Law of Contract
Contract plays a significant role in our daily life. A contract is an agreement
between two or more parties, which have obligation and rights according to the
content of the agreement. A contract is legally enforceable. In India, contracts
are governed by the Indian Contract Act, 1872.
Contract
A set of promises, may be oral or written in nature, which is legally enforceable is known as contract. It is a binding agreement between two or more parties. A contract includes variety of subjects such as exchange of goods, services, capital or promises of any of those. Contracts are part and parcel of our life. Contracts can be of various types depending on the terms and conditions. A contract creates mutual obligation on the contracting parties.
Definitions of Contract
According to Pollock, Every agreement and promise enforceable by law is a contract.
According to Salmond, A contract is an agreement creating and defining obligation between two or more persons by which rights are acquired by one or more to act or forbearance on the part of others.
According to 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.
According to Section 2(h) of the Indian Contract Act, 1872, An agreement enforceable by law is a contract.
From this definition, we find that a contract essentially consists of two elements i.e. an agreement and legal obligation i.e. a duty enforceable by law.
According to Cambridge Dictionary, Contract is a legal document that states and explains a formal agreement between two different people or groups, or the agreement itself.
Law of Contract in India
In India, contracts are being governed by the British enacted legislation i.e. the Indian Contract Act, 1872. This act is based on the principle of ‘English Common Law'. It deals efficiently with all the aspects of contract such as formation, enforcement etc. There are 11 Chapters and 266 sections however Sections 76 to 123 and 239 to 266 have been repealed.
Important Definitions in the Indian Contract Act, 1872
As per Section 13, Consent is defined as two or more persons are said to be consent when they agree upon the same thing in the same sense.
As per Section 14, Free consent is defined as consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and mistake.
As per Section 15, Coercion is defined as the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 to 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.
As per Section 16, Undue influence is defined as 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.
As per Section 17, 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 of his agent, or to induce him to enter into the contract.
As per Section 18, 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; [Section 18(1)]
Any breach of duty which, without intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; [Section 18(2)]
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; [Section 18(3)]
As per Section 31, Contingent contract is defined as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
As per Section 148, Bailment, Bailor and Bailee are defined as a ‘bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed off according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor'. The person to whom they are delivered is called the ‘bailee'.
As per Section 172, Pledge, Pawnor and Pawnee are defined as the bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor is in this case called the pawnor. The bailee is called the pawnee.
As per Section 182, Agent and Principal are defined as an agent is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal.
Essential Elements of Contract
As per Section 10 of Indian Contract Act, 1872, 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.
The essential elements of a valid contract are as follows
Offer
An offer is also termed as proposal. An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual obligation in return for a promise, act or forbearance.
As per Section 2 (a) of the Indian Contract Act, when one person signifies to another his willingness to do or 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 or offer.
The person making the proposal/offer is called the proposer or offeror and the person to whom the proposal is made, is called the offeree.
Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an offer. Under Section 2 (b) of the Contract Act, When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted.
Mutual Agreement
A situation is referred to as meeting of mind, when both the parties have recognised the contract and both give consent for entering into its obligations.
Lawful Consideration
The term ‘consideration' simply means something in return (quid pro quo). Any contract to be enforceable by law must have legal consideration.
According to Section 2(d), consideration is defined When at the desire of the promisor, the promisee or other person has done or abstained from doing, or does, abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called consideration for the promise.
Capacity of Parties to Contract
For a contract to be valid, the parties of a contract must have capacity, i.e. competence to enter into a contract. Every person is presumed to have capacity to contract but there is certain person whose age, condition of mental status renders them incapable of binding themselves by a contract. This incapacity must be proved by the party claiming the benefit of it.
As per Section 11 of the Act, it deals with the competency of parties and provides that:
every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject.
Therefore, the following persons are incompetent t contract:
Minor, Person of unsound mind and person disqualified by any law to which they are subject. Thus, any contract entered into by the persons mentioned above, are void.
Legality of Contract
Legality of contract is the basis for its future and performance of obligation by the parties. A contract can be made only for the legal product or services; legality of contract, vary from one jurisdiction to another. For instance, an arm smuggler's contract with its buyers cannot be entertained into court of law.
Free Consent
For a contract to be valid, the consent of the parties must be genuine i.e. free. The principle of consensus-ad-idem is followed which means that the parties entering into contract, must mean the same thing in the same sense. The parties to the contract must have the same understanding regards to subject matter of the contract.
As per the Act, free consent is consent, i.e. free from coercion, undue influence, fraud, misrepresentation or mistake. When the given consent is affected by these elements, it calls into question whether the consent given was free and voluntary.
Types of Contract
Contracts are of diversified nature. Contracts can be classified into four types, namely:
On the Basis of Formation
Formation in general means the way in which contract is formed. Based on the methodology of formation, contract can be of three types-express contract, implied contract and quasi-contract.
