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Law of Contracts

COMPANY LAW | LAW OF AGENCY | LAW OF CONTRACTS | PARTNERSHIP | SALE OF GOODS

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I. CONTRACT & ITS ESSENTIALS

1. What is a contract?

A contract is an agreement enforceable by law.

2. What is an agreement?

An agreement is an arrangement between parties that creates legal obligations between them. Generally an agreement is said to be arrived at when an offer or proposal made by one person is accepted by another, with the intention of creating mutual obligations between them.

3. What is an offer or proposal?

An offer is an indication from one person to another that he is willing to do or refrain from doing a specified act. An offer is the first step in the formation of a contract.

4. What is an acceptance?

An acceptance is the assent to the offer made by the person to whom the offer is proposed. In order to convert a proposal into a promise, the acceptance must

a.be absolute and unqualified.
b.be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted.

5. What are the essential features of a contract?

The following features are considered to be essential to a contract:

A minimum of two parties.
There has to be a lawful offer and acceptance which results in an agreement.
There must be intention between the parties to create a legal obligation.

Consideration must pass: Each party to the agreement must benefit from the agreement. Therefore, each party must give and get something. Consideration need not be immediate. It can be for something done in the past, present or future. In a contract, each party puts the other party under some obligation or extracts some promise from him or her. The exchange given for the obligation or promise is called consideration. It can be in cash or in kind.

Lawful consideration: Consideration must be lawful. That means the consideration given by one party to another should not be illegal, fraudulent, or opposed to public policy.

Competent parties: the parties to a contract must be competent to contract. For this they must be 18 years old (must have attained majority).

They must be of sound mind and should not be disqualified by law from entering into contracts. This means that, lunatics, drunkards, etc. cannot enter into a valid contract except in special cases. Sound mind means being able to make a rational decision as a normal person would be able to do. It also implies that one should not be in a state of intoxication in any manner.

Free consent: The parties to a contract must agree to enter into a contract freely. This means that they should not be coerced or be under any kind of undue influence, fraud, misrepresentation or mistake while entering into a contract. When consent is given it must specifically relate to the offer. When a person has the capacity to force another to do or not do something and the other person cannot resist that, the first person is said to have undue influence over the second.

The parties cannot enter into a contract which has terms which are contrary to any law. This means that the contract cannot contain terms which are illegal, fraudulent , immoral or opposed to public policy.

Not expressly declared void: No law should clearly ban contract of that particular nature.

Clarity of terms: The terms of the agreement must be clear. If an agreement is unclear it cannot be enforced under law.

Legal formalities to be complied with: Contracts may be either oral or written. However, certain contracts have to be in writing while some contracts have to be written and registered. For example, a contract to sell property has to be written and registered.

6. Do contracts have to be in a particular format?

No. Contracts can be in any format, oral or written. If it is in the written form it can be entered into through the exchange of letters, or the sending of a fax message. It may be also entered into when a person completes an order form, booking tickets etc.

7. What are the various kinds of contracts?

A. Express Contract: when both offer and acceptance are clearly made in words (whether spoken or written) it is called an express contract.

B. Implied contract: when the offer or the acceptance is implied from the conduct of the parties it is called an implied contract.

C. Contingent contract: When the performance of an obligation by a party depends on whether a certain event happens or not, it is called a contingent contract. This means that the agreement becomes enforceable only on the happening or not happening of an event. For example, in a contract of insurance, the insurance company pays the sum of money if and when an accident happens and the claim is made on it. When it is impossible for the event to occur the agreement becomes void.

D. Quasi-contract: Such contracts are also known as constructive contracts. These are contracts which do not arise out of an understanding between the parties but when law demands it. For example if somebody finds a lost purse, he is under a legal obligation to return it to the owner.

E. Executed Contract: when both parties have performed their obligations in a contract it is called an executed contract.

F. Executory Contract: when both parties have not yet performed their respective obligations it is called an executory contract. Sometimes, if some obligations have been performed, it will be a partly executed contract and a partially executory contract.

G. Contracts for executed consideration: When only one party to a contract has to fulfil his obligation at the time of entering into the contract, such a contract is a contract for executed consideration.

H. Valid contract: When an agreement is enforceable by law and contains all the essential elements of a contract it is a valid contract.

I. Voidable contract: A valid contract which can be cancelled (rescinded) at the choice of a party whose consent to the contract was obtained by coercion, undue influence, misrepresentation or fraud is called voidable contract. Such contracts remain valid until they are cancelled by the party who was the victim of any of the conditions mentioned above.

J. Void contract : when a contract ceases to be enforceable by law it is a void contract. A contract can become a void contract on the event of certain subsequent events such as impossibility, illegality or on repudiation of a voidable contract.

Impossibility : When something cannot be done. physically or legally. For e.g. A who lives on the eastern side of the river Godavari has to deliver certain goods within one week to B who lives on the western bank of the river. The river floods and cannot be crossed by A. This makes his obligation impossible to perform

Illegality: Anything that is prohibited by law or is an offence.

Repudiation: The rejection of a contract on the grounds that it is unjust or illegal.]

K. Unenforceable contracts: When a contract cannot be enforced because it has some technical defect in it, it is an unenforceable contract. For example, A cannot legally recover the money which B owes him after a period of three years from the date on which B had to repay him as the debt becomes time barred under the Limitation Act.

8. What are standard forms of contracts ?

Printed forms containing terms and conditions are standard contracts for e.g. contracts entered into with the LIC, Railways etc.

