SHORT NOTES ON CONTRACT ACT ALL THAT VALUERS NEED TO KNOW: BEAUTIFULLY COMPILED PRESENTATION: BY ER VAIBHAV BANSAL
WHAT IS CONTRACT IN INDIAN CONTRACT ACT?
A contract defined under Section-2(h) of The Contract Act, 1872(hereinafter referred to as “the act”) means “any agreement which is enforceable by law”. Contracts can be written by using formal or informal terms or could be entirely verbal or spoken Contract. The contract is an undertaking by a person or firm to do any work under certain terms and conditions.
The work may be for the construction or maintenance and repairs, for the supply of materials, for the supply of labour, for the transport of material, etc.
OBJECTIVE OF THE ACT
The objective of the Contract Act is to ensure that the rights and obligations arising out of a contract are honored and that legal remedies are made available to an aggrieved party against the party failing to honor his part of the agreement. The Indian Contract Act makes it obligatory that this is done and compels the defaulters to honour their commitments. It came into force on the first day of September 1872.
The Act as enacted originally had 266 Sections, it had a wide scope and
General Principles of Law of Contract – Sections 01 to 75
Contract relating to Sale of Goods – Sections 76 to 123
Special Contracts- Indemnity, Guarantee, Bailment & Pledge, and Agency – Sections 124 to 238
Contracts relating to Partnership – Sections 239 to 266
At present the Indian Contract Act may be divided into two parts:
Part 1: deals with the General Principles of Law of Contract Sections 1 to 75
Part 2: deals with Special kinds of Contracts such as
Contract of Indemnity and Guarantee
Contract of Bailment and Pledge
Contract of Agency.
PROPOSAL
When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of the other to such act or abstinence, he said to make a proposal.
A proposal is not a promise or commitment but, if accepted by the other party, its proposer is expected to follow through and negotiate for the creation of a binding contract.
PROMISE
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted, becomes a promise.
The person making the proposal is called the “Promisor” and the person accepting the proposal is called the “Promisee”.
CONSIDERATION
When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.
Consideration is the return benefit the parties to the contract get.
A party to an agreement who promises to do something must gain something in return. This something in return is called consideration.
AGREEMENT
Every promise and every set of promises, forming the consideration for each other is an agreement.
An agreement not enforceable by law is said to be void.
CONTRACT
An agreement enforceable by law is a contract.
When the parties to an agreement intended to make it legally enforceable, the agreement should be so made as to satisfy the criteria provided by section 10 of the Indian Contract Act, 1872. Law will recognize an agreement as a contract only when the agreement is so made that all the essential elements of a contract as prescribed by section 10 of the Indian Contract Act are present in it. If any of these elements lack, an agreement shall not be enforceable at law.
All agreements are not contracts but all contracts are agreements.
STEPS INVOLVED IN THE CONTRACT
Proposal and its communication
Acceptance of proposal and its communication
Agreement by mutual promises
Contract
Performance of Contract
ESSENTIAL REQUIREMENTS OF A VALID CONTRACT
Offer and its acceptance
Free consent of both parties
Mutual and lawful consideration for agreement
It should be enforceable by law. Hence, the intention should be to create a legal relationship. Agreements of social or domestic nature are not contracts
Parties should be competent to contract
The object should be lawful
Certainty and possibility of performance
The contract should not have been declared as void under Contract Act or any other law
THE ELEMENTS OF OFFER ARE AS UNDER :
Offer must be communicated to the offeree.
Offer constitutes willingness to do or abstinence to do some act.
Offer must be made to another person.
Offer must be made with a view of obtaining the assent of the other.
Offer may be express or implied.
Offer may be conditional.
Offer must be capable of creating a legal relationship.
The terms of the offer must be certain.
Offer must not thrust the burden of acceptance on the offeree.
(i)Offer must be communicated to the offeree – The definition of the proposal contains the words. “when one person signifies to another his willingness”. lt infers that the offer must be conveyed to the offeree.
Section 4 of the Contract Act lays down that, “the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.”
Thus the law recognizes a proposal when it is communicated. Communication is complete only when it comes to the knowledge of the person to whom it is made. As a corollary, there can be no acceptance of a proposal that is not communicated because a person cannot assent to something which he is not aware of.
Example: A proposes, by letter, to sell a Machine to B at a price of Rs. 10000/-. The communication of the proposal is complete when B receives the letter.
(ii)Offer constitutes a willingness to do some act or abstinence An offer is a promise to do or not to do something which an offer or purports to perform provided the offeree gives his consent to it.
Examples:
A says to B, “I will paint a picture for you if you are ready to pay Rs. 10,000 for it.” This is an offer where A is willing to perform a certain act for a certain price.
