Corp Comm Legal
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MODULE - 3
ESSENTIAL COMPONENTS OF
The Indian Contract Act occupies the most important As per Section 10 of the Indian Contract Law, 1872,
place in the Commercial Law. Without contract Act, it an agreement is a contract which is enforceable by
would have been difficult to carry on trade or any law. An agreement is enforceable by law and can be
other business activity and in employment law. It is defined as a valid contract if it is made by competent
not only the business community which is concerned parties, out of their free consent and for lawful
with the Contract Act, but it affects everybody. The object and consideration. In simple words, a contract
objective of the Contract Act is to ensure that the is an agreement binding between two or more
rights and obligations arising out of a contract are parties intending to create a legal relationship, in
honored and that legal remedies are made available to which one makes the proposal while the other
those who are affected. accepts the proposal or offer and thus it becomes a
promise. Such acceptance has to be certain and not
The Indian Contract Act, 1872 deals with the vague and must be free from any undue influence,
principlesoflaw ofcontract,itsessentialelements,its force ormisrepresentation.
formation, its performance and the remedies for the
breach of contracts. It determines the circumstances Both the parties to the contract must be major, sound
in which promises are made by the parties to a mind and not declared disqualified by any law for the
contract, general principles of the formation of time being in force in India. As per Section 23 of the
contract and also prescribes the remedies which are Indian Contract Act, 1872 the object of the contract
available in the Court of law for the breach of contract and the consideration must be lawful. It must be
against a person who fails to perform his undertaking certain, definite and not vague and such as are capable
created under the Contract. of performance. A contract may be made by words
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spoken or written. In India, usually where there is a one's wife and children does not arise out of contract.
statutory need that contract for example Agreements Agreements which result in the transfer or the
relating to mortgage, sale, lease etc must be made in destruction of rights are not covered by the Contract
writing, attested by witnesses, signed by the parties Act.
and to be registered by the parties in order to make
that agreementenforceable. Meaning and Nature of Contract
A contract has been defined as follows: Salmond defines
3.1 The Contract Act, 1872 a contract as “an agreement creating and defining
The Indian Contract Act, 1872 defines the term obligations between the parties”. Sir William Anson
“Contract” under its section 2 (h) as “An agreement observes, A contract is an agreement enforceable at law
enforceable by law”. In other words, we can say that a made between two or more persons, by which rights are
contract is anything that is an agreement and acquired by one or more to acts or forbearances on the
enforceable by the law of the land. This definition has part of other or others. According to Sir Federick
two major elements in it viz – “agreement” and Pollock, “Every agreement and promise enforceable at
“enforceable by law”. law is a contract”. Sec. 2(h) of the Indian Contract Act
Application of the English Law defines a contract as “An agreement enforceable by
In case, a particular matter is not covered by any section law”. These definitions resolve themselves into two
of the Contract Act or by any other law in force in India, distinct parts: First, there must be an agreement.
the courts may follow the principles of English Common Secondly, such an agreement must be enforceable
Law, provided they are not inconsistent with Indian bylaw and an agreement to be enforceable must be
conditions and circumstances. Indian Contract Act coupled with obligation and the obligation has its source
applies only to those agreements which are valid and in law. Thus a contract requires:
enforceable by law. Further, the Law of Contract is not (i) Two Parties: There must be two parties to
the whole law of agreements nor is it the whole law of constitute a contract. A contract can only be bilateral
obligations. An agreement which does not give rise to and the same party cannot be a party from both the
any legal obligations will not be enforceable by law. sides. Hence, there cannot be a contract between A on
There are various social, religious and moral obligations, one side and A on the other. Nor can a partner be a
e.g., marriage, conveyance of gifts, etc., which are not servant of his own firm as a man cannot be his own
enforceableby law as contracts.Obligation to maintain employer. A person cannot enter into a contract with
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himself. The person who makes the promise is known as contract, as it was not intended to give rise to any legal
the “promisor” and the person to whom the promise is obligation. Similarly, an agreement to agree in future is
made is known as the “promise”. As a matter of fact in a not a contract because unless all important terms of the
contract each party is a promisor as well as promisee. contract are settled, there cannot be any binding
For example when A promises to sell his car for a sum of obligation. Such agreements are void for want of
Rs.20,000 to B,A is a promisor because he has promised certainty. For example, if A agrees to sell 100 bales of
to sell his car while he is also a promisee because there is cotton to B at a price to be settled in future.