9. What are Quasi Contracts?

Transactions which do not arise between the parties in the proper legal sense but out of rights and obligations similar to those created by a contract is a Quasi Contract. For e.g. A pays to B the money that C owes B. A shall be entitled to be reimbursed by C.

10. When is time considered to be essence of a contract ?

1. when the parties expressly agree to treat time to be of essence ; or
2. the delay in performance causes loss or injury to atleast one of the parties ; or
3. the nature and necessity of the contract requires it to be so understood. For example - A tell B that he wants a kilogram of mangoes for the party he is having next week. B will have to deliver the mangoes before the end of the week and before the day of the party.

11. Distinguish between Voidable and Void Contracts.

Voidable contract: A valid contract which can be cancelled (rescinded) at the choice of a party whose consent to the contract was obtained by coercion, undue influence, misrepresentation or fraud is called voidable contract. Such contracts remain valid until they are cancelled by the party who was the victim of any of the conditions mentioned above.

Void contract : when a contract ceases to be enforceable by law it is a void contract. A contract can become a void contract on the event of certain subsequent events such as impossibility,illegality or on repudiation of a voidable contract.

12. What is Quasi Contract? Explain the different types of Quasi Contracts.

Quasi Contract or Implied Contract deals with rights or liabilities accruing from relations resembling those created by Contract. These relations resembling contract are known as contract implied in law or quasi contract. It is not a real contract and thus called a consensual contract based on agreement of the parties. Quasi-contracts are based on the principal of equity and justice and prevent enrichment of one person at the cost of another.
The different types of Quasi Contracts are:

a.Claim for necessaries supplied to person incapable of contracting or on his account.- If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessities suited to his condition in life, the person who has furnished such supplies in entitled to be reimbursed from the property of such incapable person.

b.Reimbursement of person paying money due by the other, in payment of which he is interested A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, in entitled to be reimbursed by the other.

c.Obligation of person enjoying benefit of non-gratuitous act When a person lawfully does anything for another person or delivers anything to him not intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of or to restore, the thing so done or delivered.

d.Responsibility of finder of goods; A person who finds goods belonging to another and takes into his custody, is subject to the same responsibility as a bailee.

e.Liability of person to whom money is paid, or thing delivered by mistake or under coercion A person to whom money has been paid or anything delivered by mistake or under coercion must repay or return it.

13. What are the essentials of an offer ?

i) Intention to create legal obligations: The person who makes the offer should want to create a legal obligation and/or legal consequence when the agreement is entered into.
ii) Certainty: The offer should be clear and definite. The person to whom the offer is made must understand it exactly as the offerer made it. The person to whom the offer is made should not be able to interpret it in any different way.
iii) To do or not to do something: The Offeror must propose to the Offeree that s/he, the Offeror shall do or not do something.
For example, when A offers to buy B's motorcycle for Rs.18,000/- he makes a proposal to do something. When A makes an offer to B that he shall not smoke if he is paid a sum of Rs.50/- by B, he makes an proposal not to do something.
iv) Communication of offer: When an offer is made it must be communicated to the person to whom it is intended.
v) Offer should not be in negative terms: When an offer is made it should not contain a term to the effect that if the person to whom the offer is made does not do or say something then it shall mean that the offer has been accepted. For example, if A tells B that if B does not tell A that he does not want to purchase A's motor cycle within two days A shall take it to mean that B is purchasing the Motorcycle.

14. What are the different kinds of offers?

An Offer can be express or implied, specific or general. There can also be standing offers.
(i)An offer is said to be an express offer when it is made by words clearly spoken or written. For example when X tells Y - will you buy my 1996, Hero Honda motorcycle for Rs 18,000/-?
(ii)An implied offer is when the offer can be understood from the conduct of the parties or the circumstance of the situation. For example- when a train is being run on a particular route the implication is that the train will carry the passengers at the rate fixed.
(iii)A Specific offer is when an offer is made to a particular person and only that person can accept the offer or reject it.
(iv)A general offer is an offer is made to the public at large and can be accepted by any person.
(v)Standing offers: When an offer is open for acceptance for a long stretch of time it is called a Standing Offer. A long stretch of time depends on the circumstances of the case. Such an offer may be accepted by the Offeree until it is withdrawn by the Offerer.
Offeree is the person to whom the offer is made
Offerer is person who makes the offer.

15. What is not an offer ?

i)When an invitation is made by a person asking for offers it does not amount to an offer but an invitation to offer. For example, when a Company invites people to purchase its shares, it is not offering to sell shares but is inviting people to make offers to purchase its shares.
It is not obvious, but when a Company invites tenders to execute jobs the invitation is not an offer but an invitation to offer.

ii)Cross offers : When two people make identical offers to each other not knowing that the other has made the same offer, the offers are called cross offers. In this case, it cannot be presumed that they shall accept each others offer.

iii)Special Terms:If any special terms are included in a Contract they have to be brought to the notice of the Offeree and the Offeree must clearly accept or acknowledge the special terms while entering into the Contract. If he does not explicitly accept the special terms, they shall not be binding on him.

16. When does an offer lapse ?

By efflux of time :When an offer is not accepted within the prescribed time (or within a reasonable time if there is no prescribed time) it lapses. For e.g. a Company offers to sell Televisions worth Rs.15,000/- for Rs.10,000/- during the month of December. The offer lapses at the end of December.

Wrong mode of acceptance : Offers have to be accepted in the usual or customary manner. However, if the contract specifies a particular mode of acceptance, the offer lapses if it is not accepted in that manner}.

Rejection by the Offeree :If an Offeree refuses to accept the offer, the offer lapses. Once he rejects the offer expressly, the Offeree cannot accept it later.

