Contracting
CONTRACT- According
CONTRACT A di t sec.2(h)
to 2(h) off Indian
I di
Contract Act, 1872, a contract is defined as an
agreement enforceable by law.
law
AGREEMENT - According to sec.2(e),sec 2(e) every
promise and every set of promises, forming
consideration for each other,, is an agreement.
g
PROMISE - According to sec.2(b), when a
person makes
k a proposall to another,
h if proposall is
i
assented/accepted, it becomes a promise.
OFFER - According
A di tto S
Sec.2(a),
2( ) when
h a person
made a proposal, he signifies to another his
willingness to do or to abstain from doing
something with a view to obtaining the
assent of the other to such acts or
abstinence.
AGREEMENT = OFFER + ACCEPTANCE
CONSENSUS - AD – IDEM-
According to Sec
Sec.13,
13 meeting of minds or
identity of minds or receiving the same thing
in same sense at same time
time.
•Offer & acceptance.
acceptance
•Intention to create legal relationship.
•Consensus ‐ ad ‐ idem.
•Consideration.
•Capacity to contract.
•Free consent.
•Legality of object.
•Possibility of performance.
performance
•Writing & registration.
OFFER
According to Sec.2(a), a person makes a
proposal, when he signifies to another
his willingness to do or to abstain from
doing something.
TYPES OF OFFER
Express offer
Implied offer
Specific offer
General offer
Cross offer
Counter offer
Standing offer
Express offer - When offer is given to another
person either in writing or in oral.
oral
Implied offer - When offer is given to another
person neither in writing nor in oral.(For
oral (For example,
example
when a coolie picks up your luggage to carry it from
railwayy pplatform to the taxi,, it means that the coolie is
offering his service for some payment)
Specific offer - When offer is given to a
specific person.
General offer - When offer is given to entire
world at a large.(Carlill Vs. Carbolic smoke ball
Co.,)
,)
Cross offer - When both the persons are making identical
offers to each other in ignorance of other’s offer.
Counter offer - When both the persons are making offers
to each other which are not identical in ignorance of
other’s offer.
Standing offer - An offer which remains continuously
enforceable for a certain period of time.
LEGAL RULES OF OFFER
Offer must be given with an intention to create
a legal relationship.
Offer
Off must be b definite.
d fi i
There is a clear cut difference between offer,
invitation to offer,
offer invitation to sale.
sale
Offer must be communicated.
Mere statement of price is not an offer.
ACCEPTANCE
According to sec.2(b), when a person to
whom the proposal is made signifies his
assentt thereto,
th t the th proposall is
i said
id to
t be
b
accepted.
LEGAL RULES OF ACCEPTANCE
•Acceptance
p must be g
given as p
per the mode p
prescribed
by the offerer.
• Acceptance must be given before the lapse of time or
within
ithi reasonable
bl time.
ti
• Acceptance must be unconditional.
• Acceptance may be given by any person in case of
general offer.
• Acceptance has to be given by specific person in
case the said p
person is specifically
p y authorized.
• Acceptance must be communicated.
• Mental acceptance is no acceptance or acceptance
must not be derived from silence.
• Acceptance cannot be before offer.
According to Sec. 5 of the Act, a proposal may be revoked at any
time before communication of its acceptance is complete as against
the proposer, but not afterwards.
afterwards
An acceptance may be revoked at any time before the
p
communication of the acceptance is complete
p as against
g the
acceptor, but not afterwards.
CONSIDERATION
According to sec 2(d) when at the desire of the promisor, the
promisee or any other person has done or abstained from
doing or does or abstains from doing,
doing, doing or promises to do or to
abstain from doing, something, such an act or abstinence or
promise is called a consideration for the promise .
LEGAL RULES AS TO CONSIDERATION
y It must be at the desire of the promisor.
y It may be by the promisee .
y It could be past, present or future .
y It need not be adequate
q .
y It must be real .
y It must not be illegal
g , immoral or opposed to
public policy .
Contract without consideration is
void – Exceptions (Sec
(Sec‐25)
25)
y Natural Love & affection between near relations.
y Compensation for voluntary service .
y Promise to pay a time – barred debt .
y For creating Agency – (sec 185) .
y Contract off bailment ‐ (sec 148 ) .
The image part with relationship ID rId3 was not found in the
file.
y Charity .
