PERSONS COMPETENT TO CONTRACT
PERSONS COMPETENT TO CONTRACT
1.0 Who is competent to contract
1.1 Person who is of the age of majority according to the law to which he is subject
1.2 Person who is of sound mind.
1.3 Person who is not disqualified from contacting by any law to which he is subject
2.0 A minor whose property has passed under superintendence of the court of words attains majority on compelition of 21 years.
3.0 Position of Agreements by a Minor
3.1 An agreement with a minor is void ab-initio
3.2 No Estoppel- A minor is not estopped from setting lip the plea of minority. He may plead infancy to escape from being liable.
3.3 In case of fraudulent representation of age by minor the court may award compensation to the other party if the money or property supplied to minor could be traced.
3.4 No Ratification on attaining the age of majority- An agreement with a minor cannot be ratified even after he attains majority. Ratification relates back to the date of the making of the agreement and therefore an agreement which was then void cannot be made valid by subsequent ratification.
3.5 Validity of minor’s agreement jointly with a major person -The agreements made by a minor jointly with a major person are void vis-a-vis the minor but can be enforced against the major person who has jointly promised to perform.
3.6 Minor as a partner – A minor cannot become a partner in a partnership firm. However, with the consent of all the partners, minor may be admitted to the benefits of partnership.
3.7 Minor can be an agent and not Principal – A minor can act as an agent and bind his principal by his acts without incurring any personal liability. 3.8 Minor can be a shareholder or member of a company A minor can become a shareholder or member of a Company if (a) the shares are fully paid up and (b) the articles of association do not prohibit so.
3.9 Minor can not be an insolvent – A minor cannot be declared insolvent because he is not competent to contract.
3.10 Contract for the benefit of a minor – A minor can be a promisee.
3.11 Contract by minor’s guardian – The contracts entered into on behalf of a minor by his guardian or manager of his estate can be enforced by or against the minor if the contract (a) is within the scope of the authority of guardian or manager, and (b) is for the benefit of the minor. It may also be noted that his guardian cannot enter into a valid contract for purchase of the immovable property for his/her service.
3.12 Contract for supply of necessaries -
1. A person who has supplied the necessaries to a minor or to those who are dependent on him is entitled to be reimbursed from the property of such minor.
2. Meaning of necessaries: The term ‘necessaries’ includes articles required to maintain a particular person in the state, degree and station in life in which he is. InIndia, food, clothing, shelter, education and marriage of a female have been held to be necessaries.
3. Section 68 covers the reimbursement for the supply of such items or loans for the same. Section 68 also covers the rendering of necessary services to a minor.
4. ‘Claim against property and not against person’ A claim for the payment of necessaries supplied can be made against the minor’s property and not against the minor personally, In other words, a minor cannot be asked to expend labour in exchange.
5. Liability of minor’s guardian The parent or guardian of a minor cannot be held liable unless those goods/services are supplied/rendered to a minor as the agent of the parent or guardian.
3.13 Minor’s liability in Tort – A minor may be held liable in Tort (civil wrong). But if in the course of doing what he is entitled 10 do under the contract, he is found guilty of negligence. he cannot be made liable on tort if he is not liable on the contract.
4.0 Position of Persons of unsound Mind
4.1 Who is a Person of Unsound Mind
“A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, is capable-
(a) to understand the terms of the contract.
(b) to form a rational judgment as to its effect upon his interests:’
4.2 “A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind.”
4.3 “A person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind.”
4.4 The position of contracts with persons of unsound mind is identical with that of contracts with a minor. Thus, the position of contracts with persons of unsound mind is as under:
(a) He may enforce a contract for his benefit;
(b) His properties shall be attachable for realisation of money due against him for the supply of necessaries to him or to any of his dependents.
5.0 Position of Persons Disqualified by Law
5.1 An alien whose country is at war with theRepublicofIndiais called an alien enemy. His contractual capacity can be summarised as under:
| I. Position of contracts during the
War |
An alien enemy can neither enter into any contract nor can be sued in anIndian Courtexcept by licence from the Central Government,
|
| II. Position of contracts entered into
before the war (a) lf such contracts are against the public policy or are such that may benefit the enemy (b) If such contracts are not against public policy |
(a) Such contracts stand dissolved
(b) Such contracts are merely suspended for the duration of the war and revived after the war is over unless they have already become time barred under the Law of I Limitation Act.
|
5.2 Foreign Sovereigns and Ambassadors They can enter into contracts und enforce those contracts in our courts but they cannot be sued in our courts without the sanction or the Central Government unless they choose to submit themselves to the jurisdictions or our Courts,
5.3 Convicts A person is called a convict during his period of sentence.
5.4 Contractual capacity of company is dertermined by the ‘object clause’ of its Memorandum of Association.
5.5 Contractual capacity of statutory corporation is determined by the statute creating it.
5.6 Any act done in excess of the power given is ultra vires (i.e. beyond power) and hence void.
5.7 Insolvents When a person’s debts exceed his assets, he is adjudged insolvent and his property stands vested in the Official Receiver or Official Assignee appointed by the Court. Such person-
(i) cannot enter into contracts relating to his property,
(ii) cannot sue,
(iii) cannot be sued.
DISCHARGE OF CONTRACT
DISCHARGE OF CONTRACT
1.0 Meaning of Discharge of a Contract- Discharge of a contract means termination of the contractual relations between the parties to a contract.
2.0 Modes of Discharge of Contract
2.1 Discharge by Performance
(a) By Actual Performance A contract is said to be discharged by actual performance when the parties to the contract perform their promises in accordance with the terms of the contract.
