LAW OF CONTRACT
Q-1 What is a Contract ? State the
Essential Elements of a Valid Contract?
Ans. The term contract is defined under
section 2(h) of the Indian Contract Act, 1872 as- “an agreement enforceable by
law”. The contract consists of two essential elements: (i) an agreement and
(ii) its enforceability by law. Contract = Accepted proposal/Agreement +
Enforceability by law In terms of Section 10 of the Act, “all agreements are
contracts if they are made by the free consent of the parties competent to
contract, for a lawful consideration and with a lawful object and are not
expressly declared to be void”.
Essential Elements Of A Valid Contract
1. Two
Parties:
One cannot contract
with himself. A contract involves at least two parties- one party making the
offer and the other party accepting it. A contract may be made by natural
persons and by other persons having legal existence e.g. companies,
universities etc.
2. Parties
must intend to create legal obligations:
There must be an intention on the part of the parties to create legal
relationship between them. Social or domestic type of agreements are not
enforceable in court of law and hence they do not result into contracts. Case
Law : (Balfour v. Balfour) A husband agreed to pay to his wife certain amount
as maintenance every month while he was abroad. Husband failed to pay the
promised amount. Wife sued him for the recovery of the amount. Here in this
case wife could not recover as it was a social agreement and the parties did
not intend to create any legal relation.
3. Other
Formalities to be complied with in certain cases:
In case of certain
contracts, the contracts must be in writing, e.g. Contract of Insurance is not
valid except as a written contract. 4. Certainty of meaning: The agreement must
be certain and not vague or indefine.
4. Possibility
of performance of an agreement:
The terms of agreement
should be capable of performance. An agreement to do an act impossible in
itself cannot be enforced.
5. Offer
and Acceptance : An agreement is the first
essential element of a valid contract. According to Section 2(e) of the Indian
Contract Act, 1872, “Every promise and every set of promises, forming
consideration for each other, is an agreement” and according to Section 2(b) “A
proposal when accepted, becomes a promise”. An agreement is an outcome of offer
and acceptance.
6. Free Consent:
Two or more persons are said to consent when they agree upon the same thing in
the same sense. This can also be understood as identity of minds in
understanding the terms viz consensus ad idem. Further such a consent must be
free. Consent would be considered as free consent if it is not caused by
coercion, undue influence, fraud or, misrepresentation or mistake.
7. Capacity
of Parties:
Capacity to contract means the legal
ability of a person to enter into a valid contract. Section 11 of the Indian
Contract Act specifies that every person is competent to contract who (a) is of
the age of majority according to the law to which he is subject and (b) is of
sound mind and (c) is not otherwise disqualified from contracting by any law to
which he is subject.
8. Lawful
Consideration and Object:
The consideration and
object of the agreement must be lawful.
9. Not
expressly declared to be void:
The agreement entered into must not be which
the law declares to be either illegal or void. An illegal agreement is an
agreement expressly or impliedly prohibited by law. A void agreement is one
without any legal effects.
Q-2 State the Types Of Contract?
Ans. As per The Indian Contract Act 1872
contracts are classified on the following basis:
I.
On the basis of the
Validity
1. Valid
Contract:
An agreement which is
binding and enforceable is a valid contract. It contains all the essential
elements of a valid contract.
2. Void
Contract:
Section 2 (j) states as
follows: “A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable”. Thus a void contract is one which cannot be enforced
by a court of law
.
3. Voidable
Contract:
Section 2(i) defines
that “an agreement which is enforceable by law at the option of one or more
parties thereto, but not at the option of the other or others is a voidable
contract”. This in fact means where one of the parties to the agreement is in a
position or is legally entitled or authorized to avoid performing his part,
then the agreement is treated and becomes voidable.
4. Illegal
Contract :
It is a contract which
the law forbids to be made. The court will not enforce such a contract but also
the connected contracts. All illegal agreements are void but all void
agreements are not necessarily illegal.
5. Unenforceable
Contract: Where a contract is good in substance
but because of some technical defect i.e. absence in writing, barred by
limitation etc. one or both the parties cannot sue upon it, it is described as
an unenforceable contract .
II.On the basis of the Formation
.
1. Express
Contracts:
A contract would be an express contract if the
terms are expressed by words spoken or in writing. Any promise is made in words
the promise is said to be express.
2. Implied
Contracts: Implied contracts in contrast come
into existence by implication. Most often the implication is by law and or by
action. Any promise is made otherwise than in words the promise is said to be
implied.
3. Tacit
Contracts: The word Tacit means silent. Tacit
contracts are those that are inferred through the conduct of parties without
any words spoken or written. A classic example of tacit contract would be when
cash is withdrawn by a customer of a bank from the automatic teller machine
[ATM]. Another example of tacit contract is where a contract is assumed to have
been entered when a sale is given effect to at the fall of hammer in an auction
sale.
