BUSINESS LAWS
UNIT 01: Indian Contract Act
Definition of a Contract and Its Main Characteristics
Definition: A contract, as defined under Section 2(h) of the Indian Contract Act of 1872, is "an agreement enforceable by law." In essence, a contract is a legally binding agreement between two or more parties that creates obligations which are enforceable in a court of law.
Main Characteristics:
- Offer and Acceptance: A valid contract requires a lawful offer by one party and acceptance by another.
- Intention to Create Legal Relationship: The parties involved must intend for the agreement to have legal consequences.
- Lawful Consideration: There must be something of value exchanged between the parties.
- Capacity: The parties must have the legal capacity to enter in the contract.
- Free Consent: Consent must be given freely without coercion, undue influence, fraud, misrepresentation, or mistake.
- Lawful Object: The objective of the contract must be lawful and not against public policy.
- Certainty: The terms of the contract must be clear and unambiguous.
- Possibility of Performance: The terms must be capable of being performed.
IMP:- Is every agreement contract?
1) No, every agreement is not a contract.
2) An agreement to become a contract must give rise to a legal obligation (duty)
4) Every contract is an agreement, but every agreement is not a contract.
Relevant Case Law:
- Balfour v. Balfour (1919): Though an English case, it is frequently cited in Indian courts. It illustrates that agreements within domestic settings (e.g., between husband and wife) lack the intention to create legal relationships and, therefore, do not qualify as contracts. This highlights the necessity of a legal intention for enforceability.
- Lalman Shukla v. Gauri Dutt (1913): In this Indian case, it was established that for a contract to be valid, the offer must be communicated. This case underscores the importance of clear and unambiguous offers in forming a valid contract.
Different Kinds of Contracts
Types of Contracts:
- Express Contract: Terms are clearly stated orally or in writing.
- Implied Contract: Formed by conduct or actions of the parties.
- Bilateral Contract: A promise made in exchange for another promise.
- Unilateral Contract: A promise made in exchange for a performance.
- Void Contract: An agreement that is not enforceable by law.
- Voidable Contract: A valid contract that can be annulled at the option of one party.
- Quasi-Contract: Not a true contract but imposed by law to prevent unjust enrichment.
- Executed Contract: A contract where both parties have fulfilled their obligations.
- Executory Contract: A contract where performance is due in the future.
Relevant Case Law:
- Carlill v. Carbolic Smoke Ball Co. (1893): This English case, which has influenced Indian jurisprudence, is a classic example of a unilateral contract. The company promised to pay £100 to anyone who used their product and caught the flu. The court held that a unilateral offer could be accepted by conduct without communication, highlighting that unilateral contracts are enforceable.
- Kedar Nath v. Gorie Mohammad (1886): This Indian case dealt with implied contracts. It was decided that when a party induces another to act based on a promise, it creates an implied contract, as seen when a subscriber promised funds to a hall construction project, which was partially built on reliance.
Essential Elements of a Valid Contract
Offer: A proposal by one party to another to form a contract. It must be specific, definite, and capable of being accepted.
Acceptance: An unconditional agreement to the terms of the offer. It must be communicated clearly and must mirror the terms of the offer.
Consideration: Something of value exchanged between the parties, which can be monetary, services, or a promise to refrain from an action.
Interaction of Elements:
- An offer leads to an acceptance, creating an agreement. This agreement becomes a contract when consideration is present, making it enforceable.
- Without consideration, an agreement is not legally binding unless it is a formal contract like a gift deed.
Relevant Case Law:
- Felden v. Revelle (1953): The case stressed that for a valid offer, the terms must be clear and definite. Any ambiguity can render a contract void for uncertainty.
- Durga Prasad v. Baldeo (1880): This case emphasizes the requirement of lawful consideration, demonstrating that past voluntary services are not sufficient consideration unless requested.
Contractual Capacity and Free Consent
Contractual Capacity: Refers to the ability of a person to enter into a contract. Under the Act:
- Minors, individuals of unsound mind, and persons disqualified by law (e.g., bankrupts) lack capacity.
- Contracts with such persons are void or voidable.
Free Consent: Consent is free when it is not influenced by coercion, undue influence, fraud, misrepresentation, or mistake. If any of these factors are present, the contract may be voidable at the aggrieved party's discretion.
Relevant Case Law:
- Mohori Bibee v. Dharmodas Ghose (1903): A landmark case in India, it held that a contract with a minor is void ab initio (from the beginning). A minor's agreement cannot be enforced.
- Ranganayakamma v. Alwar Setti (1889): In this case, consent obtained under coercion was addressed. A widow's consent to adopt a child was given under undue pressure, making the contract voidable.
Legality of the Object
Legality: A contract's object must be lawful. An agreement is void if the object is illegal, immoral, or against public policy (e.g., contracts involving illegal drugs, fraud).
Illegal Object Examples:
- A contract to smuggle goods is void because its object is illegal.
- Agreements to commit a crime or to harm the public good are void.
Relevant Case Law:
- Gherulal Parakh v. Mahadeodas Maiya (1959): This case examined the legality of a wagering agreement (betting) under Indian law. It was concluded that wagering contracts are void but not illegal unless prohibited by a specific statute.
- Sita Ram v. Radha Bai (1968): A contract entered into with the intent of defeating the provisions of any law was declared illegal, reinforcing the need for lawful object and consideration.
Contracts of Indemnity and Guarantee
Indemnity: A contract where one party promises to save the other from loss caused by the promisor or another party (e.g., insurance contracts).
Guarantee: A contract where one party (surety) assures the creditor of another party's performance or repayment (e.g., bank guarantees).
Difference:
- Indemnity: Involves two parties; liability is contingent on loss.
- Guarantee: Involves three parties (principal debtor, creditor, and surety); liability is secondary unless the principal defaults.
Relevant Case Law:
- Adamson v. Jarvis (1827): A commonly referenced English case in India, it explains indemnity. A plaintiff, who auctioned cattle on behalf of a person who did not own them, was indemnified when sued for damages.
- Bank of Bihar v. Damodar Prasad (1969): In this case, the Supreme Court of India clarified that a surety's liability in a contract of guarantee is secondary and arises only if the principal debtor defaults.
Difference Between Bailment and Pledge
Bailment: The transfer of possession of goods from one person (bailor) to another (bailee) for a specific purpose, after which they are returned (e.g., giving a car for repair).
Pledge: A type of bailment where goods are transferred as security for a debt or obligation (e.g., pledging jewelry against a loan).
Difference:
- Purpose: Bailment is for temporary use; pledge is for security.
- Right to Sell: In a pledge, the pledgee can sell the goods if the pledgor defaults, unlike bailment.
Relevant Case Law:
- Lallan Prasad v. Rahmat Ali (1967): This Indian case dealt with pledge and determined that the pledgee has the right to retain goods until repayment of the debt. It established that in case of default, the pledgee can sell the goods after proper notice.
- State of Gujarat v. Memon Mahomed Haji Hasam (1967): In this case, the distinction between bailment and pledge was discussed. It clarified that in bailment, the bailee cannot sell the goods, unlike a pledgee.
