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LEGAL ELEMENT OF CONTRACTS
• Promise to do a certain thing in exchange for a promise from another person • Promise so made is legally enforced , a Legal Bond i.e.
• All contracts are agreement but not all agreement are contracts – agreement often deals with personal or social matter – It often enforces social or moral obligation – If agreement is legally enforceable then only it can be called as Contract OR – (Agreement + legal enforceability = Contract )
LEGAL ELEMENT OF CONTRACTS contd.
• Two essentials of agreement are : – Plurality of persons – two or more parties – Consensus ad idem – consent over same thing
So two basic requirement of contract are – An agreement – (vinculum juris) - Legal enforceability
FORMATION OF CONTRACT
1. FREE CONSENT • Free will or consent over same thing & same sense • No Coercion, undue influence, Fraud (knowingly)Misrepresentation(unknowingly) or mistake 2. CAPACITY OF PARTIES – Major , sound mind & not disqualified(Insolvent/ convicted)under any law for time being in force 3. OFFER • There should be lawful offer & lawful acceptance • Offeror or promisor & offeree or promisee
• • TYPES OF OFFER General or specific offer .Offer may be generally to whole community or specific to an individual • Express or implied – either in words spoken or written or can be inferred from conduct of parties • (Express) A writes to B to sell his car for Rs 2 lacs • (Implied) X purchases airlines ticket – implied offer by airline to take passengers to scheduled places at scheduled fares .FORMATION OF CONTRACT contd.
Such acceptance of B is not binding on A as the counter offer implies rejection of offer .FORMATION OF CONTRACT contd. B counter offer to purchase it for 1 lacs but when A is not ready he agrees for 2 lacs . • Positive or negative offer • A offers to sells his house to B (+) • X offers not to interfere in Y business (-) • Counter offer • Where offeree attempts to change the terms of offer initially made by the Offeror • Counter offer implies rejection of original offer • A offered to sale land for 2 lacs.
highest bidder is assumed to be buyer once deal is struck • Acceptance should be unconditional or it‟s a Counter offer .FORMATION OF CONTRACT 4 ACCEPTANCE • Consent of offeree either in words or implied • Implied means when it is inferred by conduct of party – E g –In auction .
2. Where offer is not accepted in prescribed mode When offer is not accepted in prescribed time By rejection or counter offer or conditional acceptance Death or insanity of either party By revocation – if Offeror informs the offeree that he is withdrawing or revoking contract before it is accepted Subsequent illegality – subject matter is destroyed or becomes illegal Failure to fulfill a condition precedent to acceptance – non payment of fees with tender . 5. 4.LAPSE OR TERMINATION OF OFFER 1. 3. 6. 7.
CONSIDERATION & LEGAL ENFORCEABILITY • Agreement without consideration is void • Indian Contract Act 1872 restricts to those agreement only which are legally enforceable • When both parties performs their respective promises then contract is said to be performed • When promissor dies then promisee has to sue legal heirs to whom property is devolved • Promises bind representatives of promissor unless contrary intention is there in contract • When promissor does not show intention to perform alone he or his representatives can employ a competent person .
minor . disqualified under any other law • Agreement under mutual mistake of fact of material – Mistake of fact which is of prime importance • A agrees to buy cargo with B which while making agreement was lost in transit . Neither party is aware of the contract • Agreement with unlawful consideration – Division of gain among partners acquired by them by fraud • Illegal & immoral agreements – Agreement to interfere with marital relations – Illicit concubinage or cohabitation .VOID AGREEMENTS • Agreement by incompetent parties – Unsound mind .
VOID AGREEMENTS CONTD. • Agreement opposed to public policy – Trading agreement with enemy – Marriage brokerage contract • Agreement unlawful in part – Whole agreement is void if the unlawful part of object or consideration cannot be separated from lawful part – A got consolidated 15000 pm from B for two contracts where one is illegal & one legal • Agreement without consideration – Unless it is out of love & affection ( Gift or Will) – Promise to compensate for any past consideration .
• Agreement in restraint of marriage of any person – Other than minor – Two widows of same deceased husband agrees that if any one of them re marry than she will forfeit her right in husbands property • Held that this agreement is not restraint in marriage • Agreement in restraint to trade – Any agreement by which anyone is restrained from exercising a lawful trade . Afterwards B did not give money .VOID AGREEMENTS CONTD. profession or business is void – E g A who is rival shopkeeper of B in same area agrees to take money from B not to do business in that area. Held that agreement was void .
it is valid • If in above case clause is that A if fails to sue within two years then he will have no right to sue.VOID AGREEMENTS CONTD – Exception • Agreement created by statute or arising from judicial pronouncements • E g Purchaser of goodwill of business may ask the seller not to do same business in specified area for specified time which is reasonable in eyes of law • Agreement in restraint to legal proceedings – Contract to become valid must be enforceable by law – Any clause should no restrain either party to enforce agreement • E g A has sold goods to B . . Clause that A cannot realise the money by a suit in court is void – When enforcement is partial .
