Law relating to contracts

Dr. Nandimath Omprakash V,

Professor in Law,
National Law School of India,
Bangalore-560 072
Email – ovnandimath@nls.ac.in
Contents of the presentation

I. Functional analysis of ‘contracts’

• Why ‘contract’ law?
• The objective to the achieved
II. The strategy adopted in India
• Artificial classification between ‘agreement’ &
‘contract’
• Performance law
III. Construction of contracts & interpretation
• Standard form of contracts
• Classification of complex contracts
IV. Miscellaneous
 Functional analysis of contracts

The objective and necessity of law…

The basis of contract law

• Bringing certainty into the activities of life

[especially the economic transactions]
• Different theories to explain
– Based on ‘morality’
– Based on ‘expectation’
– Based on ‘utility’
• Hence, basically ‘contract law’ aims to ensure
‘certainty’ of promises made
If there is no certainty…

• Promisee suffers ‘pain and disappointment’

[first order of impact]
• His/her family & other dependants get
disappointed [second order of impact]
• Such tendency encourages the ‘bad man’ (who
has a tendency to deviate) [third order of
impact]
The strategy adopted

• The reality – practically all promises can’t be

enforced
• Common law approach – underlining
‘intention’
– Highly subjective and open to questions
– Ideal only to eliminate trivial litigations
• Statute based approach – enforcement based on
‘selection’ criterion
The Indian law of contract

The strategy adopted…

AGREEMENT

Capacity of parties

Free mind of the parties

Legally not harmful

No specific bar by law

Valid consideration

CONTRACT
AGREEMENT

Capacity of parties

Free mind of the parties

Legally not harmful

No specific bar by law

Valid consideration

CONTRACT
Indian law

• Sec. 10
– “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…”
• Sec. 11
– “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”
Capacity of parties

• Law limits the capacity of certain persons to

bind themselves by a promise
– The crown and public authority
– Minors
– Corporations
– Mentally disordered persons
– Others [by law to which they are subject to]
 Objective of abrogation of ‘capacity’ by law

Public finance/tax payers’

Public authorities
money

corporations investors’/creditors’ money

minors Minors interest

others Subject to the policy

persons of ‘unsound mind’

• Sec. 12 of Indian contract Act

– “A person is said to be of sound mind for the purpose
of making a contract if, at the time when he makes it,
he is capable of understanding it and of forming a
rational judgment as to its effect upon his interests.
A person who is usually of unsound mind, but
occasionally of sound mind, may make a contract
when he is of sound mind.
A person who is usually of sound mind, but
occasionally of unsound mind, may not make a
contract when he is of unsound mind”
AGREEMENT

Capacity of parties

Free mind of the parties

Legally not harmful

No specific bar by law

Valid consideration

CONTRACT
‘consent’ – defined

• Sec. 14 – “consent is said to be free when it is

not caused by;
1. Coercion; as defined in Sec. 15; or
2. Undue influence, as defined in Sec. 16; or
3. Fraud, as defined in Sec. 17; or
4. Misrepresentation, as defined in Sec. 18; or
5. Mistake, subject to the provisions of Sections
20, 21 and 22
Consent is generally presumed to be free

coercion voidable

undue influence voidable

fraud voidable

misrepresentation voidable

mistake void

Unless any party to the contract proves

‘coercion’

• Consent is said to be caused by coercion when it

is obtained by pressure exerted by either of the
following techniques;
– Committing or threatening to commit any act
forbidden by the Indian Penal code, 1860
– Unlawfully detaining or threatening to detain any
property
‘undue influence’
• Sec. 16 ICA
– “(1) 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
(2) in a particular and without prejudice to the forgoing
principle, a person is said to be able to dominate the will of
another;
• (a) where he holds a real or apparent authority over the
other or where he stands in a fiduciary relation to the
other; or
• (b) where he makes a contract with a person whose
mental capacity is temporarily or permanently affected
by reason of age, illness, or mental or bodily distress…”
Relationship
between
parties

One is in a apparent authority

position fiduciary relations
of domination

Uses the
domination
to his
advantage
‘mistake’

