contract question and answer - most likely asked in exams

DISCHARGE OF A CONTRACT –  (12 marks)

                The contract gets discharge by following ways –

1.       Discharged by performance

2.       Discharged by mutual agreement

3.       Discharged by lapse of time

4.       Discharged by operation of law

5.       Discharged by impossibility of performance

6.       Discharged by breach of contract

1.       Discharged by performance –

Discharged by performance takes place when the parties to the contract fulfill their obligations arising under the contract. In such case, the parties are discharged and the contract comes to an end. The performance of the contract may be:

Actual performance : where both the parties perform their promises. Attempted performance: where a party offers to perform his obligation under the contract but the other party refuses to accept the performance

2.       Discharge by mutual agreement  or consent  –

The contractual obligation may be discharged by agreement among the parties to the contract. The parties to the contract may agree to rescind the contract, alter the contract or substitute it with a new contract. In such a case, the original contract gets discharged. A contract may terminate by mutual consent in any one of the following ways:

1.       Novation :

Novation takes place when –

·         A new contract is substitute for an existing one between the same parties.

·         A new contract is substituted for an existing one where the contract on the same terms is entered into between one of the parties and the third party.

On novation, the original contract is discharged and need not to be performed. However, the novation should take place before the expiry of the time for the performance of the original contract.

2.       Alteration –

The parties to a contract may mutually decide to alter certain terms of the contract. When the parties to a contract, agree to alter the contract, the original contract is rescinded an need not be perform. For alteration, the benefitting party has to pay some consideration to the other party.

Difference between Novation and Alteration –

a.       In Novation, there may be change in the terms of the contract or in the parties to the contract. However, in Alteration there is change only in the terms of the contract an not in the parties to the contract.

b.      In Novation there is a substitution of an existing contract with a new one. But in Alteration there is no such substitution but only a change in some terms and condition of the original contract.

3.       Recession –

Recession means termination of a contract. Where parties mutually decide to cancel the terms of the contract, the contract need not be performance. In recession, the old contract is cancelled and no new contract comes into existence.

4.       Remission –

Remission is said to be done where a party to the contract agrees to:

·         Dispense with (waive the performance)

·         Accept a lesser amount or lesser degree of performance for full discharge of contract.

·         Extends the time of performance.

For remission, no consideration is required to be paid by benefitting party. Once the party agrees for remission, it cannot be revoked. However, the remission may be conditional.

5.       Waive –

Waive means abandonment or intentional relinquishment of a right under a contract. promise may dispense with performance of a promise. When a party waives his rights under a contract the other party is released from his obligation. Consideration is not necessary for waiver.

3.       Discharged by lapse of time –

The right and obligation under a contract can be enforced only within a specified period called the ‘period of limitation’. The limitation Act has prescribed the period of limitation for various contracts. After the expiry of the ,imitation period, the contractual rights cannot be enforced and the contract comes to an end due to a lapse of limitation period.

4.       Discharged by operation of law –

A contract may be discharged by operation of law in the following cases  -

1.       Death of the promisor –

Contracts, the performance of which involves personal skill or ability of the promisor, comes to an end with the death of the promisor.

2.       Insolvency – 

When a person is declared insolvent by insolvency court, he is discharged from all his liabilities incurred prior to his adjudication.

3.       Merger –

When an inferior right accruing to party in a contract merges into a superior right accruing to the same party, then the contract conferring inferior rights is discharged.

By unauthorized alteration of terms of a written document : where any of the parties to a contract makes any material alteration to the terms of the contract makes any material alteration to the terms of the contract without seeking the consent of the other party, the contract can be avoided by the other party at his will.

5.       Discharged by impossibility of performance –

An agreement to do an impossible act is void ab initio. When an act subsequently becomes impossible or unlawful, it becomes void. Impossibility may be of two types:

1.       Impossibility existing at the time of making the contract –

When the parties agree upon doing something which is impossible, the agreement is void whether the fact of impossibility was known or not known to the parties at the time of making the contract. Where at the time of contracting, the promisor alone knows about the impossibility or he should have known it with reasonable diligence then the promise can claim compensation for damages on account of non performance.

2.       Supervening impossibility –

Impossibility which arises subsequent to making of the contract is called supervening impossibility. If the contract was capable of performance at the time of making it, but subsequently because of some event which the promisor could not prevent, the performance becomes impossible or unlawful, the contract becomes void and the parties are discharged from their obligations.