a promise from Bto pay a sum of Rs. 20,000 to him. The
same is the position of B. All Obligations also do not constitute contracts
(ii) An Agreement: A proposal from
the side of one party to do or abstain from doing a Any obligation, which arises independently of an
particular act and its acceptance by the other party are agreement, cannot be the basis of a valid contract. A
the two essential elements of an agreement. An domestic arrangement with no intention to create
agreement is constituted by means of an offer and a legally binding relations will not constitute a contract,
binding acceptance of the offer. Thus, an agreement suchasapromisebyafathertopaypocketmoneyto his
occurs when two minds meet for a common purpose; son.In the words of Lord Atkin, “The most usual form of
they mean the same thing in the same sense at the same agreements,which do not constitutea contract,are the
time. The meeting of the mind is called consensus ad agreements made between husband and wife”. They are
idem, i.e., consent to the matter.For example; if A says to not contracts because the parties do not intend that
B that he is willing to sell him his car for Rs.20,000 and B they should be attended by legal consequences.
gives his assent to this offer, the agreement will come
into being. 3.1.1 Agreement
(iii) An Obligation: An obligation is Initssection2(e),theActdefinesthetermagreementas
the legal duty to do or abstain from doing something. An “every promise and every set of promises, forming the
agreement to a contract should give rise to some legal consideration for each other”. The Act defines the term
obligation i.e., obligation which is enforceable at law. “agreement”, there may be some ambiguity in the
Agreements which give rise only to social or domestic definition of the term promise.
obligations cannot be termed as contracts. Thus, an All contracts are agreement but all agreements are not
agreement to go to a picture or attend a dinner is not a contracts- This implies that for an agreement to become
a contract there are essential considerations and
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stipulations which have to be complied. Thus, an contracts.Obligationsarising from a trust or a decree or
agreement which is legally enforceable is a contract. All fromstatutesdo notfallwithinthescopeoftheContract
agreements are contracts if they are made by the free Act. Thus, an agreement is the genus ofwhich contract is
consent of the parties competent to contract, for a the species, and therefore, all contracts are agreements
lawful consideration and with a lawful object and are not butallagreementsarenot contracts.Hence,“thelaw of
hereby expressly declared to be void. contractsis notthewholelaw ofagreementsnoris it the
Leading Case-Balfour v. Balfour (1919) whole law of obligations. It is the law of those
Mr. Balfour left his wife in England on medical grounds agreements which create obligations, and those
andleftforCeylon,theplaceofhisappointment.He had obligations which have their sources in agreements.”
promised to pay £30 P.M. to his wife until he returns. — Sir John Salmond.
Subsequently, he stopped sending money to her and 3.1.2 Promise -This ambiguity is removed by the Act
decided to live apart. The wife sued the husband for the itself in its section 2(b) which defines the term “promise”
herconsenttotheagreementwasenoughto constitute signifies his assent thereto, the proposal is said to be
valid consideration for the contract. The court did not accepted. Proposal when accepted becomes a promise”.
agreewiththeviewsofthewifeanddismissedherclaim. 3.1.3 Agreement & Promise
Itwasheldthatit wasonlya domesticarrangementand An agreement is an accepted promise, accepted by all
not a legalcontractbecause domestic arrangements are the parties involved in the agreement or affected by it.
outside the realm of contract altogether. However, This definition thus introduces a flow chart or a
partiesstandingin a domesticorsocialrelationshipmay sequence of steps that need to be triggered in order to
enter into an enforceable contract they intend their establish or draft a contract. The steps may be
agreements to have legal consequences described as under:
In Merrit v. Merrit (1970), therefore, to sum up, a
contract results from a combination of agreement and i.The definition requires a person to whom a
obligation. But it is not necessary that all agreements certain proposal is made.
should create an obligation between the parties to the
agreements.An agreementmayexistwithoutanylegal ii. The person (parties) in step one has to be in a
obligation buta contract cannot. Agreements giving rise position to fully understand all the aspects of a
to social obligations will not constitute binding proposal.