Counter offer or conditional acceptance : When an Offeree makes a counter offer or says that he accepts but only on certain conditions, the offer lapses. This is because a counter offer or conditional acceptance implies that the original offer is rejected. For example, A offers to sell his motorcycle to B for Rs.18,000/-. B says that he will purchase the motorcycle for Rs.15,000/-. Here,A's offer has been rejected by B and B has made a counter offer.

Death or insanity of any of the parties : If the Offeror dies or becomes insane before the offer is accepted, the offer lapses. However, if the Offeree accepts the offer without knowing of the Offerors death or insanity, the acceptance will be valid.

Subsequent illegality or Destruction or Impossibility of subject matter: When the object of the offer becomes illegal or is destroyed or becomes impossible to perform, the offer lapses. For example, A cannot sell his bike to B if the law bans the sale of motorcycles or if it is totally destroyed in an accident.

Revocation : When the Offeror takes back or revokes his offer before it is accepted, the offer lapses. Revocation means withdrawing or taking back.

17. Distinguish between counter and cross offers.

Cross offers are offers that the parties make to each other, in ignorance of each others offers. Cross offers are identical. In the case of cross offers, the court cannot construe one offer as the offer and the other as acceptance and as such there is no contract.

A counter offer, on the other hand is a rejection of the original offer. It is a new offer that needs acceptance by the original promisor before a contract is made.

For e.g., If X offers Y, agreeing to sell his car and writes a letter to Y offering him to sell the car and Y also, at the same time, sends a letter to X, offering to buy his car, there is said to be a cross offer as X and Y are ignorant of each others offer before they make their own offers.

However, if X asks Y,Will you buy my car for Rs. 80,000? and Y says, No, but for Rs. 50,000 there is said to be counter offer.

II. AGREEMENTS

1. What are the various kinds of Void Agreements ?

Agreements are void when:-
i) consideration and objects are unlawful in part or full
ii) they are without consideration.
iii) They aim at restraining marriage.
iv) They are agreements which try to restrain trade. This means that one party cannot restrain another party from carrying on lawful profession, trade or business of any kind. This is true except when there is a Sale of goodwill i.e. when one person sells the goodwill of his business to another the Buyer may insist on the Seller refraining from carrying on identical or similar business in the locality wherein the Sellers goodwill exists. Goodwill is the benefit, advantage, reputation that is derived out of a business

a) Partnership Agreements : Partners may agree with each other that i) they shall not during the continuance of the firm carryon any business other than that of the firm.
ii) they shall not carry business similar to that of business of the firm after its dissolution ; and
iii) a retiring partner shall not carryon similar business for a certain period or within certain local limits.
c) Association understanding / Trade combinations : When associations are formed to regulate and promote trade it would not amount to restraint of trade if such regulation and promotion brings about standardised goods, fixed prices and eliminates bad competition.
d) Sole Dealing Agreements for e.g. X appoints Y as his sole agent or distributor for a specified area and Y agrees not to deal with goods of any other manufacturer.
e) Service Agreements : When an employee is restrained from working for another during the contract period by the employer it is a void agreement.
The above restraint should however be limited by time and territory.
v) Agreement in restraint of legal proceedings : when one party in an agreement attempts to restrain the other party from enforcing the rights which the other party has by way of legal proceedings in the ordinary tribunals / Courts, the agreement is void. Agreements which limit the time within which the other party may enforce his/her rights or which cancels the rights of a party on the expiry of a specified period will be void to that extent. i.e. to say that the provisions of the contract shall be void but the rest of the contract shall remain.

Exceptions :
a) when parties agree that disputes arising between them shall be referred to Arbitration and that only the amount awarded in the arbitration shall be recoverable, then it is a valid restraint of the rights of the parties to approach the court.
b) An agreement to refer to arbitration any question which comes up between the parties is valid.
vi) Unclear Agreements. For e.g. A agrees to sell his motorcycle to B for Rs.18,000/- or Rs.20,000/-. Here the price is uncertain and unclear.
vii) Wagering Agreements: An agreement wherein two parties hold opposite views as to the result of an uncertain event and agree to give consideration upon the happening or non-happening of the event is a Wagering Agreement. For e.g. A tells B that X team shall win. B tells A that Y shall win. Both A and B are aware that it is very unlikely there will be match between X and Y and yet they decide that they shall pay the other Rs.1000/- if the team they support loses.
viii) An agreement to do impossible acts.

2. What is meant by agreement opposed to public policy?

An agreement opposed to public policy is any agreement that may harm public safety, health, morals or general welfare.

3. Explain the six agreements opposed to public policy.

a. Trading with enemy country.
b. Inducing a public offer to act corruptly.
a.Interfering with administration of Justice.
b.Sale of seats in public administration.
c.Marriage of minor.

4. What is meant by Ignorantia juris non excusat?

Ignorantia juris non excusat is a famous principle meaning ignorance of law is not excusable. This means that a contract entered or extended into an erroneous belief as to law in force in India is a valid contract and can not be avoided. Thus a person ignoring a law in force in India cannot be excused.

5. Explain any two agreements in restraint of trade.

The Indian Contract Act, 1872 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to an extent, void. It is the fundamental right of the citizens to carry on a lawful business of their own choice.

The two agreements in restraint of trade are :
a)Agreement to close down a business in a particular locality
b)Agreement to carry on any business in competition.


III. ACCEPTANCE

1. What is acceptance ?

An acceptance is the assent to the offer made by the person to whom the offer is proposed.

