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MERCANTILE LAW: NOTES - Contract Act
Definition of Contract:
Contract is defined by Sec. 2(h) as, "An agreement enforceable at law is a contract."
Thus Contract is composed of:
- An agreement, and
- That agreement must be enforceable at law
Contract = Agreement + EnforceabilityAgreement:
Agreement is defined by Sec. 2(e) as, "Every promise or every set of promises forming the consideration for each other."
Thus, every contract is an agreement but not vice versa.Promise:
Promise is defined by Sec. 2(b) as, “A proposal (offer) when accepted becomes a promise.”
Hence, it could be concluded that, "An agreement is an accepted proposal."
Agreement = Proposal + Acceptance
Agreements are of two types:
- Social Agreements
- Legal Agreements
Social agreements are social in nature and are not enforceable at law, hence cannot be called contract.
For example, Father promise to pay his son Rs.1000 if he got first position in exams. The son cannot recover the amount if the father refuses to pay.Legal Agreements:
These agreements are enforceable at law. Legal agreements are composed of:
- An agreement
- An intention to create legal obligations
The ordinary test of legal obligation is that, "When both the parties know that they would be attended by legal consequences if they default."Intention to Create Legal Relations:
There are agreements which do not result into contract, since the defaulter would not attended by legal consequences.
For example, A invited B at dinner, B came but A did not hosted the dinner. B cannot sue A because there wes no intention of the parties to create legal relation (OR Legal obligation).
The intention to create legal relation is known from the terms and conditions of the contract and surrounding circumstances.Balfour v. Balfour Case:
A husband promise to pay his wife, a domestic allowance of $30 per month. Later the parties separated and the husband defaulted the payment, Held, the wife could not recover since there was no intention to create legal relations at the time of entering into the agreement.From Agreement to Contract:
Sec.10 defines, "An agreement is a contract if it is made by the free consent of the parties, competent to contract, for a lawful consideration and for a lawful object."
The direct conditions laid down in Sec.10 and few derived condition are called "Essentials of a valid Contract".Essentials of a valid Contract:
For an agreement to become a contract; it must satisfies the following conditions:
- Agreement: Offer by one party, and the acceptance by other party.
- Consensus ad Idem: Consensus an idem means that both the parties agree on the same thing in the same sense.
- Legal Relationship: It arises when both the parties know that they would be attended by legal consequences if they default.
- Lawful Consideration: Consideration means "Something in return". For a valid cntract, consideration must be lawful.
For example, A agrees to sell his house to B for Rs.500,000. Here, for A, the consideration is Rs.500,000 and for B, the consideration is House.
- Capacity of Parties: Parties must be competent to contract, that is, any party must not a minor, detain person etc.
- Free Consent: Consent must be free, that is, it must not caused by coersion, mis-representation, fraud, undue influence etc.
- Lawful object: The object of contract must not be:
Contract must be certain and capable of being performed.Appropriate legal formalities must be performed like writing, registration, witnesses, attestation etc.
- Illegal or unlawful
- Opposed to public policy
Proposal (Offer) is defined by Sec. 2(a) as, "When one person signifies to another his willingness to do or abstain from doing anything with a view to abstaining the assent of that other to such act or abstinence, he is said to make a proposal."
Person making the offer is called offerer, and the person to whom the offer is made called offeree.Types of offer:
The types of offer can be categrise as:
Mode of offer:
- Mode of offer
- Scope of offer
Offer may be:
Scope of offer:
- Express offer: When offer is made in words spoken or written, the offer is "express offer".
- Implied offer: When offer is "expressed by conduct", the offer is implied.
Offer may be:
Offer and Invitation to offer:
- Specific offer: When offer is made to a particular person, or a particular class of person, and that could be accepted by that particular person or that particular class of person, the offer is specific.
- General offer: When offer is made to the world at large, and that could be accepted by anyone performing the conditions of the offer, the offer is general. For example, announcement of the reward to the person, solving some particular problem.
These two terms must clearly be differetiated. Invitation to offer is intention to make offer, or invitation to make offer. On the other hand offer is final propsal by the offerer to be bound by his promise.
