ASSIGNMENT SET 1

1. All contracts are agreements but all agreements are not contracts. Discuss
Ans.Contract: An agreement enforceable by law is a contract. To make a contract, there must be (I) an agreement and (ii) the agreement should be enforceable by law. Agreement: Agreement is defined as every promise and every set of promises forming consideration for each other . A promise is defined as an accepted proposal. Thus, every agreement in its ultimate analysis is made of a proposal from one side and its acceptance by the other. To become a contract an agreement must be enforceable by law. Sec. 10 of the Act lays down the condition of enforceability. An agreement becomes enforceable only when it is coupled with obligation. An obligation is the legal bond, which binds the parties to a contract. The obligations springing from agreements should be legal obligations and not moral, social or religious obligations. Essentials of a Valid Contract: All contracts are agreements but all agreements need not be contracts. The agreements that create legal obligations only are contracts. The validity of an enforceable agreement depends upon whether the agreement satisfies the essential requirements laid down in the Act. Section 10 lays down that all the agreements are contracts if they are made by the free consent of the parties competent to contract for a lawful object and are not hereby expressly declared to be void. The following are the essentials: Agreement: An agreement which is preliminary to every contract is the outcome of offer and acceptance. An offer to do or not to do a particular act is made by one party and is accepted by the other to whom the offer is made. Then we say that there is a meeting of the minds of the parties. Such a position is known as consensus ad idem. Free consent: The parties should agree upon the same thing in the same sense and their consent should be free from all sorts of pressure. In other words it should not be caused by coercion, undue influence, misrepresentation, fraud or mistake. Contractual capacity: The parties entering into an agreement must have

legal competence. In other words, they must have attained the age of majority, should be of sound mind and should not be disqualified under the law of the land. A contract entered into between the parties having no legal capacity is nullity in the eyes of law. Lawful consideration: There must be consideration supporting every contract. Consideration means something in return for something. It is the price for the promise. An agreement not supported by consideration becomes a nudum pactum i.e., naked agreement. The consideration should be lawful and adequate. However, there are certain exceptions to this rule. Lawful object: The object or purpose of an agreement must be lawful. It should not be forbidden by law, should not be fraudulent, should not cause injury to the person or property of another, should not be immoral or against public policy. Not expressly declared void: The statute should not declare an agreement void. The Act itself has declared certain types of agreements as void. E.g., agreements in restraint of marriage, trade, legal proceedings. In such cases, the aggrieved party cant seek any relief from the court of law. Possibility of performance: The agreement should be capable of being performed. e.g., Mr. A agrees with Mr. B to discover treasure by magic. Mr. B cant seek redressal of the grievance if Mr. A fails to perform the promise. Certainty of terms: The terms of the agreement should be certain. E.g., Mr. A. agrees to sell 100 tons of oil. The agreement is vague as it does not mention the types of oil agreed to be sold. Intention to create legal obligation: Though Sec. 10 is silent about this, under English law this happens to be an important ingredient. Therefore, Indian courts also recognise this ingredient. An agreement creating social obligation cant be enforced. Legal formalities: Indian Contract Act deals with a simple contract supported by consideration. Agreements made in India may be oral or written. However, Sec. 10 states that where the statute states that the contract should be in writing and should be witnessed or should be registered, the same must be observed. Otherwise, the agreement cant be enforced e.g., Under Indian Companies Act, the Memorandum of Association and Articles of Association must be registered. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall effect any law in force in India and not hereby expressly repealed, by

which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. [Section 10].

