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Constituents of the
working of Contracts:
Formation of the agreement
Consideration
Setting aside of bad
contracts
Damages & Compensation
Formation of agreements
An agreement is about meeting of
two minds.
This can be formed when one party
makes an offer and the other
accepts it.
An offer or proposal can be accepted or
rejected. If the offer is rejected, that is
the end of it. However, if an offer is
accepted, an agreement is formed.
Offer and acceptance can be express
(spoken or written in words) or
Formation of agreements
Contracts formed through spoken or
implied offers and/or acceptances,
are as valid as contracts formed
through a written offer and
acceptance
The founding principle for the
formation of agreements is the
meeting of minds (consensus ad
idem), offer and acceptance is only
a modality.
Offer
An offer is an expression to
contract without further
negotiations.
It requires only acceptance
from the other party to form a
contract.
Offer
Offer must be communicated
to the offeree.
Lalman v Gauri Datta (1913)
- Case involving absconding nephew reward of Rs.
501
Offer
Offer must be made to some other
person.
Offer to one particular person.
Offer to a group of persons..
Offer to the whole world..
(Continuing offer v Offer of Reward
for Information).
Carlill v Carbolic Smoke Ball Co (1893)
- Case involving cure for influenza reward for contracting influenza
money lodged in the bank.
Offer
Offer may be expressed or
implied.
Offer must be made with a
view to obtaining the assent
of the other and should not be
an expression of intention or
enquiry.
Offer
Offer may be conditional.
The terms of the offer must
be certain.
An offer must not thrust the
burden of acceptance on the
offeree.
Revocation of offer..
An offer can be revoked.
It may come to an end due to
lapse of time.
It may be revoked when the
acceptor fails to fulfil the
condition precedent to
acceptance.
It may be revoked by the death
or insanity of the proposer.
A long silence implies rejection of
Offer - Summary
Internet is only a medium for communication. The
content of the communication decides whether it is
an invitation to offer or an offer.
Advertisements can be offers or invitations to offer
depending upon the intended communication.
Ordinarily, displays in shop windows, product
catelogues and price lists are invitations to offer.
Ordinarily, in a self-service store, the customer
offers.
Ordinarily, in auctions and tenders, the bidders offer.
Choice of words used to express an offer will not
decide whether a communication is an offer or not.
The essence of the communication is important for
this purpose.
Unqualified Acceptance
An offer should be accepted without changing its
terms.
Changing the terms of the offer amounts to an
implied rejection of the offer.
An acceptance changing the terms of an offer is
a counter-offer.
Acceptance should be directed and
communicated to the person making the offer.
Mental acceptance is no acceptance
Silence can only imply rejection, not acceptance
An offer can specify the modality of
communication of acceptance.
It cannot be made in ignorance of the offer.
It must be given before the offer lapses.
Consideration
Consideration is the benefit accruing
to the parties to a contract.
Consideration can be right, interest,
profit or benefit for one party. It can
also be some forbearance,
detriment, loss or responsibility
given, suffered or undertaken by
the other.
Agreements without consideration
are not enforceable.
Consideration does not have to be
Consideration
Consideration must move at the desire of the
promisor
Durga Prasad v Baldeo (1880)
Case involving construction of market place on the order of DC
Occupants of shops to pay commission on sale.
Nude Contracts
An agreement made without consideration
is void
Exceptions:
Love and affection.
A written and registered agreement based
on natural love and affection between near
relatives.
Compensation for past voluntary services.
Promise to pay a time barred debt.
Completed gift.
Transfer of property by one person to
another as a gift according to the provisions
of Transfer of Property Act.
Continued..
Nude Contracts
An agreement made without consideration
is void
Exceptions:
Contract of agency does not require
consideration.
Consideration is not required for
remission of debt.
A contract of guarantee is made
without consideration.
Parties to a contract
Only the contracting parties have rights and
obligations towards one another. All others are
strangers and can claim no rights and have no
obligations.
