CONTRACT : DEFINITION AND CONCEPT

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1 CONTENTS 1 CONTRACT : DEFINITION AND CONCEPT 1.1 Introduction What is contract Agreement Legal enforceability of an agreement All agreements are not contracts Essential Elements of a valid contract Writing and registration of contract Classification of contracts English law Indian law Some important comparisons Agreement and Contract Illegal and Void Agreements Void and Voidable Contract Void Agreement and Void Contract 16 2 AGREEMENT : OFFER AND ACCEPTANCE 2.1 Introduction Offer/Proposal Offer should be distinguished from Cross offers Counter offers Invitation to offer Standing offer 29 I-7

2 CONTENTS I Termination of offer Instances of termination of offer as per section 6 of the Act Other instances when an offer gets terminated Acceptance of an offer Communication of offer, acceptance and revocation Communication of offer - When complete Communication of acceptance - When complete Effect of delay or loss of letter of acceptance in postal transit Communication of revocation - When complete 39 3 CONSIDERATION AND LEGALITY 3.1 Introduction What is consideration Essential elements of consideration Rules regarding consideration Exceptions to the doctrine of consideration Stranger to contract vis-a-vis stranger to consideration Stranger to the contract Stranger to consideration Exceptions to the Doctrine of privity to contract Legality of object and consideration Agreements opposed to public policy Effect of unlawful object and consideration Object and consideration wholly unlawful Objects and consideration unlawful in part 62 4 CAPACITY OF PARTIES 4.1 Introduction Minors Who is a minor Status of the contracts entered into by a minor The status of a minor with respect to the agreements entered into by him 68

3 I-9 CONTENTS Minor and Special Contracts/Agreements Persons of unsound mind Who is a person of unsound mind Unsoundness of mind may take various forms Effect of the agreement entered into by the persons of unsound mind Burden of proof Disqualified persons 75 5 FREE CONSENT 5.1 Introduction Coercion Acts amounting to coercion Features of coercion Special Points to be noted a Threat to commit suicide b Threat to prosecution Effect of coercion Burden of proof Undue influence What is undue influence Features of undue influence Special point : Transaction with Pardanashin woman Effect of undue influence Burden of proof Fraud Definition of fraud Acts which constitute fraud Mere silence is not Fraud Effect of fraud Burden of proof Misrepresentation What is misrepresentation When a consent is said to be caused by misrepresentation 92

4 CONTENTS I Effect of misrepresentation Burden of proof Limitations to the right of rescission Mistake Mistake of law a Mistake of Indian Law b Mistake of Foreign Law Mistake of fact a Bilateral mistake b Unilateral Mistake Effect of mistake Some important comparisons Fraud and misrepresentation Coercion and undue influence 99 6 VOID AGREEMENTS 6.1 Introduction Agreements in restraint of marriage Agreements in restraint of trade What is an agreement in restraint of trade Exceptions to the rule that agreements in restraint of trade are void a Exception under the Indian Contract Act, Sale of goodwill b Exceptions under the Partnership Act, c Exceptions established by judicial decisions Uncertain agreements Agreements in restraint of legal proceedings Restrictions must be absolute Curtailing the period of limitation Exceptions in the agreements against legal proceedings Wagering agreements What is a wager 109

5 I-11 CONTENTS Essentials of a wager Effect of wagering agreements a Main transaction b Collateral transaction Exception in the wagering agreements Special transactions resembling to wagering Agreements contingent on impossible events Agreements to do impossible acts CONTINGENT CONTRACTS 7.1 Introduction What is a contingent contract Rules regarding a contingent contract Effect of contingent contracts An important comparison Wagering agreement and contingent contract QUASI CONTRACTS 8.1 Introduction Various forms a quasi contract may take Supply of necessaries Payment of lawful dues by interested person Obligation of a person enjoying benefit of a gratuitous act Responsibility of finder of goods Liability of a recipient of goods delivered by mistake or under coercion Failure to discharge obligations created by quasi contracts PERFORMANCE OF CONTRACTS 9.1 Introduction Actual or attempted performance 131