When a contract results from an expression or conversion, it is known as express contract. In this type of contract, parties to contract know everything about the content of the contract. In future, they can't claim that anything included in the contract has been hidden from them.
On the other hand, contract is called implied contract when it occurs without expression. It is just opposite to the express contract.
Quasi-contract is not a type of contract, but it is an equitable remedy to prevent unjust enrichment that is determined as though a contract existed. In legal terms, it is sometimes referred to as implied-at-law contract.
On the Basis of Nature of Consideration
In law, consideration is referred to as value given in exchange for a promise and must be something of sufficient value exchanged for that promise. On the basis of nature of consideration, there are two types of contract, namely ‘Unilateral and Bilateral' contract.
In former, only one party makes a promise, it also means that other party does not have any obligation for making this type of contract, just an acceptance of an offer is sufficient. A unilateral contract can be both expressed as well as implied.
In latter, participating parties promise each other and have certain rights and obligations towards each other. In common language, this type of contract is also referred to as two-sided contract. The salient feature of bilateral contract is that, both the parties are involved in the negotiation of a contract.
On the Basis of Execution
Execution can be defined as the manner or style in which something is accomplished. On the basis of execution, contract can be classified into two main types i.e. ‘Executed' contract and ‘Executory' contract.
Former can be defined as a contract, when the act or forbearance promised in the contract has been accomplished by one, both or all parties i.e., a contract in which performance is already completed. The buying of goods or services generally falls under this category.
Latter refers to a contract in which parties are obliged to perform their obligation in the future. In this type of contract, consideration can only be made sometime in the future. The promise made under executory contract cannot be performed immediately.
On the Basis of Validity
Validity of a contract means, whether it can be trusted or believed. Validity of a contract is directly related to its acceptance by the parties.
On the basis of validity, contract can be of five different forms;
Valid Contract
A contract or agreement, which is enforceable at law, is referred to as a valid contract. The Indian Contract Act, 1872, has laid down all the essential elements of a valid contact. Some of the integral features of contract are consensus, certainty, two directional consideration, fulfillment of legal formalities etc.
Void Contract
Void contract is just contradict of valid contract, these are the contracts which are not enforceable by law. A valid contract can become void, when there is change in circumstances or some essential elements of the contract are altered.
Voidable Contract
A contract is known as voidable contract, when it is made under certain physical or mental pressure. There is possibility that in future, this contract can become valid or void. This contract lacks most basic requirement of contract i.e. free consent.
Legal Contract
A contract which is not according to the law and often breaks some rule of basic public policy is referred to as illegal contract. They are not enforceable by law. All the parties that are found to have agreed on an illegal promise are prosecuted in court of law.
Unenforceable Contract
When a contract due to certain defects such as absence of a proper stamp, absence of written form, signature, clauses etc. cannot be accepted as legal in a court of law, it is known as unenforceable contract.
E-contract
With the advancement in the technological sphere, there has been a change in the style and pattern of contract. Information technology has revolutionized the way contracts are formed.
With the increase in trend of digitization around the world, the new concept has evolved, i.e. e-contract. Now, people sitting far away from each other, can make contract using information technology such as e-mail, websites etc. Digital signature plays prominent role in the formation of e-contracts.
There are lots of benefits of e-contract, however there is also limitation to it. It can be defined as a contract, modeled, specified, executed and deployed by a software system. The essential elements of e-contract are similar to that of offline or physical contract. At a global level, countries have different view point, and rules and regulations regarding e-contract.
Nature of E-contract
E-contract has two main parties i.e. originator and addressee. According to the IT Act of 2008, originator is a person, who sends, generates, stores or transit electronic message, and the act defines an addressee as a person who is intended by the originator to receive the electronic record.
The most distinct nature of e-contract is that, usually, parties do not meet physically. For e-contract, there is no physical boundary. Their boundaries are mainly decided by the jurisdiction.
Types of E-contract
Shrink-Wrap Agreement
The contract which is made for purchase of software (lincensing agreement), is referred to as shrink-wrap agreement.
In this type of agreement, terms and conditions are basically decided by the manufacturer. A buyer has to give his/her assent for using that software. Such agreement is made with a objective to ensure copyright or intellectual property right of manufacturer.
Click or Web-Wrap Agreement
While browsing internet, we often see provision of I accept or ‘Ok' on the screen. Such types of agreements are known a click-wrap agreement. If consumer does not give consent he/she cannot use or purchase the product.
Browse-Wrap Agreement
When an agreement is binding on two or more people it known as browsing-wrap agreement. It is applicable while using website.
