can not be asked to compensate or pay for it. He can always plead minority. There can be no specific performance of the agreement entered into by him as they are void ab initio.

7. He can not enter into a contract of partnership. 8. He can not be adjusted insolvent. 9. He is liable for necessaries services from anyone who is legally bound to support. 10. He can be an agent. 11. His parents/guardians are not liable for the contract entered by him. 12. A minor is liable in Tort( a civil wrong).

Person of unsound mind

Sec 12 lays down that A person is said to be sound mind for the purpose of making a contract if , at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person, who is usually of unsound mind but occasionally of sound mind, may make a contract when he is of sound mind.

Contract of persons of unsound mind

LUNATICS. A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffer from intermittent intervals of sanity and insanity. He can enter into contract during the period when he is of sound mind. 2. IDIOT. An idiot is a person who has completely lost his mental powers. He does not exhibit understanding of even ordinary matters. 3. DRUNKEN OR INTOXICATED PERSON. He suffers from temporary incapability to contract. The position of a drunk person is similar to that of a lunatic.
1.

Other Person
Alien Enemies: An alien is a person who is not a subject of the republic of India. He may be an alien friend or an alien enemy. Contract with an alien friend subject to certain restrictions, are valid. Contracts with an alien enemy may be studied under two heads, namely1) Contract during the war 2) Contracts made before the war During the continuance of the war, an alien enemy can neither contract with an Indian subject nor can be sue in an Indian court. He can do so only after he receives a license from the Central Govt.

Corporation
A corporation is an artificial person created by law, having a legal existence apart from his members. Its contractual capacity is regulated by the terms mentioned in Memorandum of Association. Further, it can not enter into a contract in personal nature. Convicts A convict when undergoing imprisonment is incapable of entering into a contract. This incapacity to contract, or to sue on a contract, comes to an end when the period of sentence expires.

Free Consent ( Sec 13 & 14)

It means act of assenting to an offer. Two or more persons are said to consent when they agree upon the same thing in the same sense. (sec 13) A consent is said to be free when it is not caused by: 1. Coercion 2. Undue influence 3. Fraud 4. Misrepresentation 5. Mistake

Coercion (sec 15)

When a person is compelled to enter into a contract by the use of force by the other party or under a threat, coercion is said to be employed. When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused (sec 19)
Threat to commit suicide is also voidable.

Undue Influence
Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. This happens when a special kind of relationship exist between the parties such as one party is in a position to exercise undue influence over the other. A person is deemed to be in a position to dominate the will of the other1. Where he holds a real or apparent authority such as master and servant, doctor & patient. 2. Where he stands in a fiduciary relation such as father and son 3. Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age , illness or stress such as medical attendant and patient.

when consent to an agreement is obtained by undue influence, the agreement is said to be voidable .

Misrepresentation
A statement of fact which one party makes in the course of negotiation with a view to inducing the other party to enter into a contract is known as a representation. It must relate to some fact which is material to the contract. It may be expressed by worlds spoken or written or implied from the acts and conducts of the parties. A representation when wrongly made, either innocently or intentionally, is a misrepresentation.

It is a false statement which the person making it honestly believes to be true or which he does not know to be false. It also include non disclosers of material facts. For ex. The director issue a prospectus stating their in that the company had the right to use steam power. They honestly believed that the permission for the use of steam power would be granted but the permission was refused by the goverment. The company was then wound up.

Requirement of misrepresentation
It must be a representation of a material fact. 2. It must be made before the conclusion of the contract. 3. It must be made without any intension. 4. It must be wrong but the person who made it honestly believed it to be true.
1.

Fraud
A false representation has been made a) Knowingly. b) Without belief in its true. c) Not caring whether it is true or false. And the maker intended the other party to act upon it.

LEGALITY OF OBJECT AND CONSIDERATION UNLAWFUL AGREEMENTS

CONSIDERATION One of the essentials of valid contract should be lawful. Every agreement of which the object or consideration is unlawful is void. Section 23 of the act Section 10 of the Indian Contract Act elaborates this in the following manner" All agreements are contracts if they are made for a lawful' consideration". According to Sec.23:What consideration and object are lawful and what not The consideration or object of an agreement is lawful, unless 1. It is forbidden by law or 2. Is of such nature that, if permitted, it would defeat the provisions of any law; or 3. Is fraudulent; 4. Court regards it as immoral, or opposed to public

FORBIDDEN BY LAW
An agreement to what has been prohibited by the Indian Penal Code or by some other law cannot be enforced e.g. An agreement to sell liquor without license, when a license is required to sell the same is void. A contract to pay some money if a crime is committed is prohibited by law. If the agreement does not satisfy the requirement of the Statute, it is void.