Competent to contract (Sec 11)
y Should be major
y Should be of sound mind
y Should not be disqualified by any other law.
y Should
Sh ld nott be
b insolvent
i l t
Minor
According
g to sec(3)
( ) of Indian
Majority Act any person under the
age of 18 years is a minor.
AGREEMENT WITH MINOR
y An agreement with minor is void ab initio
y Minor can be promisee
y Minor cannot ratify his agreement on
attaining the age of majority
Unsound person
y According to sec 12, a person generally sound ,
occasionally
y unsound can enter into a contract
when he is of sound mind
y A person generally of sound mind occasionally of
unsound mind cannot enter into contract when he
is of unsound mind .
Persons of unsound mind
1)Lunatic,
2)Idiots,
3)Drunken or intoxicated persons .
FREE CONSENT
According to Sec 10 of the Indian Contract Act
one of the essentials of a valid contract is “Free
Consent
Consent”
Sec 13 defines “consent” as “two or more persons
are said to consent when they agree upon the
same thing in the same sense”.
According to Sec 14, consent is said to be free
when it is not caused by:
1.Coercion
2.Undue influence
3F d
3.Fraud
4.Misrepresentation
5 Mistake
5.Mistake
COERCION
According to Sec 15 coercion means
“C
“Committing
itti or threaten
th t t commitit any actt
to
forbidden by Indian Penal Code, 1860 or
unlawful detaining or threating to detaining
any other persons property with a view to
enter into an agreement. It is immaterial
whether the IPC is or is not in force where
the coercion is employed
employed”
The threat amounting
g to coercion need not
necessarily be from a party to contract , it
may also proceed from a stranger to the
contract.
UNDUE INFLUENCE
A contract is said to be induced by “undue
influence” where the relations subsisting
between the parties are such that one of
the parties is in a position to dominate the
will of the other and uses that position to
obtain an unfair advantage over the other.
Scope of undue influence between the
following persons:
‐Principal and agent
‐Superior and subordinate
‐Doctor and patient
‐Father and son
‐Teacher and student
‐Promoter and company
‐Master servant
‐Spiritual advisor and devotee
Among the following relations there is no
undue influence
1.wife and husband
2.landlord and tenant
3.debtor and creditor
FRAUD
According to Sec 17, fraud means and includes any of
those acts committed by a party to contract or with
his connivance or by his agent with an intent to
deceive or induce a person to enter a contract:
1. The suggestion that a fact is true when it is not
1
true and the person making it does not believe in
it to be true
2. The active concealment of a fact by a person
having knowledge or belief of the fact
3. A promise made without any intention of
performing it
4. Any other act fitted to deceive
5. Any such act or omission as the law specially
declares to be fraudulent
MISREPRESENTATION
Accordingg to Sec 18 there is
misrepresentation:
1. When a person positively asserts a fact is
true when his information does not
warrant it to be
b so, though
h h he
h believes
b l it to
be true
2. When there is anyy Breach of dutyy byy a
person which
hi h brings
bi an advantage
d to the
h
person committing it by misleading
another to his prejudice
3. Wh a party causes however
When h i
innocentlyl
the other party to the agreement to make a
mistake as to the substance of the thing
which s the subject of the agreement
UNLAWFUL OBJECT
y If the object of an agreement is the
performance of an unlawful act,
act the
agreement is unenforceable.
y For a contract to be valid only if the object
and the consideration is legal.
y The word object means purpose or design.
design
INDEMNITY (Sec 124)
A CONTRACT BY WHICH ONE PARTY
PROMISES TO ANOTHER TO SAVE HIM
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
ESSENTIAL FEATURES OF
INDEMNITY
9 There are two persons , the indemnifier the
indemnified or the indemnity holder
9 There must be loss either by the promisor’s
conduct or by any other person’s conduct
9 It is a contingent contract by nature
9 It may be express or implied
Sec125 deals with the commencement of the
indemnifier’s liability. His liability commences
when the event causing the loss occurs or when
the event saving the indemnified from the loss
becomes impossible
GUARANTEE (Sec 126)
A CONTRACT OF GUARANTEE IS A CONTRACT
TO PERFORM THE PROMISE, OR DISCHARGE
THE LIABILITY,OF
LIABILITY OF A THIRD PERSON IN CASE
OF HIS DEFAULT. THE PERSON WHO GIVES
THE GUARANTEE IS KNOWN AS THE ‘SURETY’,
THE PERSON IN RESPECT OF WHOM THE
GUARANTEE IS GIVEN IS KNOWN AS THE
‘PRINCIPAL DEBTOR’, AND THE PERSON TO
WHOM THE GUARANTEE IS GIVEN IS CALLED
THE ‘CREDITOR’. A GUARANTEE MAY BE
EITHER ORAL OR WRITTEN.