2. Not all persons have the capacity to enter into a contract. Discuss this statement.
Ans.Legal disability of the parties would render the agreement entered into between them unenforceable in a court of law. In fact, even a desirable person may enter into an agreement. Law does not infringe his freedom of making an agreement with anybody he likes. But by declaring certain classes of persons having no contractual capacity, law seeks to protect their interests from being exploited by unscrupulous persons. Definition: Section II lays down that Every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject. This section declares following persons to be incompetent: Minors Persons of unsound mind and Persons disqualified by law to which they are subject. Minors:A minor is a person who has not attained the age of majority. According to Indian Majority Act, 1875 the age of 18 years is a major. However, if a guardian is appointed by the court or if the minor or his property is under the supervision of a court of wards, the age of majority is 21 years. Principles governing minors contracts: The law protects minors persons, preserves either their rights or estates, excuses their shortcomings and negligence and assists them in their pleadings, the judges are their counselors, the jury are their servants and law is their guardian. In pursuing the above objective, the law should not cause unnecessary hardship to those who deal with minors.Sec. II of the Act is silent as regards the legal effects of an agreement entered into by or with a minor. In Mohari Bibi Vs. Dharmo Das Ghosh case it was held that a minors agreement is void-ab-initio. Effects of minor agreement: A minors agreement is void-ab-initio. Where there is no contract, there should be no contractual obligation on either side. Hence, the effects of a minors agreements are worked out independently of any contract.

No estoppels against minor: A minor who has made an agreement by misrepresentation of his age may disclose his real age. There is no estoppel against him. No liability in contract or tort arising out of contract: A minor is, in law, incapable of giving consent. Hence, there could be no change in the character or status of the parties. A minor who misrepresents his age to obtain a contract cant be sued for deceit. You cant convert a contract into a tort to enable you to sue an infant. This principle has been followed in India. Where, however, the tort is independent of contract the mere fact that a contract is also involved will not absolve the minor from liability. Doctrine of restitution: If a minor obtains property or goods by misrepresentation of his age, he can be compelled to restore it but only so long as the same is traceable in his possession. This is known as the equitable doctrine of restitution. Suppose the minor has sold the goods he cant be made to repay the value of the goods because that would amount to enforcing a void contract. However, when a minor invites the aid of the court for the cancellation of his contract the court may grant relief subject to the condition that he shall restore all benefits obtained by him under the contract or make suitable compensation to the other party. But the court will not compel any restitution by a minor even when he is a plaintiff, where the other party was aware of the infancy so that he was not deceived or where the other party was unscrupulous in his dealings with the minor. Beneficial contracts: The law that a minors agreement is absolutely void has been confined to the cases where a minor is charged with obligations and the other party seeks to enforce them. On the other hand a minor is allowed to enforce a contract which is of some benefit to him and under which he is required to bear no obligations. A minor is capable of purchasing immovable property and he may sue to recover the possession of the property purchased by tendering the purchase money. A minor can be a beneficiary e.g., a payee, an endorsee, or a promise under a contract. A promissory note executed in favour of a minor is valid and can be enforced in a court. Ratification: On attaining majority, a person cant ratify an agreement made by him when he was a minor. Ratification relates back to the date of making of the contract. Therefore, a contract which was void originally cant be made valid by subsequent ratification. If it is necessary, a fresh contract should be made on attaining majority. A new contract requires a fresh consideration. The consideration which passed under the earlier contract cant be implied into the contract into which the minor enters on attaining majority. Liability for necessaries (Sec. 68): Persons incompetent to contract are made liable for necessaries supplied to them. Sec. 68 reads If a person

incapable of entering into a contract or any one whom he is legally bound to support is supplied by another person with necessaries suited to his conditions in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. The liability is only for necessaries. But what is necessary is not defined by the Act. We have to depend upon judicial decisions. Things necessary are those without which an individual cant reasonably exist such as food, raiment, lodging etc. What may be necessary for one class may be luxury for another. Therefore, the class has to be ascertained and then whether a thing is a necessity or not has to be determined. To render an infants estate liable for necessaries, two conditions must be satisfied: (1) The contract must be for goods reasonably necessary for his support in his state of life and (2) he must not have already a sufficient supply of these necessaries. The supplier has to prove not only that the goods supplied were suitable to the conditions in life of the minor but that he was not sufficiently supplied with the goods of that class. Thus, the liability for supply of necessaries attaches only to the estate of a minor and he does not incur any personal liability. Persons of Unsound Mind: A person is said to be of sound mind for the purpose of making a contract if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interests. A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind (Sec. 12). Two tests are laid to determine the soundness of mind while making a contract. They are (i) the person making a contract should be capable of understanding it and (ii) should be capable of forming a rational judgment as to its effects upon his interests.In English Law, a person of unsound mind is competent to contract. He may avoid his contract by satisfying the court that he was incapable of understanding the contract at the time of its formation and the other party knew it. The contract is voidable at his option.Under Indian Law, the agreement of a person of unsound mind is absolutely void. A person of unsound mind, however, may make a contract when he is of sound mind. Sec. 12 also puts the persons such as drunkard or a person who is delirious from fever in the same category as a person of unsound mind.