2. What are the features of valid acceptance ?

i)Communication to the Offeror: When an offer is accepted, that acceptance must be communicated to the Offeror. This communication must be only by the Offeree or by a person authorised by the Offeree.
An exception to this is when the Offeror has said that communication of acceptance is not necessary or when the offeree does something to clearly indicate that he accepts. For example, A makes an offer stating that he will give the person who finds and returns his purse Rs. 50/-. When a person finds and returns the purse, he has acted on the offer. Because he has acted on the offer, he is said to have accepted it.

ii) Made by the Offeree : An offer can be accepted by the Offeree only. If the offer is towards a specific person only that person can accept and if it is a general offer any or all the recipients of the offer can accept.

iii) Acceptance must be given after the offer is made and not before.

iv) Acceptance must be given within the stipulated time period (or if there is no stipulated time, within a reasonable time period). Acceptance must also be given before the offer lapses or is revoked by the Offeror.

v)Acceptance must be communicated in the manner prescribed or in the usual or reasonable manner.

vi)Acceptance must not be conditional. When an Offeree says that he accepts but only on certain conditions, it is not acceptance but a counter offer made by the Offeree.

vii)Once the offer is rejected it cannot be accepted unless the offer is renewed by the Offeror.

3. Is there any prescribed manner for acceptance ?

Acceptance can be express or implied.

IV. CONSIDERATION

1. Define consideration. What are the features of consideration?

Consideration may be defined as a benefit falling due to a promisor or a detriment incurred by the promises. For e.g., A sells a car to B for Rs. 1.00 lakh. Here consideration for A is Rs. 1.00 lakh and B, the car.

The features of consideration are:

i) As consideration is the price paid for an obligation that is undertaken by an offeror, it should be paid or given in the way that the offeror wants. That is, the person offering should do so at his wish. Therefore, if a party or a person does something or abstains from doing something voluntarily or without the consent of the Promisor it shall not be valid consideration.

ii) Consideration can move from the Promisee to any other person and from that person to another.

iii) Consideration must be of some value. It may be in the form of a promise to do or not to do something. This promise should be of some value to the Promisor or to the detriment of the Promisee. It must be real, definite and not vague.

iv) Consideration may be past, present or future. This means that it may be :-
the doing or not doing of something (called executed or present consideration).
something that shall be done or not done in the future (executory or future consideration).
something that has already been done or not done in the past (called past consideration). Past consideration is valid only if it is given by the Promisee at the desire of the Promisor. For example, B wants A's motorcycle. A gives it to him while saying that it is consideration for B dropping him to college for a year

v) Consideration need not be adequate i.e. the value of the consideration need not be proportionate to what is received by the offerer. It is sufficient for something of value to pass from one party to another.
Consideration must be real and not vague, illusory, physically impossible, uncertain or ambiguous. For example, A tells B if you drop C to college everyday I will reward you. Here reward is vague.

vi) Consideration must be legal. For e.g. A cannot tell B that he will kill D for B, if B drops A to college everyday.

2. State the essentials of a valid consideration.

They are:
Desire of the promisor
Consideration may be an act or abstinence
Consideration may be past, present or future
Consideration need not be adequate
Consideration must be real and not illusionary
Consideration must be legal and moral.

3. When is consideration not necessary in a contract ?
or Explain No consideration, no contract.

Ans: Consideration is notnecessary in case:

i. Love & affection.
ii. Compensation for voluntary services.
iii.Paying a time-barred debt.
iv.Completed gift.
v.Agency.

i) Agreements entered into on account of natural love and affection between the parties do not have to have consideration passing.

ii) Compensation for past voluntary service : This occurs when a person compensates wholly or partly a person who does something voluntarily. This can also occur when a person compensates another for something the other person is legally compelled to do. For e.g. B finds A's motorcycle which was lost and returns it to him. This is in accordance with the law. A promises to give B Rs.1000/- as a reward. This would be a binding contract.

iii) Promise to pay a time barred debt: When an agreement is entered into under which a person undertakes to pay to his Creditor a sum of money wholly or in part even if the debt is time barred (3 years) it is enforceable. Such agreements should be in writing and signed by the Debtor or his authorised representative).

iv) Gifts : Consideration is not required when a gift is made or given.

v) Agency : No consideration is necessary to create a contract of agency.

4. A contract without consideration is void.

Consideration is a necessary element of a binding contract. Each party to the agreement must benefit from the agreement. Therefore, each party must give and get something. Consideration need not be immediate. It can be for something done in the past, present or future. In a contract, each party puts the other party under some obligation or extracts some promise from him or her. The exchange given for the obligation or promise is called consideration. It can be in cash or in kind. Consideration must be lawful. That means the consideration given by one party to another should not be illegal, fraudulent, or opposed to public policy.

5. When is the consideration of an agreement or the object of an agreement deemed to be unlawful ?

The consideration or the object of an agreement is deemed to be unlawful when it is forbidden by law. For example, X promises B to get him a license to drive a car for a sum of money despite knowing that B is only 15 years old and cannot hold a valid Driving License.

The consideration or the object of an agreement is deemed to be unlawful when it defeats the provisions of law.Parties cannot enter into an agreement under which the consideration aims to defeat the provisions of law.
Consideration should not be fraudulent. For e.g. Parties cannot enter into an agreement to defraud their creditors.
The consideration or object of an agreement should not cause, or involve hurt or injury to another person or damages his property.

Consideration should not be for immoral reasons.
Consideration should not be opposed to public policy.
The agreement and consideration therein should not injure the public interest or public welfare.

