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THE CONTRACT ACT

Definition of contract : An agreement enforceable by law.

Contracts are those agreements which have been entered into by parties competent to

contract, with an intention of creating legal relationship, with a free consent for a lawful

consideration with a lawful object, which are not expressly declared to be void, the terms

of which are certain, can possibly be performed and wherever necessary legal formalities

are complied with.

Essentials of a valid contract:

1) A contract should be an agreement between [b/w] 2 OR more parties:

There must be a lawful proposal. A proposal is lawful when it is absolute & unconditional

& it is made with an intention to legally bind the other party. If the proposal is not

absolute it is not valid.

A proposal may be made to the world at large OR to a specific person. This proposal

should be lawfully accepted. An acceptance is lawful when its absolute & unconditional.

When a proposal is made to the world at large any person has a right to accept it. When

the proposal is to a specific person only that person has a right to accept it.

When a valid proposal is accepted it becomes an agreement.

2) The agreement must be enforceable by law:

An agreement is enforceable by law when there is an intention of the parties to the

agreement to legally bind each other.

If such an intention is not present in an agreement the agreement cannot be termed as

a contract because where there is no intention of the parties to legally bind themselves

it would not be possible to enforce the agreement by law.

Eg :

a) A & B agree b/w themselves to go for a cinema. A commits breach of the agreement

& does not go.

Here we could not take the help of law to compel A to perform his part of the

agreement.

b) A & B entered into an agreement whereby A agrees to sell his car to B for a total

consideration of Rs. 2Lac. A, commits a breach of the agreement by refusing to sell

his car to B.

In this case B can take the help of law to compel A to sell his car for

Rs. 2Lac.

In both the above cases we see that there was an agreement b/w 2 parties but in the

first there was a mere social agreement without any intention of the parties to legally

bind each other. Hence the same was not enforceable by law. However in the second

there was a definite intention of the parties to legally bind each other & law could

enforce therefore the agreement.

Only those agreements that are enforceable by law can be termed as a contract. We

therefore see that the term agreement has a broader meaning than the term contract.

Thus we say that “all contracts are agreements but all agreements are not

contracts”.

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3) Free consent:

Consent means to agree upon a particular thing in the same sense. A consent must be

free. If the consent is not free the contract would not be valid.

Consent is not free when it is obtained by

i) Coercion,

ii) undue influence,

iii) fraud,

iv) misrepresentation,

v) mistake.

4) Parties to the contract :

The parties to the agreement must be competent to contract.

The following parties are incompetent to contract:

i) any person who has not attained the age of 18 years at the time of entering into

the contract.

ii) a lunatic, an idiot OR an insane person.

iii) a person disqualified to contract.

iv) an insolvent person.

5) A lawful consideration:

Consideration means what one gets in return of the promise. The consideration of the

contract must be lawful.

Consideration is lawful when:

i) It is not forbidden by law.

ii) It does not defeat any provision of law.

iii) It does not cause any injustice OR injury to another person OR his property.

iv) It is not opposed as public policy OR regarded as immoral.

v) It is not fraudulent.

Consideration must be real. It may be past, present OR future.

It may be by way of:

i) an act,

ii) forbearance {omission of an act},

iii) may be in cash,

iv) may be in kind,

v) may be a promise to do an act,

Consideration need not be adequate

6) Lawful object:

The lawful object for which an agreement is entered into should be lawful in order to

enable the agreement to be enforceable by law.

The object of a contract is lawful when:

a) Law does not forbid it.

b) It should not defeat any provision of law.

c) It should not cause injury to any person OR his property.

d) It should not be opposed to public policy OR be regarded as immoral.

e) It should not be fraudulent.

Where the object of a contract is unlawful it is not a valid contract.

7) The agreement must not be expressly declared to be void:

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Some of the agreements which are declared void under the Indian Contract Act are as

follows:

i) An agreement in restrain of trade.

ii) An agreement in restrain of legal proceedings.

iii) An agreement in restrain of marriage.

iv) An agreement of wager.

v) Agreements the terms whereof are not definitive.

8) Legal formalities:

Whenever a law specifies a contract should be in writing & should

comply with all the legal formalities. If the legal formalities are not complied with, the

contract will not be valid.

9) The terms must be certain:

The agreement should not be vague.

10) Possibility of performance

It should be possible to perform the terms of the agreement.

Definition of a proposal:

Whenever a person signifies, to another, his willingness to do or abstain from doing anything

with a view of obtaining the assent of that other person to such an act or abstinence he is

said to have made a proposal. A proposal is also known as “an offer”.

An offer when accepted becomes a promise. The person making the proposal is called as the

promisor {offeror} & the person accepting the proposal is called the promise {offeree}.

When an offer is accepted it results into a contract. An offer that has not been accepted is

inert, ineffective & powerless.

Rules regarding a valid proposal:-

1) The terms of offer must be definite.

2) The offer must contemplate the creation of legal relationship b/w

the offeror & the offeree.

3) An offer may be expressed OR implied.

4) An expressed offer is that which is made to the offeror either in

writing OR by spoken words.

Eg:

i) A writes to B about his desire to sell his flat to B for Rs.1000000. An

implied offer is that which is implied OR understood by the conduct of

the offeror.

ii) A taxi standing parked on the road. This is an implied offer of the taxi

driver to carry passengers for a fare as per the meter reading.

5) Person to whom an offer may be made :

a) To a definite person

Eg:

A offers to sell his house to B for Rs.50 Lac. This is an offer that is

made to B & it is only B who has a right to accept the offer.

b) To a specific class of persons.