E-contract in India
In India, contracts are governed by the Indian Contract Act 1872, however, at the time of formation of the Act, concept of e-contract was not evolved. So, it does not include any specific provision regarding e-contract.
In the IT Act, 2008, there are many provisions which support e-contract in indirect way. Section 10 (A) of the Act says that:
Wherein a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposal and acceptance, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purposes.
In the year 2011, Section 65 A and 65 B were added in the Indian Evidence Act of 1872, which provided for the admission for any information contained in an electronic record in a court of law. Further, in the case of State of Delhi v. Mohd. Afzal and other, Delhi High Court held that, Electronic records are admissible as evidence. Such developments led to the acceptance of e-contract in India.
Breach of Contract
In simple words, ‘Breach of Contract' can be defined as a situation when one or more of the parties to the contract dishonour terms and conditions of a contract by non-performance or interference with the other party's performance.
Breach of contract occurs when any of the three conditions' take places i.e. fail to deliver in the appropriate time frame, does not meet the terms of the agreement, and fail to perform them. It is considered as civil wrong and one who breaches the contract may face legal action. To claim a breach of contract, a proof of the violation is imperative.
Types of Breach of Contract
Minor Breach
When a party under the obligation of contract fails to deliver/perform a part of the contract rather than whole contract, then it is referred to as minor breach. The other term used for minor breach is an impartial breach.
Material Breach
When a breach is so substantial, it destroys the value of whole contract. The basic purpose of the contract fails completely due to material breach. For this, the party can sue other, in order to claim damages from breaching party.
Anticipatory Breach
It is also referred as anticipatory repudiation. It may take place either by the promise doing an act which makes the performance of his promisee impossible or by the promisor in some other way showing his intention not to perform it.
Actual Breach
It refers to a breach that has already occurred, i.e., the breaching party has either refused to fulfill their obligations by the due date or they have performed their duties incompletely or improperly. Actual breach may take place either at the time of the performance is due or when actually performing the contract.
Provisions Related to Breach of Contract
The Chapter VI (Sections 73 to 75) of the Indian Contract Act, 1872, provides for the consequences of breach of contract.
According to Section 73 of the Act:
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
For example:
A contract to repair B's house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract.
A contract to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B's mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.
According to Section 74:
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
For example:
A contract with B to pay B 1,000, if he fails to pay B 500 on a given day. A fails to pay B 500 on that day. B is entitled to recover from A such compensation, not, exceeding 1,000, as the court considers reasonable.
A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B 5,000. A practice as a surgeon within Calcutta, he will pay B 5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation; not exceeding 5,000 as the court considers reasonable.
According to Section 75, A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.
For example:
A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her 1,000 for each night's performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfillment of the contract.
Remedies for Breach
When a contract is broken, the injured party has several courses of action open to him. The appropriate remedy in any case will depend upon the subject-matter of the contract and the nature of the breach.
Remedies against Breach of Contract
When a contract is broken, the injured party has several courses of action open to him, which are as follows:
As per Section 65 of the Act:
When a party treats the contract as rescinded, he makes himself liable to restore any benefits, he has received under the contract to the party from whom such benefits were received.
As per Section 75 of the Act:
If a person rightfully rescinds a contract, he is entitled to a compensation for any damage which he has sustained through the non-fulfillment of the contract by the other party.
Damages for Breach of Contract
As per Section 73 of the Act:
When a contract has been broken, a party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage, caused to him.
Specific Performance
When a party fails to perform the contract, the court may at its discretion, orders the defendant to carry out his undertaking according to the terms of the contract. A decree for specific performance may be granted in addition to or instead of damages.
Injunction
An injunction is an order of a court restraining a person from doing a particular act. It restrains continuance of a wrongful commission.
Frustration of Contract
In layman language, frustration simply means defeated. A contract becomes a frustrated contract, when either of the parties is incapable to perform due to an unforeseen event. Thus, none of the party is responsible for non-performance or unsuccessful transaction. With the passage of time, concept of doctrine of frustration has evolved.
Frustration of contract is common cause behind the failure of contract. It could be caused by reason such as an accident, change in law, fire, sickness of one of the party and third party interference. Generally, it is not acceptable in all circumstances nor in all types of contract.
Genesis of Frustration of Contract
To understand frustration of contract, we should know what freedom of contract is. It means that contract must be based on mutual agreement and free choice. The concept of freedom of contract laid down the foundation for frustration of contract.
In the year 1863, the English Court used the doctrine of frustration in the case of Taylor v. Cardwell. Main issue in the case was regarding holding concert at opera house, which was rented, however it was destroyed by fire. The court observed that the contract was frustrated because the very thing on which contract depended on ceased to exist.
Similarly, in the case of Krell v. Henry, in 1903, the English Court upholded the doctrine of frustration.