6 CONTENTS I Actual performance Attempted performance a Essentials of a valid tender of performance b Effect of refusal to Tender of performance When law excuses non-performance of contract Who should perform the contract Who can demand performance Time and place for performance Rules as to time and place for performance Effect of failure to perform in time Joint promises What is a joint promise Who can demand performance of joint promises Who should perform a joint promise Rights and liabilities amongst joint promisors Reciprocal promises What is reciprocal promise Rules regarding performance of reciprocal promises Appropriation of payments Assignment of a contract An important comparison Succession and Assignment DISCHARGE OF CONTRACT 10.1 Introduction Discharge by performance Discharge by impossibility of performance Where impossibility is existent at the time of making contract Where impossibility arises subsequently after the formation of contract Factors causing impossibility to performance 152

7 I-13 CONTENTS Effect of doctrine of supervening impossibility Non-applicability of the Doctrine of Supervening Impossibility Discharge by mutual agreement Novation Alteration Rescission Remission Waiver Discharge by lapse of time Discharge by operation of law Discharge by breach of contract Actual breach Anticipatory Breach REMEDIES FOR BREACH OF CONTRACT 11.1 Introduction Rescission of a Contract What is Rescission Consequences of rescission Different options to avail relief in case of rescission Suit for damages Kinds of damages and rules to assess their quantum Measuring interest damages Other relevant provisions Suit for specific performance Suit for an injunction Suit upon quantum meruit and restitution Quantum Meruit Restitution Generalisations based upon the doctrine of Quantum Meruit and Restitution 174

8 CONTENTS I INDEMNITY AND GUARANTEE 12.1 Introduction Contract of indemnity Contract of Guarantee Kinds of Guarantee Retrospective and prospective guarantee Specific and continuing guarantee Nature and Extent of Surety s liability Rights of surety Rights against the principal debtor Rights against the creditor Rights against co-sureties Discharge of surety An Important comparison Contract of Indemnity and Contract of Guarantee BAILMENT AND PLEDGE 13.1 Introduction Basic elements of bailment Types of Bailment Classification on the basis of profit that each party to the transaction receives Classification on the basis of expectation of reward by the parties Duties of a bailor Rights of a bailor Duties of Bailee Rights of bailee Bailee s right of lien Particular lien General lien How right of general lien is exercised by specified bailees Termination of bailment 207

9 I-15 CONTENTS Finder of lost goods Duties of a finder of goods Rights of a finder of goods Pledge or pawn What is a pledge Essential features of a pledge Who can make a pledge Duties of a Pawnor Rights of a Pawnor Duties of a Pawnee Rights of a Pawnee Some important comparisons Bailment and pledge Particular lien and general lien of a bailee Pledge and lien AGENCY 14.1 Introduction Contract of agency Test of agency Classification of agents Classification based on the extent of agents authority Classification based on the nature of work performed by agents Creation of agency Agency by express agreement Agency by implied agreement Agency by operation of law Agency by ratification Extent of agent s authority Actual or real authority Ostensible or apparent authority Authority in emergency Delegation of authority by an agent 229

10 CONTENTS I An agent cannot delegate his authority Sub-agent Who is a sub-agent Consequences of appointing a sub-agent Substituted agent Pretended agent Duties of an agent Rights of an agent Rights of a principal Duties of a principal Position of principal towards third parties Position of named principal Position of unnamed principal Position of undisclosed principal Position of an agent towards third parties Circumstances where an agent becomes personally liable to third parties Termination of agency Termination by act of the parties Termination by operation of law When termination of agency takes effect Irrevocable agency Agency coupled with interest [Section 202] Agent incurs personal liability Agent partly exercise the authority [Section 204] Some important comparisons Agent and servant Agent and independent contractor Agent and bailee CONTRACT OF SALE OF GOODS 15.1 Introduction Contract of sale Sale and agreement to sell Sale 253

