Introduction to agreement and contract
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The document provides an overview of contract law, defining law, contracts, and the distinction between agreements and contracts. It discusses various theories of contract, principles of offer and acceptance, and obligations arising from contracts, including the importance of intention and communication. The piece includes the Indian Contract Act, 1872's definitions and explains the legal enforceability of agreements.
Introduction to agreement and contract
- 1. UNIT – I INTRODUCTION AND FORMATION OF CONTRACT SHIVANI SHARMA -ASSISTANT PROFESSOR -SARDAR PATEL SUBHARTI INSTITUTE OF LAW
- 2. WHAT IS LAW? Law consists of rules that regulate the conduct of individuals, businesses, and other organizations within society. Law means any rule of conduct, standard or pattern, to which actions are required to conform. This Photo by Unknown author is licensed under CC BY.
- 3. OBJECT OF LAW Object of law is the creation and protection of legal rights to maintain order in the society. Keeping the peace. Shaping moral standards. Promoting social justice Maintaining the status quo Facilitating orderly change Maximizing individual freedom This Photo by Unknown author is licensed under CC BY-SA-NC.
- 4. WHAT IS A CONTRACT? A contract is a legally binding agreement which recognizes and governs the rights and duties of the parties to the agreement. A contract is legally enforceable because it meets the requirements and approval of the law. An agreement typically involves the exchange of goods, services, money, or promises of any of those
- 5. Would you like to buy a 2 BHK Flat? What price are you offering? Okay, deal! At 30,00,000/- only A PROMISE AN AGREEMENT
- 6. NATURE OF LAW OF CONTRACT It does not lay down the duties and responsibilities which the law will enforce BUT, It consists a number of limiting principles, subject to which; the parties may create rights & duties for themselves which the law will upload. It creates Jus in personam It is civil in nature
- 7. FUNCTIONS Securing that the expectations created by a promise of future performance are fulfilled, or that compensation will be paid for its breach. To facilitate , planning for the future transaction and to make provisions for future contingencies. Establish the value of exchange- how much is paid for the goods or services provided. Establish the respective responsibilities of the parties, and the standard of performance to be expected of them The economic risk involved in the transactions are allocated in advance between the parties. Finally provide remedies if parties are not fulfilling their part of obligations.
- 9. WILL THEORY PROMISE EQUIVALENT INJURIOUS- RELIANCE RELATIONAL ECONOMIC UNCONTIONABILITY SOCIAL REASONABLENESS DISTRIBUTIVE JUSTICE
- 10. 1. WILL THEORY - The 'Will Theory' is regarded as the oldest theory of contract. According to this theory, the law enforces a contract only because will or intention of the parties to a Contract should be respected. By giving effect to a contract the law, therefore, respects the will of the parties to the contract. Savigny, Pollock and Salmond are the main supporters of this theory. According to them the agreement of wills or meeting of minds is the first essential of a contract. The second factor which is helpful in giving recognition to will theory is the concept of liability. A contract gives rise to liability commonly known as contractual liability. Such a contractual liability is supposed to be created by means of intention.
- 11. 2. THE PROMISE THEORY - The promisee who has done something for the promisor may naturally think that the promisor will also fulfil his promise.The opinion of a common man is that when the promisor enjoys the benefit of the promisee's act, he should be bound by his promise. Firstly, the promise theory makes it clear that the promisor must keep his promise Secondly, the element of individual autonomy and trust is stressed more by this this theory than the element of purpose or object of the promise. Thirdly, it is well-known that freedom to contract extends to freedom to substitute a new contract at the place of old one or rescind or alter the original contract.'
- 12. 3. THE EQUIVALENT THEORY (BARGAIN THEORY) - The 'Equivalent Theory' states that only those promises should be enforced which contain their equivalent from the promisee's side. Unless the promisee has done or abstained or promises to do something which forms consideration in response to promisor's promise, it would be unjust to hold the promisor liable. The Indian law clearly recognises (with a few Exceptions) the doctrine of consideration. The consideration is regarded as one of the essentials of a contract. 4. INJURIOUS RELIANCE THEORY - According to this theory the contractual liability arises only where:(i) someone makes a promise explicitly in words or implicitly by some act; (ii) someone else relies on it, and (iii) suffers loss due to its non- performance.