SUCH NATURE THAT. IF PERMITTED. IT WOULD DEFEAT THE PROVISIONS OF ANY LAW
If such agreements are made they are void. Law may not expressly forbid certain acts, but if they result in circumventing any law they cannot be encouraged. We can explain the above point with the help of following examples .Examples- The agreement between the partners with a view to evading payment of income Tax and Sales Tax was aimed at defeating the provisions of Tax Laws and was opposed to public Policy and therefore the same was not enforceable.

FRAUDULENT
If the consideration or the object of an agreement is to commit fraud, the agreement is void e.g. A, B & C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful. Similarly if a debtor has made a compromise with his creditors, agreeing to pay them one third of the some due, but makes a secret agreement with the plaintiff agreeing to pay him in full, the secret agreement with one creditor is fraud on the other.

INVOLVES OR IMPLIES INJURY TO A PERSON OR PROPERTY

If the consideration or the object of an agreement is to cause injury to a person or property of another the agreement is unlawful and will be treated as void. Injury means to harm person or property. e.g. A promises B, an editor of a local daily to pay Rs. 5000/for publishing a defamatory article against C. This agreement involves injury to C and hence is void.

COURT REGARDS IT AS IMMORAL

What is immoral has not been defined by the Indian Contract Act, it depends on the norms accepted by the society at a particular point of time. A bachelor entering into a contract with a married woman to obtain divorce from her husband and thereafter to marry him is a void contract on the basis of immorality

Discharged Through Performance

A contract becomes discharged through performance where both parties have fully performed their contractual obligations. If one party does not fully perform the contract this will amount to a breach of contract and the other party may have a claim for damages unless the contract has been frustrated.

VOID AGREEMENT
1.
2. 3.

4.
5. 6. 7.

Agreement which are unlawful. Agreement without consideration.( sec 25) Agreement in restraint of marriage. ( sec 26) Agreement in restraint of trade. ( sec 27) Agreement in restraint of legal proceedings. ( sec 28) Unmeaning agreement.( sec 29) Wagering agreement. (sec 30)

DISCHARGE OF CONTRACT BY PERFORMANCE

Every contract is formed for achieving the object that the parties had in their mind. When the object of the contract is fulfilled, the liability of either party comes to an end. This is known discharge of contract. A contract may be discharged by:1. Performance 2. Impossibility of performance 3. Agreement 4. Breach of contract

BY Whom Contract Be Performed

1.Promisor Himself 2. Agent 3. Legal Representative

TIME & PLACE OF PERFORMANCE

1. Where no time and place is specified (sec 46)

Where no time and place is specified in the application then promise must be performed with in reasonable time and it depends on the social circumstances of case. 2. Where time is specified but application is not made (sec 47): When a promise is performed on certain day, promisor may undertake to perform it without application by the promisee during the business hours.

3. Application for performance on a certain day and place (sec 48): When a promise to be performed on a certain day, the promisor may undertake to perform it after the application by the promisee to that effect. In such case it is the duty of promisee to apply for performance at a proper place and time. 4. Performance in manner prescribed by promisee (sec 50) The performance of any promise may be made in any manner, or at any time which the promisee santions.

TIME AS THE ESSENCE OF CONTRACT

When time is of the essence (sec 55) In a contract, in which time is of the essence of the contract, if there is a failure on the part of the promisor to perform his promise with in the prescribed time, contract becomes voidable. 2. When time is of the essence (sec 55) In a contract, in which time is not of the essence of the contract, if there is a failure on the part of the promisor to perform his promise with in the prescribed time, contract does not make the contract voidable but the promisee is entitled to compensation for any loss occasioned to him by such failure.
1.

DISCHARGE OF CONTRACT BY PERFORMANCE

Section 37 of contract act lays down obligation of contracting parties under their contract. It says that the parties to a contract must either perform their respective promises unless such performance is dispensed with the provision of act.
Person by whom promise is to be performed( sec 40 & 42) Promise must be performed by the promisor or his representative may employ a competent person to perform it. Where the contract involves personal performance by the promisor, the promisor should perform. Performance of joint promises ( Sec 42) When two or more persons have made a joint promise, then all such persons shall perform or fulfill the promise. After the death of any of them his representative jointly with survivors must fulfill the promise.

IMPOSSIBILITY OF PERFORMANCE
If an agreement contains an undertaking to perform an impossibility, it is void ab initio. According to sec 56, impossibility may fall into the following. 1. Impossibility existing at the time of agreement a) Known to the parties: This is known as absolute impossibility and agreement is void. For example, A agrees with B to discover treasure by magic or undertakes to put life into the dead wife of B.

b) Unknown to the parties: Where at the time of making contract both the parties are ignorant of the impossibility, the contract is voidable on the ground of mistake

Breach of contract
A breach of contract occurs where a party to a contract fails to perform, precisely and exactly, his obligations under the contract. This can take various forms for example, the failure to supply goods or perform a service as agreed.

Actual breach
Actual breach occurs where one party refuses to contract on the same day of performance from his side. The aggrieved party may immediately sue him for breach of contract. Ex. A agree to deliver to B 5 bags of wheat on 1st January. He does not deliver the wheat on that day. There is a breach of contract. Actual breach of contract also occurs when during the performance of the contract , one party fails or refuse to perform his obligations under the contract.