(b) By Attempted performance or tender A contract is said to be discharged by attempted performance when the promisor has made an offer-of performance 19 the promisee but it has not been accepted by the promise.
2.2 Discharge by Mutual Agreement
(a) Novation
(b) Rescission
(c) Alteration
(d) Remission
(e) Waiver
2.3 Discharge by Operation of Law
(a) By Death of the Promisor in case of a contract involving the personal skill or ability of the promisor.
(b) By Insolvency
(c) By Unauthorised Material Alteration
(d) By the Identity of Promisor and Promisee
2.4 Discharge by Impossibility of Performance
(a) Effects of Initial Impossibility- Initial impossibility means the impossibility existing at the time of making the contract.
| Case | Effect |
| I. Where both the promisor and promisee know about the initial impossibility | Such agreement is void ah-initio. |
| II. Where both the promisor and promisee do not know about the initial impossibility | Such agreement is void on the ground of mutual mistake. |
| III. Where the promisor alone knows about the initial impossibility | Such promisor must compensate for any loss which such promisee sustains through the non-performance of the promise. |
(b) Effects of Supervening Impossibility- Supervening impossibility means impossibility which does not exist at the time of making the contract but which arises subsequently after the formation of the contract.
| Case | Effect |
| I. Where an act becomes impossible after the contract is made | The contract to do such an act becomes void when the act becomes impossible |
| II. Where an act becomes unlawful by reason of some event beyond the control of promisor | The contract to do such an act becomes void when the act becomes unlawful. |
| III. Where the promisor alone knows about the impossibility | Such promisor must compensate knows about the impossibility the promisee for any loss which such promisee might have suffered on account of non-performance of the promise. |
| IV. Where an agreement is discovered to be void or where a contract becomes void | Any person who has received any benefit under such agreement or contract is bound to restore it or to make compensation for it, If’ the person from whom he received it. |
(c) Cases when a Contract is Discharged on the Ground of Supervening Impossibility
(a) Destruction of Subject Matter after the formation of the contract without any fault of either party.
(b) Death or Personal Incapacity of a person if the performance of a contract depends on his personal skill or ability.
(c) Declaration of War:
(d) Change of Law after the formation of the contract.
(e) Non-existence or Non-occurrence of aParticularStateof Things Necessary for Performance:
(d) Cases when the Contract is not Discharged on the Ground of Supervening Impossibility
(a) Difficulty of Performance
(b) Commercial Impossibility
(c) Default of a Third Party
(d) Strikes, Lackouts and Civil Disturbances
(e) Partial lmpossibility
2.5 Discharge by Lapse of Time- as per The Limitation Act, 1963 (e.g., 3 years to recover a debt, 12 years to recover an immovable property)
2.6 Discharge by Breach of Contract
(a) Anticipatory Breach of Contract
(b) Actual Breach of Contract
(i) On Due Date of Performance:
(ii) During the Course of Performance:
Consequences of Breach of Contract The aggrieved party (i.e. the party not at fault) is discharged from his obligation and gets rights to proceed against the party at fault.
BREACH OF CONTRACT
1.0 Meaning of Breach of Contract
A breach of contract occurs if any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract.
2.0 A breach of contact may arise in two ways, (a) anticipatory breach and (b) actual breach.
3.0 Anticipatory Breach of Contract
3.1 Meaning Anticipatory breach occurs when the party declares his intention of not performing the contract before the performance is due.
3.2 Modes of Declaring an Intention not Performing the Contract
A party may declare his intention of not performing the contract in the following two ways:
(a) When a party to a contract has refused to perform his promise.
(b) When a party to a contract has disabled himself from performing his promise in its entirety.
3.3 Two Options Available to Aggrieved Party
(a) He can rescind the contract and claim damages for breach of contract without waiting until the due date for performance, or
(b) He may treat the contract as operative and wait till the due date for performance and claim damages if the promise still remains unperformed.
3.4 consequences of Treating Contract ns Operative
(a) the promisor may perform his promise on or before the due date of performance and the promisee will be bound to accept the performance.
(b) The promisor may take advantage of the discharge by supervening impossibility arising between the date of breach and the due date of (he performance and in such a case, the promisee shall lose his right to sue for damages.
3.5 Amount of Damages
| Option exercised | Amount of damages …. |
| 1. When the aggrieved party rescinds the con tract at the date of breach | Difference between the price prevailing on the date of breach and the contract price. |
| II. When the aggrieved party does not rescind the contract at the date of breach
|
Difference between the price prevailing on the due date of performance and the contract price. |
4.0 Actual Breach of Contract
4.1 Actual breach of contract may take place in any of the following two ways:
(a) Actual Breach On due Date of Performance
(b) Actual Breach During the Course of Performance
4.2 Consequences of Actual Breach [Section 55]
| Where time is the essence of a contract | Where time is not the essence of a contract | |
| I. Whether the contract becomes void able at the option of the promisee.
II. Whether the promisee is entitled to claim the compensation for any loss occasioned to him by the nonperformance of the promise at the stipulated time (i) Where performance beyond the stipulated time is not accepted (ii) Where performance beyond the stipulated time is accepted. |
Yes
No, unless the promisee gives notice to the promisor of his intention to do so. |
No
No, unless the promisee gives notice to the promisor of his intention to do so. |
5.0 Remedies for Breach of Contract
5.1 Meaning of Remedy- A remedy is the course of action available to an aggrieved party (i.e. the party not at default) for the enforcement of a right under a contract.
5.2 Remedies for Breach of Contract
1. Rescission of Contract [Section 39] Rescission means a right not to perform obligation.
2. Suit for Damages
(a) Such damages which naturally arose in the usual course of things from such breach. This relates to ordinary damages arising in the usual course of things.