11 I-17 CONTENTS Agreement to sell Comparison between sale and agreement to sell Kind of Goods Existing goods [Section 6(1)] Future goods [Section 2(6)] Contingent goods [Section 6(2)] Perishing of goods When goods are considered to be perished Effect of perishing of the subject-matter of a contract Determination of price of goods How to fix the price Situation when price fixation is to be done by third party [Section 10] Earnest money and Security deposit Consequences of not adhering to the time in a sales contract When time is stipulated regarding the payment of price When time is stipulated regarding delivery of goods Documents of title to goods [Section 2(4)] Some important comparisons Sale and hire purchase Agreement to sell and hire purchase Sale and bailment Sale of goods and contract for work and labour Barter, Exchange and Sale CONDITIONS AND WARRANTIES 16.1 Introduction Condition and warranty defined Condition Warranty Implied conditions and implied warranties Implied Conditions 270

12 CONTENTS I Implied Warranties Change of a condition into warranty Exclusion of implied conditions and warranties Doctrine of caveat emptor Meaning Exceptions to the doctrine of caveat emptor Some important comparisons Condition and warranty Condition as to Fitness of goods for buyer s purpose and condition as to Merchantability TRANSFER OF PROPERTY 17.1 Introduction Significance of transfer of ownership Rules regarding transfer of property Transfer of ownership in the sale of specific goods Transfer of ownership in the sale of unascertained or future goods Transfer of title No one can transfer better title then he himself possess Exceptions to the rule PERFORMANCE OF CONTRACT OF SALE 18.1 Introduction Delivery of goods by seller What is the meaning of delivery Modes of delivery Rules regarding effective delivery of goods Acceptance of delivery by the buyer What is meant by acceptance of delivery of goods Rules regarding acceptance of delivery of goods Duties of the buyer 302

13 I-19 CONTENTS 19 REMEDIES 19.1 Introduction Buyer s breach Unpaid seller s remedies Who is an unpaid seller Rights of an unpaid seller a Right of an unpaid seller against the goods b Rights of unpaid seller against the buyer Seller s breach : Buyer s remedies Ways in which a seller may breach Remedies available to a buyer Anticipatory breach of contract Auction sale Meaning Rules Some important terms used in an auction sale An important comparison Seller s right of lien and seller s right of stoppage in transit PARTNERSHIP : AN INTRODUCTION 20.1 Introduction What is a partnership Definition Essential elements of a partnership Test of partnership How to test existence of partnership Sharing profits is not a conclusive evidence of a partnership The mutual agency test is an important test of partnership Partners, firm and firm name Some important comparisons 327

14 CONTENTS I Partnership and Joint Stock Company Partnership and Hindu Undivided Family (HUF) Partnership and co-ownership Partnership and a Club FORMATION OF PARTNERSHIP 21.1 Introduction Partnership Deed Registration of firms Registration of a firm is discretionary Procedure for registration of a firm Recording of alterations Penalty for furnishing false particulars [Section 70] Register of firms Effects of Non-Registration Disabilities of a firm due to non-registration Exceptions as to disabilities of non-registration Kinds of Partnership Kinds of Partners RIGHTS AND OBLIGATIONS OF PARTNERS 22.1 Introduction Mutual rights of partners Mutual duties and limitations of partners Absolute duties General duties Minor as a partner General Status Rights of a minor partner Limitations and liabilities of minor partner Position of a minor on attaining majority Relations of partners with third parties A partner binds himself and his firm provided he acts within his authority 349

15 I-21 CONTENTS Authority of a partner Liabilities of a firm and its partners to third parties Liability of a partner for acts of the firm Liability of a firm for acts of the partners Liability of a firm for misapplication by partners Reconstitution of a firm Admission of a partner Retirement of a partner Expulsion of a partner Insolvency of a partner Death of a partner Transfer of partner s interest Effect of change in firm on mutual rights and duties of partners Effect of change in firm on continuing guarantee Partnership property DISSOLUTION OF A PARTNERSHIP FIRM 23.1 Introduction Modes of dissolution of a firm By agreement [Section 40] By notice [Section 43] On the happening of certain contingencies [Section 42] Compulsory dissolution [Section 41] By court [Section 44] Consequences of Dissolution Continuing liability of partners after dissolution of a firm Rights of partners after dissolution of the firm Settlement of accounts upon dissolution Sale of goodwill after dissolution Public notice 371