X says to Y, “If you will pay me Rs. 500 per month, I will not play tabla every night.” This is an offer where X is willing to abstain from something for consideration.
(iii)The offer must be made to another person – An offer cannot be made by a person to himself. On the basis of the fact to whom an offer is made, it can be categorized as follows:
Offer made to –
one particular person is a specific offer
a particular group of persons is specific offer
the whole world, i.e. anyone having knowledge of its existence is a general offer
(iv) Offer must be made with a view of obtaining the assent of the other– An offer must be addressed to another person in order to obtain his assent to the proposal. It must be distinguished from an expression of intention or inquiry. Thus a casual inquiry- “Do you intend to sell your car?” – is not a proposal. Similarly a mere statement of intention – “I may sell my car if I can get Rs. 50,000 for it” – is not a proposal. But if X says to Y, “Will you buy my car for Rs. 50,000”, we have a proposal as it has been made with the object of obtaining the assent of Y.
Examples:
A says to B, “I will sell you my house if you are ready to pay Rs. 1 Lakh for it”. B says, “I accept your offer.” Here what A said to B was with a view to obtain his assent. A contract is formed.
A, jokingly said that he was willing to sell his horse for Rs. 2,000. B knowing that A was not seriously making the offer, said that he has accepted the offer. In this case A’s offer is not the real offer as he did not make it with the view to obtain the consent of B.
(v) An offer may be express or implied – An offer may be expressed by words or may be inferred from conduct. Section 3 of the Indian Contract Act provides two modes of communication – (i) an act or (ii) omission.
Act includes:
express words spoken which include telephone messages – it is also known as an express oral offer.
written words which include letters, telegrams, telex, advertisements, etc. – it is also known as an express written offer.
the conduct would include positive acts or signs so that the other person understands what the person acting or making signs mean to say or convey – it is an implied offer.
Examples:
A says to B, “will you buy this car for Rs. 80,000?” This is an express oral proposal.
A writes a letter to B stating the above offer. It is an express written proposal.
The BEST runs buses on different routes to carry passengers at the scheduled fares. This is an implied offer by the BEST.
The omission would not mean silence but would include such conduct or forbearance on one’s part that the other person takes it as his willingness or assent. For example, A says to B, “I will leave 80 % of my property for you if you will not drink alcohol till I am alive.” B who was very fond of alcohol does not say anything but abstain from drinking alcohol. B’s acceptance is conveyed.
(vi) An offer may be conditional-An offeror may attach any terms and conditions to the offer he makes. In such a case, it can be accepted only when that condition is fulfilled. It is immaterial if the terms are hard and ridiculous.
Example – A gave an offer to B to sell his car for Rs. 50,000 if he sends his acceptance by telegram immediately on receiving the offer. B sends a letter of acceptance instead of a telegram. No contract is made.
However, in such cases, the offeror’s status can be viewed as follows – The offeror may opt to treat the acceptance as valid even if the offeree does not comply with the condition stipulated by him. Thus in the above example, if A chooses to consider the letter of acceptance as valid, a contract will come into existence. If the offeror does not opt to treat the acceptance as valid, it is a duty on his part to make it very clear to the offeree that he will not accept the acceptance because of the non-performance of the condition by him. In case, the offeror does not communicate to this effect to the offeree, he becomes bound by the acceptance.
Considering the above example, it is the duty of A to convey to B that his acceptance will not hold good because he has not sent his acceptance by telegram. If A does not make this clear to B, he will be bound by the acceptance made by B, and a contract will be made.
(vii) Offer must be capable of creating legal relationship – A valid offer must intend to create legal relations. If the parties to the agreement have no intention to create legal relationships, it is not an offer in the eyes of law.
It may be noted here that the basic testing criteria is “intention of the party” – Even in a business transaction the party can specifically rule out the legal enforceability, and even in domestic transactions things can be made legally enforceable if the parties decide so.
Examples:
X makes a promise with his wife Y that he will pay her Rs. 1000 per month if she will leave her job, in writing with the specific mention that they want to be legally bound by it, it is enforceable in the court of law.
X and Y agree to contribute Rs. 1 Lakh each and start a partnership business with a specific clause in their partnership deed that any partnership dispute is not to be taken in the court of law, the agreement lacks legal enforceability.
The terms of the offer must be certain – A contract may fail to come into existence, even though there is an offer and an acceptance, because of uncertainty as to what has been agreed. A vague offer does not convey what it exactly means. In particular, this will be the case where the parties have left essential terms to be settled between them. Thus where parties enter into an agreement for sale of goods but fail to state the price at which the goods are to be sold, the courts are not able to enforce such promise.
EXAMPLES:
Where a person states that he is prepared to purchase the property for a reasonable sum, the proposal cannot be construed as an offer to purchase for any definite amount.
