INFORMATION ON CONTRACTS & JOINT VENTURES USEFUL FOR EXAMINATION PURPOSES
COMPILED BY VR VAIBHAV BANSAL
CONTRACT
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 Contracts. 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 labor, for the transport of material, etc. According to sec.2(h), a contract is defined as an agreement enforceable before the law.
THE OBJECTIVE OF THE CONTRACT
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 Act as enacted originally had 266 Sections, it had a wide scope and
General Principles of Law of Contract – Sections 01 to 75
A 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.
AGREEMENT
According to sec.2(e), every promise or set of promises forming consideration for each other.
PROMISE
According to sec.2(b), when a person made a proposal to another to whom the proposal is made, if the proposal is assented thereto. A proposal when accepted becomes a promise. In simple words, when an offer is accepted it becomes a promise.
Promisor and promisee 2(c): When the proposal is accepted, the person making the proposal is called as promisor and the person accepting the proposal is called as promisee.
Consideration 2(d): When at the desire of the promisor, the promisee 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. Price paid by one party for the promise of the other Technical word meaning QUID-PRO-QUO i.e. something in return.
Agreement 2(e): Every promise and set of promises forming the consideration for each other.
Reciprocal Promises 2(f): Promises which form the consideration or part of the consideration for each other are called ‘reciprocal promises’.
OFFER
According to Sec.2(a), when a person made a proposal when he signifies to another his willingness to do or to abstain from doing something.
AGREEMENT = OFFER + ACCEPTANCE
CONSENSUS – AD – IDEM
According to Sec.13, meeting of minds or identity of minds or receiving the same thing in the same sense at the same time.
“All contracts are agreements but all agreements are not contracts.”
CONTRACT = AGREEMENT + ENFORCIBILITY BEFORE LAW
Contract 2(h): An agreement enforceable before Law is a contract.
Therefore, there must be an agreement and it should be enforceable by law
COMPETENT TO CONTRACT
Section 11 of The Indian Contract Act specifies that every person is competent to contract provided:
He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years in normal case and 21 years if a guardian is appointed by the Court.
He should be of sound mind while making a contract. A person cannot who is usually of unsound mind, but occasionally of sound mind, can make a contract when he is of sound mind. Similarly, if a person is usually of sound mind, but occasionally of unsound mind, may not make a valid contract when he is of unsound mind. He is not disqualified from contracting by any other law to which he is subject.
ESSENTIAL ELEMENTS OF A VALID CONTRACT (Sec.10)
1. OFFER & ACCEPTANCE.
2. INTENTION TO CREATE LEGAL RELATIONSHIPS.
3. CONSENSUS – AD – IDEM.
4. CONSIDERATION.
5. CAPACITY TO CONTRACT.
6. FREE CONSENT.
7. LEGALITY OF OBJECT.
8. POSSIBILITY OF PERFORMANCE.
9.WRITING & REGISTRATION.
TYPES OF CONTRACTS –
a. VALID CONTRACTS
Absolute contract
Contingent contract(Sec. 31-36)
Express contract
Implied/Quasi contract(Sec.68-72)
VALID CONTRACT – If all the conditions are fulfilled it is called a valid contract.
CONTINGENT CONTRACT – In a contract to do or not to do something, if an event is collateral, does or doesn’t happen.
EXPRESS CONTRACT – When contracts are either in writing or in oral.
IMPLIED CONTRACT – When contracts are neither in writing nor in oral.
ABSOLUTE CONTRACT – A contract that is not dependent on the fulfillment of any condition.
b. INVALID CONTRACTS
1. Void contract
(a) void (Void – ab – initio)
(b) void
2. Voidable contract
3. Illegal contract
4. Unenforceable contract
INVALID CONTRACT – In a contact if any one condition is not fulfilled.
IS VOID (VOID-AB-INITIO) – An agreement that is not valid from the beginning.