(b) Such damages which the parties knew, when they made the contract, to be likely to result from the breach. This relates to special damages.
(c) The aforesaid compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach, and
(a) Ordinary Damages
(i) The aggrieved party must suffer by breach of contract, and
(ii) The damages must be proximate (i.e. direct) consequence of the breach of contract and not the indirect consequence.
(b) Special Damages -Aggrieved party may claim the damages as follows:
(a) Such damages which naturally arose in the usual course of things from such breach. This relates to ordinary damages arising in the usual course of things.
(b) Such damages which the parties knew, when they made the contract, to be likely to result from the breach. This relates to special damages.
(c) The aforesaid compensation is not to be given for any remote or indirect loss or damages sustained by reason of the breach
(c) Exemplary or Punitive or Vindictive Damages- Exemplary damages are those which arc in the nature of punishment. The court may award these damages in case of (i) a breach of promise to marry, where damages shall be calculated on the basis of mental injury sustained by the aggrieved party, (ii) Wrongful dishonour of a cheque by a banker.
(d) Nominal Damages where there is only a technical violation of a legal right but the aggrieved party has not in fact suffered any loss because of breach or contract. (say, one rupee)
(e) Damages for Inconvenience and Discomfort suffered
(j) Liquidated Damages and Penalty -When the parties to a contract at the time of formation of contract, specify a sum which will become payable by the party responsible for breach, such specified sum is called:
(i) Liquidated Damages if the specified Sum represents a fair and genuine pre-estimate of the damages likely to result due to breach;
(ii) Penalty if the specified sum is disproportionate to the damages likely to result due to breach.
InIndia, there is no distinction between penalty and liquidated damages. The Courts inIndiaallow only reasonable compensation not exceeding the specified sum [Section 741·
But under English law, liquidated damages are enforceable and not penalty.
(g) Stipulation for Interest
| Stipulation | Whether the stipulation is in the nature of a penalty or not |
| (i) For payment of interest in case of default
(ii) For payment of increased interest from the date of the contract (iii) For payment of increased interest from the date of default only
(iv) For payment of compound interest on default at the same rate as simple interest (v) For payment of compound interest on default at the rate higher than that of simple interest (vi) For payment of interest at a rate lower than that of original rate if interest is paid on due date |
It is not in the nature of a penalty if the interest is reasonable.
It is always in the nature of a penalty.
It mayor may not be in the nature of a penalty depending on the terms and I circumstances of the case. It is not in the nature of a penalty.
It is in the nature of a penalty.
It is not in the nature of a penalty.
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(h) Forfeiture of Security Deposit (or Earnest Money) A clause In a contract which provides for forfeiture of security deposit in the event of failure to perform is in the nature of a penalty. In such cases, the court may award reasonable compensation only.
3. Suit for Specific Performance i.e. demanding the court’s direction to the defaulting party to carry out the promise according to the terms of the contract.
4. Suit for Injuction i.e. demanding court’s stay order. Injuction means an order of the court which prohibits a person to do a particular act.
QUASI CONTRACT
1.0 Meaning of Quasi-Contracts
A Quasi-contract is an obligation imposed by law upon a person for the benefit of another even in the absence of a contract. It is based Oil the principle of equity.
2.0 Features of a Quasi-contract
(a) It is imposed by law and does not arise from any agreement.
(b) The duty of a party and not the promise of any party is the basis of such contract.
(c) The right under it is always a right to money and generally, though not always, to a liquidated sum of money.
(d) The right under it is available against specific person(s) and not against the world.
(e) A suit for its breach may be filed in the same way as in case of a complete contract.
3.0 Similarity between Quasi-contracts and Contracts
The outcome of quasi contracts resemble that created by a contract. So far as claim for damages are concerned, there is a similarity between a Quasi contracts and contract because in case of breach of a quasi-contract, Section 73 provides for the same remedies as provided in case of breach of a contract.
4.0 Kinds of Quasi-Contracts
4.1 Right to Recover the Price of Necessaries Supplied to a person who is incapable of contracting or anyone whom such incapable person is legally bound to support, from the property of such incapable person.
4.2 Right to Recover Money Paid for Another Person
4.3 Right to Recover for Non-Gratuitous Act
4.4 Responsibility of Finder of Goods as Bailee
4.5 Right to Recover from a Person to whom Money is Paid or thing is Delivered, by Mistake or Under Coercion
5.0 When an. obligation created by a Quasi-contract is not discharged, the injured party is entitled to receive the same compensation from the party in default as if such person had contracted to discharge it and had broken his contract.
6.0 Quantum Meruit
6.1 Meaning of Quantum Meruit
The term ‘quantum meruit’ means as much as merited or ‘as much as earned’. In other words, it means payment in proportion to the amount of work done. The right to claim on ‘quantum meruit’ does not arise out of a contract as the right to damages does. It is a claim on the quasi contractual obligations which is implied by the circumstances. The claim for quantum meruit arises only when the original contract is discharged.
6.2 Cases in which the Claim of Quantum Meruit Arise
1. In case of void agreement or contract that becomes void
2. In case of non-gratuitous act
3. In case of act preventing the completion of contract
4. In case of divisible contract
5. In case of indivisible contract performed completely but badly
CONSIDERATION
CONSIDERATION
1.0 Consideration in simple term means something in return.
2.0 Consideration must result either
(a) a benefit to the promisor and detriment or loss to the promisee,
or
(b) a detriment to both-promisor or promisee.