• “where both the parties to an agreement are

under a mistake as to a matter of fact essential to
the agreement, the agreement is void” [Sec. 20]
• Mistake as to the identity of the party
• Mistake as to the subject matter
• Mistake as to the nature of promise
AGREEMENT

Capacity of parties

Free mind of the parties

Legally not harmful

No specific bar by law

Valid consideration

CONTRACT
Legality of contract

Freedom of contract

•Agreements without
consideration [s. 25]
Specific •Agreements in restraint of
cases marriage [s. 26]
identified •Agreements in restraint of
trade [s. 27]
Anything opposed to •Agreements in restraint of
public policy legal proceedings [s. 28]
•Unmeaning agreements
[s. 29]
•Wagering agreements [s.
30]
•Agreements to do
impossible act [s. 56]
unlawful agreements

• Sec. 23 renders certain considerations and

objects as unlawful
• They are
– If it is forbidden by law;
– Is of such nature that, if permitted, it would defeat
the provision of any law;
– Is fraudulent;
– Involves injury to the person or property of another;
– The court regards it as immoral or opposed to public
policy
• Effect of such unlawful contracts are void
‘public policy’

• The term ‘public policy’ in its broadest sense

means that sometimes the courts will, on
considerations of public interest, refuse to
enforce a contract
• But there is no specific definition accepted of –
‘public policy’
•
“The doctrine of public policy may be summarized
thus; public policy or the policy of the law is an
illusive concept; it has been described as an
‘untrustworthy guide’, ‘variable quality’,
‘unruly horse’ etc., the primary duty of the
court of law is to enforce a promise which the
parties have made and to uphold the sanctity of
contract which forms the basis of society; but in
certain cases, the court may relieve them of their
duty on a rule founded on what is called the
public policy”
- Subba Rao. J, in Gherulal v Mahadeo Das,
[1959] 2SCA 342 at p. 370
ADVANCEMENT PREVENTION OF
OF PUBLIC PUBLIC
GOOD MISCHIEF

The question of ‘public policy is to be

decided by the judges not as men of
legal learning but as experienced
and enlightened members of society
agreements without consideration

• “Consideration means something which is of

some value in the eye of law… It may be some
benefit to the plaintiff or some detriment to the
defendant”
• So.. Contract without consideration is void
• Exceptions to the rule of consideration
– Contracts under seal
– Promise to compensate for something done
– Promise to pay debt barred by limitation law
– Creation of ‘agency’
agreement in restraint of trade

“every agreement by which any one is restrained

from exercising a lawful profession, trade or
business of any kind is to that extent void”
Exceptions:
1. Agreement not to carry on business of which
goodwill is sold,
2. Any other reasonable restrains
• Trade combinations
• Exclusive dealing agreements
• Restraints upon employees
agreements in restraint of legal proceedings

• Sec. 28 ICA renders void two kinds of

agreements viz;
1. An agreement by which a party is restricted
absolutely from enforcing his legal rights arising
under a contract by the usual legal proceedings in
the ordinary tribunals
2. An agreement which limits the time within which
the contract rights may be enforced
3. But there is an exception – ‘arbitration’
uncertain agreements

• Sec. 29 ICA – “agreements, meaning of which

is not certain, or capable of being made certain
are void”
• Agreement to sell ‘100 tons of oil’
• To decorate the hall in accordance to the ‘latest
fashion’
• But where by reference to the circumstances
certainty be bestowed – not hit be s. 28
wagering agreements

• Agreement by way of wager are void

• But s.30 of ICA does not define ‘wager’
• “Wager as a promise to give money or money’s
worth upon the determination or ascertainment
of an uncertain event..” - Anson
AGREEMENT

Capacity of parties

Free mind of the parties

Legally not harmful

No specific bar by law

Valid consideration

CONTRACT
Progression of contract

Determination
Discharge
Pre-contract of terms &
of the
negotiations conditions of
contract
contract
Modes of discharge of contract

