Our day to day life is interspersed with many rights,duties, obligations through which we interact with society. The laws which lay down rules and provide strength to the agreement and support of arm of law for their implementation, are adjudged as civil laws.
The law which provide the procedure to be followed at the time of filing of any case is the Code of Civil Procedure. The number of civil laws is innumerable but the most important of these is the law of contract.
LAW OF CONTRACT
Not exhaustive (not limited) and not retrospective Contract are probably the most familiar legal concept in our society because it is so central to the essence of our political, economic and social life. The law relating to contract constitute the most important branch of commercial law.
This is governed by the Indian Contract Act 1872. The contract Act defines contract as an agreement enforceable by law. All agreements are not enforceable by law and therefore all agreements are not contracts.
Example: An agreement to go to see a movie may be a mere agreement not enforceable by law. Thus, all agreements are not contracts.
When one person signifies to another his willingness to do, to abstain from doing anything, with a view of obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
If a statement is made without any intention to obtain the assent of the other party, it cannot be termed as proposal. Generally the offer should be made with an intention to create legal relationship. Promise in the case of social engagements is generally without an intention to create legal relationship.
OFFER & INVITATION TO OFFER (DISTINGUISHED)
When one person expresses his will to another person to do or not to do something, to take his approval is known as an offer. An offer must be definite, certain and complete in all respects. It must be communicated to the party to whom it is made.
Example: A tells to B, “I want to sell my motorcycle to you at Rs. 30,000, will you purchase it?”
x says to y, “I want to purchase your car for Rs. 2,00,000 will you sell it to me?
2. Invitation to Offer
It is an act prior to an offer, in which one person induces another person to make an offer to him. The invitation to offer is made to inform the public the terms and conditions and also in which a person is interested to enter into a contract with the other party.
Invitation to Offer → Offer → Acceptance
In a leading case, company A advertised a sale by action. B travelled to the advertised place of action and found that the defendant had cancelled the action sale. He bought an action against the defendant to recover the expenses of his travel. It was held that he was not entitled for the same as there was yet no contract between the parties.
TYPES OF OFFER
1. Express and Implied Offer
Example: A person who boards a bus or who hires a taxi, undertakes to pay the fare at his destination, even though he makes no express promise to do so.
2. Specific and General Offer
When the offer is made to a specific or an ascertained person it is known as a specific offer,and when the same is not made to any particular person but to the public at large, it is known as general offer.
Cross Offer: When the offers made by two persons to each other containing similar terms of bargain cross each other in post, they are known as cross offers.
Example: A offered to sell his watch to B for Rs. 2000 through a letter sent by post. On the same date B also wrote to A making an offer to purchase A’s watch for Rs. 2000. When A or B sent their letters they did not know about the offer which was being made by the other side. In these cross offers, even though both the parties intended the same bargain, there would arise no contract. A contract could arise only if either A or B after having the knowledge of the offer, had accepted the same.
Standing, Open OR Continuing Offer: An offer which is allowed to remain open for acceptance over a period of time is known as a standing, open or a continuing offer.
Example: An offer to supply 1,000 bags of wheat from 1st January to 31st December, in accordance with the orders which may be placed from time to time is a standing offer. As and when the orders are placed that amounts to acceptance of the offer to that extent. In the above stated illustration if an order for the supply of 100 bags of wheat is placed on 15th January, there is acceptance of the offer to that extent. So far as the remaining quantity is concerned, this offer can be revoked just like any other offer.
Communication of Offer: The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. Hence, as offer cannot be accepted unless and until it has been brought to the knowledge of the person to whom it is made.
Example: "Mr. X makes an offer that whoever finds his lost dog, will get Rs, 10,000 from him; through a newspaper advertisement. If Mr. Y reads the advertisement and finds his lost dog, he is entitled to get the said amount. But suppose Mr. Y did not read the advertisement, he found the dog moving astray on the road and submitted it to the police. Or suppose, Mr. Y happens to be the neighbour of Mr. X and he finds the dog during his morning walk and takes it to the owner, he will not be entitled to the reward amount."
In this scenario, Mr. Y has come to know of the reward of 10,000 after the dog has been found. In both the situations Mr. Y will not be entitled to claim the amount from X because there was no communication of the offer to Mr. Y. Hence there cannot be a valid acceptance of the offer and hence no contract is formed.
