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Law of Contract Study Course Introduction
INTRODUCTION
The Indian Contract act 1872 comes under the ambit of
mercantile law (Business Law). It came enforced on 1 September 1872. It is
private law. Its base is English common law, but it was passed in Imperial Legislative Council in Calcutta (Charter Act of 1853 created Governor General's legislative council with six legislative members. It was later called the Indian (Central) Legislative Council and worked as a mini-Parliament.).
It contains XI Chapters, but Chapter VII citing Sale of Goods
and Chapter XI citing Partnership was repealed, the Sale of goods was repealed
in 1930, and the partnership was in 1932.
It became an
independent act after repealing it from its parent Act, that is Indian Contract
Act 1872.
It becomes imperative to study the Contract act, as today in
the market sector all the dealings are made through contract.
It covers various aspects in a much broader sense such as it
describes what is an offer, acceptance, essentials of contract, valid
consideration, voidable agreements, quasi-contracts, damages under Indian
contract act 1872. Apart from it covers Contract of indemnity, guarantee,
bailment, pledge and agency.
What is a contract?
Under the Indian Contract Act 1872, the term contract finds
its definition under Section 2(H), which states that an agreement that is
enforceable by the law is known as Contract. In contract, there must be an
intent to create legal relationships, and not purely social, moral or religious.
Definitions of
‘Contract’
- Sir
Fredrik Pollock:
‘’Every agreement and promise enforceable by law is a contract’’.
- Salmond: ‘’A contract is an
agreement creating and defining an obligation between two or more persons
by which rights are acquired by one or more to acts or forbearances on the
part of others’’.
- Anson: ‘’The law of contract
is that branch of law which determines the circumstances in which a
promise shall be legally binding on the person making it’’.
ESSENTIALS OF CONTRACT
Q. What are the essential elements of a valid
contract?
Ans. Section 10
of the Indian Contract Act, 1872 cites conditions which makes a contract
valid.
Following are some of those conditions:
- Offer
- Acceptance
- Free Consent
- Possibility of Execution
- Apparent Form of Contract
- Intention
to Create Legal Relationship
- Lawful Object and Lawful
Consideration
- Contractual Capacity
- Legal Formalities fulfillment
as applicable under other laws
10. Consensus ad idem
1. Offer
Q. What is ‘offer’ under Indian Law of Contract?
Ans. The word offer and proposal are often usable synonymously.
Offer is the first step in the formation of an agreement that further leads to
contract.
According to section 2 (A) of the Indian Contract Act,1872 “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 makes an offer is called ‘’Offeror’’ or
‘’Promisor’’ and the person to whom the offer has been made is called Offeree
or Promisee.
Essentials of an Offer:
1. Multiple people
2. Communication to the
Offeree
3. Object of making the
Offer
4. Clearly defined Terms
of the Offer
5. May contain specified
terms and conditions
6. Unconditional Offer or
deeming acceptance in case of non fulfillment of some specified conditions
Illustration: Ms. A owns several machines. She enters into an
agreement with Ms. B to sell one of her machines. She tell Ms. B, if she is
willing to buy her machine for Rs. 10, 000. This is not a valid offer as Ms. A
did not specify the specific machine he is talking about. Here, the offer by
Ms. A is ambiguous.
2. Acceptance
Q. What is ‘acceptance’ under Indian Law of Contract?
Ans. Per the section 2(b) of Indian Contract Act, 1872, when a
person to who a proposal has been made, conveys their assent thereto.
Following are some conditions of a valid Acceptance:
i. Acceptance must be absolute and unconditional: Acceptance
must be absolute. There should not be any conditions attached to acceptance.
Example: A offers to sell his laptop to B at Rs. 20000. B
replies that he will buy it for Rs. 15000. This is not a valid acceptance.
Here, there is a condition attached to the acceptance. This is as B accepts to
buy the machine but for 15000 and not for 20000, so there is no match between
the 2.
ii. Expression: Acceptance is a clearly understandable
expression of the offeree’s consent or agreement to the offer
iii. Acceptance must be communicated: Acceptance must be
communicated by the offeree to the offerer in the manner prescribed. A mental
acceptance to an offer is not a valid acceptance, legally. Acceptance must come
to the knowledge of the offeror.
Example: A tells B to communicate his acceptance to him by a
communication app message on mobile. But, B sends his acceptance by post. This
will be an invalid acceptance unless B informs A that the acceptance is not in
accordance with the prescribed manner.
iv. Use of Agency: Offer and Acceptance can be made either by
the offerer and offeree respectively, or their authorized agents /
representatives.
Illustration: If a bank makes or accepts an offer their
authorized representatives who are its servants sign and place the bank’s seal.
As their duty while their holding such position in the bank entitles them to
make or accept such offer, they are valid. Such employee’s offer or acceptance
will be treated as the bank’s offer or acceptance, even if such bank or banker
were a sole proprietor.
v. Acceptance must be communicated within a reasonable time:
Acceptance must be communicated within the time prescribed. If no time period
is prescribed, then it must be given within justifiable time.
Illustration: A wants to
sell his mobile phone to B. He says to B, “Will you buy my mobile phone at
Rs.12000?” Here A is making an ‘offer’ so he is an offeror and B is an ‘offeree’.
If B accepts the offer, it will be deemed as B’s ‘acceptance’.
Illustration: A man called A makes a public offer by a newspaper
publication to the mass to sell his new car and states that it must sell to
someone with highest buying bid. Also, he asks the respondents to communicate
acceptance by the end of 10 July 2022. A woman called B communicates the
acceptance that reaches Mr. A on 11 July 2022 mentioning the highest bid. This
acceptance by B will not be valid
because the acceptance had to be communicated within the specified time.
vi. Acceptance by Post: In case the acceptance is by post then
general rule considers tha acceptance to have been made on the date of posting
the offer by the offerer, and not of receipt by the offeree.
3. Free Consent
Q. What is ‘free consent’ under Indian Law of Contract?
The parties must enter into an agreement with free consent.
Ø When 2 or more people
agree upon the same matter and in the same sense, they are said to have
consented
Ø Consent is known to be
free if not caused by:
§ Coercion
§ Undue Influence
§ Misinterpretation
§ Fraud
§ Mistake
The parties should enter into an agreement with his own wish and
will and not by coercion, undue influence, fraud, mistake or misrepresentation.
Consent will be deemed to be free only if it does not constitute the following
elements:
Coercion:
Coercion is defined under section 13 of Indian Contract Act,1872
as “Coercion” is the committing, or threatening to commit, any act forbidden by
the Indian Penal Code under(45,1860), 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.
Illustration: X threatens Z to kill him if he does not transfer
all his money to him. Z transfers all his money to X to save his own life. This
agreement is not valid as the money was transferred by coercion.
Undue Influence:
According to section 16 of the Indian Contract Act, 1872 , A
contract is said to be induced by ‘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.
Illustration: A sells his land to B, who is his employer at a
very low price in order to get promotion. Here, A’s consent was not free and he
was under undue influence of his employer.
Misrepresentation:
According to section 18 of Indian Contract Act, 1872
misrepresentation means and includes:
The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true, though he
believes it to be true;
any breach of duty which, without an intent to deceive, gains an
advantage of the person committing it, or any one claiming under him, by
misleading another to his prejudice, or to the prejudice of any one claiming
under him;
causing, however innocently, a party to an agreement, to make a
mistake as to the substance of the thing which is the subject of the agreement.
Illustration: A enters into a contract with B to sell his horse.
B wants a horse that is ideal for racing as he wants to participate in a horse
racing competition. A sells a sick horse to B by misrepresenting it to be an
ideal horse for racing. Later on, he finds out that the horse is sick and not
capable of running in competition. This amounts to misrepresentation and this
contract is void.