6. What happens if the consideration or the object of an agreement is partly unlawful?

If the legal part of an agreement can be performed separately from the illegal part of the agreement the legal part of the agreement can be enforced.

7.A stranger to consideration can sue, but a stranger to a contract cannot sue.

This means that only a party to a contract has a right to sue.
For e.g.: A enters into a contract with B. In case of a default by A, the other party i.e. B can sue A. C, a stranger to the contract cannot sue A or B.

However, the exceptions to the following rule are:
a)A beneficiary;
b)Minors or dependents;
c)Acknowledgement or estoppel;
d)Insolvency.

V. MODES OF DISCHARGE OF CONTRACT

1. Discuss the various modes by which the contract may be discharged.

The various modes are:
a.By performance
b.By agreement
c.By impossibility
d.By bar of limitation
e.By operation of law
f.By breach of contract

2. What is Doctrine of Frustration? State any four instances where this doctrine is applied.

Where the supervening circumstances have so changed by the time of performance of a promise, that to compel the parties to perform the promise under conditions so altered, would require them o do something, which in fact they had never agreed to do. This is called the frustration of contract.

The doctrine of frustration arises from the coming into existence of facts not within the contemplation of the parties, beyond the control of parties.

The four instances where this doctrine is applied are:

a)Impossibility created by change of law: A contract is discharged when its performance becomes impossible on account of a change of law. Persons generally contract on the basis of the law existing at the time of the contract.
b)Frustration by delay: The commercial frustration of adventure by delay means the happening of some unforeseen delay, without the fault of either party to a contract.
c)Destruction of subject matter of the contract: A contract is discharged if a specific thing that is essential to the performance of the contract is destroyed.
d)Non-existence or non-occurrence of a state of things that form the basis of the contract: If a state of things on the basis of which a contract was made does not exist, the contract is discharged.
Death or serious illness of promisor in a contract for personal service.

3. Explain the various instances in which Doctrine of supervening impossibility is implied.

A contract that was possible to perform at the time it was entered into, may be impossible to perform at the time it is required to perform. This is due to supervening factor.
Instances of supervening impossibility are:
a)Destruction of the subject matter of the contract;
b)Alteration of matter that were present at the time of contract;
c)Declaration of war
d)Loss of skill
e)Failure of one of the objects of the contract.

4. Explain the instances in which the rule of Quantum Meruit is applied.

Quantum Meruit means as much as is merited when a person has done some work and the other party repudiates the contract, then the party who has performed the work can claim remuneration for work already done.

Instances :

a)When the agreement is discovered to be void;
b)When something is done without any intention;
c)When there is an expressed or implied contract to render services but no agreement as to the remuneration
d)When the completion of the contract has been prevented by the act of another party to the contract
e)When contract is divisible
f)When an indivisible contract is performed but defectively.

5. What is meant by Champerty?

The action of assisting a party in a suit in which one is not naturally interested, with a view to receiving a share of the disputed property. Champerty is unlawful if it tends to encourage litigation that is not bona fide but speculative.

VI. PERFORMANCE OF CONTRACTS

1. Who can enter into a Contract ?

Any person who is of the age of majority, of sound mind, and not disqualified from contracting by law can enter into a contract.

A contract can be entered into by a guardian for the benefit of the minor.
People of unsound mind can enter into contracts during lucid intervals.

2. Who cannot enter into a contract?

No person is competent to contract who is not the age of majority according to the law to which he is subject, in other words a minor is not competent to contract.

3. Explain the position of a minor regarding contract.

A minor is a person who has not completed 18 years of age.
However in the following cases, a person continues to be a minor upto 21 years of age:

a.Where a guardian of a minors person or property is appointed.
b.Where the superintendence or a minors property is assumed by a court of wards.

Legally a minors contract remains valid until disaffirmed. In most instances, the minors privilege of escaping responsibility for a contract is absolute. This means that a minor is protected even though he lied about his age at the time the contract was made

4. Explain the exceptions to the statement-An agreement with a minor is void.

A contract entered into by a minor is void. The exceptions are:
a)Contracts of marriage
b)Contracts if apprenticeship
c)Contracts for necessities and benefit

5. Can a minor cancel or confirm an agreement entered into by him after he attains majority ?

An agreement made by a minor is void from the beginning (void ab initio) and therefore, he cannot cancel or ratify such an agreement.

6. Can a person of unsound mind enter into a contract ?

If a person of unsound mind enters into a contract at a time when he is capable of understanding the terms of the contract and making rational judgements, it is a valid contract. At the other times, the contract is void. This special provision is made because there are certain people who are mentally capable of rational thought but only for some time.

7. Can a contract be entered into with an insolvent?

An insolvent person can enter into valid contracts until the time when the court explicitly declares that he is insolvent

8. Can contracts can be entered into with a Corporation or between Corporations ?

A Corporation is a person in the eyes of law. Therefore, it can enter into contracts. However, a company cannot enter into a contract if the subject of the contract is outside the scope of its Memorandum and Articles of Association.

9. a) Who must perform the Contract ?
b) Distinguish between Unilateral and Bilateral Contracts.

a)Both the parties must perform their respective obligations under the contract.
b)An unilateral contract is one in which the consideration is executed whereas a bilateral contract is one I which the consideration is executory.

10. Who can demand performance of a contract ?

The person to whom promise is made can demand performance of the contract.

