Contract Law

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Contract Lawyer in Delhi

Writing out a contract, and contracts in general, is an important part of business and transactions. Here are all the steps to building out a contract.

Formation of a Contract

The formation of a contract requires certain conditions to be fulfilled so that these contracts can be legally binding on a person in case any dispute arises between the parties to the contract. Thus, in order to form a contract between the parties which can be legally binding on both, there should be an agreement between the parties to contract and that agreement should be enforceable by law.

The formulae for determining whether a contract is a legally binding contract or not, is given as:

  1. Offer (proposal by one party) + Acceptance (by other party) = Promise
  2. Promise + Consideration (compensation given by one party for the work done by other party) = Agreement
  3. Agreement + Enforceability by law = Contract [Section 2(h)]

(a) Essentials of a Contract

All agreements are contracts if they are made by the free consent of parties, allowed by law to create a contract, for a lawful compensation (consideration) and with a lawful motive (object) and are not hereby expressly declared to be illegal (void). Thus, the essential elements of a valid contract can be summarized as under:

  1. An agreement [Section 2(e)];
  2. The agreement should be made by the free consent of the parties (Section 13-22);
  3. The agreement should be entered into between parties who are allowed by law to contract (Section 11-12);
  4. It should be for a lawful consideration (compensation) [Section 2(d), 23, 25];
  5. It should be with a lawful motive (Section 23-30);
  6. It should not have been expressly declared to be illegal (Section 10);
  7. Formalities under different laws: Any other law in India will not be affected by the Indian Contract Act, 1872, unless the law under Indian Contract Act specifically nullifies any other law. This is mainly applicable where a 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); and
  8. Intention to create a legal relationship.

(b) Proposal / Offer

According to Section 2(a), when one person declares to another person that he wihes to do something or restrain himself from doing something, with the intention that the other person will give his approval for doing so, he is said to make a proposal. The expression ‘offer’ is synonymous with ‘proposal’. The person making the proposal is called the ‘promisor’ and the person accepting the proposal is called the ‘promisee’ [Section 2(c)].

(c) Acceptance

When the other person accepts the proposal without putting any condition, it is called acceptance. An offer/proposal when accepted  becomes a promise. Say for example A offers to buy B’s car for rupees two lacs and B accepts such an offer. Now, this has become a promise.

(d) Revocation of Proposals and Acceptances

A proposal may be revoked at any time before the acceptance is given, but not afterwards. An acceptance may be revoked at any time before the acceptance reaches the other person, but not afterwards.

(e) Capacity to Contract

Since any person less than 18 years of age is not legally allowed to enter into a contract, any agreement made with a minor does not exist in the eyes of law from the beginning. Also, if a minor enters into a contract, then he cannot make the contract legal even after he attains majority (above 18 years) since the contract does not exist in the eyes of law from the begining. And, a non-existent contract cannot be made legal.

  1. A Minor can be a Beneficiary of a Contract: While a minor cannot enter a contract, he can be the beneficiary of one. Section 30 of the Indian Partnership Act, 1932, also specifies that while a minor cannot become a partner in the partnership firm, the benefits of the firm can be extended to him.
  2. A Minor is always given the Benefit of being a Minor: Even if a minor falsely represents himself as a major and takes a loan or enters into a contract, he can argue that he is a minor as use it as his defence.
  3. Contract by Guardian: Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of the minor. Such a contract, which the guardian enters into, for the benefit of the minor, can also be made compulsory by the minor. However, guardians cannot bind a minor by a contract for buying immovable property. But, a contract entered into by a certified guardian of a minor, appointed by the Court, with approval from the Court for the sale of a minor’s property can be executed.
  4. Insolvency: A minor cannot be declared insolvent as he cannot avail debts. Also, if some dues are pending from the properties of the minor and he is not personally liable for the same.
  5. Joint contract by a Minor and an Adult: In case of a joint contract between an adult and a minor, executed by the guardian on behalf of the minor, the legal responsibility of the contract falls on the adult.
  6. Person of Sound Mind: According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a person is said to be of sound mind if he is capable of understanding the contract and being able to assess its effects upon his interests. It is important to note that a person who is usually of an unsound mind, but occasionally of a sound mind, can enter a contract when he is of sound mind. No person can enter a contract when he is of unsound mind, even if he is so temporarily. A contract made by a person of an unsound mind is legally non-existent.
  7. Disqualified Persons: Apart from minors and people with unsound minds, there are other people who cannot enter into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc.

