Business Law
An Introduction to Law of Contract- 1872
Nidhi Bhatnagar
The law of contract is contained in the
Indian Contract Act, 1872
(a) Deals with the general principles of law governing all
contracts, (Secs.1 to 75)
(b) Some special contracts only (Secs.124 to 238)
The first six chapters of the Act deal with the different stages
in the formation of a contract, its essential elements, its
performance or breach and the remedies for breach of
contract.
The remaining chapters deal with some of the special
contracts, namely, Indemnity and Guarantee (Chapter VIII
(Secs.124 to 147)), Bailment and Pledge (Chapter IX (Secs.148
to 181)) and Agency (Chapter X (Secs.182 to 238)).
Law of contract creates jus in personam as distinguished from jus in rem:
Jus in rem means a right against or in respect of a thing:
Jus in personam means a right against or in respect of a specific person.
Jus in rem is available against the world at large;
jus in personam is available only against particular persons.
Examples:
I.
X owes a certain sum of money to Y. Y has a right to recover this amount
from X. This right can be exercised only by Y and by no one else against
X. This right of Y is a jus in personam.
II. A is the owner of a house. He has a right to have quiet possession and
enjoyment of that house against every member of the public. Similarly
every member of the public is under an obligation not to disturb A’s
possession or enjoyment. This right of A is a jus in rem.
What is a contract?
• The legal definition of a contract is a promise
(or set of promises) that, when breached by
one party, gives the other party a legal
remedy.
• An agreement enforceable by law is a contract. As per Indian Contract
Act 1872 “An agreement is an accepted proposal”.
Thus it can be said that a contract is an agreement; an agreement is a
promise and a promise is an accepted proposal. Every agreement in its
ultimate analysis, is the result of a proposal from one side and its
acceptance by the other. Hence it is a bilateral transaction.
DEFINITION OF CONTRACT
Sir Fredirck Pollock defines, “Every agreement and promise enforceable at law is a Contract.”
According to the Indian Contact Act, Section 2 (h) “An agreement enforceable by law is a Contract.”
According to above definitions, it is clear that a contract should consist of two elements;
(i) Agreement
(ii) Legal obligation or agreement must be enforceable by law.
(i) Agreement:
An agreement should have a Promise and Promise should have Proposal.
•2(e) as, “Every promise or every set of promise, forming the consideration for each other is an
agreement.”
•Section 2 (b) as, “when the person to whom the proposal is made signifies his assent there to, the
proposal is said to be accepted. A proposal when accepted, becomes a promise.”
•Section 2 (a) as, “When one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtain the assent of that other to such act or abstinence, he is said to make a
proposal.”
Agreement = offer + Acceptance.
5
Continued…
(ii) Legal obligation or agreement must be enforceable by law.
An agreement to become a contract must give rise to legal obligation.
All contracts are agreements but all agreements are
not contracts.”
So,
Contract = Agreement + Legal obligation
Or
Contract = Agreement + Enforceability at law
RELATED TERMINOLOGY
Agreement
• An agreement occurs when two minds meet upon a
common purpose, i.e. they mean the same thing in the same
sense at the same time. The meeting of the minds is called
consensus-ad-idem, i.e., consent to the matter.
• Section 2(e) defines the term ‘agreement’ as “Every promise
and every set of promise, forming the consideration for
each other”
• In other words, an agreement consist of an offer by one
party and its acceptance by the other party whom the offer
was made
Thus, Agreement = Offer + Acceptance
Offer
Section 2 (a) defines proposal (offer) as “When one
person signifies to another his willingness to do or to
abstain from doing something with a view to obtain the
assent of that other to such act or abstinence, he is said
to make a proposal.”
Promise
Section 2 (b) defines “a proposal (offer) when accepted
becomes a promise.” Thus an accepted offer is a
promise.
Acceptance
Section 2(b) “when the person to whom the offer is made
signifies his assent there to, the proposal is said to be
accepted.”
Enforceability
Enforceability means creation of some legal obligations.
An agreement is said to be enforceable only after
complying all the requirements under section 10 of
Indian contract act and only those agreements called
contracts which have enforceability.
An agreement differs from a contract in the
following respects
Basis
Agreement
Contract
1. Definition
Every promise and set of An agreement enforceable by
promises forming consideration Law is a contract.
for each other is an agreement
2. Formation
Offer and its acceptance Agreement
constitute an agreement.
enforceability
contract.
3.Legal
obligation
An agreement may or may not A contract necessarily create a
create legal obligation.
legal obligation.
4.One in other
Every agreement need
necessarily be a contract.
5.Scope
contract
and
its
constitute a
not All contracts are necessarily
agreements.
of Scope of agreement is wider as Scope of contract is narrow in
it covers all types of agreement comparison as it covers only
as well as to agreement
those agreement which are
enforceable.
Essential of a Valid Contract
Proper Offer and Acceptance
Intention to create Legal
Relationship
Capacity of parties
Lawful object
Agreement not declared
void or illegal
Certainty of meaning
Lawful consideration
Possibility of performance
Free consent
Legal formalities
“All contracts are agreement but all agreements are not contract.”
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The essential elements of a valid contract
(Section 10)
1. Two Parties: To constitute a contract there must be at least two
parties, i.e. one party making an offer (offeror / proposer) and
the other party accepting the offer (offeree / proposee). The
terms of the offer must be definite.