3. Discuss how a contract can be discharged by breach

Ans.Discharge of contract means parties to the contract is no more liable to the contract. In other words, the liability of the parties to the contract will come to an end.When the rights and obligations arising out of a contract are extinguished, the contract is said to be discharged or terminated. A contract

may be discharged in any of the following ways: By performance actual or attempted. By mutual consent or agreement. By subsequent or supervening impossibility or illegality. By lapse of time. By operation of law. By breach of contract. Discharge by breach of contract: Breach of contract by a party there to be also a method of discharge of a contract, because breach also brings to an end the obligations created by a contract on the part of each of the parties. Of course the aggrieved party i.e., the party not at fault can sue for damages for breach of contract as per law; but the contract as such stands terminated. Breach of contract may be of two kinds: Anticipatory breach; and Actual breach.

Anticipatory breach: An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. It may take place in two ways: Expressly by words spoken or written. Here a party to the contract communicates to the other party, before the due date of performance, his intention not to perform it. Impliedly by the conduct of one of the parties. Here a party by his own voluntary act disables himself from performing the contract. When a party to a contract has refused to perform or disabled himself from performing, his promise in its entirity, the promisee may put an end to the contract, unless he has signed, by words or conduct his acquiescence in its continuance. Actual breach: Actual breach may also discharge a contract. It occurs when a party fails to perform his obligations upon the date fixed for performance by the contract. Actual breach entitles the party not in default to elect to treat the contract as discharged and to sue the party at fault for damages for

breach of contract.

4. Discuss the essentials of a contract of guarantee. Ans.Definition of Contract of Guarantee: It is a contract to perform the promise or discharge the liability of a third person in case of his default (S. 126). Surety is a person who gives the guarantee. The person in respect of whose default the guarantee is given is called principal debtor. The person to whom the guarantee is meant for is called the Creditor. Essentials of Contract of Guarantee: From: A contract of guarantee is just like any other contract which may be either oral or in writing. Tripartite agreement: Every contract of guarantee involves three agreements betweenthe creditor and principal debtor,the surety and the creditor, andthe surety and the principal debtor. Consent of the parties: There must be consent of all the three parties. Example: X sells and delivers goods to Y. X afterwards requests Z to pay in default of Y. Z agrees to do so. Here, Z cannot become surety without the consent of Y. Secondary Liability: The test which applied to determine whether the contract is one of guarantee or indemnity is whether the obligation has been undertaken at the debtors request in which case the contract is one of guarantee. If the obligation is undertaken without any request of the debtor, the contract is one of indemnity. The intention of the parties is also important whether one making oneself primarily or collaterally liable. Hence, the promise to be primarily and independently liable is not a guarantee, though it may be an indemnity. Hence in a contract of guarantee, the primary liability is with the principal debtor. Existing liability: It is not necessary that the principal contract must be in existence at the time the contract of guarantee is made; the original contract by which the principal debtor undertakes to repay the money to the creditor may be about to come into existence.Example: X took a loan of Rs.10, 000 from Y on 1st Jan. 1999 and paid nothing on account of interest and principal. On 2nd Jan. 2002, Z gave the guarantee to Y for the payment of Rs.10,000 due from X. This is not a valid contract of guarantee because the primary liability between X and Y is a time barred debt which is not enforceable by law.