Fraud:
Section 17 of Indian Contract Act states that, ’’Fraud’ means
and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract:
the suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;
the active concealment of a fact by one having knowledge or
belief of the fact;
a promise made without any intention of performing it;
any other act fitted to deceive;
any such act or omission as the law specially declares to be
fraudulent.
Illustration: A sells his watch to B, claiming that the watch is
original and antique. Later on, B finds out that the watch is not original and
antique.
Mistake:
According to section 20 of Indian Contract Act, 1872, Mistake is
where both the parties to an agreement are under a mistake as to a matter of
fact essential to the agreement. Mistakes can be both unilateral (one party is
under mistake as to matter of fact) and bilateral (both parties to agreement
are under mistake as to matter of fact).
Illustration: X enters into an agreement with Y to sell German
Shefford. At the time of agreement, the dog was already dead. Both X and Y was
not aware of it. This contract is void due to mistake of fact.
4. Possibility of Execution
Agreement must be possible of execution. If agreement has no
possibility of execution, it is void. In order to make an agreement valid, the
terms of the agreement must be clear, certain and able to be executed. An
agreement to do an impossible act is void.
Illustration: A enters into an agreement with a godman to bring
his dead grandfather back to life who is already dead. This agreement is void.
5. Apparent Form of Contract
According to Indian Contract Act,1872, a contract can be both in
i.
oral
ii.
writing
§ Contract involving movable
property can be verbal
§ Contract involving
immovable property must always be in writing
However, it is advisable that the contract must always be in
writing because it will be easier to prove in the court if any dispute arises
between the parties in future.
Contract must be signed
and attested by witness and registered if required by the law.
Illustration: A passenger entered into an oral agreement with an
auto driver to drop him to a specific airport for a fare of Rs. 100. This is a
valid agreement.
6. Intention to Create Legal Relationship
i.
The intention of the Parties must be to create a Legal
Relationship between them. Agreement of social or domestic nature (agreement
between spouses, friends or Children) are not enforceable by law.
ii.
The parties to the agreement must make it clear while entering
into a contract that they want to create a legal relationship.
iii.
If any party to the contract fails to comply with the terms of
the agreement then it will amount to breach of contract and will give rise to
legal consequences.
Illustration: A Father promises his son to buy him a bicycle if
he scores 75% in his exam. Later on, father refuses to buy his son a bicycle
even after scoring 75%. This will not amount to any breach of contract as there
was not international to create a legal relationship between a father and his
son.
7. Lawful Object and Lawful Consideration
Section 2(d) of Indian Contract Act,1872 defines
consideration as ‘’When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing,
or promises to do or to abstain from doing, something, such act or abstinence
or promise is called a consideration for the promise.’’
Object and consideration of an agreement must be lawful. It
must not be illegal, immoral, forbidden by any law or opposed to public policy.
Consideration means something in return of something i.e.
give and take procedure.
For a valid contract:
i.
There
must always be transfer of consideration from all parties to the contract
ii.
Consideration
must be legal
iii.
Consideration
must be adequate
iv.
Consideration
must be real and substantial
v.
An
entity which has no locus in the
contract cannot maintain suit regarding the contract
vi.
Consideration
must be applicable on the desire of the promisor
vii.
Consideration
may more from the promisee to any other party
Both the parties to
agreement must receive something of value in return of promise. Consideration
is one of the most essential elements of a contract. Consideration must be
lawful. There cannot be a contract without consideration.
Any agreement which has unlawful objects or consideration
will be void. According to Section 23 of the Indian Contract Act,1872. lays
down certain consideration that would make a consideration and object unlawful.
Consideration should Not Forbidden by Law: Consideration
should not be of such nature, if permitted, it would defeat the provisions of
any law or, is fraudulent.
If consideration involves or implies injury to the person or
property of another. The Court regards it as immoral or opposed to public
policy.
Illustration A man promises to sell his truck to a woman at
Rs.100000, the woman promises to pay Rs. 100000 to the man. This is an example
of valid consideration.
A man enters into an agreement with a woman to sell legally
forbidden narcotics material in exchange of Rs. 19000/- This is not a valid agreement
because the object of agreement is unlawful.
8. Competence to Contract
The parties to the contract must be competent. An agreement
with a person who is a minor will be void ab
initio. Section 11 of Indian Contract Act lays the following condition to
specify competency of parties to the contract.
i. Competence to Contract in case of minors
Ø Parties to Contract must have
attained the age of majority ie.18 years in normal cases and 21 years if
guardian is appointed by the Court
Ø Minor is not competent to contract
Ø Contract by a minor or with them is
void
Ø A minor is incompetent to become a
partner in a business firm
Ø A minor can be a promise or a
beneficiary
Ø An agreement by or with a minor
cannot become a contract when they attain the age of majority
Ø A minor can act as an agent and bind
their principal by their acts without incurring own personal liability
Illustration: A enters into agreement with B who is a minor
to sell his bracelet. This is not a valid contract.
ii. Mental Ability of the Parties to Contract
- Parties must be of sound mind while making an agreement.
- A person who is usually of unsound mind, but occasionally of
a sound mind can make a contract when he is of sound mind.
- However, if a person is usually of a sound mind but,
occasionally of unsound mind cannot make a valid contract when he is of unsound
mind.
- The soundness of mind of the parties depends upon:
a.
Their
ability to understand terms of the agreement
b.
Their
ability to make a sound judgment depending upon their interests
ii. Competence to Contract through Status
ü Alien Enemies
ü Foreign Sovereigns
ü Insolvent Party
ü A company cannot enter into an
agreement which is ultra vires per
its memorandum
ü A statutory company cannot enter into
an contract which is outside its object per its Act of legislature
ü A municipal corporation cannot enter
into a contract which is outside statutory powers
Parties to the agreement must not be disqualified from
contracting by any law to which he is subject.
9. Legal Formalities fulfillment as applicable under Other Laws
If other
laws bind something for performance of the contract then they are entitled to
be taken into account.
Illustration:
A tourist books a hotel room where in the bill shows a service charge. This
would indicate that he agrees to pay the service charge. But as the payment of
the service charge is voluntary per the law of land the tourist is entitled to
be exempted from the charge.
10. Consensus ad idem
Offer and acceptance under contract must be ‘consensus ad idem’
meaning that all the parties to contract must agree on the same thing and in
the same manner.
REVOCATION OF PROPOSAL
AND ACCEPTANCE
A proposal may be
revoked at any time before the communication of its acceptance is complete
as against the proposer, but not afterwards.
An acceptance may be
revoked at any time before the communication of the acceptance is complete
as against the acceptor, but not afterwards.
Illustration: A proposes, by a letter sent by post, to sell
his house to B.
B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment
when B posts his letter of acceptance, but not afterwards.
B may revoke his acceptance at any time before or at the
moment when the letter communicating it reaches A, but not afterwards.
A proposal stands revoked:
Ø By communication of notice to the
other party about such revocation
Ø If the acceptor fails to fulfill the
condition preceding acceptance of the offer
Ø On the lapse of the specified time
period as cited in the offer for acceptance by the offeree, or a justifiable
time where no acceptance communication has been made by the offeree.
Ø On the demise or lunacy of the
offeror, in case the offeree gets to know about such demise or lunacy of the
offeror before acceptance
STATE AMENDMENT
Uttar Pradesh:
Amendment of section 5 of Act (9 of
1872).--In section 5 of Indian contract Act, 1872, hereinafter in this Section
referred to as the principal Act, at the end of the first paragraph, the
following explanation shall inserted, namely:--
"Explanation: Where an
invitation to a proposal contains a condition that any proposal made in
response to such invitation shall be kept open for a specified time and a
proposal is thereupon made accepting such condition, such proposal may not be
revoked within such time."
