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Essential elements of valid contract

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1 Essential elements of valid contract

2 Capacity of parties - Sec 11
11. Who are competent to contract  Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. santhi

3 Capacity: Ability to do something, such as the mental ability to make a rational decision.
Why capacity is important? If a plaintiff seeks to enforce a contract, he must prove that the defendant had legal capacity to enter into a contract. Capacity is an essential element of a contract because it shows that a party understood the contractual obligation. santhi

4 A person is incompetent to contract under the following circumstances:
Contd - A person is incompetent to contract under the following circumstances: 1. If he is a minor 2. If he is of unsound mind 3. If he is disqualified from contracting by any law to which he is subject santhi

5 Minor Person domiciled in India, who is under 18 years of age.
Law protects minor’s rights because they are not mature and may not possess the capacity to judge what is good or what is bad santhi

6 Position of minor’s agreement
Validity – An agreement with a minor is void-ab-intio Case – Mohiri Bibee vs Dharmdas Ghosh santhi

7 Position of persons of unsound mind
Who is a person of unsound mind Sec 12 - A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable – (a) to understand the terms of the contract. (b) to form a rational judgment as to its effect upon his interests Ex ; idiots, lunatic, drunken person santhi

8 Position of agreements with persons of unsound mind
1. Lunatic (a) while he is of unsound mind Capacity to contract He cannot enter into any contract. Any agreement entered into by him during this period is altogether void and he cannot be held liable thereon. santhi

9 Contd- b) While he is of sound mind (II) Idiots
He can enter into a valid contract and he is liable for such contract. He cannot enter into any contract. Any agreement entered by him is void and he is liable thereon. santhi

10 Contd Drunken person He cannot contract while such delirium or drunkness lasts santhi

11 Persons disqualified by law
Alien enemies – cannot enter into any contracts Foreign sovereigns and ambassadors – can enter into contracts enforce those contracts in our courts but cannot be sued in our courts without the sanction of the central government Convicts – Cannot enter into any contract during the period of the sentence santhi

12 Example of Alien X, an Indian carries on a business in Pakistan.He enters into a contract with Y who carries on business in India. Immediately after the formation of the contract, a war broke out between India & Pakistan. In this case X becomes an alien enemy though he is an Indian and the contract between X & Y (if not against public policy) will be suspended for the duration of the war and revived after the war is over. santhi

13 Contd - Company – Insolvent –
Contractual capacity is determined by the ‘object clause’ of the memorandum of association. Any act done in excess of the power given is ultra vires [(i.e) beyond the power] and hence void. Insolvent – Cannot sue and be sued. Cannot enter into contracts relating to his property. When the insolvent is discharged the disqualification is removed. santhi

14 Consideration Without which no single promise is enforceable
A technical term used in the sense of quid pro quo (ie, something in return). When a party promises to do something he must get ‘something in return’. This something is defined as consideration. santhi

15 Section 2(d) “When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise”. santhi

16 Contd - Ex – X promises to deliver the goods to Y and Y promises to pay Rs 1000 on delivery. In this case, the consideration for each of these promises is as under: For X’s promise - Y’s promise to pay Rs 1000 on delivery For Y’s promise – X’s promise to deliver the goods santhi

17 Elements of valid consideration
Move at the desire of the promisor Move from any person Past/present or future Of some value Real and not illusory Something other than the promisor’s existing obligation Lawful santhi

18 Essential elements Move at the desire of the promisor – An act constituting consideration must have been done at the desire or request of the promisor. Case – Durga Prasad vs Baldeo May move from any person – immaterial as to who furnishes the consideration Case – Chinnayya vs Ramayya santhi

19 Contd - It may be past present or future It must be of some value.
It must be real and not illusory Something other than the promisor’s existing obligation Case – Ramachandra Chintamana vs Kala Raju santhi

20 Stranger to contract A stranger to consideration – can sue because the consideration can be furnished or supplied by any person whether he is a promisee or not A stranger to the contract - cannot sue because of the absence of the privity of the contract Case – Dunlop P tyre Co ltd vs Selfridge&Co Ltd santhi

21 Contracts without consideration(Exceptions to general rule,no consideration, no contract )
Agreements made on account of natural love and affection Promise to compensate for past voluntary service Promise to pay a time barred debt Completed gift Agency santhi

22 Free consent It is essential to the creation of the contract that the parties are ad idem,ie, they agree upon the same thing in the same sense at the same time and their consent is free and real. Consent means an act of assenting to an offer. santhi

23 Sec 13 “Two or more persons are said to consent when they agree upon the same thing in the same sense.” Effect of absence of consent – When there is no consent at all, the agreement is void ab-intio, ie, it is not enforceable at the option of either party. santhi

24 FREE CONSENT Two or more persons are said to consent when they agree upon the same thing in the same sense. (Section 13)  Example: A agreed to sale car to B. But A has to cars X and Y. A thought of selling car X whereas B thought of purchasing car Y. no consent =>no contract as there was no meeting of mind santhi