BECOMES VOID – An agreement that is valid in the beginning but due to some supervening impossibility the contract becomes void.
VOIDABLE CONTRACT – A contract that is valid unless until avoided by either party.
c. ILLEGAL CONTRACT – An agreement forbidden by law.
UNENFORCEABLE CONTRACT – It is valid but due to some technical defect, the contract becomes void. In case defects are removed the contract is enforceable.(lack of registration, lack of signature, etc.,)
OTHER TYPES OF CONTRACTS
EXECUTED CONTRACT
EXECUTORY CONTRACT
UNILATERAL CONTRACT
BILATERAL CONTRACT
EXECUTED CONTRACT – In a contract where both the parties have performed their obligation, there is remaining nothing to perform.
EXECUTORY CONTRACT – In a contract where both the parties are yet to perform their obligation.
UNILATERAL CONTRACT – In a contract, one party has performed his obligation and other person is yet to perform his obligation.
BILATERAL CONTRACT – In a contract where both the parties have performed their obligation. Bilateral & Executory are the same and inter-changeable.
OFFER
According to Sec.2(a), when a person made a proposal when he signifies to another his willingness to do or to abstain from doing something.
TYPES OF OFFERS
- Express offer
- Implied offer
- Specific offer
- General offer
- Cross offer
- Counteroffer
- Standing offer
EXPRESS OFFER – When an offer is given to another person either in writing or in oral.
IMPLIED OFFER – When an offer is given to another person neither in writing nor in oral.
SPECIFIC OFFER – When an offer is given to a specific person.
GENERAL OFFER – When an offer is given to the entire world at a large. (Carlill Vs. Carbolic smoke ball Co.,)
CROSS OFFER – When both the persons are making identical offers to each other in ignorance of the other’s offer.
COUNTER OFFER – When both the persons are making offers to each other which are not identical in ignorance of the other’s offer.
STANDING OFFER – An offer that remains continuously enforceable for a certain period of time.
LEGAL RULES FOR OFFER
Offer must be given with an intention to create a legal relationship.(Balfour Vs. Balfour)
Offer must be definite. (Taylor Vs. Portington)
There is a clear-cut difference between offer, invitation to offer, invitation to sale. (Harris Vs. Nickerson)
Offer must be communicated. (Fitch Vs. Snedkar)
The mere statement of the price of price is not an offer. (Harvey Vs. Facey)
ACCEPTANCE
According to sec.2(b), when a person made a proposal to another to whom the proposal is made, if the proposal is assented there to, it is called acceptance.
LEGAL RULES FOR ACCEPTANCE
Acceptance must be given as per the mode prescribed by the offerer.
Acceptance must be given before the lapse of time or within a reasonable time.
Acceptance must be unconditional.
Acceptance may be given by any person in case of a general offer.
Acceptance may be given by any specific person in case of a specific offer.
Acceptance must be communicated. (Bordgon Vs. Metropolitan Rly. Co.)
Mental acceptance is no acceptance or acceptance must not be derived from silence.
Acceptance must not be a precedent to offer.
CONSIDERATION
According to sec 2(d) consideration is defined as “when at the desire of the promisor, or promisee 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 an act or abstinence or promise is called a consideration for the promise.
When a party to an agreement promises to do something he must get “something” in return. This “something” is defined as consideration.
LEGAL RULES AS TO CONSIDERATION
1)It must move at the desire of the promisor.
[Durga Prasad v. Baldeo ]
2)It may move by the promisee.
[Chinnaya v. Ramayya ]
3)It must be past, present or future .
4)It need not be adequate .
5)It must be real .
6)It must not be illegal , immoral or opposed to public policy.
STRANGER TO CONTRACT
It is general rule of contract that only parties to contract can sue & be sued on that contract . This rule is known as ‘Doctrine of privity’ i.e relationship between the parties to contract .
Exceptions
1)A trust or a charge .
2)Marriage settlement , partition or other family arrangements .