[Vide Uttar Pradesh Act, 57 of 1976,
s. 2]
DISCHARGE OF CONTRACT
Ø Execution
Ø Impossibility
Ø Time Bar
Ø Consensual Discharge
Ø By Applicability of Law
Ø By Breach
TYPES OF CONTRACT
I. Contract on the Basis of Validity
Void Contract
A contract may become void if it ceases to be enforceable by
law.
Illustration: A supplier company enters into a contract with a
vehicle company to supply diesel for 3 years. Diesel becomes banned in the area
by the government after 2 years. Now the contract become void as its implementation
becomes impossible.
Voidable Contract
A contract that may be repudiated on the will of any of the
parties. There may be a clause or provision in the contract itself under which
any of the parties may be allowed to terminate the contract. The contract
remains valid until repudiated.
Illustration: A startup and an investor enter into contract
stating that the startup founders will enhance the equity to the investor after
1 year with a provision that they may do so if they find their interest in the
investor with the intent of seeking more investment or whatsoever. After 1 year
founders do not find such need and are unwilling to provide more equity so they
can void the contract as it is voidable by them.
Similarly, it may be voidable
by the investor also if it contains the provision in favor of investor as well.
Under such circumstances, even if the founders want to give more equity to the
investor, they may refrain from its acceptance. Thus in this case voidable by
the investor.
Non-enforceable Contract
This contract type is neither void nor voidable but is
unenforceable as it lacks legal or technical requisites, thus, cannot stand in
the court of law. E.g.:
·
No
proof of existence of contract as it was not in writing
·
Contract
not duly registered, like in case of sale deed of a real estate property
·
Due
stamp duty not paid
And so on
II. Contract on the Basis of Formation
Express
Contract
Content
of this contract are in verbal or written form.
- Section 9 of Indian
Contract Act states if any proposal or acceptance of any promise is
made in words, the promise is said to be expressed.
- Hence, if any offer or
acceptance is made in words either verbal or in written, it will be
considered as Expressed Contract.
Implied
Contract
Ø
The contract evolves
owing to the acts or conduct of the parties or out of the circumstances such
created.
Ø
As implied contract
arises out of such act by some party, there must be some action by some party
to bind it to the contract. Thus on the event of such act or conduct, the
contract evolves
Ø
There is no explicit
agreement but the conduct or actions of the relevant parties itself signifies the
intent of the parties to the contract
Ø
There may be
circumstances pertaining to the parties that themselves evolve a contract
e-Contract
Contract
entered into by the use of electronic medium or mode like a contract via email,
online form submission as in the case of user agreement before installing an
app, ecommerce contract like booking a product delivery online via app or
website.
Quasi
Contract
When
some obligation is imposed on a party without an agreement, like, payment of
house tax to a local body / municipality, etc.
III. Contract on the Basis of Accrual
of Implementation
Executed and Executory Contract
Ø Executed Contract Implemented Fully
Illustration: A contract of sale of a product is done
outrightly on full payment for purchase
Ø Executory Contract clauses or content may need to be performed as and when required
Illustration: Disaster management department may enter into
contract with a supplier to purchase goods needed in case of disaster for the
next 5 years as and when it emerges.
IV. Unilateral and Bilateral
Contracts
Unilateral Contract:
This contract type binds only 1
party for performance or commitment of something under contract
Bilateral Contract:
When 2 or more parties agree to perform something or accept
the performance of something by the other party or third parties in
reciprocation to each other, it is termed a a bilateral contract.
V. Contracts Under Seal
Ø Some time ago contracts were required
to be under seal. However in many jurisdictions this is losing significance
Ø Recognition of informal contracts by
courts, like informal contracts.
Illustration: Contract between employer and employees
including service bonds have lost its significance and courts do not recognize them.
Unconscionable Contract
o
This
type of contract is unduly in favor of one or few parties
o
This
contract type is such that no fair, just and of sound minded person would
accept
Adhesion Contract
Adhesion contact is prepared or offered by a party / parties
which have greater negotiating power than the other parties to the contract.
The other party/ parties may only adhere to it (accept or reject) but do not
have their own stance in the content of the agreement.
Aleatory Contract
·
Aleatory
contract is such that is implementable on the occurance of some uncertain incident
·
Under
aleatory contract all parties to the contract assume risk / risks
E.g. In marine insurance the compensation is payable only
when the ship sinks which is not sure to happen.
All Agreements are not Contracts but all Contracts are
Agreements
Offer
+ Acceptance = Promise
Promise
+ Consideration = Agreement
Agreement
+ Enforceablity = Contract
All
Contracts are Agreements because:
An
Agreement can become a contract only if it is legally enforceable by law or
fulfills the conditions laid down under section 10 of Indian Contract Act,
1872. So, all contracts are definitely agreements.
All Agreements are not Contracts
because:
All Agreements are not Contracts because only those
agreements which fulfill the conditions laid down under section 10 of Indian
Contract Act, 1872 become contracts. It is not necessary that all the
agreements will satisfy the conditions laid down under section 10 of Indian
Contract Act, 1872.
STANDARD FORM OF CONTRACT
Some
other names for standard form of contracts are:
·
Boilerplate contracts
·
Contracts of Adhesion
·
‘Take it or leave it’
contracts
Ø
The position of both
or all the parties to such contract is unequal. One has a superior position pertaining
to contract and other has inferior.
Ø
Under this, the
superior party does not allow any space to the inferior party but only to
accept or leave the contract. E.g. Terms and conditions while creating an email
account or while downloading mobile app, etc.
Ø
The terms of the
contract are drafted only by the superior party and the inferior party must
accept it as it is, else leave fully.
Standard Form Contracts are standardized contracts that
contain a large number of terms and conditions, mostly in fine print, which
restrict and often exclude liability of the superior party under the contract.
This gives a unique opportunity to the advantageous party to exploit the weakness
of the individual by imposing terms upon tem which appear like private
legislation and which may go to the extent of exempting the company from all
liabilities under the contract. The battle against such abuse comes to the
courts of law. The courts find very difficult to come to the rescue of the
weaker party.
Statutory Position on Standard Form of Contract
Ø
Section 16 of the
India Contract Act 1872 cites ‘unconscionable contract’ which means disparity
in the bargaining power of both or all the parties. Some parties are superior
to others, or at advantageous position.
Ø
With reference to ‘contracts’
unconscionable position refers to the position of the inferior party which has
no or very low degree of choice and must accept the wish and will of the
superior party. This facilitates undue exploitation of the inferior party by
the superior as the inferior cannot influence the terms of the contract and
must accept whatever is presented.
STANDARD FORM OF CONTRACT VS. SPECIAL RELIEF ACT 1963
Ø Section 20 of the Specific Reliefs
Act 1963 deals with court’s discretion on decreeing specific performance
Ø Decree in favour of the defendant is
at court’s discretion and not essential despite it might be lawful to give such
respite to the defendant. The court may even abstain from issuing such decree
in case of:
§ Unfair Contract
§ Hardship by the defendant or the
inferior party
§ Inequitable to enforce specific
performance
SECTION 19 OF THE INDIAN CONTRACTS ACT 1872
Section
19 of the Indian Contract Act 1872 provides for making the contract voidable at
the discretion of the party, the consent of which was created by coercion,
undue influence, misinterpretation or fraud.
SECTION 23 OF THE INDIAN CONTRACT ACT 1872
This section cites mainly 3 issues:
1.
Object
of the Agreement
2.
Consideration
for the Agreement
3.