3.0 Essential Elements of valid consideration.
3.1 It must be given at the desire of Promisor.
3.2 It may be given by the promisee or any other person (i.e. stranger).
3.3 It may be past or present or future.
[Note: Past consideration is no consideration inEngland]
3.4 It need not be adequate but it must be of some value in the eye of law. 3.5 It must be real and not Illusory
3.6 It must be something which the promisor is not already bound to do.
3.7 It must be lawful.
3.8 It must not be opposed to public policy.
4.0 Stranger to a Consideration
A stranger to consideration can sue because the consideration can be furnished or supplied by any person whether he is the promisee or not.
5.0 Stranger to Contract
5.1 A stranger to a contract cannot sue because of the absence of privity of contract (i.e. relationship subsisting between the parties to a contract).
5.2 Exception to above Rule
(a) In case of Trusts -The beneficiary (i.e. the person for whose benefit the trust has been created) may enforce the contract.
(b) In case of Family Settlement -The person for whose benefit the provision is made under family arrangements may enforce the contract.
(c) Acknowledgments- The person who becomes an agent of third party by acknowledgment or otherwise, can be sued by such third party.
(d) Assignment of a Contract- Where a benefit under a contract has been assigned, the assignee can enforce the contract subject to all equities between the original parties to the contract e.g. the assignee of an insurance policy.
6.0 No consideration, No contract
6.1 An agreement made without consideration is void.
6.2 Five Exceptions to above rule
(a) Written & Registered Agreements made on Account of Natural Love and Affection between parties standing in a near relation to each others.
(b) Promise to compensate the person who has already done something voluntarily or has done something which the promisor was legally bound to do.
(c) Written promise duly signed by debtor or his authorized agent to pay Time Barred Debt
(d) Completed Gifts [Explanation to Section 25] The gifts actually made by a donor and accepted by the donee are valid even without consideration. Thus, a completed gift needs no consideration.
(e) Agency-No consideration is necessary to create an agency.
CONSENT
1.0 Consent
1.1 Meaning of Consent
The consent means an act of assenting to an offer.
According to Section 13, “Two or more persons are said to consent when they agree upon the same thing in the same sense,” Thus, consent involves identity of minds in respect of the subject matter of the contract. In English Law, this is called ‘consensus-ad-idem’.
1.2 Effect of Absence of Consent When there is no consent at all. the agreement is void ab-initio, i.e. it is not enforceable at the option of either party.
2.0 Free Consent
2.1 Meaning of Free Consent -Consent is said to be free when it is not caused by
(a) coercion, or (b) undue influence, or (c) fraud, or (d) misrepresentation, or (e) mistake.
2.2 Effect of Absence of Free Consent When there is consent but it is not free (i.e. when it is caused by coercion ‘or undue influence or fraud or misrepresentation), the contract is usually voidable at the option of the party whose consent was so caused.
3.0 Coercion
3.1 Meaning of Coercion -Coercion means compelling a person to enter into a contract under a pressure or a threat. According to Section 15, a contract is said to be caused by coercion when it is obtained by-
(a) Committing any act which is forbidden by the Indian Penal Code; or (b) threatening to commit any act which is forbidden by the Indian Penal Code;
or
(c) Unlawful detaining of any property; or (d) threatening to detain any property.
Note: The Indian Penal Code need not be in force in place where the coercion is employed.
3.2 Coercion may proceed from’ any person, and may be directed against any person, even a stranger.
3.3 A threat to file a suit (whether civil or criminal) does not amount to coercion unless the suit is on false charge. Threat to file a suit on false charge is an act forbidden by the Indian Penal Code and thus will amount to an act of coercion.
3.4 TheMadrasHigh Court held that though a threat to commit suicide is not punishable under the Indian Penal Code. it is deemed to be forbidden by that code. Hence, the threat to commit suicide amounted to coercion and the release deed was therefore, voidable.
3.5 Effects of Coercion
1. Right of aggrieved party to Rescind the contract
2. Obligation of aggrieved party to restore benefit
3. Obligation of other party to repay or return 4.0 Undue Influence
4.1 Meaning of Undue Influence- The term ‘undue influence’ means dominating the will of the other person to obtain an unfair advantage over the other. According to Section 16(1), a contract is said to be induced by undue influence-
(a) where the relations subsisting between the parties are such that one of them is in a position to dominate the will of the other, and
(b) the dominant party uses that position to obtain an unfair advantage over the other.
4.2 Presumption of Domination of Will A person is deemed to be in a position to dominate the will of another in the following three Circumstances.
| Circumstances | Examples |
| (a) Where he holds a real or apparent authority over the other | Master and servant, parent and child
Income tax officer and assessee, Principal and a temporary teacher |
| (b) Where he stands in a fiduciary
fiduciary relation to the other |
Trustee and beneficiary, spiritual
adviser (Guru) and his disciples, solicitors and client, guardian and ward
|
| (c) Where he makes a contract with
with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress |
Medical attendant and patient
|
4.3 In Which cases there is No Presumption of Domination of Will
According to judicial decisions held in various cases, there is no presumption of undue influence in the following relationships:
(a) Husband and wife (other than pardanashin)
(b) Landlord and tenant
(c) Creditor and debtor
4.4 Effect of Undue Influence When Consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.
4.5 Similarities between Coercion and Undue Influence In case of both coercion and undue influence, the consent is not free and the contract is voidable at the option of the aggrieved party.
5.0 Fraud
5.1 Meaning of Fraud The term ‘Fraud’ means a false representation of fact made by a party to a contract (i.e not by a stranger to a contract) willfully (i.e., with knowledge of its false hood) with a view to deceive the other party who has acted on the basis of such representation and has been actually deceived.