Utilization of Frustration of Contract
There are number of situations where frustration of contract can be utilized. Some of the major situations are as follows:
Impossible to Perform
This is the most prominent situation for the frustration of contract, it occurs when one or more parties find it impossible to meet obligations. There may be various reasons behind the impossibility of the performance.
Circumstances Changes
Circumstances keep on changing from time to time, At the time of preparation of contract, agreements are based on the existing situation, however due to occurrence of an unexpected, unforeseen event, which are beyond the control of parties, etc., it will be impossible or difficult for the parties to fulfill their obligation. In such circumstances, a contract will become frustrated contract.
Loss of Object
Contracts are based on the certain basic objects which are the foundation of the contract. Due to any reason, if that object ceases to exist, then the contract automatically become frustrated contract.
Doctrine of Frustration under the Indian Contract Act, 1872
The doctrine of frustration is not explicitly mentioned or defined in the Indian Contract Act, 1872. However, concept of frustration of contract can be interpreted from Section 56 of the Act. It states that an agreement to do an act impossible in itself is void.
Further, the section contain that:
A contract wherein a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.
In regard with the compensation, act of frustrated contract, Act states, Where one person has promised to do something which he knew, or with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
Judgments regarding frustration of contract
In Satyabrata Ghose v. Mugneeram Bangur and Co case, court held that doctrine of frustration of contract from the impossibility to do an act. The principle not only confined to physical impossibilities. In Sushila Devi v. Hari Singh case, the court stated that Z the performance of a contract becomes impracticable or useless having regard to the object and purpose of the parties, then it must be held that the performance of the contract became impossible.
But the supervening events could take away the very basis of the contract and it should be of such a character that it strikes at the root of the contract. As it was a case of lease of property, which after the unfortunate partition of India and Pakistan, the property in dispute which was situated in India, went onto the side of Pakistan, hence, making the terms of the agreement impossible.
In Rozan Mian v. Tahera Begum case, the court held that:
where a law promulgated after the contract is made, makes the performance of the agreement impossible and thereby the agreement becomes void.
Agreement
Agreement is basic foundation stone of the contract. It can be simply defined as an understanding and intention between two or more parties, with respect to the effect upon their relative duties and rights, of certain past or future facts or purpose. It is generally written in standard form. Offer, acceptance and consideration are some of the basic elements of the agreement.
Void Agreement
The agreements which do not have legal capacity to be enforceable are referred to as void agreements. Such agreement does not have any legal value. Valid agreement becomes void agreement, when it lacks one or more essential element of the contract.
According to Section 2(g) of Indian Contract Act, 1872, An agreement not enforceable by law is said to be void. In Section 2(j), A contract which ceases in to be enforceable by law becomes void.
Prominent sections of the Indian Contract Act, 1872, in the context of void agreement are as follows:
Section 23: The consideration or object of an agreement is lawful, however in case of fraud, which involves or implies injuries to the person or property, immoral, and opposed to public policy, etc. an agreement becomes void.
For example:
For example:
A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in other articles. B promises to pay to A salary of 10,000 a year. The agreement is void, the object of A's promise, and the consideration for B's promise, being in part unlawful.
Section 25: Agreement without consideration is void, unless it 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 of law.
For example,
Section 27: Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Section 28: Every agreement:
For example,
Section 35: Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within a fixed time may be enforced by law when the time fixed has expired and such event has not happened or, before the time fixed has expired, if it becomes certain that such event will not happen.
For example:
Voidable Agreement
When a formal agreement between two or more parties may become enforceable due to multiple reasons, then such agreements are referred to as voidable agreement. According to Section 2(i) of Indian Contract Act, 1872, An agreement which is enforceable by law at the option of one or more parties thereto, but not at the option of the others is avoidable contract.
According to Section 19, When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.
For example:
A, intending to deceive B, falsely represents that 500 kg of indigo are made annually at A's factory, and thereby induces B to buy the factory, the contract is voidable at the option of B.
According to Section 19 (A), When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit there under, upon such terms and conditions as to the court may seem just.
For example:
A, a money-lender, advances 100 to B, an agriculturist, and, by undue influence, induces B to execute a bond for 200 with interest at 6 percent per month. The court may set the bond aside, ordering B to repay the 100 with such interest as may seem just.
Contract
A set of promises, may be oral or written in nature, which is legally enforceable is known as contract. It is a binding agreement between two or more parties. A contract includes variety of subjects such as exchange of goods, services, capital or promises of any of those. Contracts are part and parcel of our life. Contracts can be of various types depending on the terms and conditions. A contract creates mutual obligation on the contracting parties.
Definitions of Contract
According to Pollock, Every agreement and promise enforceable by law is a contract.
According to Salmond, A contract is an agreement creating and defining obligation between two or more persons by which rights are acquired by one or more to act or forbearance on the part of others.