- 13. 5. RELATIONAL THEORY - Prof. Ian Mac Neil is the propounder of this theory. He recognises reality of relationship in contract. He thinks so because the contracts are not always accurately characterised as discrete transactions. According to him the transaction are affected by prior and ongoing relationships of the parties. They are independent of social or other economic relations. A discrete transaction is detached others i.e. it affects the parties and not the society. 6. THE ECONOMIC THEORY - The 'Economic theory' emphasises that Justice should not be costly. No one should be debarred from seeking Justice merely on the ground of poverty. The effect of is that a stranger to a contract is entitled to sue upon the contract to receive benefits of the contract provided (i) the contract is valid, (ii) the contract is such that the promisee can enforce it specifically. The doctrine of privity of contract, according to this theory is expensive, especially when the contract tends to confer benefit on a stranger.
- 14. 7. SOCIAL THEORY - The distinguished American Jurist, Roscoe Pound, is the propounder of Socio-legal school. According to him, law should be changed according o varying circumstances and demands of society.If the judges completely ignore the point of social interests of expediency practical convenience a system of law cannot be durable. The 'social theory' of contract is based on the tenets of sociological school of law. This theory provides no justification for doctrine privity of contract. 8. THEORY OF UNCONCIOUNABILITY - The theory of unconscionability is a device which controls abuse of contract and prevents injustice to the beneficiary (i.e. third person). This theory suggests that the promisor should not be placed in a position where he can abuse his own promise i.e. refuse to perform his promise.
- 15. 9. REASONABLENESS THEORY - According to this theory when parties to a contract are unequal in bargaining (i.e. one is stronger and the other is weaker in bargaining) and the stronger party enters into a contract with the weaker party with an unreasonable or Unfair or unconscionable term favourable to him, the court will not enforce it. Thistheory was propounded by the Supreme Court of India in Central Inland Water Transport Corporation Ltd, v. Bro.jo Hath Ganguly. This theory makes it clear that gross inequality of bargaining power between to a contract, together with terms unreasonably favourable to the stronger party will make the bargain unconscionable.
- 16. 10. THEORY OF DISTRIBUTIVE JUSTICE - According to this theory there should be fair distribution of wealth among the members of society. The economy should not be controlled by a few big business houses. Central Inland Water Transport Corporation Ltd, v. Bro,jo Nath Ganguly has approved of this theory. The court has held that according to the doctrine (i.e. distributivE theory) distributive fairness and justice in the possession of wealth and property can be achieved not only by taxation but also by regulatory control of private and contractual transactions even though this might involve some sacrifice of individual liberty. This theory is in accordance with the direction of Art.39 the Constitution of India.
- 17. PHENOMENON OF AGREEMENT This Photo by Unknown author is licensed under CC BY-NC-ND.
- 18. DEFINITION The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act defines the term agreement as: “every promise and every set of promises, forming the consideration for each other”. The Act in its section 2(b) defines the term “promise” here as: “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted, becomes a promise”. “signifies his assent thereto” – means that the person in point one accepts or agrees with the proposal after having fully understood it. In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or affected by it.
- 20. Now we can define a contract and more importantly, understand what is “Not” a contract. A contract is an accepted proposal (agreement) that is fully understood by the law and is legally defined or enforceable by the law. So a contract is a legal document that bestows upon the parties special rights(defined by the contract itself) and also obligations which are introduced, defined and agreed upon by all the parties of the contract. The Indian Contract Act, 1872 defines the term “Contract” under section 2 (h) as: “An agreement enforceable by law”. In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land.
- 21. DIFFERENCE BETWEEN CONTRACT AND AGREEMENT CONTRACT A contract is an agreement that is enforceable by law. A contract is only legally enforceable. All contracts are also agreements. A contract has to create some legal obligation AGREEMENT A promise or a number of promises that are not contradicting and are accepted by the parties involved is an agreement. It may or may not be enforceable by the law. An agreement may or may not be a contract. An agreement doesn’t create any legal obligations.