16 CONTENTS I NEGOTIABLE INSTRUMENTS 24.1 Introduction What is a negotiable instrument Characteristics of a Negotiable Instrument Kinds of negotiable instruments Hundis Classification of Negotiable Instruments Presumptions as to the negotiable instruments Law overriding the provisions of the Negotiable Instruments Act, PROMISSORY NOTES, BILLS OF EXCHANGE AND CHEQUES 25.1 Introduction Promissory Note Definition Parties to a Promissory Note Essentials of a valid Promissory Note Specimen of a Promissory Note Bill of exchange Definition Parties to a bill of exchange Essentials of a valid bill of exchange Specimen of a bill of exchange Different kinds of Bill of Exchange Cheque Definition Parties to a cheque Essentials of a valid cheque Specimen of a cheque Some important comparisons Promissory Note and Bill of Exchange Bill of Exchange and Cheque 404

17 I-23 CONTENTS 26 PARTIES TO A NEGOTIABLE INSTRUMENT 26.1 Introduction Holder Definition Status of a holder Who is not a holder Holder in due course Definition Essentials to become a holder in due course Privileges of being of a holder in due course Capacity of parties Minor s position as a drawer, indorser, etc Persons of unsound mind Insolvent Corporations and companies Agents Legal Representative Liability of parties Liability of drawer of the instrument [Section 30] Liability of a banker as a drawee [Sections 31 & 77] Liability of maker of note and acceptor of bill [Section 32] Liability of indorser [Section 35] Liability of prior parties [Section 36] Liability inter se [Sections 37 to 40] Important Comparison Holder and holder in due course HOW TO NEGOTIATE AN INSTRUMENT 27.1 Introduction What is negotiation Assignment Who may negotiate an instrument When a negotiable instrument stops to be negotiable 432

18 CONTENTS I Methods of negotiation Negotiation of bearer instruments Negotiation of order instruments Delivery of a negotiable instrument What constitutes delivery of an instrument Kinds of delivery Who can make delivery to whom Indorsement What constitutes an indorsement Essentials of a valid indorsement Effect of indorsement Types of indorsements Negotiation back Negotiation by unauthorized parties Negotiation of dishonoured and overdue instruments Important comparison Negotiation and assignment DISCHARGE, PRESENTMENT AND DISHONOUR OF A NEGOTIABLE INSTRUMENT 28.1 Introduction Discharge How to get a discharge on a negotiable instrument What is payment in due course Presentment Presentment for acceptance Presentment for sight Presentment for payment Dishonour Dishonour by non-acceptance [Section 91] Dishonour by non-payment [Section 92] Effect of dishonour of a negotiable instrument Notice of dishonour Noting 463

19 I-25 CONTENTS 28.6 Protest Rules as to compensation in case of dishonour BANKER AND CUSTOMER 29.1 Introduction Banker and customer Who is a banker Who is a customer Legal relationship between a banker and a customer Crossing of a cheque General crossing Special crossing Not negotiable crossing Restrictive crossing Who can cross the cheque Opening or cancellation of a crossing Rights and obligations of a banker When banker must refuse payment on his customer s cheques When banker may refuse payment on his customer s cheques Special provisions relating to electronic cheques Protection granted to bankers Protection given to a paying banker Protection given to a collecting banker Wrongful dishonour of cheques by a banker Liability towards the drawer of the cheque Liability towards the payee (or holder) of the cheque Obligations of a customer Bouncing of cheques When an offence under section 138 is constituted Procedure to seek redressal Parties punishable for offence under section Presumption in favour of holder Defence which is specifically barred 490