A contract is discharged by supervening impossibility in the following cases –

·         Destruction of subject matter

·         Death of personal incapacity

·         Change of law

·         Declaration of war

·         Non - existence or non – occurrence of a particular state of things

  

What is breach of contract? What are the principal on which damages are assess for breach of contract?–  (12 Marks)

Breach of Contract -

is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance.

Illustration –

A, a singer, contract with B the manager of a theatre, to sing at his theatre for one year, and to abstain from singing at other theatres during the period. She absents herself. B cannot compel A to sing at his theatre (as it is a personal contract), but he may sue her for an injunction restraining her from singing at the other theatres.

The principal on which damages are assessed for breach of contract –

Section 73(1) –

Rules governing the measure of damages -

            When a contract has been broken, the party who suffers by such breach of contract is entitle to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby –

1.      Which naturally arose in the usual course of things from such breach, or

2.      Which the party knew, when they made the contract, to be likely to result from the breach of the contract.

Illustration –

A contracts to sell and deliver 50 mounds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 mounds of saltpeter, ought to have been delivered.

Case Laws –

Featherson V. Wilkinson, (1873) –

A contracts with B to provide a ship on a certain day to receive a cargo of coal to be carried to Havra. A fails to provide the ship in time, and B has to charter vessels at an advanced freight and also buy coal at higher price. What is B’s remedy? – B can recover from A the increase of price as well as the increase in freight, unless A can show that, by reason of a corresponding increase in the market price at the port of delivery otherwise, the loss is compensated, wholly or in part.

Illustration –

1.      A, the owner of a boat, contract with B to take a crgo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, doesnot start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived, if the boat had sailed according to the contract. After the date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived.

2.      A contracts to repair B’s house in a certain manner and receives payment in advance. A repairs the house of B, but not according to the contract. B is entitled to recover from A, the cost of making the repairs conforming to the contract.

“Acceptance to a proposal is what is a lighted match to a train of gun – powder”. Discuss and state essentials of a valid acceptance. (12 – Marks)

The position relating to  revocation of proposal and acceptance has been described by Anson in the following words,

“Acceptance is to offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone.”

This statement primarily holds good under English law.

Here, Gunpowder = offer and lighted match = acceptance

When a lighted match is shown to a train of gunpowder, it explodes and something happens which cannot be undone. Similarly, and offer once accepted cannot be revoked. But so long a lighted match is not shown, the gunpowder remains inert and can be removed, similarly an offer can be revoked before it is accepted.

Similarly, once acceptance is given it cannot be revoked. But under Indian Contract Act, acceptance can be revoked by resorting to quicker means of communication, so that the offerer learns about it before acceptance. Thus, the above statement doesn’t hold in relation to revocation of acceptance under Indian law.

Essential of a Valid Acceptance –

Must be absolute and unqualified :

            In order to be binding, there must be an unqualified acceptance to all the terms of the offer, whether material or immaterial, major or minor. If the parties are not ad idem on all the matters concerning the offer can acceptance, there is no contract. The proposal, therefore, must be accepted into.

Must be communicated to the offeror:

            The communication of acceptance may be express or implied. A mere resolve or mental determination on the part of the offeree to accept an offer, when there is no external manifestation of the intention to do so, is not sufficient. A communication to any other person is an ineffectual as if no communication has been made.

Must be according to the mode prescribed:

            The offer must be accepted according to the mode prescribed and if no mode is prescribed , the offeror may intimate to the offeree within a reasonable time that the acceptance is not according to the mode prescribed and may insist that the offer must be accepted in the prescribed mode only. If he does not inform the offeree, he is deemed to have accepted the acceptance.

Note :

·         Acceptance must be given within a specified time; if time is not mentioned then it should be given within a reasonable time.

·         Acceptance cannot precede an offer.

·         It must show an intention on the part of the acceptor to fulfill the terms of the promise.

·         Acceptance must be only by the party or parties to whom the offer is made.

·         Acceptance must be made before the offer lapse or before the offer is withdrawn.

·         Silence cannot be the mode of acceptance.

·         Acceptance may be expressed or implied.

Q. Describe the law relating to communication of proposals, their acceptance and their revocation. (12 Marks)

Section 2(a) of Indian Contract Act 1972 says that when a person signifies his willingness to do or to abstain from doing something to another, with a view to obtaining the assent of that another, he is said to make a proposal.  Further, section 2(b) says that when the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. The important point to note here is that the party making the proposal or the party accepting the proposal must "signify" their willingness or assent to the other party. Thus, a promise cannot come into existence unless the willingness or assent is communicated to the other party. Further, even the revocation, if any, must be communicated to the other party for it to take effect. Therefore, communication is the most critical aspect in the making of a contract.