Agreement
per se
Sec. 23 conveys that the object or consideration of an
agreement is lawful unless:
Ø They are forbidden by law
Ø Are fraudulent
Ø Of such nature that would violate the
provisions of any law
Ø Cause or aid injury to person or
property of others
Ø Court considers it immoral or against
public policy
DOCTRINE OF PRIVITY OF CONTRACT
INTRODUCTION
The Indian Contract Act 1872 falls under the ambit of
mercantile laws (Business Laws). It came enforced on 1 September 1872. It is
private law. Its base is English common law.
It contains XI Chapters, but Chapter VII citing Sale of Goods
and Chapter XI citing Partnership were repealed, the Sale of goods was repealed
in 1930, and the partnership was in 1932.
These became an
independent Acts after getting repealed from their parent Act, that is Indian
Contract Act 1872.
It becomes imperative to study the Contract act, as today in
the market sector all the dealings are made through contract:
It covers various aspects in a much broader sense such as it
describes what is an offer, acceptance, essentials of contract, valid consideration,
voidable agreements, quasi-contracts, damages under Indian contract act 1872.
Apart from it covers Contract of Indemnity, Guarantee, bailment, pledge and agency.
What is a contract?
Under the Indian Contract Act 1872, the term contract finds
its definition under Section 2(H), which states that an agreement that is
enforceable by the law is known as Contract. In contract, there must be an
intent to create legal relationships, and not purely social, moral or
religious.
Definitions of
‘Contract’
- Sir
Fredrik Pollock:
‘’Every agreement and promise enforceable by law is a contract’’.
- Salmond: ‘’A contract is an
agreement creating and defining an obligation between two or more persons
by which rights are acquired by one or more to acts or forbearances on the
part of others’’.
- Anson: ‘’The law of contract
is that branch of law which determines the circumstances in which a
promise shall be legally binding on the person making it’’.
ESSENTIALS OF CONTRACT
Q. What
are the essential elements of a valid contract?
Ans. Section 10 of the Indian Contract Act, 1872 cites conditions which makes a contract valid.
Following are some of those conditions:
- Offer
- Acceptance
- Free Consent
- Possibility of Execution
- Apparent Form of Contract
- Intention to Create Legal
Relationship
- Lawful Object and Lawful
Consideration
- Contractual Capacity
- Legal Formalities fulfillment
as applicable under other laws
10.
Consensus ad idem
1. Offer
Q. What is ‘offer’
under Indian Law of Contract?
Ans. The word offer
and proposal are often usable synonymously. Offer is the first step in the
formation of an agreement that further leads to contract.
According to section 2 (A) of the Indian Contract Act,1872 “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 makes an offer is called ‘’Offeror’’ or
‘’Promisor’’ and the person to whom the offer has been made is called Offeree or
Promisee.
Essentials of an
Offer:
1.
Multiple people
2.
Communication to the
Offeree
3.
Object of making the
Offer
4.
Clearly defined Terms
of the Offer
5.
May contain specified
terms and conditions
6.
Unconditional Offer or
deeming acceptance in case of non fulfillment of some specified conditions
Illustration: Ms. A owns several machines. She enters into an
agreement with Ms. B to sell one of her machines. She tell Ms. B, if she is
willing to buy her machine for Rs. 10, 000. This is not a valid offer as Ms. A
did not specify the specific machine he is talking about. Here, the offer by
Ms. A is ambiguous.
2. Acceptance
Q. What is
‘acceptance’ under Indian Law of Contract?
Ans. Per the section
2(b) of Indian Contract Act, 1872, when a person to who a proposal has been
made, conveys their assent thereto.
Following
are some conditions of a valid Acceptance:
i. Acceptance must be
absolute and unconditional: Acceptance must be absolute. There should not be any conditions
attached to acceptance.
Example: A offers to sell his laptop to B at Rs. 20000. B
replies that he will buy it for Rs. 15000. This is not a valid acceptance.
Here, there is a condition attached to the acceptance. This is as B accepts to
buy the machine but for 15000 and not for 20000, so there is no match between
the 2.
ii. Expression:
Acceptance is a clearly understandable expression of the
offeree’s consent or agreement to the offer
iii. Acceptance must
be communicated:
Acceptance must be communicated by the offeree to the offerer in
the manner prescribed. A mental acceptance to an offer is not a valid
acceptance, legally. Acceptance must come to the knowledge of the offeror.
Example: A tells B to communicate his acceptance to him by a
communication app message on mobile. But, B sends his acceptance by post. This
will be an invalid acceptance unless B informs A that the acceptance is not in
accordance with the prescribed manner.
iv. Use of Agency:
Offer and Acceptance can be made either by the offerer and
offeree respectively, or their authorized agents / representatives.
Illustration: If a bank makes or accepts an offer their
authorized representatives who are its servants sign and place the bank’s seal.
As their duty while their holding such position in the bank entitles them to
make or accept such offer, they are valid. Such employee’s offer or acceptance
will be treated as the bank’s offer or acceptance, even if such bank or banker
were a sole proprietor.
v. Acceptance must be
communicated within a reasonable time:
Acceptance must be communicated within the time prescribed. If
no time period is prescribed, then it must be given within justifiable time.
Illustration: A wants to
sell his mobile phone to B. He says to B, “Will you buy my mobile phone at
Rs.12000?” Here A is making an ‘offer’ so he is an offeror and B is an ‘offeree’.
If B accepts the offer, it will be deemed as B’s ‘acceptance’.
Illustration: A man called A makes a public offer by a newspaper
publication to the mass to sell his new car and states that it must sell to
someone with highest buying bid. Also, he asks the respondents to communicate
acceptance by the end of 10 July 2022. A woman called B communicates the
acceptance that reaches Mr. A on 11 July 2022 mentioning the highest bid. This
acceptance by B will not be valid
because the acceptance had to be communicated within the specified time.
vi. Acceptance by
Post:
In case the acceptance is by post then general rule considers
tha acceptance to have been made on the date of posting the offer by the
offerer, and not of receipt by the offeree.
3. Free Consent
Q. What is ‘free
consent’ under Indian Law of Contract?
The parties must enter
into an agreement with free consent.
Ø
When 2 or more people
agree upon the same matter and in the same sense, they are said to have
consented
Ø
Consent is known to be
free if not caused by:
§
Coercion
§
Undue Influence
§
Misinterpretation
§
Fraud
§
Mistake
The parties should enter into an agreement with his own wish and
will and not by coercion, undue influence, fraud, mistake or misrepresentation.
Consent will be deemed to be free only if it does not constitute the following
elements:
Coercion:
Coercion is defined under section 13 of Indian Contract Act,1872
as “Coercion” is the committing, or threatening to commit, any act forbidden by
the Indian Penal Code under(45,1860), 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.
Illustration: X threatens Z to kill him if he does not transfer
all his money to him. Z transfers all his money to X to save his own life. This
agreement is not valid as the money was transferred by coercion.
Undue Influence:
According to section 16 of the Indian Contract Act, 1872 , A
contract is said to be induced by ‘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.
Illustration: A sells his land to B, who is his employer at a
very low price in order to get promotion. Here, A’s consent was not free and he
was under undue influence of his employer.
Misrepresentation:
According to section 18 of Indian Contract Act, 1872
misrepresentation means and includes:
The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true, though he
believes it to be true;
any breach of duty which, without an intent to deceive, gains an
advantage of the person committing it, or any one claiming under him, by
misleading another to his prejudice, or to the prejudice of any one claiming
under him;
causing, however innocently, a party to an agreement, to make a
mistake as to the substance of the thing which is the subject of the agreement.
Illustration: A enters into a contract with B to sell his horse.
B wants a horse that is ideal for racing as he wants to participate in a horse
racing competition. A sells a sick horse to B by misrepresenting it to be an
ideal horse for racing. Later on, he finds out that the horse is sick and not
capable of running in competition. This amounts to misrepresentation and this
contract is void.