Eg:

X puts a notice of reward to any student finding & returning his lost

book. This offer is made to a definite class of persons namely the

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students.

c) To the world at large.

Eg:

A advertises in the news papers for a reward to any person finding OR

giving information about his missing son.

Distinction b/w an Offer & an invitation to offer:

When an offer is accepted it results in the creation of an agreement. However when an

invitation for an offer is accepted it results into an offer itself.

An offer remains open till:

a) It is rejected.

b) It is lapsed.

c) It is accepted.

d) By non-acceptance.

e) It is revoked.

When an offer is made which is not accepted, not rejected, not revoked, then after a

reasonable period the offer will be deemed to have come to an end.

Eg:

An offer for sale of a flat for Rs. 50 Lac cannot be accepted after an unreasonable time

that is say after a year of the offer.

Communication of an offer:

An offer has to be communicated to the offeree without which there would be no valid

offer. Any special condition if contained in the offer will be binding upon the offeree.

An offer may be communicated expressly OR it may be implied. An offer is said to have

communicated when it has come to the knowledge of the offeree.

Valid acceptance:

a) An offer can be accepted only by the offeree & therefore there can be a

valid acceptance only if the acceptance is made by the offeree.

b) Acceptance should be absolute & unconditional.

c) A qualified acceptance OR acceptance with variation is not an acceptance

but is a counter offer.

d) The acceptance should be within a reasonable time.

e) An offer may be accepted either expressly that is in writing OR orally,

by conduct OR by following the prescribed manner of the offer.

f) Mental acceptance is not sufficient.

g) Acceptance must be communicated to the offeree.

h) Acceptance is acceptance for all terms.

i) Acceptance must be before lapse.

Revocation of an offer:

a) Revocation of an offer can be made by communication by way of a notice of

revocation. The notice of revocation of an offer must reach the offeree before the

offer has been validly accepted.

b) An offer is revoked automatically by lapse of the prescribed time.

c) When there is no prescribed time specified in the offer, the offer will be deemed

to have been revoked after a reasonable time.

d) By failure of condition precedent.

e) By death OR insanity of the proposal.

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f) By death OR insanity of the offeree.

g) Revocation by counter offer.

h) When an offer has not been accepted according to the prescribed manner

i.e. when the acceptance is defective the offer will be deemed to

have been revoked.

i) By the refusal OR rejection of the offer by the offeree.

Consideration:

When at the desire of the promiser the promisee OR any other person

a) has done OR abstained from doing,

b) does OR abstains from doing,

c) promises to do OR abstain from doing,

something, then such an act, promise OR abstinence is called as the consideration of the

contract. Consideration is therefore what one gets in return of the promise.

Essentials of a consideration:

1) It must be something that is done at the desire of the promiser. If any act has been

done voluntarily

i.e. not at the desire of the promiser then such an act will not amount to a

consideration.

Eg:

a) A’s house is on fire. A’s son is in the house. B voluntarily enters the

house & saves his son. Here as the act of saving A’s son is voluntarily & not at

the desire of A. B cannot demand any reward from B.

b) A’s house is on fire. A’s son is in the house. A offers a reward of

Rs. 1Lac, for saving his son. On the offer being made B enters the house & saves

the child. Here B is entitled for reward as his saving of the child was at the

desire of A.

The act, abstinence OR promise {consideration} may be given by the promisee OR

any other person.

2) As per the India Contract Act the consideration may be given by the

promisee OR any other person.

Under the English Act the consideration must be given by the promisee only. As per

English law a stranger to a contract has no right to enforce the same.

Eg:

A enters into an agreement with B, her daughter where A agreed to give B a piece

of land & B agreed to pay a fixed sum to C her uncle. A dies, B refuses to pay the

amount to C.

In this case C, the uncle though is a stranger to the contract {not a party to the

contract} can enforce the contract against B.

The defense at B that the uncle had given no consideration for the contract &

therefore was not entitled for the money, could not be considered because as per

the Indian Contract Act consideration may be given by the promisee OR any other

person therefore the uncle who was a stranger to the contract could enforce the

contract against B.

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Only a stranger who is a beneficiary of the contract can enforce the contract in the

following cases.

A stranger may enforce the contract:

1) The nominee of an insurance policy.

2) Beneficiary of trust property.

3) Third party Insurance contracts.

4) Endorsee of a negotiable instrument.

5) Holder of a document in title {holder of a bill of lading}.

6) Legal representatives.

7) Undisclosed principles.

8) An assignee.

3) The consideration of a contract need not be adequate:

The consideration of a contract shall have some value & it is not necessary that the value

should be sufficient OR adequate in return of the promise. Inadequacy of consideration

cannot make the contract void.

Eg:

A agrees to sell his car worth Rs. 2Lac to B for a consideration of

Rs. 50 K

In this case though the consideration received by A is obviously insufficient OR inadequate.

A will be bound to sell his car to B if he has given his free consent to the agreement.

4) Consideration may be an act to do OR not to do an act ( abstinence ) it may be in

cash or in kind :

Eg:

a) A agrees to sell his car to B for Rs. 2 Lac. The consideration received by A is

consideration in cash.

b) A declares a reward in the newspapers for finding his son. The consideration

received by A is consideration in terms of the act of finding his son.

c) A agrees to give his car to B in return of a plot of his land. This is consideration in

kind.

d) A agrees to pay money to B provided B does not sell his property. This is a

consideration by way of a promise not to do an act.