5.2 Essential Elements of Fraud
1. By a party to a contract
2. False representation of fact
3. Intention of deceiving the other party
4. Act of other party on the basis of such representation
5.3 Effects of fraud
1. Right to rescind the contract
2. Right to insist upon performance
3. Right to Claim Damages
5.4 Silence does not amount to fraud
1. General Rule According to explanation of section 17, “Mere silence as to facts likely to affects the willingness of a person to enter into a contract is not fraud”
2. Exceptions to the General Rule
(i) Where parties stand in fiduciary relationship like parent-child,trustee-beneficiary.
(ii) Where the silence itself is equivalent to speech.
(iii) Half Truth
6.0 Misrepresentation
6.1 Meaning of Representation- The term ‘Misrepresentation means a false representation of fact made by a party to a contract (i.e. not by a stranger to II contract) made innocently (i.e. without knowledge of its falsehood) or lion-disclosure of a material fact without any intention to deceive the other party who has acted on the basis of such representation.
6.2 Essential Elements of Misrepresentation
1. By a party to a contract
2. False representation of fact,
3. Inducing other party to enter into contract without any intention to deceive the other party
4. Act of other party on the basis of such representation
6.3 Effect of Misrepresentation
1. Right to Rescind the Contract
2. Right to Insist upon Performance
7.0 Effects of Mistake
| Type of mistake | Effect on Validity |
| 1. Mistake of Indian Law | The contract is not voidable because everyone is supposed to know the law of his country. |
| 2. Mistake of Foreign Law | A mistake of foreign law is treated as mistake of fact, i.e. the contract is void if both the parties are under a mistake as to a foreign law because one cannot be expected to know the law of other country. |
| 3. In case of Bilateral Mistake as to essential fact (i.e., where both the par ties to an agreement are
under mistake to essential fact) |
The agreement is void. |
| 4. In case of Unilateral Mistake (i,e. where one of the parties to an agreement in under mistake)
(i} as to the identity of the person contracted with (ii) as to the nature of contract (iii) as to other matter |
The agreement is void,
The agreement is void, The agreement is void, |
LEGALITY OF OBJECT AND CONSIDERATION
1.0 Five Circumstances Under Which the Object or Consideration is Deemed to be Unlawful
1.1 If it is forbidden by Law
1.2 If it Defeats the Provisions of any Law 1.3 If it is Fraudulent
1.4 If it Involves or Implies Injury to a Person or Property of Another
1.5 If the Court Regards it as Immoral or Opposed to Public Policy
2.0 Illegal Agreements
2.1 Meaning of Illegal Agreements
Illegal agreements are those agreements which are
(a) Void ab-initio, i.e. void from the very beginning, and
(b) Punishable by the criminal law of the country or by any special legislation/regulation.
2.2 Effects of Illegal Agreements
The effects of illegal agreements are as under:
(a) The collateral transactions to an illegal agreement also become illegal and hence cannot be enforced.
(b) No action can be taken for the recovery of money paid or property transferred under an illegal agreement and for the breach of an illegal agreement.
(c) In case of an agreement containing the promise. some part of which is legal and other part illegal, the legal position is as under:
3.0 if one of the several considerations or objects of an agreement is unlawful, the agreement is void.
4.0 Agreements Opposed To Public Policy ,
4.1 Agreements of Trading With Enemy
4.2 Agreement for Stifling Prosecution
4.3 Agreements in the Nature of Maintenance and Champerty Maintenance is an agreement whereby one party having no interest in suit, agrees to assist another to maintain suit. For example, X promises to pay Y Rs 5,000 if Y files a suit against Z. This is a maintenance agreement.
| g Case | Provision
|
| 1. if the illegal part cannot be Separated from the legal part | The whole agreement is alto gether illegal. |
| 2. if the illegal part cannot be Separated from the legal part | The Court will enforce the legal part and reject the illegal part. |
Champerty is an agreement whereby one party agrees to assist another in recovering property and in turn is to share in the proceeds of the action.
4.4 Agreement for the Sale/Transfer of Public Offices or to Obtain Public Titles
4.5 Agreements in Restraint of Parental Rights
4.6 Agreements in Restraint of PersonalLiberty
4.7 Agreement Tending to Create Monopoly
4.8 Agreements Interfering with Course of Justice
4.9 Marriage Brokerage Contracts
4.10 Agreement in Restraint of Marriage of any person other than a minor is void.
4.11 Agreement in Restraint of any lawful Trade profession, or business, is to that extent void.
4.12 Agreement in Restraint of Legal Proceeding
VOID AGREEMENTS
1.0 Meaning of Void Agreements
a void agreement is an agreement which is not enforceable by Jaw. The agreements which are not enforceable by law right from the time when they are made, are void-ab-initio.
2.0 Examples of Agreements which have expressly been declared void.
1. Agreements by or with persons incompetent to contract (Sections 10 & 11).
2. Agreements entered into through a mutual mistake of fact between the parties (Section 20).
3. Agreement, the object or consideration of which is unlawful (Sect jon 23).
4. Agreement, the consideration or object of which is partly unlawful (Section 24).
5. Agreement made without consideration (Section 25).
6. Agreements in restraint of marriage (Section 26).
7. Agreement in restraint of trade. (Section 27).
8. Agreement in restraint of legal proceedings (Section 29).
9. Wagering agreement(Section 30).
10. Impossible agreement (Section 56).
11. an agreement to enter into an agreement in the future .
3.0 Agreement in Restraint of Marriage of any person other than a minor is void.
4.0 agreements in Restraint of Trade
4.1 “Every agreement by which anyone is restrained from exercising a lawful profession trade or business of any kind, is to that extent void.”