Exceptions:
1. Where a trust or charge has been created in
favour of a person.
Gandy v Gandy (1884)
- Case of promise to pay to trustees to pay for expenses for the
maintenance of wife from whom he had separated.
Continued.
Parties to a contract
Only the contracting parties have rights and obligations
towards one another. All others are strangers and can
claim no rights and have no obligations.
Exceptions:
3. Where the promisor by his conduct, acknowledges or
otherwise constitutes himself as an agent of a third
party, a binding obligation is thereby incurred by him
towards the third party .
4. An assignee of rights and benefits under a contract not
involving personal skill can enforce the contract subject
to the equities between the original parties
E.g. holder in due course of a negotiable instrument
5. Covenants running with the land
Tulk v Moxhay (1848)
- Case of sale of large immovable property in 1808 with a covenant to keep
garden square uncovered with buildings after property exchanged
hands several times, buyer M in 1848 refused to abide by the covenant as
he claimed he was not in privity of contract and so was not bound by it.
Privity of Contract
Preist & Wife v Last (1903) - P asked
L for a hot water bottle Having being
shown one by L he asked L if it would
stand boiling water L replied no, but it
would stand hot water P then bought
for his wife Fifth night of use bottle
bursts & injures Mrs. P turned out that
the bottle burst because pure rubber
formed a very small proportion of the
material P claims price & damages for
wifes pain & suffering from L Issues
Privity of contract: Mrs. P has no right?
Privity of Contract
Donoghue v Stevenson(1932)
Snail in the bottle case There was no
contractual relationship between Ms. May
Donoghue and the drinks manufacturer or even
the caf owner, as Donoghue had not ordered or
paid for the drink herself. Although there was a
contractual relationship between the caf owner
and Donoghue's friend, the friend had not been
harmed by the ginger beer. As ginger beer was
not a dangerous product, and the manufacturer
had not fraudulently misrepresented it, the case
also fell outside the scope of the established
cases on product liability. On the face of it, the law
therefore did not provide a remedy for Donoghue
Continued
Privity of Contract
Donoghue v Stevenson(1932)
-On an appeal to the House of Lords laid down the following
main points:
1. Negligence is a distinct Tort
2. A contract is not necessary
3. Manufacturers liability a manufacturer of products, which
he sells in such a form as to show that he intends them
to reach the ultimate consumer in the form in which they
left him with no reasonable possibility of intermediate
examination, and with the knowledge that the absence of
reasonable care in the preparation or putting up of the
products will result in an injury to the consumers life or
property, owes a duty to the consumer to take that
reasonable care
4. The Neighbour Principle persons who are so closely and
directly affected by my act that I ought to have them in
contemplation as being so affects when I am directing my
mind to the acts or omissions which are called question
Privity of Contract
Klaus Mittelbachert v East India Hotels Ltd (1997) Co pilot of
Lufthansa injured by defective pool at Hotel Oberio Intercontinental
hotel room booked by Lufthansa, not Klaus There was no privity of
contract between Klaus & the hotel.
It was held by the Delhi High Court, that though the contract was between
Lufthansa & the hotel, the beneficiaries are the crew who would stay, and
hence the contract was for their benefit.
M C Chacko v State Bank of Travancore (1970) M C Chackos father
guarantees his overdraft father gifts his property under a gift deed to
family members which states that M C Chacko should meet the liability
under the guarantee from the share of property gifted to him - Bank tries
to enforce a provision of this gift deed.
Capacity to Contract
The following persons are incompetent to
contract:
1. Minors
2. Persons of unsound mind
Idiot
Lunacy or insanity
Drunkenness or intoxication
3. Disqualified persons
Alien enemies
Foreign sovereigns & ambassadors
Convicts
Undischarged insolvent
Minors
A contract with a minor is void abinitio.
Payment can be made out of the property of a minor for
the necessaries of life supplied to him.
Necessaries are those without which an individual cannot reasonably
exist.
Consent
Free & genuine consent:.
