Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC- 013 - Business Law
Question No. 3.
What is a ‘Contract’? Discuss the essentials of a Valid Contract.
Solution:
A contract is an agreement enforceable in a court of law. An agreement is a set
of reciprocal promises between the parties to the contract. These set of promises
arises from an offer and acceptance from the parties to the contract.
The contract may be express or implied i.e., it may be oral words or in writing
and even inferred from the conduct of the parties.2
It may be bilateral or unilateral
contract. The former one refers to the involvement of two parties and the latter
refers one party alone can perform without the other.
Generally, the contract completes when the acceptance of the offeree is posted
or put in to transmission. It was made at the place where the acceptance is received by the offeror. It was easy to determine the completion of contract when the
parties negotiate in person. But it will be difficult to determine in case of
negotiation by post, telegram, telephone and mail, etc. The contract in case of
instantaneous contracts completes only when the communication of the
acceptance is received by the offeror. In other words, the contract is said to be
made at the place where the acceptance received but not at the place where it is
transmitted.
The United Nations Commission on International Trade Law (UNCITRAL)
adopted the Model Law on Electronic Commerce in 1996. As a result the
Information Technology Act, 2000, governs the rules relating to the e-commerce
contracts. The offeror and acceptor are substituted by expression soriginato15
and addressee. The electronic record sent by the originator may be received
intact or it may vary. The addressee has to acknowledge the receipt of electronic
record by communication automated or any mode or by conduct.16 The contract
completes where the principal place of business of the originator, in case of
more than one place of business of originator or addressee the principal place of
business of the originator or addressee and in case of no place of business his
usual place of residence will be considered as the completion of the contract for
the purpose of jurisdiction.
Essentials of a valid Contract
Consideration, capacity to contract, free consent, and legality of consideration
and object are some of the essentials of a valid contract. These are explained in
detail below:
1) Consideration:
Consideration is one of the essential conditions for the validity of contract.18 The
essential condition for the enforceability of simple contacts is consideration,
and the rule is expressed by the Latin maxim: ex-nudopacto non orituractio
which means out of nude pact no cause of action arises. It can be understood in
the sense quid pro quo.
“ A valuable consideration in the sense of the law may consist either some right,
interest, profit or benefit accruing to one party, or some forbearance, detriment,
loss or responsibility, given suffered undertaken by the other.”19
“An act or forbearance of one party or the promise thereof, is the price for which
the promise of the other is brought and the promise thus given for value is
enforceable.” “When at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promise to do or
abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.”
The analysis of the above definitions says that the consideration may be executed
or executory. In a contract to deliver a watch by A to B for Rs.100, A and B
gained money and watch and in another stand point A and B lost watch and
Rs.100, respectively. The law insists more upon the presence of the element of
detriment to the promisee B and then the presence of benefit to the promisor A.
A promise from one party to the other and a promise from the other to the former
support the consideration. In other words, the reciprocity of promises between
the parties establishes the consideration.
The absence of consideration makes the contract void. This principle has certain
exceptions recognized under the provisions of law. They are:
i) Where the contract reduced in to writing and registered and made out of
natural love and affection between the parties standing in near relationship
to each other.
ii) Where the contract is to compensate the person who voluntarily rendered
services in past. In other words, past services rendered at the desire of the
promisor constitute a valid consideration in India. But under English law
past consideration is not valid.
iii) Where a promise is made to pay a time-barred debt does not require a fresh
consideration.
iv) Where a gift between the donor and donee is not affected for want of
consideration if it is registered and attested by two witnesses.
Though consideration is necessary it need not be adequate. The adequacy and
sufficiency of consideration is immaterial. It is said that pepper corn is sufficient
for purchase of an elephant.
The consideration is to move from whom is the question to be determined for the
enforceability of the contract. It must proceed or move from the promisee. Under
English law a stranger to a consideration cannot sue. In other words, the promisee
cannot sue the promisor if the consideration doesn’t move from him. But under
Indian law, a stranger to consideration can sue.
