LAW NOTES ABOUT CONTRACT ACT AND PAKISTAN PENAL CODE, Study notes of Contract Law

Download LAW NOTES ABOUT CONTRACT ACT AND PAKISTAN PENAL CODE and more Study notes Contract Law in PDF only on Docsity! CONTRACT ACT NOTES: Q1: what is agreement and contract? INTRODUCTION: The terms “agreement” and “contract” are used interchangeably, but legally speaking, they are two different things. An agreement is simply an understanding or arrangement between two or more parties. A contract is a specific agreement with terms and conditions that are enforceable court. AGREEMENT: In general, an agreement is any understanding or arrangement reached between two or more parties. However, under contract act it has been provided under section 2(e) which provides that “every promise and every set of promises, forming the consideration for each other is an agreement” An agreement is an expansive concept that includes any arrangement or understanding between two or more parties about their rights and responsibilities with respect to one another. Such _ informal arrangements often take on the form of “gentlemen’s agreements,” where adherence to the terms of the agreement relies upon the honor of the parties involved rather than exterior means of enforcement. In order to reach an agreement, parties need only come to a common understanding as to their relative rights and responsibilities, what is often termed a “meeting of the minds. CONTRACT: In general A contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law. As per section 2(h) of Contract Act “an agreement enforceable by law is a contract. As notes above, an agreement enforceable by law becomes a contract. All such agreements which satisfy the conditions mentioned in section 10 of the contract Act are contracts. The conditions which are required for the validity of contracts are following: 1. There should be an agreement between two parties. An agreement arises when one party makes proposal and the other party accepts the offer. 2. The parties to the agreement should be competent to contract. 3. There should be lawful consideration and lawful object in respect of the agreement. 4. There should be free consent of the parties, when they enter into an agreement. 5. The agreement must not be declared as void. Q2: What are the essential of a valid contract? INTRODUCTON: An agreement is a promise or set of promises between two parties which come into existence when one party makes a proposal or offer to other party and agreement is regarded as contract when it is enforceable by law. An agreement becomes contract when there are competent parties, consideration, free consent and legal object. DEFINITION OF CONTRACT: In general, a contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law. As per section 2(h) of Contract Act “an agreement enforceable by law is a contract. ESSENTIALS OF A VALID CONTRACT: The essential of a valid contract are as under: © OFFER AND ACCEPTANCE: For a contract to be valid there must be a lawful proposal or offer by one party and lawful acceptance of that proposal or offer by the other party. A proposal when accepted becomes a promise or agreement. An offer is a specific proposal by one party to enter into an agreement with another party, which is essential to the formation of an enforceable contract. e POSSIBILITY OF PERFORMANCE. The terms of the agreement must also be such as are capable of performance. An agreement to do the act impossible in itself, physically or legally, if cannot be enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is not enforceable. Hence all agreements need to be physically and legally enforceable. ¢ NOT DECLARED TO BE VOID OR ILLEGAL.? The agreement though satisfying all the conditions for a valid contract must not have been expressly declared void by any law in force in the country. Section 24 to 30 of Contract Act explains certain types of agreement which have been expressly declared to be void. An agreement without consideration or an agreement in restraint of marriage etc. are declared to be void. e LEGAL FORMALITIES. The agreement may be oral or in writing, where it is to be in writing it must comply with all legal formalities as to writing, registration and attestation. An oral Contract is a perfectly valid contract, except in those cases where writing, registration etc. is required by some statute. In Pakistan, writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments; memorandum and articles of association of a company, etc. Registration is required in cases of documents coming within the scope of section 17 of the Registration Act. If the agreement does not comply with the necessary legal formalities, it cannot be enforced. CONCULSION: To conclude I can say that when legal obligation is intended to be created, the person intending so communicates to another person his proposal or offer. The person receiving the offer communicates the acceptance for certain conditions. This proposal and acceptance for certain consideration call for the compliance of the foregoing requisites of a contract. Q3: WHAT DO YOU UNDERSTAND BY THE TERMS COMMUNICATION, ACCEPTANCE AND REVOCATION OF THE PROPOSAL? (TWO TIMES REPEAT) OR Q: HOW COMMUNICATION, ACCEPTANCE AND REVOCATION OF THE PROPOSAL IS COMPLETED? OR Q: DEFINE THE FOLLOWING IN YOUR OWN WORDS WITH ILLUSTRATIONS: PROMISE, ACCEPTANCE, AND REVOCATION OF PROPOSAL? OR WHAT IS AN OFFER, DISCUSS THE PRINCIPLE OF ITS COMMUNICATION, ACCEPTANCE AND REVOCATION? OFFER/PROPOSAL: According to Black’s law dictionary “An offer is something proffered. An offer by one person to another, of terms and conditions with reference to some work or understanding, or for the transfer of property” According to section 2(a) of Contract Act: “When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtain the assent of that other to such act or abstinence, he said to make a proposal” ACCEPTANCE: According to Black’s law dictionary: “The act of a person to whom a thing is offered or tendered by another, whereby he receives the thing with the intention of retaining it, such intention being evidenced by a sufficient act” According to section 2b of the Contract Act: “When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted” COMMUNICATION: When the contracting parties are face to face and negotiate in person, there is instantaneous communication of offer and acceptance, and a valid contract comes into existence the moment the offeree gives his absolute and unqualified acceptance to the proposal made by the offeror. The question of revocation of either offer or acceptance does not arise, for, in such cases a definite offer is made and accepted instantly at one and the same time. But where services of the post office are utilized for communicating among themselves by the contracting parties because they are at a distance from one another, it is not always easy to ascertain the exact time at which an offer or/and an acceptance is made or revoked. In these cases, the following rules, as laid down in Sections 4 and 5 of Contract Act, will be applicable. COMMUNICATION OF OFFER/PROPOSAL: In order to constitute a valid contract, the proposal must be communicated to the person to whom it has been made. If it is not communicated to the person to whom it is addressed, it cannot be accepted as proposal. Thus, a proposal which has not been communicated is not a valid proposal in the eye of law. COMMUNICATION OF PROPOSAL WHEN COMPLETE: According to para-A of section 4 of the Contract Act: “The communication of proposal is complete when it comes to the knowledge of the person to whom it is made” It means that communication of proposal completes when letter of proposal comes to the knowledge of the offeree. ILLUSTRATION: A proposes a letter, to sell a van t B for Rs. 5,00,000/-. This letter is posted on 6" march and reaches to B on 14" June. The communication of its acceptance is completed as against the proposer but not afterwards b) Time for revocation of acceptance: as per section 5 para-B, an acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards. MODE OF REVOCATION OF PROPOSAL AND ACCEPTANCE: As per section 6 of the Contract Act, a proposal or acceptance ceases to exist in the following circumstances: @ by the communication of notice of revocation by the proposer to the other party ©@ by the laps of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; © by the failure of the acceptor to fulfil a condition precedent to acceptance; or © by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. CONCLUSION To conclude, communication of proposal completes when the person to whom it is made comes, to know that. It can be revoked at any time before the acceptance is complete, as against the proposer when it is put in a course of transmission to him and as against acceptor, when it comes to the knowledge of the proposer. It can be revoked at any time before the communication of the acceptance is complete and not afterwards. Q4: WHAT IS SOUND MIND FOR THE PURPOSE OF ENTERING INTO A CONTRACT? (TWO TIMES REPEAT) OR WHO ARE COMPETENT TO CONTRACT? INTRODUCTION: Capacity to contract means a party has the legal ability to enter into a contract. Capacity also means a person has to be competent as defined by law. Someone's capacity is determined by whether or not they have reached the age of majority and if they are mentally capable of understanding the applicable contract term. Contracts made with people who don't have legal capacity are voidable. The other person has the right of rescission, the option to void the contract and all related terms and conditions. Courts may opt to void or rescind a contract if one of the parties lacked legal capacity. If the court voids the contract, it will attempt to put all parties back in the position they were in before the agreement, which may involve returning property or money when feasible One of the essential elements of a valid contract is that all the parties to it must have competency to enter into a contract. Section 10 of the Contract Act provides that an agreement becomes a contract if it is entered into between the parties who are competent to contract. COMPETENCY OF PARTIES: One of the essential elements of a valid contract is that all the parties to it must have competency to enter into a contract. Section 10 of the Contract Act provides that an agreement becomes a contract if it is entered into between the parties who are competent to contract. According to section 11 of the Contract Act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject.” Negatively stated, a person is incapable of entering into contract if: 1. he is minor; 2. he is not sound mind; 3. he is disqualified from contracting by any law which he is subject. MINORS: A minor is a person who has not completed 18 years of age. A minor’s contract is altogether void in law and a minor therefore cannot bind himself by a contract. A minor can always derive benefit under a contract. He can be a promisee, although he cannot be a promisor. A duly executed transfer by way of sale or mortgage in favour of a minor who had paid the consideration money is not void. In pursuing the above object, the law should not cause unnecessary hardship to persons who deals with minors. Since the contract is void ab intio it cannot be ratified by the minors on attaining the age of majority. If minor has obtained any benefit, such as money on a mortgage, he cannot be asked to refund nor can his mortgage property be liable to pay. A minor can always plead infancy, even where he had entered into a contract by falsely representing that he was of full age, when in reality he was a minor. A minor is always liable for necessaries supplied to him or his wife according to his status in life. It must be kept in mind that for necessaries supplied to a minor, it is only his property that is liable not the minor himself personally. A contract with a minor does not give the creditor any rights against the minor’s parents, whether the contract is for necessaries or not. The only case where a parent may be liable is when the child is contracting as an agent for the parents. SOUND MIND: Sound mind is the state of mind of a person which is sufficient to reason and reach a judgment upon ordinary subjects, like other rational men. There is a presumption of law that every person who has acquired full age is of sound mind, and therefore is competent to make contracts and perform all civil duties. A person who asserts that he is not of sound mind must prove it by clear evidence. One of the essential conditions of competency of parties to a contract is that they should be of sound mind. Section 12 lays down a test of soundness of mind, which runs as follow: - Corporations include registered companies, local bodies and city corporations. Corporations are legal artificial persons. Since they have legal existence, they can acquire property, transact their business and are capable of suing and being sued. But they cannot do so without their seals. Powers of a corporation are limited by its Memorandum of Association, beyond which it cannot do anything. 