Court has no machinery to determine luck • Agreement by way of Wager or Wagering agreement – No suit can be brought to recover money staked on outcome on an uncertain event • Agreement to do impossible act – A already married to B contract with C for marriage where polygamy is forbidden – A agrees with B to discover treasure by magic .VOID AGREEMENTS CONTD • Agreement which are uncertain or unambiguous – A agrees to sell house to B on condition that B will pay some amount more if it is lucky to B.
age is 21 – Guardian is appointed under Guardian & Ward Act – Minor whose property is under superintendence of any court • Contract with a minor is Void ab initio • No estoppel against minor – Under Indian Evidence Act a person is not allowed to go back on his previous representations but minor misrepresenting his age can disclose his real age later • Doctrine of restitution (act of giving back to rightful owner) doesn‟t apply to minor – Minor who took money by mortgaging house is not bound to restore money (Mohiri Bee Vs Dharmdas) .MINOR • Indian Majority Act 1875 • 18 is the age • For two purpose .
He cannot be made to repay loan back or any damages for deceit • Contract of marriage – Minor marriage is valid otherwise children born out of such marriage will be illegitimate – But this provision does not give immunity to people who performed such marriage .MINOR • No ratification of contract even when he attains majority • Minor can be promisee but can never be promissor i. e minor can enforce a contract which is beneficial to him E g He can enter into contract for „ necessaries‟ with a person who is looking after his estate • No liability of minor in case of contract or Tort – Minor who misrepresented his age took loan.
adult surety can be sued but Bank cannot recover loan from minor .MINOR • Contract for apprenticeship (to learn trade or employment) – Contract is to be made by guardian on behalf of minor – Minor is not personally liable but only his estate is liable • Position of minor‟s parents or guardian – Contract of guardian on behalf of minor cannot enforce minor – But Guardian are responsible for his acts when he is agent of his parents • Surety of minor – Though original contract with minor is void yet surety can be sued – If bank gives loan to minor .
His liability is limited though liability of other partners is unlimited .MINOR • Minor as an agent – Can be appointed as an agent but not liable for his acts – Principal will be held responsible to third parties • Specific performance – As agreement with minor is void ab –initio there can be nothing which can be specifically performed – A contract can be specifically enforced by or against minor only if the guardian is competent to do the specific performance • MINOR IN OTHER LAWS • Minor cannot enter into agreement of partnership but can be admitted to the benefit .
hence cannot be adjudged as insolvent • Cannot become Shareholder except when shares are fully paid up and bought through lawful guardian • In case of inheritance he can become SH through lawful guardian • Under Negotiable Instruments . he can draw endorse instruments & are binding to all except him • Minor cannot become principal or appoint an agent .MINOR • Minor is not a debtor .
g. a patient of mental asylum who is at intervals of sound mind may enter into contracts during those intervals – Drunken – under influence of intoxicating liquors or drugs .POSITION OF UNSOUND MIND • If at the time of contract person is – Incapable of understanding contract – Not capable of forming rational judgment about the effects of contract • Unsound mind – Idiots – who is devoid of ability to think – Lunatics – mental power is damaged • A person who is of sound mind occasionally can enter into contract • For e.
DISQUALIFIED UNDER ANY OTHER LAW • Alien enemy – country declared enemy at time of war • Insolvent – but after the „order of discharge‟ he can enter into contracts • Convicted .
CONSIDERATION • Agreement without consideration is void – except • Gifts • Voluntary services • Time barred debts • Kinds of consideration – Past – Present – Future • Consideration should not be – Forbidden by law – fraudulent – Doing injury to other person property – Immoral or against public policy .
REMEDIES FOR BREACH OF CONTRACT • 1)Suit for rescission (To Cancel) – When a contract is broken by one party other party can rescind the contract & refuse further performance – Enable him to be free from his own obligations – Entitled to compensation which he has sustained due to non fulfillment of contract • 2)Suit for injunction – Order from court that prohibit a party to do or to refrain from doing some act – E g A enters into contract with B to present a entertainment program in his hotel on New year day . A can now take injunction from court to do it in B‟s party refrain B from conducting program in C‟s party . B later on does another agreement with C.
B can enforce A to sell house if court finds that remedy of damages is not adequate .REMEDIES FOR BREACH OF CONTRACT • 3)Suit for specific performance – Doing exactly what had been intended to be done according to contract – Court grants this remedy rarely& only in cases where it is essential to grant it – This is done when monetary compensation is not adequate remedy – E g A agrees to sell house to B .