5) Consideration may be past, present OR future:

a) Where the consideration is given before the promisor performs his part of the

promise. It is termed as past consideration.

Eg:

The consideration for finding ones son for a reward would be a past consideration.

b) When the consideration is given after the promise is fulfilled, it is future

consideration.

Eg:

The offer of a contractor to receive payment {consideration} after the job is done

is a future consideration.

c) Present consideration is that which is given simultaneously at the time of the

fulfillment of the promise.

Eg:

A agrees to sell his car to B for Rs. 2 Lac.

In this case as soon as the money is given to A he hands over the car to B.

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6) Consideration must be real:

By real we mean that which can actually be performed. Consideration cannot be an act that

is physically OR legally impossible.

A consideration that cannot be physically OR legally performed will be an illusory

consideration. Such considerations are not allowed as the Indian Contract act specifies that

the consideration of a contract in order to be enforceable must be real, which can actually

be performed.

Eg:

i) A enters into a contract with B whereby he agrees to walk on the surface

of a deep river if B gives him Rs. 10,000/-.

Here the consideration that may be received by B that is the act of

walking over the surface of a deep river for a promise of Rs.10,000/- is not

a real consideration as the same cannot be physically performed.

ii) A agrees to withdraw a case of robbery filed against B if B pays him the

loss suffered by A.

In this case the consideration of withdrawing the case is an illusory

consideration as it is not possible to be performed.

7) Consideration must be lawful:

Consideration is unlawful when

a) It is forbidden by law:

Eg:

A agrees to withdraw a case for murder against B.

b) It defeats any provision of law :

Eg:

A contract of bigamy {2 marriages} defeats the provision of Hindu law therefore

such a contract b/w the two Hindus will be void as the same is for an unlawful

consideration.

c) It imparts {involves} injustice to any person OR his property :

Eg:

A agrees to set the house of C on fire on payment of Rs. 50,000/- from B.

d) When it is fraudulent:

Eg:

A agrees to enter into an agreement with B whereby he agrees to get lease of a land

actually owned by C even though he is not entitled to do so.

e) When it is immoral OR opposed to public policy:

An agreement, which interferes with the marital status relationship of a person,

would be for an immoral consideration.

An agreement for getting a job through influence in a public office would be an

agreement, the consideration of which is opposed to public policy.

From the above we can see that consideration is the basis of a contract.

Without a consideration there can be no contract. Out of bare promise no cause of action

arises.

Though the rule that no consideration no contract applies to all contracts there are

certain exceptions to the rule.

1) Agreements that are arising out of natural love & affection & which are duly

registered:

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For an agreement to be a contract enforceable by law without any consideration it should be

seen that offer is out of love & affection. When the agreement cannot be seen to be made

out of natural love & affection then the general rule “ no consideration, no contract “ shall

apply.

Eg:

a) A promise to give a car to B out of natural love & affection.

This agreement is put into writing & registered. This agreement even

though without consideration will be enforceable by law as it was obviously

made out of natural love & affection.

b) A offers to give his wife B a flat on the condition that C stays separately.

A refuses to give the flat.

C filed a case for specific performance wherein C stated that the

contract was b/w husband & wife & & was made out of natural love &

affection. Hence it should be valid even though there was no

consideration.

In this case the court held that the consideration of the promise to live

separately was contrary to the principles of natural love & affection &

hence the contract was void.

2) Promise to pay a time barred debt:

A time barred debt is a debt that cannot be recovered by the creditor if he has not taken

steps to recover the same from the debtor for a consideration.

In this case of debts a creditor should claim them within a period of 3 years from the date

on which it becomes due. If the creditor takes no action for recovery of debt within a

period of 3 years the debt will be termed as a time barred debt & creditor looses his claim

over the same.

If a debtor promises to pay a time barred debt to the creditors this promise even though

made without consideration will be a valid contract. However this promise in order to be a

contract must be made by the person originally liable to pay & not any other person.

3) Promise to pay for voluntary services:

When a person promises to pay something for services voluntarily rendered by another he

shall be bound to do so. However it should be noted that the services rendered were

voluntary & that while the services were rendered the promisor was in existence & the

person who render the service must be a person competent to contract.

Eg:

B has saved the son of A who was caught in the fire. Afterwards A promises the reward to

B worth Rs. 50,000/-.

In this case the act of B saving his son was voluntary. However after such an act is

complete, if A has made a promise to reward B even though the promise is without any

consideration A will be bound to keep his promise

4) Creation of an agency:

When a person appoints another as his agent even if the same is done without any

consideration the same is a valid contract as the benefits out of the acts of the agent will

be automatically be derived by the principal.

Free consent:

The consent of a party to a contract is not free when it is has been obtained by :-

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A) Coercion

B) Undue Influence

C) Fraud

D) Misrepresentation

E) Mistake

An agreement where there is no free consent is a voidable agreement

i.e. the person whose consent is not free can get the contract declared as void.

Valid contract is that contract which has all the essentials of a contract & which is

enforceable by law.

Void contract is that which is not enforceable by law. Voidable contract is that contract

which may be declared void at the instance of one of the parties.

Eg:

Contract without free consent

A) Coercion:-

Coercion is the committing OR threatening to commit any act forbidden by Indian Penal

code OR the unlawful detention OR threatening to detain any property, to the prejudice of

any person, with the intention of causing any person to enter into an agreement.

Coercion means the committing OR threatening to commit an act which is against law Or

detaining or threatening to detain property which is against the interest of another person

& which has been done to force the another to enter into a contract.