Fraud:
Section 17 of Indian Contract Act states that, ’’Fraud’ means
and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract:
the suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;
the active concealment of a fact by one having knowledge or
belief of the fact;
a promise made without any intention of performing it;
any other act fitted to deceive;
any such act or omission as the law specially declares to be
fraudulent.
Illustration: A sells his watch to B, claiming that the watch is
original and antique. Later on, B finds out that the watch is not original and
antique.
Mistake:
According to section 20 of Indian Contract Act, 1872, Mistake is
where both the parties to an agreement are under a mistake as to a matter of
fact essential to the agreement. Mistakes can be both unilateral (one party is
under mistake as to matter of fact) and bilateral (both parties to agreement
are under mistake as to matter of fact).
Illustration: X enters into an agreement with Y to sell German
Shefford. At the time of agreement, the dog was already dead. Both X and Y was
not aware of it. This contract is void due to mistake of fact.
4. Possibility of
Execution
Agreement must be possible of execution. If agreement has no
possibility of execution, it is void. In order to make an agreement valid, the
terms of the agreement must be clear, certain and able to be executed. An
agreement to do an impossible act is void.
Illustration: A enters into an agreement with a godman to bring
his dead grandfather back to life who is already dead. This agreement is void.
5. Apparent Form of
Contract
According to Indian
Contract Act,1872, a contract can be both in
i.
oral
ii.
writing
§
Contract involving movable
property can be verbal
§
Contract involving
immovable property must always be in writing
However, it is
advisable that the contract must always be in writing because it will be easier
to prove in the court if any dispute arises between the parties in future.
Contract must be signed and attested by
witness and registered if required by the law.
Illustration: A
passenger entered into an oral agreement with an auto driver to drop him to a
specific airport for a fare of Rs. 100. This is a valid agreement.
6. Intention to Create
Legal Relationship
i.
The intention of the
Parties must be to create a Legal Relationship between them. Agreement of
social or domestic nature (agreement between spouses, friends or Children) are
not enforceable by law.
ii.
The parties to the
agreement must make it clear while entering into a contract that they want to
create a legal relationship.
iii.
If any party to the
contract fails to comply with the terms of the agreement then it will amount to
breach of contract and will give rise to legal consequences.
Illustration: A Father
promises his son to buy him a bicycle if he scores 75% in his exam. Later on,
father refuses to buy his son a bicycle even after scoring 75%. This will not
amount to any breach of contract as there was not international to create a
legal relationship between a father and his son.
7. Lawful
Object and Lawful Consideration
Section 2(d) of Indian Contract Act,1872 defines
consideration as ‘’When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or abstains from doing,
or promises to do or to abstain from doing, something, such act or abstinence
or promise is called a consideration for the promise.’’
Object and consideration of an agreement must be lawful. It
must not be illegal, immoral, forbidden by any law or opposed to public policy.
Consideration means something in return of something i.e.
give and take procedure.
For a
valid contract:
i.
There must always be
transfer of consideration from all parties to the contract
ii.
Consideration must be
legal
iii.
Consideration must be
adequate
iv.
Consideration must be
real and substantial
v.
An entity which has no
locus in the contract cannot maintain
suit regarding the contract
vi.
Consideration must be
applicable on the desire of the promisor
vii.
Consideration may more
from the promisee to any other party
Both the parties to
agreement must receive something of value in return of promise. Consideration
is one of the most essential elements of a contract. Consideration must be
lawful. There cannot be a contract without consideration.
Any agreement which has unlawful objects or consideration
will be void. According to Section 23 of the Indian Contract Act,1872. lays
down certain consideration that would make a consideration and object unlawful.
Consideration should Not Forbidden by Law: Consideration
should not be of such nature, if permitted, it would defeat the provisions of
any law or, is fraudulent.
If consideration involves or implies injury to the person or
property of another. The Court regards it as immoral or opposed to public
policy.
Illustration A man promises to sell his truck to a woman at
Rs.100000, the woman promises to pay Rs. 100000 to the man. This is an example
of valid consideration.
A man enters into an agreement with a woman to sell legally
forbidden narcotics material in exchange of Rs. 19000/- This is not a valid
agreement because the object of agreement is unlawful.
8.
Competence to Contract
The parties to the contract must be competent. An agreement
with a person who is a minor will be void ab
initio. Section 11 of Indian Contract Act lays the following condition to
specify competency of parties to the contract.
i. Competence
to Contract in case of minors
Ø
Parties to Contract
must have attained the age of majority ie.18 years in normal cases and 21 years
if guardian is appointed by the Court
Ø
Minor is not competent
to contract
Ø
Contract by a minor or
with them is void
Ø
A minor is incompetent
to become a partner in a business firm
Ø
A minor can be a
promise or a beneficiary
Ø
An agreement by or
with a minor cannot become a contract when they attain the age of majority
Ø
A minor can act as an
agent and bind their principal by their acts without incurring own personal
liability
Illustration:
A enters into agreement with B who is a minor to sell his bracelet. This is not
a valid contract.
ii.
Mental Ability of the Parties to Contract
Parties
must be of sound mind while making an agreement.
A
person who is usually of unsound mind, but occasionally of a sound mind can
make a contract when he is of sound mind.
However,
if a person is usually of a sound mind but, occasionally of unsound mind cannot
make a valid contract when he is of unsound mind.
The
soundness of mind of the parties depends upon:
a.
Their ability to
understand terms of the agreement
b.
Their ability to make
a sound judgment depending upon their interests
ii.
Competence to Contract through Status
ü
Alien Enemies
ü
Foreign Sovereigns
ü
Insolvent Party
ü
A company cannot enter
into an agreement which is ultra vires
per its memorandum
ü
A statutory company
cannot enter into an contract which is outside its object per its Act of
legislature
ü
A municipal
corporation cannot enter into a contract which is outside statutory powers
Parties
to the agreement must not be disqualified from contracting by any law to which
he is subject.
9. Legal Formalities
fulfillment as applicable under Other Laws
If other
laws bind something for performance of the contract then they are entitled to
be taken into account.
Illustration:
A tourist books a hotel room where in the bill shows a service charge. This
would indicate that he agrees to pay the service charge. But as the payment of
the service charge is voluntary per the law of land the tourist is entitled to
be exempted from the charge.
10. Consensus ad idem
Offer and acceptance under contract must be ‘consensus ad idem’
meaning that all the parties to contract must agree on the same thing and in
the same manner.
REVOCATION OF PROPOSAL AND
ACCEPTANCE
A proposal may be revoked at any time
before the communication of its acceptance is complete as against the proposer,
but not afterwards.
An acceptance may be revoked at any time
before the communication of the acceptance is complete as against the acceptor,
but not afterwards.
Illustration: A proposes, by a letter sent by post, to sell
his house to B.
B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment
when B posts his letter of acceptance, but not afterwards.
B may revoke his acceptance at any time before or at the
moment when the letter communicating it reaches A, but not afterwards.
A
proposal stands revoked:
Ø
By communication of
notice to the other party about such revocation
Ø
If the acceptor fails
to fulfill the condition preceding acceptance of the offer
Ø
On the lapse of the
specified time period as cited in the offer for acceptance by the offeree, or a
justifiable time where no acceptance communication has been made by the
offeree.
Ø
On the demise or
lunacy of the offeror, in case the offeree gets to know about such demise or
lunacy of the offeror before acceptance
STATE AMENDMENT
Uttar Pradesh:
Amendment of section 5 of Act (9 of
1872).--In section 5 of Indian contract Act, 1872, hereinafter in this Section
referred to as the principal Act, at the end of the first paragraph, the
following explanation shall inserted, namely:--
"Explanation: Where an
invitation to a proposal contains a condition that any proposal made in
response to such invitation shall be kept open for a specified time and a
proposal is thereupon made accepting such condition, such proposal may not be
revoked within such time."