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iii. “Signifies his assent thereto” – means that the expenditure of money or effort, a promise to
person in point one accepts or agrees with the perform some service, an agreement not to do
proposal after having fully understood it. something, or reliance on the promise.
Consideration is the value that induces the parties
iv. Once the “person” accepts the proposal, the status to enter into the contract.
of the proposal changes to “accepted proposal”.
The existence of consideration distinguishes a
v.“Accepted proposal” becomes a promise. Note that contract from a gift. A gift is a voluntary and
the proposal is not a promise. For the proposal to gratuitous transfer of property from one person to
become a promise, it has to be accepted first. another, without something of value promised in
return. Failure to follow through on a promise to make
Thus, in other words, an agreement is obtained from a a gift is not enforceable as a breach of contract
proposal once the proposal, made by one or more of the because there is no consideration for the promise.
participants affected by the proposal, is accepted by all
the parties addressed by the agreement. To sum up, we 3. Acceptance - The offer was accepted
can represent the above information below: unambiguously. Acceptance may be expressed
through words, deeds or performance as called for
Agreement = Offer + Acceptance. in the contract. Generally, the acceptance must
mirror the terms of the offer. If not, the acceptance
3. 2 Essentials components of Contract is viewed as a rejection and counteroffer.
When a party files a suit claiming a breach of contract, If the contract involves a sale of goods (i.e. items that
the first question the judge must answer is whether a are movable) between merchants, then the
contract existed between the parties. The acceptance does not have to mirror the terms of the
complaining party must prove four elements to show offer for a valid contract to exist, unless:
that a contract existed:
(a) The terms of the acceptance significantly
1. Offer - One of the parties made a promise to do alter the original contract; or
or refrain from doing some specified action in the
future. (b) The offeror objects within a reasonable time.
2. Consideration - Something of value was
promised in exchange for the specified action or
non-action. This can take the form of a significant
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4. Mutuality -Thecontractingpartieshad“ameeting c. Case Specific Contracts - Somecontractshave
of the minds” regarding the agreement. This means special conditions that if not observed would render
the parties understood and agreed to the basic them invalid or void. For example, the Contract of
substance and terms of the contract. Insurance is not a valid contract unless it is in the
When the complaining party provides proof that all of written form. Similarly, in the case of contracts like
these elements occurred, that party meets its burden contracts for immovable properties, registration of
of making a prima facie case that a contract existed. contract is necessary under the law for these to be
For a defending party to challenge the existence of valid.
the contract, that party must provide evidence
undermining one or more elements. d. Certainty of the Meaning - Consider this
statement “I agree to pay Mr. X a desirable amount
Let us now understand them in more detail. for his house at so and so location”. Is this a valid
contract even if all the parties agree to this term? Of
a. Two Parties - A Valid Contract must involve at course, it can’t be as “desirable amount” is not well
least two parties identified by the contact. One of defined and has no certainty of meaning. Thus we say
these parties will make the proposal and the other is thata validcontractmusthavecertaintyofMeaning.
the party that shall eventually accept it. Both the
parties must have either what is known as a legal e. PossibilityofPerformanceofanAgreement-
existence e.g. companies, schools, organizations, etc. Suppose two people decide to get into an agreement
or must be natural persons. wherea personA agreesto bringbackthepersonB’s
dead relative back to life. Even when all the parties
b. Intent of Legal Obligation - The parties that agree and all other conditions of a contract are
are subject to a contract must have clear intentions satisfied, this is not valid because bringing someone
of creating a legal relationship between them. What back from the dead is an impossible task. Thus the
this means is those agreements that are not agreement is not possible to be enforced and the
enforceable by the law e.g. social or domestic contract is not valid.