(f) Free Consent

When two or more persons agree upon the same thing in the same sense, they are said to have consented. For a contract to be valid, it is not only essential that parties must consent, but also that they must consent freely. Where there is a consent, but no free consent, there is, in general (excluding mistake), a contract which can be decalred illegal at the option of the party whose consent was not free. Section 14, Indian Contract Act 1872 defines ‘free consent’ as under:

Consent is said to be free when it is not caused by:

  1. Coercion (Section 15)
  2. Undue influence (Section 16)
  3. Fraud (Section 17)
  4. Misrepresentation (Section 18)
  5. Mistake (Sections 20, 21 and 22)

(g) Consideration (Compensation)

In simple terms, consideration is defined as the compensation given by the party (for the work done by the other party) contracting to the other. The essentials of a valid consideration are:

  1. The consideration must made at the desire of the promisor. Compensation must be paid for the work done by the promisor which was his desire.   Example. A saves B’s goods from a fire without being asked to do so. A cannot demand payment for his service.
  2. The compensation may be paid by the promisee or any other person. This means as long as there is a consideration it is immaterial who has given it. Consideration may be given by the promisee or even a stranger. But the stranger to the consideration cannot sue until he’s a party to the contract. Example: ‘A’ by gift deed transferred certain property to her daughter with the direction that the daughter should pay an annuity to ‘A’s brother as had been done by ‘A’. Whereas daughter executed writing in favor of brother to pay the annuity. Afterward, she refused to fulfill her promise saying that no consideration had moved from A’s brother. The court held that ’A’s brother was entitled to maintain the suit. [Chinnayya v. Ramayya (1882) 4 Mad.137]
  3. The consideration may be an act, restrain from an act or forbearance (ferain from exercising a legal right) or a return promise.
  4. The consideration may be past, present or future: The words used in Section 2(d) clearly state that a consideration may be past present or future.
  5. Past Consideration: if the compensation by a party to an agreement was given in the past, i.e. before the date of promise, it is called past consideration. Example: A renders some service to B at the latter’s desire. After a month B promises to compensate A for the services rendered to him. It is past consideration.
  6. Present Consideration or executed consideration: When the consideration is given at the same time the promise is made. It is called present or executed consideration. The best example of such consideration would be a cash sale. When we buy something in consideration for money from a shop it is a present consideration.
  7. Future or Executory consideration: When the consideration from one party to the other is gievn subesquently to the making of the contract, it is a future consideration. Example: D promised to deliver certain goods to P after a week; P promises to pay the price after a fortnight. The promise of D is supported by the promise of P. consideration in this case is future or Executory.
  1. Consideration need not be adequate: It is however not necessary that consideration must be adequate to the promise made. Consideration as considered to be “something in return”, it need not necessarily be equal to the value to the “something given”. But it should be something to which the law attaches value. The adequacy of consideration depends upon the parties, how valuable it is to them while entering the agreement, not for the court when it is sought to be enforced. Example: A purchases a table from B for Rs. 500. It is a difficult task for the court to ascertain whether the value of the table is worth the price is given or not.
  2. Consideration should not be illusory but real: Although the consideration accepted may not be adequate but it should be real and not illusory and should be competent and of some value in the eye of law. There is no real consideration in the following cases.
    1. Physically Impossible: A promises to put life in B’s dead wife on behalf of Rs. 500. This is physically impossible to perform.
    1. Legally Impossible: A owes to B Rs. 100. He promises to pay Rs. 510 to C, the servant of B, who in return promises to discharge A from his debt. This is legally impossible because C cannot give a discharge for a debt due to B.
    1. Uncertain Consideration: A engages B for doing certain work and promises to pay a “reasonable” sum. There is no recognized way to ascertain the “reasonable” remuneration. This consideration is uncertain consideration.
  1. Consideration should not be something which the promisor is already bound to do: A person may already be bound to do something by law or by contract. A promise to do something which he is already bound to do is not a good consideration. Likewise, a promise to perform a public duty by a public servant is not a good consideration.
  2. Consideration must not be illegal, immoral or against the public policy: Section 23 of the Contract Act 1872 refers that consideration to an agreement should not be something illegal, immoral or something against the public policy. The court should decide whether the consideration promised is lawful or unlawful. Where it is unlawful the courts should not allow the action on the agreement.

(h) Legality of Object and Consideration

An agreement will not be enforceable if its motive (object) or the compensation for the work (consideration) is unlawful. According to Section 23 of the Contract Act, the consideration or object of an agreement is lawful, unless it is forbidden by law; or is fraudulent, or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. According to Section 24 of the Indian Contract Act, if any part of a single consideration for one or more objects, or anyone or any part of any one of several considerations for a single object, is unlawful, the agreement is void.

  1. Void Agreements: There are certain agreements which the Indian Contract Act specifically declares void. Some of those important provisions are:
    1. Agreement void, where both the parties are under a mistake as to a matter of fact essential to the agreement (Section 20).
    2. Every agreement of which the object or consideration is unlawful is void (Section 23)
    3. Agreements void, if considerations or objects unlawful in part (Section 24)
    4. Agreements without consideration, void (Section 25)
    5. Agreements in restraint of marriage (Section 26)
    6. Agreements in restraint of trade (Section 27)
    7. Agreements in restrain of legal proceedings (Section 28)
    8. Agreements void for uncertainty (Section 29)
    9. Agreements by way of wager (Section 30)
    10. Agreement contingent on impossible events void (Section 36)
    11. Agreements to do impossible acts (Section 56, para-1)

2. Discharge of Contracts

    (a) Performance of a Contract

When the parties to a contract fulfill the obligations arising under the contract within the time and manner prescribed, then the contract is discharged by performance.

Example: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to be paid by John on the delivery of the cycle. As soon as it is delivered, John pays the promised amount.