According to 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.
According to Section 2(h) of the Indian Contract Act, 1872, An agreement enforceable by law is a contract.
From this definition, we find that a contract essentially consists of two elements i.e. an agreement and legal obligation i.e. a duty enforceable by law.
According to Cambridge Dictionary, Contract is a legal document that states and explains a formal agreement between two different people or groups, or the agreement itself.
Law of Contract in India
In India, contracts are being governed by the British enacted legislation i.e. the Indian Contract Act, 1872. This act is based on the principle of ‘English Common Law'. It deals efficiently with all the aspects of contract such as formation, enforcement etc. There are 11 Chapters and 266 sections however Sections 76 to 123 and 239 to 266 have been repealed.
Important Definitions in the Indian Contract Act, 1872
As per Section 13, Consent is defined as two or more persons are said to be consent when they agree upon the same thing in the same sense.
As per Section 14, Free consent is defined as consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and mistake.
As per Section 15, Coercion is defined as the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 to 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.
As per Section 16, Undue influence is defined as 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.
As per Section 17, 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 of his agent, or to induce him to enter into the contract.
As per Section 18, 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; [Section 18(1)]
Any breach of duty which, without intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; [Section 18(2)]
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; [Section 18(3)]
As per Section 31, Contingent contract is defined as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
As per Section 148, Bailment, Bailor and Bailee are defined as a ‘bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed off according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor'. The person to whom they are delivered is called the ‘bailee'.
As per Section 172, Pledge, Pawnor and Pawnee are defined as the bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor is in this case called the pawnor. The bailee is called the pawnee.
As per Section 182, Agent and Principal are defined as an agent is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal.
Essential Elements of Contract
As per Section 10 of Indian Contract Act, 1872, 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.
The essential elements of a valid contract are as follows
Offer
An offer is also termed as proposal. An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual obligation in return for a promise, act or forbearance.
As per Section 2 (a) of the Indian Contract Act, when one person signifies to another his willingness to do or 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 or offer.
The person making the proposal/offer is called the proposer or offeror and the person to whom the proposal is made, is called the offeree.
Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an offer. Under Section 2 (b) of the Contract Act, When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted.
Mutual Agreement
A situation is referred to as meeting of mind, when both the parties have recognised the contract and both give consent for entering into its obligations.
Lawful Consideration
The term ‘consideration' simply means something in return (quid pro quo). Any contract to be enforceable by law must have legal consideration.
According to Section 2(d), consideration is defined When at the desire of the promisor, the promisee or other person has done or abstained from doing, or does, abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called consideration for the promise.
Capacity of Parties to Contract
For a contract to be valid, the parties of a contract must have capacity, i.e. competence to enter into a contract. Every person is presumed to have capacity to contract but there is certain person whose age, condition of mental status renders them incapable of binding themselves by a contract. This incapacity must be proved by the party claiming the benefit of it.
As per Section 11 of the Act, it deals with the competency of parties and provides that:
every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject.
Therefore, the following persons are incompetent t contract:
Minor, Person of unsound mind and person disqualified by any law to which they are subject. Thus, any contract entered into by the persons mentioned above, are void.
Legality of Contract
Legality of contract is the basis for its future and performance of obligation by the parties. A contract can be made only for the legal product or services; legality of contract, vary from one jurisdiction to another. For instance, an arm smuggler's contract with its buyers cannot be entertained into court of law.
Free Consent
For a contract to be valid, the consent of the parties must be genuine i.e. free. The principle of consensus-ad-idem is followed which means that the parties entering into contract, must mean the same thing in the same sense. The parties to the contract must have the same understanding regards to subject matter of the contract.
As per the Act, free consent is consent, i.e. free from coercion, undue influence, fraud, misrepresentation or mistake. When the given consent is affected by these elements, it calls into question whether the consent given was free and voluntary.
Types of Contract
Contracts are of diversified nature. Contracts can be classified into four types, namely:
On the Basis of Formation
Formation in general means the way in which contract is formed. Based on the methodology of formation, contract can be of three types-express contract, implied contract and quasi-contract.
When a contract results from an expression or conversion, it is known as express contract. In this type of contract, parties to contract know everything about the content of the contract. In future, they can't claim that anything included in the contract has been hidden from them.
On the other hand, contract is called implied contract when it occurs without expression. It is just opposite to the express contract.
Quasi-contract is not a type of contract, but it is an equitable remedy to prevent unjust enrichment that is determined as though a contract existed. In legal terms, it is sometimes referred to as implied-at-law contract.
On the Basis of Nature of Consideration
In law, consideration is referred to as value given in exchange for a promise and must be something of sufficient value exchanged for that promise. On the basis of nature of consideration, there are two types of contract, namely ‘Unilateral and Bilateral' contract.