2. Agreement: A contract is initially an agreement when person
whom the offer is given signifies his acceptance on it there arises
an agreement which is the foundation of a contract.
3. Consent: There must be consensus-ad-idem (meeting of minds)
to constitute a valid contract unity of minds i.e. consensus-adidem means that the parties must agree to the same thing in the
same sense and at the same time. An agreement without
consent is void.
4. Intention to create legal relationship: There must be an
intention by both parties to create legal relationship and to legally
bind themselves as a result of such agreement. Thus, agreements of
social or household nature are not contracts, as the usual
presumption is that the parties do not intend to create legal
relationship unless otherwise agreed upon. However, in case of
commercial transaction the usual presumption is that parties intend
to create legal relationship.
CASE LAW: BALFOUR VS BALFOUR (1919)
5. Contractual Capacity: The parties to the agreement must be
capable of entering into a valid contract.
According to Section 11, every person is competent to contract if he
or she,
(a) is of the age of majority;
(b) is of sound mind; and
(c) is not disqualified from contracting by any law to which he/she is
subject.
Capacity of Parties-Persons who is competant to contract
Person not capable for contract
Exception / Law
relating to Minors
Minor
Person of unsound mind
•
•
•
•
Idiot
Insane/ Lunacy
Drunkard
Old person
• Void-ab-initio
• Can be a promise or beneficiary
No restitution
• No ratification
• Pleade for minority/No estoppel
Liability for necessaries
• Not to hold any specific
• performance
Disqualified by other law
Married Women
Insolvent
Alien enemies
Convict Professionals Foreign
Soverigns Ambassadors Corporations
•
•
•
•
•
•
•
•
Cannot be a partner
Cannot be an Insolvent
Cannot be a surety
Can be for Joint Contract
Shareholder only for transmission
Be an agent Parents are not liable
Contract for training &development
Liable for tort
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6. Consideration: An agreement by incompetent person is
void. A valid contract must be supported by consideration.
Consideration means “something in return” (quid pro quo). It
can be cash, kind, an act or abstinence. It can be past, present
or future. However, consideration must be real and lawful. An
agreement without consideration is void however, it need not
to be adequate, if parties are agreed in it.
7. Free consent: The parties are said to be in consent when
they are agree upon the same thing in the same sense, in
addition to it, to constitute a valid contract there must be free
and genuine consent of the parties to the contract, consent is
said to be free if it is not be obtained by misrepresentation,
fraud, coercion, undue influence or mistake. If the consent is
not free, the contract becomes voidable.
CONSIDERATION
Consideration is something in return or price of a promise
“No considerations, no contract”.
Consideration is :
• Is an act / abstinence
• Done by promise / other
persons
• Executed / Executory
Essentials consideration should be:
• It should move
• May be from the promisee or any other
person
• Need not be adequate
• Real and not illusory
• Lawful
• It is act/abtinence or promise
Exceptions:
• Natural love and affection [Sec. 25(1)]
• Compensation for services rendered [Sec. 25(2)]
• Time bared debt. [Sec. 25(3)]
• Gift
• Agency
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FREE CONSENT
Consensus - as - idems” - Meeting of mind at the same time with same sense
Elements
Coercion
Sec. 15
Undue-influence
Sec. 16
Frauds- Sec. 17
Agreement is voidable
Mis-representation
Sec. 18
Mistake
Sec. 20, 21 and
22
Void/Voidable
8. Lawful object and consideration: The object as well as
consideration of the Contract must not be unlawful. According
to Section 23, the consideration or object of an agreement is
un lawful, if
• It is forbidden by law; or
• it Is of such nature that, if permitted it would defeat the
provisions of any law or
• It is fraudulent; or
• it Involves or implies, injury to the person or property of
another; or
• The court regards it as immoral
LEGALITY OF OBJECT
Legality of object - Object should be Lawful
Sec. 23 - Unlawful act are
•
•
•
•
•
•
•
•
•
•
For-bidden by law
Prohibited by special legislation
It would defeat the provisions of any law
If it is fraudulent
Involves injury to the person/property of another Courts to public policy
Opposed to public policy
Trade with alien enemies
Interference with the course of justice
For suppressing the prosecution
For sale of public offices/title and honours
9. Agreement not declared void: Under the provisions of
Indian Contract Act, 1872 certain agreement are expressly
declared as void. Agreements which have been expressly
declared void are not enforceable at law; hence does not
constitute a valid contract. For example agreement of wager,
agreement in restraint of trade and marriage.
10. Certainty of meaning: The terms of agreement must be
certain and not vague. It must be either certain or be
certained at the time of execution. If it is not possible to
ascertain the meaning of the agreement, it is not enforceable
at law.
11. Possibility to Perform: The promises made under a valid
contract must be executable. An agreement to do some impossible
act is void from the beginning and never converted into contract.
12. Legal formalities: Although Indian contract Act does not provide
any formality to enter into contract therefore a contract may be
express (oral or written) or even implied (by conduct). However,
where the law requires for a particular contract, it must comply
with all the legal formalities such as in writing, registration and
attestation.