5. INSOLVENT: There is no prohibition against a contract by an insolvent after the insolvency proceedings have commenced but before adjudication. In simple words, the insolvent is disqualified from entering into a contract until he is discharged by the court of law. CONCLUSION From the above discussion, it is very clear that only those people are competent to contract who is major, sound mind and not disqualified by law. A person who is diagnosed as being mentally ill, that prevents them from managing his own affairs may be declared mentally incompetent by a court of law. When a person is judged to be incompetent, a guardian is appointed to handle the person’s property and personal affairs. Q5: DISCUSS VOID AGREEMENT AND ITS VARIOUS KINDS? OR Q: WHAT ARE VOIDABLE AND VOID CONTRACT? DISCUSS VARIOUS KINDS OF VOID AGREEMENTS SPECIFIED UNDER THE CONTRACT ACT WITH ILLUSTRATION. INTRODUCTION: A contract which does not bind the contracting parties is a void agreement. It does not create legal rights and obligations on parties. It is not a contract at all and is void ab initio. Contract Act has defined void agreements and voidable contracts and various kinds of void agreement. VOIDABLE CONTRACT: These types of Contracts are defined in section 2(i) of the Act: “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This contract would be valid, the only problem is that person B is a minor and can’t legally enter a contract. So, this contract is a valid contract from the point of view of A anda “voidable” contract from the point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus, this is a voidable contract. A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be bound to the terms of the contract. For example, person A in the above example. The other party is not bound and may choose to repudiate or accept the terms of the contract. If they so choose to repudiate the contract, the contract becomes void. Otherwise, a voidable contract is a valid contract. VOID CONTRACT: Section 2 (j) of the Contract Act, 1872 defines Void Contract as a contract that no longer remains a valid contract and cannot be enforced in the court of law. Such contracts do not have any legal effect and cannot be enforced by either party. Void contracts are valid, when they are entered into, as they conform to all the conditions of enforceability, laid down under section 10 of the act and are binding on the parties, but later on becomes void because of impossibility to perform. Such contracts become unenforceable in the eyes of law due to: « Supervening impossibility « Change of law « Subsequent Illegality « Repudiation of voidable contract ¢ Contingent contract etc. Example: Suppose A, a popular dancer contracts with Alpha Company, to dance in a show. Unfortunately, met an accident some days before the event, in which her legs injured badly and not allowed to dance by the doctor. In such a case, the contract becomes void. DEFINITION OF VOID AGREEMENT: Void agreements are those agreements which are not enforced by law courts. Section 2(g) of the Contract Act defines a void agreement as, “An agreement not enforceable by law”. Thus, the parties to the contract do not get any legal redress in the case of void agreements. Void agreements arise due to the non-fulfillment of one or more conditions laid down by Section 10 of the Contract Act. This Section states as follows: “All agreements are contracts if they are made with 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” From the above, it is quite clear that non-fulfillment of any of these conditions by one of the parties to a contract shall make an agreement void. These conditions being: - 1. Free consent of the parties “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”. EXCEPTION TO RULE: All agreements in restraint of trade are void. But there are certain exceptions to this rule, which are as under: a) SELLER OF GOODWILL: The seller of a business concern provided he has sold the goodwill of the business may agree with the buyer that he (the seller) shall refrain from carrying on similar business within a specified local limit. b) TARDE COMBINATIONS: If the object of the agreement is to regulate business and not to restrain it, then it is valid. Combinations of this kinds are often desirable in the interest of trade and also for the promotion of public interest. Thus, an agreement between businessmen to regulate prices, output etc. cannot be regarded as restraint of trade and is valid. c) SERVICE CONTRACTS: An agreement of service by which a person binds himself during the term of employment, not to take services with anyone else, is not restraint of lawful profession and is valid In Pakistan trade has been in its infancy and it is desirable to develop trade. Therefore, through the stringent provisions of Sec. 27 every agreement interfering with the right to trade has been specifically declared void. Public policy required that every citizen be allowed freedom to work for himself and should get the benefit of labour to himself or to the State. He should not enter into any agreement by which he may not be able to utilize his skill or talent for his benefit or to the benefit of his country. If he does so by an agreement, he shall not be allowed to do so. The words, “To that extent”, included in the provisions of Sec.27 are very important. These words clarify the position of a situation where the agreement can be broken up into parts. If the agreement can be broken into parts and some of these parts are not affected by the provisions of this section, i.e., are not vitiated as being in restraint of trade, the agreement pertaining to these parts shall be held valid. However, where the agreement is not divisible, the whole of the agreement shall be declared void. e¢ AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS. An agreement purporting to oust the jurisdiction of the Courts are illegal and void section 28 of the Contract Act renders void two kinds of agreement namely 1. An agreement by which any party is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or 2. An agreement which limits the time within which the contract rights may be enforced. Exception 1: This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. Exception 2: Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or effect any provision of any law in force for the time being as to arbitration. Section 28 of the Contract Act, as is evident from the above, clearly states agreements restraining legal proceedings to be void. In Pakistan, as also in England, agreements perverting the course of justice are declared void, because their object is illegal. Neither the Law favors an agreement the object of which is to change the jurisdiction of a court of law nor it permits an agreement the object between the parties to invest a court which has no Jurisdiction, with authority to try the disputes arising out of a contract. But when two courts have jurisdiction to try a case, and the parties by an agreement limit the jurisdiction to one court only, then such an agreement shall not be declared as void. e¢ UNCERTAIN AGREEMENTS: Section 29 of Contract Act, provides that agreement the meaning of which is not certain or capable of being made certain are void. For a contract to be valid, it is necessary that each and every term of the contract has some meaning and is clarify to both the parties in a contract. ILLUSTRATION: A agrees to sell B 100 tons of oil. In this case it is not clear as to which oil is intended to be sold. So, the agreement is void for uncertainty. e WAGERING AGREEMENT: Under section 30 of the Contract Act it is provided that an agreement by way of wager is void. No suit will lie for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. e AGREEMENT CONTINGENT ON IMPOSSIBLE EVENTS: Section 36 of the Contract Act, provides those contingent agreements to do or not to do anything if an impossible event happens, are void, whether the impossibility of the event is known or not known to the parties to the agreement at the time when it is made. ILLUSTRATION: A agrees to pay B 1000 rupees if two straight lines should enclose a space. The agreement is void. CONTRACT ACT NOTES: Q1: what is agreement and contract? INTRODUCTION: The terms “agreement” and “contract” are used interchangeably, but legally speaking, they are two different things. An agreement is simply an understanding or arrangement between two or more parties. A contract is a specific agreement with terms and conditions that are enforceable court. AGREEMENT: In general, an agreement is any understanding or arrangement reached between two or more parties. However, under contract act it has been provided under section 2(e) which provides that “every promise and every set of promises, forming the consideration for each other is an agreement” An agreement is an expansive concept that includes any arrangement or understanding between two or more parties about their rights and responsibilities with respect to one another. Such _ informal arrangements often take on the form of “gentlemen’s agreements,” where adherence to the terms of the agreement relies upon the honor of the parties involved rather than exterior means of enforcement. In order to reach an agreement, parties need only come to a common understanding as to their relative rights and responsibilities, what is often termed a “meeting of the minds. CONTRACT: In general A contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law. As per section 2(h) of Contract Act “an agreement enforceable by law is a contract. As notes above, an agreement enforceable by law becomes a contract. All such agreements which satisfy the conditions mentioned in section 10 of the contract Act are contracts. The conditions which are required for the validity of contracts are following: 1. There should be an agreement between two parties. An agreement arises when one party makes proposal and the other party accepts the offer. 2. The parties to the agreement should be competent to contract. 3. There should be lawful consideration and lawful object in respect of the agreement. 4. There should be free consent of the parties, when they enter into an agreement. 5. The agreement must not be declared as void. Q2: What are the essential of a valid contract? INTRODUCTON: An agreement is a promise or set of promises between two parties which come into existence when one party makes a proposal or offer to other party and agreement is regarded as contract when it is enforceable by law. An agreement becomes contract when there are competent parties, consideration, free consent and legal object. DEFINITION OF CONTRACT: In general, a contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law. As per section 2(h) of Contract Act “an agreement enforceable by law is a contract. ESSENTIALS OF A VALID CONTRACT: The essential of a valid contract are as under: © OFFER AND ACCEPTANCE: For a contract to be valid there must be a lawful proposal or offer by one party and lawful acceptance of that proposal or offer by the other party. A proposal when accepted becomes a promise or agreement. An offer is a specific proposal by one party to enter into an agreement with another party, which is essential to the formation of an enforceable contract. e POSSIBILITY OF PERFORMANCE. The terms of the agreement must also be such as are capable of performance. An agreement to do the act impossible in itself, physically or legally, if cannot be enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is not enforceable. Hence all agreements need to be physically and legally enforceable. ¢ NOT DECLARED TO BE VOID OR ILLEGAL.? The agreement though satisfying all the conditions for a valid contract must not have been expressly declared void by any law in force in the country. Section 24 to 30 of Contract Act explains certain types of agreement which have been expressly declared to be void. An agreement without consideration or an agreement in restraint of marriage etc. are declared to be void. e LEGAL FORMALITIES. The agreement may be oral or in writing, where it is to be in writing it must comply with all legal formalities as to writing, registration and attestation. An oral Contract is a perfectly valid contract, except in those cases where writing, registration etc. is required by some statute. In Pakistan, writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments; memorandum and articles of association of a company, etc. Registration is required in cases of documents coming within the scope of section 17 of the Registration Act. If the agreement does not comply with the necessary legal formalities, it cannot be enforced. CONCULSION: To conclude I can say that when legal obligation is intended to be created, the person intending so communicates to another person his proposal or offer. The person receiving the offer communicates the acceptance for certain conditions. This proposal and acceptance for certain consideration call for the compliance of the foregoing requisites of a contract. Q3: WHAT DO YOU UNDERSTAND BY THE TERMS COMMUNICATION, ACCEPTANCE AND REVOCATION OF THE PROPOSAL? (TWO TIMES REPEAT) OR Q: HOW COMMUNICATION, ACCEPTANCE AND REVOCATION OF THE PROPOSAL IS COMPLETED? OR Q: DEFINE THE FOLLOWING IN YOUR OWN WORDS WITH ILLUSTRATIONS: PROMISE, ACCEPTANCE, AND REVOCATION OF PROPOSAL? OR WHAT IS AN OFFER, DISCUSS THE PRINCIPLE OF ITS COMMUNICATION, ACCEPTANCE AND REVOCATION? OFFER/PROPOSAL: According to Black’s law dictionary “An offer is something proffered. An offer by one person to another, of terms and conditions with reference to some work or understanding, or for the transfer of property” According to section 2(a) of Contract Act: “When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtain the assent of