B) Undue Influence:-

A contract is said to be induced by undue influence where the relation subsisting b/w the

parties are such that one of the parties is in a position to dominate the will of the other &

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

Essentials of undue influence:

a) One of the parties to the contract is in a position to dominate the will of the

other:

It should be seen that the relations b/w the parties where one is in a position to

dominate the will of the other is subsisting OR is present at the time the consent has

been given.

If the relation does not subsist at that time

i.e. where the relations was such before the consent has been given OR after the

consent has been given then it will not amount to undue influence.

A person is in a position to dominate over the will of the other where:

i) He holds a real OR apparent authority over the other.

ii) Where he stands in fiduciary over the other

i.e. a position of trust, faith & confidence.

iii) Where he makes a contract with a person whose mental capacity is

temporarily OR permanently affected by the reasons of age, illness & mental OR

physical distress.

b) The use of this position to obtain an unfair advantage over the other

i.e. the above mentioned relation must have been used by the party to get an advantage

which he could not have got in the absence of such a relation.

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When a contract has been signed under undue influence the contract is voidable at

the option of the person whose consent has been obtained under undue influence.

C) Fraud:-

While entering into a contract where an act is done with an intention to deceive the

other party OR to induce the other party to enter into such a contract such an act

would amount to fraud.

Fraud is committed when:

i) A person makes a suggestion of a fact to be true when in reality the fact

suggested is not true & where the person suggesting the fact does not

believe it to be true :

When a person enters in a contract believing the suggestion is true then

fraud is committed.

ii) When a person actively conceals the fact which is to his knowledge :

Whenever a person knows a certain fact that is subject matter of the

contract & he deliberately does not disclose the fact to the other party

then a fraud will be deemed to have been committed.

iii) A promise made by a person without any intention of fulfilling it :

Whenever a person promises to perform an act with an intention, before

making a promise, of not performing the act fraud is committed.

Eg:

A buys goods from B with an intention of not paying B at all.

It should however be noted that where the intention of not performing the

act is absent it will not amount to fraud.

iv) Silence:

In certain cases even silence amounts to fraud

i.e. when a person who has a duty to disclose the facts keeps silent about

the same & if the other party enters into an agreement because of the

silence

i.e. the other party would not have agreed if the facts were disclosed such

acts of silence would be equivalent to speech & therefore would be fraud.

If certain facts are not disclosed by keeping silence & if such silence would

not effect the willingness of the other party then there shall be no fraud.

Similarly the silence should be in respect of the subject matter of the

contract.

vi) Any act done with an intention to cheat the other party:

When a contract has been signed under fraud the contract is voidable at the

option of the person whose consent has been obtained under fraud. Such

party can also claim compensation.

D) Misrepresentation:-

Misrepresentation means a wrong statement of the fact material to the contract.

It may be of the following types:

i) An unwarranted positive statement:

A person suggests a fact to be true when it is not true & the person suggesting the

fact believes it to be true. Whenever a person makes a statement pertaining to the

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subject matter of the agreement believing it to be true when in fact the statement

is not true.

If the other party enters into a contract believing the statement to be true it

would amount to misrepresentation & the consent of the other party would be

deemed to have been obtained by misrepresentation.

ii) By breach of a contract:

When there is a duty of a person to disclose certain facts & a person commits

breach by not disclosing the facts & where such a breach is without any intention to

cheat it amounts to misrepresentation.

When a contract has been signed under misrepresentation the contract is

voidable at the option of the person whose consent has been obtained under

misrepresentation. However, he cannot claim any compensation.

E) Mistake:-

It means that the parties to an agreement are under an erroneous belief as to the

subject matter of an agreement. When an agreement is entered into such an erroneous

belief the agreement is void. However it should be noted that the mistake should be in

respect of the fact of the agreement.

i.e. in respect of the identity of the parties to the contract OR identity of the subject

matter of contract.

Eg:

A & B entered into contract whereby B agrees to purchase A ‘s horse for Rs. 50,000/-.

Both A & B are not aware at the time of entering into contract that the horse had

already died.

This could be a contract concerned under a mistake of facts & therefore would be void.

A therefore cannot force B to purchase the horse.

A mistake of law is not considered as a mistake because ignorance of law cannot be an

excuse, as every citizen is supposed to know the laws prevailing in the country.

A mistake of foreign law is considered to be a mistake of fact as per Indian Contract

Act.

Competency of the parties:

According to the Indian Contract Act every person who is not a minor, who is not in the

state of an unsound mind OR a person who is not disqualified from contracting by law can

enter into contract, such persons are competent to contract.

A minor’s contract:

According to provisions of Indian Contract Act a minor is incompetent to contract,

therefore a contract entered into by a minor is void.

According to law prevailing in our country any person below age of 18 is a minor. In case a

lawful guardian has been appointed a person below the age of 21 is considered a minor.

1) A minor cannot mortgage his property, his contract is void ab initio: A, a minor mortgaged his house in favour of B a money lender & received

Rs. 8,000/- as initial loan from a total loan amount Rs. 30,000/-.

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B filed a suit against A for recovery of the money OR declaration of that mortgage was

valid.

The courts held that as a minor is incompetent to contract the mortgage was not valid & the

money already advanced could not be rendered to B as a minors contract is void ab initio i.e.

the promise to return the money does not arise.

2) A minor cannot be a partner of a firm. However he may derive benefit from a

partnership firm. Minor deriving benefits from a partnership firm can become a partner

within 6 months of his attaining majority.