The promise to pay must be conditional: In other words, the liability of the surety should arise only when the principal debtor makes a default. Consideration: Something done for the benefit of the principal debtor is considered as consideration for the guarantee to make the contract valid. The legal detriment incurred by the promisee at the promisors request is sufficient to constitute the element of consideration. Competency: The principal debtor, surety and creditor must be a person competent to contract. However, under certain circumstances, a surety is liable though the principal debtor is not i.e. the original contract is void as is the case of a contract with a minor in which the surety is liable not only as surety but also as principal debtor. A person of unsound mind or an undischarged insolvent cannot give a valid guarantee. Consent: There must be free consent; otherwise the contract of guarantee may become void or voidable. Generally a contract of guarantee is not the contract of utmost good faith i.e., uberrimae fidei, but it is sometimes a first cousin to it. Mere non-disclosure will not affect the contract of surety unless there is an intentional concealment.Example: I: A engages B as clerk to collect money from him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duty accounting. C gives his guarantee for Bs duty accounting. A does not acquaint C with Bs previous conduct. B afterwards makes a default. The guarantee is invalid.Example: II: A guarantees to C payment for iron to be supplied by himto B to the amount of 2000 tons. B and C have privately agreed that we should pay Rs.500 per ton beyond the market price, such excess to be applied on liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.

5. How can negotiable instruments be endorsed? Discuss in detail.

Ans.Negotiable instruments are the most common credit devices used in modern business. They are basically written promises or orders to pay money, and may be transferred from person to person. The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. The chief objective of this Act is to legalize the system under which negotiable instruments pass from hand to hand in negotiation like ordinary goods. The Act is based on the principles of English Law. In fact the law of negotiable instruments is not the law of a single country but of the whole of

the commercial world and the general rule of the law will be of the same pattern in all the countries. The law relating to Negotiable Instruments is contained in the Negotiable Instruments Act, 1881, as amended up-to-date. It deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and Cheques.The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms: Payable to order: A note, bill or cheque is payable to order which is expressed to be payable to a particular person or his order. But it should not contain any words prohibiting transfer, e.g., Pay to A only or Pay to A and none else is not treated as payable to order and therefore such a document shall not be treated as negotiable instrument because its negotiability has been restricted. There is, however, an exception in favour of a cheque. A cheque crossed Account Payee only can still be negotiated further, of course, the banker is to take extra care in that case. Payable to bearer: Payable to bearer means payable to any person whom so ever bears it. A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all encompassing definition of negotiable instrument had been suggested by Thomas which is as follows: A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonafide transferee for value, notwithstanding any defect in the title of the transferor." Promissory Note According to Section 4 a promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument. Essentials of a Promissory Note: From the definition given in the Act it follows that to be a valid promissory note an instrument must fulfill the following essential requirements:

It must be in writing: A promissory note has to be in writing. An oral promise to pay does not become a promissory note. The writing may be on any paper, on any book. It may be in pencil or in ink and includes printing or typing. No particular form of words is necessary, even a promise contained in a letter will suffice, provided the other requirements of Section 4 are complied with. It must contain a promise or undertaking to pay: There must be a promise or an undertaking to pay. The undertaking to pay may be gathered either from express words or by necessary implication. A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an agreement and may be sued upon as such. The promise to pay must be unconditional: A promissory note must contain an unconditional promise to pay. The promise to pay must not depend upon the happening of some uncertain event i.e., a contingency or the fulfillment of a condition. If an instrument contains a conditional promise to pay, it is not a valid promissory note. It must be signed by the maker: It is imperative that the promissory note should be duly authenticated by the signature of the maker. The maker must be a certain person: The instrument itself must indicate with certainty who is the person or are the persons engaging himself or themselves to pay. The payee must be certain: Like the maker the payee of a promissory note must also be certain. The sum payable must be certain: For a valid promissory note it is also essential that the sum of money promised to be payable must be certain and definite. The amount payable must be in legal tender money of India: A document containing a promise to pay a certain amount of foreign money or to deliver a certain quantity of goods is not a promissory note. Other formalities: Though it is usual and proper to state in a note the place where it is made and the date on which it is made but their omission will not render the instrument invalid. But a promissory note must be properly stamped as required by the Indian Stamp Act and each stamp must also be duly cancelled. The makers signature with the date across the stamp cancels the stamp effectively. Although an unstamped or inadequately stamped promissory note is invalid, but the amount of loan can be recovered if proved otherwise