In former, only one party makes a promise, it also means that other party does not have any obligation for making this type of contract, just an acceptance of an offer is sufficient. A unilateral contract can be both expressed as well as implied.
In latter, participating parties promise each other and have certain rights and obligations towards each other. In common language, this type of contract is also referred to as two-sided contract. The salient feature of bilateral contract is that, both the parties are involved in the negotiation of a contract.
On the Basis of Execution
Execution can be defined as the manner or style in which something is accomplished. On the basis of execution, contract can be classified into two main types i.e. ‘Executed' contract and ‘Executory' contract.
Former can be defined as a contract, when the act or forbearance promised in the contract has been accomplished by one, both or all parties i.e., a contract in which performance is already completed. The buying of goods or services generally falls under this category.
Latter refers to a contract in which parties are obliged to perform their obligation in the future. In this type of contract, consideration can only be made sometime in the future. The promise made under executory contract cannot be performed immediately.
On the Basis of Validity
Validity of a contract means, whether it can be trusted or believed. Validity of a contract is directly related to its acceptance by the parties.
On the basis of validity, contract can be of five different forms;
Valid Contract
A contract or agreement, which is enforceable at law, is referred to as a valid contract. The Indian Contract Act, 1872, has laid down all the essential elements of a valid contact. Some of the integral features of contract are consensus, certainty, two directional consideration, fulfillment of legal formalities etc.
Void Contract
Void contract is just contradict of valid contract, these are the contracts which are not enforceable by law. A valid contract can become void, when there is change in circumstances or some essential elements of the contract are altered.
Voidable Contract
A contract is known as voidable contract, when it is made under certain physical or mental pressure. There is possibility that in future, this contract can become valid or void. This contract lacks most basic requirement of contract i.e. free consent.
Legal Contract
A contract which is not according to the law and often breaks some rule of basic public policy is referred to as illegal contract. They are not enforceable by law. All the parties that are found to have agreed on an illegal promise are prosecuted in court of law.
Unenforceable Contract
When a contract due to certain defects such as absence of a proper stamp, absence of written form, signature, clauses etc. cannot be accepted as legal in a court of law, it is known as unenforceable contract.
E-contract
With the advancement in the technological sphere, there has been a change in the style and pattern of contract. Information technology has revolutionized the way contracts are formed.
With the increase in trend of digitization around the world, the new concept has evolved, i.e. e-contract. Now, people sitting far away from each other, can make contract using information technology such as e-mail, websites etc. Digital signature plays prominent role in the formation of e-contracts.
There are lots of benefits of e-contract, however there is also limitation to it. It can be defined as a contract, modeled, specified, executed and deployed by a software system. The essential elements of e-contract are similar to that of offline or physical contract. At a global level, countries have different view point, and rules and regulations regarding e-contract.
Nature of E-contract
E-contract has two main parties i.e. originator and addressee. According to the IT Act of 2008, originator is a person, who sends, generates, stores or transit electronic message, and the act defines an addressee as a person who is intended by the originator to receive the electronic record.
The most distinct nature of e-contract is that, usually, parties do not meet physically. For e-contract, there is no physical boundary. Their boundaries are mainly decided by the jurisdiction.
- For e-contract, parties have to rely on digital signature.
- There is no specific body or authority for monitoring e-contract.
- E-contract are enforceable by law, as electronic documents can be used as evidence in court.
Types of E-contract
Shrink-Wrap Agreement
The contract which is made for purchase of software (lincensing agreement), is referred to as shrink-wrap agreement.
In this type of agreement, terms and conditions are basically decided by the manufacturer. A buyer has to give his/her assent for using that software. Such agreement is made with a objective to ensure copyright or intellectual property right of manufacturer.
Click or Web-Wrap Agreement
While browsing internet, we often see provision of I accept or ‘Ok' on the screen. Such types of agreements are known a click-wrap agreement. If consumer does not give consent he/she cannot use or purchase the product.
Browse-Wrap Agreement
When an agreement is binding on two or more people it known as browsing-wrap agreement. It is applicable while using website.
E-contract in India
In India, contracts are governed by the Indian Contract Act 1872, however, at the time of formation of the Act, concept of e-contract was not evolved. So, it does not include any specific provision regarding e-contract.
In the IT Act, 2008, there are many provisions which support e-contract in indirect way. Section 10 (A) of the Act says that:
Wherein a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposal and acceptance, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purposes.
In the year 2011, Section 65 A and 65 B were added in the Indian Evidence Act of 1872, which provided for the admission for any information contained in an electronic record in a court of law. Further, in the case of State of Delhi v. Mohd. Afzal and other, Delhi High Court held that, Electronic records are admissible as evidence. Such developments led to the acceptance of e-contract in India.