3)Estoppel
4)Assignment of contract .
5)Contract with agent .
6)Convenants running with land .
CONTRACT WITHOUT CONSIDERATION IS VOID – EXCEPTIONS
Love & affection. [Venkataswamy v. Rangaswamy]
Compensation for voluntary service.
Promise to pay a time – barred debt .
Completed gift .
Agency sec (185) .
Charity .
Contract of bailment sec(148 ) .
CAPACITY TO CONTRACT
Following are the condition for a person to enter into contract-
He must be major
He must be sound mind
He must not be disqualified by any other law.
DISQUALIFIED PERSONS TO ENTER INTO A CONTRACT
A) MINOR
B) UNSOUND PERSON
C)OTHERS
I.E ALIEN ENEMY,
INSOLVENT,
CONVICT,
COMPANY/CORPORATION AGAINST MOA / AOA.
MINOR
According to Indian majority act sec(3) minor is defined as any person under the age of 18 years . In the following cases a person is said to be minor if he does not complete the age of 21 years
a) any person under the guardian & wards act ,1890
b)any person which comes under superintendence of law/legal representative.
RULES GOVERNING MINORS AGREEMENT
Rule 1 : Judges are counsellors ,
jury is the servant ,
law is the guardian .
Rule 2: In case minor entered into a contract which is unlawful , illegal , immoral he is also prosecutable & punishable under the relevant law.
LEGAL RULES
An agreement with minor is void ab initio
[Mohiri Bibi v. Dharmadas Ghase]
Minor can be promisee
[Shrafat Ali v. Noor Mohd]
Minor cannot ratify his agreement on attaining the age of majority
[Indra Ramaswamy v. Anthiappa Chettier]
Minor as a shareholder ,
Minor as a partner,
Minor as a agent ,
Minor as a member of trade union ,
No estoppel against minor ,
He can plead his minority ,
He can enter into contract for his necessary
[Robert v. Gray ]
On behalf of minor his parents , guardian or any other person can enter into void contract to acquire movable property.
UNSOUND PERSON
According to sec(12) a person generally sound , occasionally unsound can enter into a contract when he of sound mind
A person generally unsound occasionally sound can enter onto contract when he is sound mind.
JOINT VENTURE
A commercial enterprise was undertaken jointly by two or more parties that otherwise retain their distinct identities.
ADVANTAGES
Focused approach on new business
Risk Sharing
Conservation of Managerial &
Financial Resources
Work in more free environment (level playing field)
Preference of JV Partner
Vendor Development
Creating spare capacity.
DISADVANTAGES
Cost of managing a new company
Legal Compliances
Losing control / ownership including IP
Reduction in scale of operation.
Creation of new JVC where:
Two or more parties (company or individual) incorporate a new company to start new business activity.
Two parties incorporate a new company and business of one (both) company (ies) is transferred to new company
Shares of an existing company are allotted to another company / individual
REASONS TO FORM A JVC
Combining complementary
R & D technologies
Efficient commercialization of a technology or business concept
Developing or acquiring marketing or distribution expertise
Sharing of professionals with unique skills
Financial support or sharing of economic risk
Overcome barrier to enter market
Acceleration of revenue growth
Ability to increase profit margins
Enter new / international market
New product development
Block / Reduce Competition
INTERNAL PROCEDURES
Methodology of Selection of Partner
1 Due diligence – Finance, Commercial and Legal
2 Competitive Bidding for JVC Partners
3 Presentation to the Company by the probable partners on various parameters
4 Previous dealing / History / Status in the Market
PROCESS OF NEGOTIATIONS
Form a core group representing technical/finance/legal/commercial with a leader
Setting Objectives
Internal deliberation to identify Key Issues/Parameters
Develop your own draft Contract /Agreement
Collect data and information including business intelligence reports
Develop Systematic Record of Negotiations by recording the key decisions
Important steps / factors to be considered
AFTER SELECTION OF MOST SUITABLE PARTNER
Sign MOU & NDA containing broad understanding with the selected partner along with a preliminary Business Plan
FDI / ODI guidelines
Jointly develop:
Business Plan
Shareholders Agreement (SHA)
MOA and AOA (in line with the SHA)
Other ancillary agreements
FORMATION OF JVC’S
After selection of partner, sign MOU & NDA — — along with a preliminary Business Plan
Board’s in-principle approval to go ahead
Board’s approval for formation of JVC, Investment, SHA & Business Plan —
Signing of SHA, Business Plan & Ancillary Agreements —
Take steps for formation of JVC
RISKS OF JOINT VENTURE
Partnering with another business can be complex.