A promised to buy the horse from B if it proved lucky. This is a vague and loose offer. Thus it cannot give rise to any contract.
LIMITATIONS TO THE RULE –The rule that an offer is not valid if its terms are not certain, can be ignored in the following cases:
If only a minor term is meaningless, it may simply be ignored and the rest of the contract may be treated as binding.
If the parties have had previous dealings similar to the present transaction, the courts can use these matters to ascertain the terms of the contract.
ESSENTIAL ELEMENTS OF OFFER
(ix) An offer must not thrust the burden of acceptance on the offeree – The offeror cannot say that if the acceptance is not communicated within a fixed period of time, the offer would be considered as accepted. The offer should not impose on the offeree, an obligation to reply.
Example- A writes to B “I will sell you my horse for Rs. 500. If I do not receive a reply by Sunday next, I shall assume you have accepted the offer.” B does not reply. There is no contract.
OFFER SHOULD BE DISTINGUISHED FROM :
Cross offers – Two offers meeting cross purposes, made by two parties to each other, in ignorance of each other’s, offer are termed as ‘cross offers’. Cross offers do not amount to acceptance of one’s offer by the other and do not constitute a completed agreement.
Example – A wrote a letter to B, a firm of furniture dealers to supply him 5,000 chairs of a particular type and at a certain price. The same firm on the same day posted a letter to A offering to sell 5,000 chairs of the same quality at the same price. The letters crossed each other in the post. Here, the letters are cross offers, and neither is acceptance of the other because each side was ignorant of the proposal of another party at the time of writing the letter.
Comment: It may be noted here that the offer made by A and the offer made by B are good offers in their individual capacity. If B gives an acceptance to the offer given by A or vice versa, an agreement will be formed. The idea is that the two similar offers cannot be treated as offers and acceptance.
OFFER SHOULD BE DISTINGUISHED FROM :
Counter offers – Acceptance to an offer with a variation is no acceptance. It is simply a counter offer. A contract can be concluded only when the exact terms of the offer are accepted by the offeree. A counter offer amounts to the rejection of the original offer and has the effect of canceling the original offer. An offer once rejected is dead and cannot be accepted unless renewed.
Example:A offered B to sell his horse at Rs. 1000. B replied that he can pay Rs. 800 for the horse. B’s reply is a counter offer. When a counter offer is made by an offeree, the following situations may occur :
(i)The offer or refusal to accept the counter offer, original offer comes to an end. Result – No contract.
The offeror chooses to accept the counter offer, the original offer comes to an end, counter offer amounts to a new offer; acceptance of the counter offer by the original offeror amounts to acceptance, a contract is formed.
The offeror refuses to accept the counter offer, the original offer comes to an end. The offeror renews the offer and the offeree now accepts it. A new contract is formed.
OFFER SHOULD BE DISTINGUISHED FROM :
(iii) Invitation to offer – When a person makes an invitation to offer, the purpose is not to obtain the assent of the other person but merely to circulate the information that he is willing to deal with anybody, who on such information is willing to open the negotiations with him.
If I park my car on the driveway of my house with a ‘For Sale’ notice on the windscreen, it is an example of an invitation to offer, not an offer. The idea behind this invitation is that anybody who is interested in buying the car can come and talk to me.
An invitation to offer is not the same thing as an offering. An offer is a final expression of the willingness of the offeror. If the offeree accepts it, a contract will be made and both the parties will be bound by it. Invitation to offer is an invitation to open negotiations. Acceptance to an invitation to offer cannot give rise to a contract.
OFFER
It May be express or implied
It May be positive or negative
Must intend to create a legal relationship
Terms of the offer must be certain
It May be made to a specific person or class of persons or to anyone in the world at large
Must be communicated to the offeree
Must be made with a view to obtaining the assent
Maybe conditional
TERMINATION OF OFFER
By notice of revocation
By lapse of time
By failure of the acceptor to fulfill a condition precedent to acceptance
By failure to accept according to the mode prescribed
By death or insanity of the offeror
By rejection
ESSENTIALS OF A VALID ACCEPTANCE
Acceptance must be absolute and unconditional
Acceptance by usual mode as desired by the offeror
Acceptance cannot precede the offer
Acceptance may be express or implied
Acceptance must be given within a reasonable time
Acceptance must be by an ascertained person (offeree)
Offer cannot be accepted after it was rejected unless it is renewed
Silence does not imply acceptance
Acceptance must be made before the lapse or revocation of the offer Acceptance of offer means acceptance of all terms attached to the offer
LEGAL RULES REGARDING CONSIDERATION
Consideration is required both for the formation and discharge of an agreement or contract
Consideration may be passed, present, and future
Consideration may be either positive or negative
Consideration must be done at the desire of the promisor
Consideration may be furnished by the promisee or any other person
Consideration must be lawful
Consideration must be real and not illusory
Consideration need not be adequate
Consideration must not be the performance of existing duties
Consideration must be of some value in the eyes of the law
CONTRACTUAL CAPACITY
Every person is competent to contract who is of the age of the majority according to the law to which he is subject and who is of a sound mind, and is not disqualified from contracting by any law to which he is subject.