WRITTEN
ESSENTIAL FEATURES OF
GUARANTEE
y Concurrence of three contracts
y Primary liability
l b l is that
h off the
h principall
debtor
y In case the debtor is a minor , the surety’s
liability becomes primary
y All the essentials of a valid contract
y It may be in writing or oral
y There need not be full disclosure of facts
to the surety before he gives the guarantee
TYPES OF GUARANTEE
y SPECIFIC GUARANTEE :
When a guarantee extends
Wh d to a single
i l transaction
i
or debt it is known as a specific or simple
guarantee
CONTINUING GUARANTEE :
When a guarantee extends to a series of
transactions
It is called continuing guarantee
DISCHARGE OF A CONTRACT
DISCHARGE BY PERFORMANCE
DISCHARGE BY AGREEMENT OR
CONSENT
DISCHARGE BY IMPOSSIBILITY OF
PERFORMANCE
DISCHARGE BY LAPSE OF TIME
DISCHARGE BY OPERATION OF LAW
DISHARGE BY BREACH OF CONTRACT
AGENT
Sec 182 defines an agent as a person
employed to do any act for another , or to
represent another in dealings with third
persons. The
Th person for f whom
h such
h actt is
i
done is called the principal
ESSENTIALS OF RELATIONSHIP OF AGENCY
y Agreement between principal & agent
y Intention of agent to act on behalf of the
principal
y Anyone
A can b
be an agentt
y Anyone can employ an agent
CREATION OF AGENCY
y BY EXPRESS AGREEMENT
y BY IMPLIED AGREEMENT
Agency b
A by estoppel
t l
Agency by holding out
A
Agency b
by necessity
it
y AGENCY BY RATIFICATION
y AGENCY BY OPERATION OF LAW
Termination of Agency
y act of p
y By parties
Agreement
Revocation by the principal
R
Revocation
ti byb th
the agentt
y By operation of law
Performance of the contract
Expiry of time
Death of either party
Insanity of either party
Insolvency of either party
Destruction of the subject matter
Principal becoming an alien enemy
Dissolution of a company
Termination of sub‐agents authority
y In the case of Super Poly Fabriks ltd., vs.Commissioner
Central Excise, Punjab reported in 2008 (10) STR 545,
Hon’ble
Hon ble Supreme Court while referring Assam Small Scale Ind. Dev.
Corp. Ltd vs. J.D. Pharmaceuticals held that “the expression
principal and agent used in a document are not decisive. The
nature of transaction is required to be determined on the basis of
th substance
the b t th
there and
d nott by
b the
th nomenclature
l t used.
d Documents
D t
are to be construed having regard to the contexts thereof.
y Karakattu
K k tt communications
i ti vs. CCE,
CCE Cochin
C hi reported
t d ini
2007(8) STR 164, 2007 the principal question was raised as to
whether the transaction of sim cards is coming under the purview
of sale or service in view of the fact that the same is subjected to
sales tax. Hon’ble CESTAT, Bangalore while allowing the appeal
held that, service tax is not applicable on such transactions.
Subsequently, in case of Chetan Traders vs. CCE, Jaipur,
CESTAT Delhi
CESTAT, D lhi Bench
B h while
hil relying
l i on the
th above
b d i i
decision h
has also
l
decided the issue in favour of the assessee, treating the
transaction (sale of sim cards) as a sale.
TIRUMALA VENKENTASWAR TIMBER &
BAMBOO FIRM VS. CTO
y As a matter of law there is a distinction between a
contract of sale and a contract of agency by which the
agent is authorized to sell or buy on behalf of the
principal
i i l andd makek over either
ith the
th sale
l proceedsd or the
th
goods to the principal. The essence of a contract of sale
is the transfer of title to the goods for a price paid or
promised to be paid. The transferee in such a case is
liable to the transferor as a debtor for the price to be
paid and not as agent for the proceeds of the sale. The
essence of agency is to sell them, not as his own
p ope t but
property b t as the property
p ope t of the principal
p in ipal who
ho
continues to be the owner of the goods and will
therefore be liable to account for the sale proceeds.