3) The principle of estoppel is not applicable to a minor:

i.e. if a minor does not disclose his incompetency to the other party & enters into a

contract even then he cannot be held liable & will not be bound by the contract.

4) Ratification:

A minor cannot make ratification after attaining majority as a contract entered into by a

minor is void “ab initio” & therefore the question of ratifying the contract shall not arise.

5) Basic necessities supplied to a minor can be recovered by a person from the property of

a minor. However the minor himself shall not be liable for the same.

6) A Minor cannot be declared insolvent.

7) A minor cannot become a member of a registered company.

8) A minor can act as an agent:

When a minor acts as an agent the principal shall be liable for all the acts of a minor.

However the principal cannot hold the minor liable for any breach of conditions of an

agency.

9) A person standing surety for a minor:

Whenever a person who may be competent to contract acts as a surety as a payment of

debts of minor he shall not be liable to pay the debts if the minor fails to pay the amount as

according to the courts the liability a surety arises subsequently. It is secondary liability &

when the principal debtor {minor} himself is not liable the surety can be forced to pay the

debtor.

10) A minor may be a promisee:

According to the courts a minor though is incompetent to contract can be a promisee. A

promisory note OR a negotiable instrument drawn in favour of a minor is a valid document.

11) Whenever a person competent to contract promises to pay with a minor in favour of any

third person the minor shall not be liable to pay. The other person competent to contract

will be held liable.

Eg:

A {competent to contract} & B {minor} jointly promise to pay Rs. 50,000/- for goods

received to C.

In this case through one of the party to contract will be void the contract will be valid.

However the minor, B will not be liable to pay C hence A will have to make the entire

payment of Rs. 50,000/- to C.

12) A minor has a right to hold property OR interest on property :

A minor can hold a property transferred in favour OR for the benefit of a minor.

Contract by a person of unsound mind:

The Contract Act defines a person to be of a sound mind when he is capable of

understanding the contract & of forming a rational judgment as to it’s effect upon his

interest. A persons may be permanently of an unsound mind

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i.e. insane person, an idiot.

A person may be temporarily of an unsound mind. i.e.a lunatic.

The Indian Contract Act says that a person who is of an unsound mind is incompetent to

contract therefore any person whose mental capacity has been derranged either

temporarily OR permanently to such an extent that he cannot understand as to what he is

doing OR he cannot form a rational judgement on any matter such a person would be

incompetent to contract.

a) An idiot, mental dwarf.

b) A lunatic {mental disease causing regular OR irregular derangement}.

c) Insane person {permanent mental derangement}.

d) Drunkenness {clouding of mental capacity due to intoxication}.

A lunatic may be of an unsound mind usually & may come to his senses

i.e. becomes of a sound mind occasionally & vice versa.

A contract entered into by a person having an unsound mind is a void contract.

However in the case of a lunatic who is usually of an unsound mind the presumption is that

he was of an unsound mind when he entered into the contract and the third party will have

to prove that he was of a sound mind at the time of the contract if he wants to enforce the

contract. For a lunatic who is usually of a sound mind the presumption will be that he was of

a sound mind when he entered into the contract & he will have to prove that he was of an

unsound mind if he wants to get the contract declared void.

Contract by a corporation:

A corporation is an artificial person created by law having a legal existence & capable of

suing & being sued.

A corporation cannot enter into contracts, which are purely of a personal nature. It can

enter into contracts through its agents. However a corporation that has been entered into

restricts the contractual powers of a corporation & which is not allowed by the rules

governing it would be a void contract.

Contract by an insolvent:

An insolvent cannot enter into a contract. Only the official assignee who is in charge of the

assets of the insolvent can enter into a contract on behalf of the insolvent.

Contract by convicts:

A person undergoing imprisonment is incompetent to contract. However he may contract if

he is under a licence called as “a ticket OR leave”. The law of limitation is kept in abeyance

for the time he is in prison.

Contingent contracts:

Section 31 of the Indian Contract Act defines a contingent contract is a contract to do

OR not to do something if some event collateral to such contract does OR does not happen.

Whenever a party enters into a contract with another & where the consideration is

dependent upon a future uncertain event that is directly related to the contract such a

contract would amount to a contingent contract.

Eg:

A agrees to pay B Rs. 10,000/- if B marries C.

Characteristics of a contingent contract:

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1) A contingent contract depends upon the happening OR not happening of

some event in future.

2) The happening OR not happening of the event must be uncertain.

3) The event must be collateral to the contract

i.e.it must be incidental to the contract.

Eg:

A agrees to purchase certain goods from B provided the same are approved

by C.

Rules regarding contingent contracts:

1) The uncertain event must happen [Section 32] :

Eg:

A, contracts with B, to buy his horse if he survives C.

In this case the contract is dependent upon a future event of A surviving C. If A

dies before C the uncertain event cannot happen & therefore the contract will be

void.

2) The non happening of a future uncertain event [Section 33]:

Eg:

A agrees to pay B a certain sum of money if the ship carrying his goods does not

arrive within 3 months.

For the contract to be enforced the ship must not arrive at the port within 3

months

i.e. where the contract is dependent upon the non happening of an uncertain event

the event must not happen.

3) When an event is deemed to be impossible [Section 34]:

Whenever a person does an act which renders it impossible for an event to happen

the contract will come to an end.

Eg:

A agrees to pay Rs. 10,000/- to B if B marries C. B married D. The conduct of B has

rendered the happening of the event impossible & therefore the contract comes to

an end.