MINORS
Contracts entered into by minors do not have any value in the eyes of law.
Who is a Minor?
A minor is a person who has not attained the age of majority. The age of the majority is determined by the law to which he is subject. In India, the term ‘minor’ is understood as explained in section 3 of the Indian Majority Act, 1875, which reads as -. A minor is a person who has not completed eighteen years of age”.
However, in the following two cases, a person becomes major on completing the age of 21 years:
Where a guardian of a minor’s person or property has been appointed under the Guardians and WardsAct, 1890.
Where the superintendence of the minor’s property is assumed by a Court of Wards.
MINORS
It may happen that the law of land where a person belongs to, and the law of land where a contract is entered into prescribing different age limits to recognize a person as ‘major’. For example, the age of the majority in India is 18 years. While in Sri Lanka it is 21 years. This kind of situation may create a legal problem like when a 20 year old Sri Lanka national enters into a contract in India, whether he should be considered as a minor or not? To deal with such cases, the courts of law follow the following approach:
In the case of contracts relating to ordinary mercantile transactions, the age of the majority is to be determined by the law of the place where the contract is made.
In the case of contracts relating to land, the age of the majority is to be determined by the law of the place where the land is situated.
PERSONS OF UNSOUND MIND
Persons of unsound minds are not competent to enter into a contract.
Who is a person of unsound mind?
A person who does not have a sound mind is considered as a person of an unsound mind.
Section 12 of the Indian Contract Act, 1872 provides that, a person is said to be of ‘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.
To make this situation clearer, section 12 further adds two clauses –
A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
Example- A, a patient, was in a lunatic asylum. It was noticed that at intervals, he was of sound mind. During such an interval, A borrowed Rs. 5,000 from B and executed a promissory note in his favor for repayment of the loan. This promissory note is valid and A is liable to repay the loan taken from B.
A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
Example –A sane man, who was delirious from fever and was not in a position to make a rational judgment, sold his scooter while in that state.The transaction of sale is void.
FREE CONSENT
Agree upon the same thing in the same sense.
VOID AND VOIDABLE CONTRACT
An agreement that is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.
A voidable contract, unlike a void contract, is a valid contract that may be either affirmed or rejected at the option of one of the parties. At most, one party to the contract is bound. The unbound party may repudiate (reject) the contract, at which time the contract becomes void.
Typical grounds for a contract being voidable include coercion, undue influence, misrepresentation, or fraud. A contract made by a minor is often voidable, but a minor can only avoid a contract during his or her minority status and for a reasonable time after he reaches the age of majority. After a reasonable period of time, the contract is deemed to be ratified and cannot be avoided.
A voidable contract may be considered valid if it is not cancelled by the aggrieved party within a reasonable time.
A contract that ceases to be enforceable by law becomes a void contract.
LEGAL EFFECTS
Validcontract:
An agreement that has all the essential elements of a contract is called a valid contract. A valid contract can be enforced by law.
Voidcontract [Section 2(g)]:
A void contract is a contract that ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void.
Voidable contract [Section 2(i)]:
An agreement that is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers the right on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party.
Illegal contract:
A contract is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to public policy. These agreements are punishable by law. These are void-ab-initio.
“All illegal agreements are void agreements but all void agreements are not illegal.”
Unenforceablecontract:
Where a contract is good in substance but because of some technical defect cannot be enforced by law is called an unenforceable contract.
These contracts are neither void nor voidable.
PERFORMANCE
Unilateralcontract: A unilateral contract is one in which only one party has to perform his obligation at the time of the formation of the contract, the other party has fulfilled his obligation at the time of the contract or before the contract comes into existence.
Bilateralcontract: A bilateral contract is one in which the obligation on both the parties to the contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known as contracts with executory consideration.
Executedcontract: An executed contract is one in which both parties have performed their respective obligation.
Executorycontract: An executory contract is one where one or both the parties to the contract have still to perform their obligations in the future. Thus, a contract that is partially performed or wholly unperformed is termed an executory contract.
TYPES OF CONTRACT – ON THE BASIS OF FORMATION
Expresscontract: Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time of formation, the contract is said to be an express contract.
Impliedcontract: An implied contract is one that is inferred from the acts or conduct of the parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise than in words, the promise is said to be implied.