4. Quasi-Contract:
A quasi-contract is not an actual contract but it resembles a contract. It is
created by law under certain circumstances. 5. E-Contracts: When a contract is
entered into by two or more parties using electronics means, such as e-mails is
known as e-commerce contracts.
II.
On the basis of the Performance.
1. Executed
Contract:
The consideration in a
given contract could be an act or forbearance. When the act is done or executed
or the forbearance is brought on record, then the contract is an executed
contract.
2. Executory
Contract: In an executory contract the
consideration is reciprocal promise or obligation. Such consideration is to be
performed in future only and therefore these contracts are described as
executory contracts.
3. Unilateral Contract:
Unilateral contract is a one sided contract in which one party has performed
his duty or obligation and the other party’s obligation is outstanding.
4. Bilateral Contract:
A Bilateral contract is one where the obligation or promise is outstanding on
the part of both the parties.
Q-3 Define An Offer . State the types of
an offer . Also explain the Essentials of A Valid Offer ?
Ans. Definition of Offer/Proposal
: According to Section 2(a) of the Indian Contract Act, 1872, “when one person
signifies to another 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”.
Types Of Offer
(a) General offer:
It is an offer made to public at large and hence anyone can accept and do the
desired act.
Case Law:
Carlill Vs. Carbolic Smoke Ball Co. (1893) Facts: In this famous case Carbolic
smoke Ball Co. advertised in several newspapers that a reward of £100 would be
given to any person who contracted influenza after using the smoke balls
produced by the Carbolic Smoke Company according to printed directions. One
lady, Mrs. Carlill, used the smoke balls as per the directions of company and
even then suffered from influenza. Held, she could recover the amount as by
using the smoke balls she had accepted the offer.
(b) Special/Specific offer:
When the offer is made to a specific or
an ascertained person, it is known as a specific offer. Specific offer can be
accepted only by that specified person to whom the offer has been made .
(c) Cross offer:
When two parties exchange identical offers in ignorance at the time of each
other’s offer, the offers are called cross offers. There is no binding contract
in such a case because offer made by a person cannot be construed as acceptance
of the another’s offer.
(d) Counter offer:
When the offeree offers to qualified acceptance of the offer subject to
modifications and variations in the terms of original offer, he is said to have
made a counter offer. Counter-offer amounts to rejection of the original offer.
It is also called as Conditional Acceptance.
(e) Standing or continuing or open offer:
An offer which is allowed to remain open for acceptance over a period of time
is known as standing or continuing or open offer. Tenders that are invited for
supply of goods is a kind of standing offer.
Essential of a valid offer
1. It
must be capable of creating legal relations: Offer must be such as in law is
capable of being accepted and giving rise to legal relationship.
2. It must be certain, definite and not
vague: If the terms of an offer are vague or indefinite, its acceptance cannot
create any contractual relationship.
3. It must be communicated to the offeree: An
offer, to be complete, must be communicated to the person to whom it is made,
otherwise there can be no acceptance of it. An acceptance of an offer, in
ignorance of the offer, is not acceptance and does not confer any right on the
acceptor.
4. It must be made with a view to obtaining
the assent of the other party: Offer must be made with a view to obtaining the
assent of the other party addressed and not merely with a view to disclosing
the intention of making an offer.
5. It may be conditional: An offer can
be made subject to any terms and conditions by the offeror.
6. Offer should not contain a term the
non compliance of which would amount to acceptance: Thus, one cannot say that
if acceptance is not communicated by a certain time the offer would be
considered as accepted.
7. Offer may be express or implied: An
offer may be made either by words or by conduct.
8. An offer should be distinguished from
an invitation to offer. An offer is definite and capable of converting an
intention into a contract. Whereas an invitation to an offer is only a
circulation of an offer, it is an attempt to induce offers and precedes a
definite offer. An invitation to offer is an act precedent to making an offer.
Q-4 State the difference between an
Offer and an Invitation to an Offer ?
Ans. Difference between offer and
invitation to make an offer:
·
In terms of Section 2(a) of the
Act, an offer is the final expression of willingness by the offeror to be bound
by the offer should the other party chooses to accept it.
·
On the other hand, offers made with
the intention to negotiate or offers to receive offers are known as invitation
to offer. Thus where a party without expressing his final willingness proposes
certain terms on which he is willing to negotiate he does not make an offer,
but only invites the other party to make an offer on those terms.
·
Hence the only thing that is
required is the willingness of the offeree to abide by the terms of offer. If a
person who makes the statement has the intention to be bound by it as soon as
the other accepts, he is making an offer.
·
Thus the intention to be bound is
important factor to be considered in deciding whether a statement is an ‘offer’
or ‘invitation to offer.
·
’ Following are instances of invitation to
offer to buy or sell:
(i)
An invitation by a company to the
public to subscribe for its shares.
(ii)
Display of goods for sale in shop
windows.
(iii)
Advertising auction sales, and ,
(iv)
Quotation of prices sent in reply
to a query regarding price.