4) The happening of an event within a fixed time [Section 35(1)]:

When a contract is contingent upon the happening of an event within a fixed time it

shall be void if the event happens within the fixed time. But if the event does not

happen within the fixed time the contract will be void.

5) The not happening of an event within a fixed time [Section 35(2)]:

When the contract is contingent upon the not happening of an event within a fixed

time it will be valid & can be enforceable only after the expiry of the fixed time that

the event cannot happen.

Eg:

A agrees to pay Rs. 5,000/- to B if the ship carrying his goods does not arrive

within 6 months.

This contract is enforceable after 6 months OR if the ship has sunk

i.e. it is certain that the ship cannot arrive within 6 months.

6) Agreements contingent on impossible events [Section 36]:

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Contingent contracts to do OR not to do an act if an impossible event

happens are void. Whether the impossibility of the event is known OR not to

the parties at the time of an event.

Eg:

A agrees to pay Rs. 10,000/- to B if B marries C. At the time of the contract C was

already dead.

Therefore this contract is said to be contingent on the happening of an impossible

event & shall be a void contract whether A OR B were aware of C’s death OR that

will have no effect upon the validity of the contract.

The time & place of performance:

1) When no time is specified:

[Section 46] Whereby a contract a promisor is to perform his promise without

application by the promise & no specific time for performance is mentioned the

contract must be performed within a reasonable time.

Reasonable time depends on the special circumstances of every case & the

facts & intentions of the parties while making the contract. Reasonable time is in

each particular case a question of fact.

2) When time is specified:

[Section 47] When a promise is to be performed on a certain date & the promisor

has undertaken to perform it without an application by the promise the promisor may

perform it at any time during the usual hours of business on such a day & at such a

place where the promise is ought to be performed.

[Section 48] When a promise is to be performed on a particular date & the

promisor has not undertaken to perform without an application by the promise it is

the duty of the promise to apply for performance at a fixed place & time.

[Section 49] When the promise is to be performed without the application of

the promise & there is no fixed time OR place it is the duty of the promisor to

appoint a reasonable place & time for

performance.

3) Time is the essence of the contract:

If the intention of the parties at the time of making the contract was that

time should be the essence of the contract then the promisor who has promised to

perform at a specified time must perform his promise within the specified time. If

he fails to do so the contract becomes voidable at the option of the promise.

4) If it is not the intention of the parties that time should be the essence of the

contract:

The contract does not become voidable by the failure of the promisor to

perform at OR before the specified time but the promise is entitled to

compensation from the promisor for any lost occasion to him by such failure.

5) Whether time is the essence of the contract OR not depends on the terms of

the contract & the intentions of the parties:

The real intention has to be ascertained from the substance of the agreement it

may differ depending upon the facts of each case. In case of a voidable contract on

account of promisors failure to perform his promise at the fixed time & the

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promisee accepts the performance of such promise at any time other than the time

agreed upon the promisee cannot claim compensation for any lost occasion. He will be

entitled to compensation only if he gives a notice of his intention to claim

compensation to the promisor.

Discharge of a contract:

Discharge means termination of a contract. By discharge the rights & obligations of the

parties come to an end.

A contract may be discharged in the following ways:

1) By performance [Section 37]:

If both the parties to the contract have performed what they had agreed to do the

contract is discharged. A party is released from the contract where the

performance of the contract is excused under the provisions of this law OR any

other law.

2) By death:

Where the contract is of a personal nature OR where the personal skill OR ability

of the promisor is involved the death of the promisor shall discharge the contract.

3) By refusing tender of performance [Section 38]:

Offer of performance to the promisee shall have the same effect as a performance.

Hence if a party offers to perform his promise & the offer is not accepted by the

other party the promisor is not responsible for non-performance & is discharged

from the obligations.

4) By breach of the contract [Section 39]:

When a party to a contract has refused to perform OR has disabled himself from

performing his promise the promisee may put an end to the contract. However the

promisee has a right to resist it.

5) By impossibility of performance [Section 56]:

Cases where the performance of a contract becomes impossible are :

a) Death OR personal incapacity of the promisor

b) Outbreak of war

c) Non-existence of a particular state OR thing which forms the basis of the

contract.

Breach of a contract:

Whenever the promisor refuses to perform OR fails to perform the promise it is said to be

committing a breach of contract.

Anticipatory breach of a contract:

An anticipatory breach of a contract is said to take place when the promisor repudiates the

contract even before the date of the performance of the contract.

This may be possible where the promisor communicates to the promisee before the actual

date of performance of the contract that he does not desire to perform his part of the

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contract. In such a case the promisee may treat the repudiation as an immediate breach of

the contract & sue the promisor for damages. He may also put an end to the contract.

The promisee has an option to treat the communication of the intention of the promisor as

inoperative & wait for the time of performance & then hold the promisor responsible for

non-performance.

The disadvantage for the promisee is that the contract is kept alive for the benefit of the

promisor that would enable the promisor to fulfill the promise if so advised even after

repudiating the same.

In case a promisee keeps a contract alive by treating the communication inoperative the

result would be

a) The promisor gets a second chance to choose to perform the contract at the agreed

fixed time & the promisee is bound to accept the same.

b) If the contract is alive & some event happens which may discharge the contract by

some operation of law the promisor may take advantage of the changed

circumstances.

Quasi contracts [Section 68 to 72]:

Law requires a person who receives the benefit to pay OR compensate the person giving

the benefits even though he receives the benefit without any contract. Such a contract

created OR constituted by law are called as “quasi contracts”.