Quasi-contract: A quasi-contract is created by law. Thus, quasi-contracts are strictly not contracts as there is no intention of parties to enter into a contract. It is a legal obligation that is imposed on a party who is required to perform it. A quasi-contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another.
CONTINGENT CONTRACT
The word ‘contingent’ is used in the Indian Contract Act, 1872, to mean ‘conditional’ as we use ordinarily. Thus a contingent contract is a conditional contract.
Section 31 of the Indian Contract Act, 1872, provides that, “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.”
It may be inferred from the above that the performance of a contingent contract is dependent on a future uncertain event, and such an event should be collateral to the contract.
Example:A agrees to sell his house to B provided C, to whom he offered in the first instance does not purchase it; here A’s promise to sell his house to B is conditional depending upon C’s refusal to purchase it. If C refuses, both A and B will become bound to perform their respective obligations, but if C accepts to purchase A’s house, no contract will exist between A and B. This is a contingent contract.
QUASI CONTRACT
The word ‘Quasi’ means pseudo. Hence, a Quasi-contract is a pseudo-contract.
A quasi-contract is a retroactive arrangement between two parties who have no previous obligations to one another, created by a judge to correct a circumstance in which one party acquires something at the expense of the other. The contract aims to prevent one party from unfairly benefiting from the situation at the other party’s expense. These arrangements may be imposed when goods or services are accepted, though not requested, by a party—and the acceptance then creates an expectation of payment.
Example of a Quasi Contract
A classic quasi-contract circumstance might be created by the delivery of a pizza to the wrong address—that is, not to the person who paid for it. If the individual at the incorrect address fails to fess to the error and instead keeps the pizza, he or she could be seen legally as having accepted the food, and thus be obliged to pay for it. A court could then rule to issue a quasi-contract that would require the pizza recipient to pay back the cost of the food to the party who purchased it—or to the pizzeria if it subsequently delivered a second pie to the purchaser. The restitution mandated under the quasi-contract aims for a fair resolution of the situation.
WHEN A CONTRACT IS SAID TO BE PERFORMED
Actual Performance
A party to a contract is said to have actually performed his promise when he has fulfilled all his obligations under the contract. The actual performance brings the contract to an end.
Example- A enters into a contract to sell his car to B. A delivers his car to B and B pays promised money toA. Here actual performance has taken place.
Attempted performance
Sometimes it happens that the promisor is ready and willing to perform his promise, and offers to perform the same, but the promisee refuses to accept it. The motive of the party ‘offering to perform’ or ‘tendering to perform’ is to perform the promise. Thus a valid tender of performance is equivalent to the performance of the promise, and it discharges a party from his obligations under a contract.
Example – A enters into a contract to sell his car to B. A offers to deliver his car to B but B refuses to accept it. It is a tender of performance made by A. By offering the car, A has completed his part of the promise.
DISCHARGE OF CONTRACT
DISCHARGE BY PERFORMANCE
A contract is discharged when parties to it perform their respective obligations under it. The performance may be actual or attempted.
DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
When the performance of a contract becomes impossible due to factors beyond the control of parties, the contract stands discharged. Section 56 of the Indian Contract Act, 1872, deals with contracts that are impossible to perform, under two different circumstances:
1.Where impossibility is existent at the time of making a contract.
2. Where impossibility arises subsequently after the formation of the contract.
Where Impossibility is Existent at theTime of Making Contract
When an agreement is made which is impossible to perform, it is void from its very inception. Such an agreement does not come into existence as a contract. Thus there is no question of
discharge of a contract, which never existed. Following are various alternative situations in this context.
The fact of impossibility known to parties – When a contract is entered into for the performance of an act impossible in itself, for Example – contract to discover a treasure by magic, such contract is void.
The fact of impossibility known to one party – When a contract is entered into by a person to perform an act knowing that it is impossible, and the other party is not aware of such fact, the contract is void. However, in such a case, if the latter party sustains any loss because of non-performance of the contract, former party would be liable to make compensation to him. Example – A contracts to marry B while he is already married to C, and being forbidden by law from second marriage. Here although the contract does not give rise to any contractual obligation because it was not possible to be performed when it was made, butA is liable to make compensation to B for non-performance of the promise.
The fact of impossibility unknown to the parties – When both the parties are ignorant of the impossibility of performance at the time of contract, the contract is void for mutual mistake. For example, A, not knowing that his horse is dead, contracts to sell it to B. The contract is void.
Where impossibility arises subsequently after the formation of contract
Sometimes the performance of a contract is possible when it is made by parties. But some event subsequently happens which renders its performance impossible or unlawful In either case the contract becomes void. A contract gets discharged from the moment it becomes void.
Para 2 of section 56 of the Indian Contract Act, 1872, provides that, “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible, or unlawful” Thus a contract becomes void on the ground of subsequent impossibility only if the following conditions are satisfied:
1.The act should have become impossible, or unlawful.
