Business Contracts

BUSINESS CONTRACTS

M.N.S.KISHORE KUMAR

BUSINESS CONTRACTS 1. 2. 3. 4. 5. 6. 7. 8. 9.

Legal elements of contracts Remedies for breach of contract Contracts of Agency Contracts of Guarantee Contracts of Indemnity Letter of Credit Contracts Employment contracts Special rights to contracts Documentation of Commercial Contracts

LEGAL ELEMENTS OF CONTRACTS

■ A contract is the result of a promise ■ ■ ■ ■

to do a certain thing in exchange for a promise from another person A contract is said to create a legal bond – a vinculum juris Non-business, religious or charitable agreements need not be contracts Casual agreements between friends and family or household agreements are not held as contracts Balfour vs Balfour

CONTRACT

■ 2 basic requirements ■ An agreement ■ Legal enforceability

■ Thus a contract is an

agreement, an agreement is a promise and a promise is an accepted proposal

AGREEMENT

■ 2 essential requirements ■ Plurality of persons

■ An agreement must be between

2 or more persons ■ Consensus ad idem ■ The promisor and the promisee must agree about the same thing in the same sense

FORMATION OF CONTRACTS

■ SEC 10 of the Indian Contract Act, 1972 “all agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object, and are not expressly declared to be void” ■ Offer and acceptance ■ Free consent ■ Capacity ■ Consideration ■ Lawful object ■ Certainty and possibility of performance ■ Term of contract should be clear ■ Agreement must not be declared void ■ Legal formalities

OFFER AND ACCEPTANCE

■ An agreement presupposes an offer by

one party which is accepted by another party ■ Mere offer does not conclude a contract unless it is accepted by the other party to the contract ■ A proposal or offer is the starting point to initiate an agreement which could finally lead to a contract ■ There must be a lawful offer and a lawful acceptance

RULES FOR A VALID OFFER

■ The offer or proposal must be made with a view ■ ■

to obtain the acceptance of the person to whom it is made By whom offer – offeror / promisor To whom offer – offeree / promisee

■ It must be an expression of the willingness to

do or abstain from doing a particular act ■ The willingness must be communicated to another person ■ It must be communicated with an intention to receive the assent of the other person for such act or abstinence. ■ Therefore mere enquiry or statement of intention doesnot amount to an offer

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KINDS OF OFFER General or Specific offer ■ ■

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General offer – made to the world at large or to the general public and may be accepted by any person who fulfills the necessary conditions Specific offer – made to a particular person and it may be accepted only by those person

Express or Implied offer ■ ■

Express offer – if it is in words, spoken, or written Implied offer – if it can be inferred from the conduct of the parties

Positive or Negative offer ■ ■

Positive offer – an offer to do something Negative offer – an offer not to do something

Counter offer ■ ■ ■ ■

Where the offeree attempts to change the terms of the offer initially made by the offeror Counter offer means rejection of an offer Hyde vs Wrench Counter offer must not be mistaken with a request for information

ACCEPTANCE

■ Next step after offer ■ Until acceptance is communicated to the offeror, it ■ ■ ■ ■ ■

cannot be held as a valid and an effective acceptance Express acceptance Implied acceptance – example auction sale An acceptance must be clear and unconditional Conditional acceptance is like counter offer Essential conditions for a valid acceptance

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It must be made by the offeree It should be absolute and unqualified It shall be in a prescribed form It should be within the specified time Communication of acceptance Acceptance during the course of negotiations Acceptance must be positive

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LAPSE AND REVOCATION OF OFFER AND ACCEPTANCE LAPSE OR TERMINATION OF OFFER ■

When the offer is not accepted in the prescribed mode ■ If the acceptor deviates from the prescribed mode and makes acceptance

in an alternative way, and the offeror does not protest the deviation, he is deemed to have accepted the new method of acceptance

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When it is not accepted within the prescribed time ■ If no time is prescribed then reasonable time By rejection or counter offer By death or insanity of either party to the contract ■ An offer lapses if the offeree dies or becomes insane before its acceptance ■

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and such a fact comes to the knowledge of the offeree Thus an acceptance made in ignorance of the death or insanity of the offeror, and the personality of the offeror, was not vital to the contract then it is a valid acceptance

By revocation ■ Before the offeree accepts the offer By subsequent illegality or destruction of subject matter On failure to fulfill a condition precedent to acceptance

REVOCATION OF ACCEPTANCE An acceptance must be revoked at any time before the communication of the ■ acceptance is complete as against the acceptance but not after words