Communication

Section 3 defines how a communication, acceptance, or revocation can be signified:
The communication, acceptance, and revocation are deemed to be made by an act or omission of the party proposing, accepting, or revoking, by which he intends to communicate such proposal, acceptance, or revocation, or which has the effect of communicating it.
Thus, a proposal may be made by any way, which has the effect of laying before another person his willingness to do nor not do something. The acceptance can be signified similarly.  Section 9 specifies that a promise (i.e. a proposal and its acceptance) can be formed either by words, written or oral, is which case it is called express or by action, in which case it is called implied. In the case of Haji Mohd Ishaq vs Mohd Iqbal SCC 1978, the defendants accepted the goods supplied by the plaintiff through a go between man and also paid part of the price. It was held that the defendants were liable to pay the remaining balance because the proposal and its acceptance were signified by their actions.

Section 4 specifies when a communication is complete:

• Communication of a proposal is complete when it comes to the knowledge of the party to whom the proposal is made.

For example, if A sends a proposal in the mail to B and if the mail is lost, it can be held that the communication of the proposal is not complete. In the case of Lalman vs Gauridatta 1913, it was held that the reward for the missing child cannot be claimed by a person who traced the child without any knowledge of the announcement. There was no contract between the two in the first place because the proposal never came to the knowledge of the person who found the child and thus he could never accept it.

• Communication of the acceptance is complete, as against the promisor, when it is put in course of transmission to the  promisor so as to be out of the power of the acceptor, as against the acceptor, when it comes to the knowledge of the promisor.

For example, as soon as B drops a letter of acceptance in mail back to A, A is bound by the promise. However, B is not bound by it unless A receives the acceptance letter. In the case of Adams vs Lindsell 1818, it was held that a contract arose as soon as the acceptance was posted by the acceptor. In this case, the plaintiff received the offer to sell wool on 5th and they posted an acceptance, which was received on 9th by the defendants. The defendants, however, had already sold the wool on 8th. The court observed that the contract must arise as soon as the acceptance is posted and is gone out of the reach of acceptor otherwise this will result in an infinite loop.

• Communication of a revocation is complete as against the party who makes it when it is put in course of transmission to the party to whom it is made, so as to be out of the power of the party who makes it; as against the party to whom it is made, when it comes to the knowledge of the party to whom it is made.

For example, if A sends a letter revoking his proposal, it will be complete against A as soon as the letter is dropped in the mailbox and is out of his control. However, the revocation will be held complete against B only when B receives the letter.
Further, if B revokes his acceptance by telegram, it will he deemed complete against B as soon as he dispatches the telegram. It will be held complete against A, when A receives the telegram.

Section 5 specifies when a proposal and acceptance can be revoked:

• A proposal can be revoked anytime before the communication of its acceptance is complete as against the proposer but not afterwards.

For example, if A propose to B through a letter, A can revoke the proposal as long as B has not posted a letter of acceptance to A. In the case of Henthorn vs Fraser 1862, an offer to sell a property was made to a person. This person was to reply to it within 14 days.  He lived in another town and he posted an acceptance at 3.50PM, which reached the offerer at 8.30 PM. Meanwhile, the offerer posted the revocation letter at 1 PM, which reached the person at 5.30PM. Thus, the revocation did not reach the offeree before the communication of the acceptance was complete as against the offerer.  Thus, the revocation was held ineffective.

• An acceptance may be revoked anytime before its communication is complete as against the acceptor.

For example, B can revoke his acceptance that was sent by letter, by a telegram that reaches A before the acceptance letter.  In the case of Union of India vs Bhimsen Walaiti Ram 1969, the defendant won an auction for a liquor shop and paid 1/6 of the cost upfront. However, the bid was supposed to be finalized by the financial commissioner, which he had not done. Meanwhile, the defendant failed to pay the remaining amount and the commissioner ordered a re-auction. In the re-auction, less money was realized and the plaintiff sued to recover the shortfall. However, SC held that since the commissioner had not given is final approval for the bid, the communication of acceptance was not complete against the defendant, thus the defendant was free to withdraw or revoke his proposal (i.e the bid).
 