- 22. OBLIGATIONS
- 23. OBLIGATIONS • A SITUATION IN WHICH A PERSON HAS AN HONOURABLE, INHERENT OR LEGAL DUTY TO DO SOMETHING • Obligation is the moral or legal duty that requires an individual to perform, as well as the potential penalties for the failure to perform. • An obligation is also a duty to do what is imposed by a contract, promise, or law. • In the most general sense, duty is a synonym of obligation • Another legal scholar, John Salmond, stated that an obligation refers to the morals or laws that command or require an individual to perform an action. • According to Anson, "an obligation is a control exercisable by definite persons over definite persons for the purpose of Definite acts or forbearance reducible to a money value"
- 25. CONTRACTUAL OBLIGATION Contract obligations are those duties that each party is legally responsible for in a contract agreement. In a contract, each party exchanges something of value, whether it be a product, services, money, etc. An example of contract obligations is with the sale of a product such as an automobile. One party has the obligation to transfer ownership of the car, while the other has the obligation to pay for it. The contract will specify the terms that regulate the obligations, such as the method and amount of payment, and the time/place of delivery. If either party fails to perform their contractual obligations according to the contract terms, it will usually result in a breach of contract. This may result in a damages award to reimburse the non-breaching party for their economic losses.
- 26. Most legal agreements contain some of the same types of contract obligations, such as: 1. Payment: One party (the buyer) is usually legally bound to provide payment for the sale of goods or services. The contract terms may state state obligations regarding payment amounts and the deadline for payment. 2. Delivery: The seller is usually bound to provide delivery of the goods or services. Again, the contract may state specific obligations in terms of delivery dates, method of delivery and other terms. 3. Quality of Goods: The seller may also be bound to provide goods of a a certain quality. This may be specifically described in the contract
- 27. OFFER = EXPRESSING WILLINGNESS (sec-2a) ACCEPTANCE = ASSENT TO OFFER (sec-2b) PROMISE = ACCEPTED OFFER (sec-2c) AGREEMENT = PROMISE/S + CONSIDERATION (sec-2d) FOR EACH OTHER (sec-2e) CONTRACT = AGREEMENT + ENFORCEABILITY BY LAW (sec-2h)
- 28. OFFER OR PROPOSAL This Photo by Unknown author is licensed under CC BY-SA-NC.
- 29. WHAT IS AN OFFER? A proposal and its acceptance is the universally acknowledged process. Section 2(a) defines proposal as: “when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” Offeree/ Proposee Offeror/ Proposer Offer
- 30. ELEMENTS OF OFFER 1. Intention to create a legal relationship – Family and Social Agreements- Balfour v Balfour, Appleson v Littlewood, Merrit v Merrit 2. Offer must be communicated 3. The terms of the contract must be definite or capable of being definite – must be certain – Taylor v Portingto 4. Must be distinguished from ‘Invitation to Offer’
- 31. KINDS OF OFFER OFFER EXPRESS IMPLIED SPECIFIC GENERAL CROSS COUNTER STANDING/ CONTINUING Section-9 Expressed clearly either by words or writing Section-9 By implied actions Addressed specifically to a party General in nature Made to general public Carlill v Carbolic Smoke Ball Co., Lalman Shukla v Gauri Dutt Both parties make similar offer to each other with similar terms Tinn vs Hoffman Where offeree agrees to accept offer subject to conditions Intended to remain open for certain time period UOI v Maddala Thathiah
- 32. COMMUNICATION OF OFFER 1. Communication of Offer - Lalman Shukla v Gauri Dutt, William v Carwardine 2. Communication of Revocation: Meaning of Revocation- the official cancellation of a decree, decision, or promise Revocation of offer – Setion-5- “A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards” Modes of Revocation – Section-6- “A proposal is revoked— (1) by the communication of notice of revocation by the proposer to the other party (2) by the lapse 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; (3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or (4) 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.”
