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CONTRACT

 Making contract is an incident of every day life. A layman conceives of a


contract as a technical, complicated and even bewildering(Confusing)
document drawn up by skilled lawyers.

 This common misconception makes a layman distinguish between “legal


contracts’’ and other “ordinary contracts”.

 He does not realize that when he buys a newspaper or a cup of tea he is


making a contract of sale of goods,

 When he board a bus and buys a ticket, he is making a contract of


carriage,When he entrusts his cloths to the dry-cleaner for washing , he is
entering into a contract of bailment.

All these transactions are contracts in the full sense of the term in law, even if
there is nothing in writing or signed and however small their value may be.

 What is a Contract
Some definitions-

I. A legally binding agreement between two or more persons , by which rights


are acquired by one or more, to an act or forbearance on the part of others.
( i.e one party can enforce the agreement from the other) -- Anson

II. “An agreement made between two or more persons which is intended to be
enforceable by law.”- Halsbur’s Laws of England.

III. “ A promise or set of promises for the breach of which, the law gives a remedy
or the performance of which, the law in some way, recognizes as a duty.”–
St.Paul Minnesota

IV. “ An agreement enforceable by law “ –Sec.2(h) of Indian Contract Act


Choose the right one
“ All contracts are agreements , but all agreements are not contracts” .
or

“All agreements are contracts , but all contracts are not agreements” .

The right one is


“ All contracts are agreements , but all agreements are not contracts” .
Because several agreements are only social agreements not legally binding
(contracts).

The above definitions, while defining a contract in terms of an agreement, also


add the additional component of legal enforceability.
Offer( proposal) + Acceptance = Agreement
Agreement + Enforceability = Contract

 Types of Contract
Contracts may be classified according to their
A) Formation - i) Express
ii) Implied
iii) Quasi
B) Validity --- i) Valid
ii) Voidable
iii) Void
iv) Illegal
v) Unlawful
vi) Unenforceable
C) Performance ----- i) Unilateral Contract
ii) Bilateral Contract
iii) Discharged Contract
iv) Executory
v) Executed
A) Classification According to Formation:

i) Express Contract – A contract in which the proposal and acceptance are made
by words spoken(oral) or written. When a valid proposal is accepted, an
express contract has been created.

ii) Implied Contract- - An implied contract is one which is inferred form the acts or
conduct of the parties or in the course of dealings between them. It is not the
result of any express promises between the parties. It is also called as a ‘ tacit
or inferred contract’.
Ex- C, a coolie, takes up the luggage of D, to be carried out of the railway station.
( even though there is no express agreement it imposes an obligation on D to
pay for C’s services as C is not rendering services gratuitously )

iii) Quasi Contract – It is not an actual contract. A contract is intentionally entered


into by the parties. A quasi contract, on the other hand, is created by law.
It is based on the policy that a person shall not be allowed to enrich himself
unjustly, at the expense of another.
Ex. Payment by an interested person– Tenant paid the land revenue to the
government can recover from the owner.

B) Classification according to Validity

i) Valid Contract – A valid contract, or simply a contract is an agreement


enforceable by law according to Sec.2(h) of the Indian Contract Act. An
agreement that satisfies all the requirements specified in sec.10 of the Indian
Contract Act and is enforceable in a court of law.

Example- A agrees to sell his house for Rs.10,000 and B agrees to purchase it
for that amount. If A and B have the capacity and they consent to the
agreement freely, it is a valid contract between them. As it is supported by a
consideration and the object –sale and purchase of the house– it is lawful and
further, such an agreement is not expressly declared to be void.

ii) Voidable Contract-- A contract which is avoidable at the option of one party
thereto and not at the option of the other or others , is a voidable contract.
Ex. A promises to sell his car to B for Rs 20,000. His consent is obtained by the use
of force . The contract is voidable at the option of A and not of B. A may avoid
the contract or elect to be bound by it.

iii) Void Contract- Although two parties may have come to an agreement, it is not
recognised as a legal contract. It does not create any legal rights or obligations.
Ex– A contract formed in which one party agrees to perform an illegal act. Or A
contract with a minor or A contract without consideration etc.

iv) Illegal Contract – It is one which violates some rule of basic public policy
or which is criminal in nature or which is immoral.
An illegal contract, while resembling the void contract in that it has also no
legal effects between the immediate parties, has this further effect that
transactions collateral to such contract become tainted with illegality and
are therefore, not enforceable.

For example—
A borrows Rs.50,000 from X and enters into a contract with an alien B, to import
prohibited goods. X knows about the purpose of the loan. The transaction
between A and X is collateral to the main agreement between B and X. It is
illegal since the main agreement is illegal.

v) Unlawful Contract --- These agreements are generally, those that are
discountenance by law. The effect of such agreements is that they are void and
hence, unenforceable.
Where the consideration or object of an agreement is unlawful, as laid down
under Sec.23 of the Act, it is called an unlawful contract and the contract is
void.