Breach of Contract
In simple words, ‘Breach of Contract' can be defined as a situation when one or more of the parties to the contract dishonour terms and conditions of a contract by non-performance or interference with the other party's performance.
Breach of contract occurs when any of the three conditions' take places i.e. fail to deliver in the appropriate time frame, does not meet the terms of the agreement, and fail to perform them. It is considered as civil wrong and one who breaches the contract may face legal action. To claim a breach of contract, a proof of the violation is imperative.
Types of Breach of Contract
Minor Breach
When a party under the obligation of contract fails to deliver/perform a part of the contract rather than whole contract, then it is referred to as minor breach. The other term used for minor breach is an impartial breach.
Material Breach
When a breach is so substantial, it destroys the value of whole contract. The basic purpose of the contract fails completely due to material breach. For this, the party can sue other, in order to claim damages from breaching party.
Anticipatory Breach
It is also referred as anticipatory repudiation. It may take place either by the promise doing an act which makes the performance of his promisee impossible or by the promisor in some other way showing his intention not to perform it.
Actual Breach
It refers to a breach that has already occurred, i.e., the breaching party has either refused to fulfill their obligations by the due date or they have performed their duties incompletely or improperly. Actual breach may take place either at the time of the performance is due or when actually performing the contract.
Provisions Related to Breach of Contract
The Chapter VI (Sections 73 to 75) of the Indian Contract Act, 1872, provides for the consequences of breach of contract.
According to Section 73 of the Act:
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
For example:
A contract to repair B's house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract.
A contract to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B's mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.
According to Section 74:
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
For example:
A contract with B to pay B 1,000, if he fails to pay B 500 on a given day. A fails to pay B 500 on that day. B is entitled to recover from A such compensation, not, exceeding 1,000, as the court considers reasonable.
A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B 5,000. A practice as a surgeon within Calcutta, he will pay B 5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation; not exceeding 5,000 as the court considers reasonable.
According to Section 75, A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.
For example:
A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her 1,000 for each night's performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfillment of the contract.
Remedies for Breach
When a contract is broken, the injured party has several courses of action open to him. The appropriate remedy in any case will depend upon the subject-matter of the contract and the nature of the breach.
Remedies against Breach of Contract
When a contract is broken, the injured party has several courses of action open to him, which are as follows:
- The injured party may rescind the contract and refuse further performance of the contract.
- The injured party may sue for damages.
- The injured party may sue for specific performance.
As per Section 65 of the Act:
When a party treats the contract as rescinded, he makes himself liable to restore any benefits, he has received under the contract to the party from whom such benefits were received.
As per Section 75 of the Act:
If a person rightfully rescinds a contract, he is entitled to a compensation for any damage which he has sustained through the non-fulfillment of the contract by the other party.
Damages for Breach of Contract
As per Section 73 of the Act:
When a contract has been broken, a party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage, caused to him.
Specific Performance
When a party fails to perform the contract, the court may at its discretion, orders the defendant to carry out his undertaking according to the terms of the contract. A decree for specific performance may be granted in addition to or instead of damages.
Injunction
An injunction is an order of a court restraining a person from doing a particular act. It restrains continuance of a wrongful commission.
Frustration of Contract
In layman language, frustration simply means defeated. A contract becomes a frustrated contract, when either of the parties is incapable to perform due to an unforeseen event. Thus, none of the party is responsible for non-performance or unsuccessful transaction. With the passage of time, concept of doctrine of frustration has evolved.
Frustration of contract is common cause behind the failure of contract. It could be caused by reason such as an accident, change in law, fire, sickness of one of the party and third party interference. Generally, it is not acceptable in all circumstances nor in all types of contract.
Genesis of Frustration of Contract
To understand frustration of contract, we should know what freedom of contract is. It means that contract must be based on mutual agreement and free choice. The concept of freedom of contract laid down the foundation for frustration of contract.
In the year 1863, the English Court used the doctrine of frustration in the case of Taylor v. Cardwell. Main issue in the case was regarding holding concert at opera house, which was rented, however it was destroyed by fire. The court observed that the contract was frustrated because the very thing on which contract depended on ceased to exist.
Similarly, in the case of Krell v. Henry, in 1903, the English Court upholded the doctrine of frustration.
Utilization of Frustration of Contract
There are number of situations where frustration of contract can be utilized. Some of the major situations are as follows:
Impossible to Perform
This is the most prominent situation for the frustration of contract, it occurs when one or more parties find it impossible to meet obligations. There may be various reasons behind the impossibility of the performance.
Circumstances Changes
Circumstances keep on changing from time to time, At the time of preparation of contract, agreements are based on the existing situation, however due to occurrence of an unexpected, unforeseen event, which are beyond the control of parties, etc., it will be impossible or difficult for the parties to fulfill their obligation. In such circumstances, a contract will become frustrated contract.
