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Essential Elements/Ingredients of a Valid Contract

Law of contracts determines the circumstances in which promises given by the parties to a contract shall be legally binding on them;  Throws light on the remedies which are available in a court of law against a person who fails to perform his contract;  Every day, people knowingly or unknowingly, enters into many types of contracts and performs them;  Law of contracts is of of a great importance to people engaged in trade, commerce, business and industry as bulk of their trade or business transactions are based on contracts.

Meaning and nature of a contract :  Sir William Anson – „a contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to act or forbearance on the part of the other/s.‟  Salmond – „An agreement creating and defining obligations between the parties.‟  Sir Federic Pollock – „every agreement enforceable by law is a contract.‟  Sec 2 of the Indian Contract Act defines a contract as “an agreement enforceable by law.”

Every contract is the result of the combination of two important elements ie.,agreement and obligation.  A contract creates rights and obligations between the parties entering into contracts.  Refusal by any one party to a contract to honour a contracted obligation gives right of action to another party.  Every promise leads to an agreement and every agreement enforceable by law or recognised by law becomes a valid contract.

Essential requirements of a valid contract:  Offer and acceptance;  Intention to create legal relationship;  Lawful consideration;  Capacity of the parties – competency;  Free and genuine consent;  Lawful object;  Agreement not declared void;  Certainty and possibility of performance;  Legal formalities.

Classification of contracts :  Types on the basis of formation or creation of contracts :  – Express contracts – Implied contracts – Quasi contracts  Types on the basis of extent of execution or performance: – – – – Executed contracts Executory contracts Partly executed and partly executory contracts Unilateral and bilateral contracts .

 Classification of contracts on the basis of validity of enforceability: – Valid contracts – Void contracts – Voidable contracts  Classification of contracts on the basis of the form of contracts : – Formal contracts – Simple contracts .

„Two or more persons are said to consent when they agree upon the same thing in the same sense.Free Consent Acc to Sec 10.  As per Sec 13.”  and  . “all agreements are contracts if they are made by the free consent of the parties competent to contract.”  Sec 13 and 14 define free consent. for a lawful consideration and wit a lawful object and are not hereby expressly declared to be void.

as defined in Sec 16.Sec 14 defines. or Mistake. . subject to the provisions of Sec 20. or Fraud. 21 and 22. or Undue influence. as defined in Sec 15. as defined in Sec 18. “Free consent” as follows :  Consent is said to be free when it is not caused by  – – – – – Coercion. or Misrepresentation. as defined in Sec 17.

Coercion Is the committing or threatening to commit.  Coercion includes so many things such as fear.  . physical compulsion. with the intention of causing any person to enter into an agreement. to the prejudice of any person whatever. any property. any act forbidden by the Indian Penal Code or the unlawful detaining. meanance to goods. or threatening to detain. a threat to commit suicide. a threat to beat.

 Contracts with a pardanashin woman is presumed to be under undue influence unless otherwise proved.Undue Influence Results in mental pressure which is put upon the other party to the contract.  .  Sometimes undue influence also called moral coercions.  May happen when there exists a special kind of relationship between the parties to the contract so that one party is in a position to exercise undue influence over the other party.

or to induce him to enter the contract: – Suggestion of that which is not true.Fraud  Acc to Sec 17. – Any such act or omission as the law declares it fraudulent . – Any other act fitted to deceive. or with his connivance. by one who does not believe it to be true. with intent to deceive another party thereto or his agent. – Active concealment of fact/s by one having knowledge or belief or the fact. “Fraud means and includes any of the following acts committed by a party to a contract. – A promise made without any intention of performing it. or by his agent.

or to the prejudice claiming under him. or any one claiming under him.Misrepresentation Positive assertion.  . a party to an agreement. however innocently.  Causing. of that which is not true.  Any breach of duty which. to make a mistake as to the substance of the thing which is the subject of the agreement. by misleading another to his prejudice. in a manner not warranted by the information of the person making it. gains an advantage to the person committing it. without intent to deceive. though he believes it to be true.

” Mistake of two types – mistake of law and mistake of facts. Where both the parties to an agreement are under a mistake as to a matter of fact essential to an agreement.Mistake     Acc to Sec 20. A mistake by one of the parties also not affect the validity of the contract. the agreement is void. the agreement is void. . “where both the parties to the agreement are under a mistake as to a matter of fact essential to the agreement. Both the parties must be under mistake and the mistake must relate to a matter of fact essential to the contract.

 By agreement.Discharge of Contract By performance of the contract.  By assignment.  .  By operation of law.  By impossibility of performance.  By lapse of time.  By breach made by any party to contract.  By material alterations without the consent of the concerned party.

.  Performance of a contract implies fulfilment of the terms and conditions or obligation of the contract by the respective parties to the contract within the time and in the manner prescribed.  Performance of contract may be  – Actual performance or – Attempted performance.Performance of Contract Performance of a contract is the natural and usual way of extinguishing an obligation.

the performance of the promise made to him or may extend the time for such performance or may accept instead of it any satisfaction which he thinks fit. or alter it – Sec 62. wholly or in part.  When there is an agreement inters the parties to substitute a new contract or to rescind the old contract.Contracts which need not be performed When performance of a contract becomes impossible – Sec 56.  When any promisee may dispense with or remit.  .