The carrier was not told that absence of shaft would stop the work completely. • Court held that injured party is entitled to : – Damages which naturally arose in usual course of things „ ordinary damages‟ – Such damages which parties knew at time of contract „ special damages‟ . Delivery was delayed & carrier was in breach.REMEDIES FOR BREACH OF CONTRACT • 4)Suit for damages – Monetary compensation – To put the injured party in same position so far as money can do it as if he had not been injured – This is called as doctrine of restitution – Hadley & Baxendale • Broken shaft was given to carrier to bring to repair shop .
REMEDIES FOR BREACH OF CONTRACT • TYPES OF DAMAGES • General or ordinary – Arise directly out of breach in normal course – Puts party nearly in same position as it would have been if contract had been duly performed • Special – Arise in peculiar circumstances of a particular case – While making contract. party brings to notice of other party that it would suffer such special damage – Compensation of such losses are called as special loss • Indirect damages ( loss of profits) – Loss of profit suffered by aggrieved party due to delay in delivery as in case of Hadley & Baxendale .
REMEDIES FOR BREACH OF CONTRACT • TYPES OF DAMAGES • Exemplary or vindictive – Sometimes law finds difficult to heal mental pain or sufferings – Breach of promise to marry – Unjustified dishonour of cheques • Nominal damages – E g market is going high. breach by buyer does not entail loss to seller as he can sell his commodity to someone else – Damages awarded are very nominal • Liquidated damages – Specifically mentioned in the contract – But should be reasonable in eyes of law .
REMEDIES FOR BREACH OF CONTRACT • 5) Suit for Quantum Meruit – It means “for its worth‟ – Or „as much as he deserves‟ – Very often there is not a written contract though there is some understanding of some value – Then the person may recover some damages which he deserves or worth .
CONTRACT OF AGENCY • Contract which binds the principal & agent is called as Contract of agency • Agent is also capable of binding the principal by his acts done within the scope of his authority • A person should be major & not of unsound mind • No consideration is necessary for contract of agency • Expressed – Execute a deed & agent is appointed on formal POA on stamped paper • Implied – Arises by conduct . X visits his shop occasionally . situation or relationship of parties – X who resides in Indore owns a shop at Delhi which is managed by Y who orders goods from Z in name of X out of funds made available by X .
by his conduct or statement….that a certain person is his agent….he is estopped from denying subsequently ….leads another person to believe ……...that such person is not his agent • Agency by necessity / urgency – No opportunity of communicating to concerned parties about an urgency & a person in such situation acts for benefit of other – A of Agra consigns some goods to B of Bhuvneshwar with direction to send the goods immediately to C of Cuttack but B sells those goods in Bhuvneshwar as he finds goods cannot bear further journey • Agency by ratification– When acts done by one are ratified by another .IMPLIED AGENCY • Agency by estoppel or holding out – When a person …….
TYPES OF MERCANTILE AGENTS • Factor – Goods are entrusted for sale with wide powers – Can sell such goods in own name or on such terms he may think fit – He has general lien on such goods • Commission agent – Buys or sells on terms he thinks fit – Receives commission – Immaterial whether he posses goods or not • Broker – Employed to negotiate & make contracts – Neither control nor possession of goods – If deal materialises he gets commission .
he cannot recover afterwards from third person as his compensation is extra commission • Auctioneer – Entrusted with possession of goods for sale to highest bidder & authorised to deliver goods only when he receive price .TYPES OF MERCANTILE AGENTS • Del credere Agent – “ of entrusting” – Who for extra consideration undertake to perform financial obligation of third person if such third person fails to fulfill the same – Thus he occupies the position of surety or guarantor of the solvency of third person – If he is made to pay such sum on default of third person.
RIGHTS & DUTIES OF PARTIES • Agent is bound to conduct the business according to directions given – E g Cannot warehouse goods to any other place other than directed • Conduct the business with as much skill as he is expected – E g Enquire into solvency of third party before doing business on behalf of principal with him • Render proper account to principal & explanation of same • Reasonable diligence while communicating with principal & in case of emergency using sound discretion • Should not set up an adverse title of goods .
RIGHTS & DUTIES OF PARTIES contd. the debts due to him from A . • After deducting lawful charges he should pay sum received • Protect & preserve the interest of principal • Must not use confidential information or making of secret profit • Must not appoint sub agent unless allowed by principal or a trade custom • Agency can be revoked – Agreement – Authority by principal – Operation of law – death or completion or expiry of time • Irrevocable agency – When the agency cannot be put an end to – A asked B to sell A‟s land & pay himself out of the proceeds .