11. Where and when should a contract be performed?

Subject to the terms of the contract the contract should be performed at:
The place and time specified in the contract.
If the contract does not specify time or place it must be within the reasonable time and at the place where the promisee benefits from the performance.
If the contract is to be performed on a particular day and no time is given, it should be performed during the usual hours of business of such day at the specified place.
When the promisor has not undertaken to perform his part of the contract, without a request from the promisee, it should be performed on the request of the promisee.
When a promise is to be performed without a request by the promisee and no place is fixed for performance, the promisor must request the promisee to fix a reasonable place and perform at such place.

12. What do you understand by competence of parties to contract?

The term, competence of parties refers to the status or attributes necessary for a person to have his acts legally recognized and permitted. Every individual is presumed to have competence to make a contract unless the contrary is proved.

The following do not have the competence to contract:
Minors
Insane persons
Convicted persons
Persons who are in intoxicated condition or are addicted to drugs
Aliens

13. What is the effect of failure to perform a promise at a fixed time?

When a party fails to perform at a fixed time, the contract can be refused by the person to whom the promise was made. This is if the parties had intended that time is the essence of contract.
If the promisee accepts the delay in performance, the promisee cannot later complain that the contract was not performed on time unless he has made it clear when the delay happens that he wants to claim damages for the contract.

14. If both parties have to perform certain promises/obligations ,who has to perform the obligations first?

Where the contract is such that each party has made promises to the other which have to be performed at the same time, either party need not perform his/her side of the agreement unless the other party is ready and willing to perform his/her obligations. For example when A agrees to deliver his motorcycle to B on payment of the price first, A need not deliver the same until B is ready and willing to pay for the same.

15. What is the effect of one party preventing the other party from performing his or her obligations?

In such cases the person who has been prevented from performing his/her obligations can cancel the contract.

16.What kind of contracts need not be performed?

Contracts to do impossible acts.
When a contract is substituted by another contract, or is rescinded, altered, the original contract need not need performed. When a contract is annulled it is known as rescinding a contract
Contracts which have been discharged by operation of law i.e. the liabilities or obligations of the parties have come to an end.
Contracts that have elapsed by time.

17. Define an unenforceable contract.

An enforceable contract is one that cannot be enforced in Court of Law because of some technical defect or where the remedy has been barred by lapse of time. Such contracts may be carried out by the party but in case of breach, the aggrieved party will not be entitled to legal remedies.

18. What is meant by Tactit contract?

Tactit contract is also known as Implied contract. It is also a contract wherein neither party uses any words of promise or explicit words indicating that a contract has been formed. However, by nature of conduct of the parties, a valid contract is implied. For e.g., If A hires a gardener, it is implied that A will pay him some money.

19. What are ambiguous contracts?

A contract is said to be ambiguous when its terms are not clear. This is due to defective or unintelligible wordings.

20. When does a contract come to an end?

a. When both the parties perform their obligations the contract comes to an end.
b. The contract may also come to an end due to impossibility of performance.
c. By mutual agreement between the parties to substitute a new contract, for the old. It can be done by novation, recession or alteration.

21. What is the effect of refusal or failure to perform a promise?

When a promisor refuses or fails to perform his promise it amounts to a breach of contract by him and the promisee may, if he desires, cancel the contract.

22. What is reciprocal promise?

Promises that form the consideration or part of the consideration for each other are called reciprocal promises. Here, each party gives a promise in return for a promise. Each promise is a consideration for the other. In this case, there is an obligation on each party to perform his promise and to accept the performance of the others promise. E.g. a promise to sell and purchase between A and B.

23. What is Novation?

When the parties to a contract agree mutually to substitute the existing contract with a new one by discharging the old one and the new contract comes into effect. This is called Novation.

VII. WAGERING CONTRACTS

1. Explain Wagering Contract and its characteristics.

Wagering Contract is:
a.It consists of reciprocal promises.
b.It is of contingent nature.
c.It is a void contract.
d.The parties are not interested in the performance of promises but only in paying or receiving the difference.
e.The future event is the sole determinant of the contract.

2. Distinguish between Contingent Contracts and Wagering Contracts.

Contingent Contract
Wagering Contract
1. The contract need not contain any mutual promises.
1. The contract is bound by mutual or reciprocal promises..
2. All contingent contracts are not necessarily wager contracts.
2. All wager contracts are contingent contracts.
3. The uncertain event may be within the power of one of the parties.
3. In a wager, the uncertain event is beyond the power of both the parties.
4. In a contingent contract, the parties are interested in the occurrence of the event.
4. The parties are not interested in the occurrence of the event., apart from the money earned or lost.
5. The future event is merely collateral or incidental.
5. The future event is the sole determining factor of the contract.
6. Contingent contract is not void unless it is dependent on the occurrence of an impossible event.
6. Wagers are void.

VIII. TENDER

1. What is a Tender? State the essentials of a valid tender.

A tender is an offer of performance such as to deliver goods, or to pay a sum of money. A valid tender must fulfill the three following conditions:
a)It must be unconditional;
b)It must be made at a proper time and place;
c)If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which, the promisor is bound by his promise to deliver.

IX. FRAUD, UNDUE INFLUENCE & MISREPRESENTATION

1. When is consent to be free?

Free Consent is said to exist when it is obtained without coercion, undue influence, fraud, misrepresentation or mistake. Consent is said to be free when it is not caused by:

i)Coercion;
ii)Undue influence;
iii)Fraud;
iv)Misrepresentation;
v)Mistake.