For example, Bilal tells Saad that he is going to sell his car for at least Rs.600,000. This is intention to make offer (or invitation to make offer). Saad replied, I can buy it for Rs.500,000. This is offer.Legal Rules as to offer:
It may be Acceptance of offer or Revocation.Acceptance:
- Offer must be capable of being accepted and giving rise to legal relationship.
- Terms of offer: Terms of offer must not be ambigious, uncertain and vague.
For example, I will pay you Rs.1,000 more if there is rain on that day.
- Offer is different from: (i) Declaration of intention, tenders etc. (ii) Invitation to make offers, quotations, circular etc.
- Offer must be communicated.
- Offer must be made with a view to obtaining the assent, and not merely with a view to disclosing the intention of making an offer.
- Offer should not contain a term, the non-compliance which would amount to acceptance.
For example, I plan to sell you my car for Rs.500,000. If I don't receive a reply I presume that you have accepted the offer. In this case the offer is not accepted if person don't send reply.
Acceptance is defined as, "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted".Who can accept?
Acceptance can be made by the person to whom offer is made. If it is made to particular person, it can be accepted only by him and by no third person on his behalf.
If the offer is made to the world at large, any person or persons, with notice of the offer, may accept the offer.Performane of the conditions of the offer:
According to the Sec.8 of Contract Act, "Performance of the conditions of the proposal is an acceptance of the proposal".
For example, A person lost his original documents, then he announced that he would pay Rs.10,000 to the person who bring his documents. Another person after knowledge of the offer, search and find the documents, and hand over to the person. He is liable to Rs.10,000.Legal Rules as to acceptance:
Communication of offer and Acceptance:
- Acceptance must be absolute and unqualified.
Offeree cannot accept some part of offer and reject some part. Similarly, offeree cannot suggest or demand amendmends, if he did it would be counter offer.
- Acceptance must be in the prescribed mode: If no particular mode is prescribed it must be in a reasonable mode.
- Acceptance must be communicated to the offerer.
- Acceptance must be given within reasonable time or within specified time limit.
- Acceptance cannot be given before communication of offer.
- Acceptance must be made before the offer lapses or offer is withdrawn.
- Acceptance can be made by the party to whom the offer is made.
- Acceptance must show intention to fulfil the promise.
According to Sec.4, "The communication of an offer is complete when it comes to the knowledge of the person to whom it is made."
"The communication of an acceptance is complete as against the proposer when it is put in a course of transmission to him, so as to be out of the power of the acceptor:
as against the acceptor when it comes to the knowledge of the proposer."
For example, A college sent admission letter to Bilal on March 10, and Bilal received the letter on March 12. The communication of offer is complete when Bilal receive the letter (on March 12) - When it comes to the knowledge to the person to whom it is made.
Bilal accepts the offer and send acceptance letter to college on March 14. The college received the letter on March 16. The communication of acceptance is complete as aginst the college when Bilal posted the letter on March 14 (The communication of an acceptance is complete as against the proposer when it is put in a course of transmission to him, so as to be out of the power of the acceptor)
as against Bilal, when the letter is received by the college (as against the acceptor when it comes to the knowledge of the proposer)
Revocation of an offer:
Revocation means "cancellation".That is offerer cancelled (revoked) the offer before the acceptance of offeree.Communication of Revocation:
The communication of revocation is complete - 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, as against the person to whom it is made, when it comes to his knowledge.Modes of Revocation of an offer:
Sec.6 of Contract Act deals with various modes of revocation of an offer. In all these cases offer comes to an end.
Rejection of offer by the offeree:
- Revocation of offer by communication of notice by offerer to offeree before acceptance.
- Revocation by lapse of time.
For example, college stipulated March 18 to accpet the offer, and Bilal could not send acceptance letter till March 18. The offer is revoked.
- Revocation by failure to fulfil a condition precedent to acceptance. For example, Bilal agrees to sell his house to Anas if he pays half of the price till March 11. Anas could not pay, the offer is revoked.
- Revocation by death or insanity of the offerer
- Revocation by cross offer.
For example, Bilal agrees to sell his house to Anas for Rs.500,000. Anas replied I will buy it for Rs.475,000. The offer from Bilal is revoked by this counter offer.