It takes time and effort to build the right relationship.
Problems are likely to arise if:
The partners have different expectation / objectives for the joint venture
Different cultures and management styles result in poor integration and co- operation
The partners don’t provide sufficient leadership and support in the early stages
Inadequate planning for the joint venture.
There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.
FORCE MAJEURE
Force Majeure means an event beyond the control of the Supplier and not involving the supplier’s fault or negligence and which is not foreseeable.
Such events may include, but are not restricted to, acts of the purchaser either in its sovereign or contractual capacity, wars or revolutions, hostility, acts of public enemy, civil commotion, sabotage, fires, floods, explosions, epidemics, quarantine restrictions, strikes, lockouts, freight embargoes and the act of God.
In a situation, where there is a delay in performance due to the event of a Force Majeure and the contract is governed by Force Majeure Clause, the supplier shall promptly notify the Purchaser in writing of such conditions and the cause thereof, duly certified by the local Chamber of Commerce or Statutory authorities, the beginning and end of the causes of the delay, within twenty-one days of occurrence and cessation of such Force Majeure Conditions.
Unless otherwise directed by the Purchaser in writing, the supplier shall continue to perform its obligations under the contract as far as reasonably practicable and shall seek all reasonable alternative means for performance not prevented by the Force Majeure event.
If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of Force Majeure for a period exceeding (60) sixty days, either party may at its option terminate the contract without any financial repercussion on either side.
For delays arising out of Force Majeure, the supplier will not claim extension in the completion date for a period exceeding the period of delay attributable to the causes of Force Majeure.
There may be a Force Majeure situation affecting the purchaser also. In such a situation, the purchaser is to take up with the supplier on similar lines as above for further necessary action.
CANCELLATION OF CONTRACT FOR DEFAULT
Whether a Contract is defeated by Frustration?
For this one has to refer to Section 56 of the Contract Act, 1872.
despite the abnormal rise of price in labour and materials, a contract could not be said to have suffered frustration, unless it has become impossible to perform.
A Supplier has to prove that the rise of prices in the market made it impossible for it to effect supplies required by the contractor.
There should not be evidence to show that other suppliers continued to supply the commodity notwithstanding the tight market
A supplier would have to prove that events subsequent to the contract resulted directly in it being unable to make the supplies covered by the contract.
Also, for the plea of frustration to succeed, in terms of Section 56 of the Contract Act, a mere fact of the increase in prices of the commodity contracted to be supplied may not suffice.
As per an SC, 1960 judgment, “a wholly abnormal rise or fall in prices, a sudden depreciation of the currency, and a little obstacle to execution or the like” cannot by itself affect the bargain made between the parties.
Further, it was observed in another case by SC (1988), that a contractor cannot “on some vague plea of equity” claim to make payment of consideration at rates different from the contracted rates.
An abnormal increase in the price of labour and materials was not sufficient to plead frustration
In Badri Narain v. Kamdeo Prasad AIR 1961 Patna 41 it was observed “The decrease in the amount of remuneration has the effect of rendering the contract more burdensome.
But, to attract the doctrine of frustration, burdensomeness is not the necessary consideration; the impossibility of performance in a contract is the true criterion.”
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