FREE CONSENT OF THE PARTIES

■ The consent is said to be free when it is not caused by ■ Coercion ■ Undue influence ■ Fraud ■ Misrepresentation ■ Mistake

COERCION To induce a person forcibly to enter into a contract

■ It may be by use of physical force or a threat involving imminent danger to life or health of a person ■ “The committing, or threatening to commit, any act forbidden by the IPC, or the unlawful detaining, or threatening to detain, any ■ property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement”

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UNDUE INFLUENCE

It is the use of relationship of trust and confidence to exploit the other party to derive some contractual advantage Fiduciary relationship Domination of a person over other A person is deemed to dominate the other if Where he holds a real or apparent authority over the other, or where he stands in fiduciary relation to the other or Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress or Where a person who is in a position to dominate the will of another

The burden of proof lies on the person who is in a position to dominate the will of other

FRAUD

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There must be a fact The fact must be misstated In short it is a false statement made with an intention to deceive another person Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent or to induce him to enter into the contract The suggestion, as to a fact, of that which is not true, by one who does not believe it to be true The active concealment of a fact by one having knowledge or belief of the fact A promise made without any intention of performing it Any other act fitted to deceive Any such act or omission as the law specifically declares to be fraudulent

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MISREPRESENTATION

Misrepresentation and fraud are same except the intention 4 conditions for misrepresentation That the representations complained of were made by the wrongdoer to the victim That these representations were false in fact That the wrongdoer, made them recklessly without knowing whether they were false or true and That the victim was thereby induced to enter into the contract in question Misrepresentation means and includes The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under law Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement

MISTAKE When the parties to the contract are ignorant about the existing fact pertaining to the transaction ■ It may be a unilateral (one party) or bilateral (bi lateral)

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In the case of coercion, undue influence, fraud, misrepresentation, and unilateral mistake the contract is voidable at the option of the other party

■ If it is by bilateral mistake it is void ■

CAPACITY OF PARTIES

■ Major ■ Sound mind ■ Not disqualified under any existing law in force

MINOR ■ Minor cannot enter into contract because of

immature mind (except for supply of necessities) ■ Generally major means 18 years ■ In the following cases major means 21 years ■ Every minor for whose person or property or both a guardian has been appointed under the Guardians and Wards Act, 1890 ■ Every minor whose property is under the superintendence of any court of wards before he attains 18 years of age.

EFFECT OF MINOR’S AGREEMENT ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

An agreement with or by a minor is void and inoperative ab initio He can be a promisee or beneficiary His agreement cannot be ratified by him on attaining the age of majority If he has received any benefit under a void agreement, he cannot be asked to compensate or pay for it He can always plead minority There can be no specific performance of the agreements entered into by him as they are void ab initio He is liable for necessaries (his estate is liable not his parents) His parents or guardian are not liable for the contract entered into by him No estoppel against a minor No liability for a minor in contract or tort arising out of contract Contract of marriage Contracts of service or apprenticeship Surety for a minor Minor as an agent (but not as principal) He cannot enter into a contract of partnership (but for benefits he can be a partner) He cannot be adjudged insolvent Shareholder Negotiable instrument

UNSOUND MIND

■ A person is sound He is capable of understanding the contract ■ He should be capable of forming a rational judgment about the effects of the ■ contract or his interest ■ Unsound mind is of 2 types Permanent unsoundness of mind ■ ■ ■

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Idiots

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An idiot is a person who is devoid of the ability to think For his necessaries he is liable

Lunatics Lunatic is a person whose mental power has been damaged He is sometimes same and sometimes in insane If contracts made on fair terms and other party has no reason to know of incompetency, contract ceases to be voidable where parties cannot be restored to pre-contracting positions

Temporary unsoundness of mind ■

Drunkards ■ ■

A person who is under the influence of intoxicating liquors or drugs is equal to that of a lunatic A drunkard cannot form a rational opinion as to the effect of a contract on his interest

CONTRACT OF THE PERSONS DISQUALIFED BY LAW

■ Alien enemy ■ An alien is the citizen of a country at war with India ■ Are void on the grounds of public policy ■ Such persons are disqualified from suing in Indian Courts ■ They can sue only after approval from the Central Government ■ Insolvent ■ After the order of discharge he is competent ■ Convict

CONSIDERATION

■ Ex nudo pacto non oritur ■ Nobody would part with anything unless he

gets a proper price ■ Quid pro quo ■ Something in return ■ Where 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 abstain from doing, something, such act or abstinence or promise is called a consideration for the promise