- Revocation by failure to accept according to the prescribed mode.
Offeree may be reject the offer. Once he has rejected, he cannot subsequently accept it.
Rejection may be expressed or implied:
Rules governing the procedure of revocation of offer by the offeree:
- Express: by words spoken or written
- Implied: by counter offer or conditional offer
Rules governing the procedure of revocation of offer by the offerer:
- Offeree can revoke the offer at any time before the communication of its acceptance is complete as against the offerer but not afterwards.
- Revocation takes place when it is actually communicated to the offeree.
- Offerer can revoke the offer at any time before the offer is accepted by the offeree.
- If offerer has agreed to keep the offer open for a certain period, he can revoke it before expiration period if there is no consideration for keeping the offer open.
- Once the offer revoked, there cannot be subsequent acceptance.
- Once the offer accepted, there cannot be subsequent revocation.
Consideration is defined by Sec.2(d) as, "When at the desire of promiser, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstains from doing, something such act or abstinence or promise is called consideration for the promise."
On anlysing we find that consideration involves:
Legal rules as to consideration:
- (a) Doing of an act: A handedover his house to B on rent for C's guarantee, that B will pay the rent after 2 months. House on rent to B by A is the consideration for C's promise.
(b) Abstinence or forbearance: B was unable to pay rent after 2 months. D promise to pay the rent after 1 month for not sueing B. A's not sueing B is consideration for D's promise.
- A return promise: A agrees to sell his house to B for Rs.500,000 and B agrees to purchase the house for Rs.500,000. A's selling house is consideration for B's payment of Rs.500,000, and B's payment is consideration for A's house.
Contracts without consideration:
- It must move at the desire of the promiser
- It may move from the promisee or any other person
- It may be past, present or future
- It must be real and not illusory
- It need not be adequate
- It must be something that the promiser is not already bound to do
- Consideration must not be unlawful.
If there is no consideration; there is no contract. However, there is some exception to this rule.
In the following cases, contracts shall be valid and effective without consideration.
Capacity of Parties:
- Natural love and affection: A contract without consideration is enforceable if the following conditions are satisfied:
- The contract is made out of natural love and affection
- The contract is registered
- The contract is in writing
- Parties to it stand in near relation to one-another
- Compensation for voluntary services:
A promise to compensate wholly or in part, a person who has already voluntarily done something for the promiser is enforceable. Hence, there are two conditions:
For example, A finds documents of B and handedover to him. B promise to pay A. This is a contract.
- The service should have been rendered voluntarily, and
- For the promiser
- No consideration is required to create an agency
- No consideration is required to completed gifts:
When there is agreement for gift that has been made, this is a contract and does not require consideration. For example, A school announced gifts to students obtained first 3 positions in exams. This is a contract.
- Contracts under seal:
A contract made in the form of deed under seal is valid and does not require consideration.
Sec.10 defines that parties to contract must be competent to contract.
Competency is defined by Sec.11 as, "Every person is competent to contract if he is of the age of majority according to the law to which he is subject, is of sound mind and is not disqualified from contracting by any law to which he is subject"
Thus, to be competent to contract one must be of:
- Age of majority
- Sound mind
- Must not disqualified from contracting by any law to which he is subject
Equaivalently, incompetency is caused by:
- Unsoundness of mind
- Disqualification from contracting by any law to which he is subject
Every one is minor who have not attained the age of 18. Before completion of 18 years a person is a minor. Once he has completed 18 years, he is of the age of majority.
In following two cases the age of majority is 21 years:
Position of Minor at Law:
- A guardian of minor's person and property has been appointed by the Court under the Guardians and Wards Act 1890.
- A minor is under the guardianship of court of wards.
Law protects minor against his inexperience and inability of proper decisions.Nature of Minor's Agreements:
Persons of unsound mind
- Agreement with a minor is void ab initio
- Minor may be a promisee or beneficiary
- Minor cannot become a partner nor can a new partnership be started with minor as a partner
- Minor can be an agent
- There can be no specific performance of an agreement made by a minor
- A minor can always plead minority
- Minor cannot ratify the agreements entered into during minority on the attainment of majority
- A minor cannot be adjudged insolvent
- A minor is liable for the necessaries supplied to him or to his dependents.