 If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise.  .When a person at whose option a contract is voidable. the other party there need not perform any promise contained therein in which he is a promisor. rescinds it. the promisor is excused by such neglect or refusal as to nonperformance caused thereby.

 On death of the promisee. right of claiming performance is held jointly with all the joint promisees jointly.Who can demand performance? It is only the promisee who is entitled to demand performance of the promise.  . his legal representatives can demand the performance unless the contract requires personal skill or taste.  When promise is between two or more promisees jointly.  If all the joint promisees die then their legal representatives can demand performance.

 .  Legal representatives.By whom must the contracts be performed ? Promisor.  Third persons.  Agent. and  Joint promisors.

 .  Manner or time by promisee to perform a promise.  Application of performance at proper time and place ie..Time and Place of Performance of Contract Performance of promise within a reasonable time. on a certain day and at certain place.  Performance of promise where time and place are specified.  Promisor to apply to the promisee to appoint a place for performance of promise.

.  When time is not the essence of the contract.Time of performance of Contract  Where time is the essence of the contract.

– Between the principal debtor and the surety which is implied contract whereby the surety is entitled to recover from the principal debtor all the rightful amounts he has paid under the contract of guarantee.  There is always an existing debt or duty and the performance of the same is guaranteed. In a contract of guarantee the liability of the surety is secondary or collateral. The principal debtor‟s liability is always primary. there are three contracts: – Between the principal debtor and creditor. – Between the surety and the creditor and. In a contract of guarantee.  .

– Anticipatory breach : repudiation of an integral part of the contract by the promisor before the actual date of performance. When a party disowns his liability towards his performance of the contract.Termination of contract by Breach and its Remedies Failure of a party to a contract to perform his obligations under a contract. . Also known as present breach.  Breach of contracts arises in the following ways :  – Actual breach : breach committed by either at the time when the performance of contract is due or during the performance.

Remedies for Breach of a Contract : An aggrieved party has certain remedies against the guilty party there is a breach of contract. . The remedies are as follows : – Recession of the contract : revocation or setting aside of the contract – Suit for damages : damages means monetary compensation payable by the defaulting party – Quantum meruit : as much earned – compensate for the part performed in case of breach – Suit for specific performance : where award of damages is not considered an adequate remedy then the court of law can order performance as promised – Suit for injunction :an injunction is an order to the court asking a person to do or abstain from doing a particular act. which in fact. the subject matter of the contract.

Contract of Indemnity Sec 124 defines “a contract of indemnity as a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself.  The person whose loss is made good is known as the indemnified or indemnity holder or promisee.  . or by the conduct of any other person.  The person who promises or undertakes to indemnify to make the loss good is called the indemnifier or promisor– person giving indemnity.

In the contract of indemnity.. viz. the promisor or indemnifier and the promisee or indemnified or indemnityholder.  . the indemnifier to save merely undertakes the indemnityholder from the loss caused by the conduct of indemnifier or of a stranger.  There are only two parties to the contract.

An indemnifier can do so only when there is an assignment in his favour.  The liability of indemnifier is contingent and comes into being on the happening of a contingency. to the indemnity-holder is the main aim.  An indemnifier has no right to file a suit against the third party for any loss.  The reimbursement of loss. if any.There is only one contract and that is always between the indemnifier and indemnity-holder.  The liability of the indemnifier is primary and independent.  .

. In a contract of indemnity. it is not necessary for the indemnifier to act at the request of the indemnity-holder.

 There is a guarantee for a promise or a debt upon the default of principal debtor. the principal debtor.  There are three parties to the contract. the surety also called guarantor or there may be co-sureties. of a third person in case of his default. the creditor.Contract of Guarantee Sec 126 defines “a contract of guarantee as a contract to perform the promise or discharge the liability. viz.  .

 In a contract of guarantee.  . the surety gets the right to bring a suit against the principal debtor in order to recover the amount he has paid to the creditor. the surety should give guarantee only at the request of the principal debtor. Even the surety gets certain rights against the creditor and co-sureties.When a surety pays off the debt due to the principal debtor under a contract of guarantee.

. a principal and his agent. it is also known as consentual relation and if any consideration is agreed upon.Contract of Agency The persons who act in place of others are called agents. such relationship becomes a contractual one.  .  As the Agency is based upon the consent of the two parties ie.  This relationship indicates that an agent is the connecting link between the principal and the third party.

who is competent to enter into contract with another.  The person for whom such act is done or who is represented. is called the principal.  . or to represent another in dealings with third persons.Agent and Principal Any person. he is said to be acting through his agent.  Sec 182 lays down that an agent is a person employed to do any act for another. or (2) through some another person.  When such a person adopts the latter course. can do so either by  (1) himself.