(a) For example under the provisions of Immovable Properties Act,
a contract of immovable must be written, registered and duly
stamped unless not enforceable by law.
Legal Rules to Offer
The offer is the first step in a valid contract. If the offer itself is not
valid; the contract can never be valid.
Following are the legal rules as to offer:
1.The ‘offer’ must be with the intent to create a legal
relationship.
2.The offer must be certain and definite. It must not be vague.
3.The offer must be express or implied.
4.The offer must be distinguished from an invitation to offer.
5.The offer must be either specific or general.
6.The offer must be communicated to the person to whom it is
made.
7.The offer must be made with a view to obtaining the
consent of the offeree.
8.An offer can be conditional but there should be no term in
the offer that noncompliance would amount to acceptance.
Lapse and Revocation of Offer
Section 6 deals with various modes of lapse of an offer.
An lapse and revocation of an offer become invalid (i.e., comes
to an end) in the following circumstances:
• Offer lapses after stipulated or reasonable time
• Offer lapses by not being accepted in the mode prescribed
• Offer lapses by rejection
• Offer lapses by the death or insanity of offeror or the offeree
• Offer lapses by Revocation
• Revocation by non-fulfilment of a condition precedent to
acceptance
• Offer lapses by subsequent illegality or destruction of subject
matter
TYPES OF CONTRACT
According to the Indian Contract Act contracts may be classified on the basis of their
Validity, formation or performance.
Indian Contract Act
On the basis of
formation or mode of
creation
• Express
contracts
• Implied
contracts
• Quasi
contracts
On the basis of validity or
enforceability
• Valid contracts
• Void contracts
• Void agreements
• Voidable
contracts
• Unenforceable
contracts
• Illegal contracts
On the basis of
performance
• Executed
contracts
• Executory
contracts
I. Unilateral
contracts
II. Bilateral
contracts
III. Partly
Executed/
Executory
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A contract that is enforceable
1. Valid Contract:
• A valid contract is one, which satisfies the essential elements
described in section 10 of the Indian Contract Act.
• It must be an agreement in which an offer is made and
accepted.
• It should have the intention to create legal relations.
• There should be lawful consideration and the object should
be legal.
• It should have clear terms with free consent of both the
parties.
• When all the essential elements are complete in all respects
it is a valid contract and it is enforceable by law.
2. Voidable Contract:
• If one party to the contract has the option of enforcing a
contract by law, but not at the option of the other or others,
it is a voidable contract.
• In those cases when the consent is not given freely but
coercion has been used the party has the option to continue
with the contract or rescind it.
• Another example of a voidable contract is when a person has
promised to deliver certain goods on a certain date and he
does not deliver it, it is the option of the buyer to continue
or to rescind the contract (section 55).
3. Void contract [Section 2(j)]:
• “A void contract is a contract which ceases to be enforceable by
law”.
A contract which was valid at the time of formation and binding on
the parties however, subsequently become void, due to
impossibility to perform is said to be void contract.
Example X a famous singer agrees to sing an album for a musical
company. Unfortunately suffered from throat cancer and not
allowed to sing by doctor. Here the contract becomes void contract.
• A contract, when originally entered into, may be valid and binding
on the parties, e.g., a contract to import goods from a foreign
country. It may subsequently become void, e.g., when a war
breaks out between the importing country and the exporting
country.
4. Void agreement:
• Section 2(g) describes void agreements as those that are
unenforceable from the inception of the agreement. In other
words these agreements are void.
• A mistake between the two parties to an agreement of a
material fact makes the agreement void. Therefore a void
agreements does not create any legal rights between the
parties to the contract.
• It also does not create any obligations. There is a flaw in the
agreement itself.
The most common example is that of a minor who does not
have the legal rights to enter into an agreement. If he/she
does, the agreement is null and void.
Distinction between Void Agreement
and Void Contract
A void agreement is void ab inito i.e. from the beginning of the
contract. A void contract is valid when it is made but due to
certain lapses it becomes unenforceable by law subsequently. A
void agreement will have the following effects:
• It will be unenforceable by law
• If both parties know that the agreement is void money will not
be recoverable if already paid.
• Collateral transaction will be legal unless the agreement itself is
illegal.
• All legal promises are enforceable if the agreement can be
proved to be severable.
5. Illegal Agreements/Contracts:
The word illegal agreement is used in place of illegal contract
because if the agreement is illegal it is unenforceable by law.
Illegal agreements cannot become contracts because they are
unenforceable. “All illegal agreements are void but all void
agreements are not illegal.”
A minor entering into an agreement is void but not illegal. A
wagering contract is also void but not illegal.
An illegal agreement is void ab initio. It is unenforceable by law
from the very beginning. If a person has borrowed money illegally
he cannot be asked to return the money. If an agreement is illegal
even the collateral agreements will have the effect of being illegal.
Distinction between void & illegal
agreements
➢ Illegal agreements are void but valid contracts can become
void due to certain subsequent developments.
➢ Illegal agreements are punishable but void agreements do not
entail punishment to the parties entering into the contract.
➢ All illegal agreements are void but all void agreements are not
illegal.
➢ Collateral agreements in an illegal agreement are void but
collateral agreements are not affected in void agreements.
6. Unenforceable contracts:
Certain contracts are not enforceable by law because they
suffer from some technical faults.