[Vide Uttar Pradesh Act, 57 of 1976,
s. 2]
DISCHARGE
OF CONTRACT
Ø
Execution
Ø
Impossibility
Ø
Time Bar
Ø
Consensual Discharge
Ø
By Applicability of
Law
Ø
By Breach
TYPES OF CONTRACT
I. Contract on the Basis of Validity
Void
Contract
A contract may become void if it ceases to be enforceable by
law.
Illustration: A supplier company enters into a contract with
a vehicle company to supply diesel for 3 years. Diesel becomes banned in the
area by the government after 2 years. Now the contract become void as its
implementation becomes impossible.
Voidable
Contract
A contract that may be repudiated on the will of any of the
parties. There may be a clause or provision in the contract itself under which
any of the parties may be allowed to terminate the contract. The contract
remains valid until repudiated.
Illustration: A startup and an investor enter into contract
stating that the startup founders will enhance the equity to the investor after
1 year with a provision that they may do so if they find their interest in the
investor with the intent of seeking more investment or whatsoever. After 1 year
founders do not find such need and are unwilling to provide more equity so they
can void the contract as it is voidable by them. Similarly it may be voidable
by the investor also if it contains the provision in favor of investor as well.
Under such circumstances, even if the founders want to give more equity to the
investor, they may refrain from its acceptance. Thus in this case voidable by
the investor.
Non-enforceable
Contract
This contract type is
neither void nor voidable but is unenforceable as it lacks legal or technical
requisites, thus, cannot stand in the court of law. E.g.:
·
No proof of existence of contract as it was
not in writing
·
Contract not duly registered, like in case of
sale deed of a real estate property
·
Due stamp duty not paid
And so on
II. Contract on the Basis of Formation
Express
Contract
Content
of this contract are in verbal or written form.
- Section 9 of Indian
Contract Act states if any proposal or acceptance of any promise is
made in words, the promise is said to be expressed.
- Hence, if any offer or
acceptance is made in words either verbal or in written, it will be
considered as Expressed Contract.
Implied
Contract
Ø
The contract evolves
owing to the acts or conduct of the parties or out of the circumstances such
created.
Ø
As implied contract
arises out of such act by some party, there must be some action by some party
to bind it to the contract. Thus on the event of such act or conduct, the
contract evolves
Ø
There is no explicit
agreement but the conduct or actions of the relevant parties itself signifies
the intent of the parties to the contract
Ø
There may be
circumstances pertaining to the parties that themselves evolve a contract
e-Contract
Contract
entered into by the use of electronic medium or mode like a contract via email,
online form submission as in the case of user agreement before installing an
app, ecommerce contract like booking a product delivery online via app or
website.
Quasi
Contract
When
some obligation is imposed on a party without an agreement, like, payment of
house tax to a local body / muncipality, etc.
III. Contract on the Basis of Accrual
of Implementation
Executed and Executory Contract
Ø Executed Contract Implemented Fully
Illustration: A contract of sale of a product is done
outrightly on full payment for purchase
Ø Executory Contract clauses or content may need to be performed as and when required
Illustration: Disaster management department may enter into
contract with a supplier to purchase goods needed in case of disaster for the
next 5 years as and when it emerges.
IV. Unilateral and Bilateral
Contracts
Unilateral Contract: This contract type binds only 1
party for performance or commitment of something under contract
Bilateral
Contract: When 2 or more parties agree to
perform something or accept the performance of something by the other party or
third parties in reciprocation to each other, it is termed a a bilateral
contract.
V. Contracts Under Seal
Ø Some time ago contracts were required
to be under seal. However in many jurisdictions this is losing significance
Ø Recognition of informal contracts by
courts, like informal contracts.
Illustration: Contract between employer and employees
including service bonds have lost its significance and courts do not recognize
them.
Unconscionable Contract
o
This
type of contract is unduly in favor of one or few parties
o
This
contract type is such that no fair, just and of sound minded person would
accept
Adhesion Contract
Adhesion contact is prepared or offered by a party / parties
which have greater negotiating power than the other parties to the contract.
The other party/ parties may only adhere to it (accept or reject) but do not
have their own stance in the content of the agreement.
Aleatory Contract
·
Aleatory
contract is such that is implementable on the occurance of some uncertain
incident
·
Under
aleatory contract all parties to the contract assume risk / risks
E.g. In marine insurance the compensation is payable only
when the ship sinks which is not sure to happen.
All Agreements are not Contracts but all Contracts are
Agreements
Offer
+ Acceptance = Promise
Promise
+ Consideration = Agreement
Agreement
+ Enforceablity = Contract
All
Contracts are Agreements because:
An
Agreement can become a contract only if it is legally enforceable by law or
fulfills the conditions laid down under section 10 of Indian Contract Act,
1872. So, all contracts are definitely agreements.
All Agreements are not Contracts
because:
All Agreements are not Contracts because only those
agreements which fulfill the conditions laid down under section 10 of Indian
Contract Act, 1872 become contracts. It is not necessary that all the
agreements will satisfy the conditions laid down under section 10 of Indian
Contract Act, 1872.
STANDARD FORM OF CONTRACT
Some
other names for standard form of contracts are:
·
Boilerplate contracts
·
Contracts of Adhesion
·
‘Take it or leave it’
contracts
Ø
The position of both
or all the parties to such contract is unequal. One has a superior position
pertaining to contract and other has inferior.
Ø
Under this, the
superior party does not allow any space to the inferior party but only to
accept or leave the contract. E.g. Terms and conditions while creating an email
account or while downloading mobile app, etc.
Ø
The terms of the
contract are drafted only by the superior party and the inferior party must
accept it as it is, else leave fully.
Standard Form Contracts are standardized contracts that
contain a large number of terms and conditions, mostly in fine print, which
restrict and often exclude liability of the superior party under the contract.
This gives a unique opportunity to the advantageous party to exploit the
weakness of the individual by imposing terms upon tem which appear like private
legislation and which may go to the extent of exempting the company from all
liabilities under the contract. The battle against such abuse comes to the
courts of law. The courts find very difficult to come to the rescue of the
weaker party.
Statutory Position on Standard Form of Contract
Ø
Section 16 of the
India Contract Act 1872 cites ‘unconscionable contract’ which means disparity
in the bargaining power of both or all the parties. Some parties are superior
to others, or at advantageous position.
Ø
With reference to
‘contracts’ unconscionable position refers to the position of the inferior
party which has no or very low degree of choice and must accept the wish and
will of the superior party. This facilitates undue exploitation of the inferior
party by the superior as the inferior cannot influence the terms of the
contract and must accept whatever is presented.
STANDARD FORM OF CONTRACT VS. SPECIAL RELIEF ACT 1963
Ø Section 20 of the Specific Reliefs
Act 1963 deals with court’s discretion on decreeing specific performance
Ø Decree in favour of the defendant is
at court’s discretion and not essential despite it might be lawful to give such
respite to the defendant. The court may even abstain from issuing such decree
in case of:
§ Unfair Contract
§ Hardship by the defendant or the
inferior party
§ Inequitable to enforce specific
performance
SECTION 19 OF THE INDIAN CONTRACTS ACT 1872
Section
19 of the Indian Contract Act 1872 provides for making the contract voidable at
the discretion of the party, the consent of which was created by coercion,
undue influence, misinterpretation or fraud.
SECTION 23 OF THE INDIAN CONTRACT ACT 1872
This section cites mainly 3 issues:
1.
Object
of the Agreement
2.
Consideration
for the Agreement
3.