A person's soundness of mind depends on two facts:
- His ability to understand the business concerned, and
- His ability to form a rational judgement as to its effect on his interests.
Unsoundness of mind may arise from lunacy, idiocy, or drucness etc. Contracts with such persons are void when entered into at a time when the person was in an unsound state of mind.Disqualified Persons:
- Ambassadors, Envoys etc. These persons can enter into contracts and enforce them in our courts. But they cannot be sued unless they of their own submit to the jurisdiction of the court.
- Corporations: Corporations and companies are artificial persons created by law. As such, they can enter into contracts, sue and be sued.
- Convicts: A convict while undergoing imprisonment is incapable of entering into a contract, except under a special licence called "Ticket of leave".
Consent is said to be free when it is not caused by:
- Undue influence
When consent to a contract is cause by coersion, undue influence, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was not free. The party has liberty whether he uphold the contract or reject it. If the party uphold the contract, the contract is binding on both the parties.
When contract is caused by mistake, the contract is void, because there was no consensus ad idem and hence, there is no contract.Coersion:
Coersion is defined by Sec.15 as, "Committing or threatening to commit an act forbidden by the law, or detaining or threatening to detain any property whatever, with the intention of causing any person to enter into an agreement. It is immaterial whether the particular law is or is not in force where the coersion is employed."Examples,
1. Consent obtained at gun point is caused by coersion.
2. A threats to kill B or threats to detain B's property is committing or threatening to commit an ulawful act. Hence the consent is caused by coersion.Effect of coersion:
A contract induced by coersion is voidable at the option of the party whose consent was caused by coersion.Sec.72 states, "A person to whom money has been paid or anything delivered by mistake or under coersion, must repay or return it."
Threat to commit suicide:
Committing suicide is unlawful and forbidden by law, and hence threatening to commit suicide is threatening to commit unlawful act. Thus, a threat to commit suicide amounts to coersion.Undue Influence:
Undue influence is defined by Sec.16(1) as, "A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in position to dominate the will of other and uses that position to obtain an unfair advantage over the other."
When a person, is deemed to be in a position to dominate the will of another, is defined by Sec.16(2) as, "When he holds real or appearent authority over the other. Capacity is temporarily or permenently affected by reason of age, illness or mental or bodily distress."
In order to establish the presumption of undue influence, two essentials have to be proved:
How to rebutt the presumption?
- The relation between the parties is such that one of them is in a position to dominate the will of the other, and
- The party uses that position to obtain an undue influence over the other
The party deemed to use the undue influence can rebutt the presumption by showing that:
- Full disclosure was made regarding all facts of the contract
- Consideration was adequate
- Dominated party was in a position to receive independent advice.
1. Father purchased a car from his son for Rs.500,000 while the actual price of car was Rs.800,000. Later on son took the case to the court. The court annul the contract on the basis of undue influence used by father.
2. A, being in debt to B, the police officer, contracts another loan to A on high interest rate. Later on, A repay first loan to B, and took the case to court for the second loan (the loan on high interest rate). The court annul the contract on the basis of undue influence used by B.Cases giving rise to the presumption of "undue influence", when the relation between the parties is
- Parent and Child
- Guardian and ward
- Fiance and Fiancee
- Trustee and Beneficiary
- Doctor and Patient
- Solicitor and Client
No such presumption exists in the following cases:
Effect of undue influence:
- Husband and wife
- Landlord and Tenant
- Creditor and Debtor
A contract induced by undue influence is voidable at the option of the party whose consent was caused by undue influence. The party may uphold the contract or reject it.
Fraud means "intentional misrepresentation".
Fraud is defined by Sec.17 as, “Fraud means and includes any of the following acts committed by a party to a contract or with his connivance or by his agent,
- The suggestion as to a matter of fact of that which is not true by one who does not believe it to be true.
- The active concealment of a fact by one having knowledge or belief of the fact.
- A promise made without an intention of performing it.
- Any other act fitted to deceive.
- Any such act or omission as the law specially declares to be fraudlent."
In other word “fraud” exists if it is shown that a false representation has been made:
- Without belief of its truth
- Recklessly (whether it be true or false).