Coercion
Coercion is :
The committing or threatening
to commit any act forbidden by
the Indian Penal Code, 1860.
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
Even threat to commit suicide
amounts to coercion.
The threat need not proceed from the
party to the contract, it may proceed
from a third person also.
A threat to file a civil or criminal suit is
not forbidden by the Indian Penal Code.
The burden of proving that the consent
was obtained by coercion shall lie upon
the aggrieved party who wants to set
aside the contract.
Coercion
Effect of Coercion:
The contract is voidable at the option of
the party whose consent was so obtained.
When the aggrieved party decides to set
aside the contract, it must give back any
benefit received from the other party
under the contract. Moreover, the other
party need not perform his part of the
contract.
If the aggrieved party does not opt to set
aside the contract, it works as a valid
contract.
Undue Influence
Where relations subsisting
between the parties are such
that one of the parties is in a
position to dominate the will
of the other and uses that
position to obtain an unfair
advantage over the other.
Undue Influence
When is a person in a position to
dominate the will of the other:
Real or apparent authority.
Fiduciary relation.
Persons with affected mental
capacity.
When a transaction appears to be
unconscionable, it is presumed that
the stronger party has exercised
undue influence over the weaker
party.
Undue Influence
Undue influence may be exerted by a
person who is not a party to the
contract.
Lack of foresight is not a ground for
establishing a case of undue influence.
The law presumes undue influence in a
contract with a pardanashin woman,
and the courts throw the burden on the
other party to prove that undue
influence was not exercised.
Undue Influence
Effect of undue influence:
The contract is voidable at the option of the
party whose consent was so obtained.
The court may direct the aggrieved party to
refund the benefit whether in whole or in part or
set aside the contract without any direction for
refund of benefit.
If the aggrieved party does not opt to set aside
the contract, it works as any other valid
contract.
Fraud
Fraud: Fraud exists when it is shown that a
false representation has been made,
knowingly,
or without belief in its truth,
or recklessly, not caring whether it is true or
false,
Fraud
Fraud cannot be committed by a
stranger to the contract.
Fraud must have been committed upon
the other party.
The following acts constitute a fraud:
Suggestion that a fact is true, by one,
who does not believe it to be true.
An active concealment of fact, by
one, having knowledge of the act.
A promise made without any intention
of performing it.
Any such acts or omission which law
specifically declares to be fraudulent.
Fraud
Mere silence is not fraud, except;
When it is the duty of the person
keeping silence to speak.
Fraud
Effect of fraud:
Misrepresentation
Misrepresentation is a misstatement
of a material fact made innocently
with an honest belief as to its truth
or non-disclosure of a material fact,
without any intent to deceive the
other party.
The effect of misrepresentation is
that the agreement is voidable by
the party whose consent is
obtained by misrepresentation.
Mistake
Mistake is erroneous belief about
something. It may be mistake of law or
mistake of fact.
Mistake of law does not result in a
voidable contract.
Bilateral mistake of fact renders a
contract void. (lack of consensus ad
idem).
Mistake
Mistake as to:
1. the existence of the subject matter.
Couterier v Hastie (1856)
- Case involving sale of goods on board a ship
3. title or rights.
Cooper v Phibbs (1867)
- Case involving renting of a fishery by nephew from uncles daughter whereas it
actually belonged to the nephew
6. assumptions.
Mistake
Unilateral mistake does not effect the
validity of an agreement. However, if it can
be proved that the mistake was caused by
fraud or misrepresentation it can be avoided.
Instances of Unilateral Mistake:
Mistake as to.
1. Identity of the contracting party.
Said v Butt(1920)
- Case of the drama critic S, with whom the
management, of which B was the managing
director, never intended to enter into a contract.
Mistake
Mistake as to identity of the contracting
party (caused by fraud):
Cundy v Lindsay (1878)
- Case where a fraudulent man called Blenkarn
posing as a well known firm Blenkiron & Co ordered
a large quantity of handkerchiefs in writing from
Cundy received the goods & disposed off the
goods to Lindsay , who acted in good faith held
that there was no contract between Cundy &
Blenkarn and therefore, he had no right to sell the
goods.