that other to such act or abstinence, he said to make a proposal” ACCEPTANCE: According to Black’s law dictionary: “The act of a person to whom a thing is offered or tendered by another, whereby he receives the thing with the intention of retaining it, such intention being evidenced by a sufficient act” According to section 2b of the Contract Act: “When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted” COMMUNICATION: When the contracting parties are face to face and negotiate in person, there is instantaneous communication of offer and acceptance, and a valid contract comes into existence the moment the offeree gives his absolute and unqualified acceptance to the proposal made by the offeror. The question of revocation of either offer or acceptance does not arise, for, in such cases a definite offer is made and accepted instantly at one and the same time. But where services of the post office are utilized for communicating among themselves by the contracting parties because they are at a distance from one another, it is not always easy to ascertain the exact time at which an offer or/and an acceptance is made or revoked. In these cases, the following rules, as laid down in Sections 4 and 5 of Contract Act, will be applicable. COMMUNICATION OF OFFER/PROPOSAL: In order to constitute a valid contract, the proposal must be communicated to the person to whom it has been made. If it is not communicated to the person to whom it is addressed, it cannot be accepted as proposal. Thus, a proposal which has not been communicated is not a valid proposal in the eye of law. COMMUNICATION OF PROPOSAL WHEN COMPLETE: According to para-A of section 4 of the Contract Act: “The communication of proposal is complete when it comes to the knowledge of the person to whom it is made” It means that communication of proposal completes when letter of proposal comes to the knowledge of the offeree. ILLUSTRATION: A proposes a letter, to sell a van t B for Rs. 5,00,000/-. This letter is posted on 6" march and reaches to B on 14" June. The communication of its acceptance is completed as against the proposer but not afterwards b) Time for revocation of acceptance: as per section 5 para-B, an acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor, but not afterwards. MODE OF REVOCATION OF PROPOSAL AND ACCEPTANCE: As per section 6 of the Contract Act, a proposal or acceptance ceases to exist in the following circumstances: @ by the communication of notice of revocation by the proposer to the other party ©@ by the laps of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; © by the failure of the acceptor to fulfil a condition precedent to acceptance; or © by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance. CONCLUSION To conclude, communication of proposal completes when the person to whom it is made comes, to know that. It can be revoked at any time before the acceptance is complete, as against the proposer when it is put in a course of transmission to him and as against acceptor, when it comes to the knowledge of the proposer. It can be revoked at any time before the communication of the acceptance is complete and not afterwards. Q4: WHAT IS SOUND MIND FOR THE PURPOSE OF ENTERING INTO A CONTRACT? (TWO TIMES REPEAT) OR WHO ARE COMPETENT TO CONTRACT? INTRODUCTION: Capacity to contract means a party has the legal ability to enter into a contract. Capacity also means a person has to be competent as defined by law. Someone's capacity is determined by whether or not they have reached the age of majority and if they are mentally capable of understanding the applicable contract term. Contracts made with people who don't have legal capacity are voidable. The other person has the right of rescission, the option to void the contract and all related terms and conditions. Courts may opt to void or rescind a contract if one of the parties lacked legal capacity. If the court voids the contract, it will attempt to put all parties back in the position they were in before the agreement, which may involve returning property or money when feasible One of the essential elements of a valid contract is that all the parties to it must have competency to enter into a contract. Section 10 of the Contract Act provides that an agreement becomes a contract if it is entered into between the parties who are competent to contract. COMPETENCY OF PARTIES: One of the essential elements of a valid contract is that all the parties to it must have competency to enter into a contract. Section 10 of the Contract Act provides that an agreement becomes a contract if it is entered into between the parties who are competent to contract. According to section 11 of the Contract Act, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject.” Negatively stated, a person is incapable of entering into contract if: 1. he is minor; 2. he is not sound mind; 3. he is disqualified from contracting by any law which he is subject. MINORS: A minor is a person who has not completed 18 years of age. A minor’s contract is altogether void in law and a minor therefore cannot bind himself by a contract. A minor can always derive benefit under a contract. He can be a promisee, although he cannot be a promisor. A duly executed transfer by way of sale or mortgage in favour of a minor who had paid the consideration money is not void. In pursuing the above object, the law should not cause unnecessary hardship to persons who deals with minors. Since the contract is void ab intio it cannot be ratified by the minors on attaining the age of majority. If minor has obtained any benefit, such as money on a mortgage, he cannot be asked to refund nor can his mortgage property be liable to pay. A minor can always plead infancy, even where he had entered into a contract by falsely representing that he was of full age, when in reality he was a minor. A minor is always liable for necessaries supplied to him or his wife according to his status in life. It must be kept in mind that for necessaries supplied to a minor, it is only his property that is liable not the minor himself personally. A contract with a minor does not give the creditor any rights against the minor’s parents, whether the contract is for necessaries or not. The only case where a parent may be liable is when the child is contracting as an agent for the parents. SOUND MIND: Sound mind is the state of mind of a person which is sufficient to reason and reach a judgment upon ordinary subjects, like other rational men. There is a presumption of law that every person who has acquired full age is of sound mind, and therefore is competent to make contracts and perform all civil duties. A person who asserts that he is not of sound mind must prove it by clear evidence. One of the essential conditions of competency of parties to a contract is that they should be of sound mind. Section 12 lays down a test of soundness of mind, which runs as follow: - Corporations include registered companies, local bodies and city corporations. Corporations are legal artificial persons. Since they have legal existence, they can acquire property, transact their business and are capable of suing and being sued. But they cannot do so without their seals. Powers of a corporation are limited by its Memorandum of Association, beyond which it cannot do anything. 5. INSOLVENT: There is no prohibition against a contract by an insolvent after the insolvency proceedings have commenced but before adjudication. In simple words, the insolvent is disqualified from entering into a contract until he is discharged by the court of law. CONCLUSION From the above discussion, it is very clear that only those people are competent to contract who is major, sound mind and not disqualified by law. A person who is diagnosed as being mentally ill, that prevents them from managing his own affairs may be declared mentally incompetent by a court of law. When a person is judged to be incompetent, a guardian is appointed to handle the person’s property and personal affairs. Q5: DISCUSS VOID AGREEMENT AND ITS VARIOUS KINDS? OR Q: WHAT ARE VOIDABLE AND VOID CONTRACT? DISCUSS VARIOUS KINDS OF VOID AGREEMENTS SPECIFIED UNDER THE CONTRACT ACT WITH ILLUSTRATION. INTRODUCTION: A contract which does not bind the contracting parties is a void agreement. It does not create legal rights and obligations on parties. It is not a contract at all and is void ab initio. Contract Act has defined void agreements and voidable contracts and various kinds of void agreement. VOIDABLE CONTRACT: These types of Contracts are defined in section 2(i) of the Act: “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This contract would be valid, the only problem is that person B is a minor and can’t legally enter a contract. So, this contract is a valid contract from the point of view of A anda “voidable” contract from the point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus, this is a voidable contract. A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be bound to the terms of the contract. For example, person A in the above example. The other party is not bound and may choose to repudiate or accept the terms of the contract. If they so choose to repudiate the contract, the contract becomes void. Otherwise, a voidable contract is a valid contract. VOID CONTRACT: Section 2 (j) of the Contract Act, 1872 defines Void Contract as a contract that no longer remains a valid contract and cannot be enforced in the court of law. Such contracts do not have any legal effect and cannot be enforced by either party. Void contracts are valid, when they are entered into, as they conform to all the conditions of enforceability, laid down under section 10 of the act and are binding on the parties, but later on becomes void because of impossibility to perform. Such contracts become unenforceable in the eyes of law due to: « Supervening impossibility « Change of law « Subsequent Illegality « Repudiation of voidable contract ¢ Contingent contract etc. Example: Suppose A, a popular dancer contracts with Alpha Company, to dance in a show. Unfortunately, met an accident some days before the event, in which her legs injured badly and not allowed to dance by the doctor. In such a case, the contract becomes void. DEFINITION OF VOID AGREEMENT: Void agreements are those agreements which are not enforced by law courts. Section 2(g) of the Contract Act defines a void agreement as, “An agreement not enforceable by law”. Thus, the parties to the contract do not get any legal redress in the case of void agreements. Void agreements arise due to the non-fulfillment of one or more conditions laid down by Section 10 of the Contract Act. This Section states as follows: “All agreements are contracts if they are made with 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” From the above, it is quite clear that non-fulfillment of any of these conditions by one of the parties to a contract shall make an agreement void. These conditions being: - 1. Free consent of the parties “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”. EXCEPTION TO RULE: All agreements in restraint of trade are void. But there are certain exceptions to this rule, which are as under: a) SELLER OF GOODWILL: The seller of a business concern provided he has sold the goodwill of the business may agree with the buyer that he (the seller) shall refrain from carrying on similar business within a specified local limit. b) TARDE COMBINATIONS: If the object of the agreement is to regulate business and not to restrain it, then it is valid. Combinations of this kinds are often desirable in the interest of trade and also for the promotion of public interest. Thus, an agreement between businessmen to regulate prices, output etc. cannot be regarded as restraint of trade and is valid. c) SERVICE CONTRACTS: An agreement of service by which a person binds himself during the term of employment, not to take services with anyone else, is not restraint of lawful profession and is valid In Pakistan trade has been in its infancy and it is desirable to develop trade. Therefore, through the stringent provisions of Sec. 27 every agreement interfering with the right to trade has been specifically declared void. Public policy required that every citizen be allowed freedom to work for himself and should get the benefit of labour to himself or to the State. He should not enter into any agreement by which he may not be able to utilize his skill or talent for his benefit or to the benefit of his country. If he does so by an agreement, he shall not be allowed to do so. The words, “To that extent”, included in the provisions of Sec.27 are very important. These words clarify the position of a situation where the agreement can be broken up into parts. If the agreement can be broken into parts and some of these parts are not affected by the provisions of this section, i.e., are not vitiated as being in restraint of trade, the agreement pertaining to these parts shall be held valid. However, where the agreement is not divisible, the whole of the agreement shall be declared void. e¢ AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS. An agreement purporting to oust the jurisdiction of the Courts are illegal and void section 28 of the Contract Act renders void two kinds of agreement namely 1. An agreement by which any party is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or 2. An agreement which limits the time within which