The doctrine of consideration is not extended to the discharge of contract. The
reciprocal promises between the parties constitute consideration. Subsequently if both the parties agree not to enforce the contract also constitute consideration
in India. But it is not so in English law. Till 1947 the law of England applied the
doctrine of consideration not only to the formation of a contract, but also to its
discharge. It was pointed out that a creditor ‘might accept anything in satisfaction
of his debt except a less amount of money’ A canary or pepper corn may be
accepted in full discharge of a debt, but a part payment of the debt cannot be
accepted so as to operate as full discharge of the debt. The following are the
exceptions to the rule in Pinnel’s case.
a) Under the scheme of composition if the debtor agrees to pay a portion of the
debt discharges liability without application of the doctrine of consideration
under English law.
b) In case a third party pays a part of the amount less than the amount due from
the debtor discharges the debtor without application of the doctrine of
consideration under English law.
c) The doctrine of estoppel or quasi-estoppel neutralized the rule in Pinnel’s
case.
Under Indian law, a contract may be discharged by what is called “an accord
and satisfaction” i.e., mutually agreed settlement. The English law allows the
delivery of horse against the payment of debt but not accept the delivery in future
to discharge the debt. The part payment of debt is also not accepted as accord
and satisfaction.
2) Capacity to Contract:
There are certain persons in law who are incapable wholly or in part, of binding
themselves by a promise or of enforcing a promise made to them. In mercantile
contracts lexloci contractus i.e., the law of the place will prevail whereas in case
of land lexsitus i.e., the law of the place where the land situate will be applicable.
The incapacity of a party to enter into a contract will arise in two ways namely,
on account of status, or on account of mental deficiency. The former would occur
on the grounds of political consideration and expediency, the latter is imposed to
protect the interest of the disabled person.
The incapacity of a party is broadly divided into two;
one which arises out of status of an individual for the following reasons:
a) Political or Civil status e.g., where the contracting party is a ruler of a foreign
state, Ambassador or envoy or alien enemy, or a convict or a bankrupt.
b) Profession of the contracting person e.g., barrister
c) Incorporation
d) Marriage
The other which arises from mental deficiency (soundness of mind) of the person
contracting in case of:
a) Minors
b) Insane persons
c) Idiots
d) Drunken persons
The person below the age of 21 is called as an infant as per the Infant Relief Act,
1874 under the Common Law and the person below the age of 18 is a minor as
per the Family Reforms Act, 1969, under English law and Indian law respectively.
He is a person who is not a major. The Infant Relief Act, 1874 which modified
the Common Law of England allows an infant to enter into a contract for the
following:
a) For necessaries
b) Beneficial contracts of service
c) Contracts involving recurring rights and duties e.g., an interest in property
binding on him unless he rescind them either during infancy or within
reasonable time of becoming a major
d) An isolated act or a contract to pay for goods supplied other than necessaries,
were voidable and not binding on him unless he ratified them within
reasonable time after attaining majority.
Mutuality of mind: The parties to the contract must have consensus-ad-idem35
which means mutuality of mind as to the subject matter of the contract. The lack
of mutuality of mind makes the contract void. ‘A’ had two houses namely ‘X’
and ‘Y’. ‘A’ enters into contract with ‘B’ to sell keeping ‘X’ house in his mind
and ‘B’ entered into contract with ‘A’ by keeping ‘Y’ house in his mind. This
results the contract void due to lack of consensus-ad-idem on the subject matter
of the contract.
3) Free Consent:
“The consent of the party to the contract is said to be free if it is not caused by;
coercion, undue influence, fraud, misrepresentation and mistake. These are
explained hereunder:
i) Coercion: “The committing, or threatening to commit, any act forbidden
by the Indian Penal code, or the unlawful detaining, or threatening to detain,
any property to the prejudice, of any person whatever, with the intention of causing any person to enter in to an agreement.” The term duress in English
law defined as causing, threatening to cause, bodily violence or imprisonment,
with a view to obtain the consent of the other party to the contract. Coercion
in Indian law has a much wider connotation than duress in English law. The
main distinction between coercion and duress as the first denotes the offense
forbidden by Indian Penal Code whereas the latter confined only to bodily
violence and imprisonment. The presence of coercion or duressin both Indian
and English law was an invalidating element for the enforceability of contract.
ii) Undue Influence: This was also called as constructive fraud. It covers all
the contracts where one party will be in a position to dominate the will of
the other because of relationship while entering the contract. This influence
can be presumed in existence among the following relationships:
a. Parent and child
b. Guardian and ward
c. Trustee and beneficiary
d. Spiritual master and Disciple
e. Lawyer and client
f. Doctor and patient
The contract between the parties with above relationship turns it voidable
by presuming the existence of undue influence of the former against the
other. It is the burden on the former party to prove that he was not in
dominating position and that his position was not used to obtain the consent
of the other.
iii) Fraud: The following acts of a party to a contract establish fraud while
entering into a contract with the other:
a) the suggestion of a fact, of that which is not true by one who does not
believe it to be true
b) the active concealment of a fact by one having knowledge or belief of
the fact
c) a promise made without intention of performing it;
d) any other act fitted to deceive
e) any such act or omission as the law specially declares as fraudulent.