Mistake
Mistake as to identity of the contracting party
(caused by fraud):
Ingram v Little (1961)
- Case of sale of car by three ladies including I cheque offered but
refused buyer persuaded them to believe he was a certain
Hutchinson, leading businessman quoting an address & a telephone
number particulars verified by the ladies car given for the cheque
car resold to L cheque proved worthless I sued L for car or for
its value held that as the ladies intended to enter into contract with
the real Hutchinson there could be no contract with a rogue since
the rogue had no title to the car, he could not convey a good title to
L.
Lewis v Averay (1971)
- Case of sale of car by L cheque offered buyer, masquerading as
a famous film actor, asked to wait till cheque was cleared sellers
resistance broken proof of identity, a special pass of admission to
a film studio, given cheque bounced buyer had in the meantime
sold it to innocent buyer A held that L should suffer, it was he who
had allowed the possession of goods to pass without waiting for the
cheque to be cleared.
Lawful Object
The object of an agreement is
unlawful if: it is forbidden by
law; or it is of such a nature
that, if permitted, it would
defeat the provisions of any
law; or it is fraudulent; or it
involves or implies injury to
the person or property of
another; or the court regards it
as immoral, or opposed to
public policy.
Agreements expressly
declared void
1. Agreements in restraint of
marriage
2. Agreements in restraint of trade
(exception is the sale of
goodwill, or agreements by
partners under the partnership
act)
3. Uncertain agreements (the
meaning of which is uncertain)
4. Agreements in restraint of legal
proceedings
5. Curtailing the period of
Contingent Contract
A contingent contract is a
conditional contract.
A contingent contract is a
contract to do or not to do
something, if some event,
collateral to such contract, does
or does not happen.
Insurance agreements are best
examples of contingent contracts.
Quasi Contract
These are contracts which are not founded
on actual promises. These contracts are
created by circumstances & are based on
the maxim: no man must grow rich out of
other persons cost.
1. Supply of necessaries.
2. Payment of lawful dues by interested
person.
3. Obligation of a person enjoying benefit of
a gratuitous act.
4. Finder of goods.
Discharge of a Contract
Discharge by
Discharge by
consent
Discharge by
performance
Discharge by
Discharge by
Discharge by
performance
agreement or
impossibility of
lapse of time
operation of law
breach of contract
Discharge by
performance
ACTUAL PERFORMANCE
When both parties perform their
promises & there is nothing
remaining to perform.
ATTEMPTED PERFORMANCE
When the promisor offers to
perform his obligation, but promisee
refuses to accept the performance.
It is also known as tender.
Discharge by agreement
or consent
NOVATION :New contract substituted for old
contract with the same or different parties.
RESCISSION : When some or all terms of a
contract are cancelled.
ALTERATION :When one or more terms of a
contract is/are altered by the mutual consent of
the parties to the contract.
REMISSION :Acceptance of a lesser fulfilment of
the promise made.
WAIVER :Mutual abandonment of the right by
the parties to contract.
MERGER :When an inferior right accruing to a
party to contract merges into a superior right
accruing to the same party.
Discharge by impossibility
of performance
Initial impossibility
Subsequent impossibility
Destruction of subject matter
Non-existence of state of things (Failure of
Ultimate Purpose frustration of the
contract)
Krell v Henry (1903) - Case of hiring a flat
to witness coronation procession of King
Edward VII
Impossibility of
performance not an
excuse
1. Difficulty of performance due to some
2.
3.
4.
5.
Discharge by lapse of
time
The Limitation Act 1963, clearly
states that a contract should
be performed within a specified
time called period of limitation.
If it is not performed and if the
promisee takes no action within
the limitation time, then he is
deprived of his remedy at law.