AGREEMENT PERFORMANCE

FRUSTRATION

CONTRACT

DE-NOVO AGREEMENT

OBLIGATIONS & RIGHTS TO PARTIES BREACH

Performance

Sec. 37
“The parties to a contract must either perform, or
offer to perform their respective promises,
unless such performance is dispensed with or
excused under the provisions of this Act, or any
other law.
Promises bind the representatives of the promisors
in case of the death of such promisors before
performance, unless a contrary intention appears
from the contract.”
 DURING THE LIFE OF THE PARTIES

99% PERFROM OR OFFER TO PERFORM

FRUSTRATION OR ANY OTHER LAW

01%

IF DEATH OF THE PARTIES TAKES PLACE BEFORE PERFORMANCE

LEGAL REPRESENTATIVES TO PERFORM ON

BEHALF OF THE EARLIER PARTIES

IF CONTRARY INTENTION – THEN THE RIGHT DIE WITH

THE PARTIES
Tender

• ‘Tender of performance’ is equivalent to

performance
• “where a promisor has made an offer of
performance to the promisee, and the offer has
not been accepted, the promisor is not
responsible for non-performance, nor does he
thereby lose his rights under the contract” [sec.
38]
• But… there must be valid tender
‘Valid tender’

• If it is unconditional;
• Must be made at a proper time and place
• Must provide reasonable opportunity to the
other party to verify [in case of deliver
anything]
• Must not be tender for part performance
• A tender to of several promisees is enough [it is
deemed as tender to perform to all]
Who shall perform?

“if it appears from the nature of the case that it

was the intention of the parties to any contract
that any promise contained in it should be
performed by the promisor himself, such
promise must be performed by the promisor. In
other cases, the promisor or his representatives
may employ a competent person to perform it.”
[sec. 40]
Time and place of performance

• No application & no time specified [s. 46]

– The performance must be within ‘reasonable time’
• No application & time is specified [s. 47]
– The promisor has to undertake to perform without
application by the promisee, but on the date and time
specified
– If only date or day is specified only during the normal
working hours – the performance is to be made
• Application to be made on certain day and time
[s. 48]
– It is the duty of the ‘promisee’ to apply for
performance at proper place and time – then the
promisor shall perform
• No application, no place, no date is fixed [s. 49]
– It is the duty of the promisor to apply to the promisee
to appoint a ‘reasonable place for performance’ –
and perform accordingly
• “the performance of any promise may be made
in any manner, or at any time which the
promisee prescribes or sanctions” – [s. 50]
Time of performance

• Where time is ‘essence of the contract’

– If not performed becomes ‘voidable’ at the option
of the ‘promisee’
• Where time is ‘no essence of the contract’
– Not ‘voidable’ but promisee may claim ‘damages’
for the delay in performance
• Time when essence of contract?
– Where parties have expressly agreed to treat it as
essence of contract;
– Where delay operates as injury;
– Where the nature and necessity of the contract
requires it to be so construed, for e.g., where a party
asks for extension of time for performance
Impossibility of performance

1. An impossible act – perse void

2. At the time of agreement – the agreement is
alright but becomes ‘impossible’ – because of
subsequent developments
3. Promisor within knowledge, or with
reasonable attempt should have known the
impossibility but still promises – liable to
compensate to promise
Frustration

Frustration or impossibility

Object of the
Physical
contract getting
impossibility
failed
Frustration

“this much is clear that the word ‘impossible’ has not been
used here in the sense of physical or literal impossibility.
The performance of an act may not be literally
impossible but it may be impracticable and useless from
the point of view of the object and purpose which the
parties had in view; and if an untoward event or change
of circumstances totally upsets the very foundation upon
which the parties rested their bargain, it can very well be
said that the promisor finds it impossible to do the act
which he promised to do”
-B K Mukherjea J, in Satyabrata v Mugeneeram, AIR
1954 SC 44
Frustration

• But impossibility does not mean ‘commercial

impossibility
• Specific grounds allowed so far
– Destruction of subject matter;
– Changed circumstances;
– Non occurrence of contemplated event;
– Death or incapacity of the party;
– Government or legislative intervention; and
– Intervention of war;
Remedies

• Specific performance [wherever possible]

• Damages
• punitive damages
Construction & interpretation of
contracts

The approach of the court…

Modern contract law

Use of
Inequality of
standard form of
Bargaining power
contracts

Concept of
consumer
protection