2. The impossibility should have been caused by circumstances beyond the control of the parties.
3.The impossibility should not be self-induced.
Factors causing impossibility to performance
Destruction of the subject matter
Example – C agreed to let out a music hall to T for a series of concerts. The hall was destroyed by fire before the date of first concert. Now T could not perform his concerts. Here, both parties were freed from their contractual obligations because the contract became void due to impossibility of performance.
Failure of the ultimate purpose-
Death or personal incapacity of the promisor-
A change in law, or government policy rendering further performance illegal – Example:. An agreement was entered into between D and J relating to the sale and purchase of timber, which involved its import also. Subsequently the State declared import of timber illegal. Here, the whole contract had been discharged by the subsequent change in the law rendering the import of timber illegal.
Outbreak of war
Example – An Indian firm entered into a contract with a Chinese firm to export 1 Lac Kg. of groundnuts. Before its execution could take place, China declared a war on India. The agreement became void and could not be executed. The parties are discharged from their respective obligations under the contract.
DISCHARGE BY MUTUAL AGREEMENT
A contract is created by the parties to it. Therefore, it can also come to an end by their mutual agreement. The parties may make a new agreement that will discharge or modify the obligations of one or both parties under the original contract.
Section 62 of the Indian Contract Act, 1872, provides that, “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.“ This section provides three different modes of discharging the original contract:
(i) Novation (ii)Alteration,and (iii) Recession.
NOVATION
Novation takes place when a new contract is substituted for an existing one. This new contract may be between the same parties with new terms, or between new parties with old or new terms. The consideration for the new contract is the discharge of the old contract. A valid novation discharges the old contract.
Examples –
A owes B Rs. 1,000. B owes C Rs. 1000. B asks A to credit C with Rs. 1000 in his books of account. Both A and C agree to it. A new contract between A and C is substituted in place of old contract between A and B. This is a novation contract between new parties on old terms.
ALTERATION
Alteration means a change in one or more of the terms of a contract. When a contract is altered by the mutual consent of the parties to the contract, parties to the contract remaining the same, a contract stands altered. A valid alteration discharges the original contract, and the parties become bound by the new contract (i.e., contract with altered terms).
Example –A enters into a contract with B to supply 100 bales of cotton on 9th August 1998. Later on, they mutually agree to postpone the date of supply to 17th August 1998. This change amount to an alteration of the contract.
RESCISSION
Rescission means cancellation. When a contract is rescinded, the obligations of both parties are thereby discharged. Rescission may be express or may be inferred by the circumstances or conduct of the parties. It may occur in any of the following manners:
(1)When contracting parties mutually agree to rescind the contract.
Example – A agreed to teach painting to B. Subsequently he had to shift to another city. A and B mutually agreed not to give effect to their contract of teaching painting. Both of them got discharged from the contract.
(2) When one party fails in the performance of his obligations, the other party may rescind the contract without prejudice to his right to claim compensation for breach of contract.
Example – A agreed to supply goods to B on 9th August 1998, for which B after receipt of goods would pay the price on 17th August 1998. A failed to supply the goods. B may opt to rescind the contract and need not pay the price. In such a recession, both parties are discharged from the contract, where the aggrieved party retains the right to claim damages suffered due to non-performance of the contract.
Note: A person breaking the contract cannot rescind it.
When a person at whose option a contract is voidable, like when his free consent is vitiated, rescinds it.
Example – A induces B to enter into a contract by undue influence. Here law gives an option to B to rescind the contract. If he chooses to rescind the contract, both parties are discharged.
DISCHARGE BY LAPSE OF TIME
Every contract must be performed within the stipulated period of time or within a reasonable time according to the nature of the contract. If such time lapses, the contract is discharged.
In civil litigation, the obligations are barred by the Limitation Act. The Indian Limitation Act provides that if the performance under a contract is not demanded for three years, the promisor is discharged from his obligations.
Example-A sells goods to B for a certain price. A does not demand payment for the same. After the lapse of three years from the date of sale, A loses remedy to go in court and demand payment for the goods sold to B.
In case of contracts where time is the essence of the contract, non-performance of such contract within the time fixed, discharge the party which is not at fault from his obligations under the contract and gives him a right to sue the defaulting party for damages.
DISCHARGE BY OPERATION OF LAW
Death – In the contracts of personal nature, death discharges the contract.
Example – A agrees to paint a picture for B. A dies. The contract is discharged.
Insolvency – When a person is declared insolvent by law, he is discharged from all the liabilities incurred prior to his such adjudication. Thus, an insolvent is discharged from performing his part of the contract by law. His rights and liabilities are transferred to an ‘official assignee’ appointed by the court.
