CSEET Legal Aptitude Notes - Contract Act Part 1 - Deep Gyan®
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CSEET Legal Aptitude Notes – Contract Act Part 1

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What is a contract?
According to Section 2(h) of Indian Contract Act, 1872, contract is an agreement enforceable by law.

Contract = Agreement + Legal enforceability 

Legal enforceability = Intention of parties to create legal relations + Existence in the eyes of law

Legal relations = Legal rights and Legal obligations

Note:
In case of commercial transactions it is deemed that parties to the contract always have intention to create legal relations but parties may specifically exclude their intention to create legal relations by making appropriate provisions in the agreement.

What is an agreement?
According to Section 2(e) of Indian Contract Act, 1872, every promise and every set of promises, forming the consideration for each other, is an agreement.

Agreement = Promise + Consideration

Characteristics of an agreement

  1. Plurality of persons (atleast 2 persons are involved)
  2. Consensus ad idem (matching of minds on the same subject in the same sense at the same time)

Following agreements are not contract

  1. Social Agreements and domestic agreements
  2. Agreements without intention to create legal relations
  3. Agreements without consideration

Agreement is the genus of which contract is the specie, therefore, all contracts are agreements but all agreements are not contracts.

 What is Promise?
According to Section 2(b) of the Indian Contract Act “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.

Promise = Offer + Acceptance

ESSENTIAL ELEMENTS OF A VALID CONTRACT
According to Section 10 of Indian Contract Act, 1872, all agreements are contracts if they are made

  • by the free consent
    • of parties competent to contract,
      • for a lawful consideration and
        • with a lawful object, and
          • are not hereby expressly declared to be void.

Thus according to definition of contract, agreement and promise and section 10 of Indian Contract Act, 1872, following are the essential elements of a valid contract are:

  • An offer or proposal by one party and acceptance of that offer by another party.
  • Lawful consideration
  • Intention of parties to create legal relations
  • The parties to the contract shall be legally capable of creating a contract
  • Consent of parties shall be genuine and free
  • The object of the contract shall be lawful and is not opposed to public policy
  • Agreement shall not expressly declared to be void under any law
  • Agreement shall be capable of being performed.

Offer/Proposal and Acceptance
According to Section 2(a) of the Indian Contract Act

  • when one person signifies to another
    • his willingness
      • to do or abstain from doing anything
        • with a view to obtaining the assent of that other to such act or abstinence,

such person is said to make a proposal.

Analysis

  1. When one person signifies to another
    Offer shall be communicated by the offeror to the offeree. Offeree must get an opportunity to accept or reject the offer. Such communication may be expressed or implied.

     

    Expressed communication means communication with the help of words, either oral or written.
    Implied communication means communication by the conduct or act of parties.

     

    Further, communication of an offer may be general or specific.
    General offer means an offer to public at large. Such offer can be accepted by any one from the public. One can accept such offer by fulfilling the conditions of the offer only. 
    Specific offer means an offer which is made to a particular person or a particular group of person. Means an offer to a specific offeree. Such offer can be accepted by such offeree only.
  2. Willingness
    Offeror shall be willing to give the offer. Offeror shall not be forced to give offer.
  3. To do or abstain from doing anything
    Offeror may give offer to do something or not to do something. Offer for not doing something is absolutely valid.
  4. With a view to obtaining the assent of that other to such act or abstinence
    Offer shall be given with the intention to obtain the assent of offeree. Offer without intention to fulfil such offer is invalid.
  5. Offer shall be clear, definite, complete
    Offer shall not be vague. Offeree shall understand offer clearly and completely.

Following shall not be considered as offer

  1. An invitation to make an offer is not an offer: Where one person invites another to make an offer, it is known as ‘an invitation to treat’ or ‘an invitation to make an offer’.
  2. A mere statement of intention to do or not to do something cannot be considered as offer.
  3.  Communication of information in the course of negotiation cannot be considered as offer.

Acceptance
According to Section 2(b) of the Contract Act when a person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

Essential Elements of Acceptance

  • Like offer, acceptance may be expressed or implied
  • Acceptance shall be absolute and unqualified
  • Acceptance shall be made in the mode specified in the offer (if any)
  • Acceptance shall be communicated to the offeror
  • Mere silence on the part of the offeree does not amount to acceptance (Felthouse v. Bindley)
  • If the offer is one which is to be accepted by being acted upon, no communication of acceptance to the offeror is necessary, unless communication is stipulated for in the offer itself (Harbhajan Lal v. Harcharan Lal)
  • Acceptance must be given within a reasonable time and before the offer lapses or is revoked.

Communication when complete

Communication of a proposal
The communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made.