 An idiot. “ any person who is of age of majority according to the law to which he is subject.Who may employ an Agent?  Acc to Sec 184. minor or drunkard cannot employ an agent.  . and who is of sound mind. lunatic.  Generally agents are appointed with specific instructions –to act within the scope of the authority given – to bind their principal as if they are doing the acts themselves.  Contracts entered into through an agent will have the same legal consequences as if the contracts has been entered into and the acts done by the principal in person. may employ and agent.

Agency by implied agreement. the legal relationship between the principal and his agent can be created as under – – – – – Agency by express agreement. and Agency by ratification. ..Creation of Agency  Agency ie. Agency by operation of law.

spoken or written.  Agent are appointed by executing formal power of attorney on stamped document.  .Agency by express agreement. Authority given by words.

or the ordinary course of dealing may be accounted on circumstances of the case. Lady can sue the mother as her son was an implied agent  .Agency by implied agreement. Son caused an accident and injured a lady.  Eg. An authority is said to be implied when it is to be inferred from the circumstances of the case. and things spoken or written. A woman allowed her son to drive a car for her and used to pay all the necessary expenses of maintenance.

 The principal will be estopped from denying his agents authority.  .. although it is not a fact.Three categories of an implied agency Agency by Estoppel:.  Estoppel arises when you are precluded from denying the truth of anything which you have represented as a fact.Where an agent has done or incurred obligations to third person on behalf of the principal. the principal is bound by such acts or obligations.

Shimpi for sale by giving the instruction that the goods should not be sold under a fixed price. Prasad to sell the goods at a lower price then the reserved one.K.Shimpi inadvertently enters into a contract with Mr. But Mr.P. Mr. . Ratnakar consigns some goods to Mr. K.Ratnakar is obviously bound by the contract.P. Mr.

out .Agency of holding.

 General agents.  Universal agents.  brokers  .  Factors.  Substituted agents.Types of Agents Special agents.  Sub-agents.  Co-agents.

Auctioneers.  Indenting agents.  Forwarding agents.  Del Credere agents.  Clearing agents.  .  Commission agents.

– Right to ratify or disown his agent‟s acts (Sec 196). duties and responsibilities of Principal to his Agent :  Rights :  – Right to demand accounts (Sec 213). 212). . – Right to benefits gained dealing on his own account in business of agency (Sec 216).Rights. – Right to recover damages (Sec 211. – Right to revoke agent‟s authority (Sec 203). – Right to repudiate contract when agent deals in the business of agency on his own account (Sec 215). – Right to refuse remuneration to his agent when he is guilty of misconduct (Sec 220).

– Duty to indemnify against consequences of all acts done in good faith by the agent (Sec 223). – Duty to indemnify against consequences of all legal or lawful acts (Sec 222). . – Duty to compensate his agent for injury caused (Sec 225). Duties : – Duty to pay remuneration and dues to his agent (Sec 217).

 Liabilities : – In respect of contracts entered by his agent with third parties (Sec 226). – Liability of the principal when the notice is properly given to his agent (Sec 229). – Of the principal when he induces third parties or persons to believe that his agents unauthorised acts were authorised (Sec 237). – Principal‟s liability on account of agent‟s misrepresentation or fraud (Sec 238) .

– Right of indemnification against the consequences of lawful or legal act/acts (Sec 222). .Rights. duties and Liabilities of an Agent to his Principal :  Rights :  – – – – – – To do all lawful things (Sec 188). – Right of retainer (Sec 217). Right in emergency(Sec 189). To receive compensation for premature revocation (Sec 205). – Right of lien on principal‟s property (Sec 221). To renounce his agency (Sec 201). To appoint sub-agent and substitute agent (Sec 194). To receive remuneration when due (Sec 219).

– Right of stoppage in transit .– Right to be indemnified against the consequences of all acts done on good faith (Sec 223). – Right of compensation for injury caused by his principal‟s neglect or want of skill (Sec 225). .

– To render accounts properly to his principal. – Not to set up an adverse title – his own or third party‟s. – Not to earn or make secret profit from agency business. – Duty in naming an agent for his principal. – To pay sums received for the principal. – Not to deal on his account in the business of agency. – Not to use information obtained against the principal. – Duty on termination of agency by his principal‟s death or insanity. – Not to delegate his authority. . – To communicate with principal in cases of difficulty. Duties : – To conduct principal‟s business according to his instructions or directions.

. – Personal liability fixed by trade custom or usage. Liabilities : – In respect of damages and misconduct. – When agent agrees expressly to be liable. – Agent‟s liability for his wrongful acts. – Liability of an agent for the acts of sub-agents.

By agreement between principal and his agent. . or By revocation of agency by the principal. or By renunciation of business by the agent. By operation of Law : • • • By completion of the agency business. By expiry of period of time. By destruction of subject-matter. By Acts of the parties to the contract of agency: • • • B.Termination of Agency Modes of termination of Agency : A.

– By in capacity of principal or agent.– By insolvency of the principal and in some cases. – By death of the principal. – By object of agency becoming illegal or unlawful. – By insanity of either party. – By death of the agent. – By termination of sub-agent‟s authority. that of the agent. – By principal becoming an alien enemy. .