For Example, if certain documents have to be registered and
they have not been registered then such documents become
unacceptable by the court.
Likewise if agreements have to be written on stamp paper and
the stamp paper has not been used, then such agreements
are not enforceable in the Court.
Hence formalities should be complete to make a contract
enforceable by law.
Contracts on the basis of mode of creation
1. Express Contract:
When an offer is made in words or in writing and another person
accepts it, an express contract is formed. Promise is considered to
be express when it is made in words written or spoken.
2. Implied Contract:
A contract is said to be implied when it has to be inferred from the
action, gestures or conduct of the parties. It is not a verbal or a
written contract. It has to be implied from circumstances of the
case. In the agreement some terms may be implied or the complete
agreement is implied.
3. Quasi Contract:
When contracts are not in actual fact either express or implied but
there is circumstantial evidence to show that they are actually
contracts, they are called Quasi Contracts or semi contracts. There
is actually no contract between the parties as there is no agreement
between the parties but the obligations cited in sections 68 to 72 of
the Indian Contract Act provide legality to them. These are known
as “certain relations resembling those created by contracts”.
A quasi contract is a contract that is created by the court when no
such official contract exists between the parties, and there is a
dispute with regard to payment for goods or services provided.
Courts create quasi contracts to prevent a party from being
unjustly enriched, or from benefitting from the situation when he
does not deserve to do so.
Quasi contracts are always made to fit their specific situations.
Contracts classified according to performance
measures
1. Executed contract: An executed contract is one where both
the parties have performed and completed their obligations.
The contract is completed and executed. No responsibilities
remain from either side of the contract.
2. Executory Contract: In a contract sometimes one party may
carry out his/her obligation but the other has still to conduct
his/her obligation. This obligation will be performed in the
future. This type of a contract, which is not yet complete, is
called an executory contract. In some executory contracts
both parties decide to complete their contract in the future
because of certain important reasons.
3. Unilateral Contract: In some contracts one party has
already completed his/her obligation but now the other party
is left to complete his/her part of the contract. When the
other party executes his/her part of the contract that, is still
outstanding, it is called a unilateral contract. These contracts
are also called contracts with executory consideration. When
the contract is formed, there is an obligation of only one party
to perform.
4. Bilateral Contract: As against Unilateral Contract, a Bilateral
Contract is one where at the time of entering into the contract
both the parties to the contract are yet to perform their
respective promises.
DISTINGUISH BETWEEN CONTRACT AND VOID
AGREEMENT
Basis
Contract
1. Definition
An agreement enforceable An agreement not
by law is a contract.
enforceable by law is void
agreement.
It exist in the eyes of law. It does not exist in the eyes
of law.
It consists all essentials of It does not consists all
valid contract.
essentials of valid contract.
2. Legal
Existence
3. Essentials
Void Agreement
4. Enforceable It is enforceable by law.
It is not enforceable by law.
5. Damages
No damages for non
performance.
Damages can be claimed
in case of non
performance.
DISTINGUISH BETWEEN VOID
AGREEMENT AND VOID CONTRACT
Basis
1. Definition
Void Agreement
An agreement not enforceable
by law is said to be void. [Sec.2(g)]
Void Contract
A contract which ceases to be
enforceable by law becomes void
When it ceases to be enforceable
[Sec.2(j)].
It is valid in the beginning, it
becomes void subsequently due to
or change in circumstances.
2. Void From
beginning
It is void from very beginning.
3. Restitution
Generally no restitution is granted Restitution may be granted when
by court may on equitable grounds the contract is discover to be void.
grant restitution in case of fraud or
mis- representation by minors.
4. Causes
An agreement becomes void due
to absence of one or more
essentials.
It becomes void due to
impossibility to perform.
DISTINGUISH BETWEEN VOID CONTRACT AND
VOIDABLE CONTRACT
Basis of
distinction
1. Definition
Void contract
Voidable contract
A contract which ceases to be
enforceable by law become
void when it ceases to be
enforceable.
A contract which is enforceable
By law at the option of the
aggrieved party is a voidable
contract.
2. Period of
validity
It remains valid till it does not
cease to enforceable.
There is no option with the
party to make it enforceable or
not
It remains valid till aggrieved
party avoid it.
Its validity depends upon the will
of aggrieved party. Aggrieved
party has option to treat it either
valid or void
Contracts become void
because it becomes
impossible to perform due to
change in circumstances or in
the law of the land.
Contract is voidable when the
consent of the party is not free,
Sometimes, it may be voidable
under the provisions of the
Sections 39, 53 and 55.
3. Option to the
party
4. Causes
DISTINGUISH BETWEEN VOID AGREEMENT AND
ILLEGAL AGREEMENT
Basis
Void Agreement
1. Definition
An agreement not
enforceable by law is void.
2. Effect on
collateral
agreement
3. Scope
4. Restitution
5. Punishment
Illegal Agreement
An agreement which is
expressly or impliedly
prohibited by law is illegal.
An agreement collateral to
An agreement which is
the void agreement is not
collateral agreement is always
necessarily void.
void.
The scope is wider than that Every void agreement is not
illegal thus. its scope is
of the illegal agreements
narrow.
because every illegal
agreement is void also.