Section 6 specifies how a revocation can be made:

• A proposal is revoked
• by the communication of the notice of revocation by the proposer to the other party.
• by the lapse of prescribed time in the proposal for acceptance or if no time is prescribed, by the lapse of a reasonable time in communication of the acceptance.
• by the failure of the acceptor to perform a condition precedent to acceptance.
• by death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance.

Acceptance

Section 7 specifies that an acceptance must be absolute and unqualified. A partial acceptance or a clarification regarding a proposal, or specifying a condition on acceptance is no acceptance.
In the case of Hyde vs Wrench 1840, an offer was made to sell a farm for  #1000, which was rejected by an plaintiff, who counter offered #950 for it. This was rejected by the defendant, upon which the plaintiff agreed to pay #1000. However, it was held than the defendant was not bound by any such second acceptance.

Section 7 further says that the acceptance must be in some usual and reasonable manner, unless the proposal prescribes the manner in which the acceptance should be made. If the proposal prescribes the manner, and if the acceptance is not done in that manner, the proposer may insist that the acceptance be made in the manner prescribed, and if he fails to do so, he accepts the acceptance. Thus, if the acceptance is sent by any way other than what is prescribed by the proposal, the proposer must reject it in a reasonable time otherwise the proposer accepts it.  This is markedly different from English law where a proposal must be accepted in the manner required in the proposal otherwise, the acceptance is invalid. In the case of Elliason vs Henshaw 1819, it was held that an acceptance sent by mail instead of through the wagon that brought the offer, was not valid.

Section 8 specifies that a proposal is accepted when the acceptor performs conditions prescribed for the acceptance or when he accepts the consideration given along with the offer for a reciprocal promise.  When acceptance consists of an act as in the case of State of Bihar vs Bengal C & P Works 1954, it was held that, when an order is sent for goods, the posting of goods itself is equivalent to acceptance.  No further communication of acceptance is necessary.

In the case of Carlill vs Carbolic smoke ball co 1893, it was held that, purchasing and consuming the medicine performs the condition of the proposal.
 

Requirements for an acceptance

1. Acceptance must be from a person to whom the proposal was made. In the case of Powel vs Lee 1908, it was held that communication of an acceptance from an unauthorized person is invalid.
2. Acceptance must be signified to the proposer. In the case of Felthouse vs Bindley 1863, it was held that unless an acceptance is given to the offerer, it is no acceptance.
3. It is required that there be an act that signifies the acceptance. As held in the case of Bhagvandas Goverdhandas Kedia vs Girdharilal Pursottamdas & Co SC AIR 1966, for an acceptance to be completed, a mere mental decision is not sufficient. An external manifestation of the decision is a must. 

Communication and acceptance of General Offers
A general offer, such as an advertisement for the sale of an article at a fixed price, or to give prize to the one that does something first, is not made to a particular person. Whoever the contract is done with the person who responds or who does the task first. Communication of such as offer is done through public media such as a newspaper. S general offer can be perpetual or end as soon as the condition is fulfilled.
No explicit acceptance of such offers is usually required. Performing the conditions specified in the offer acts as the acceptance of the offer. For example, in the case of Carlill vs Carbolic Smoke Ball Company 1893, it was held that it was a general offer and anybody who fulfilled the condition was eligible for the $100 compensation as advertised.

Revocation of General Offers
A general offer can be revoked in the same manner as it was made. For example, by printing a revocation in a newspaper. It will be considered complete, even if a person who is ignorant of the revocation, performs the conditions after the revocation is published.

What is consideration to a contract? what is the effect on the validity of a contract where the consideration is absent? (12 Marks)

According to section 2(d) of Indian Contract Act, 1872, “ when at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstain from doing or promises to do or abstain from doing something, such act ot abstinence or promise is called a consideration for the promise.”

In other words, consideration is the price for which the promise of the other party is bought. Thus, for a valid contract there should be “quid pro quo”, i.e “something in return”. This means when a party to an agreement promises to o something, he must get something in return. This something may be some benefit, right, interest or profit that may accrue to one party or it may be some forbearance, detriment, loss or responsibility suffered or undertaken by the other party.

Thus, NO CONSIDERATION NO CONTRACT.

Consideration must move at the desire of the promisor –

            To make a contract binding and enforceable the consideration must be supplied at the desire of the promisor. It is done at the desire of the third party or without the desire of the promisor, it will not be good consideration. On the other hand, an act done on the promisor’s desire gives a goo consideration even through it may be of an personal significance or benefit to him.