25 Free consent Sec 14 No free consent – contract is usually voidable
Consent is said to be free when it is not caused by (a) coercion (b)undue influence (c)fraud (d)misrepresentation or (e) mistake No free consent – contract is usually voidable santhi

26 Contd- Free Consent Coercion Undue influence Fraud Misrepresentation
Mistake santhi

27 Coercion Sec 15 A contract is said to be caused by coercion if it is obtained by (a) committing any act which is forbidden by the Indian Penal Code (b) threatening to commit any act which is forbidden by the Indian Penal Code (c) Unlawful detaining of any property (d) threatening to detain any property santhi

28 Case Case 1 Ranganayakam vs Alwar Shetty, (1889) 13 Mad 214
The relatives of a young widow threatened her that they would not allow her to cremate the dead body of her husband unless she consented to the adoption of a boy as her son. Held: The adoption is not binding on her on account of coercion santhi

29 Case Muttiah Chettiar vs Koruppen Chetty (1927) 50 Mad 786
A person secured a release from liabilities from his principal by refusing to hand over the books of account. The release deed was held to be voidable of the option of the principal. Effect of coercion: Contract is voidable at the option of the party whose consent has been caused by coercion. santhi

30 Undue influence Dominating the will of the other person to obtain an unfair advantage over the other Sometimes the parties to the agreement are related in such a way that one of them is able to dominate the will of the other. It creates a mental or moral fear created by coercion. Consequently the party on whom undue influence is exercised is indirectly compelled to enter into the contract santhi

31 Contd- Ex: A, having money advanced money to his son B during his minority, upon B’s coming of age, obtains by parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence santhi

32 Fraud-Sec 17 "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 of his agent, or to induce him to enter into the contract:- (1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent. santhi

33 Contd- Explanation.- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. santhi

34 Illustrations a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A. (b) B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse, is unsound. santhi

35 Contd- (c) B says to A - "If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B. santhi

36 Effect Suit for recission Suit for damages for fraud
Right of recession lost if— Affirmation of the contract even after becoming aware of the fraud santhi

37 Misrepresentation A false representation of fact made innocently or non-disclosure of a material fact without the intention to deceive the other party Aggrieved party can avoid or rescind the contract santhi

38 Contd- Ex: A tells B, without checking records, that in his factory tons of indigo is manufactured every month. A believes his assessment to be true. The actual production is found to be only 830 tons. A is guilty of misrepresentation. Effect: Right to rescind the contract santhi

39 Erroneous belief about something
MISTAKE Erroneous belief about something Mistake of law Mistake of fact santhi

40 Mistake of the law of the country
Mistake of law Mistake of the law of the country Mistake of foreign law Mistake of fact Unilateral mistake Bilateral mistake santhi

41 Mistake Bilateral/Mutual Mistake of Fact
If both parties to an agreement are under a mistake as to a matter of fact essential to the agreement Effect: Void Agreement An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. santhi

Examples A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the facts. The agreement is void. A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. santhi

Unilateral Mistake of one party as to matter of fact. Effect: Not voidable santhi

44 Sec21. Effect of mistakes as to law
A contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in [India] has the same effect as a mistake of fact. Illustration A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation: the contract is not voidable. santhi

Mistake as to Indian law Effect: not voidable Mistake as to foreign law Example A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. The contract is not voidable. santhi

46 Legality of the object and consideration
Object and consideration of contract must be lawful, otherwise the agreement is void Consideration or object of contract is unlawful in the following cases: (a) If it is forbidden by law (b) If it defeats the provision of any law (c) If it is fraudulent (d) If the court regards it as immoral or opposed to public policy santhi

47 Contd- If considerations and objects unlawful in part is unlawful,. Effect: the agreement is void Example: A promises to superintend, on behalf of B, a legal manufacture of plants, and an illegal traffic in other articles. B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the object of As promise, and the consideration for Bs promise, being in part unlawful. santhi

48 Agreements opposed to the public policy
Agreements of trading with the enemy Agreement of stifling prosecution Agreement in restraint of paternal rights Agreement in restraint of personal liberty Agreements in restraint of trade santhi

49 Other essentials Certainty of meaning – terms of contract must be unambiguous Possibility of performance – An agreement to do an impossible act is void Legal formalities - Must comply with necessary formalities like writing, registration and stamping santhi

50 Examples of uncertain/certain agreements
a) A agrees to sell to B " a hundred tons of oil ". The agreement is void for uncertainty. There is nothing whatever to show what kind of oil was intended. (b) A, who is a dealer in coconut-oil only, agrees to sell to B "one hundred. tons of oil". The nature of As trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut-oil. santhi

51 Contd- (c) A agrees to sell to B one hundred tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void. (d) A agrees to sell to B " my white horse for rupees five hundred or rupees one thousand". The agreement is void, There is nothing to show which of the two prices was to be given for buying the horse. santhi

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