The court may grant
Restitution of money is not
restitution on the basis of
granted in case of an illegal
equity
agreement.
There is no punishment for
The parties to an illegal
void agreement.
agreement are punishable as
per the law of country.
DISTINGUISH BETWEEN EXECUTED CONTRACT AND
EXECUTORY CONTRACT
Basis
Executed contract
Executory contract
1.
Performance
It is such contract,
performance of both
parties are fulfilled.
If performance of both or at
least one party remains.
There remains legal
2. Obligations There remains no
contractual obligations as obligations for the parties.
parties have fulfilled their
promises.
3. Discharge
The parties are discharge The parties are not
from contract.
discharged and can be
sued.
Distinction Fraud differs from misrepresentation
Misrepresentation
Basis of
distinction
Fraud
1. Intention
A wrong representation is made A wrong representation is
willfully with the intention to made innocently, i.e. without
deceive the other party.
any intention to deceive the
other party.
2. Knowledge
of falsehood
The person making the wrong The person making the wrong
statement does not believe it to be statement believes it to be true.
true.
3. Right to
claim
damages
The aggrieved party can claim The aggrieved party cannot
damages.
claim damages.
4. Availability
of means to
discover the
truth
Except where silence amounts to
fraud, the contract is voidable even
if the aggrieved party had the
means of discovering the truth with
ordinary diligence.
The aggrieved party cannot
avoid the contract if he had the
means of discovering the truth
with ordinary diligence.
Illegal Agreement & Unlawful Agreement
Illegal Agreement
An illegal agreement is one which is forbidden by law i.e. it is entered into
with the intention of violating the law.
Example: A agrees to steal furniture for B for a consideration of
Rs.1,00,000.
It is illegal and therefore it is void.
It also attracts the penal provisions of the law it is violating.
While all illegal agreements are void, all void agreements are not illegal.
Parties to an illegal agreement cannot get any help or protection from
law courts.
Unlawful Agreements: (Sec. 23) In simple words an agreement may
be unlawful because it is:
a. Immoral – i.e. contrary to sound and positive morality as
recognized by law, e.g. cohabitation.
b. Opposed Public Policy – i.e. contrary to the welfare of the State
as tending to interfere with the civil or judicial administration, or
with individual liberty of citizens, e.g. bribing a public servant.
c. Illegal – i.e. contrary to positive law, being forbidden either by
statutes law or common law; hence a line of demarcation needs to
be drawn between illegal and unlawful agreements.
Contingent contract
A contract may be (i) an absolute contract, or (ii) a contingent contract.
DEFINITION: According to sec (31) of ICA, 1872, a contingent contract is
a contract to do or not to do something, if the event, collateral to such
contract, does or does not happen.
Thus it is a contract, the performance of which is dependent upon the
happening or non-happening of an uncertain future event, collateral to
such events.
EX: “A” promises to pay Rs 10000/-, if B’s house is burnt.
Here, the burning of the house is neither a performance promised as a
part of the contract nor a consideration. “B’s” liability arises only when
the collateral event occurs.
Rules regarding Contingent contracts
I.
Contingent contracts dependent on the happening of an uncertain future
event cannot be enforced until the event has happened. If the event
becomes impossible, such contracts become void (Sec. 32).
II. Where a contingent contract is to be performed if a particular event does
not happen, its performance can be enforced when the happening of that
event becomes impossible (Sec. 33).
III. If a contract is contingent upon how a person will act at unspecified time,
the- event shall be considered to become impossible when such person
does anything which renders it impossible that he should so act within any
definite time, or otherwise than under further contingencies (Sec. 34).
IV. Contingent contracts to do or not to do anything, if a specified uncertain
event happens within a fixed time, become void if the event does not
happen or its happening becomes impossible before the expiry of that
time.
V. Contingent agreements to do or not do anything, if an impossible event
happens, are void, whether or not the fact is known to the parties
(Sec.36).
Real-life Use
Contingent contracts are used in our daily life. Mainly for businesses, it is
being used in negotiations where all goodwill and trust that is created can
disagree in front of the negotiating opposite party about future events
that need to work, in that case, a contingent contract is of great use.
In a life insurance contract, the insurer has to pay a certain amount if
suddenly the insured person dies due to certain conditions due to which
the insurer will not be called for action of taking the amount until the
death which is an event that has happened so in this case contingent
contract is required.
Advantages of Contingent Contract
A Contingent contract has a lot of advantage which specifically
negotiator can also use;
• It helps to eliminate the need to come into agreements as it
will help the parties to bet on predictions which keeps
differences among the parties but this is only helpful in case
of negotiations.
• It can limit the losses that could happen if the contract failed
in fulfilling the conditions.
• It does not offer the scope of litigation by reducing the
conflicts which are involved in it as these events are the
future of what would happen.
Performance of a Contract
Section 27 of Indian contract Act says that;
“The parties to a contract must either perform, or offer to
perform, their respective promises, unless such performance is
dispensed with or excused under the provisions of this Act, or
any other law.”