agreements between relatives or neighbors are not
enforceable in a court of law and thus any such f. Free Consent - Consent is crucial for an
agreement can’t become a valid contract. agreement and thus for a valid contract. If two people
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reach a similar agreement in the same sense, they are iii.States that the party should not be disqualified by
said to consent to the promise. However, for a valid any other legal ramifications. For example, if the
contract, we must have free consent which means person is a convict, a foreign sovereign, or an alien
that the two parties must have reached consent enemy, etc., they may not enter into a contract.
without either of them being influenced, coerced,
misrepresented or tricked into it. In other words, we h. Consideration- Quid Pro Quo means
say that if the consent of either of the parties is ‘something in return’ which means that the parties
vitiated knowingly or by mistake, the contract must accrue in the form of some profit, rights,
between the parties is no longer valid. interest, etc. or seem to have some form of valuable
g. Competency Of the Parties - Section 11 of the
Indian Contract Act, 1872 is: “Who are competent to For example,if you decideto sellyour watch for Rs.500
contract — Every person is competent to contract to your friend, then your promise to give the rights to
whois (1)of the age of majority accordingto thelaw the watch to your friend is a consideration for your
to which he is subject, and who is (2) of sound mind friend. Also, your friend’s promise to pay Rs. 500 is a
and is (3) not disqualified from contracting by any consideration for you.
law to which he is subject.”
i.Lawful Consideration- In Section 23 of the Act, the
Let us see these qualifications in detail: unlawful considerations are defined as all those
years old or more. a. It is forbidden by law.
b. Is of such a nature that, if permitted, it
ii. Meansthattheparty or theperson should beable to would defeat the provisions of any law, or is
fully understand the terms or promises of the fraudulent.
contract at the time of the formulation of the c. Involves or implies, injury to the person
contract. or property of another
d. The Court regards it as immoral or
opposed to public policy
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These conditions will render the agreement illegal. received some benefit under the contract, he must
restore such benefits to the persons from whom it was
3.3 Kinds ofContracts received.
3.3.1 Classification on the basis of enforceability. (d) Illegal Agreements: An agreement is illegal when it
is in contravention of a statutory provision. An illegal
(a) Valid Contracts: Contracts which satisfy all the agreement is destitute of legal effects ab initio—from
essentialsofa validcontractas laid downin Sec.10,are the very beginning. All the transactions collateral to
termed as valid contracts. Only valid contracts are illegal agreements become tainted with illegality and
enforceable in a court of law. are, therefore, not enforceable. For example, if A
promises to pay as sum of Rs. 100 to B if he (B) gives a
(b) Void Contracts: An agreement may be enforceable good beating to C. B gives a good beating to C and A, in
at the time when it was entered into but later on, due to order to pay B borrows from D a sum of Rs.100. D
certain reasons, for example impossibility or illegality of knows the purpose of borrowing. The agreement
the contract, it may become void and unenforceable. betweenAandB beingillegal,thecollateraltransaction
Such contracts are called void contracts. Technically between A and D will be void, D cannot recover his debt
the words “void contracts” are a contradiction in terms. of Rs.100 from A. Parties to an unlawful agreement
Such contracts can appropriately be termed as cannot get any help from a Court of law, for courts
“contracts which have become void” in place of “void expect a person to come to them withclean hands.Law
contracts”. does not permit a guilty man to take advantages of his
(c) Voidable Contract: As per Sec. 2(i) “An agreement,
whichis enforceableby law at theoptionofoneormore (c)Unenforceable contracts:Certaincontractsbecome
of the parties thereto, but not at the option of other or void because they cannot be enforced due to certain
others,is a voidable contract”. Agreements induced by technical defects, i.e., non-observance of legal
coercion, undue influence, fraud or misrepresentation formalities of writing, registration etc. These contracts
are voidable at the option of the party whose consent are valid in the eyes of law but since they are incapable
has been so obtained. The contract shall remain valid so of proof, law courts will not enforce them. Many of the
long as it is not repudiated by the aggrieved party contracts, in the absence of writing, are quite good but
entitled to do so. The aggrieved party is entitled to get cannot be enforced in a court of law until the written
damages for any loss suffered by him. Similarly, if he has
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evidence is furnished. Some of them can be enforced if or written declaration of their intentions and of the
the technical defect is removed. terms of the transaction.