Specimen of Promissory note: Bill of Exchange Section 5 of the Negotiable Instruments Act defines a bill of exchange as follows: A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. Parties to a bill of exchange: There are three parties to a bill of exchange viz., drawer, drawee and payee. The person who makes the bill is called the drawer. The person who is directed to pay is called the drawee. The person to whom the payment is to be made is called the payee. The drawer, or if the bill is endorsed to the payee, the endorsee, who is in possession of the bill is called the holder. The holder must present the bill to the drawee for his acceptance. When the drawee accepts the bill, by writing the words accepted and then signing it, he is called the acceptor. Drawee in case of need: Sometimes the name of another person may be mentioned in a bill of exchange as the person who will accept the bill, if the original drawee does not accept it. Since another person so named is to be approached in case of need, he is known as drawee in case of need. Acceptor for honour: When a bill of exchange has been noted or protested for non-acceptance or for better security and any person accepts it supra protest for honour of the drawer or of any one of the endorsers, such person is called an acceptor for honour. Essentials of a bill of exchange: To be a valid bill of exchange an instrument must comply with the requirements of the definition given in Section 5, which are as follows: It must be in writing. It must contain an order to pay. A mere request to pay on account will not amount to an order. The order to pay must be unconditional. It must be signed by the drawer. The drawer, drawee and payee must be certain. The sum payable must be certain.

The bill must contain an order to pay money only. It must comply with the formalities as regards date, consideration, stamps, etc. Specimen of a Bill of Exchange: Cheque- Definitions & Distinction between a Cheque and a Bill of Exchange A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Thus, a cheque is a bill of exchange with two distinctive features, namely: (i) it is always drawn on a bank, and (ii) it is always payable on demand. Distinction between a Cheque and a Bill of Exchange: Although a cheque, being a species of a bill of exchange, must satisfy almost all the essentials of a bill, e.g., signed by the drawer, containing an unconditional order, to pay a certain sum of money, to the order of a person or the bearer, etc., yet there are few points of difference between the two, namely: A cheque is always drawn on a banker, while a bill may be drawn on any person, including a banker. A cheque can only be drawn payable on demand, whereas a bill may be drawn payable on demand or on the expiry of a certain period after date or sight. A cheque drawn payable to bearer on demand is valid but a bill drawnpayable to bearer on demand is absolutely void and illegal. A cheque does not require any acceptance by the drawee before payment can be damanded. But a bill requires acceptance by the drawee before he can be made liable upon it. A cheque does not require any stamp, whereas a bill of exchange must be properly stamped. Three days of grace are allowed while calculating the maturity date in the case of time bills (i.e., bills drawn payable after the expiry of a certain period). Since a cheque is always payable on demand, there is no question of allowing any days of grace. Unlike cheques, a bill of exchange cannot be crossed. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

Unlike bills, there is no system of Noting or Protest in the case of a cheque.The drawer of a bill is discharged from liability, if it is not duly presented for payment, but the drawer of a cheque will not be discharged by delay of the holder in presenting it for payment, unless through the delay, the drawer has been injured, e.g., by the failure of the bank the drawer has lost the money which would have otherwise discharged the amount of the cheque. However, where the drawer is so discharged, the payee may rank as creditor of the bank for the amount of the cheque.

6. Why do you think an agreement to take a person to moon for a holiday cannot be a contract?
Ans.A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce. For a contract to be formed an offer made must backed acceptance of which there must be consideration. Both parties involved must intend to create legal relation on a lawful matter which must be entered into freely and should be possible to perform.An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honor of the parties for its fulfillment rather than being in any way enforceable. According to section 2(h) of the Indian Contract Act: " An agreement enforceable by law is a contract." A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law.From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements detail. On analyzing the above definition the following characteristics of an agreement become evident: (a) At least two persons. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself. (b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. In the case of promising a person to

take him to moon on a holiday, it is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract. " All contracts are agreements but all agreements are not contracts,"Yet another essential feature of a valid contract is that it must be capable of performance. Section 56 lays down that "An agreement to do an act impossible in itself is void". If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.In the case of taking a person to moon is not a valid contract as it is not capable of performance to a single person. It requires huge money which a normal person cannot afford.