4.2 Meaning of Expression ‘that Extent’ The expression ‘that extent’ may be interpreted in the sense that only that portion of such agreement is void which is considered either as unreasonable or as opposed to public policy being in restraint of trade. The rest of the agreement would continue to be valid.
4.3 Exceptions to the Rule that “An Agreement in Restraint of Trade is Void”
| Under Statutory Provisions | Under judical Interpretations |
| 1. Agreement with seller of Goodwill
2. Agreement with Partners
(a) Restriction on Existing Partner to carry a any business other than that of firm while he is a partner. (b) Restrictions on outgoing Partner to carry on similar business within specified period or local limits if restrictions are reasonable. (c) Restriction on Partners on dissolution of firm to carryon similar business within specified period or local limits if restrictions are reasonable. (d) Restriction on Partners in case of sale of firm’s goodwill, to carryon similar business within specified period or local limits if restrictions are reasonable. |
1. Trade Combinations to regulate the business or to fix prices (but not to create monopoly)
2. Sole Dealing Agreements on reasonable terms.
3. Service Agreements |
5.0 Agreements in Restraint of Legal proceedings.
5.1 Agreements Restricting Enforcement of Rights is void extent,
5.2 Agreements Limiting the Period of Limitation is void because its object is to defeat the provisions of law.
6.0 Meaning and Validity of Various Agreements
| Type of Agreement | Validity |
| 1. Uncertain Agreement
[An agreement the meaning of which is not certain or capable of being made certain. |
|
| 2. Wagering Agreement
[An agreement between two persons under which money or money's worth is payable, by one person to another on the happening or non-happening of a future uncertain event is called a wagering event.] (a) In the States of Maharastra & Gujrat (b) In Rest ofIndia |
Void
Illegal Void |
| 3. Agreements collateral to Wagering Agreement
(a) In the States of Maharastra & Gujrat (b) In Rest ofIndia |
Illegal Not voide |
| 4. Contingent Agreement based on Impossible Event
[An agreement to do or not to do anything if an impossible event happens whether impossibility of the event is known or not to the partner to the agreement at the time when it is made] |
Void
|
| 5. Agreement to do an Impossible Act | Void |
| 6. Contingent Contract
[A contract to do or not to do something if some event collateral to such contract does or does not happen] [or A contract the performance of which depends upon the happening or non happening of some future uncertain event which is .collateral to the contract] |
Valid
|
7.0 Restitution
7.1 Restitution means “return or restoration of benefit.” The provisions relating to ‘restitution’ are given below:
| Case | Provision |
| (a) When a person at whose option a contract is voidable rescinds it [Section 64]. | The party rescinding a voidable contract must restore the benefit to the person from whom he has received it. |
| (b) When an agreement is discovered to be void or the contract becomes void [Section65]. | The person who has received any benefit or advantage under such agreement or contract must restore it or compensate for it to the person from whom he has received it. |
7.2 Non-applicability of the Principle of Restitution
The principle of restitution does not apply to contracts which, are void ab-initio with the exception where the minor has entered into agreement by misrepresenting his age.
PERFORMANCE OF A CONTRACT
1.0 Meaning of Performance
A contract is said to have been performed when the parties to a contract either perform or offer to perform their respective promises.
2.0 Two Types of Performance
2.1 Actual Performance Where a promisor has made an offer of performance to the promisee and the offer has been accepted by the promisee, it is called an actual performance.
2.2 Attempted Performance (or Tender) Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted by the promisee, it is called an attempted performance.
3.0 Two Effects of Tender
3.1 The promisor is not responsible for non-performance.
3.2 The promisor does not loose his rights under the contract.
4.0 Two types of tender
4.1 Tender od Goods/Services
4.2 Tender of Money
5.0 Essential of a valid tender
5.1 Unconditional
5.2 At Proper Time
5.3 at proper Place
5.4 ReasonableOpportunityto Promisee
5.5 For whole Obligation
5.6 To Proper Person
6.0 Who may Demand Performance of a Contract
6.1Promisee
6.2 Legal Representative
6.3 Third party
6.4 Joint Promisees
7.0 Who may perform the contract
7.1 promisor
7.2 Promisor’s Agent
7.3 Legal Representatives
7.4 Third Party
7.5 Joint Promisors
8.0 Devolution of Joint Liabilities and Joint Rights
8.1 meaning of Devolution
Devolution means passing over from one person to another.
8.2 Meaning of Devolution of Joint Liabilities
The liabilities of joint promisors pass to their legal representatives (in case of death).
8.3 Rules Regarding the Performance of Joint Promise
(a) Joint and Several Liability of Joint Promisors
(b) Joint Promisor’s Right to Claim Contribution
(c) Joint Promisor’s Duty to Share Loss from Default in Contribution
(d) Effect of Release of One Joint Promisor
8.4 Meaning of Devolution of Joint Rights [Section 45]
When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased person jointly, with the survivor or survivors and after the death of the last survivor, with the representatives of all jointly.
9.0 Is Time An essence of Contract
| Case where. . . | Rule as to Performance |
| 1. Time not specified | Within a reasonable time |
| 2. Time specified but promise is to be performed with out promisee’s application. | During the usual business hours on that particular day |
| 3. Time specified but promises is to be performed on promisee’s application. | The promisee must apply for performance at a proper place and within usual business hours. |
| 4. Place not specified | The promisor must apply to the promisee to appoint a reasonable place for the performance and to perform the promise at such place. |
| 5. Manner for performance prescribed | The promise must be performed in the manner and at the time prescribed by the promisee. |
10.0 Is time an essence of contract
10.1 Time is an essence of a contract means that it is essential for the parties to a contract to perform their respective promises within the specified time.