the contract rights may be enforced. Exception 1: This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. Exception 2: Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or effect any provision of any law in force for the time being as to arbitration. Section 28 of the Contract Act, as is evident from the above, clearly states agreements restraining legal proceedings to be void. In Pakistan, as also in England, agreements perverting the course of justice are declared void, because their object is illegal. Neither the Law favors an agreement the object of which is to change the jurisdiction of a court of law nor it permits an agreement the object between the parties to invest a court which has no Jurisdiction, with authority to try the disputes arising out of a contract. But when two courts have jurisdiction to try a case, and the parties by an agreement limit the jurisdiction to one court only, then such an agreement shall not be declared as void. e¢ UNCERTAIN AGREEMENTS: Section 29 of Contract Act, provides that agreement the meaning of which is not certain or capable of being made certain are void. For a contract to be valid, it is necessary that each and every term of the contract has some meaning and is clarify to both the parties in a contract. ILLUSTRATION: A agrees to sell B 100 tons of oil. In this case it is not clear as to which oil is intended to be sold. So, the agreement is void for uncertainty. e WAGERING AGREEMENT: Under section 30 of the Contract Act it is provided that an agreement by way of wager is void. No suit will lie for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. e AGREEMENT CONTINGENT ON IMPOSSIBLE EVENTS: Section 36 of the Contract Act, provides those contingent agreements to do or not to do anything if an impossible event happens, are void, whether the impossibility of the event is known or not known to the parties to the agreement at the time when it is made. ILLUSTRATION: A agrees to pay B 1000 rupees if two straight lines should enclose a space. The agreement is void. Consideration may move from the promisee or from a third person. It means, therefore, that as long as there is a consideration for a promise, it is immaterial who has immaterial it. It may move from the promisor or If promisor has no objection, from any other person e IT MAY BE AN ACT, ABSTINENCE OR PROMISE: Consideration may consist either of some act which the promisee does at the desire of the promisor or of some omission or forbearance on the part of the promisee. It may also consist of an act which is only promised to be done at some future time. IT MAY BE PAST, PRESENT OR FUTURE: Consideration may be past, present. or future: () PAST CONSIDERATION: If the act has been done before any promise is made, it is called past consideration. For example, P tenders some service to D at D'S desire, after a month D promise to compensate P for services rendered to him. It is a past consideration. (ij) _PRESENT CONSIDERATION: When consideration has been given simultaneously with the promise it is called present or executed consideration. For example, A sells some goods to B and B pays the price immediately. This a present or .executed consideration. (iii) FUTURE CONSIDERATION: Future considerations are promises to give or do something in future. For example, D promises to deliver certain goods to P after a week, P promises to pay the price after a fortnight. The promise of D is supported by :the promise of P, the consideration is future. IT NEED NOT TO BE ADEQUATE: Consideration need not be adequate to the promise but it must be of some value in the eyes of law. The parties are free to make their own bargains and it is up to them to consider the pros and cons of every promise. 2 IT MUST BE REAL: Consideration. must be real, competent and of some value and it must, also not be Illegal, impossible or illusory or sham. Where Consideration is Illegally or physically Impossible, uncertain or ambiguous It shall not be enforceable law UNLAWFUL CONSIDERATION AND OBJECT: Section 23 of' Act, declares the consideration and object of an agreement unlawful in the following cases: 1. FORBIDDEN BY LAW. Where the object of an agreement is forbidden by law the agreement is void. An act is said to be to forbidden by law ¢ When it is punishable by law. e¢ When it has been prohibited by special act of legislature. EXAMPLE: A and Bare thieves. They make an agreement to divide the proceeds of theft. Such kind of agreement is unlawful because theft has been punishable under Pakistan Penal Code. 2. DEFEAT PROVISION OF LAW: Sometimes the object or consideration for an agreement is such that though not directly forbidden by law, it would, if permitted defeat the provision of any law. Such agreement is void. 3. FRADULENT: An agreement made for a fraudulent purpose is also void. Where the parties agree to impose a fraud to a third person their agreement is unlawful. 4. INJURIOUS TO PERSON OR PROPERTY: An agreement between two persons to injure the person or property of other is unlawful. In the same way if the object of other agreement is such that it involves or imply injury to the person of property of another the agreement is unlawful and void. 5. IMMORAL CONSIDERATIONS: Every agreement the object or consideration for which is immoral is unlawful and therefore void. For example, A lets her daughter to hire to B for concubinage. The agreement is void because it is immoral. 6. OPPOSED TO PUBLIC POLICY: An agreement is unlawful if the court regards it as opposed to public policy. Public policy may include but not limited to the following: e Trading with enemy e Trafficking in public offices e Interference with administration of justice e Marriage brokage contracts ¢ Unfair or unreasonable dealings Apart from the above mention factors all other objects and consideration are lawful for the purpose of making a valid contract. e PERFORMANCE OF THE CONTRACT MUST BE CONDITIONAL The condition for which the contract has been entered into must be a future event, and it should be uncertain. If the performance of the contract is dependent on an event, which is although a future event, but certain and sure to happen, then it’lI not be considered as a contingent contract. e THE SAID EVENT MUST BE COLLATERAL TO SUCH CONTRACT The event on whose happening or non-happening of the event on which the performance of the contract is dependent should not be a part of the consideration of the contract. The happening or non-happening of the event should be collateral to the contract and should exist independently. Illustration: X enters into a contract with Y and promises to deliver 10 books to him. Y promises to pay Rs. 2000 upon delivery. This is not a contingent contract since Y’s obligation depend on the event which is a part of the contract (delivery of 10 Books) and not a collateral event. e THE EVENT SHOULD NOT BE AT THE DISCRETION OF THE PROMISOR The event so considered as for contingency should not at all to be dependent on the promisor. It should be totally a futuristic and uncertain event. Illustration: X promises to pay Y, Rs. 10,000 if Y leaves Delhi for London on 31st March 2019. This is a contingent contract. Going to London can be within Y’s will but is not merely his will. ENFORCEMENT OF CONTINGENT CONTRACT Provisions related to the enforcement of the contingent contract are given under section 32 to 36 as follows: 1. ENFORCEMENT OF CONTRACT CONTINGENT ON THE HAPPENING OF AN EVENT Section 32 of the Contract Act talks about the contingent contracts to do or abstain from doing something if an uncertain future event happens. However, the contract cannot be enforced by law unless the event takes place. If the event becomes impossible, such contracts become void. Illustration: X promises to pay Y, Rs. 100,000 if he marries Z, the prettiest girl in the neighborhood. This is a contingent contract. Unfortunately, Z dies in a car accident. Since the happening of the event no longer possible, the contract is void. 2. ENFORCEMENT OF CONTRACT CONTINGENT ON AN EVENT NOT HAPPENING Section 33 of the Contract Act provides for the contingent contracts to do or abstain from doing something if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible. If the event takes place, then the contingent contract is void. Illustration: X promises to pay Y a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. On the other hand, if the ship returns, then the contract is void. 3. WHEN AN EVENT ON WHICH CONTRACT IS CONTINGENT TO BE DEEMED IMPOSSIBLE IF IT IS THE FUTURE CONDUCT OF A LIVING PERSON Section 34 of the Contract Act provides that, if a contract contingent upon how a person will act at a future time, the event shall be considered impossible when such person does anything which makes it impossible for the event to happen. Illustration: X agrees to pay Y, Rs. 100,000 if Y marries Z. However, Z marries A. The marriage of Y to Z must now be considered impossible, although it is possible that A may die and that Z afterward marry Y. 4, CONTRACTS CONTINGENT ON AN EVENT HAPPENING WITHIN THE FIXED TIME Section 34 para 1 provides for the Contingent contracts to do or not to do anything if a future uncertain event happens within a fixed time. Such a contract is void if the event does not happen and the time lapses. It is also void if before the time fixed, the happening of the event becomes impossible. Illustration: X promises to pay Y a sum of money if a certain ship returns before 1st April 2019. The contracts may be enforced if the ship returns within the fixed time. On the other hand, becomes void if the ship sinks. 5. CONTRACTS CONTINGENT ON AN _ EVENT NOT HAPPENING WITHIN THE FIXED TIME Section 35 para 2 provides that Contingent contract to do or not to do anything if an uncertain event does not happen within a fixed time may be enforced by law when the fixed time has expired, and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen. Illustration: X promises to pay Y a sum of money if a certain ship does not return before 31st March 2019. The contract may be enforced if the ship does not return before 31st March 2019. Also, if the ship burnt before the given time, the contract is enforced by law since the return is impossible. 6. CONTRACT CONTINGENT OF IMPOSSIBLE EVENT VOID Section 36 of the Contract Act provides that if an agreement to do or not to do is based on the impossible event, then such agreement is void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. e PERFORMANCE OF THE CONTRACT MUST BE CONDITIONAL The condition for which the contract has been entered into must be a future event, and it should be uncertain. If the performance of the contract is dependent on an event, which is although a future event, but certain and sure to happen, then it’lI not be considered as a contingent contract. e THE SAID EVENT MUST BE COLLATERAL TO SUCH CONTRACT The event on whose happening or non-happening of the event on which the performance of the contract is dependent should not be a part of the consideration of the contract. The happening or non-happening of the event should be collateral to the contract and should exist independently. Illustration: X enters into a contract with Y and promises to deliver 10 books to him. Y promises to pay Rs. 2000 upon delivery. This is not a contingent contract since Y’s obligation depend on the event which is a part of the contract (delivery of 10 Books) and not a collateral event. e THE EVENT SHOULD NOT BE AT THE DISCRETION OF THE PROMISOR The event so considered as for contingency should not at all to be dependent on the promisor. It should be totally a futuristic and uncertain event. Illustration: X promises to pay Y, Rs. 10,000 if Y leaves Delhi for London on 31st March 2019. This is a contingent contract. Going to London can be within Y’s will but is not merely his will. ENFORCEMENT OF CONTRACT CONTINGENT ON AN EVENT NOT HAPPENING Section 33 of the Contract Act provides for the contingent contracts to do or abstain from doing something if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible. If the event takes place, then the contingent contract is void. If a person promises to pay another a sum of money if a ship does not return back, he will be obliged to pay only and only after the possibility of the ship returning becomes impossible. In this illustration, if the ship sinks, the possibility of it returning becomes nil. Thus, the contract has to be enforced. The person has to pay money and he cannot wait with the hope of the ship returning. Q9: WHAT ARE AGREEMENTS AND CONTRACTS? WHEN A CONTINGENT CONTRACT BECOMES VOID? INTRODUCTION: The terms “agreement” and “contract” are used interchangeably, but legally speaking, they are two different things. An agreement is simply an understanding or arrangement between two or more parties. A contract is a specific agreement with terms and conditions that are enforceable court. AGREEMENT: In general, an agreement is any understanding or arrangement reached between two or more parties. However, under contract act it has been provided under section 2(e) which provides that “every promise and every set of promises, forming the consideration for each other is an agreement” An agreement is an expansive concept that includes any arrangement or understanding between two or more parties about their rights and responsibilities with respect to one another. Such informal arrangements often take on the form of “gentlemen’s