Anticipatory breach
Anticipatory breach occurs where one party announces, in advance of the due date for performance, that he intends not to perform his side of the bargain. The innocent party may sue for damages immediately the breach is announced. Ex. A agree to deliver to B 5 bags of wheat on 1st January. He informed B that he is not going to supply it on that day. There is a anticipatory breach of contract.

Damages for breach

Damages means monetary compensation to the injured party for the loss suffered by him. The contracting party who has suffered loss due to breach of contract by the other party may bring a suit for damages. Every suit for damages raise two issues, namely, remoteness of damage and measures of damage.

RULES REGARDING DAMEGES

1. Ordinary damage: When a contract has been

broken, the injured party can recover from the other party such damages as ordinary arose from the breach. A contact B to sell 10 Quintals of wheat @ Rs. 775 per quintals, price is to be paid on delivery. The price of wheat rises to Rs. 800 per quintals. A refuse to deliver the wheat to B. B can claim damages at the rate of Rs. 25 per quintals.

2.Special Damages: damages other than those from the breach of a contract may be recovered if such damages may occasionally be supposed to have been in the contemplation of both parties as the probable result of the breach of contract. Such damages are known as special damages. Ex. G, a tailor, delivered a sewing machine and some cloth to a railway company to be delivered at a place where the festival was to be held. He expected to earn some exceptional profit at the festival but he did not bring this fact to the notice of the railway company. The goods were delivered after festival. Held, he could not recover the loss of profit.

EXEMPLARY DAMAGES
These are the punitive by nature. It means involving punishment. Such as damages for bounce of a check by the party due to insufficient balance or breach of a promise to marry.

NOMINAL DAMAGES
Where the injured party has not in fact suffered any loss by reason of the breach of contract. The damages recovered by him are nominal, i.e., very small even a rupee.

DAMAGES FOR LOSS OF REPUTATION

If a banker wrongfully refuses to honour a customers cheque of a tradesman, then he can recover the damages in respect of any loss to his trade reputation by the breach of contract.

DAMAGES FOR INCONVENIENCE AND DISCOMFORT

Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is that the measures of damages is not affected by the motive or the manner of the breach. EX. A, with his wife and children, took a ticket for midnight train, to be transported to a particular place where he lived. They were, however, transported to a wrong place and they have to walk several miles on a wet night. H could covered damage for inconvenience but nothing for medical expenses of his wife who caught cold due to inconvenience.

Contracts of Indemnity and Guarantee

Contract of Indemnity Sec. 124

A contract by which one party promises to save the other from loss caused to him by the conduct of the Promisor himself, or by the conduct of any other person, is called a contract of indemnity.

Illustration
Mr. Yasir purchased demand draft of Rs 50,000 from a bank. The draft was lost in transit. Mr. Yasir requested the concerned branch to issue a duplicate demand draft. He had to furnish an indemnity bond that in case of any claim on the bank, Mr. Yasir (indemnifier) shall be liable to make good the loss suffered by the bank (Indemnity holder/ Indemnified)

All contracts of insurance are contract of indemnity except Life Insurance

In such contracts an insurance company ( insurer)undertakes to indemnify the respective party(assured), of the losses suffered by the assured in the manner and to the extent agreed in the contract.

Parties in a contract of Indemnity

Indemnifier (Promisor).
Indemnity Holder/Indemnified ( Promisee).

Rights of Indemnity Holder When Sued

Can recover all damages incurred /Paid by

him. Can recover costs incurred. Can recover sums paid under compromise, if any. Contract of Indemnity and Guarantee

Contracts of Guarantee Sec.126

A contract of guarantee is a contract to perform the promise or discharge the liability of at hired person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor

Mr. Akram furnished the guarantee as desired by the bank. In case of default by the loanee (Mr. Aslam),the guarantor/ surety ( Mr. Akram) shall be liable to pay the amount in default.

Object of COG
1. To make credit purchases

M/S AQ brothers make credit supplies to Hilton enterprises. Under the agreement, M/S Hilton enterprises furnished guarantee of Mr. Suhail. Mr.Suhail shall be liable to make payments to M/S AQ brothers in case of default by Hilton enterprises.

2.Furnishing Guarantee to employer for seeking employment

M/S XYZ bank hired the services of Mr. Salman as cashier and asked him to furnish a guarantee of a third party for a sum of Rs 100,000. Mr. Salman furnished guarantee of Mr. Kamal.

Guarantee may be:

ORAL OR WRITTEN

PARTIES in a contract of guarantee

Surety /Guarantor (the person who gives

guarantee) Creditor. (the person in whose favor guarantee is given) Principal Debtor.(the person who primarily incurs liability)

Essentials of a Contract of Guarantee

Consideration.
No misrepresentation. Writing not necessary