The mere silence on the part of party does not amount to fraud. But silence
amount to fraud where there is a duty on the party to speak.
iv) Misrepresentation: A party may give his consent to enter into a contract
because of misrepresentation of the other. These false statements or
misrepresentations may be either inducing cause of contract. These statements
may be called as innocent misrepresentation and willful or actionable
misrepresentation which amounts to fraud.
A misrepresentation consists of the following ingredients:
a) Failure to disclosure of a fact
b) Such non-disclosure must relate to a fact not to an opinion
c) Such representation must be untrue
d) It must be material to influence the other to enter into a contract.
Any representation made by a party with full knowledge of the fact that it is not true, or without belief in its truth or recklessly, not caring whether it is
true or false, it is said to be fraudulent. Whenever the consent of the party is obtained in the absence of free consent
the contract is voidable at the option of the party whose consent is not free
because of the presence of coercion, or fraud, or misrepresentation. The
aggrieved party of such voidable contract had an option to continue the
contract or rescind the contract and entitled for damages. Further, the
contract induced by undue influence can be set side or it is voidable at the
option of the party whose consent was obtained by dominating the will of
the aggrieved party.
v) Mistake: While entering into a contract the parties to the contract may be
under a mistake. This mistake may be as to a fact or law. Mistake of fact
may be as to subject matter of the contract e.g., regarding the existence,
quality or quantity etc.; nature of contract; person entering into contract.
Mistake of law may be regarding foreign law, or ordinary law, law of our
country, or private rights of the contracting parties. Another classification
of these mistakes is bilateral and unilateral.
A mistake of fact in the minds of both the parties negatives the consensus ad
idem and the contract in such cases is void. Where both parties to an
agreement are at mistake as to a matter of fact essential to the agreement,
the agreement is void. This will come under the classification of bilateral
mistake. In case of unilateral mistake, i.e., where only one party to a contract is under
a mistake, the contract, generally speaking, is not valid. A contract is not
merely voidable because it was caused by one of the parties to it being under
mistake as to a matter of fact. A contract is not voidable because it was caused by mistake as to any law in
force in India but a mistake as to a law not in force in India has the same
effect as a mistake of fact.
4) Legality of Consideration and Object:
Apart from the above essentials for the formation of a valid contract the legality
of consideration and object48 is must. The unlawful agreements may be classified
as follows:
1) Illegal-where the agreement is contrary to the statute law
2) Immoral- where it is opposed to public morals e.g., agreement for illicit cohabitation, or separation between husband and wife
3) Opposed to public policy- where the agreement is forbidden as conflicting with the well-being of the state e.g., agreements tending to the abuse of legal process, agreements in restraint of trade, agreements in restraint of marriage, agreements in restraint of parental rights, etc.
Where a part of consideration or object of an agreement is unlawful the agreement is void. In case of non-separation of the unlawful part from the agreement the total transaction will be void. The rule applicable to separate the unlawful and lawful part is known as blue pencil rule. In such cases the lawful part which separated by drawing blue pencil lining from the unlawful part can be enforceable. A contract without consideration is said to be void with certain exceptions;
a) Every agreement in restraint of marriage of any person, other than a minor is void.
b) An agreement in restraint of trade is void with an exception where goodwill is sold or as per the provisions of the Partnership Act, 1932.
c) Any agreement in restraint of legal proceeding is void with an exception of arbitration agreement.
d) Where the meaning of an agreement is not certain, or capable of being certain are void,
e) Agreement by way of wager is void.
f) The performance of the contract is depending on the happening or non-happening of an event at a future date is called as contingent contract. If the happening of the event is impossible the contract becomes void.
g) The enforcement of a contingent contract is possible before the impossibility of its occurrence. The promise of A to pay B a sum of money if B marries C. C marries D. Marriage between B and C is impossible during the life time of A makes the agreement void.
h) The contingent contract to do or not to do within a specified becomes void after the expiry of the time.
i) Any agreement contingent on impossible events is void.
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