2. Define fraud.

A fraud is an intentional or deliberate misrepresentation of facts. According to Indian Contract Act, Fraud means and includes any of the following acts done with intention to deceive or induce a person to enter into a contract:

The suggestion that a fact is true when it is not so and the person making the suggestion is ware of its falsehood;
Active concealment of a fact by a person who has knowledge or belief of the fact;
Promise made without any intention of performing it;
Any other act fitted to deceive;
Any such act or commission that the law declares as fraudulent.

3. What is misrepresentation?

Misrepresentation refers to misstatement of a fact or material of a contract. It includes:
a)Positive assertion of fact or information that is not true;
b)Any breach of duty which gains an advantage to the person committing it;
c)Causing a party to an agreement to make a mistake in the subject matter or substance of the agreement.

4. Define coercion.

Coercion refers to physical threat or force used by one party against the other for making the former enter into a contract.

5. Define undue influence.

Undue influence is said to exist when one of the parties to the contract obtains, through dominance, consent of another party to enter into a contract.

6. Differentiate between Coercion and Undue Influence.

Coercion
Undue influence

1. Consent is obtained under the threat of an offence
1. Consent is obtained by the dominant will of another.

2. Consent is obtained by force.
2. Consent is given in good belief but under moral influence.

3. Generally coercion is physical in nature.
3. Undue influence is moral in nature.

4. Coercion is punishable under the Indian Penal Code.
4. There is no criminal liability in this case.

7. Define Remission.

The term remission refers to the reduction in the penalty, fine or imprisonment enforced legally upon a person for non-performance of some contract or breach of contract agreed upon.

8. When does silence amount to fraud?

Mere silence without any duty to speak does not amount to fraud. Mere silence as regards material facts that the other party is not bound to disclose to the other, is not a ground for rescission or a defence to specific performance. Thus mere silence as to the facts does not amount to fraud, unless there is a duty to speak.

The Act lays down that if the consent was caused by misrepresentation or by silence fraudulent within the meaning of section 17 of the Act, the contract is not voidable if the party, whose consent was caused had the means of discovering the truth with ordinary diligence.

E.g.: A, by misrepresentation makes B erroneously to believe that 5000 Tons of detergent are made annually at A's factory. B examines the accounts of the factory that show the annual production as 4000 Tons. Subsequently B buys the factory.

The contract is not voidable on account of A's misrepresentation.

9. What are mistake of fact and mistake of law?

Mistake is of two kinds- of fact or of law.

a) Mistake of fact: There are two principles:
i.Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Mistake in this case, arises as to the identity of the person or as to the subject matter of the contract. A mistake of fact may be either bilateral or unilateral. A bilateral or mutual mistake as to an existing fact essential to the agreement.
E.g. A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Mumbai. It turns out that before the day of the bargain, the ship conveying the cargo is cast away and sinks. Neither party was aware of the facts. The agreement is void.

ii.Where a contract is not voidable merely because it was by one of the parties to it being under a mistake as to a matter of fact. In other words, mistake must be mutual and not unilateral. Both the parties must be labouring under such a mistake.

b) Mistake of law: This provides that a contract is not voidable because it was not caused by a mistake as to any law in force in India. This is based on the maxim Ignorantia juris non excusat.

10. Distinguish between Mistake of law and mistake of fact.

Mistake of law
Mistake of fact

1. A mistake of fact vitiates a contract
1. Generally, a mistake of law does not vitiate a contract.

2. Where there is mutual mistake as to an existing fact material to the agreement, the contract is void.
2. In most cases the contract is not voidable.

X. BREACH OF CONTRACTS

1. What are the different types of breach of contract?

The different types of breach of contract are:
a)Anticipatory breach
b)Present breach.
i) Anticipatory breach : When the breach happens before the date when the promisor had to perform his obligations and signifies his intention not to do it , he will not be bound by it. In such a situation the other party need not perform his obligations. He also becomes entitled to claim damages from the promisor immediately or after the time when the promise was to be performed.
If the promisee waits till time of performance it shall result in :

The promisee changing his mind and performing his obligation when he should. In such situation, the promisee is bound to accept such performance.

The contract in such situation is alive and some situation arises (obviously not repudiation) resulting in the contract being discharged. For e.g. it becomes impossible to perform the contract. In such cases the promisee cannot sue for damages.
The promisee being entitled to assess damages only from the date the repudiation is accepted.

b) Present Breach : When the promisor indicates his refusal to perform his obligation at the time of performance it amounts to a present breach.

2. What are the remedies available against a breach of contract?

In cases of breach of contract the following remedies are available to the injured party :
a. He may sue for damages. Damages are the monetary compensation for the injury suffered. It is not given for any remote or indirect loss.

Remoteness of damages are based on the following :
i) whether the damages is the consequence of the breach;
ii) whether it is the probable consequence;
iii) whether the parties had contemplated the damage when the contract was entered into.
if the parties had specified the amount of damages in the case of breach , then the said amount should be made by the guilty party whether or not the loss had been caused.

Damages maybe either General or Special.

General damages: When the loss arises naturally from the breach general damages can be claimed. These are damages which maybe ordered by the court when the court cannot point out any measure of damages by which they are assessed except in the opinion of a reasonable man.

Special Damages : When loss arises because of an unusual circumstance which the promisor was aware of and the parties had taken it into consideration whilst entering into the contract, special damages maybe claimed. However, if the unusual circumstance was not known, then it cannot be claimed.

When the parties fix a sum which is to represent an estimate of the probable damage that is likely to result from the breach it is called liquidated damages.

Exemplary damages ( Punitive or penal damages) is awarded in cases to preserve certain as highly of specialised obligations.

Nominal damages (where the party has not suffered any loss)

Damages for loss of reputation

Damages for inconvenience and discomfort.

