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.” 11 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 14 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 16 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 25 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