agreements,” where adherence to the terms of the agreement relies upon the honor of the parties involved rather than exterior means of enforcement. In order to reach an agreement, parties need only come to a common understanding as to their relative rights and responsibilities, what is often termed a “meeting of the minds. CONTRACT: In general A contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law. As per section 2(h) of Contract Act “an agreement enforceable by law is a contract. As notes above, an agreement enforceable by law becomes a contract. All such agreements which satisfy the conditions mentioned in section 10 of the contract Act are contracts. The conditions which are required for the validity of contracts are following: 1. There should be an agreement between two parties. An agreement arises when one party makes proposal and the other party accepts the offer. The parties to the agreement should be competent to contract. There should be lawful consideration and lawful object in respect of the agreement. There should be free consent of the parties, when they enter into an agreement. The agreement must not be declared as void. CONDITIONS WHEN A CONTINGENT CONTRACT BECOMES VOID Enforcement of contracts contingent on an event happening As per section 32 of the contract act, if the event on the happening of which the contract is contingent becomes impossible, the contract becomes void. Illustration: A contract to pay B a sum of Money when B marries C. C dies without being married to B. The contract becomes void. ignorance of truth which later on turns out to result in fraud will make the person liable. Even if the statement is made by the person without any deliberate reasons, absence of truth in the statement will prove him guilty. ACTIVE CONCEALMENT OF FACT [Section 17(2)] In a contract generally there is a duty to speak of one party, active concealment is a situation where this party conceals the fact that they have a duty to disclose. Active concealment and passive concealment are two different things, passive concealment refers to situations of the past when the party had a duty to speak and remained silent. If a contract was formed under conditions involving active concealment it can render the contract void or voidable. The parties to the contract need to consent this contract later on in order to make it valid. Further the party responsible for active concealment might be held for civil wrong and liable to pay fines. PROMISE MADE WITHOUT ANY INTENTION TO PERFORM [Section 17(3)] When a person makes a promise to another without any intention to perform it in future it results in fraud. An example can be taking loans without any intention to repay in future. SILENCE DOES NOT RESULT TO FRAUD Mere silence in any situation which can affect the willingness of a person to enter into a contract is not fraud, unless circumstances arise that it becomes the duty of the person who is silent to speak. Non-disclosure of a fact cannot result in fraud. MISREPRESENTATION (Section 18) Section 18 of the Contract Act talks about misrepresentation as “Misrepresentation" means and includes— (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. The first clause of section 18 talks of positive assertion which leads us to interpret it in two ways- 1. Innocent Misrepresentation It is used to depict misrepresentation which has no element of fraud and negligence in it. 2. Negligent Misrepresentation It is made when one misrepresents a fact baselessly without any grounds to believe it to be true. The Second of clause of section 18 was intended to meet the cases which do come to court for enquiry. There is no intention to deceive as such, but circumstances arise that make the party which derived benefit from the act be answerable to court. This statement was observed in the case of Oriental Bank corporation vs. John Fleming. Another thing to note down is English books always referred to misrepresentation of facts and not that of law; it was understood that misrepresentation of law is done in order to avoid a contract. KEY DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION The key differences between the two, they are 1. Fraud is an intentional misrepresentation made in order to deceive someone, misrepresentation on the other hand is an innocent statement without any intention to deceive. 2. Intention differentiates the two, it is an important element as fraud is intentional while misrepresentation is not 3. The aggrieved party in fraud has right to sue but it is not so in misrepresentation 4. The party who made a fraudulent statement cannot take the defence that the other party had means to discover the truth, in cases of misrepresentation this defence can be taken. The principal difference between fraud and misrepresentation is in one case the person stating the facts believes it to be true and in the other case, he believes it to be true. Intention to deceive is essential in cases of fraud. In both the cases the contract can be avoided but in fraudulent silence or misrepresentation contract cannot be avoided if the other party had means of discovering the truth with the help of ordinary diligence. Ql1l1: DEFINE CONSENT AND FREE CONSENT. DIFFERENTIATE BETWEEN THESE TWO. CONSENT: - Without the consent of the parties’ contract cannot take place. Where the parties have different things in mind or understand the same thing in different ways is not real consent. Under section 13 of the contract act, it defines in the following words: "When two or more person agree upon the same thing in the same sense, they are said to be consent." In above definition two words are more important, same thing and same sense. In some cases, the consent may have been given under the mistake which prevents the formation of real agreement. Mistakes may relate to: i. The subject matter of the agreement. ii. The nature of transaction. iii. The identity. ESSENTIALS OF CONSENT: 1. TWO OF MORE PERSONS: There must be two or more persons to constitute consent. If two or more persons are not present then there is neither any contract nor any consent regarding any matter between them. So, two or more persons must be present to give consent to each other regarding any matter. or when events, the conduct of the parties, or the operation of law releases the parties from performing. MODES OF DISCHARGE OF CONTRACT: A contract may be discharged in any of the following ways: 1. DISCHARGE BY PERFORMANCE: This is the first mode by which a contract may be discharged. When both promisor and promisee perform their parts of promises, the contract is discharged and if there are several parties to contract and only one of them performs his part of promise, he alone is discharged. Discharge by performance may be of two types: a) Actual performance: When each party to contract performs his part of obligations arising under the contract, it is called actual performance. b) Offer of performance: This is also called tender or attempted performance. When one parties to contract offers to perform the contract but the other party does not accept it, there is offer of performance. 2. DISCHARGE BY AGREEMENT: A contract can also be discharged by the fresh agreement between the parties. According to section 62 of the contract act, if the parties to a contract agrees to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. MODE TO TERMINATE CONTRACT: A contract may be terminated by agreement in any of the following modes: a) NOVATION: Where with the consent of the parties to a contract a new contract is substituted for the old one, there is novation. In novation there is a change of parties and if parties are not b) co) changed then there is substitution of new contract in the place of old contract. ALTERATION: Alteration of a contract takes place when one or more clauses of the contract are altered. This alteration if made in writing without other party’s consent, the contract is discharged provided that the alteration is in the material part but an alteration in the immaterial part does not avoid the contract. A material alteration is one which varies the rights, liabilities or legal position of the parties as ascertained by the deeds in its original state. WAIVER: When the party entitled to demand performance agrees to waive his rights, the other party is discharged by waiver. RECISSION: Recession means cancellation of contract by mutual consent. A contract may be cancelled by agreement between the parties at any time before it is discharged by performance. The cancellation of agreement releases the parties from their obligations arising out of the contract. REMISSION: Remission means the acceptance of lesser amount of money than what was contracted by the promisor. A promisee may: O Dispense with the remit wholly or part of the promise made to him, or O May extend the time of performance, or O May accept instead of any satisfaction which he thinks fit. 3. DISCHARGE BY SUBSEQUENT IMMPOSIBILITY: The element of impossibility terminates contractual relation. Impossibility is of two types which are as follow: a) INITIAL IMPOSSIBILITY: If impossibility has already come into force before the contract itself it is called initial impossibility. Here discharge of contract takes place soon after the formation of contract. b) SUBSEQUENT IMPOSSIBILITY: The impossibility which comes into force after the contract is called subsequent impossibility. Here the contractual obligation will exist only up to occurrence of impossibility. WAYS OF IMPOSSIBILITY: Following are the different ways by which a contract becomes subsequently illegal or impossible: e Destruction of subject matter. e Failure of ultimate purpose. ¢ Death or incapacity of a party. © Change of law. ¢ Declaration of war. 4. DISCHARGE BY LAPSE OF TIME: A contract may also be discharged by lapse of time. The limitation act lays down that a contract should be performed within a specified period. If the contract is not performed within a specified period and no legal action is taken, then the contract is discharged. 5. DISCHARGE BY OPERATION OF LAW: A contract may be discharged by operation of law in any of the following ways: a) MERGER: A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery. B need not pay for the goods, unless A is ready and willing to deliver them on payment. A Sequence of Performance of a Reciprocal Promise (Section 52) When a contract includes a reciprocal promise, the parties might agree upon the order in which the promises are performed. If that is the case, then the order, as mentioned in the contract should be followed. However, if the contract does not specify any such order, then the order of performance of the reciprocal promises is determined based on the nature of the transaction. Example: Peter promises to help John find a house in lieu of John’s promise to pay him acommission for the same. The contract does not specify the order of performance of the promise. However, the nature of the transaction suggests that Peter should first help John get a house before he expects him to perform his promise of paying him the commission. One party preventing the other from the Performance of the Promise (Section 53) In a contract consisting or reciprocal promises, if one party prevents the other from performing the promise, then the prevented party has the option of voiding the contract. Also, the prevented party can claim compensation from the obstructing party for any loss that he might sustain due to non-performance of the contract. Example: Peter and John entered into a contract where Peter promises to paint John’s house. In exchange, John promises to pay Peter Rs 10,000 and clear the house of all furniture before Peter begins. However, when Peter starts painting, he finds that John has not cleared the furniture as promised and does not accede to his requests too. Peter can void the contract and claim the money since John obstructed him from performing his promise. Reciprocal and Dependent Promises (Section 54) Imagine a contract where the reciprocal promises are dependent on each other. If the promisor who is supposed to perform his promise before the other, fails to perform it, then he cannot claim the performance of the reciprocal promise. He is also liable to compensate the other party for any loss that he might sustain due to non-performance of the contract. Example: Peter hires a car for a month and promises to pay the car rental company a certain amount. The company promises to send the car to his house within 24 hours of receiving the advance payment. Peter does not make the payment and fails to perform his promise. The company does not send the car either. Peter cannot claim the performance of the company’s promise since he was supposed to perform his promise first. He will also have to compensate the company for the losses sustained by them due to him not paying the advance. CONCLUSION: To conclude, in above mention sections promisee is not bound to perform his promise until and unless promisor is ready and willing to perform his part of promise. Further, if the promisor prevents the contract, then the promisee is under no obligation perform his part. In addition to this, if the reciprocal promise is dependent on the performance of the promisor, then in this situation also, the promisee is not bound to perform his reciprocal promise until and unless the promisor does not perform his part. Q14: WHAT ARE