Loss of Object
Contracts are based on the certain basic objects which are the foundation of the contract. Due to any reason, if that object ceases to exist, then the contract automatically become frustrated contract.
Doctrine of Frustration under the Indian Contract Act, 1872
The doctrine of frustration is not explicitly mentioned or defined in the Indian Contract Act, 1872. However, concept of frustration of contract can be interpreted from Section 56 of the Act. It states that an agreement to do an act impossible in itself is void.
Further, the section contain that:
A contract wherein a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.
In regard with the compensation, act of frustrated contract, Act states, Where one person has promised to do something which he knew, or with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
Judgments regarding frustration of contract
In Satyabrata Ghose v. Mugneeram Bangur and Co case, court held that doctrine of frustration of contract from the impossibility to do an act. The principle not only confined to physical impossibilities. In Sushila Devi v. Hari Singh case, the court stated that Z the performance of a contract becomes impracticable or useless having regard to the object and purpose of the parties, then it must be held that the performance of the contract became impossible.
But the supervening events could take away the very basis of the contract and it should be of such a character that it strikes at the root of the contract. As it was a case of lease of property, which after the unfortunate partition of India and Pakistan, the property in dispute which was situated in India, went onto the side of Pakistan, hence, making the terms of the agreement impossible.
In Rozan Mian v. Tahera Begum case, the court held that:
where a law promulgated after the contract is made, makes the performance of the agreement impossible and thereby the agreement becomes void.
Agreement
Agreement is basic foundation stone of the contract. It can be simply defined as an understanding and intention between two or more parties, with respect to the effect upon their relative duties and rights, of certain past or future facts or purpose. It is generally written in standard form. Offer, acceptance and consideration are some of the basic elements of the agreement.
Void Agreement
The agreements which do not have legal capacity to be enforceable are referred to as void agreements. Such agreement does not have any legal value. Valid agreement becomes void agreement, when it lacks one or more essential element of the contract.
According to Section 2(g) of Indian Contract Act, 1872, An agreement not enforceable by law is said to be void. In Section 2(j), A contract which ceases in to be enforceable by law becomes void.
Prominent sections of the Indian Contract Act, 1872, in the context of void agreement are as follows:
Section 23: The consideration or object of an agreement is lawful, however in case of fraud, which involves or implies injuries to the person or property, immoral, and opposed to public policy, etc. an agreement becomes void.
For example:
- A, B and C enter into an agreement for the division among them of gains acquired or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.
- A promises to obtain for B an employment in the public service and B promises to pay 1,000 to A. The agreement is void, as the consideration for it is unlawful.
For example:
A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in other articles. B promises to pay to A salary of 10,000 a year. The agreement is void, the object of A's promise, and the consideration for B's promise, being in part unlawful.
Section 25: Agreement without consideration is void, unless it 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 of law.
For example,
- A promise, for no consideration, to give B 1,000. This is a void agreement.
- A, for natural love and affection, promises to give his son, B, 1,000. A puts his promise to B into writing and registers it. This is a contract.
Section 27: Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Section 28: Every agreement:
- by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or
- which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specific period so as to restrict any party from enforcing his rights, is void to the extent.
For example,
- A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
- A agrees to sell to B all the grain in my granary at Ramnagar. There is no uncertainty here to make the agreement void.
Section 35: Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within a fixed time may be enforced by law when the time fixed has expired and such event has not happened or, before the time fixed has expired, if it becomes certain that such event will not happen.
For example:
- A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.
- A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.
Voidable Agreement
When a formal agreement between two or more parties may become enforceable due to multiple reasons, then such agreements are referred to as voidable agreement. According to Section 2(i) of Indian Contract Act, 1872, An agreement which is enforceable by law at the option of one or more parties thereto, but not at the option of the others is avoidable contract.
According to Section 19, When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.
For example:
A, intending to deceive B, falsely represents that 500 kg of indigo are made annually at A's factory, and thereby induces B to buy the factory, the contract is voidable at the option of B.
According to Section 19 (A), When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit there under, upon such terms and conditions as to the court may seem just.
For example:
A, a money-lender, advances 100 to B, an agriculturist, and, by undue influence, induces B to execute a bond for 200 with interest at 6 percent per month. The court may set the bond aside, ordering B to repay the 100 with such interest as may seem just.
Law Article in India
Legal Question & Answers
Lawyers in India - Search By City
LawArticles
How To File For Mutual Divorce In Delhi
How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...
Increased Age For Girls Marriage
It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...
Facade of Social Media
One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...
Section 482 CrPc - Quashing Of FIR: Guid...
The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...
The Uniform Civil Code (UCC) in India: A...
The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...
Role Of Artificial Intelligence In Legal...
Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...
Please Drop Your Comments