- 33. INVITATION TO OFFER Sometimes a person may not make an offer but make some statement or give some information with a view to invite offers on that basis Examples – Government Tenders, catalogues, Prospectuses, Price Tags etc. Harris v Nickerson – Auction case Harvey v Facey – Bumper Hall Pen Case Pharmaceutical Society of Great Britain v Boots Cash Chemists ltd. – Price tags case Mac Pherson v Appanna – (not more than 10,000 for property)
- 34. ACCEPTANCE
- 35. WHAT IS ACCEPTANCE? According to Section 2(b) of the Indian Contract act, 1872: “When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when a accepted, becomes a promise” Effect- Anson- “Acceptance is to offer what lighted match is to train of gun powder. It produces something which can’t be undone” Made proposal Accepta- nce Assent
- 36. ELEMENTS OF ACCEPTANCE 1. Acceptance must be absolute and unqualified – Section-7- Hyde v Wrench 2. Communication must be expressed in usual manner – Section-7 or; 3. in the manner prescribed by the offeror – Elliasion v Henshaw (acceptance by wagon) 4. It must be by the party named 5. Mere silence is no acceptance 6. It must be communicated – Felthouse v Bindley; buying horse, Dunlop v Higgins; letter lost in frosty weather
- 37. COMMUNICATION 1. Communication must be by the Promisor or his authorized agent- Powell v Lee; post of headmaster 2. Communication to wrong person is no acceptance – Kartar Singh v The Collector Chattarpur 3. Acceptance is not needed in Acceptance by conduct 4. In case of acceptance by phone- Bhagwan Das v Girdhari Lal
- 38. REVOCATION Communication of Revocation: Meaning of Revocation- the official cancellation of a decree, decision, or promise Revocation of offer – Setion-5- “An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but no afterwards.” Difference between English and Indian Law: Revocation of acceptance is not permitted in English Law
- 39. Cont.. Communication when completes – Section – 4: “The communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made. The communication of an acceptance is complete -as against the proposer, when it is put in a course of transmission to him so at to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete -as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge.”
- 40. PROVISIONAL ACCEPTANCE Provisional Acceptance is a conditional acceptance which means that the client has accepted the project but performance needs to be verified or confirmed under operational conditions within an agreed period. The client issues a Provisional Acceptance Certificate to evidence this step. Provisional acceptance does not bind either party until final approval is given Meanwhile the offeror is at the liberty to cancel the offer Bengal Coal Company v Homi Wada- Tender can be withdrawn before final acceptance
- 41. CONSIDERATION
- 42. DEFINITION Section 2 (d) of the Indian Contract act, 1872: “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, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise” Consideration is something that moves from the promisee to the promisor, at the implied or express request of the latter, in return for his promise. The item that moves can be a right, interest, profit, loss, responsibility given or suffered, forbearance or a benefit which is of some value in the eyes of law.
- 43. ESSENTIALS OF CONSIDERATION 1. Consideration must move at the desire of the Promisor – Durga Prasad v Baldeo, P. Mudaliar v S. Mudaliar 2. It can be an Act, Abstinence or Promise: • Consideration must be of value/Consideration must be real – White v Bluett • Consideration need not be adequate – De La Bere v Pearson, R.B. Banerjee v Commissioner of IT but can be considered for evidence for determining free consent. 3. Performance of an existing legal duty is no consideration – Collin v Godfry- Promise to pay a police officer for investigation
- 44. 4. Consideration may move from the Promisee or any other person: As per section 2 (d), the words “any other person” clears that as long as there is consideration for promise it is immaterial who has furnished it. Doctrine of Privity of Contract: This reasoning was reversed in Tweedle v Atkinson- A’s daughter married to plaintiff. Both fathers agreed to pay money to plaintiff. A did not pay. Plaintiff sued for the amount. Held: though the sole object was plaintiff’s benefit yet he was stranger to the contract. Therefore the action failed. Dunlop Pneumatic Tyres Co. v Selfridge – sold goods at a lower price. Action not held as company was stranger to the contract. Jamna Dass v Ram Avtar- P.C. introduced the doctrine in India Not applicable in India as per Section 2 (d) – Chinnaya v Rammaya Applicable in India – S.C. – M.C. Chacko v State Bank of Travancore
- 45. Exceptions to Doctrine of Privity of Contract: 1. Trust or Charge – Khwaja Mohd. Khan Hussaini Beghum 2. Marriage Settlement, partition or other Family Arrangements – Dropadi v Jaspat Rai 3. Acknowledgement or Estoppel – Narayani devi v Tagore Commercial Corporation Ltd. 4. Covenants running with the Land – Smith and Snipes Hall Farm Ltd. V River Douglas Catchment Board