Agreement
per se
This section conveys that the object or consideration of an
agreement is lawful unless:
Ø They are forbidden by law
Ø Are fraudulent
Ø Of such nature that would violate the
provisions of any law
Ø Cause or aid injury to person or
property of others
Ø Court considers it immoral or against
public policy
E-CONTRACTS / ELECTRONIC CONTRACTS
Electronic Contract refers to a contract that takes place
through e-commerce, often without the parties meeting each other. It refers to
commercial activities transacted electronically. E.g. e-auction, online
purchase through luckonluck.com site, online credit transfer through bank
accounts, payment via payment apps, ATM cash withdrawal, and so on.
Ø
Earlier there were 2
problems with e-transactions and contracts:
1} Writing / Recording / Storing the transactions
2)
Recognizable signatures
Ø
Electronic
transactions are:
1)
Cheaper
2)
Easier to perform
3)
Easier to Store
4)
Easier to Retrieve
There
are 4 major types of e- contracts:
1.
Browse wrap contracts
2.
Shrink wrap contracts
3.
Click wrap contracts
4.
e-mail contracts
1. Browse Wrap Contract
i.
A browse wrap agreement is
intended to be binding on the contracting party by the use of the website.
ii.
Such contracts are usually used by
websites wherein the continued use of a website by a user is deemed to be
acceptance of its revised terms of use and other policies.
2. Shrink Wrap Contract
i.
A shrink wrap contract is a license
agreement where the terms and conditions of the contract are enforced upon the
consumer as soon as he opens the package.
ii.
Such contracts can be generally
observed in the case of buying of software products. E.g. The license agreement,
indemnity by the user for any copyright or intellectual property rights of the
manufacturer violation, arbitration, limitation of liabilities of the
manufacturer, etc. as soon as the buyer opens the pack (containing the software
product).
3. Click Wrap Contract
i.
Click wrap contract or click
through agreements require the user to manifest his consent or assent to
the terms and conditions governing the licensed usage of the software by
clicking "OK" or "I
Agree" button on the dialog box.
ii.
A user may choose to disagree or
reject the terms by clicking cancel or closing the window. Such a user will not
be able to buy or use the service upon rejection.
iii.
Unlike the shrink wrap agreements
where the terms of the agreement are hidden inside the box, in case of click wrap
agreements, all the terms and conditions are accessible prior to acceptance,
either in the same window or through a hyperlink.
4. An email
contract has 2 categories:
I.
The contract draft and its signed up
scanned/unscanned copies are exchanged via email OR direct email offer and
email acceptance
II.
A link is sent via email to the
other party which clicks to verify its acceptance
Status of e-contracts in India
1.
Indian Contract Act
1872 does not exactly and explicitly provide for e-contracts
2.
The Information technology
Act 2000, commonly known as the IT Act governs e-contracts or their provisions
3.
The IT Amendment Act
gives power to the ventral government on ascertaining as to what mode of
signatures are considerable as electronic signatures
4.
IT Act Amendment in
2008 provided for the validity of contracts formed through electronic means by
bringing in Section 10A stating such contracts cannot become unenforceable
merely as they are in electronic form
5.
The IT Act imposes
regulations on 3 parties to the electronic process transmission:
i.
Originator
ii.
Intermediary
iii.
Addressee
Evidence vis-Ã -vis E-contracts
i.
Evidence recorded or
stored on electronic devices hold the status of evidence
ii.
Electronic evidence
acceptable as evidence (State of Delhi vs. Mohammad Afzal)
iii.
Voice records taken
with the help of various electronic devices and various modes are treatable as
evidence
DOCTRINE OF PRIVITY
Privity
means privacy, which here refers to private between the parties to contract.
Essentials
of privity to contract application or claim:
1.
Contract entered into between 2 parties: Most
importantly there must be a contract between 2 or more parties
2.
Parties must be competent and there should be a valid consideration: Competency of parties and the existence of consideration are
pre-requisites for application of this doctrine
3.
There has been a breach of contract by at least 1 party: Breach of contract by one Party is the essential requirement for the
application of the doctrine of privity of contract.
4.
Only parties to contract can sue each other: After the breach, only Parties to a contract are entitled to sue
against each other for non-performance of the contract.
Doctrine of Privity under Indian Contract Act 19872
Ø
Sec. 73 of the Indian
Contract Act provides for compensation to the party, by the party breaching the
contract
Ø
In sec. 73 it appears
that compensation arises for actual damages caused due to non performance of
the contract and not indirect damages. Here only pecuniary damages are taken
into account.
Ø
In estimating the loss
arising from the breach of contract, the means of remedying the inconvenience
caused by the non-performance of contract must be considered
Ø
Sec. 73 states, In
estimating the loss arising for breach of contract inconvenience caused by non
performance of contract must be considered
Exceptions to Privity of Contract
·
Benefit Aspect of
Contract
·
Burden Aspect of Contract
·
Doctrine of Privity
under Law of Agency
Benefit Aspect of Contract
ü
A person stranger to
contract cannot enforce the contract except some exceptions defined in court
rulings or previous cases.
ü
2 basic court ruled
exceptions where a stranger to contract can sue the other party / parties are:
o
Beneficiary/beneficiaries
under the contract towards who contract creates trust
o
Beneficiary/beneficiaries
under the contract which is a part of family arrangement
Burden Aspect of Contract
1.
Burden of contract stands
for liability of obligation created by the contract
2.
A contract gives right
to a party/parties and assigns duty to other party/ parties
Doctrine of Privity under Agency (Exceptions)
1.
The principal-agent
relationship is named as ‘agency’. Also, the agent does the agency work by
representing the principal toward other parties.
2.
The principal, as well
as the agent in their capacity have certain rights and duties towards other
parties directly attributable to the acts of his agent or the agency
3.
In most cases specific
to agency despite the agents fault it is treated as that of the principal and
the principal is liable towards other parties acts and omissions of his agent
There are, certain exceptions to the rule of privity of
contract recognized both by the English Law and the Indian Law, under which a
person, who is not a party to a contract can sue on it. Some exceptions to the
rule pertaining to some circumstances under the following:
1. Trust or Charge
Sometimes under contract, a benefit is given to a person who
is not a party to the contract. This benefit can be given by creating a Trust
or Charge in favour of such person. In such cases, the beneficiary under the
trust or charge may enforce the contract even though he is not a party to it.
2. Marriage Settlement, Partition or Other Family
Arrangements
In an agreement made in connection with marriage, partition
or other family arrangements, a person, for whose benefit the provision is
made, can enforce the agreement though he is not a party to it.
3. Acknowledgement of Payment
If a party acknowledges the payment to the third person or
constitutes himself as an agent of that third person, then the third person can
recover the amount from such a party.
4. Agreements Affecting the Land
If such land is purchased by somebody with the notice of
rights and obligations of the owner, then those rights and obligations shall
bind the purchaser although he was not a party to the agreement.
5. Agency
A principal, even if concealed, may sue on a contract made by
an agent. The third party cannot plead that there was no contract between him
and the principal.
6. Assignment
The assignee of a debt or an actionable claim may sue the
original debtor if the assignment is a legal one.
7. Holder in Due Course
A holder in due course of a negotiable instrument is one who
has obtained the negotiable instrument in good faith and for valuable
consideration. He can sue prior parties to the negotiable instrument.
8. Fund in Hands of a party
Where a fund is created in the hands of one of the
contracting parties in favor of a third party, it may be possible to give the
latter, a remedy in quasi-contract on the grounds that to allow the contracting
party to keep the fund would be to allow unjust enrichment.
As a general rule, both Indian and English law are similar to
each other that only parties to contract can sue each other. In a leading
English case of Tweddle v. Atkinson, it was held that the plaintiff cannot sue
as he was both a stranger to the contract as well stranger to consideration.
This concept of privity of contract was again analyzed in the case of Dunlop
Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd.