10.2 In the following cases, time is usually considered to be the essence of contract:
(a) Where the parties have expressly agreed to treat the time as the essence of the contract.
(b) Where the non-performance at the specified time operates as an injury to the party.
(c) Where the nature and necessity of the contract requires the performance of the contract within the specified time.
10.3 In commercial contracts time fixed for the delivery of goods and not for the payment of price is considered to be the essence of a contract.
10.4 Consequences of Non-performance of contract within specified time.
| Where time is essence | Where time is not essence |
| 1. Contract becomes voidable | 1. Contract does not become voidable |
| 2. Promisee cannot claim compensation | 2. Promisee can claim compensation |
11.0 Reciprocal Promises
11.1 Meaning of Reciprocal Promises
Promises which form the consideration or part of the consideration for each other, are called ‘reciprocal promises’. [Section 2(f)]
11.2 Types of Reciprocal Promises
Lord Mansfield in Jones v. Barkley case have classified the reciprocal promises as under:
| Types of reciprocal promises | Meaning |
| (a) Mutual and Independent | When the promises are to be performed by each party independently, without waiting for the other party to perform his promise. |
| (b) Mutual and Dependent | When the performance of one party depends on the prior performance of the other party. |
| (c) Mutual and Concurrent | When the promises are to be performed simultaneously. |
12.0 Meaning of Assignment of Contracts
Assignment of a contract means transfer of contractual rights and liabilities to a third party.
12.1 Modes of Assignment of contract
| Case | Rule |
| (a) By Act of parties
1.Assignment of Contractual liabilities
2. Assignment of contractual Rights |
contractual liabilities cannot be assigned unless Novation takes place.(Novation is a tripartite agreement between promisor, promisee and third party) Contractual Rights can be assigned subject to all equities between the original parties |
| (b) By Operation of law | The rights and obligations (other than those of personal nature) of the deceased/insolvent party pass on to legal representatives/Offical Receiver/Assignee. |
12.2 Assignment and Succession
Under succession, both benefits and burden attached to the contract devolve upon the legal heir. A son succeeding his father’s estate shall be liable to meet the debts and liability of his father to the extent of the property inherited. However, in assignment, only the benefit of a contract can be assigned and not the liabilities attached thereto.
13.0 Meaning Appropriation of payment means application of payment to a particular debt.
13.1 What are the Rules Regarding Appropriation of Payments [Sections 59-61] /
The various rules regarding appropriation of payments are given below:
| Case | Rule |
| I. Where debt to be discharge is indicated, | The payment, if accepted must be applied accordingly. |
| II. Where debt to be discharge is not indicated, | The creditor has opinion to apply the payment to any lawful debt due from the debtor even if it is a time barred debt. But he can not apply to a disputed debt. |
| III. Where neither party makes any appropriation | The payment shall be applied in discharge of the debts in order of time whether or not they are time barred. If the debt are of equal standing, the payment shall be applied in discharge of each, proportionality. In other words all payments shall be applied towards the payment of first debt till it gets extinguished. Similarly, all subsequent payments applied towards second debt till it gets fully paid and so on and so forth. |
MEANING OF LAW
MERCANTILE LAW
Meaning of Law
Law = set of rules.
Body of principles recognized and accepted by the state for the administration of justice.
Why One should know Law??
Because ignorance of law is no excuse
Meaning of Mercantile
Mercantile = Business/Commercial
Meaning of Mercantile Law
Mercantile Law = the body of rules applied to commercial transactions
Mercantile law is a part of civil law. It governs and regulates the trade and commerce in the country. Mercantile law deals with the needs of a business man. This includes laws relating to insurance, partnerships, contracts, companies, negotiable instruments, arbitration, carriage of goods etc.
Law of Contract
The Law of Contract is contained in the Indian Contract Act, 1872 which-
Deals with the general principles of law governing all contracts and covers the special provisions relating to special contract.
THE INDIAN CONTACT ACT 1872
Meaning of Contract Sec 2(h):
An Agreement enforceable by law is known as Contract.
Meaning of Agreement Sec 2(e):
Every promise and set of promises forming consideration for each other is an Agreement
Meaning of Promise Sec 2(b):
A Proposal when accepted becomes Promise.
Meaning of Proposal Sec 2(a):
A person is said to have made the proposal when he signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that offer to such act or abstinence.
|
CONTRACT = Agreement + Enforceability by Law
AGREEMENT = Promise + Consideration
PROMISE = Proposal + Acceptance
PROPOSAL = Willingness + Free Assent
|
*** Enforceability means creating legal relationship
DISTINCTION BETWEEN AN AGREEMENT AND CONTRACT
|
BASIS |
AGREEMENT |
CONTRACT |
| 1) Constituents | Offer + Acceptance | Agreement + Enforceability |
| 2) Creation of Legal relation | May or may not | Necessarily |
| 3) One in other | Need not be a contract | All contracts are necessarily agreements |
| 4) Binding | Agreement is not concluded or a binding contract | Contract is concluded and binding on the concerned party |
CLASSIFICATION OF CONTRACT
|
TYPE OF CONTRACT |
MEANING |
| 1) on the basis of creation
a) Express Contract b) Implied Contract c)Tacit Contract |
a)Which is made by words spoken or written b)Which is made otherwise in words c)Which inferred from the conduct of parties |
| 2) on the basis of Execution
a) Executed Contract b) Executory Contract
c) Unilateral Contract d) Bilateral Contract |
a)Parties to contract have performed their obligation b)Parties to contract have still to perform their obligation c)Only one party has to perform d)Both parties have to perform |
| 3) on the basis of Enforceability
a) Valid Contract Sec 10
b) Void Contract Sec2(j)
c) Voidable Contract Sec 2(i)
d) Illegal Agreement e) Unenforceable Contract |
a) This satisfies all the conditions prescribed by law.