Difference between void agreements, illegal (b) Implied Contracts: Contracts which come into
agreements and voidable contracts existence on account of the conduct and acts of the
parties are termed as implied contracts. For example, if
1. The term “illegal agreement” has wider conception a person takes a seat in a bus. His act shows that he has
than void agreement. All illegal agreements are void but entered into an implied contract that he will pay the
all void agreements are not necessarily illegal, e.g., a specified fare to the bus owner for taking him to his
wagering agreement is void but not illegal or an destination.
agreement with a minor is void but not illegal. Illegal
agreements are prohibited by law. Void agreements are 3.3.3 Classification of contracts on the basis of the
declared non-enforceable in a court of law. If the parties extent ofexecution
wish to perform, they can perform void agreements.
(1) Executed contracts: When both the parties to the
2. Thoughthelegaleffectsofbotharethesame,i.e.void contract have fulfilled their respective obligations,
ab initio. But a void agreement does not affect the contract is said to be executed.
performance of collateral transaction but illegality of
the original contract will make even the collateral (2) Executory contract:Whenoneorboththeparties
transactions tainted with illegality. to the contract have still to perform certain things in
future,thecontractis termedas an Executorycontract.
3. For entering into a void agreement, there is no For Example:A agrees to sell a radio set to B for Rs.200,
penalty on the parties. But for an illegal agreement the B paysthepricein advance.Thecontractis executedas
parties may be punished. regards B, but executory as regards A, for he is yet to
deliver the radio set to B. On the basis of execution,
3.3.2 Classification of contracts on the basis of mode contracts may also be divided as:
(a) Unilateral contracts: A contract is said to be
(a) Express Contracts: Contracts entered into between unilateral where one party has performed his obligation
the parties by words spoken or written, are termed as either before or at the time when the contract comes
express contracts. In such contracts, parties make oral into existence, whereas the other party is yet to
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perform his obligation. Example: A, a coolie, puts B's 3.4 Rights of Parties - The Indian Contract Act, 1872
luggage in the carriage. A has performed his obligation. also determines which promises and agreements are
It is now for B to perform his obligation by paying the binding on the parties and the contract will lead to the
charges to the coolie. birth of some rights and duties for the parties to the
(b) Bilateral contracts: A contract is bilateral if the
obligations of both the parties are outstanding at the 3.4.1 Rights in Rem or Jus in Rem
time of the formation of the contract. They are
executory or bilateral contracts. Example: A agrees to As per the law of the land, every person entering into a
sell his car to B after a month. B promises to pay the contract has rights in rem. This is right available to him
price on the delivery of the car. The contractis bilateral. or her against the entire world. It protects a person’s
It is to be noted that the contract comes into existence property from the entire world.
on the date on which it is entered into between the
parties and not from the time its performance is due. This is why we call such a right as a negative right.
Because it gives the right to any person to be left alone.
3.3.4 Classification of contracts on the basis of form This means that no other person can interfere with his
(a) Formal Contracts: (i) Contracts under, seal and (ii)
contracts of record have been recognized as formal This specific right (jus in rem) is given via the freedoms
contracts under English Law. Their validity depends written in Article 19 of the Indian Constitution with its
upon their form alone. Consideration is not necessary restrictions.Thisrightin remis availabletoan indefinite
for such contracts. They are required to satisfy certain or open class of people, i.e. available to all. Let us see
legal formalities in order to be valid and binding. some examples.