VARIOUS MODES OF DISCHARGE OF A CONTRACT
Modes of Discharge of
Contract
Discharge
by
AgreementSec. 62 63
•Novation
•Rescission
•Alteration
•Remission
•Wavier
•Merger
Performance Sec. 37,
38
•Actual Performance
•Tender
Breach Sec. 39
 Actual
•At the due date of
performance
•During the performance
Anticipatory
•By express repudiation
•By implied repudiation
Operation of law
•Unauthorized material alteration
•Insolvency
•Merger
•Death
•Rights vested in same person
Lapse of time
Impossibility- Sec. 56
a) Initial Impossibility
b) Subsequent Impossibility
•Destructions of subject matter
•Change of circumstances
•Death
•Change of law
•Declaration of war
•Failure of Pre-condition
DISCHARGE OF A CONTRACT
Discharge of a contract means termination of the contractual relations
between the parties to a contract. A contract is said to be discharged
when the rights and obligations of the parties under the contract come to
an end.
I. DISCHARGE BY PERFORMANCE.
Performance means; the doing of that which is required by a contract.
Discharge by performance takes place when the parties to the contract
fulfill their obligations arising under the contract within the time and in
the manner prescribed. In such a case, the parties are discharged and the
contract comes to an end.
Performance of a contract is the most usual mode of its discharge. It may be:
Actual performance
Attempted performance or tender of performance.
1. Actual performance: When both the parties perform their promises, the
contract is discharged. Performance should be complete, precise and
according to the terms of the agreement. Most of the contracts are discharged
by performance in this manner.
Ex: “A” contracts to sell his car to “B” for Rs.15,000/- as soon as the car
delivered to “B” and “B” pays the agreed price for it. The contract comes to an
end by performance.
2. Attempted performance or Tender of Performance: In certain situations
the promisor offers performance of his obligation under the contract at the
proper time and place but the promisee refuses to accept the performance.
This is called as “Tender” or “Attempted Performance”. Where a valid Tender is
made and is not accepted by the promisee, the promisor shall not be
responsible for non-performance and he doesn't not lose his rights under the
contract.
II. “Discharge of a contract by agreement (or) by consent or by mutual
consent”
The general rule of law is a thing may be destroyed in the same manner in
which it is constituted. This means a contractual obligation may be
discharged by an agreement which may be expressed or implied.
(a) Novation (Section.62)
 Novation means the substitution of a new contract for the actual
contract. Such a new contract may be either between the same parties
or between different parties.
 The consideration for the new contract is the discharge of the original
contract.
Ex: “A” owes “B” Rs.10,000/-. He enters into an agreement with “B” a
mortgage of his (A‟s) estate for Rs.5,000/- in place of the debt of
Rs.10,000/-. This is a new contract extinguishes the old one.
(b) Recession (Section.62):
Recession of a contract takes place when all or some of the terms of the
contract are cancelled. It may occur:
 By mutual consent of the parties (or)
 Where one party fails in the performance of his obligation.
In such a case, the other party may resend the contract without claiming
compensation for the breach of contract.
In case of recession, the contract is cancelled and no new contract comes
to exist in its place. Both in novation and in recession, the contract is
discharged by mutual agreement.
Ex: “A” and “B” enters into a contract that “A” shall deliver certain goods to
B by the 15th of this month and that “B” shall pay the price on the 1st of
the next month. “A” does not supply the goods. “B” may resend the
contract, and need not pay the money.
(c) Alteration (Section.62):
Alteration means a change in one or more terms of a contract with mutual
consent of parties. In such a case the old is discharged.
Ex: “A” enters into a contract with “B” for the supply of hundred bales of
cotton at his godown No.1 by the 1st of the next month. “A” & “B” may
alter the terms of the contract by mutual consent.
(d) Remission (Section.63):
Remission means acceptance of a lesser fulfillment of the promise made
or acceptance of a sum lesser than what was contracted for. In such a
case, Section.63 of the Contract Act allows the promise to dispense or
remit the performance of the promise by the promisor, or to extend the
time for the performance of to accept any other satisfaction instead of
performance.
Ex: Example II: A owes B Rs 5,000. A pays to B, and B accepts, in
satisfaction of the whole debt Rs 2,000 paid at the time and place at which
Rs 5,000 were payable. The whole debt is discharged.
(e) Waiver:
Waiver means intentional relinquishment of a right under the contract.
Thus, it amounts to releasing a person of certain legal obligation under a
contract.
e.g., A promises to supply goods to Y. Subsequently, Y exempts X from
carrying out the promise. This amounts to waiving the right of
performance on the part of Y.
(f) Merger;
Merger takes place when an inferior right accruing to a party under
contract merges into a superior right accruing to the same party under the
same or some other contract.
EXAMPLE; P holds a property under a lease. He later buys the property. His
right as a lessee merges into his right as an owner.
III. Discharge by Operation of Law
A contract may be discharged by operation of law in the following
cases:
1. By Death of the Promisor;
A contract involving the personal skill or ability of the promisor is
discharged on the death of the promisor.
2. By Insolvency:
When a person is declared insolvent, he is discharged from his liability
up to the date of his insolvency.
3. By Un-authorized Material Alteration:
If any party makes any material alteration in the terms of the contract
without the approval of the other party, contract comes to an end.
4. By the Identity of Promisor and Promisee:
When the promisor becomes the promisee, the other parties are
discharged.
Example: X draws a bill receivable on Y who accepts the same. X
endorses the bill in favour of Z who in turn endorses in favor of Y.