THE JOINT LIABILITIES IN A CONTRACT? IN CASE OF JOINT PROMISORS WHO WOULD PERFORM CONTRACTUAL OBLIGATION? (3 TIMES REPEAT) DEFINITION: When two or more promisors agree to perform the terms of the promise together, they are said to have made a joint promise and the people who jointly agreed to perform the promise are called the joint promisors. PERFORMANCE OF JOINT PROMISES: The rules relating to the performance of joint promises are laid down under section 42 to 45 of the Contract Act, which are as follow: All promisors must jointly fulfill the promise: According to section 42, when two or more persons have made a joint promise, then unless a contrary intention appears by the contract, all joint promises must jointly fulfill the promise. If any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the promise. If all of them die, the legal representative of all of them must fulfill the promise jointly. The section provides that the promisors are jointly liable to fulfil the promise until the terms of the contract provide anything to the contrary. The Section also provides that in case of death of any one of the joint promisors his legal representatives will be bound by the obligation under which the promisor was in his lifetime. This Section provides security to the promisee by assuring him that the promisors would be bound by the promise made by them during their joint life and after the death of either of the promisor, their representatives will be bound by the promise made by the deceased promisor. Any one of the joint promisors_ may be compelled to perform: {section 43, paral}: when two or more persons make a joint promise and there is in the absence of express agreement to the contrary, the promisee may compel any one or more of the joint promisors to perform the whole of the promise. This means the liability of joint promisors is joint and several. Example: A, B, and C jointly promises to pay D Rs 3000. D may compel all or any or either A or B or C to pay him Rs 3000. A_joint promisor compelled to perform, may claim contribution {section 43, Para 2}: is because a contract of guarantee acts as a second pocket to repay the amount if the first pocket or the person to whom the loan is advanced fails to pay. In a contract of guarantee, a surety undertakes to pay the amount to the creditor in case the principal debtor is not able to pay the amount. The Contract Act, 1872 through its different provisions ensures that it protects the interest of all the parties in a contract of guarantee, especially the interests of the surety. It may happen that initially when the contract of guarantee had been entered into, the contract was not entirely based on good faith. However, after entering into such a contract, our legal system makes it a point that good faith is imposed on the creditor. It also ensures that there is no ambiguity related to the rights and liabilities of the surety. DISCHARGE OF SURETY The Contract Act, 1872 provides for the discharge of the liability of surety, in case of certain given circumstances. A surety is said to discharge from his liability if his liability to perform the promise, in case of a default by the principal debtor, comes to an end. The situations under which a surety is discharged from his liability is listed as follows: « Discharge by Revocation 1. Revocation of guarantee by giving notice (Section 130); 2. Revocation by death (Section 131). + Discharge by the conduct of the parties Variance in terms of the contract (Section 133); Release or discharge of the principal debtor (Section 134); Compounding by Creditor with the principal debtor (Section 135); Creditor’s act/omission impairing surety’s eventual remedy (Section 139); 5. Loss of security (Section 141). RWNPr ¢ Discharge by the invalidation of the contract 1. Guarantee obtained by misrepresentation (Section 142); 2. Guarantee obtained by concealment (Section 143); 3. Failure of a co-surety to join a surety (Section 144). 1. DISCHARGE OF SURETY BY REVOCATION: e REVOCATION OF SURETY BY GIVING NOTICE Section 130 of the Contract Act, 1872 states that a continuing guarantee, ie., a guarantee for a series of transactions can be revoked if a notice is served to the creditor. However, revocation in case of a specific guarantee is not possible if the contract entered into has been already acted upon On analysis of Section 130 of the Contract Act, 1872, it can be inferred that a continuing guarantee can be revoked by serving a notice only for any future transactions. The surety is liable for the transactions which are already entered into. This is the reason, why the section does not include revocation of specific guarantee, as there are no future transactions which have not yet been entered into in case of a specific guarantee. It can also be inferred that the notice should be given to the creditor at any time. This notice should be clear and specific and it should state that the surety is intending to terminate his liability as to the future transactions. Also, there should not be any existence of the contract stating the contrary. e REVOCATION BY DEATH Section 131 of the Contract Act, 1872 provides that in case of death of the surety, the liability of the surety is discharged. From the interpretation of Section 131, it can be inferred that the death of the surety will lead to a discharge of the surety. The surety will be discharged from the future transactions which are entered into. However, the legal heirs of the deceased surety have the obligation towards the transactions, for which the surety has given the guarantee, in case the transactions have already been entered into. They are liable only to the extent of the property that they have inherited and they cannot be made personally liable for the obligations of the surety. Also, there should be no separate provision in the contract which states that the contrary to this provision. 2. DISCHARGE BY CONDUCT OF THE PARTIES: e BY VARIANCE IN TERMS OF THE CONTRACT Section 133 of the Contract Act, 1872 provides for the discharge of the liability of the surety, in case of material alteration or variance in the terms of the contract. Through the literal interpretation of the provision, it can be determined that a surety can be discharged from his liability if there is a variance that has been made without the consent of the surety, in case of a continuing contract of guarantee. The essential factor which determines if the liability of the surety is discharged is the concept of substantiality and materiality of the variance. The court has to decide, keeping the entire facts into consideration, whether a given variance is material or not. In case the variance in the contract leads to a benefit of the surety, the surety may not be discharged of his liability as it is within the discretion of the court with regards to the materiality of the fact. e RELEASE OR DISCHARGE OF THE PRINCIPAL DEBTOR Section 134 of the Contract Act provides for the discharge of the liability of the surety, in case the principal debtor is released from his liability to repay the amount. Therefore, Section 134 deals with the discharge of the secondary liability of the surety in case the primary liability of the principal debtor is discharged. However, the converse is not true. This means that if there is a discharge of the liability of the surety, it will not automatically discharge the liability of the principal debtor. The section provides two situations which would result in the release of the principal debtor. These are as follows: e LOSS OF SECURITY Section 141 of the Contract Act, 1872 gives surety the right to claim all the security which had been kept with the creditor after paying the amount to the creditor. If the security is lost and the surety does not get the security for any reason, the surety can be discharged from his liability. Through Section 141, it can be inferred that it is immaterial whether the security that was earlier held by the creditor was known to the surety or not. In case the surety does not receive the security after repayment, he can be discharged of his liability. However, this discharge of liability will be to the extent of the value of the security which had not been duly delivered to the surety. Thus, if the value of the lost security is less than the liability of the surety, the surety will be discharged to the extent of his liability. However, if the value of the security is more than the liability, the surety will be discharged from the whole of his liability. This provision arises due to the Right of Subrogation with the surety, according to which the surety is entitled to all the rights of the creditor and takes the position of the creditor after paying the amount to the original creditor. Hence, the surety also has the right to the security of exercising the right of subrogation. 3. DISCHARGE BY INVALIDATION A surety can be discharged of his liability if the contract of guarantee is invalidated. The Contract Act provides for three circumstances under which a contract of guarantee can become invalidated. These are as follows: e GUARANTEE BY MISREPRESENTATION (SECTION 142) Section 142 provides that if a contract of guarantee has been entered into owing to the misrepresentation of a material fact which was known to the creditor, it would invalidate the contract. e GUARANTEE BY CONCEALMENT (SECTION 143) According to Section 143, if a contract of guarantee is obtained due to concealment of a material fact by a creditor, the contract would be invalid. e FAILURE OF A _CO-SURETY TO JOIN A SURETY (SECTION 144) If the surety has put forth a condition that the creditor shall not act upon the contract in the absence of another co-surety and this condition is not fulfilled, it would lead to invalidation of contract. CONCLUSION The Contract Act, 1872 provides for the discharge of the liability of surety in case of certain given circumstances with the objective of securing the interests of the surety, who guarantees payment of the debt in case of a default. The situation under which the surety can be discharged from his liability can be categorized into three different heads i.e., by revocation, the conduct of the parties and invalidation of the contract. Q16: DEFINE CONTRACT OF INDEMNITY AND GUARANTEE? WHAT ARE THE RIGHTS OF INDEMNITY HOLDER WHEN SUED? OR WHAT IS A CONTRACT OF INDEMNITY AND GUARANTEE? ALSO EXPLAIN THE SALIENT DIFFERENCES? (THREE TIMES REPEAT) CONTRACT OF INDEMNITY A contract of indemnity is one of the most important forms of commercial contracts. Several industries, such as the insurance industry, rely on these contracts. This is because of the nature of these contracts. They basically help businesses in indemnifying their losses and, therefore, reduce their risks. This is extremely important for small as well as large businesses. A contract of indemnity basically involves one party promising the other party to make good its losses. These losses may arise either due to the conduct of the other party or that of somebody else. To indemnify something basically means to make good a loss. In other words, it means that one party will compensate the other in case it suffers some losses. Section 124 of the contract act define indemnity as, a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a contract of indemnity. For example, A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in and promises to indemnify B’s losses if A fails to so deliver the goods. This is how B and C will enter into contractual obligations of indemnity. A contract of insurance is very similar to indemnity contracts. Here, the insurer promises to compensate the insured for his losses. In return, he receives consideration in the form of premium. However, the Contract Act does not strictly govern these kinds of transactions. This is because the Insurance Act and other such laws contain specific provisions for insurance contracts. PARTIES UNDER INDEMNITY CONTRACTS There are generally two parties in indemnity contracts. The person who promises to indemnify for a loss is the Indemnifier. On the other hand, the person whose losses the indemnifier promises to make good is the Indemnified. We can also refer to the Indemnified party as the Indemnity CONTRACT OF GUARANTEE Apart from indemnity contracts, the Contract Act also governs contracts of guarantee. These contracts might appear similar to indemnity contracts but there are some differences between them. According to section 126 of the Contract Act, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. In guarantee contracts, one party contracts to perform a promise or discharge a liability of a third party. This will happen in case the third party fails to discharge its obligations and defaults. However, the burden of discharging the burden will first lie on the defaulting third party. The person who gives the guarantee is the Surety. On the other hand, the person for whom the Surety gives the guarantee is the Principal Debtor. Similarly, the person to whom he gives such a guarantee is the Creditor. ESSENTIALS OF A CONTRACT OF GUARANTEE e Must be made with the agreement of all three parties The three parties to the contract i.e. the principal debtor, the creditor, and the surety must agree to make such a contract with the agreement of each other. Here it is important to note that the surety takes his responsibility to be liable for the debt of the principal debtor only on the