(b) Simple Contracts: All contracts other than formal Mr. X owns a house. This house exclusively
contracts are known as simple contracts. They will be belongs to him. He has right in rem with respect to
valid only when they are supported by consideration. the house. So nobody can interfere with his
The Indian Law does not recognize formal contracts. It ownership of the house. No one can disturb his
recognizes only simple contracts which must be right in rem.
supported by consideration except in circumstances
specifically laid down in the Act. Mr. Y has a suitcase full of cash. This money
belongs to Mr. Y exclusively. The world or anyone
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in it cannot take away the money from him, .i.e. they party to the contract and is called Doctrine of Privity of
cannot disturb his possession or interfere with his Contract.
ownership of the money.
Let’s understand this with the help of an example:
3.4.2 Right in Personam or Jus in Personam
Peter has borrowed some money from John.
This is the opposite of right in rem. Right in personam Peter owns a property and decides to sell it to
gives the person rights against one person or party to Arjun.
the contract. It generally will correspond with a duty Arjun promises to pay John on behalf of Peter.
imposed on the said person or party. The Indian However, if Arjun fails to pay, then John cannot sue
Contract Act grants rights in personam to the parties of since Arjun is a stranger to the contract. It is
a contract. So the parties of a contract have these important to note that the Doctrine of Privity has
contractual rights only against each other, i.e. jus in exceptions which allow a stranger to enforce a claim
personam. Let us see some examples, as given below.
A sold his car to B. A has the right to receive the 3.5.1 Exceptionsto theDoctrineofPrivityof Contract
sale proceeds. This right to receive the money only
belongs to A, so it is a right in personam. No other A stranger or a person who is not a party to a contract
party is involved. can sue on a contract in the following cases:
B loaned money to C. The right to recover the 1. Trust - If a contract is made between the
money belongsonlytoB,nottheworldin general. trustee of a trust and another party, then the
beneficiary of the trust can sue by enforcing his right
3.5 Doctrine of Privity of Contract under the trust, even if he is a stranger to the contract.
Arjun’s father had an illegitimate son, Ravi. Before he
The Indian Contract Act 1872, allows the died, he put Arjun in possession of his estate with a
‘Consideration’ for an agreement to proceed from a condition that Arjun would pay Ravi an amount of Rs
third-party. However, a stranger (third-party) to 500,000 and transfer half of the estate in Ravi’s name,
consideration is different from a stranger to a contract. once he becomes 21 years old.
The law does not allow a stranger to file a suit on the
contract.This right is available only to a person who is a After attaining that age when Ravi didn’t receive the
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money and asked Arjun about it, he denied giving him 4. Acknowledgement or Estoppel - If a contract
his share. Ravi filed a suit for recovery. The Court held requires that a party pays a certain amount to a third-
that a trust was formed with Ravi as the beneficiary for party and he/she acknowledges it, then it becomes a
a certain amount and share of the estate. Hence, Ravi binding obligation for the party to pay the third-party.
had the right to sue upon the contract between Arjun The acknowledgement can also be implied.
and his father, even though he was not a party to it. Peter gives Rs 1,000 to John to pay Arjun. John
acknowledges the receipt of funds to be paid to Arjun.
2. Family Settlement - If a contractis madeunder However, he fails to pay him. Arjun can sue John for
a family arrangement to benefit a stranger (person not recovery of the amount.
a party to the contract), then the stranger can sue in his
own right as a beneficiary of the contract. Rita sold her house to Seema. A real estate broker,
Peter promised Nancy’s father that he would marry Pankaj, facilitated the deal. Out of the sale price, Pankaj
Nancy else would pay Rs 50,000 as damages. was to be paid Rs 25,000 as his professional charges.
Eventually, he married someone else, thereby Seema promised to pay Pankaj the amount before
breaching the contract. Nancy filed a case against Peter taking possession of the property. She made three
which was held by the Court since the contract was a payments of Rs 5,000 each and then stopped paying
family arrangement with Nancy as the beneficiary. him. Pankaj filed a suit against Seema which was held by
the Court because Seema had acknowledged her
Ritika was living in a Hindu Undivided Family (HUF). liability by conduct.