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. The person making the proposal is called the Promiser and the person accepting the proposal is called the Promisee.
Consideration means to do something in return i.e. quid Pro quo under Indian contract Act. Consideration is defined as when at the desire of the promisor, the promise has done or abstained from doing or does or abstains from doing or promises to do or abstain something, such an act or abstinence or promise is called Consideration for the promise.
An agreement must be supported by a lawful consideration on both sides.
1. Consideration to be given at the desire of the promisor.
2. Consideration to be given by the promise or any other person.
3. Consideration may be past, present or future.
4. There should be some act, abstinence or promise by the promise which constitutes consideration for the promise.
Past Consideration means that the consideration for any promise was given earlier and the promise is made thereafter.
Executed or Present Consideration: When one the parties to the contract has performed his part of the promise, which constitutes the consideration for the promise by the other side. In other words consideration is provided simultaneously along with the making of the contract.
Executory or Future Consideration: When one person makes a promise in exchange for the promise by the other side, the performance of the obligation by each side to be made subrequest to the making of the contract, the consideration is known as Executory.
Every promise and every set of promises forming the consideration for each other is an agreement. An agreement arises by an “offer or proposal” by one of the parties and the “acceptance” of such offer by the other. In other sense, in an agreement there is a promise from both sides.
Offer + Consideration → Agreement
Example: A promises to deliver his watch to B and in return B promises to pay a sum of Rs. 200 to A. There is said to be an agreement between A & B.
An agreement not enforceable by law is said to be void. These agreements include an agreement without consideration, an agreement in restraint of trade, etc.
LET's CHECK YOUR UNDERSTANDING SO FAR
Principle 1 :- An offer is a proposal made with an intention of entering into an agreement.
Principle 2 :- Acceptance of an offer is essential for the existence of an agreement.
Facts: "Rashid has lost his wallet inside his college campus. He uploads a post on the college Facebook group with its photo, and promises a reward of Rs. 500/- for returning it or any information leading to discovery. In the meantime, Aditya, Rashid’s roommate, who was attending a lecture when Rashid discovered he lost his wallet, spots the wallet outside the library. He returns the wallet to Rashid. Later in the evening, when he accesses Facebook, he sees the post with the promise of reward. He approaches Rashid to claim the reward".
(a) Aditya will get the reward since he found the wallet.
(b) Aditya will not get the reward since he performed a duty of a friend, which transcends any contractual relations.
(c) Aditya will get the reward since he performed a condition of the contract by returning the wallet.
(d) Aditya will not get the reward since he did not accept the offer, as he was unaware about the offer in the first place.
Answer: (d) For the reasons given in the option, Aditya’s actions were not influenced in any way by the offer. Therefore, his actions were not driven by the agreement (which was absent, to begin with), but maybe by social duty. The Law of Contracts is not concerned with social obligations.
The offer need not have been seen first hand – even if Aditya got to know about the reward through a friend, and not the Facebook post, and then he acted upon it, he would still be accepting the offer.
All that is required is for the offer to be known to the promisee.
ESSENTIALS OF A VALID CONTRACT
1. Offer and Acceptance
There must be a ‘lawful offer’ and a ‘lawful acceptance’. In other words there are some legal rules governing offer and acceptance.
2. Intention to Create Legal obligation
Both the parties, to a contract, must contemplate legal consequences. For example, a husband offering to take his wife out for a movie is not an agreement intended to create legal relations.
3. Lawful Consideration
Consideration is the price paid for the promise of the other. Consideration may be an act / abstinence or a promise.
It may be past, present or future.
Example: Robert promises to supply 10 quintals of wheat for a consideration of Rs.5000/-
4. Capacity of Parties:
5. Free Consent
Both parties, to a contract must enter it out of their free will and consent. Consent is said to be “free”, when it is not affected by reasons such as
6. Lawful Object
7. Writing and Registration
However, Indian Contract Act lays down that in certain special cases, for a contract to be valid, it must only be in writing. Besides, it also needs to be registered.
Example: An agreement for a sale of immovable property must be in writing and registered.
To ensure that a contract is valid, the terms of it must be certain. In other words “agreements, the meaning of which is not certain or capable of being made certain are void”.
Example: Mr. Sharma agrees to sell his car to Mr. Mukesh at “best competitive price”, since the price is not clearly ascertainable in this case, the agreement is void.