Q-5 Define An Acceptance. State the
Theory of Anson. Also explain the Essentials of A Valid Acceptance?
Ans. Definition of Acceptance:
In terms of Section 2(b) of the Act,
‘the term acceptance’ is defined as follows: “When the person to whom the
proposal is made signifies his assent thereto, proposal is said to be accepted.
The proposal, when accepted, becomes a promise”.
Theory Of Anson:
Relationship between offer and acceptance: According to Sir William Anson
“Acceptance is to offer what a lighted match is to a train of gun powder”. The
effect of this observation is that what acceptance triggers cannot be recalled
or undone. But there is a choice to the person who had the train to remove it
before the match is applied. It in effect means that the offer can be withdrawn
just before it is accepted. Acceptance converts the offer into a promise and
then it is too late to revoke it. This
means as soon as the train of gun powder is lighted it would explode. Train of
Gun powder [offer] in itself is inert, but it is the lighted match [the
acceptance] which causes the gun powder to explode. The significance of this is
an offer in itself cannot create any legal relationship but it is the
acceptance by the offeree which creates a legal relationship. Once an offer is accepted it becomes a
promise and cannot be withdrawn or revoked. An offer remains an offer so long
as it is not accepted but becomes a contract as soon as it is accepted.
Legal Rules regarding a valid acceptance.
(1) Acceptance
can be given only by the person to whom offer is made:
In case of a specific offer, it can be
accepted only by the person to whom it is made.
2) Acceptance must be absolute and
unqualified:
Any conditional acceptance or acceptance with
varying or too deviant conditions is no acceptance. Such conditional acceptance
is a counter proposal and has to be accepted by the proposer, if the original
proposal has to materialize into a contract.
(2) The
acceptance must be communicated:
To conclude a contract between the parties,
the acceptance must be communicated in some perceptible form. Further when a
proposal is accepted, the offeree must have the knowledge of the offer made to
him. If he does not have the knowledge, there can be no acceptance.
(3) Acceptance
must be in the prescribed mode: Where the mode
of acceptance is prescribed in the proposal, it must be accepted in that
manner.
(5) Time: Acceptance must be given
within the specified time limit, if any, and if
no time is stipulated, acceptance must be given within the reasonable time and
before the offer lapses.
(6)
Mere silence is not acceptance: The acceptance of an offer cannot be
implied from the silence of the offeree or his failure to answer, unless the
offeree has in any previous conduct indicated that his silence is the evidence
of acceptance.
Q-6 Explain the Rules regarding
communication and revocation of offer and acceptance ?
Ans. The Indian Contract Act, 1872 gives
a lot of importance to “time” element in deciding when the offer and acceptance
is complete. Communication of offer: In terms of Section 4 of the Act, “the
communication of offer is complete when it comes to the knowledge of the person
to whom it is made”.
This can be explained by an example.
Where ‘A’ makes a proposal to ‘B’ by post to sell
his house for ` 5 lakhs and if the letter containing the offer is posted on
10th March and if that letter reaches ‘B’ on 12th March the offer is said to
have been communicated on 12th March when B received the letter.
Communication of acceptance:
Communication of acceptance is complete;
·
As against the proposer, when it is
put in the course of transmission to him so as to be out of the power of the
acceptor to withdraw the same;
·
As against the acceptor, when it comes to the
knowledge of the proposer.
·
Acceptance over
telephone or telex or fax: When an offer is made
of instantaneous communication like telex, telephone, fax or through e-mail,
the contract is only complete when the acceptance is received by the offeree,
and the contract is made at the place where the acceptance is received (Entores
Ltd. v. Miles Far East Corporation).
·
However, in case of a call drops and
disturbances in the line, there may not be a valid contract. Revocation In term
of Section 4, communication of revocation (of the proposal or its acceptance)
is complete.
·
(i) as against the person who makes
it when it is put into a course of transmission to the person to whom it is
made so as to be out of the power of the person who makes it, and
·
(ii) as against the person to whom it is made,
when it comes to his knowledge.
Q7:How can An Offer Lapse? State the
ways of lapse of an offer?
Ans. Modes of revocation of offer
·
(i) By Notice of Revocation
·
(ii) By Rejection of offer
·
(iii) By Lapse of Time: The time for
acceptance can lapse if the acceptance is not given within the specified time
and where no time is specified, then within a reasonable time.
·
(iv) By Non fulfillment of condition
precedent: Where the acceptor fails to fulfill a condition precedent to
acceptance the proposal gets revoked.
·
(v) By Death or Insanity: Death or
insanity of the proposer would result in automatic revocation of the proposal
but only if the fact of death or insanity comes to the knowledge of the
acceptor.
·
(vi) By Counter offer
·
(vii) By Cross offer
·
(viii) By the non acceptance of the
offer according to the prescribed or usual Mode
·
(ix) By subsequent illegality
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