The family had made a provision for her marriage.
Eventually, the family went through a partition and 5. A Covenant Running with the Land - When a
Ritika filed a suit to claim her marriage expenses. The person purchases a piece of land with the notice that
Court held the case because Ritika was the beneficiary the owner of the land will be bound by all duties and
of the provision despite being a stranger to the liabilities affecting the land, then he can sue upon a
contract. contract between the previous land-owner and a
settler even if he was not a party to the contract.
3. Assignment of a Contract - If a contract is Peter owned a piece of land which he sold to John under
made for the benefit of a person, then he can sue upon a covenant that a certain part of the land will be
the contract even though he is not a party to the maintained as a public park. John abided by the
agreement. It is important to note here that nominees covenant and eventually sold the land to Arjun. Though
of a life insurance policy do not have this right.
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Arjunwasawareofthecovenant,hebuilta houseinthe Let’s look at some examples: Peter promises to pay Rs
specific plot. When Peter came to know of it, he filed a 50 to John. In this case, Peter can perform the promise
suit against Arjun. Although Arjun denied liability since himself by paying the money to John or can ask
he was not a party to the contract, the Court held him someone else to pay him. Also, if Peter dies before
responsible for violating the covenant. fulfilling his promise, then his representatives are
requiredto perform thepromiseor employsomeoneto
6. Contract through an Agent -Ifapersonenters do the same.
into a contract through an agent, where the agent acts
within the scope of his authority and in the name of the a. Promisor Performs the Promise
person (principal). If a contract indicates that the parties intended for the
promisor to fulfill the promise himself, then the
3.6 Who performs the Contract ? promisor is obligated to perform the promise. Usually,
these include promises which involve personal skills,
There are at least two parties to a contract, a promisor, experience, or expertise and are usually based on trust
and a promisee. A promisee is a party to which a promise between the promisor and the promise.
is made and a promisor is a party which performs the
promise. Three sections of the Indian Contract Act, b. Agent Performs the Promise
1872 define who performs a contract – Section 40, 41, If the contract does not require the personal
and 42. consideration of the promisor, then the promisor can
employ a competent person to perform the promise.
3.6.1 Section 40 of the Indian Contract Act, 1872
states c. LegalRepresentativesPerformthePromise
If the promisor dies before performing the promise,
If the nature of a contract indicates that either of the then the legal representatives become responsible for
parties intended that the promise contained in the the same. If the promise involves the utilization of
contract must be performed by the promisor himself personal skills or expertise, then the consideration
ceases with the death of the promisor.
then the promisor is obligated to perform the
promise However, in all other scenarios, the legal
representatives are obligated to perform the promise
Else the promise can be performed by the unless the contract has a contrary intention specified.
promisor or his representatives or an employed
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Also, the liability of the legal representatives is limited ifa promisordeniestoperformhispromiseandsignifies
to the value of the property inherited by them. his unwillingness before the time for performance, then
it is an anticipatory breach of contract.
3.6.2 Section 41 of the Indian Contract Act, 1872
The promisor can convey his unwillingness either by:
If the promisee accepts the performance of a promise Expressing it in words (spoken or written)
from a third person, then he cannot enforce it against Implying it by his conduct
the promisor at a later date. Hence, the performance of
the promise by a third-party discharges the promisor of The anticipatory breach of contract is specified under
his obligations even if he has not authorized the third- Section 39 of The Indian Contract Act, 1872. It states:
party to perform the promise. “When a party to a contract has refused to perform or
disable himself from performing, his promise in its
3.6.3 Section 42 of the Indian Contract Act, 1872 entirety, the promisee may put an end to the contract,
unless he has signified, but words or conduct, his
If the promisors agree to perform a promise together – acquiescence in its continuance.”