- 46. 5. Consideration may be past, present or future – Consideration Past Present Executed Future Executory • Exchange of past Consideration for Promise • Act done before the promise was made. • Exchange of Promise for promise • To perform tasks at a later time. • Eg- Future delivery of a car • Exchange of Consideration for the Promise • UOI v Chaman Lal Loona- act forms consideration. No contract unless it is performed. • one party to a contract makes a promise for an act by another party, it is an executed consideration when the act is done • Unilateral contracts • one of the parties has performed his part of the promise
- 48. PAST CONSIDERATION ENGLISH LAW Promise for past consideration is not enforceable Mc. Ardle Re – Improvements made on the property and subsequent promise to pay is not enforceable Exception: 1. Past consideration at request 2. Promise to pay a time barred debt 3. N.I. issued for a past consideration INDIAN LAW Promise for past voluntary service can be enforced under section 25 Past service at request is also enforceable under section 25
- 49. 6. Promise to pay less is no consideration just like promise to pay more: Exception: Part payment by a third party may be a good consideration for discharge of the whole debt Compromise between creditor and debtor Payment before time Promissory Estoppel: • Promissory estoppel is the legal principle that a promise is enforceable by law, even if made without formal consideration, when a promisor has made a promise to a promisee who then relies on that promise to his subsequent detriment. • Promissory estoppel is intended to stop the promisor from arguing that an underlying promise should not be legally upheld or enforced. • Hughes v Metropolitan Railway Co., Combe v Combe, Shadwell v Shadwell
- 50. AGREEMENT WITHOUT CONSIDRATION The general rule is that "No consideration, no contract". So, a contract made without consideration in it is void. – Quid pro quo However, law excludes considerations in few exceptions because it invokes the concept of Promissory Estoppel. 1. Natural love and affection: For example, a father, out of love and affection towards his son, makes a formal written registered document as per law, transfers a piece of land he owns. In this contact, the consideration is not essential because it arises out of natural love and affection. Rajlukhy Dabee v Bhootnath Mookerjee 2. Compensation for past voluntary service: When a promise is made to compensate, wholly on in part, a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do is enforceable although made without consideration. Karan Chand v Basant Kaur Examples: A finds B's purse and gives it to him. B promises to give A Rupees 50. This is a valid contract. If A supports B's infant son. B promises to compensate A's expenses in so doing. That is a contract.
- 51. Necessary conditions: The act must have been done voluntarily and not at request. The act must have been done for the promisor. (Durga Prasad v Baldeo) The act must have been done for a promisor who was in existence at the time when the act was done. The work done by a promoter of a company before its formation cannot be said to have been done for the company. The act done must have been done for a promisor who is competent to contract at the time when the act was done. Hence a promise by a person on attaining majority to repay money lent and advanced to him during his minority does not come within the exception, the promisor not being competent to contract when the loan was made to him. The intention of the promisor should be to compensate the promisee. If the intention is not to compensate, the promise will not come within this clause. Abdulla Khan v Purshottam The service rendered must be legal. In Alice Verses William, it was held that a promise to pay for past cohabitation with a woman whose husband is alive is adulterous. But divergent views are held by High Courts in India on the question whether the same principle could be applied to a promise to pay a woman for past cohabitation which is not an infringement of the penal law.
- 52. 3. Agreement to pay time barred debt: A promise made in writing and signed by the person to be charged therewith, or by his agent generally or specially authroised in that behalf to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. Necessary conditions: The debt must be such of which the creditor might have enforced payment but for the law of limitation of suits. A mere acknowledgement of the debt is not sufficient. There must be promise to pay the debt. The promise must be in writing and signed by the debtor or his authorised agent. The promise must be given by the person to be charged therewith and not by any third party.
- 53. 4. Completed gift: Absence of consideration shall not affect the validity, as between the donor and donee, of any gifts actually made. 5. Contract of agency: No consideration is necessary to create an agency. 6. Remission by the promisee after the performance of the promise 7. Contribution to the charity 8. Promissory Estoppel