Example–
B barrows Rs 50 from A in order to bet with C as to the result of a horse race.
Since a contact of betting in respect of horse race is void, if B loses, C cannot
recover from B. But A can recover the sum from B since his transaction with B
is only collateral to a void contract and is enforceable. Thus in an unlawful
contract, the collateral agreements are not affected though the main
agreement is void.
iv) Unenforceable Contract ---
It is one which is valid in every respect as it satisfies the requirements laid
down in Sec.10, but it cannot be enforced in a court of law because of some
technical defect, such as stamp or the absence of writing(if it is immovable
property) or barred by limitation ( 3 years for promissory note).

C) Classification According to Performance

i) Unilateral Contract -- One party has already fulfilled his obligation and only
the other party has to fulfill his obligation, at the time of formation of the
contract.
Example --- A offers a reward to anyone who furnishes certain information. B
furnishes the information and the contract comes into existence. B has already
performed his obligation and A has yet to perform his obligation the payment
of reward.

ii) Bilateral Contract --- It is one in which one party’s promise is exchanged for
the other party’s promise. In this contract the obligation of both the parties is
outstanding at the time of formation of the contract.
Example – A agrees to sell a house for a certain price and B agrees to purchase
it. The contract is formed, but the parties have not discharged their obligations
yet. ( Executory contract)

iii) Discharged Contract -- A discharged contract is one in which both the parties
have performed their obligations.
For example – A agrees to paint a picture for B for Rs.500. When A paints the
picture and B pays the price, ie, when both the parties have performed their
obligations, the contract is said to have been discharged.

iv) Executory contract — An executory contract is one in which both the parties
have not yet performed their obligations.
For Example- A agrees to sell a house for a certain price and B agrees to purchase
it. The contract is formed, but the parties have not discharged their obligations
yet.
v) Executed Contract – An executed contract is one in which one of the parties
has performed his obligations. The term executed gives an impression that
every thing has been completed. However, here, executed has been given a
technical meaning.
For example- A and B agreed to sell and purchase a pen. The pen has already been
delivered by A. B has yet to pay the price.

Contract – Its Formation

 Concurrence of the parties is the first requisite element in the formation


of a contract.

 Every contract has to pass through several stages, beginning with the
stage of negotiation, during which the parties discuss and negotiate
proposals and counter –proposals, as also the consideration, resulting
finally in the acceptance of the proposals.

 The proposal when accepted, gives rise to an agreement. It is at this stage,


that the agreement is reduced into writing and formal document is
executed, on which the parties affix their signatures or thumb
impressions, so as to bound by the terms of the agreement set out in that
document.

 An agreement is the foundation on which the superstructure of a contract


is built.

 An agreement is defined in Sec.2(e) of the Indian Contract Act as:


Every promise and every set of promises forming the consideration for each
other, is an agreement.

 Sec.2(b) of the Act declares -


A Proposal, when accepted becomes a promise. A person making the proposal
is called the ‘promisor’ and the person accepting the proposal is called the
‘promisee’.
Offer/Proposal
Sec. 2 (a) When one person signifies his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act
or abstinence, he is said to make a proposal.

Essentials of Valid Offer


1. Terms must be certain and definite ---
Example:
A has two motorcycles. He offers B to sell one motorcycle for Rs.27,000. It is
not a valid offer because it is not clear that which motor cycle A wanted to
sell.

2. Must be communicated to the other person


Example:
A without knowing that a reward has been offered for the arrest of a particular
criminal, catches the criminal and informs the police. A cannot recover the
reward as he was not aware of it.

3. Intention to create legal obligation


Example:
a) A invites B to dinner B accept the invitation. It does not create any legal
relations, so there is no agreement.
b) A offers to sell his watch to B for Rs.200 and B agrees. There is an agreement
because here the parties intend to create legal relations.

4. Offer should not impose burden on offeree


An offeror cannot say that if acceptance is not communicated up to a certain
date, the offer would be presumed to have been accepted. If the offeree does
not reply, there is no contract
 Kinds of Offer

1.General Offer and specific---

 Carlill vs. Carbolic Smoke Ball Co—The defendants advertised their


product a preventive remedy against influenza. In the advertisement
they offered to pay a sum as reward to anyone who contacted influenza,
cold or any disease after having used their product.
 Specific Offer- Specifically to an individual or group of individuals.

2.Express and implied ---

 Express--An offer may be made either in words, spoken or written .

 Implied offer--- Inferred from the conduct of the parties- eg. The person
who boards a bus or who hires a taxi, thereby undertakes to pay the fare
to his destination, even though he makes no express promise to do so.

3. Positive and Negative

 Positive-- An offer to do something is a positive offer-Intends to sell car

 Negative: An offer not to do something is a negative offer- If C offers not to


interfere in B’s business if B agrees to shift his place of business to another
locality.