9. Possibility of Performance
The Contract Act lays down that “Agreement to do an impossible act is void”.
Example: Nagabushan agrees to bring a dead body alive in return for a crore of rupees. The agreement is not enforceable.
10. Not Expressly Declared Void:
The Contract Act has ‘expressly declared’ certain agreements to be void. Following are the cases:
Thus, an agreement should not be expressly declared void by the Act.
When the person to whom the proposal is made signifies his assent, the proposal is said to have been accepted. A proposal when accepted becomes a promise. It is only after the acceptance of the proposal that a contract between the two parties can arise.
Effect Of Acceptance: A contract comes into effect only after the offer is accepted. Before its acceptance, neither party is bound by it.
Essentials Of A Valid Acceptance
1. Acceptance must be communicated by the 'Offeror to the Offeree
Acceptance in essence means making one’s assent known to the offeror. This means that if Arvind makes an offer to Varun, and Varun wants to accept it, he must ensure that Arvind is made aware of his assent, by one way or another.
What if a Varun assigns Rahul, a third party (another person outside the two parties of the contract), to communicate his acceptance to Arvind. What if that third party fails to do so?
Legally we’ll say, Varun’s communication has the effect of being made to a third party and not to the offeror. Therefore, it fails the first rule.
As such, the acceptance has not reached Arvind, so he will not be liable to fulfil his offer to Varun. Between Varun and the third party, it’s a different matter.
There, the third party’s liability will depend on the intention with which they had entered into the contract. Try to recall the portion about the legal intention behind an offer from the previous article.
Such an acceptance will not form an agreement.
Offeror makes offer → Offeree gives acceptance → Offeror receives the acceptance = Binding Agreement
|Acceptance must reach the offeror and he must also be aware it.|
2. Acceptance must be absolute and unqualified
The Law of Contracts follows a ‘no strings attached’-policy vis-à-vis acceptance. An acceptance cannot have any conditions attached to it.
This is because an acceptance is one’s assent to an offer as it is.
This ‘conditional acceptance’ occurs commonly in bargaining. If X offers to pay Rs. 100 to Y for a product (legally termed as ‘goods’), Y can either:
Now, case (i) forms an agreement straightaway.
In case (ii), the italicized part of Y’s ‘acceptance’ is his condition. Words and phrases such as “but”, “if”, “in case” are key to spot an acceptance with a condition attached.
If you rearrange it slightly to make the meaning of Y’s statement clearer: “I will sell it to you only at Rs. 120”. That’s because he is not agreeing to sell it as per X’s offer; but he agrees to sell it only at his own price.
In such a case, Y is making a counter-offer which X is free to accept or reject (or even yet make his own counter-offer!). This counter-offer functions just like any other offer, and not as an acceptance of X’s original offer. This will not bind X.
|Acceptance should not be 'conditional'; conditional acceptance is not binding on the offeror.|
3. Acceptance must be communicated in the prescribed manner or in a reasonable/usual manner.
An offer may specifically mention that the acceptance be sent only by a telegram and no other means. If any other means is used, even though the acceptance will be communicated, it will not be a ‘valid’ acceptance for failing this third rule.
On the other hand, if an offer contains no such stipulation, then any usual mode of communication such as telephone, e-mail, telegram, fax, etc. may be used.
So, if a company makes an advertisement for sale of its products, a buyer should contact the agent by phone or e-mail, instead of floating a large banner in front of the office expressing his intention to buy the products.
|Only in the absence of a prescribed mode of acceptance, the usual modes of acceptance can be used.|
4. Acceptance has to be communicated while the offer is subsisting
If a date is mentioned as the deadline for communicating acceptance, that also makes up the ‘terms and conditions’ of the offer. Failing that deadline not only bypasses a condition of the offer, but also, the offer lapses or expires, i.e., no longer exists.
An offer may be revoked (which will be covered in the next article) before an acceptance is communicated. This has the same effect, and the offer ceases to subsist.
Also, once an offer has been rejected or a counter offer is made to the original offer, the original offer lapses. If the offeree decides to accept the original offer after that, the acceptance will be hit by this rule.
When is Acceptance Completed?
In case the parties to the contract are present at the same place, one making the offer and the other communicating the acceptance, both the parties become bound immediately. But the problem arises when the parties are at different places at the time of communication of offer and acceptance is made by post or telephone etc. The law has laid down the following rules when the communication of acceptance is made by post/telegram:1. The communication of acceptance is complete as against the proposer, when it is put in the course of transmission to him so to be out of the power of the acceptor.2. The communication of acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer.