KINDS AND RULES OF CONSIDERATION ■ Kinds of consideration ■ Past consideration ■ Present consideration ■ Future consideration ■ Rules of consideration ■ ■ ■ ■ ■ ■

Consideration must move from the promisor Consideration may move from the promisee or on the desire of the promisee, from any other person (even a stranger) Consideration need not be adequate for the validity of a contract Consideration in question must be real and not illusory and Performance of an existing legal duty will not constitute consideration Consideration must not be illegal or immoral or opposed to public policy

EXCEPTIONS TO THE RULES OF CONSIDERATION ■

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Love and affection The agreement should be in writing It should be registered It is between parties who are closely related and It is on account of natural love and affection Nearness in relationship doe not always indicate the love and affection exist ■ Voluntary services The service should be rendered voluntarily The service is rendered to the promisor and nobody else The promisor should have been capable of entering into a contract at the time of rendering of services The promisor must have intended to compensate the promisee and The services rendered should not be immoral Time barred debt The promise must be in writing It should be signed by the promisor or his agent The debt must be a time-barred one and There must be an express promise to pay, either the whole or a part of the debt The debt must be one which would have otherwise been enforceable but for the law of limitation ■ Gift Agency Charitable subscription

UNLAWFUL CONSIDERATION AND OBJECT If it is forbidden by law-(employment in public service) If it is of such a nature that, if permitted, it would defeat the provisions of any law (liquor shop with partnership) ■ If it is fraudulent (agreement to share money from fraud) ■ If it involves or implies injury to the person or property of another (company and shares) ■ If the court regards it as immoral (woman to marry with lender, concubinage) Where the consideration is an act of sexual immorality ■

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Cohabitation, prostitution

Where the object of the agreement is the furtherancce of sexual immorality (lending to prostitute) If the court regards it as opposed to public policy Interference with course of justice Agreement to restrain prosecution Agreement of maintenance and champerty Marriage brokerage contract Unfair or unreasonable dealings

AGREEMENTS OPPOSED TO PUBLIC POLICY ■

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Interference with course of justice An agreement which obstructs the ordinary process of justice is unlawful So, an agreement for using improper influence of any kind with the judges or officers of justice is unlawful Agreement to restrain prosecution Agreement of maintenance and champerty Maintenance means an agreement to give assistance, financial or otherwise, to another to enable him to bring or defend legal proceedings when the person giving assistance has got no legal interest of his own in the subject matter Champerty is an agreement whereby one party is to assist another to bring an action for recovering money or property, and is to share in the proceeds of the action Both are valid unless It is reasonable so as to be unjust to the other party or ■ It is made by a malicious motive like that of gambling in litigation, or oppressing other party by encouraging ■ unrighteous suits, and not with the bonafide object of assisting a claim believed to be just

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An agreement by a client to pay his lawyer according to the result of the case is against public policy Marriage brokerage contract ■ Middlemen ■ For parents - dowry ■ Unfair or unreasonable dealings ■ When there is a wide gap of economic status between persons entering into contracts ■

LEGAL ENFORCEABILITY

■ All contracts are agreements, but all

agreements are not contracts ■ The basis of this statement is that the existence of a mutual set of promises does not suffice for the courts to accord legal recognition to such promises unless the intention to create legal relations is clearly established

LEGAL ENFORCEABILITY

■ All contracts are agreements, but all

agreements are not contracts ■ The basis of this statement is that the existence of a mutual set of promises does not suffice for the courts to accord legal recognition to such promises unless the intention to create legal relations is clearly established

CLASSIFICATION OF CONTRACTS / AGREEMENTS Enforceability Valid Voidable Void Unenforeable Illegal Formation Express Implied Quasi Standard form Contingent

Extent of performance Executed Executory Obligation to perform Unilateral Bilateral

MISCELLENEOUS

■ Person by whom promise is to be performed ■ Obligation of representatives of the promisor to perform ■ Promisor employs third persons to perform

VOID AGREEMENTS ■ Agreements by incompetent parties ■ Agreements under mutual mistake of fact material to the ■ ■ ■ ■ ■ ■ ■ ■

agreement Agreements with unlawful consideration or object

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Immoral and illegal agreements Agreements opposed to public policy

Agreements unlawful in part Agreements without consideration Agreements in restraint of marriage Agreements in restraint of legal proceedings Agreement which are uncertain and ambiguous Agreement by way of wager or wagering agreements Agreements to do impossible acts