Communication of an acceptance
The communication of an acceptance is complete –

  • as against the proposer,
    • when it is put in a course of transmission to him (means when such communication is out of the power of the acceptor);
  • as against the acceptor,
    • when it comes to the knowledge of the proposer.

The communication of a 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.

Revocation/Lapse of Offer (Expiration of offer) (Section 6)

An offer lapses if –

  1. by the communication of notice of revocation by the offeror to the offeree
  2. it is not accepted within the specified time or if no time is specified, after a reasonable time;
  3. it is not accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable manner
  4. the offeree rejects it by distinct refusal to accept it;
  5. by the death or insanity of the offorer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance;
  6. by the death or insanity of the offeree before acceptance;
  7. the acceptor fails to fulfill the conditions precedent to an acceptance;
  8. the offeree makes a counter offer

Counter Offer
Counter offer means offer against an offer. It is a situation where offeree does not accept the offer and makes an offer in response of the offer of offeror. Counter offer amounts to rejection of the original offer made by offeror.

By what time or till what point offeror can revoke the offer [Section 5]

A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

It means the revocation must reach the offeree before he sends out the acceptance.

Note:
If offeree wants offeror to keep the offer open for specific time, offeree shall pay certain consideration for that.

Revocation of Acceptance

By what time or till what point offeree can revoke the acceptance [Section 5]
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but no afterwards.

Standing offer (Tenders)
Standing offer means an offer which stands for a particular duration. A standing offer is of the nature of a continuing offer. An acceptance of such an offer merely amounts to an intimation that the offer will be considered to remain open during the period specified and that it will be accepted from time to time by placing separate orders for specified quantities.

Consideration

  • Essential element of a contract
  • A promise without consideration cannot be enforceable at law (except in certain cases)
  • Consideration means “quid pro quo”, i.e. “something in return”

According to Section 2(d),

When at the desire of the promisor,

          the promisee or any other person

o   has done or abstained from doing something, or

o   does or abstains from doing something, or

o   promises to do or to abstain from doing something,

such act or abstinence or promise is called a consideration for the promise.

 

Essentials of Consideration

  1. Consideration must be at the desire of the promisor
    Voluntary/ gratuitous act or abstinence by one person shall not bound other person.
  2. In Indian Laws, consideration may move from the promisee or from any other person
    It means a stranger to the consideration can sue on the contract.

    It should be noted that In English law, consideration must move from the promisee, so that a stranger to the consideration cannot sue on the contract.

Kinds of Consideration

(a)           Executory or Future Consideration

(b)          Executed or Present consideration

(c)           Past Consideration

 

In English law, past consideration is no consideration.

 

Rules Governing Consideration

  1. Every contract shall be supported by some consideration (except in certain cases)
  2. A gratuitous promise (promise without consideration like in case of charity, donation or gift) is not enforceable.
  3. Consideration may be an act of promise (to do something) or abstinence (not to do something)
  4. Consideration must be real, definite and not vague, or illusory
  5. Consideration need not to adequate
  6. Consideration must be lawful
  7. Consideration must be something more than the promisee is already bound to do for the promisor

When Consideration not Necessary

  1.  If it is expressed in writing and registered and is made out of natural love and affection between parties standing in a near relation to each other; or
  2. If it is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally compellable to do; or
  3. If it is a promise in writing and signed by the person to be charged therewith, or by his agent, to pay a debt barred by the law of limitation.
  4. Besides, according to Section 185 of the Indian Contract Act, consideration is not required to create an agency.
  5. In the case of gift actually made, no consideration is necessary. There need not be nearness of relation and even if it is, there need not be any natural love and affection between them.

Whether Gratuitous Promise can be enforced

  • When promisee has taken some action and/or create some liability due to the promise of promisor.
  • Gratuitous Promise can be enforced only for that amount which promisee incurred due to the promise of promisor.

 

Doctrine of Privity of Contract

A stranger to a contract cannot sue. It means a person who is not a party to a contract is stranger to contract and cannot sue upon it even though the contract is for his benefit.

 

Exceptions

  1.  A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit.
  2. An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, tittle and interest. But a mere nominee (i.e., the person for whose benefit another has insured his own life) cannot sue on the policy because the nominee is not an assignee.
  3. In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, can sue.
  4. In case of acknowledgement of liability.
  5. Whenever the promisor is by his own conduct estopped from denying his liability to perform the promise, the person who is not a party to the contract can sue upon it to make the promisor liable.
  6. In cases where a person makes a promise to an individual for the benefit of third party and creates a charge on certain immovable property for the purpose, the third party can enforce the promise though, he is stranger to the contract.

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