3. Are there any other reliefs for a injured party?

In certain cases the injured party may initiate a suit for injunction to restrain the guilty party from doing or not doing a particular act to.
Specific performance of the contract in certain cases.
In cases where the contract becomes void, a person who receives advantages under such contract is bound to return or restore to the person the advantage that he has received.
If the advantage is not returned, then, the party who has given the advantage has the right to file a suit for “quantum meruit. i.e. the injured party may file a suit for restoration to the position he was or would have been if the contract had not been entered into.

4. What are actionable claims?

Actionable claims are claims for damages that can be enforced by law. These are the claims that the aggrieved party makes on breach of contract. The aggrieved party can approach the courts of law for legal action on breach of contract.

XI. INDEMNITY & GUARANTEE

1. What is the difference between Indemnity and Guarantee ?

In a Contract of Indemnity there are only 2 parties to a contract of indemnity, The Indemnifier and the Indemnified. In a Contract of Guarantee there are 3 parties to a contract of guarantee, The Surety, Creditor and the Principal Debtor.

In a Contract of Indemnity, Indemnity envisages a compensation or reimbursement of losses. In a Contract of Guarantee, Guarantee envisages a situation where security is given to the Creditor that either the principal debtor will complete his obligations or the guarantor shall complete the obligation or compensate the creditor. In a Contract of Indemnity the Indemnifier himself is liable on the happening of an event. In a Contract of Guarantee liability of the Surety arises only when the Principal Debtor defaults.

In a Contract of Indemnity Indemnifier's liability is primary. In a Contract of Guarantee liability of a Surety is secondary In a Contract of Indemnity Indemnifier has no rights against a third party after performing obligations. His rights against a third party can arise only if such a right is assigned to him by the Indemnified in his favour. In a Contract of Guarantee once the Surety discharges the liability of the Principal Debtor he steps into the shoe of the creditor and can sue the principal debtor.


XII. CASES

1. State the rating given in the following case on the basis of facts:

i)Harvey vs. Facey
ii)Fitch vs. Snedakar

i) Harvey vs. Facey (1893) is a popular case stating that a statement of price is not an offer.
In this case three telegrams were exchanged between Harvey and Facey as follows:
a)Will you sell us Bumper Hall pen? Telegraph lowest price. (Harvey to Facey)
b)Lowest price 900.(Facey to Harvey)
c)We agree to buy Bumper Hall pen for the sum of 900. (Harvey to Facey)

The court rated that there was no contract as Facey never made a proposal.; Facey only replied to the question and did not make an offer to sell.

ii) Fitch vs. Snedakar is a case that reflects that a valid offer must be communicated. In this case, Snedaker offered a reward to anyone who found and returned his lost dog. Fitch found the dog and brought it to Snedaker before being aware of the offer made by Snedaker.

The court rated that Fitch would not be entitled to the reward. This is because acceptance of an offer, in ignorance of offer, is no acceptance and does not conder any right on Fitch.

2. State the facts and ruling of Mohrabibi vs. Dharamadas case (1903).

In this case, a minor mortgaged his house in favour of a money lender to secure a loan.

The Court held that a minor is not liable to perform what he has promised to do under an agreement or to repay the money received under it.

Thus the Court held that a mortgage made by a minor is void and the money lender who ahs advanced money to the minor on the security of the mortgage is not entitled to repayment of the money.

3. Explain whether a contract exists in the following cases:

i)A occupies a seat in a public carrier
ii)A engages B to do certain work and promises to pay remuneration fixed by C. B completes the allotted work.

i)There is no implied contract because when a passenger gets onto a public carrier, it is implied that he will be given a seat and transportation.
ii)There is no contract between A and B. However a contract may exist between B and C.

4. A agrees to buy a horse for Rs. 4, 000/- from B. Unknown to both parties, the horse was dead at the time of bargain. What is the legal effect of this contract?

This is a case of bilateral mistake as both A and B are not aware of the horses death. The agreement is therefore void in this case.

5. X enters the home of Y in Y's presence and starts cleaning the room. Later X demands consideration for his services but Y refuses to pay. Discuss the legal implications.

In the above case, there is no contract between X and Y as there was no offer and no acceptance. X entered into Y's house on his own discretion and cleaned the place without asking Y whether he would accept his services or not. Thus there is no valid contract. Y is right in refusing to pay X.

6. A young Hindu widow was forced to adopt a boy of a relative under a threat that her husband's corpse would not be allowed to be removed unless she adopted the boy. Is this adoption valid? (Ranganyakamma vs. Alwar Setti)

In the above case, the adoption is not binding on her since her consent is not free but induced by coercion. Hence the adoption is void and not valid.

7. State the facts and ruling of Carlill vs. Carbolic Smoke Ball Co. (1893)

In this case, the Carbolic Smoke Ball Company advertised that any person who would be attacked with influenza after using the medicine of the Company (Carbolic Smoke Ball Co.) for a specified period would be paid 100 pounds. The Company further deposited 1000 pounds with a Bank to show their sincerity.

Mrs. Carlill after using the medicine (as prescribed by the Company) nevertheless caught influenza.

It was held that she was entitled to recover 100 pounds because of the Companys advertisement.

The Company was held liable for:
i)The alleged offer was not a mere advertisement because the Company had deposited 1000 pounds with a Bank for this purpose.
ii)The acceptance was complete for the offer in question admitted of no other acceptance than performance of the condition.

The objection raised by the Company that Mrs. Carlill ought to have notified her acceptance to the Company was rejected by the Court.

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