Quasi contracts are also known as “implied contracts” because they are such obligation

which resemble a contract. They are also called as “construction contracts” under the

English law.

When an obligation resembling those created by contracts have been incurred & not

been discharged any person injured by the failure to discharge is entitled to receive

compensation from the party in deficit.

Types of quasi contracts:

1) Claim for supply of necessities to a person incompetent to contract [Section

68]:

If a person incapable to contract is supplied with necessities suited to his condition

of life by another person then the person who supplies the necessities is entitled to

be reimbursed from the property of such incompetent person.

Eg:

A supplies B a lunatic necessities suitable to his conditions of life. A is entitled to

reimbursement.

“Necessities” as such are a question of fact & law in each case. It includes articles

required to maintain a person in the same stage & the degree of life in which he is

living. They are those without which an individual cannot reasonably exists.

Eg:

a) Expense incurred by a person for performing the funeral of the father of a

minor is a necessity.

Every money advanced for purchase of necessities can be claimed. However the

price paid for such supplies must be reasonable.

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The incapable person is however not personally liable to pay compensation.

Compensation may be claimed from his property.

2) Reimbursement of money paid in which he is interested [Section 69]:

A person, who is interested in the payment of money that another person is bound

by law to pay & therefore pays it, is entitled to reimbursement from the person who

is bound by law to pay the amount.

Eg:

B holds a land on lease granted by A. The revenue is payable by A to the government.

But A is in arrears of the same. The government has advertised the sale of the land

on account of the failure by A to pay the revenue. Under the law the result of the

sale would mean that B would loose his right over the property & therefore in order

to prevent the sale B pays the revenue to the government. A is bound to reimburse B

with the amount spent by him to save his interest.

3) Obligation of a person to pay for enjoying the benefits out of non gratituous

act [Section 70]:

When a person lawfully does anything to another person OR delivers something not

intending to do so gratituously & if the other person enjoys the benefit of the act

the latter is bound to compensate the former OR restore the thing so done OR

delivered.

Eg:

A tradesman leaves certain goods at the house of B by mistake. B treats the goods

as his own. He will be liable to pay for the goods to A.

4) Responsibility of finder of goods [Section 71]:

A person who finds the goods belonging to another & takes them into his custody is

subject to the same responsibility as a bailee.

Rights of the finder of the goods:

a) The finder of the goods is entitled to retain the goods until he receives his

lawful charges OR compensation for returning the goods & for the care &

preservation of the goods. However he cannot sue for such compensation. He

may sue where the owner has advertised a specified reward.

b) He is entitled to the possession of the goods till the true owner is found.

c) He can sell the goods where

(i) the goods are of a perishable nature.

(ii) the true owner is not found.

(iii) the true owner if found refuses to pay the lawful charges.

(iv) where the lawful charges amounts to more than 2/3rd of the

value of the commodity found.

Liabilities of the finder of goods:

a) He is responsible to take due care of the goods as a man of ordinary prudence

would take in respect of his own goods.

b) He must with reasonable diligence trace the true owner of the goods.

5) Contract b/w a person to whom money has been paid OR things have been

delivered by mistake OR coercion [Section 72]:

A person to whom money has been paid OR anything has been delivered by mistake

OR under coercion must repay OR return it. A payment made under mistake that is

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not legally due OR which cannot be enforced when made by a person must be repaid

to him. Even taxes paid under the mistake of law are to be repaid.

Eg:

A & B jointly owed Rs. 10,000/- to C. A alone pays the sum to C not knowing that B

has already paid Rs. 5000/- to C. In this case A is entitled to the refund of Rs.

5000/- paid by him to C under mistake.

The Contract of Guarantee :

The contract of guarantee is a contract to perform the promise n discharge the

liability of a 3rd person in the case of his default.

The person who gives the guarantee is called the surety OR guarantor. The

person in respect of whose default the guarantee is given is called the principal

debtor & the person to whom the guarantee is given is called as the creditor.

The guarantee may be written OR oral. A contract of Guarantee has three parties.

A Contract of Guarantee has 3 agreements:

1) An agreement b/w the creditor & the principal debtor

2) An agreement b/w the creditor & the guarantor.

3) An agreement b/w the principal debtor & guarantor

The contract b/w the guarantor& the principal debtor is an indemnity contract

Whereby the principal debtor indemnifies the guarantor that if ha pays any

amount on account of the default committed by the principal debtor the surety

would be indemnified for the loss [Section 126]

Essentials of a Contract of Guarantee:

1) There must be a dept existing which should be recoverable.

2) There must be 3 parties in the Contract of Guarantee.

3) There must be a promise oral OR written by the surety to pay the

dept incase of the default committed by the principal debtor.

4) The liability of the principal debtor is primary {first liability} & the

liability of the surety is secondary

5) There should be some consideration.

6) The liability of the surety must be legally enforceable.

7) The Contract of Guarantee must have all the essentials of a valid

contract.

Continuing Guarantee [Section 129] :

A guarantee that extends to a series of transaction between the creditor and the

principal debtor is called as a Continuing guarantee. A guarantee may cover a single OR

a specific transaction OR a series (separate and distinct) of transaction.

A guarantee that covers a single transaction is called as SINGLE GUARANTEE and

that which covers a series of transaction is called as CONTINUING GUARANTEE.

In a single guarantee the liability of the surety exists only for a single or a specific

transaction. In Continuing guarantee the liability is not restricted to a single

transaction but it extends to a series of transaction.