HALSBURY’S LAWS OF ENGLAND ON PRINCIPAL
AND AGENT REFERRED IN BHOPAL SUGAR CASE
y A contract of agency differs from a contract of sale in
as much as an agent,
agent after taking delivery of the
property, does not sell it as his own but sells it as the
property of the principal under his instructions and
directions. The relation of principal and agent raises
b implication,
by i li ti a contract
t t on the
th partt off the
th principal
i i l
to reimburse the agent in respect of all expenses, and
to indemnify him against all liabilities, incurred in the
reasonable performance of the agency provided that
such implication is not excluded by the express terms
of the contract between them, and provided that such
expenses and liabilities are in fact occasioned by his
employment.
l t
Letter of Intent (LoI), is a document that describes a formal
agreement between two parties. It is a non‐committal written
statement
t t t detailing
d t ili the
th preliminary
li i understanding
d t di off theth parties
ti who
h
intend to enter into a contract at a future date.
The sole purpose of entering into a MoU is to record the consensus of
the parties to enter into a contract in the future.
future The parties,
parties through
a MoU, generally do not intend to raise an obligation or create an
obligation on either party. It is not a legal agreement but it helps in
indicating the establishment of a business relationship that will
continue and likely result in a legal agreement such as a contract in
the near future.
According to Section 10 of the Act, agreements made by
parties, competent to contract under the Act, of their own
f
free willll and for
f a lawful
l f l consideration and object
b are
contracts
Clauses under the MoU making provision for an
enforcement mechanism in case of breach by either party
will confirm that the parties did intend to enter into a
binding agreement.
A MoU containing preliminary terms is non‐binding, unless
a binding understanding between the parties can be
inferred from the context.
context
The Courts have given mixed opinions regarding the
bindingness and enforceability of Memorandums of
Understanding. It can be said that the enforceability and
bindingness of such Memorandums depends on the intention
of the parties as seen from the terms of the agreement.
The Hon’ble Supreme Court in Dresser Rand
S A vs Bindal
S.A Bi d l Agro
A Ch
Chem L d (2006) 1 SCC
Ltd
751 held that a Letter of Intent may be
construed as a letter of acceptance if such
intention is evident from its terms. It is not
uncommon in contracts involving detailed
procedure, in order to save time, to issue a
letter of intent communicatingg the acceptance
p
of the offer and asking the contractor to start
the work with a stipulation that the detailed
contract would be drawn up later
If such a letter is issued to the contractor, though it
may be
b termedd as a Letter off Intent, it
i may amount to
acceptance of the offer resulting in a concluded
contract between the parties. But the question
whether the letter of intent is merely an expression of
an intention to place an order in future or whether is
a final acceptance of the offer thereby leading to a
contract, is a matter that has to be decided with
reference to the terms of the letter
In the case of Rickmers Verwaltung Gmbh v. Indian Oil
Corporation Ltd [1999 (1) SCC 1] it has been held by
the Apex Court that whether there was any meeting of
mind between the parties, which could create a binding
contract between
b them
h b the
but h Court
C i not empoweredd
is
to create a contract for the parties by going outside the
clear language
g g used in the correspondence,
p , exceptp
insofar as there are some appropriate implications of
law to be drawn
U l
Unless f
from the
h correspondence
d i can unequivocally
it i ll
and clearly emerge that the parties were ad idem to the
terms,
e s, it ccannoto be ssaid
d that an agreement
g ee e hadd cocomee
into existence between them through correspondence.
Whereas in Trimex International Fze Limited v. v Vedanta
Aluminium Limited 2010 (1) SCALE 574, the Hon’ble
Supreme Court took a contrary view in typical fact and
circumstances of the case. It is held that a contract is said to
be concluded when parties agree as to the ‘essential
terms’ of the contract though minor details can be left over
for them to decide later, albeit subject to satisfaction of other
requirements as provided by S.10:
S 10: without such essential
terms being decided, contract cannot be enforced by
law as it is deemed to be incomplete.