20 CONTENTS I SOME IMPORTANT PROVISIONS 30.1 Introduction Maturity of negotiable instruments When negotiable instruments payable on demand mature When negotiable instruments payable on or after specified date mature Computation of date of maturity What is meant by acceptance of a bill of exchange Essentials of a valid acceptance Types of acceptance Acceptance for honour Certain conditions must be satisfied for accepting the bill for honour Rights and liabilities of acceptor for honour Payment for honour Consideration in a negotiable instrument Effect of absence or failure of consideration in a negotiable instrument Partial absence or failure of consideration Payment of interest Applicability of international law Important comparison Acceptance for honour and payment for honour CONSUMER PROTECTION ACT : A MUCH NEEDED LEGISLATION 31.1 Introduction Who is a consumer Consumer of goods Consumer of services Complaint What Constitutes a complaint [Section 2(1)(c)] Who can file a complaint [Sections 2(b) & 12] 510

21 I-27 CONTENTS What a complaint must contain [Section 2(1)(c)] Time frame within which a complaint can be filed Relief available against complaint [Section 14] When a complaint cannot be filed Dismissal of frivolous and vexatious complaints [Section 26] Unfair Trade Practice and Restrictive Trade Practice [Section 2(1)(r) & (nnn)] What is an Unfair Trade Practice What is a Restrictive Trade Practice Goods and Defect [Section 2(1)(i) & (f)] Goods Defect Service and Deficiency [Section 2(1)(o) & (g)] What can be termed as a service What is meant by deficiency in service Trader and Manufacturer [Section 2(1)(q) &(j)] Trader Manufacturer Who should be sued by a consumer - Manufacturer or seller CONSUMER PROTECTION COUNCILS 32.1 Introduction Objects of the Councils [Sections 6, 8, & 8B] Central Council State Consumer Protection Councils (State Councils) [Section 7] District Consumer Protection Councils (District Councils) [Section 8A] Working Groups [Rule 3] CONSUMER FORUMS 33.1 Introduction 533

22 CONTENTS I Constitution of the Forums Constitution of District Forum [Section 10] Constitution of State Commission [Section 16] Constitution of National Commission [Section 20] Jurisdiction Jurisdiction of District Forum [Section 11] Jurisdiction of State Commission [Section 17] Jurisdiction of National Commission Procedures Relating to Consumer complaints [Sections 12 & 13] How a complaint is dealt by Consumer Forums Procedure to be followed by the National Commission [Sections 22 & 22A] Service of Notice [Section 28A] Powers of the Consumer Forums [Sections 13(4), 14(1) & Rule 10] Sitting of the Forums Sitting of the District Forum [Section 14(2)] Sitting of the State Commission Sitting of the National Commission Orders of the Forums Signing of orders of the Forums Appeals against orders Finality of orders Penalties for non-compliance of orders ARBITRATION AND CONCILIATION ACT, Background of the Act Scheme of the Act Domestic Arbitration Arbitration Agreement Court must refer the matter to arbitration in some cases Matter not to be split if partly covered under agreement 558

23 I-29 CONTENTS Consumer Forum can entertain complaint irrespective of arbitration Application for winding up cannot be referred Matter can be referred even if appeal is pending Unregistered partnership firm can apply for arbitration Challenge to jurisdiction or validity of arbitration agreement Arbitration clause in agreement Formation of Arbitral Tribunal Appointment of Arbitrator Challenge to appointment of Arbitrator Termination or substitution of Arbitrator Conduct of Arbitral Proceedings Cost of Arbitration Settlement during arbitration Arbitral Award Law applicable to Arbitration Requirement of Award Stamp Duty on Arbitration Award Finality and enforcement of arbitration award Termination of arbitration proceedings Intervention by Court in Arbitration proceedings Setting aside arbitral award by Court Setting aside if contrary to law Appeal against order of District Court Conciliation Enforcement of Foreign Awards 572

UNIT I INDIAN CONTRACT ACT, 1872

Contents About the Author I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11 List of Cases I-23 UNIT I INDIAN CONTRACT ACT, 1872 1 ICA, 1872 : NATURE, MEANING, ESSENTIALS AND KINDS OF CONTRACT 1.1 Introduction