Here, Y is both promisor and promisee and hence the other parties
are discharged.
5. Merger
The conversion of the inferior right into the superior right is called a
merger. It is also called as the vesting of rights and liabilities in the
same person.
Example: A person holds property under lease, purchases the
property. On purchase, his lease agreement is discharged
IV. Discharge by impossibility of Performance.
1. Effects of Initial Impossibility [Section 56 Para 1 and 3]:
Initial impossibility means the impossibility existing at the time of making
the contract.
2. Effects of Supervening Impossibility [Section 56 Para 2]:
Supervening impossibility means impossibility which does not exist at the
time of making the contract but which arises subsequently after the
formation of the contract.
• The act should have become impossible after the formation of the
contract.
• The impossibility should have been caused by a reason of some event
which was beyond the control of the promissory.
• The impossibility must not be the result of some act or negligence of
the promisor himself.
V. Discharge by lapse of time
A contract is discharged if it is not performed or enforced within a
specified period, called period of limitation.
The Limitation Act, 1963 has prescribed the different periods for different
contracts, e.g. period of limitation for exercising right to recover a debt is 3
years, and to recover an immovable property is 12 years. The contractual
parties cannot exercise their rights after the expiry of period of limitation.
If it is not performed, and if no action is taken by the promisee within the
period of limitation, he is deprived of his remedy at law.
VI. Discharge by breach of contract
A Breach of contract occurs when one of the parties to a contract refuses
to perform his obligation under the contract. A Breach of contract may be
either partial or total but the effect is that one of the parties fails to
perform his part of the obligation.
1. Anticipatory Breach of Contract:
2. Actual Breach of Contract
Anticipatory Breach of Contract
If before the performance of the contract becomes due one of the parties
decides not to perform the contract, it is an anticipatory breach of
contract. The person makes his intention known to the other party that he
does not intend to complete the contract and the terms binding him to
the contract will no longer be his liability. The anticipatory breach is
created in the following way:
By express repudiation: One of the parties to the contract renounces his
obligations towards the contract before his actual performance is due.
By implied repudiation: One of the parties before his performance is
due creates some impossibility before the time of performance by some
act which makes the performance of the promise impossible to
complete
Section 39 of the Indian Contract Act states that in the doctrine of
anticipatory breach, if a party to a contract refuses or makes it
impossible to perform his part of the obligation completely, the other
party can put an end to the contract, except when by words or conduct
the first party shows his intention to continue the contract
Case Law: Hochster vs De la Tour 1853 2E & B678
• A person appointed an employee to accompany him on a tour at a
specified salary for three months from the 1st of June.
• However, before June 1st the employer told the employee that he
was not required to accompany him to the tour.
• The employee sued the employer before waiting for June 1st.
• The employer stated that since June 1st had not yet arrived there
was no breach of contract.
The court held that since the employer had made an anticipatory
breach, the employee could take legal action before June 1st.
Therefore, the contract becomes a legal entity from the moment
the agreement is made and not when the performance is due.
2. Actual Breach of Contract:
Actual breach of contract is when one of the parties does not
perform;
• On the due date of the performance: If one of the parties fails to
perform or refuses to perform his role in the contract on the date
when it has to be performed, it is called actual breach of contract.
• While the performance takes place: If one of the parties performs
a part of the agreed role in the contract and either refuses or fails
to complete the rest of the contract, it is called actual breach of
contract while the performance takes place. It is also called actual
breach during the course of performance.
Case Law
Cort v Ambergate Railway Company 1851
Cort agreed to supply 3,900 tons of railway chairs at a fixed
price. After he delivered 1787 tons of chairs; the company
decided not to take any more chairs. The company failed to
perform its role in the contract. This is actual breach of
contract by the company.
REMEDIES FOR BREACH OF CONTRACT
Recession
Quantum merit
Specific Performance
Injunction
Damages
• Ordinary or General or
Compensatory Damages
• Special damages
• Vindictive or exemplary damages
 Breach of a contract to marry
 Dishonor of a cheque
• Nominal damages
REMEDIES FOR BREACH OF
CONTRACT
WHERE THERE IS A RIGHT, THERE IS A
REMEDY
A contract gives rise to correlative rights and obligations. A remedy is the
means given by law for the enforcement of a right. When a contract is
broken the injured party (.ie., the party who is not in breach) has one or
more of the following remedies;
1. Suit for rescission of the contract.
2. Suit for damages
3. Suit upon quantum meruit.
4. Suit for specific performance of the contract.
5. Suit for injunction.
I.
Rescission of contract [Section 39]:
Rescission means a right not to perform obligation.
In case of breach of a contract, the promisee may put an end to the
contract. The aggrieved party is discharged from all the obligations under
the contract and is entitled to claim compensation for the damage which
he has sustained because of the non-performance of the contract.
Under Section 64, if the aggrieved party treats the agreement as
rescinded, he has to restore any benefits that were received by him under
the contract.
II. Suit for Damages: (Section 73)
Damages are monetary compensation allowed for loss suffered by the
aggrieved party due to breach of a contract. The object of awarding
damages is not to punish the party at fault but to make good the financial
loss suffered by the aggrieved party due to the breach of contract.
i. Ordinary Damages:
Ordinary damages are those which naturally arise in the usual course of
things from such breach. These damages can be recovered if the following
two conditions are fulfilled:
a. The aggrieved party must suffer by breach of contract, and
b. The damages must be proximate (i.e. direct) consequence of the breach
of contract and not the indirect consequence.
