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The Laws of Contract

Law of Contract is the most important and basic part of Mercantile (commercial/business) Law. The law of contract lays down the legal rules relating to promises: their formation, their performance, and their enforceability. The object of the law of contract is to ensure that the rights and obligations created by a contract are honoured.

The Indian Contract is not exhaustive as it does not deal with all the branches of the law of contract. There are separate Acts which deal with contracts relating to transfer of property, sale of goods, partnership, insurance etc.

Definition of Contract

According to Anson, “A contract is a legally binding agreement between two or more persons by which rights are acquired by one or more to acts or forbearance on the part of the other or others.”

Salmond said: “It is an agreement creating and defining obligations between the parties.”

The Indian Contract Act defines a contract as: “An agreement enforceable by law is a contract”.

An Agreement has been defined as: “Every promise or set of promises forming the consideration for each other.”

A promise is defined as: “A proposal when accepted becomes a promise.”

Therefore, there must be proposal or offer by one party and its acceptance by the other party for making an agreement.  An agreement is thus, the outcome of two consenting minds.

Therefore, Agreement = Proposal/Offer + Acceptance

Enforceable by law means that it must give rise to a legal obligation and not merely the relations which are purely social or domestic in nature.

Thus,

Contract = Agreement + Enforceability by law

So, offer and its acceptance subsequently is the universally accepted process for creating a contract whether it is express or implied.

An agreement is a wider term than a contract. Every contract is an agreement, but agreement is not a contract (i.e. legally binding agreement).

Offer and Acceptance

Offer (under English law) or Proposal (under Indian law) is the starting point in the formation of a contract.

Proposal under the Indian Contract Act is, when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.

The person who offers/proposes is called an offer or/promisor.

A proposal may be by words or conduct.

Essentials elements of offer are:

1. Expression of willingness to do or not to do something,

2. Made to another,

3. With the object of gaining consent of the other person to such act or abstinence.

Types of Offer:

1. Specific Offer: An offer made to a definite person or body of persons is called a specific offer. A specific offer can usually be accepted only by the person or persons to whom it is made.

2. General Offer: when an offer is addressed to the whole world, it is called general offer. A general offer can be accepted by anyone.

Offer and Invitation to Offer

An offer is different from an invitation to offer.

An “offer” is the final expression of willingness by the offer or to be bound by his offer, whereas

Where a party, without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an offer but merely ‘invites’ the other party to make an offer on those terms. This has been termed as an “invitation to offer.”

For example:- a book seller sends catalogue of books indicating price of various books to many persons. This is an ‘invitation to offer.’ The interested party may make an offer and the book-seller may accept or reject the offer.

Cross Offers: when two parties make identical offers to each other, in ignorance of each other’s offer, the offers are ‘cross-offers’. Such offers do not constitute acceptance of one’s offer by the other and as such there is no completed agreement.

For example, A wrote to B offering to sell him certain goods. On the same day, B wrote to A offering to buy the same goods, the letters crossed in the post. There is no concluded contract between A and B.

Acceptance:

When the person to whom the proposal is made signifies his assent, it is an acceptance of the proposal. An accepted proposal is called promise or an agreement.

The person to whom offer/proposal is made is called an offeree / promisee.

An offer can be accepted only by the person to whom it is made.

Essentials of Acceptance:

1. It must be absolute and unconditional,

2. It must be communicated to the offer or,

3. The acceptor must be aware of the proposal at the time of the offer.

According to Anson, just as when the lighted matchstick comes into contact with the trail of gunpowder, there would be explosion and then it will not be possible to bring the things back to the original position, similarly, after the offer is accepted it creates a contract whereby both the parties become bound and none of them can go back.

Components Of Contract

Section 10 of the Contract Act lays down that, all agreements are contract it they are made by:--

1. By Free Consent of the Parties,

2. Competent to Contract,

3. For a lawful Consideration,

4. With a lawful object, and

5. Not expressly declares to be void

Competency to Contract:

Section 11 of the Contract Act provides that, every person is competent to contract who is:

1. Of the age of Majority,

2. Of Sound Mind, and

3. Not Disqualified from contracting by law.

Thus, minors, persons of unsound mind and persons disqualified by law are incompetent to contract. The age of the majority is 18 years, but where a guardian is appointed it is 21 years.

Minor’s Agreement: in the case of Mohoribibi versus Dharmodass Ghosh it was held that a minor’s agreement is void.

Effects of Minor’s Agreement:

1. No estoppel against minor: a minor will not be stopped from alleging that the agreement entered into is not enforceable and no liability can be fasten upon him.

2. Ratification of Minor’s agreement: a person cannot on attaining majority ratify an agreement made by him during his minority. Ratification relates back to the date of making of the contract and, therefore, a contract which was then void, cannot be made valid by subsequent ratification.

Persons of unsound mind: a person is said to be of unsound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

A person who usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is unsound mind.

For example, a sane man, who is delirious from fever, or who is drunk that he cannot understand the terms of a contract, or from a rational judgment as to its effects on his interests, cannot contract while such delirium or drunkenness lasts.