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Whether a guarantee is single or continuing depends upon the intention of the parties,

language of the guarantee and the position of the parties at the time the instrument

was written.

A guarantee for payment of a certain sum of money, in installments, within a definite

time is not a continuing guarantee.

Revocation of Continuing Guarantee:

1. By notice [Sec. 130]

The surety may at any time revoke a Continuing guarantee by notice to the creditor.

A notice of revocation by the surety to the creditor is sufficient to revoke the

Continuing guarantee as to all future transactions. Notice by the surety must be

clearly and sufficiently given. The liability of the surety ceases from the day of the

service of the notice upon the creditor.

A single guarantee cannot be revoked by notice if the liability has already arisen.

2. By death of Surety [Sec. 131]:

In the absence of a contract to the contrary the death of the surety operates as a

revocation of the continuing guarantee as regards the future transaction.

3. By discharge of the Surety ;

A Continuing guarantee is also revoked when the surety is discharged in any one of the

following ways:

a) By variance OR variation in the terms of the contract [Sec. 133]:

Any variation made, without the consent of the surety, in the terms of contract

between the Creditor and Principal debtor discharges the surety in respect of all

future transactions. i.e. any future transaction after the date of variance.

This is based on the principle that there is also a contract between the surety and the

principal debtor and the surety and creditor which may be effected because of the

variation.

b) By release OR discharge of the principal debtor [sec. 134] :

The surety is discharged by any contract between the creditor and the Principal

debtor by which the principal debtor is discharged of his liabilities OR when the

principal debtor is discharged by an act of the creditor the consequence of which

discharges the principal debtor.

Eg. A contracts to build a house for B for a fixed price within a fixed time under the

condition that B would supply the raw material for construction. C guarantees the

performance of A. B fails to supply the raw materials on time. C is discharged of his

liability.

c) By the creditor compounding with the principal debtor [Sec. 135] :

A contract between the creditor and the principal debtor by which the creditor makes

a compromise with the principal debtor or gives the principal debtor time to sue will

discharge the surety unless he has consented to the compromise.

d) By misrepresentation :

Where, a creditor misrepresents to the surety regarding the material facts, the

guarantee is invalid and the surety is discharged.

e) By the creditors act OR omission impairing the surety’s eventual remedy [Sec.

139] :

If the creditor does any act which is inconsistent with the rights of the surety OR

omits to do any act which he is bound to do towards the surety and which takes away

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the eventual remedy of the surety against the principal debtor then the surety is

discharged of his liabilities.

Eg: B contracts to build a ship for C for a certain sum of money to be paid in

installments as the work reaches different stages. A guarantees the performance of

B. C without the knowledge of A prepays the last 2 installments to B. C is discharged

of his liability because of the prepayment.

f) By the concealment of material facts [Sec. 143] :

In case the creditor or the principal debtor, conceal facts, which are material to the

contract, from the surety the surety is discharged of his liability.

g) By the failure of the co-surety to join [ Sec. 144] :

Failure on the part of a person to join the contract as a co-surety, where the first

surety had given the guarantee under the expressed condition that the creditor shall

not act upon the guarantee unless the other person is joined as a co-surety, will

discharge the surety of his liability.

A surety is not discharged in the following cases:

a) When an agreement is made by the creditor with a third party to give time to the

principal debtor.

Eg.: A promised B to repay certain amount within a fixed period. C has guaranteed the

performance of B. A contracts with D whereby he agrees to give extra time for

repayment to D. In such a case C will not be released of his liabilities as a surety.

b) Creditors forbearance to sue the Principal debtor [Sec. 137] :

Mere forbearance on the part of the creditor to sue the principal debtor OR to

enforce any remedy against him does not in the absence of a contract to the contrary,

discharge the surety.

Eg: B owes C a debt guaranteed by A. The debt becomes payable but C does not sue B

for a year after the default. This will not discharge the surety of his liability.

c) By release of one of the Co-sureties. [Sec. 138]:

When two or more persons guarantee the performance of a debt they are called as

joint co-sureties.

When there are co-sureties in a contract of guarantee the release by the creditor of

one of them does not discharge the others, neither does it discharge the surety so

released from his responsibilities towards the other sureties.

Eg.: A owes C a debt which is guaranteed by 3 sureties S1,S2 and S3. C releases S3 of

his liabilities. S1 and S2 are not released of their liabilities towards C. Though S3 has

been released of his liabilities towards C he is not released of his liabilities towards

S1 and S2.

RIGHTS OF A SURETY:

1) Right of Subrogation [Sec 140]:

This is the right of surety against the principal debtor where the guarantee debt has

become due on the default of the principal debtor to perform a guarantee duty has

taken place and the surety is liable to perform. The surety upon the payment OR

performance is vested with all the rights which the creditor had against the principal

debtor.

2) Right of Indemnity[Sec. 145]:

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The surety has a right of indemnity against the principal debtor i.e. the principal

debtor is bound to make good any loss suffered by the surety on account of the

default on the part of the principal debtor.

3) Right to the benefits of the creditors securities [Sec. 141]:

If the principal debtor has given certain securities in addition to the surety, the

surety will have a right over the securities and if the creditor releases the securities

without the consent of the surety then the surety is released of his liability to the

extent of the amount of the security so released.

4) Right against the co-sureties[Sec 146 & 147]:

Where there are more than one sureties guaranteeing they are liable to share the

debt or equal share of the part that has remained unpaid.