CONTRACTS OF GUARANTEE • Contract to perform promise • Person who gives guarantee – Surety • Person in respect of whose default guarantee is given – Principal Debtor • Person to whom guarantee is given – Principal Creditor • Contract of guarantee is additional security to creditor in event of default by principal debtor • Specific guarantee – Covers only one transaction or objective • Continuing Guarantee – Covers a series of transaction • Revocation of continuing guarantee – By surety giving notice – By death of surety .
• Liability of surety – Surety cannot be made liable beyond what he had contracted to – Continues to be liable even if • Death of debtor • Creditor fails to sue debtor • Release of one or more co sureties by creditor • Discharge of surety – By revocation – • notice to creditor – but liable for transactions prior to revocation • death – discharged if there is contract to that effect • novation – new contract substitutes old contract – By conduct of creditor.change in terms without surety‟s consent .
..when such customer fails to pay such amount to third party • Where creditor feels that debtor has committed breach of contract . creditor & surety while BG consist of 2 parties Bank & Debtor • Creditor cannot invoke BG if debtor proves that there is fraud committed by creditor or it is injustice to debtor • Types of BG – Financial – Deferred Performance Statutory . he can invoke BG • BG is independent of contract between Debtor & creditor • Ordinary Guarantee consist of 3 parties – debtor.to pay certain sum of money ….BANK GUARANTEE • Guarantee given by bank to a third person ….on behalf of Bank‟s customer….
caused to him by ……….conduct of promissor himself or by conduct of any other person • Insurance is COI because the insurer makes good the loss suffered by assured for consideration of premium • But Life insurance is not COI because money may be paid on expiry of stipulated time though there is no loss (No death) • Promissor is called as indemnifier & promisee as indemnity holder .CONTRACT OF INDEMNITY • Contract by which one party promises to save the other from loss ……..
allowing him to draw money ….if it complies some specific requirement • Its not a negotiable instrument & hence cant be transferred • Applicant/buyer/importer/opener – who intends to purchase goods or avail services applies to bank to open the L/C • Issuing /operating / Importers bank.to a customer (applicant / buyer / importer/ opener)…. issued by buyer‟s bank ( issuing bank ) …..from the issuing bank/its branches/ agencies ….which opens L/C • Beneficiary/exporter/seller – person who has right to receive the payment • Advising bank/ notifying bank – forwards L/C to beneficiary/exporters country & is located in exporter‟s country .LETTER OF CREDIT ( L/C) • Doc.
airway bill .LETTER OF CREDIT ( L/C) • Negotiating bank – which is in exporter‟s country & which makes payment on bills drawn by seller • Reimbursing Bank – appointed by issuing bank to reimburse to advising bank • Doc. bill of lading . courier receipt . insurance – Issuing bank certify the above doc. Under L/C – invoice . sent by seller • UCP 500 – Uniform & custom practice issued by ICC ( international chamber of commerce) are incorporated in all L/C & are binding on both parties .
employee relationship • Binding under law of Tort or agency law and Indian Contract Act • • • • • • • Conditions Employment at will – free hand to both Expressed – fired only for just cause Termination – discipline will be progressive Non competition agreement Trade secrets Arbitrate disputes .EMPLOYMENT CONTRACT • Determines employer.
EMPLOYMENT CONTRACT contd. job title. governing laws & jurisdiction . salary structure. place of posting . profile. borrowing / accepting gifts . • Collective bargaining – Exception to employment at will – Discharged or disciplined only for just cause – File grievance through union – If grievance not settled – arbitrator – Arbitrator decision is final & binding • Liquidated damages – Parties to contract agrees to pay certain sum as decided at time of entering into contract • Date privacy & confidentiality • Non disclosure of information concerning business • Indemnification • Commencement of job . leave . hours of work . acceptance of offer .
LIEN • Right of person ( creditor) to retain possession of goods belonging to other person ( debtor ) till the amount due to him are realised • Party who has acquired goods should have absolute title • There must be actual or constructive possession • Lien should arise upon agreement • Two kinds – Particular – person claims right to retain property in respect of money or labour expended on such property • E.g. Goldsmith or transporter retain goods till payment of service charges is made – General – person claims right to retain property for performance of all obligations • Bank keeping lien on ornaments till repayment of personal & agriculture loans taken by borrower if there is no specific agreement .
DOCUMENTATION OF CONTRACTS • Description of parties or their representatives • Recital of subjects – background history or motive for preparation of subject matter • Consideration • Statutory Covenants.relevant sections of acts binding • Signatures & attestation – authorities to sign • Stamps duty – non judicial or special adhesive • .
DOCUMENTATION OF CONTRACTS • Registration if required • LEX FORI – Law of country by which parties want to be governed by • FORCE MAJEURE – Common clause which decided the rights & duties of parties & relieves them from their duties • Arbitration clause .
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