Since both the parties to the contract fulfill their obligation arising under the contract, then it is discharged by performance. Now, discharge by the performance of a contract can be by:

  • Actual performance
  • Attempted performance

As shown in the example above, actual performance is when all the parties to a contract do what they had agreed for under the contract. On the other hand, it is possible that when the promisor attempts to perform his promise, the promisee refuses to accept it. In such cases, it is called attempted performance or tender.

    (b) Discharge by Impossibility or Unlawfulness of Contract

If it is impossible for any of the parties to the contract to perform their obligations, then the impossibility of performance leads to a discharge of the contract. If the impossibility exists from the start, then it is impossibility ab-initio (from the beginning). However, the impossibility might also arise later due to:

  • An unforeseen change in the law
  • Destruction of the subject-matter essential to the performance
  • The non-existence or non-occurrence of a particular state of things which was considered a given for the performance of the contract
  • A declaration of war

Example: Peter enters into a contract with John to marry his sister Olivia within one year. However, Peter meets with an accident and becomes insane. The impossibility of performance leads to a discharge of the contract.

    (c) Discharge by Agreement and Consent (Consensual Discharge)

If all parties to a contract mutually agree to replace the contract with a new one or annul or remit or alter it, then it leads to a discharge of the original contract due to a mutual agreement.

Example: Peter owes Rs 100,000 to John and agrees to repay it within one year. They document the debt under a contract. Subsequently, he loses his job and requests John to accept Rs 75,000 as a final settlement of the loan. John agrees and they make a contract to that effect. This discharges the original contract due to mutual consent.

    (d) Discharge by Lapse of Time

The Limitation Act, 1963 prescribes a specified period for performance of a contract. If the promisor fails to perform and the promisee fails to take action within this specified period, then the latter cannot seek remedy through law. It discharges the contract due to the lapse of time.

Example: Peter takes a loan from John and agrees to pay installments every month for the next five years. However, he does not pay even a single installment. John calls him a few times but then gets busy and takes no action. Three years later, he approaches the court to help him recover his money. However, the court rejects his suit since he has crossed the time-limit of three years to recover his debts.

    (e) Discharge by Operation of Law

A contract can be discharged by any change which occur automatically due to existing law, such as insolvency or death.

    (f) Discharge by Breach of Contract

If a party to a contract fails to perform his obligation according to the time and place specified, then he is said to have committed a breach of contract. Also, if a party repudiates a contract before the agreed time of performance of a contract, then he is said to have committed an anticipatory breach of contract. In both cases, the breach discharges the contract. In the case of:

  • An actual breach, the promisee retains his right of action for damages.
  • An anticipatory breach of contract, the promisee cannot file a suit for damages. It also discharges the promisor from performing his part of the contract.

3. Remedies in the Event of Breach of Contracts

    (a) Cancellation and Damages

When a breach of contract is committed by one party, the other party may sue to treat the contract as cancelled. In such a case, the aggrieved party is freed from all his obligations under the contract.

For example, X promises Y to supply 100 bags of sugar on a certain date and Y promises to pay the price on receipt of the goods. X does not deliver the goods on the appointed day; Y need not pay the price, and can refuse to accept the contract and claim the damages for the loss suffered.

    (b) Damages

The most common remedy claimed by the party suffering from the breach of contract is ‘damages’. There are mainly four kinds of damages:

  1. General/ Ordinary Damages: Ordinary damages are awarded for such losses that naturally arise in the usual course of things from such breach.
  2. Special Damages: Where there are certain special or extraordinary circumstances present and their existence is communicated to the promisor, then, the non-performance of the promise entitles the promisee to not only claim the ordinary damages but also damages that may result therefrom (like, loss of profits, etc).
  3. Nominal Damages: Nominal damages are awarded in such cases of breach of contract where there is only a technical violation of the legal right, but no considerable loss is caused thereby. The damages granted in such cases are called nominal, for they (such damages) are very less in value.
  4. Vindictive/ Exemplary/ Punitive Damages: Vindictive damages are awarded with the object of punishing the defendant, and not solely with the idea of awarding compensation to the plaintiff. This type of damages is not common in contracts.

    (c) Specific Performance of Contracts

It is a discretionary and equitable relief granted by a court in case of breach of contract in the form of a judgment that the defendant is to actually perform the contract in accordance with its terms and conditions.

    (d) Injunction

An injunction is a judicial process whereby a party is ordered to do or to abstain from doing a particular act or thing. Sections 36-42 of the Specific Relief Act provide for different facets of injunction. Similarly, the procedure for granting temporary injunction is governed by the rules laid down in Order XXXIX, Rules 1 and 2 of the Civil Procedure Code 1908.

    (e) Quantum Meruit

The general rule of law is that unless a party has performed his promise in its entirely, he cannot claim performance from the other. To this rule, however, there are certain exceptions on the basis of ‘quantum meruit’. A right to sue on a ‘quantum meruit’ arises where a contract, partly performed by one party, has become discharged by the breach of the other party. Quantum meruit claims are based on the law of restitution and flow from the principles of unjust enrichment.