B accepts A’s proposal by a letter sent by post. The communication of the acceptance is complete –
REVOCATION OF OFFER & ACCEPTANCE
A proposal may be revoked at any time; before the communication of acceptance is complete as against the proposer but not afterwards and in case of acceptance, it is at any time before the communication of the acceptance is complete as against the acceptor but not after wards.
Modes of Revocation of Offer:
1. By communication of notice of revocation by proposer.
2. By lapse of time.
3. By failure of acceptor to fulfill a condition precedent.
4. By death / insanity of proposal.
WHO ARE COMPETENT TO CONTRACT?
Every person is competent to contract who is of the age of majority according to the law of land of which he is a subject and who has not been disqualified from entering into a contract is competent to contract.
Therefore, the following persons are parties incompetent to contract:
1. A minor i.e. a person below the age of 18 years.
2. A person of unsound mind or insane.
3. A person disqualified by any law to contract.
Thus, an agreement with a minor is absolutely void. Agreement Without Consideration As Void
1. Natural love and affection.
2. Compensation for past voluntary services.
3. Promise to pay time barred debt.
In a very popular case, Mohiri Bibee in Dharmodas Ghose (ILR 1903) 30 cal 539 a minor mortgaged his house in favour of a money lender and received certain amount from him. The privy council held that the money lender is not entitled to get the money back which was advanced to a minor. This is because only a person capable of entering into a agreement can make a contract.
MINOR AND RULE OF ESTOPPEL
Further a situation may arise where a minor has declared or intentionally caused or permitted another person to believe him to be a person who has attained the age of majority upon such belief, if the money lender advances some money to the minor, can the minor be held liable to pay?
The Mohiri Bibee case clearly ruled out that the rule of estoppels does not apply against minor. It means a minor cannot be held liable to repay a loan even if he has procured it by misrepresenting him as a major person.
MINOR AND RULE OF RESTITUTION
Again a question arises as to the rule of restitution applying against a minor. Restitution means to restore or return the benefit received by a minor under an agreement. A minor is not liable to restore the benefits received under a void contract except under certain cases.
A minor who has obtained money or goods by misrepresenting him to be major, can be compelled to restore the benefit to the extent, he or his estate has benefited. If some benefit of permanent nature has been accrued to him, he has to restore it.
Therefore, if a minor meets an accident and a person expends money on his hospital expenses, he would be reimbursed from minor’s property. A minor’s parents are out of station. His neighbor lends him money to buy food and clothes for himself his claim of repayment would lie against minor’s property.
WHAT IS A SOUND MIND FOR THE PURPOSES OF CONTRACTING?
A person is said to be of sound 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.
Example: A patient in a lunatic asylum, who is at intervals, of sound mind may contract during intervals.
A person, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgments as to its effect on his interests cannot contract whilst such delirium or drunkenness lasts.
Two or more persons are said to be consented when they agree upon the same thing in the same sense.
Consent is said to be free when it is not caused by coercion, undue-influence, fraud, misrepresentation and mistake.
Coercion is the committing or threatening to commit any act forbidden by the Indian Penal code or the unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
Example: A threatens to shoot B is B does not agree to sell his property to A at a stated price. B’s consent in this case has been obtained by coercion.
Undue influence takes place where two persons stand in such a relation that one party is in a position to dominate the will of the other. When such person uses his position to obtain an unfair advantage over the other, any agreement entered into is vitiated by undue influence a person can be said to dominate the will of other or able to exercise undue influence over the other if –
1. He has real or apparent authority over the other or he stands in a fiduciary relation with him and
2. He makes a contract with a person whose mental capacity is temporarily or permanently affected due to old age, illness or mental or bodily distress.
Example: Mr A is heavily indebted to Mr. B the money lender of the village. B gets on agreement signed by A in which he sells all his land to B at a price much below, say one-fourth of the existing market price of the land. Can A challenge the agreement on the ground of being induced by undue influence? The answer is yes. It lies upon B to prove that the contract was not induced by influence.
Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his to enter into the contract:
Except in two cases where:
1. There is a duty to speak.
2. Silence is equivalent to speech.
Example: B says to A – if you do not deny it, I shall assumes that the horse is sound”. A says nothing mere A’s silence is equivalent to speech and if the horse is found unsound, he would be guilty of fraud.
Misrepresentation means misstatements or unwarranted statements which are not true though the person believes it to be true. The statement believes it to be true. Whereas, ‘fraud’ is also called a wildful misrepresentation where makes of the statement known and believes it not to be true.
In contracts, voidable is a term typically used with respect to a contract that is valid and
binding unless avoided or declared void by a party to the contract who is legitimately exercising a power to avoid the contractual obligations.
An agreement which is enforceable by law at the option of one or more of the parties thereto; but not at the option of the other is a voidable contract. Thus a voidable contract is one which could be avoided by one of the parties to the contract at his option.
Example: When the consent of a party to a contract has been obtained by coercion, undue influence, fraud or misrepresentation the contract is voidable at the option of the party whose consent has been so obtained.
A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does not happen.
Example: A contracts to pay to B, Rs. 10000 if B’s horse is burnt. This is a contingent contract.
Substitution of an existing contract with a new one:
1. Change in terms of contract
2. Change in parties of contract
REMEDIES FOR BREACH OF CONTRACT
2. Quantum merit
3. Specific performance
Mistake as to matter of fact:-
1. Where both the parties to an agreement are under a mistake as to a matter of that essential to the agreement, the agreement is void.
Example: A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
2. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. In other words if any one party is under mistake as to a matter of fact, then that would be considered as a valid contract.
EFFECT OF MISTAKES AS TO LAW
A contract is not voidable because it was caused by a mistake as to any law in force in (India), but a mistake as to a law not in force in (India) has the same effect as a mistake of fact.
What consideration and objects are lawful and what not - The consideration or object of an agreement is lawful unless
1. It is forbidden by law, or
2. Is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent, or
3. Involves or implies injury to the person or property of another, or
4. The court regards it as immoral or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
SOME IMPORTANT POINTS
1. When consent to an agreement is caused by coercion, fraud or misrepresentation the agreement voidable at the option of the party whose consent was so caused.
2. If any part of a single consideration for one or more objects or nay one or any part of any one of several considerations for a single object is unlawful, the agreement is void.
3. Agreement without consideration, void, unless is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law.
4. Every agreement in restraint of the marriage any person other than a minor, is void. Every agreement by which any one is rest rained from exercising a lawful profession, trade or business of any kind is to that extent void.
5. Agreements, the meaning of which is no certain, or capable of being made certain, are void.
6. Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won on any wager or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.
Principle: An agreement includes an offer and an acceptance accompanied by a consideration. Consideration must be lawful and carrying some value in the eyes of law. Void agreements are devoid of consideration.
Facts: Bina told her husband to drop her to the office in the evening as she was being late to the office every day and spoiling her impression in front of her new boss. The husband of Bina agreed to do this the next morning. However, he got late for the office and couldn’t drop her resulting into her being extremely late the same morning. This lowered her reputation in front of the new boss and she was finally removed from office. Bina sued her husband for not dropping her. Decide.
(a) As a consideration, dropping to office has no value in the eyes of law. Hence, the agreement is void.
(b) Bina may sue her husband but will not be granted any relief as Court does not award penalty in such matters.
(c) There was an offer from Bina which was accepted by her husband. The necessary terms of an agreement have been fulfilled and an agreement has come into place.
(d) There is no consideration in the present case. Hence, due to absence of consideration, no agreement has come into play
Principle: All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Consent is said to be free when it is devoid of coercion, undue influence, fraud, misrepresentation. “Coercion” is the committing, or threating to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
Facts: The electricity department of city of Melono sends people to various houses of a colony telling them to pay a certain amount towards compulsory replacement of existing meter by a meter that saves electricity. This is because of the growing electricity problems in the city. One of the customers, Ms. Manty, is uninterested in this and refuses to get her meter replaced. The group of persons sent to her house take this but Ms. Manty silently feels her that electricity supply to her house shall be cut off by this. Feeling threatened, she immediately agrees to get the meter changed. Is there any coercion here?
(a) No, It was being done by a government department.
(b) No, There has been no real committing or threat of commission of any act forbidden by IPC.
(c) Yes, She was threatened by the group for cut of electricity supply.
(d) Yes, The gesture of the persons of ‘taking this’ signifies threat.