request of the principal debtor. Hence communication either express or implied by the principal debtor to the surety is necessary. The communication of the surety with the creditor to enter into a contract of guarantee without the knowledge of the principal debtor will not constitute a contract of guarantee. ¢ Consideration According to section 127 of the act, anything is done or any promise made for the benefit of the principal debtor is sufficient consideration to the surety for giving the guarantee. The consideration must be a fresh consideration given by the creditor and not a past consideration. It is not necessary that the guarantor must receive any consideration and sometimes even tolerance on the part of the creditor in case of default is also enough consideration. ° Liability In a contract of guarantee, the liability of a surety is secondary. This means that since the primary contract was between the creditor and principal debtor, the liability to fulfill the terms of the contract lies primarily with the principal debtor. It is only on the default of the principal debtor that the surety is liable to repay. e Presupposes the existence of a Debt The main function of a contract of guarantee is to secure the payment of the debt taken by the principal debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in cases when the debt is time- barred or void, no liability of the surety arises. e Must contain all the essentials of a valid contract Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply in contracts of guarantee as well. Thus, all the essential requirements of a valid contract such as free consent, valid consideration offer, and acceptance, intention to create a legal relationship etc. are required to be fulfilled. ¢ No Concealment of Facts The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by the concealment of material facts e No Misrepresentation The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract of guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus, does not require complete disclosure of all the material facts by the principal debtor or creditor to the surety before he enters into a contract. But the facts, that are likely to affect the extent of surety’s responsibility, must be truly represented. DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND GUARANTEE: CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE It refers to a Contract by which one party promises to save the other from loss caused by conduct of the promisor or another person It refers to a Contract to perform the promise or discharge the liability of a third person in case of his default. In contract of indemnity, the liability of the Indemnifier is primary In contract of guarantee, the primary liability is of principal debtor and the liability of surety is secondary. Contract between the indemnifier the express and specific. and indemnity holder is Contract between surety and principal debtor is implied and between creditor and_ principal debtor is express. In contract of indemnity there are two parties, indemnifier and the indemnity holder. In contract of guarantee there are three parties i.e., creditor, the principal debtor and surety. In Contract of indemnity there is In contract of guarantee there are Illustrations of continuing guarantee 1. T, in consideration that Y will employ G in collecting the rent of Y’s zamindari, promises Y to be responsible, to the amount of Rs. 50000 for collection and payment by G of the rents and therefore, this is a Continuing Guarantee Contract. 2. T guarantees payment to Y of the price of ten sacks of wheat, to be delivered by Y to G and to be paid for the same in a month. Y delivers ten sacks to G. G pays for them. Later, Y delivers eight sacks to G which G did not pay for. The guarantee given by T was not a continuing guarantee, and thus he is not liable for the price paid for the eight sacks. LIABILITY OF THE SURETY CONTINUING GUARANTEE CONTRACT The principle of Surety’s liability is given down under Section 128 of the Contract Act, 1972 which states that the liability of the Surety is co- extensive along with that of the Principal Debtor unless it is otherwise provided by the contract. The Surety continues to be liable for transactions given by the Creditor to the Principal Debtor. The Surety is liable for any amount which may become due from time-to-time dealings or transactions between the Creditor and the Principal Debtor. The Surety is discharged from his liability when he revokes his guarantee. Liability of the Surety is secondary to the contract and consequently, if the principal debtor is not liable, the surety will also not be liable. disDIFFERENT MODES OF REVOCATION CONTINUING GUARANTEE CONTRACT ¢ By giving a Notice — As per section 130 of the Contract Act, A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. when a transaction has been made and it is in progress, the Surety’s liability with regards to that particular transaction cannot be cancelled or revoked. It applies to future transactions only. A Surety cannot revoke/waive off his liability just by giving notice. If a contract of guarantee involves a clause of certain time duration that is required to be met out before the contract can be revoked or stand cancelled, then at no chance can the Surety cannot avoid the liabilities. ILLUSTRATION: A, in consideration of B’s discounting at A’s request, a bill of exchange for C, guarantee to B, for twelve months the due payment of all such bills to the extent of 5,000 rupees. B discounts bill for C to the extent of 2,000. Afterwards at the end of three months, A revoke the guarantee. This revocation discharges A from all liability to B for subsequent discount. But A is liable for the 2000 rupees, on default of C. On death of the Surety — As per section 131 of the Contract Act, the death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. A continuing guarantee contract comes to an end by the death of the Surety. It automatically stands revoked as regards to future transactions. However, the Surety’s heirs can be held liable for those transactions that were made prior to his death. If there is any provision in the respective contract of guarantee stating that on Surety’s death, his property or legal representatives or heirs or agents can be held responsible and liable for any liability or breach incurred, then it would be a contract contrary to the meaning of Section 131 of the Contract Act, 1972, and the guarantee is not revoked even after the death of the Surety. ILLUSTRATION: A, who is the Surety, gave guarantee for the collection and the payment of rent of Creditor’s Zamindari by the Principal Debtor. An amount of Rs. 6000 along with the consideration of the employment of the Principal Debtor as an agent was put forth. Later, on death of the Surety, the Principal debtor defaulted, now according to the provision the surety is not liable for the default as he was dead at the time the debtor defaulted and his liability ended with his death. Q18: WHAT IS A CONTRACT OF GURANTEE, NAME THE PARTIES IN A CONTRACT OF GURANTEE. THE LIABILITY OF THE SURETY IS CO-EXTENSIVE WITH THAT OF THE PRINCIPAL DEBTOR, WHAT IS CO-EXTENSIVE LIABIALITY? (Contract of guarantee is discussed above) CO-EXTNESIVE LIABILITY: According to section 128 of the Contract Act, the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The provision that the surety’s liability is coextensive with that of the principal debtor means that his liability is exactly the same as that of the principal debtor. It means that on a default having been made by the principal debtor the creditors can recover from the surety all what he could have recovered from the principal debtor. A surety is discharged by any contract between the creditor and principal debtor by which the principal debtor is released or by any act or omission of the creditor. But a discharge which the principal debtor may secure by the operation of law in bankruptcy or in liquidation proceedings does not absolve the surety of his liability in an unconditional guarantee. The quantum of obligation of a surety is the same as that of a principal debtor unless there is a contract to the contrary. In other words, the extent of surety’s liability cannot be greater than that of the principal debtor. 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. COMPENSATION FOR LOSS OR DAMAGE WHICH NATURALLY AROSE IN THE USUAL COURSE OF THINGS FROM SUCH BREACH Compensations to be recovered for loss or damage which the parties knew or which would have naturally arisen in the usual course, to be likely to result from the breach of it. SECTION 73 2" PARAGRAPH DEALS WITH REMOTE AND INDIRECT LOSS OR DAMAGE It states that no compensation is payable for remote and indirect loss or damage arising out on account of breach of contract. The indirect loss cannot be said to arise on usual course of things. The aggrieved party can claim compensation for indirect loss or loss of profit, only where it is expressly made known to the other party or contemplated by contract that breach of non-performance of the contract would result in some indirect loss or loss of profit to the party. The term remoteness of damage refers to the legal test used for deciding which type of loss caused by the breach of contract may be compensated by the award of damage. SECTION 73 3" PARAGRAPH DEALS WITH BREACH OF RESEMBLING CONTRACT It confers a statutory right upon a party to get compensation from a party who has incurred a statutory obligation to pay compensation in case default even though there may be no contract to pay compensation. The party in default is under obligation to pay compensation to injured party as if there was contract and has broken such contract. SECTION 73 4" PARAGRAPH DEALS WITH: MITIGATION OF LOSSES It explains that the means which existed of remedying the inconvenience caused by the non-performance of the contract must be considered while calculating the damage or loss for breach of the contract. SECTION 74: PENALTIES IN REGARD TO BREACH OF CONTRACT The party to the contract may agree at the time of contracting that, in the occurrence of breach, the party in default have to pay a stipulated sum of money to the other, or may agree that in the event of breach by one party any amount paid by him shall be forfeited. If this sum is genuine pre- estimate of damage likely to flow from the breach is called ‘liquidated damages. If it is not genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be called as ‘penalty’. Section 74 provides for the measure of damages in two classes: (a) where the contract names a sum to be paid in case of breach; and (b) where the contract contains any other stipulation by way of penalty. ESSENCE OF PENALTY AND LIQUIDATED DAMAGE: Penalty is a payment of money to non —defaulting party, which put the other party in fear and enforces the other party to perform its promise under the contract. The penalty is deterrent in nature. A liquidated damage is a genuine and reasonable pre-estimate of damage. Liquidated damages mean it shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage. SECTION 75. COMPENSATION TO THE PARTY RIGHTFULLY RESCIDING THE CONTRACT A person who rightfully resides the contract is entitled to compensation for any damage which he has sustained through non fulfillment of the contract. A party to a contract is entitled to rescind the contract in circumstances given in Section 39, 53, 55, 64 and 65 of the Contract Act. The claim for compensation under Section 75 is maintainable when the right of repudiation of the contract has been exercised either of the Section 39, 53, 54 and 55 of the Contract Act. Remedies for Breach of Contract 1] Recession of Contract When one of the parties to a contract does not fulfil his obligations, then the other party can rescind the contract and refuse the performance of his obligations. As per section 65 of the Contract Act, the party that rescinds the contract must restore any benefits he got under the said agreement. And section 75 states that the party that rescinds the contract is entitled to receive damages and/or compensation for such a recession. 2] Sue for Damages Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation for loss or damages caused to them in the normal course of business. Such damages will not be payable if the loss is abnormal in nature, i.e., not in the ordinary course of business. There are two types of damages according to the Act, « Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in case of a breach. This is known as liquidated damages. ¢ Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by the courts or any appropriate authorities. 