Business Regulatory Framework - Nov '2011 (Solved)

“All contracts are agreements, but all agreements are not contracts.”
Essential Elements of a Valid Contract
Section 2 (h) defines ‘Contract’ as an agreement enforceable by law.  If we analyse the definition it has two components viz.
(i) An agreement an
(ii) Its enforceability by law.

Section 2 (e) defines ‘agreement’ as “every promise and set of promises forming consideration for each other”. For a contract to be enforceable by law there must be an agreement which should be enforceable by law. To be enforceable, the agreement must be coupled with obligation. Obligation is a legal duty to do or abstain from doing what one promised to do or abstain from doing.  All contracts are agreements but for agreement to be a contract it has to be legally enforceable.

Section10 of the Act provide “All agreements are contracts if they are made by the free consent of the parties competent to contract for lawful object & are not hereby expressly declared void.”  All contracts are agreements but for an agreement following essential element are required:

a)      Offer & Acceptance: - There must be two parties to an agreement i.e. one making the offer & other party accepting it. Acceptance of must be unconditional & absolute. A part of an offer cannot be accepted. The terms of an offer must be definite. The acceptance must be in the mode as prescribed & must be communicated. The acceptor of an offer must accept it in the same way & same sense & at the same time as offered by the offeror i.e. there must be consensus ad idem.

b)      Intention to create legal relationship: - When two parties enter into a contract their intention must be to create legal relationship. If there is no such intention between the parties, there is no contract between them. Agreements of a social or domestic nature to do not constitute contracts.

c)       Lawful consideration: - An agreement to be enforceable by law must be supported by consideration. “Consideration” means an advantage or benefit which one party receives from another. It is the essence of bargain. The agreement is legally enforceable only when both parties give something or get something in return. An agreement to do something without getting anything in return is not a contract. Contract must be in cash or kind.

d)      Capacity to Contract – Competency: - The parties competent to contract must be capable of contracting i.e. they must be of the age of majority, they must be of sound mind & they must not be disqualified from contracting by any law to which they are subject to.  An agreement with minors, lunatics, drunkards, etc. is not contract & does not get a legal title.

e)      Free Consent: - It is necessary between the contracting parties to have a free & genuine consent to an agreement. The consent of parties is said to be free when the contracting parties are of the same mind on the materials of a contract. They must mean the same thing at the same time the parties must not enter into a contract under undue influence, coercion, misrepresentation etc. If these flaws are present in an agreement it does not become a contract.

f)       Lawful object: - The object of an agreement must be lawful. It should not be illegal, immoral or it should not oppose public policy. If an agreement suffers from a legal flaw with respect to object it is not enforceable by law & so it is not a contract.

g)      Agreement not declared void: - For an agreement to be a contract it is necessary for the agreement must not be expressly declared void by any law in force in the country.

h)      Possibility & Certainty of performance: - The terms of an agreement must not be vague or indefinite. It should be certain. The agreement must be to do a thing which is possible. For e.g. an agreement to sell a car for Rs. 100/- if sun does not rise tomorrow. This agreement is impossible & so not enforceable by law.  Thus, agreement is the genus of which contract is the specie.


Modes of discharge of a contract:
A Contract is said to be discharged when the rights and obligations created by it come to an end. A contract may be discharged in the following modes:-

a)      Discharge by performance: Discharge by performance takes place when the parties to a contract fulfill their obligations arising under the contract within the time and in the manner prescribed. Performance may be actual performance or attempted performance.

b)      Discharge by Agreement or Consent: A Contract comes into existence by an agreement and it may be discharged also by an agreement. The following are modes of discharge of a contract by an agreement:
By Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be bound by the contract. For e.g. A an actor promised to make a guest performance in the film made by B. Later B forbids A from making the guest appearance. B is discharged of his obligation.
By Novation: Novation occurs when a we contract is substituted  for an existing contract, either between the same parties or between different parties, the consideration being the discharge of old contract, mutually. E.g.: A is indebted to B & C to C. By mutual agreement B’s debt to C & B’s loan to A are cancelled & C accepts as his debtor.
By Rescission: Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur by mutual consent or where one party fails in the performance of his obligations, the other party may rescind the contract.
By alteration: Alteration of a contract may take place when one or more of the terms of the contract is/are altered by mutual consent of the parties to the contract.
By Remission: Remission means acceptance of a lesser fulfillment of the promise made, E.g. Acceptance of a lesser sum than what was contracted for, in discharge of the whole of the debt.
By Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a superior right accruing to the same party under the same or some other contract. For e.g. P holds a property under a lease. He later buys the property. His rights as a lessee merge into his rights as an owner.

c)       Discharge by impossibility of performance: If a contract contains an undertaking to perform impossibility, it is void ab initio. As per Section 56, impossibility of performance may fall into either of the following categories –
(i) Impossibility existing at the time formation of the contract: This is known as pre-contractual impossibility. The fact of impossibility may be:
a) Known to the parties: Both the parties are aware or know that the contract is to perform an impossible act. For e.g. A agrees with B to put life into dead wife of B, the agreement is void.
b) Unknown to the parties: Both the parties are unaware of the impossibility. The contract could be on the ground of mutual mistake of fact. For e.g. contract to sell his house at Andaman to B. Both the parties are in Mumbai and are unknown to the fact that the house is actually washed away due to Tsunami.
(ii) Impossibility arising subsequent to the formation of the contract: Where impossibility of performance of the contract is caused by circumstances beyond the control of the parties, the parties are discharged from further performance of the obligation arising under the contract.

d)      Discharge by lapse of time:  The Limitation Act, 1963 lays down certain specified periods within which different contracts are to be performed and be enforceable. If a party to a contract does not perform, action can be taken only within the time specified by the Act. Failing which the contract is terminated by lapse of time. For e.g. A sold a gold chain to B on credit without any period of credit, the payment must be made or the suit to recover it, must be instituted within three years from the date of delivery of the instrument.

e)      Discharge by Operation of Law: A contract may be discharged independently of the wished of the parties i.e. by operation of law. This includes discharge:
By death: In contract involving personal skill or ability, the contract is terminated on the death of the promisor. In other contracts the rights and liabilities of a deceased person pass on to the legal representatives of the deceased person.
By insolvency: When a person is declared insolvent, he is discharged from all liabilities incurred prior to such declaration.
By unauthorized material alteration of the terms of a written agreement – Any material alteration made by a party to the contract, without the prior permission of the other party, the innocent party is discharged.
By rights and liabilities becoming vested in the same person – When the rights and liabilities under a contract vests in the same person.

f)       Discharge by Breach of Contract: A breach of contract occurs when a party thereto without lawful excuse does not fulfill his contractual obligation or by his own act makes it impossible that he should perform his obligation under it. A breach to a contract occurs in two ways:-
Actual Breach: When a party fails, or neglects or refuses or does not attempt to perform his obligation at the time fixed for performance, it results in actual breach of contract. For e.g. A promises to deliver 100 packs of ice-cream to B on his wedding day. A does not deliver the packs on that day. A has committed actual breach of the contract.
Anticipatory Breach: Anticipatory Breach is a breach before the time of the performance of the contract has arrived. This may take place either by the promisor doing an act which makes the performance of his promise impossible or by the promisor, in way showing his intention not to perform it.