Measure of Ordinary Damages: In a contract for the sale of goods, the
measure of ordinary damages is the difference between the contract price
and the market price of such goods on the date of breach.
ii. Special Damages:
Special damages are those which may reasonably be supposed to have
been in the contemplation of both parties as the probable result of the
breach of a contract.
These damages can be recovered if the special circumstances which would
result in a special loss in case of breach of a contract are communicated to
the promisor,
e.g. loss of profits on account of default by the other party to the contract
can be claimed only when an advance notice of such damages has been
given before.
iii. Exemplary or Punitive or Vindictive Damages;
They are awarded by the court if a party has suffered mentally or
emotionally due to breach of the contract. The court makes an exception
to the general principle that damages should be awarded only for financial
loss due to the breach of contract. Exemplary damages are those which
are in the nature of punishment. The court may award these damages in
case of
a.
b.
a breach of promise to marry, where damages shall be calculated on
the basis of mental injury sustained by the aggrieved party,
wrongful dishonor of a cheque by a banker. In case of wrongful
dishonor of a cheque, the rule is smaller the amount of the cheque,
larger will be the amount of damages awarded.
A trader may recover such damages as wrongful dishonor of cheque shall
adversely affect his goodwill but a non-trader whose cheque is wrongfully
dishonored will have to prove the loss of goodwill before claiming such
damages.
iv. Nominal Damages:
Nominal damages are those which are awarded where there is only a
technical violation of a legal right but the aggrieved party has not in fact
suffered any loss because of breach of contract.
The courts however treat this seriously so that such types of breach are
not made by the parties. Therefore, they award a small token as
compensation to take note of the offence made by the guilty party. A
small compensation may be charged so that the guilty party recognizes its
mistake.
The court may or may not award these nominal damages.
III. Suit for Specific Performance:
Suit for specific performance means demanding the court’s direction to
the defaulting party to carry out the promise according to the terms of the
contract.
When court orders specific performance
• Where there is no standard for quantifying the actual damages that are
caused to the aggrieved party by non-performance of the contract.
• Where the monetary compensation is not an adequate measure of the
loss of the aggrieved party. In cases of contracts entered into for sale of
immovable property or special rare antique pieces or certain items
which mean a lot to the aggrieved party and which cannot be replaced.
• Where a property of the aggrieved party is held by his agent or trustee
and the act is to be done to perform a trust function.
Where courts will not allow specific performance:
• When the court considers monetary compensation to be adequate for
breach of contract.
• When contracts are made by trustees or agents who have violated their
powers and breach of contract occurs.
• In contracts of a personal nature, especially in the case of a contract to
marry or a contract to stage a show.
• In cases where the courts cannot supervise the performance of the
contract because it involves continuous duty to complete the contract.
• In cases when the court is of the opinion that enforcement of specific
performance is not possible due to the intricacies of the terms of the
contract.
IV. Suit for injunction:
Where a party is in breach of a negative term of the contract (i.e., where
he is doing something which he promised not to do), in such a case, the
Court may, by issuing an order, restrain him from doing what he promised
not to do. Such an order of the court is known as “Injunction”.
Case Law; Lumley v Wagner 1852 1 DMG 604
A person made a contract to sing at a particular theatre for 3 months and
during that time not to sing for anyone else. The singer made another
contract with a new theatre violating the first contract. The theatre owner
filed a suit.
(i) The court ordered the singer not to perform in any other place until
the time of the contract is completed.
(ii) (ii) However, it did not compel the singer to actually perform and
complete the first contract.
V. Suit for “Quantum-meruit”:
The phrase Quantum meruit literally Means “as much as is earned” or “as
much as merited” or In proportion to the work is done”. The general rule
of law is that unless a person has performed his obligation in full, he
cannot claim performance for the other.
But in certain cases, when a person has done some work under a contract,
and the other party discharged the contract, or some event happens
which makes the further performance of the contract impossible, then the
party who has performed the work can claim remuneration for the work
he has already done.
Example: C an owner of a magazine engaged P to write a book to be
published by instalments in his magazine. After a few instalments were
published, the publication of the magazine was stopped. It was held that P
could claim payment for the part already published [Planche vs. Calburn].
In a following cases quantum meruit can be applied for:
• Breach of contract: If a party has completed a part of his
performance to the contract and the other party decides not
to complete the contract and work has to be stopped due to
breach of contract, quantum meruit will apply.
• Void agreement: When a person in the course of the
contract completes some part of his performance but it is
discovered that the agreement is void. He becomes entitled
to some reasonable remuneration.
DIFFERENCE BETWEEN
•
Void agreement and Voidable agreement
•
Void agreement and Illegal agreement
•
Offer and invitation to offer
•
Stranger to Consideration and Stranger to Contract
•
Coercion and Undue influence
•
Fraud and Mis-representation
•
Void Contract and Voidable Contract
•
Wagering agreement and Contingent contract
•
Novation and Alteration
•
Indemnity and Guarantee
•
Bailment and Pledge
•
Offerer and Offeree