Example – A borrowed Rs. 5,000 from B. Subsequently court declared him ‘insolvent’. NowA is relieved from repaying Rs. 5,000 to B.
Merger – When an inferior right accruing to a party under a contract merges into a superior right accruing to the same person, an inferior right vanishes into the superior right. This is known as a merger. In such a case, the obligation constituted by inferior rights is discharged.
Example- A man holds property under a lease. Subsequently, he buys that property. Now his right as a lessee vanishes. It is merged into the right of ownership, which he has now acquired.
DISCHARGE BY OPERATION OF LAW
(4) Unauthorized material alteration – When an alteration of a material term of the contract is made by a party to the contract without the consent of the other party, both the parties are discharged from the contract by the operation of law. The effect of such alteration would be the same as the cancellation of the document.
Example – A contracted to sell his plot of 500 sq. m. to B for Rs. 1 Lac. The sale deed was executed accordingly. Before registration, A altered the deed and made it a deed for 300 sq. m. in place of 500 sq. m. In this case, the contract is discharged.
A material alteration is one that changes the legal effect of the instrument or is one that alters its legal character or identity. An alteration is immaterial if it is merely the correction of clerical errors or making explicit what was already expressed though not completely in the document. Thus, an immaterial alteration does not make any difference to the status of a contract
DISCHARGE BY BREACH OF CONTRACT
The ‘breach of contract’ means the failure of a party to perform his obligations. When one party commits a breach, the aggrieved party becomes entitled to rescind the contract. It, therefore, operates as a mode of discharging a contract.
Actual Breach
Where one party fails to perform his contractual obligations on the due date of the performance, or during the performance, he is said to have committed a breach of the contract. Sometimes, a party performs his obligations, but not strictly according to the contract, it is also an actual breach of contract.
Examples –
A promised to supply B 200 refrigerators on 9th August 1998. A does not supply the refrigerators on 9th August 1998. Here A failed to perform on the due date. He is guilty of breach of contract and B is the aggrieved party.
S, a seller on May 1 contracts to deliver a thousand gallons of crude oil to buyer B on August 15, and on that date S delivers only 200 gallons with no indication that the balance will be delivered shortly thereafter. Here S has defaulted during the performance. He has committed an actual breach of contract.
Note: There can be no actual breach of contract by reason of non-performance, so long as the time for performance is not yet arrived.
DISCHARGE BY BREACH OF CONTRACT
Effect of the actual breach – When a party commits a breach of contract, the aggrieved party can rescind the contract and sue for the damages. When the defaulter party performs or offers to perform his contract promise at a date later than the due date, whether the delayed performance will constitute a breach of contract or not will depend upon whether the time is the essence of the contract or not. In such a case, when time is the essence of the contract, the aggrieved party can rescind the contract and claim damages, and when time is not the essence of the contract, the aggrieved party cannot rescind the contract but is entitled to claim damages caused, by delayed performance.
Examples:
In the first example given above, B can avoid the contract, and claim from A, damages suffered by him because of the non-delivery of 200 refrigerators. However, if A supplies the refrigerators on 10th August instead of 9th August, B cannot refuse to accept the same (here time is not the essence of the contract). But he can claim compensation from A if he has suffered any loss because of this delayed delivery.
In the second example given above, B can cancel the entire contract returning the oil already delivered, and sue S for damages he suffers because of such non-delivery of oil.
DISCHARGE BY BREACH OF CONTRACT
Anticipatory Breach
Section 39 of the Indian Contract Act, 1872, provides that, “When a party to a contract has refused to perform or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.” Thus, if one contracting party indicates to the other, before the arrival of the time for performance, that he or she is not going to perform his or her part of the bargain, an anticipatory breach has occurred. It may happen in two ways:
Express breach by words spoken or written – Where a party to the contract communicates to the other party before the due date of performance about his intention not to perform it.
Example – In March, X contracts to put a sewer line for a city, work to commence by June 1. On April 10, X tells the city management that he will not do the job. It is an express anticipatory breach.
Implied breach – Where a party, by his own voluntary acts disables himself from performing the contract.
Example – A agrees to marry B, but before the due date of marriage, she marries C. This an anticipatory breach brought by the conduct of the party.
DISCHARGE BY BREACH OF CONTRACT
Effect of the anticipatory breach – The effect of an anticipatory breach can be summarized as under:
The aggrieved party may treat the anticipatory breach as an actual breach. In this case, he is discharged from the performance of his promise under the contract and is entitled to claim damages from the defaulter party for non-performance of the contract. The party can bring a suit for breach of contract without waiting for the due date of performance.