b) A Contract which was valid when entered into but which subsequently became void due to impossibility of performance, change of law, or some other result c)Which can be set aside or repudiated at the option of the aggrieved party d)Object or consideration of which is unlawful e) Which are actually valid but cannot be enforced due to technical defect.
|
ESSENTIAL ELEMENTS OF A VALID CONTRACT
|
Journal For Bills of Exchange
| 1) When goods are sold on credit to B | B A/c Dr. To Sales A/c (Being goods sold on credit to B) |
Purchase A/c Dr. To A A/c (Being goods purchased on credit) |
| 2) When bills accepted | B/R A/c Dr. To B A/c (Being bills accepted) |
A A/c Dr. To B/P A/c (Being bills accepted) |
| 3) a) When bill was retained till maturity and encashed on due date | Bank or Cash A/c Dr. To B/R A/c (Being bill encashed) |
B/P A/c Dr. To Cash/Bank A/c (Being bill was discharged due date) |
| b) When bill is sent to the bank for collection 1) on sending the bill2) on realising the amt of bill |
Bill sent for collection A/c Dr.To B/R A/c
Bank A/c Dr. Bank Charges a/c Dr. To Bill sent for collection A/c |
no entry
B/P A/c Dr. To Cash A/c |
| c) When bill was discounted before due date with bank (i.e drawer need amt before due date) | Bank A/c Dr.Discount A/c Dr.
To B/R A/c (B/R discounted with bank before due date)
|
No entry on that date;When paid:B/P A/c Dr.To Cash/Bank A/c
(Being bill paid on due date) |
| d) When bill was endorsed to C | C A/c Dr.To B/R A/c
(Being bill endorsed to C) |
No entry on that date ;B/P A/c Dr.
To Cash/Bank A/c (Being bill paid on due date) |
| d) When bill was retired under rebate(i.e paid by drawee before due date) | Bank/Cash A/c Dr.Rebate A/c Dr.
To B/R A/c (Being bill encashed under rebate) |
B/P A/c Dr.To Cash A/c
To Rebate on Bill A/c |
| 4) When bill was dishonored under different condition:a) When bill was retained till maturity and dishonored on due date | B A/c Dr.To B/R A/c
(Being bill dishonored) And when noting charges paid B A/c Dr. To B/R A/c To Cash A/c
|
B/P A/c Dr.Noting Charges A/c Dr.
To A A/c |
| b) When bill is sent to the banker for collection | B A/c Dr.To Bill sentforcollection A/cTo Bank A/c(Being bill dishonoured and noting charges debited to the drawee) | |
| c) When bill was discounted before due date with bank (i.e drawer need amt before due date) | B A/c Dr.To Bank A/c(Being bill dishonored) | |
| d) When bill was endorsed to C | B A/c Dr.To C A/c(Being bill dishonored) | |
| 5) When Bill is reneweda) on cancelling the old billb) on making due the interestc) on receiving a portion of the amt due
d) on acceptance of a fresh bill |
B A/c Dr.To B/R A/cB A/c Dr.
To Interest A/c Bank A/c Dr. To B A/c B/R A/c Dr. To B A/c |
B/P A/c Dr.To A A/cInterest A/c Dr.
To A A/c A A/c Dr. To Bank A/c B A/c Dr. To B/P A/c |
Bill Of Exchange
BILLS OF EXCHANGE
I. MEANING:
Bills of exchange is an instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.
A bill of exchange is a document requiring a debtor to pay an agreed amount by the date written on the bill. It is prepared by the creditor, send to the debtor. If the debtor agrees, he will sign and return back to the creditor.
PARTIES TO A BILL OF EXCHANGE:
a) Drawer – The person who draws the bill is called the drawer.
b) Drawee – The person to whom the bill is drawn for its acceptance by him is called the drawee.
c) Payee – The person in whose favour the bill is drawn is called the payee.
DUE DATE OF THE BILL
The date on which the term of the bill expires.
DAYS OF GRACE
The three days after the due date of grace.
DATE OF MATURITY
Due date + Days of Grace
II. Some Special Terms
1. Bills Receivable: A bill of exchange which the creditor (seller) who will receive the money at the agreed date. It is similar to the Debtor’s Account. It is a current asset in the Balance Sheet.
2. Bills Payable: A bill of exchange which the debtor (buyer) will pay the money at the agreed date. It is similar to a Creditor’s Account. It is a current liability in the Balance Sheet.
3. Drawer: The creditor (seller) who draws (prepares) the bill.
4. Drawer : The debtor (buyer) who will pay the bill.
5. Acceptor : the debtor who has agreed to pay the bill.
6. Maturity date: The date which the bill will be settled.
7. Discounting charges: The charge made by the bank for cash the bill at an earlier date. It is charged against the creditor (seller). It is treated as an Expense in the Profit and Loss Account.
8. Dishonored bill: The debtor (buyer) could not pay the bill on due date.
9. Noting charges : It is a penalty charge for dishonoring the bill. The debtor (buyer) has the responsibility to pay the noting charges to the bank.
10. Contingent Liability: A possible liability which may not occur. At the Balance Sheet date, if the Bills Receivable has not matured, it is a kind of Contingent Liability because the debtor may not pay the bill although it is recorded as a Current Asset.