Professional Documents
Culture Documents
Recap
• Agreement and contract
• Communicating offer and acceptance, time of communication
• Essential Conditions
• Lawful Consideration, Free consent, Capacity of parties, Lawful consideration
and Lawful object,
• Need not be in writing
Types of contracts
• On the Basis of creation
• Express or implied
• Quasi contract - created by law. (A leaves his goods at B’s shop by mistake, it is
for Mr. B to return the goods or to compensate the price. In fact, these contracts
depend on the principle that nobody will be allowed to become rich at the
expenses of the other.
• E contract - entered into between two parties via the internet
• On the basis of validity
• Void or Voidable Contracts
• Illegal Contracts
• Unenforceable Contracts
• Contingent Contract
• Unilateral Contract – take it or leave it
Unilateral Contract
• A unilateral contract is created by an offer to be accepted by performance.
• To form the contract, the party making the offer (offeror) makes a promise in
exchange for the act of performance by the other party.
• First party not under any obligation to perform; second party only needs to fulfill the
duty if they wish to.
• Promise must be an express promise. The contract must clearly offer something
valuable in exchange for the other party performing a service.
• A lease option is a unilateral contract until the option is exercised.
• Request to find any lost item - if someone finds the dog, he gets paid, but he is not
promising to go and look for the lost item.
• Complications can arise when it comes to unilateral contracts, especially in areas
pertaining to – acceptance, consideration and offer
• Take it or leave it
• Consumer Protection Act and RERA rules for contracts
Flaws in Contracts
• Under certain circumstances a contract made under these rules may be bad, because
there is a flaw, vice or error somewhere.
• Impossibility
• Incapacity
• Mistake
• Misrepresentation
• Fraud
• Undue Influence
• Coercion
• Illegality
• In such cases, three remedies are possible
• The resultant contract will have no effect and it will then be known as void, or
• The law may give the party aggrieved the option of getting out of his bargain, and the contract
is then known as voidable, or
• The party at fault may be compelled to pay damages to the other party.
Flaw in Capacity - Capacity and Persons
• All natural persons have full capacity to make binding contracts,
except minors, lunatics, and persons otherwise disqualified
• Minor's Contract
• Mohiri Bibee case - a minor has no capacity to contract and minor's contract
is absolutely void. But if the minor has carried out his part of the contract, he
can proceed against the other party. The rationale is to protect minor's
interest.
• If the minor has obtained any benefit, such as money on a mortgage, he
cannot be asked to repay, nor can his mortgaged property be made liable to
pay.
• Since the contract is void ab initio, it cannot be ratified by the minor on
attaining the age of majority.
• Estoppel does not apply to a minor
• Lunatic or unsound mind
• A person of unsound mind cannot enter into a contract and is therefore void.
But if he makes a contract when he is of sound mind, i.e., during lucid
intervals, he will be bound by it.
• A sane man delirious from fever, or unable to understand the terms of a
contract due to effect of alcohol or drugs cannot contract whilst such delirium
or state of drunkenness lasts. Hypnotism or mental decay included
• Persons Disqualified from Entering into Contract
• Alien Enemies
• Foreign Sovereigns and Ambassadors
• Corporations
Mistake
Contracts are essential for smooth conduct of business. No one is allowed to evade
consequences on the plea that he was mistaken. However mistakes do occur and if
these are fundamental than there may be no contract at all.
• Mistake of Law: Contract is binding; ignorance of law is no excuse. Mistake of foreign
law is treated as mistakes of fact.
• Mistake of fact: Fact must be so essential so as negate the contract and must be on the
part of both the parties
• A mistake in the nature of miscalculation or error of judgement by one or both the parties has no
effect on the validity of the contract. Paying excessive price for goods under a mistake as to their
true value, the contract is binding on him.
• Mistake could be about existence or title of the subject matter or identity of the
subject matter, or Quantity or Quality of the subject matter
• Bilateral - both parties under a mistake. Parties have not consented to the same thing
in the same sense, absence of consent makes the agreement void.
• Unilateral when only one party to the contract is under a mistake. Contract will not be
void.
Misrepresentation (Section 18)
Could be innocent or wilful (intent to deceive - fraud.)
• Misrepresentation under a genuine belief is innocent misrepresentation. Any false representation
made with an honest belief in its truth is innocent.
• To avoid a contract on this ground
• There must be a representation or assertion (not merely an opinion or hearsay), inducing the aggrieved party
to enter into the contract.
• The assertion must relate to a matter of fact (not of law)
• It must have been made with an honest belief in its truth.
• Aggrieved party can avoid the contract, cannot get damages for, except in the following cases
• From a promoter or director who makes innocent misrepresentation in a company prospectus inviting the
public to subscribe for the shares in the company;
• Against an agent who commits a breach of warranty of authority:
• From a person who (at the Court's discretion) is estopped from denying a statement he has made where he
made a positive statement intending that it should be relied upon and the innocent party did rely upon it and
thereby suffered damages;
• Negligent representation made by one person to another between whom a confidential relationship, like
that of a solicitor and client exists.
Wilful Misrepresentation or Fraud (S. 17)
An untrue statement made knowingly with the intent to deceive.
• A false representation or assertion of fact (not a mere opinion) made with the
intention that it should be acted upon, and the representation must have actually
induced the other party to enter into the contract
• To aver that a fact is true when it is not true and the person making it knows that it
is not true
• Active concealment of a fact by a person having knowledge or belief of the fact
• A promise made without any intention of performing it or any other act to deceive
• Any such act or omission as the law specially declares to be fraudulent
• Immaterial whether the representation takes effect by false statement or with
concealment. The party defrauded can avoid the contract and also claim damages.
• Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless silence is in itself equivalent to speech, or where it is
the duty of the person keeping silent to speak
Contracts where law imposes a duty to disclose all
material information.
Failure to disclose all required information will render the contract voidable at the option
of the other party.
• All Insurance Contracts - assured to disclose to the insurer all material facts and
whatever he states must be correct and truthful.
• Company prospectus inviting the public to subscribe for its shares must disclose
truthfully the various matters set out in the Companies Act. Non-disclosure of any of
these matters is liable to damages. A contract to buy shares is voidable where there is a
material false statement or non-disclosure in the prospectus.
• Contract for the sale of land - The vendor is under a duty to the purchaser to show good
title to the land he has contracted to sell.
• Contracts of family arrangements: When the members of a family make agreements or
arrangements for the settlement of family property, each member of the family must
make full disclosure of every material fact within his knowledge.
Void Contracts
• These contracts are void ab initio and hold no validity under law
• In a legal sense, a void contract is treated as if it was never created
and becomes unenforceable in court.
• No legal effects as these cannot be enforced and thus confers no
rights on either party.
• These are not really contract at all; non-existent.
• Technically the words 'void contract' are a contradiction in terms.
• Situation that arises when a 'contract' is claimed but in fact does not
exist.
Void Contracts – Causes
• Incompetence
• Inclusion of an unlawful object or consideration
• Impossibility of performance
• Acceptance of Offer: Both parties must be fully aware of all elements of the contract. They
must accept all aspects of the contract and what it entails.
• Intention to Create Legal Relations: A contract is not merely a promise between parties. The
nature of the relationship between the individuals engaging in the contract must be
evaluated, as well as the contract itself.
• Consideration: There must be an exchange of value between parties. If one party is
knowingly benefiting from a contract at the expense of the other party, the contract is void.
• Complete: The contract must be complete and specific in nature, or it will be considered
void.
S. 2(g) - “An agreement not enforceable by law is said to be void”,
S.2(j) - “A Contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable”.
Thus Void Contracts can be of following two types :-
Meaning The type of contract which cannot The contract in which one of the two
be enforceable is known as void parties has the option to enforce or
contract. rescind it, is known as voidable contract.
Defined in Section 2 (j) Section 2 (i)
The contract is valid, but
Nature subsequently becomes invalid due The contract is valid, until the party whose
to some reasons. consent is not free, does not revokes it.
Subsequent illegality or
Reasons impossibility of any act which is to If the consent of the parties is not
be performed in the future. independent.
Rights to party
No Yes, but only to the aggrieved party.
• A agrees to pay B a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks
• 34. When event on which contract is contingent to be deemed
impossible, if it is the future conduct of a living person.—If the future
event on which a contract is contingent is the way in which a person
will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it
impossible that he should so act within any definite time, or
otherwise than under further contingencies.
• A agrees to pay B a sum of money if B marries C. C marries D. The marriage of
B to C must now be considered impossible, although it is possible that D may
die and that C may afterwards marry B.
• 35. When contracts become void which are contingent on happening of
specified event within fixed time.—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.
• When contracts may be enforced, which are contingent on specified event not
happening within fixed time.—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.
• 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.
• 36. Agreement contingent on impossible events void.—Contingent
agreements to do or not to do anything, if an impossible event
happens, are void, whether the impossibility of the event is known or
not to the parties to the agreement at the time when it is made.
• A agrees to pay B 1,000 rupees if two straight lines should enclose a space.
The agreement is void.
• A agrees to pay B 1,000 rupees if B will marry A‟s daughter C. C was dead at
the time of the agreement. The agreement is void.
Essentials of Contingent contract
• A valid contract to do or abstain from doing something
• Enforcement of the contingent contract could be on the happening or not happening of
the events respectively.
• The contract will be valid only if it is about performing or not performing an obligation.
• Performance of the contract must be conditional
• The condition for which the contract has been entered into must be a future event, and it should
be uncertain. If the performance of the contract is dependent on an event, which is although a
future event, but certain and sure to happen, then it’ll not be considered as a contingent
contract.
• The said event must be collateral to such contract
• The event on whose happening or non-happening of the event on which the performance of the
contract is dependent should not be a part of the consideration of the contract. The happening or
non-happening of the event should be collateral to the contract and should exist independently.
• The event should not be at the discretion of the promisor
• The event so considered as for contingency should not at all to be dependent on the promisor. It
should be totally a futuristic and uncertain event.
Commercial applications of contingent contracts
• Insurance is a contract to do something if the future event occurs that will
be contracted by the parties and liability will be taken by the offeror.
• In all Insurance (Life, Marine, Fire etc.), the Offeror promises to take the
risk of the offeree against the incident to do or not to do something and
for that the offeree agrees to pay a certain amount of money.
• Contingent contract can be used in the contract of guarantee as well as
the contract of warranty.
• Contingent contract in negotiation may occur when negotiating parties
fail to reach an agreement.
• CC in mergers and acquisitions (M&A) as well. Depending on the M&A
deal, contingent payments may be part of the Seller’s proceeds.
• It can also be used in the contract of indemnity.
Discharge or Termination of Contracts
A contract is said to be discharged or terminated when the rights and
obligations arising out of a contract are extinguished.
• Contracts may be discharged or terminated by any of the following
modes:
• performance, i.e. by fulfilment of the duties undertaken by parties or by
tender.
• mutual consent or agreement.
• lapse of time;
• operation of law;
• impossibility of performance; and
• breach of contract.