Position of Privity of
Consideration in India
This principle of the doctrine of privity of consideration is
not applicable in India. As per the Indian Contract Act, 1872 the definition of
consideration in Section 2(d) states, consideration may be furnished by ‘the
promisee or any other person’ as long as it is ‘at the desire of promisor’. Thus,
the consideration may move from promisee, or some other person, if the promisor
has no objection, from any other person. The leading authority, in this case,
is the case of Venkata Chinnaya v. VenkataramayaGaru.[1881 Madras HC].
Privity of Contract (Stranger to
Contract)
The doctrine of privity of a contract is a common law
principle which implies that only parties to a contract are allowed to sue each
other to enforce their rights and liabilities and no stranger is allowed to
confer obligations upon any person who is not a party to contract even though
contract the contract have been entered into for his benefit.
Position of Privity of Contract in
English law
In a leading English case of Tweddle v. Atkinson[1861], it
was held that the plaintiff cannot sue as he was both a stranger to the
contract as well stranger to consideration. This concept of privity of contract
was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge
& Co. Ltd. Where there was an agreement between a Dunlop dealer and a
subdealer. Here Dunlop could not sue as it was stranger to contract[1915]
Position of Privity of Contract in
Indian law
In India, the apex court has by its decision in MC Chacko vs.
State of Travancore (1970SC) in a far reaching attempt of clearing the
ambiguities in the application of the Doctrine of Privity held that a person
not a party to a contract cannot subject to certain well recognized exceptions,
enforce the terms of the contract. The recognized exception mentioned in the
quoted judgment is worded widely so as to cover the beneficiaries under the
terms of the contract. Views on the rights of third party beneficiaries have
been laid down by other courts of India. For instance in:
1. Bhujendra Nath vs.
Sushamoyee Basu ( Calcutta HC in 1936), the division bench of the Calcutta High
Court has held that a stranger to a contract which is to his benefit is
entitled to enforce the agreement to his benefit. Also, in Pandurang vs.
Vishwanath (1939), it has been held the person beneficially entitled under the
contract can sue even though not a party to the contract itself.
2. Chinnaya v. Rammya (Madras HC in 1987), a lady granted her
daughter some land via registered gift deed one of the terms that she will pay
an annual sum to her maternal aunt after her death which she defaulted and
denied payment invoking privity of contract i.e. claiming that her aunt was not
a party to contract. In this case though the consideration was paid by the
mother (vide sec. 2D of Indian Contract Act 1872) and not aunt so the uncle is
stranger to consideration, along with stranger to contract. Yet his suit was
allowed as he was a beneficiary of the contract under law. As the consideration
may be given by the promise or anyone of their behalf, here, the consideration
to the daughter was given by her mother on behalf of her aunt.
Stranger to Consideration
In context of Indian law, as long as there is consideration
for promise, it does not matter who furnishes the consideration. Which means in
Indian law doctrine of Privity of Consideration does not apply. It can be
clarified by the words given under Section 2(d) of Indian Contract Act, 1872.
It states that, when, at the desire of the promisor, the promise or any other
person. This concept has been confirmed by the then judicial system in the case
of Kedarnath Bhattacharji v Gorie Mohammad (1887)
Landmark Judgments of Law of
Contract
Chinnaya v. Ramayya
In this case, a lady transfers a certain portion of land to
her sister. After sometime the lady gives her land as a gift to her daughter on
the condition that she will pay Rs. 653/- as an annuity to her sister.
The daughter receives the gift and accepts to give her sister
an annuity of Rs. 650/- Later on,she refuses to give the annuity. The sister
files a case to claim the amount. The court held that the estate received as a
gift and the agreement to pay annuity is a simultaneous agreement and will be
considered as one transaction.Hence, the sister was entitled to receive the
consideration.
Lalman Shukla v. Gauri Datt
Lalman Shukla (plaintiff) was Gauri Datt’s servant
(defendant).Gauri Datt’s nephew went missing and the plaintiff was sent out in
search of the child. After the plaintiff leaves in search of the child,
Defendant offers to give a reward of Rs 501/- to anyone who finds his nephew.
The plaintiff finds the boy and brings him back home. Lalman Shukla discovers
the reward and claims the reward. Lalman Shulka filed a case to claim the
reward amount.
The court held that Llaman Shukla was entitled to the reward
amount as there was no contract between them and it was his duty as a servant
to find the missing child. Lalman Shukla had no knowledge of the offer or
contract. There cannot be an acceptance or contract without knowledge of an
offer or contract.
Balfour v. Balfour
M.r and Mrs. Balfour were enjoying vacation in England. When
they were about to leave, Mrs became ill and was advised to stay back. Mr. Balfour
promised to pay her allowance every month for maintenance. After sometime,
differences arose between them and Mr. Balfour stopped paying allowance. Mrs.
Balfour brought action against Mr. Balfour. The court held that agreement
between husband and wife was purely social and domestic in nature. There was no
intention to create legal relationship. Hence, the contract was not
enforceable.
Pharmaceutical Society of Great
Britain v. Boots Cash Chemists Ltd.
In this case, the court held that goods displayed along with
a price tag is an invitation to offer. If the buyer is willing to purchase the
goods, he can make an offer to buy the goods. The seller is not under liability
to sell it. He has the right to accept or reject the offer.
Carlill v. Carbolic Smoke Ball
The Carbolic Smoke Ball Co. made a product called ‘’Smoke Ball’’and
claimed it to cure influenza and a number of other diseases. The company
published an advertisement claiming that it would pay 100 pounds to anyone who
got sick with influenza after having its product according to the instructions
provided in it. Mrs.Carlill caught influenza even after taking smoke balls
according to the instructions.
Mrs. Carlill filed a case to claim the reward amount. The
court held that when a person fulfills the conditions of an offer, it will
amount to acceptance and there is no need to communicate the acceptance in
contract of general nature. The acceptance of the general offer is given by
conduct. Hence, the court held that Carlill accepted the offer by consuming the
smoke ball as prescribed and so she was entitled to receive the reward.
Felthouse v. Bindley
In this case, Mr. Felthouse offered to buy a horse. He wrote
a letter to Bindley stating that he wants to buy his horse at certain price and
that if he does not reply, he will assume that Mr. Felthousehas accepted the
offer. Benley could not reply to the letter because he was busy. Later on, Mr.
Bindley refused to sell the horse. Mr. Felthouse filed a case to claim the
horse. The court held that silence cannot be considered as acceptance.
Acceptance has to be expressed or implied.
Harvey v. Facey
In this case, Harvey communicated with the defendant about a
Hall Pen through Telegram.
He said, ‘’Will you sell us Bumper Hall Pen? Telegraph lowest
price’’Fasey responded to this telegraph stating that the price of the Pen to
be 900 pounds. Harvey replied to this, stating that they are willing to buy the
Pen at the said amount. The defendant refuses to sell the Pen.He contended that
he never said ‘’Yes’’ to selling. He just quoted the price. This will amount to
an invitation to offer.
Boulton v. Jones
Jones (defendant) sent a written order for goods to a shop
owned by Brocklehurst. The same day Broklehurst sold his shop to Boulton.
Boulton delivered the goods to Jones without informing him that he had bought
the shop. Defendant refused to make payment of the goods.
The court held that the defendant is not liable to make
payment because there was no contract between them. The offer was between Jones
and Brocklehurst. It was held that an offer can be accepted only by the person
to whom it was made.
Sample Test Questions on Law of Contract
I. State whether true or false:
1. An agreement without consideration is void
a.
Yes
b.
No
II. Choose the right option
1. In India consideration must flow from:
a.
Promisee Only
b.
A party to contract only
c.
Only the party which receives consideration as reciprocation
d.
Any party including non-promisee 3rd party
e.
Any of the above
f.
All of the above