3] Sue for Specific Performance contract, so all essential elements of a valid contract like consent, competency, etc. are required for it to be valid. But a valid bailment can arise even without a valid contract between the two parties, for example, a lost good finder becomes a bailee and has the responsibility to return it to its owner, the bailer, even if no contract exists between them. ESSENTIAL FEATURES © Delivery of Possession There must be a delivery of goods, which means, delivery of possession of the goods by the bailer to the bailee to fulfill the purpose of bailment. Possession refers to exercising control over the good and excluding any other person to do the same. Section 149 of the Contract Act, 1872 talks about the same. The delivery of possession can either be actual or constructive. It means that either the good can directly be put in the actual physical possession of the bailee or put the bailee in a position of power over such goods that can be physically possessed later, if possible. In constructive delivery, the bailor gives the bailee means of accessing the custody of the good and not its actual delivery. For example, C has a rare coin locked safe deposit box. As the delivery of a safe deposit box is impossible, when C, bailor, gives the key of the deposit box for the bailment of the coin to A, bailee, it would be considered as constructive delivery. e Delivery upon Contract There must be a contract between the bailor and the bailee for such transfer or good and its return. If there is no contract, there cannot be bailment. Moreover, the contract can either be expressed or implied. Exception: If the good is lost, the finder of good will be seen as the bailee even if there was no contract of Bailment or delivery of goods under a contract. A finder of goods is a person who found a lost good belonging to someone else and keeps it under his possession until the owner of the good is found. This leads to an involuntary form of Bailment contract between them. The finder has all rights and duties that of a bailee. e Delivery must be for some purpose It is essential that there must be a purpose for which the delivery of the goods takes place. If after the completion of the purpose of bailment the good is not accounted for, then bailment cannot arise. This is an important feature as it separates it from other relations like agency, etc. e Return of goods After the completion of the purpose, the good must be delivered to the bailor or dealt with as per his instructions. If he/she is not bound to return the good then there is no bailment. Even if there is an agreement to return an equivalent and not the same good, it will not amount to bailment. For example, a tailor receives a dress for stitching as he is the bailee. After the dress has been stitched, the tailor is supposed to return it to the bailor. Moreover, it is necessary for the bailee to follow the instruction given by the bailor for the purpose of the return of the good if any. TYPES OF BAILMENTS Bailment can be broadly categorized into two types: 1. ON THE BASIS OF REMUNERATION ¢ Gratuitous Bailment When a bailment is made without any consideration of benefit to the bailor or to the bailee, it is referred to as gratuitous bailment. In simple terms, it is a bailment without any consideration. For example, when one lends a book to a friend free of cost. This is gratuitous bailment. e Non-Gratuitous Bailment When generally there is a consideration for bailment between the bailor and the bailee then it is referred to as non-gratuitous bailment. For example, when someone gets a book issued from a library in exchange for a fee. This is non-gratuitous bailment. 2. ON THE BASIS OF BENEFITS TO THE PARTIES e For the exclusive benefit of the bailor In this case, the bailor delivers his/her good to the bailee for safe custody. There is no benefit/benefit for the bailee. For example, leaving a pet with a neighbor when going out. e For the exclusive benefit of the bailee In this case, the bailor delivers a good for the benefit of the bailee. For example, a friend borrowing our car for a week. e For the mutual benefit of them both In the case of gratuitous bailments, if the bailor demand back the goods bailed before the specified time or purpose, he must indemnify the bailee for any loss which the bailee has suffered. (Section 159) e) Duty to compensate bailee for defective title: The bailor is responsible to the bailee for any loss sustained by him owing to any defect in the title of the bailor to the goods bailed. (Section 164) f) Duty to take the goods back: Bailor is responsible to take the goods back from the bailee, when on the accomplishment of the purpose of bailment, he returns them to him. RIGHTS AND DUTIES OF BAILEE: 1. RIGHTS OF THE BAILEE: Following are the rights of the bailee: a) Right to claim damages: A bailee has a right to claim damages from the bailor for any loss arising directly from faults in the goods bailed. b) Right to recover expenses: The bailee is entitled to recover all necessary expenses incurred by him for the purpose of bailment, from the bailor. c) Right to deliver goods: If several joint owners of goods bail them, the bailee may deliver them back to, or according to the direction of one joint owner without the consent of all in the absence of any agreement to the contrary. (Section 165) d) Right to compensation: If the bailor has no title to the goods and the bailee in good faith, delivers them back to, or according to the direction of the bailor and as a result bailor sustain any loss, the bailee may ask to the bailor to compensate him for such a loss (section 167) e) Right to sue: If a third person wrongfully deprives the bailee of the use or possession of the goods bailed or does them any injury, the bailee is entitled to sue such persons as the owner might have sued in the like cases if a bailment had been made. f) Right to lien: Where the bailee has rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has a right to retain such goods until he receives due remuneration for the services, he has rendered in respect of them. (Section 170) 2. DUTIES OF THE BAILEE: The duties of the bailee are as under: a) Duty to take reasonable care: The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances take of his own goods of the same bulk, quality and value as the goods bailed. The bailee is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described above. b) Duty not to make unauthorized use: If the bailee makes any use of the goods bailed which is not according to the conditions of the bailment he is liable to make compensation to the bailor for any damages arising to the goods from or during such use of them. (Section 154) c) Duty to return goods: As soon as the time for which goods were bailed has expired or the purpose for which they were bailed has been accomplished, it is the duty of the bailee to return or deliver, according to the bailor’s direction the goods bailed without demand. (Section 160). If by the default of the bailee, the goods are not returned or tendered at proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. (Section 161) d) Duty to return increase: In the absence of any agreement to the contrary, the bailee is bound to return to the bailor natural increases or profits accruing to the goods during the period of bailment. This is so provided in section 163 as follow: “In the absence of any contract to the contrary. The bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have occurred from the goods bailed.” 4) Limited interest: According to section 179 of the contract act, where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. 5) No transfer of ownership: There must be a transfer of possession to the pledgee and not transfer of ownership, if there is a transfer of ownership the transaction may be a sale or exchange but not a pledge. RIGHTS AND DUTIES OF PAWNOR: RIGHTS OF PAWNOR: The rights of pawnor are as under: 1. Right to redemption of goods: If the pawnee sells the thing pledged without giving reasonable notice to the pawnor, the later has a right to file suit for redemption of goods. 2. Right to redeem: A pawnor making default in payment of a debt at a stipulated time can redeem the debt at any time before the actual sale of the goods. (Section 177) 3. Right to claim damages: A pawnor has also a right to claim damages from pawnee, if the later mixes his own goods with those of the pawnor or converts them into other forms. 4. Right to claim increase. The pawnor has the right to take back with the goods the increase, if any on making the full payment on stipulated time. 5. Preservation and maintenance. The pawnor can enforce the preservation and _ property maintenance of the goods pledged. DUTIES OF PAWNOR: The duties of pawnor are as under: 1. Duty to compensate pawnee: It is the responsibility of the pawnor to compensate the pawnee for those extraordinary expenses incurred by him for the preservation of the goods pledged. (Section 175) 2. Duty to complete obligation: It is the duty of the pawnor that he should complete his obligation regarding the contract on stipulated time. RIGHTS AND DUTIES OF PAWNEE: RIGHTS OF PAWNOR: The rights of pawnee are as under: 1. Right to redemption of goods: The pawnee can retain the goods pledged until his dues are paid. He can retain the goods not only for payment of the debt or performance of the promise, but for the interest due on the debt, all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. 2. Right to retain: He may retain the goods as collateral security pending his own suit for recovery of debt. 3. Right to receive extraordinary expenses: The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods. He can only sue to recover them. (Section 175) 4. Right to sell the goods pledged: If the pawnor makes any default in payment of debt or performance, at the stipulated time of the promise, the pawnee may sell the thing pledged on giving the pawnor reasonable notice of sale. 5. Right to retain other debts: Pawnee shall not in the absence of a contract to contrary, retain the goods pledged for any debt or promise other than debt or promise for which they are pledged. But such contract in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by pawnee. 6. Right to recover balance: and due to causes which are beyond his control the bailee cannot be made responsible for such loss. Q23: WHAT IS THE LIABILITY OF BAILEE MAKING UNAUTHORIZED USE OF GOODS BAILED? LIABILITY OF BAILEE MAKING UNAUTHORIZED USE OF GOODS BAILED: As per section 154 of the contract act, if the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. ILLUSTRATIONS (a) A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse. (b) A hire a horse in Karachi from B expressly to march to Karachi. A ride with due care, but marches to Hyderabad instead. The horse accidentally falls and is injured. A is liable to make compensation to B for the injury to the horse. Section 154 provides that, if the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor of any damage arising to the goods from or during such use of them. Where a car has been entrusted to the defendant as a bailee and the evidence establishes that he was using it for his private purpose in contravention of his agreement with the bailor, the bailee is liable for the damage arising from such use. Goods must be used by the bailee strictly for the purpose for which they have been bailed to him. Any unauthorized use of the goods would make the bailee absolutely liable for loss of or damage to the goods. Q24: WHAT IS A CONTRACT OF AGENCY? DEFINE PRINCIPAL AND AGENT. OR Q: DEFINE AGENT AND PRINCIPAL. WHO MAY APPOINT AGENT AND WHO MAY BE APPOINTED AS AGENT? INTRODUCTION: When one party delegates some authority to another party whereby the latter performs his actions in a more or less independent fashion, on behalf of the first party, the relationship between them is called an agency. Agency can be express or implied. Chapter X of the Contract Act, 1872 deals with the laws relating to Agency. It is important to know the law relating to agency because nearly all business transactions worldwide are carried out through agency. All corporations, big or small, carry their work out through agency. Therefore, laws relating to the agency are an important area of Business Law. Relationships relating to principal and agent involve three main parties: The Principal, the Agent, and a Third Party. WHO IS AN AGENT? The Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any act for another or to represent another in dealing with third persons. WHOIS A PRINCIPAL? According to Section 182, The person for whom such act is done, or who is so represented, is called the “principal”. Therefore, the person who has delegated his authority will be the principal. Illustrations + A,a businessman, delegates B to buy some goods on his behalf. Here, A is the principal and B is the agent, and the person from whom the goods are bought is the ‘Third Person’. « Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal, Mary is the Agent and the Bank is the Third Party. + Lavanya lives in Mumbai, but owns a shop in Delhi. She appoints a person Susan to take care of the dealings of the shop. In this case, Lavanya has delegated her authority to Susan, and she becomes a principal while Susan becomes an agent. WHO CAN APPOINT AN AGENT? According to Section 183, any person who has attained the age of majority and has a sound mind can appoint an agent. In other words, any person capable of contracting can legally appoint an agent. Minors and persons of unsound mind cannot appoint an agent. WHO MAY BE AN AGENT? In the same fashion, according to Section 184, the person who has attained the age of majority and has a sound mind can become an agent. A sound mind and a mature age is a necessity because an agent has to be answerable to the principal. AGENT’S DUTIES TO PRINCIPAL An agent has 6 duties towards his principal: 1. He has to conduct the business of the principal according to the directions of the principal. 2. An agent is bound to conduct the business he is supposed to conduct with as much skill as a person on his position ordinarily holds.