The aggrieved party may decide to ignore the anticipatory breach and opt to wait for the due date of performance. If a contracting party keeps the promise alive by ignoring anticipatory breach and regards the contract as continuing, he runs the risk of the contract being discharged in some other way prior to the date of performance.
The doctrine of anticipatory breach does not apply to promises to pay money debts, such as those found in promissory notes and bonds.
CONTRACT OF INDEMNITY
Contract of Indemnity (Section124)
A contract by which one party promises to another to save him 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.
Parties to the Contract of Indemnity
The person who promises to protect another: INDEMNIFIER
The person who is so protected is: INDEMNITYHOLDER / INDEMNIFIED
Meaning of Indemnity
Indemnity means enact to compensate or protect somebody from the loss or make good to the loss. When one person promises to another person that in case another person suffers from some loss the first person will compensate for the loss.
Example
A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of Indemnity.
Example – S agrees to sell toasters on behalf of N, and N agrees to indemnify S against any loss caused to him because of a manufacturing defect in any toaster. A customer B buys a toaster from S, which burst out on plugging in the socket and he sustains personal injuries therefrom. B sues S to get his loss compensated. S has to pay Rs. 10,000 to B as damage caused to him, and incurs Rs. 1000 in defending the suit. Here S is entitled to get indemnity worth Rs. 11,000 from N.
Essentials of Contracts of Indemnity Essentials of a valid Contract.
There must be a loss either by the promisor’s conduct or by any other person’s conduct
The contract may be expressed or implied.
It is a Contingent Contract by Nature
Liability of indemnifier commences when the indemnified suffers some loss according to the terms and conditions of the contract.
Contracts of Insurance are also covered in this.
All Contracts of Insurance are Contracts of Indemnity except life insurance.
Rights of Indemnity Holder
The rights of the indemnity holder are dependent on the terms of the contract of indemnity as a general rule. Section 125 of the Indian Contract Act, 1872 comes into play when the indemnity holder is sued i.e. under a specific situation.
Rights of Indemnity Holder Section 125 states rights claim for Damages-Sec. 125(1)
Claim for Cost of Suit-Sec. 125(2)
Recovery of Sums paid under conditions of compromise.-Sec.125(3)
The indemnity holder is entitled to recover:
(a)all the damages that he may have been compelled to pay in any suit in respect of any matter to which the promise of the indemnifier applies.
For example, if A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a particular transaction. If C does institute legal proceeding against B in that matter and B pays damages to C, A will be liable to make good all the damages B had to pay
(b) all the costs of suits that he may have had to pay to the third party provided he acted as a man of ordinary prudence and he did not act in contravention of the directions of the indemnifier or if he had acted under the authority of the indemnifier to contest such a suit.
(c) All the sums that he may have paid under the terms of any compromise of any such suit provided such compromise is not contrary to the indemnifier’s orders and was a prudent one or if he acted under the authority of the indemnifier to compromise the suit.
Rights of Indemnifier
Rights under Doctrine of Subrogation.
To sue against a third party after indemnifying the indemnity holder.
Not to compensate for losses not covered under the Contract of Indemnity.
CONTRACT OF GUARANTEE
Contract of Guarantee (Sec.126)
A Contract of Guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is known as the ‘Surety’, the person in respect of whom the guarantee is given is known as the ‘Principal Debtor’, and the person to whom the guarantee is given is called the ‘Creditor’.
Guarantee is e in which the promisor promises to perform the promise of a third person, or to discharge the liability or obligation of a third person, in the case of the latter’s default. It is of utmost importance to note that the defining section in itself provides that the Guarantee may be either Oral or Written.
Essential Features of Guarantee
1.Tripartite Agreement:
Concurrence of three Contracts: The Contracts connecting each other as contract between:
the Principal Debtor and Creditor, the Creditor and Surety, and the Surety and Principal Debtor
2. Liability:
Under such a contract, the primary liability is of the principal debtor and only secondary liability is of the surety.
3. Essentials ofValid Contract:
Requirements for Valid Contract i.e. Free consent, consideration, lawful object, competency of the parties, etc. are necessary to form this kind of contract. But, in respect of consideration, no direct consideration in the contract between the surety and creditor. Consideration of principal debtor is considered to be adequate for the surety.
Example – B takes a loan of Rs. 10,000 from L, where S assures L that in case B fails to pay, S will repay the loan to L. Here S is surety, B is the principal debtor, and L is the creditor.
There exist three separate and independent contracts (a) between the Principal Debtor and Surety (b) between the Principal Debtor and the Creditor (c) between the Creditor and Surety.
The liability of the Surety under the Contract Act is absolute and coextensive with that of the Principal Debtor, unless limited and restricted under the terms of Contract. Thus a party who guarantees the payment of a bill is liable for all that the principal debtor would be liable for, including costs, interest due under the contract.