4. Cross offer
 On 1st Jan, A offered to sell his land to B for Rs.5 laks through a letter sent
by post. On the same date without any knowledge of A’s offer, B also
wrote to A making an offer to purchase A’s land for Rs.5 lakhs. When A
and B sent their letters, they did not know about the offer made by the
other side.– No contract.
5. Counter offer-
 Hyde vs. Wrench
Wrench offered to sell his farm for 1,000 pounds. Hyde offered 950
pounds, which Wrench rejected. Hyde then informed Wrench that he
accepted the original offer. Such an acceptance is not binding as a
counter-offer itself implies the rejection of the original offer. Hence there
is no contract.

6. Invitation to offer
 sometimes a person may not offer to sell his goods , but make some
statement or give some information with a view to inviting others to make
offers on that basis.

 Ex. A shopkeepers catalogue of prices is not an offer


Inviting persons to an auction
Advertisement calling for tenders .

Eg.
In most bookshops customers are invited to go in and pick up books and look
at them even if they do not actually buy them. There is no contract by the
shopkeeper to sell until the customer has taken the book to the shopkeeper
or his assistant and said ‘ I want to buy this book’ and the shop keeper say
‘Yes’.
That would not prevent the shopkeeper , seeing the book picked up,
saying, ‘ I am sorry I cannot let you have the book; it is the only copy I have
got and I have already promised it to another customer.

Harve v. Facie
 Plaintiff – Will you sell us Bumper hall Pen? Telegraph lowest cash price
 Defendant – Lowest price for Bumper Hall Pen, £900
 Plaintiff – We agree to buy Bumper Hall Pen for £900
 Defendant– refused to sell the land.
 Plaintiff’s case dismissed being it is not a contract.
Termination of Offer
1. After stipulated time
2. Counter offer
3. Death or insanity of offeror
4. By revocation—
Eg. A proposes by a letter sent by post, to sell his house to B, B accepts the
proposal by a letter sent by post. B may revoke at any time before the letter
reaches A, but not after words.

Acceptance
 Sec. 2(b) When the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise.

Essentials
1. Must be absolute and un conditional
2. Acceptance only by offeree
3. Must be communicated to offeror
4. In prescribed manner and in time.

 Standard Forms of Contract


When a large number of contracts have got to be entered into by a person,
from a practical point of view and for the sake of convenience, a standard
form for the numerous contracts may be used.

The contracts with standard terms may be drafted by one party and on the
same terms contracts may be made with numerous persons.

 Standard form--
 Ex—An insurance company may prepare a draft of insurance policy.
 The contract in such a case is not made by the process of negotiation, as
regards its terms and conditions, between the two parties. One of the party
generally prepares which other party has to agree.
some times there is not time to read the conditions
(No customer in a thousand ever read the conditions. If he had stopped to do
so, he would have missed the train or the boat.)
 One of the parties being in greater bargaining position generally drafts the
terms which excludes or limits their liability . How far such condition are
valid?

 Essentials for Validity of terms in Standard Forms-

1. Contractual Document ( it must not be mere receipt)


A document is said to be contractual if it embodies the contract, that is to
say if the persons to whom it is delivered should know that it is supposed
to contain conditions.

2. Reasonable Notice
where paper is not supposed to express the conditions of the contract, it
will be regarded as mere voucher, etc. extra care(notice) will have to be
taken to communicate its terms .
if the attention of the party to the contract has been drawn to the terms
of the contract by a sufficient notice , For example, by printing on a ticket “
for conditions see back” or obtaining his signatures on the document
containing the terms or otherwise explaining the terms to him , there arises a
binding contract as regards such terms.

3. Notice must be contemporaneous to the contract


e.g – In a hotel after customers entered the room found the notice that
owner is not responsible for any loss of property in the room.

4. Conditions must be reasonable


e.g Terminate the service of employee by giving 3 months notice(even
without any reason) is not reasonable.
5. No Fundamental Breach of contract
every contract contains a core or fundamental obligation which must
be performed. If one party fails to perform this fundamental obligation ,
he will be guilty of a breach of the contract whether or not any
exempting clause has been inserted (even with proper notice).

eg. i) The receipts given for dry-cleaning restricted Launderer’s liability to 20


times of the service charges or 50% of the value of the garments, whichever
was less.

ii) A term printed on ticket exempted the defendant from liability for loss or
misdelivery of the luggage. Plaintiff luggage was delivered to an unauthorized
person without the production of the ticket. It was held that non-delivery of
luggage to plaintiff amounted to fundamental breach.

6. Statutory Protection
In England there are some statues where in exclusion of liability has been
barred.
Eg.
 Unfair contract terms act, sale of goods Act etc.
 In India there is no specific legislation concerning the question of exclusion of
contractual liability.
 There is a possibility of striking down –sec.16,23 of Indian contract Act.

 Contract and Statutes


The law relating to contracts is scattered over many statutory enactments .
1. The Indian Contract Act 1872
2. Transfer of Property Act 1882
3. Sale of Goods Act 1930
4. Indian Partnership Act 1932 etc.

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