Disqualified persons:  alien enemies, foreign sovereigns and ambassadors, convicts, married women (with respect to their husband’s properties), insolvents in certain cases are some examples of disqualified persons.

Consent:

Section 13 of the Contract Act provides, two or more persons are said to consent when they agree upon same thing in the same sense.

Thus, in a contract there must be ‘meeting of minds’ i.e. ‘consensus ad idem.’

However, a mere consent is not enough for a valid contract unless it is with their free consent.

According to section 14, consent is said to be free when it is not caused by—

1. Coercion, or

2. Undue Influence, or

3. Fraud, or

4. Misrepresentation, or

5. Mistake.

Where consent to an agreement is caused by coercion, undue influence, fraud, or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Where consent is caused by mistake, the agreement is void. A void agreement is not enforceable at the option of either party.

Coercion:

According consent is said to be caused by coercion when it is obtained by pressure exerted by either of the following techniques-

i) Committing or threatening to commit any act forbidden by the Indian Penal Code, or

ii) Unlawfully detaining or threatening to detain any property.

The party exercising coercion also exposes himself to criminal liability.

Duress under English Law: Under Common law, duress consists in actual violence or threat of violence to a person.

Coercion and Duress: Difference

1. Duress includes fear of loss to life or bodily harm, whereas Coercion includes loss to goods also.

2. Duress should proceed from a party to the contract, whereas Coercion may proceed from a person not a party.

3. Duress should be directed against party or near relative, whereas Coercion may be directed against any person.

Undue Influence: where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and uses that position to obtain an unfair advantage over the other, there is said to be undue influence.

Relations which involve domination come under the heading of Fiduciary Relationship. Fiduciary relationship means a relation of confidence and trust. For example, spiritual advisor and devotee, doctor and patient, parent and child, husband and wife, master and servant etc.

The fiduciary relationships are based upon the principle of uberrima fides, which means utmost good faith.

Fraud:

it means any act done with intention to deceive and includes giving wrong suggestions, actively concealing facts, promise made without any intention of performing it, or any other act to deceive.

Thus, the essential of fraud is that there should be a false statement of fact by a person with wrongful intention.

Mere silence is no fraud: Ordinarily, ‘passive concealment’ or mere silence is no fraud, as a contracting party is not obliged to disclose each and every thing to the other party.

Caveat Emptor:

it means ‘buyer beware’.

Execeptions:

1. Where there is duty to speak e.g. in cases of fiduciary relations/uberrima fides relations.

2. Sometimes, silence is itself ‘equivalent to speech’ e.g. buyer puts some conditions.

Misrepresentation:

Misrepresentation means misstatement of a fact material to the contract. When a person makes a false statement which he himself believes to be true, and does not intend to deceive the other party, there is “misrepresentation”.

Mistake:

Mistake implies an error. Mistake may operate upon a contract in two ways:-

1. It may defeat the consent altogether, or

2. It may mislead the parties as to the purpose which they contemplated.

Bilateral mistake:

it means when both the parties to an agreement are mistaken as to a matter of fact essential to the agreement. e.g. subject matter have ceased to exist before contract was made. In case of bilateral mistake agreement is void.

Unilateral mistake:

it is the mistake by one of the parties to an agreement. in such a case the contract is not voidable.

Mistake of fact: the mistake should be one of fact and not of law.

Mistake as to Indian law is not an excuse to avoid a contract, however mistake as to foreign law is.

Consideration:

Consideration constitutes the very foundation of the contract. An agreement not supported by consideration is void.

Consideration is the cause of the promise and its absence would make the promise a gratuitous or bare promise (nudum pactum).

In the words of Pollock, it is a price of the promise. A valuable consideration in the sense of law, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

Consideration is a return or Quid Pro Quo (something for something).

Under the Indian law the consideration may be past, present or future, however under English law past consideration is no consideration.

The consideration must have some value in the eyes of law, even though it need not be adequate.

Exceptions:

1. Natural love and affection: a written and registered agreement based on natural love and affection between near relatives is enforceable without consideration. The expression ‘near relative’ will include parties related by blood or marriage.

2. Past voluntary services: a promise to compensate a person, who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable.

3. Time-barred debt: a promise to pay a time barred debt is enforceable.

Unlawful Agreements:

For the validity of a contract it is essential that the consideration and object should be lawful. A contract the object of which is opposed to the law of the land may either be unlawful or simply void.

According to section 23, the consideration or object of an agreement are lawful unless:

i) It is forbidden by law, or [ e.g. sale of liquor without license]

ii) Is of such a nature that it would defeat the provision of law, or [ e.g. to do bigamy]

iii) It is fraudulent, or [ e.g. to defraud any person or agency]

iv) It involves or implies injury to the person or property of another, or

v) The court regards it as immoral or opposed to public policy.

Opposed to public policy includes: trading with enemy, trafficking in public offices, interference with the administration of justice, maintenance and champerty.

Maintenance consists in aiding a party in civil proceeding by providing financial or other assistance without lawful justification.

Champerty is a kind of maintenance in which the person assisting in proceeding is to receive a share in the gain made in the proceedings.

Legal Aptitude for CLAT