joint promise – then they are jointly obligated to fulfil When a promisor refuses to perform his promise
the promise, unless the contract specifies a contrary leading to an anticipatory breach of contract, the
intention. Also, if any of the promisors die, then their promisee is excused from performance or from further
legalrepresentativesmust fulfilthe promisejointlywith performance of his obligations. Also, he can either:
legal representatives of each of them must perform the Treat the contract as cancelled and file a
promise jointly. suit against the other party for damages arising from
the breach. This suit can be filed immediately
3.7 Breach of Contract without waiting until the date of performance
specified in the contract or;
A breach is a failure by a party to fulfil the obligations
undera contract.It is oftwotypes,namely,anticipatory Choose not to cancel the contract but treat it
breach and actual breach. as an operative and wait until the time of
performance has passed before holding the other
3.7.1 Anticipatory Breach of Contract party responsible for the damages caused due to
non-performance. However, he will need to keep the
As the name suggests, an anticipatory breach is a contract alive for the benefit of all parties involved.
breach of contract before the time of performance. So,
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3.7.2 Actual Breach of Contract prescribed, then the contract is discharged by
While an anticipatory breach is before the time of
performance, an actual breach of contract is on the Since both the parties to the contract fulfil their
scheduled time of performance of the contract. An obligation arising under the contract, then it is
actual breach of contract can be committed either: discharged by performance. Now, discharge by the
performance of a contract can be by:
a. At the time when the Performance of the
Contract is Due 1. Actual performance
Peter enters into a contract with John promising to
deliver 50 bags of cotton to him on June 30, 2018. 2. Attempted performance
However, on the scheduled day, he fails to deliver
the same. This is an actual breach of contract. Also, The actual performance is when all the parties to a
this breach is at the time the performance of the contract do what they had agreed for under the
contract is due. contract. On the other hand, it is possible that when the
b. During the Performance of the Contract promisorattemptstoperformhispromise,thepromisee
An actual breach of contract can also occur when refuses to accept it. In such cases, it is called attempted
one party fails to perform his obligation, during the performance or tender.
performance of the contract. This refusal can be
expressed in words or by action. 3.8.2 Discharge by Mutual Agreement
3.8 Discharge of Contract If all parties to a contract mutually agree to replace the
contractwitha newoneor annulorremitor alterit,then
A contract creates certain obligations on one or all it leads to a discharge of the original contract due to a
parties involved. The discharge of a contract happens mutual agreement.
when these obligations come to an end. There are many
ways in which a contract is discharged. 3.8.3 Discharge by the Impossibility of Performance
3.8.1 Discharge by Performance If it is impossiblefor any of the parties to the contractto
perform their obligations, then the impossibility of
When the parties to a contract fulfil the obligations performance leads to a discharge of the contract. If the
arising under the contract within the time and manner impossibility exists from the start, then it is
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impossibility ab-initio. However, the impossibility might 3.8.6 Discharge of Contract by Remission
also arise later due to:
A promisee can waive or remit the performance of
An unforeseen change in the law promise of a contract, wholly or in part. He can also
Destruction of the subject-matter essential to extendthetimeagreedfortheperformanceofthesame.
The non-existence or non-occurrence of a 3.8.7 Discharge by Non-Provisioning of Facilities
particular state of things which was considered a
given for the performance of the contract. In many contracts, the promisee agrees to offer
A declaration of war reasonable facilities to the promisor for the
performance of the contract. If the promisee fails to do
3.8.4 Discharge of Contract by Lapse of Time so, then the promisor is discharged of all liabilities arising
due to non-performance of the contract.
The Limitation Act, 1963 prescribes a specified period
for performance of a contract. If the promisor fails to 3.8.8 Discharge of contract due to Merger of Rights
perform and the promisee fails to take action within this
specified period, then the latter cannot seek remedy In some situations, it is possible that inferior and
through law. It discharges the contract due to the lapse superior right coincides in the same person. In such
of time. cases, both the rights combine leading to a discharge of
the contract governing the inferior rights.
3.8.5 Discharge of Contract by operation of law
A contract can be discharged by operation of law which
includes insolvency or death of the promisor.
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