FAQ's

Contract Law

Q.1. What is meant by freedom of contract?

Ans. Following factors are required to be understood:

  • Consensus ad-idem: Parties to contract should have 'meeting of mind' on all points touching the contract;

  • Norms & practices: Parties are at freedom to exclude them by a specific clause in the agreement;

  • Public policy: This concept puts a limit in to the freedom of contract between the parties. This concept started with the 'State' entering into business like railways & others, and concept of public policy became touchstone to formation of contract.

However, freedom of contract has the following flip sides:

  • Frustration: This is a valid defence for non-performance of the contract, but it cannot be visualised that this also forms ingredient of 'intention of parties';

  • Inequality: Both the parties to a contract need not always be at equal footing

Q.2. How would one define a contract? What are its essential pre-requisites?

Ans. American Re-statement of contracts: A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognises as a duty.

Following are the essential ingredients of contract:

  • Offer & acceptance;

  • Certainity;

  • Consideration;

  • Intention to create legal rights - difference between agreement & contract;

  • Capacity to contract.

Thus, agreement becomes contract when it is made in contemplation of legal consequences.

Balfour v. Balfour, 1919 (KBD)

Husband was employed in Ceylon, and wife was in England. Consequently, he agreed that he would pay 30 a month till the time she was able to join him. Question arose regarding enforceability of the agreement. Held, as there was no legal consequence which was provided in the agreement, therefore it cannot be held as an enforceable contract, and it remains an agreement.

Q.3. What is the meaning of offer & acceptance?

Ans. It is important to understand offer & acceptance as this determines as to when the contract stands concluded. For this, there shall be an unequivocal offer & an unequivocal acceptance. Admittedly, in today's world it would not be possible to analyze conclusion of all the contracts from the viewpoint of offer & acceptance. Eg. Contract concluded with the signature of the parties.

Further, such offer & acceptance may be in the following manner:

  • Person offer goods/services - once discharged, it becomes necessary to reward such promise - eg. Kuli at the railway station, auto-rickshaw, buses, PCO, etc.;

  • Persons offer reward for successful completion of a particular good/services - necessary to pay reward - eg. Painter/electrician/ plumber at home, iron & dry-cleaning, monthly salary, etc.;

  • Offer is accepted by giving promise on both sides - both parties become bound to discharge their respective promises.

Offer & invitation to treat:

Offer is intimation - by words or conduct of willingness to enter into a legally binding contract - it becomes binding immediately upon acceptance of an act/forbearance/return promise.

Invitation to treat - are invitation to make an offer - eg., advertisement, etc.

Carlill v. Carbolic Smoke Ball Company, 1893 (QBD)

Respondent offered by advertisement to pay 100 to anyone who contacted the disease even after consuming medicine prepared by the company for the prescribed period of time. Question arose whether company was liable for payment if condition fulfilled? Held, it was an offer, and once a consumer accepts the said offer through usage, contracts stands concluded and company held as liable.

Bhagwati Prasad Pawan Kumar v. Union of India, (2006) 5 SCC 311

When railway offered an amount of compensation lower then claimed through cheque, with the condition that if the amount is not acceptable then recipient should return the cheque, or else it would be considered as deemed acceptance. In such a case, if the cheque was en-cashed after submitting protest, then it would not amount to acceptance by conduct u/s.8 of Act.

An offer is effective when, and not until, it is communicated to the offeree;

An acceptance of an offer is expression - of assent to the terms of offer in the manner prescribed in the offer.

Problem areas:

  • Rejection & counter-claim;

  • Acceptance of offer with some variation;

  • Unequivocal acceptance.

M/s. Allahabad Jal Sansthan v. State of UP, AIR 2004 All 366 (DB).

Demand of extra premium without any agreement with the insured would be void; as any alteration to the contract requires agreement of both the parties being novation of contract u/s.62 of Act.

Q.4. What does one mean by consideration in a contract?

Ans.According to Blackstone, 'consideration is the recompense give by the party contracting to another'.

Kedar Nath v. Gorie Mohammad, 1886 (Calcutta HC)

Commissioner of Howarh Municipality set out to work of the construction of the town hall - request was made to the public to invest - defendant entered his name in the subscription register. Plaintiff entered into contract with construction contractor - defendant refused to pay. Held, as the plaintiff had acted on promise of defendant, latter becomes estopped to pay 'consideration' as per the promise.

Consideration:

  • Present of future;

  • From one party of contract to another or by a third party.

However, due to privity of contract, when a third party promises to pay on behalf of one of the parties to the contract, such third party cannot be sued on failure to make the payment - such suit would be maintainable as between the parties to the contract. Still, with the development of trade & commerce, certain exceptions have been carved out from the 'privity of contract':

  • Negotiable instruments;

  • Agency;

  • Bill of lading;

  • Trust or charge - beneficiaries;

  • Covenants running with the land.

Tulk v. Moxhay, 1919 (HL)

Agreement between land-owners that owner of land would be bound by certain duties. Such land sold to a third party, and one of the parties to the contract sued for enforcement of the promise. Held, such purchaser would be liable to follow the duties as laid down in the contract.

However, under s.25 of the Indian Contract Act, 1872, following exceptions have been carved out of consideration:

  • Natural love & affection;

  • Past voluntary service;

  • Promise to pay time-barred debt (as otherwise not enforceable).

Q.5. What is the meaning of capacity of contract?

Ans.Under the Indian Contract Act, following persons are debarred from making a contract:

  • Minor

  • Unsound mind

  • Otherwise disqualified by law - insolvent, etc.

Mohoribibi v. Dharmodas Ghosh, 1903 (Calcutta HC)

Question arose whether a contract entered by a minor would be void or voidable? Held, since the Act mandates that all contracting parties should be competent to contract, accordingly, no contract should be entered by a minor, hence void.

Srikakulam Subrahmanyam v. Kurra Saba Rao, 1949 (PC)

Contract to sell-off land entered by a minor & his mother to pay-off father's debt undertaken in a mortgage. Subsequently, attempt to redeem the mortgage challenged as not maintainable as contract was void. Held, as contract was for benefit of minor, therefore it would be voidable at the option of minor when he attains majority.

K Balakrishnan v. K Kamalam, AIR 2004 SC 1257.

Though a minor does not have capacity to enter into a contract of a gift, however, he would be entitled to receive such a gift, being a contract for benefit of minor.


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