Discharge by Operation of
Law
Death
Merger
Insolvency
Unauthorised alteration of the
terms of a written agreement
Rights & liabilities becoming
vested in the same person
(e.g. bill of exchange gets into the hands of
the acceptor)
Discharge by breach of
contract
ACTUAL BREACH
At the time when the performance is
due
During the performance of the contract
ANTICIPATORY BREACH
Declaration of not performing the
contract before the performance is due
Remedies
When a there is breach of
contract, the injured party has one
or more of the following remedies:
1. Rescission of contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of
the contract
5. Suit for injunction
Damages
.monetary compensation for
the loss caused to the injured
party.
Every action for damages
raises two problems:
Remoteness of damage
Measure of damages
Remoteness of damages.
Hadley Vs Baxendale (1854)
A shaft in Hadleys (P) mill broke rendering the mill
inoperable. Hadley hired Baxendale (D) to transport the
broken mill shaft to an engineer in Greenwich so that he
could make a duplicate. Hadley told Baxendale that the
shaft must be sent immediately and Baxendale
promised to deliver it the next day. Baxendale did not
know that the mill would be inoperable until the new
shaft arrived.
Baxendale was negligent and did not transport the shaft
as promised, causing the mill to remain shut down for an
additional five days. Hadley had paid 2 pounds four
shillings to ship the shaft and sued for 300 pounds in
damages due to lost profits and wages. The jury
awarded Hadley 25 pounds and Baxendale appealed.
Remoteness of
damages.
Two rules
1. General damages are for loss which
arises naturally in the usual course of
things from the breach itself.
2. Special damages are for loss which
arises on account of the unusual
circumstances affecting the plaintiff.
Measure of damages
Damages are compensatory; not
penal
In ordinary cases, damages for
mental pain and suffering caused
by the breach are not allowed.
Injured party has to take
reasonable steps to see that his
loss is kept to the minimum. (Duty
to mitigate)
Liquidated Damages
Monetary compensation for a loss, detriment,
or injury to a person or a person's rights or
property, awarded by a court judgment or by
a contract stipulation regarding breach of
contract.
Generally, contracts that involve the
exchange of money or the promise of
performance have a liquidated damages
stipulation.
The purpose of this stipulation is to establish a
predetermined sum that must be paid if a
party fails to perform as promised.
Liquidated Damages
Damages can be liquidated in a contract only
if :
1. the injury is either uncertain or difficult to
quantify;
2. the amount is reasonable and considers the
actual or anticipated harm caused by the
contract breach, the difficulty of proving the
loss, and the difficulty of finding another,
adequate remedy; and
3. the damages are structured to function as
damages, not as a penalty.
. If these criteria are not met, a liquidated
damages clause will be void.
Penalty
A penalty is a sum that is disproportionate to
the actual harm. It serves as a punishment or
as a deterrent against the breach of a
contract. Penalties are granted when it is
found that the stipulations of a contract have
not been met. For example, a builder who
does not meet his or her schedule may have
to pay a penalty.
Liquidated damages, on the other hand, are
an amount estimated to equal the extent of
injury that may occur if the contract is
breached. These damages are determined
when a contract is drawn up, and serve as
protection for both parties that have entered
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Present Position
1.
2.
3.
4.
5.
6.
Structure of a Contract
1. Preamble
2. Interpretation & definitions
3. Scope, technical specifications & performance
parameters
4. Price
5. Terms & mode of payment
6. Price variation
7. Taxes & duties
8. Scheduled delivery date
9. Force majeure
10. Export license
70
Structure of a Contract
10. Defaults & liquidated damages
11. Inspection & acceptance
12. Shipment
13. Passing of title & risk
14. Warranty
15. Patents & copyrights
16. Indemnities
17. Spares
18. Options
19. Assignments
71
Structure of a Contract
19. Termination
20. Resolution of disputes
21. Confidentiality
22. Survival
23. Amendments
24. Applicable Laws
25. Effective Date
26. Notices
27. Contract Signatures
28. Forms
72