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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

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

Sec 14 defines, Free consent as follows : Consent is said to be free when it is not caused by

Coercion, as defined in Sec 15, or Undue influence, as defined in Sec 16, or Fraud, as defined in Sec 17, or Misrepresentation, as defined in Sec 18, or Mistake, subject to the provisions of Sec 20, 21 and 22.

Coercion
Is the committing or threatening to commit, any act forbidden by the Indian Penal Code 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. Coercion includes so many things such as fear, a threat to beat, physical compulsion, meanance to goods, a threat to commit suicide.

Undue Influence
Results in mental pressure which is put upon the other party to the contract. 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. Sometimes undue influence also called moral coercions. Contracts with a pardanashin woman is presumed to be under undue influence unless otherwise proved.

Fraud

Acc to Sec 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 or his agent, or to induce him to enter the contract:
Suggestion of that which is not true, by one who does not believe it to be true; Active concealment of fact/s by one having knowledge or belief or the fact; A promise made without any intention of performing it; Any other act fitted to deceive; Any such act or omission as the law declares it fraudulent

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

Mistake

Acc to Sec 20, where both the parties to the agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. 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, the agreement is void. Both the parties must be under mistake and the mistake must relate to a matter of fact essential to the contract; A mistake by one of the parties also not affect the validity of the contract.

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

Performance of Contract
Performance of a contract is the natural and usual way of extinguishing an obligation; 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.

Contracts which need not be performed


When performance of a contract becomes impossible Sec 56; When there is an agreement inters the parties to substitute a new contract or to rescind the old contract, or alter it Sec 62; When any promisee may dispense with or remit, wholly or in part, 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;

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

Who can demand performance?


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

By whom must the contracts be performed ?


Promisor; Agent; Legal representatives; Third persons; and Joint promisors.

Time and Place of Performance of Contract


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

Time of performance of Contract

Where time is the essence of the contract;

When time is not the essence of the contract.

In a contract of guarantee, there are three contracts:


Between the principal debtor and creditor; Between the surety and the creditor and; 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.

In a contract of guarantee the liability of the surety is secondary or collateral. The principal debtors liability is always primary; There is always an existing debt or duty and the performance of the same is guaranteed;

Termination of contract by Breach and its Remedies


Failure of a party to a contract to perform his obligations under a contract; 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. Also known as present breach. 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.

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, 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. The person whose loss is made good is known as the indemnified or indemnity holder or promisee.

In the contract of indemnity, 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, viz., the promisor or indemnifier and the promisee or indemnified or indemnityholder;

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

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

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

When a surety pays off the debt due to the principal debtor under 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. Even the surety gets certain rights against the creditor and co-sureties; In a contract of guarantee, the surety should give guarantee only at the request of the principal debtor.

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

Agent and Principal


Any person, who is competent to enter into contract with another, can do so either by (1) himself, or (2) through some another person. When such a person adopts the latter course, 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 to represent another in dealings with third persons; The person for whom such act is done or who is represented, is called the principal.

Who may employ an Agent? Acc to Sec 184, any person who is of age of majority according to the law to which he is subject, and who is of sound mind, may employ and agent; An idiot, lunatic, minor or drunkard cannot employ an agent; 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.

Creation of Agency

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

Agency by express agreement;


Authority given by words,spoken or written. Agent are appointed by executing formal power of attorney on stamped document.

Agency by implied agreement;


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

Three categories of an implied agency


Agency by Estoppel:- 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. Estoppel arises when you are precluded from denying the truth of anything which you have represented as a fact, although it is not a fact.. The principal will be estopped from denying his agents authority.

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

Agency of holding- out

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

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

Rights, duties and responsibilities of Principal to his Agent : Rights :

Right to demand accounts (Sec 213); Right to repudiate contract when agent deals in the business of agency on his own account (Sec 215); Right to benefits gained dealing on his own account in business of agency (Sec 216); Right to recover damages (Sec 211, 212); Right to refuse remuneration to his agent when he is guilty of misconduct (Sec 220); Right to revoke agents authority (Sec 203); Right to ratify or disown his agents acts (Sec 196).

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

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); Principals liability on account of agents misrepresentation or fraud (Sec 238)

Rights, duties and Liabilities of an Agent to his Principal : Rights :

To do all lawful things (Sec 188); Right in emergency(Sec 189); To appoint sub-agent and substitute agent (Sec 194); To renounce his agency (Sec 201); To receive remuneration when due (Sec 219); To receive compensation for premature revocation (Sec 205); Right of retainer (Sec 217); Right of lien on principals property (Sec 221); Right of indemnification against the consequences of lawful or legal act/acts (Sec 222);

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

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

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

Termination of Agency
Modes of termination of Agency : A. By Acts of the parties to the contract of agency:

B.

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