Consideration may move from the promise or any other person –

            As long as there is a consideration for a promise, it is immaterial who has furnished it. It may from the promise or any other person. “Any other Person” is technically referred to as “ Stranger to consideration”. A person strange to consideration can sue but strange to contract cannot sue.

Consideration may be Past, Present or Future –

            The definition of consideration clearly states that the consideration may be past, present or future.

Past consideration – past consideration is said to be past consideration when something is provided to or done for the primisor before he gives the promise.

Present / Executed consideration – when the consideration is given simultaneously with the promise, i.e., at the time of making the promise, it is said to be present or executed consideration. Example, cahs sales.

Future/Executory consideration – when the consideration from one party to another is to move at some future date after making the promise, it is called future or executor consideration.

Consideration must be real and not illusory –

Consideration, although need not be adequate, must be real, competent and of some value in the eyes of law. It must not be impossible or illusory.

The following are not real consideration –

a.      Physical impossibility

b.      Legal impossibility

c.       Uncertain consideration

d.      Illusory consideration

Consideration must be legal –

            The consideration should not be illegal, immoral or opposed to public policy. Every agreement whose consideration is unlawful is void.

Consideration must not be something which the promise is already bound to do –

If a person is already bound to do something under law or as an official duty or under some contract and he promises to do the very same thing to form an agreement then this promise would not form any consideration for the other person’s promise.

 

Difference between Contingent contract and wager contract – 

(Short Notes)

·         A contingent contract is defined as a, to do or not to do something, if some event collateral to such contract does or does not happen. A wager is a contingent contract, A agrees to pay money to B if the given event happens, and similarly, B pays money to A if the given event does not happen. Thus it is an agreement of mutual promise. Each of them conditional on the happening or not happening of the unknown event. In the case of every contingent contract it is not necessary that there should be a mutual promise.

·          All wager contracts are contingent contract, but all contingent contracts are not by way of wager.

·         In wager contract all uncertain events is beyond  the powers of both the parties, whereas in contingent contract the event may be within the powers of one of the parties.

·         In a wager contract, the parties are not interested in the occurrence of the event, apart from the money earned or lost. In a wager contract, they are so interested. For example, A promise to B, he will pay the sum of the amount to B, if the ship doesn’t return on time, or ship sunk, or get looted during the voyage. And if ship return safely then the contract gets void.

·         In a wager the, the future event is sole determining factor of the contract. In a contingent contract, the future event is merely collateral or incidental.

·         Wager are void (section 30), but contingent are not, unless it is dependent on an impossible event. (section 36)

Time and place of performance –

             Section 46 –

Where by the contract, a promisor is to perform his promise without the application by the promise, no time for performance is specified – the engagement must be performed within a reasonable time, what is reasonable time is a question of fact and depends on the fact and circumstance of every particular case.

Section 47 –

When a day for performance is fixed by the contract, the promisor must perform it at any time during the usual business hours on the day fixed, and at the place at which the promise ought is to be performed.

Illustration –

A promise to deliver the goods to B’s warehouse on the 1^st November. On that day, A brings the goods to B’s warehouse, but after the usual business hours. And they are not received. A has not perform his promise.

Section 48 –

When a promise is to be performed on a certain day and only on the application by the promise – it is the duty of the promisee to demand performance at a proper place and time. What is proper place and time is, in each particular care, is a question of fact.

Section 49 –

When a promise is to be performed without application by the promise and no place is fixed for the performance – it is the duty of the promisor to apply to the promise to fix a reasonable place for performance an to perform it at the place fixed.

Illustration –

A undertakes to deliver a thousand mounds of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.

Quantum Meruit –

Under the well known English law doctrine of quantum meriut have been allowed by the court under section 65 of the Indian contract Act. The Supreme Court observed in State of Madras V. Dunkerley and Co. (1958 AIR 560). That the claim for Quantum Meriut is a claim for damage for breach of contract. The value of material used for goods or delivered is a factor for which furnishes a basis for assessing the amount of compensation. The claim is not for goods supplied and delivered but for the damages.

Where a party has in the performance of a contract had done some work or rendered some service and the further performance had been made unless by the other party, he may recover reasonable compensation for the work or service.

The Supreme Court in a subsequent case explained the requirement of the claim. The original contract must be so discharge by the opposite party that the plaintiff is entitled to treat himself as free from obligation of the performance and he must have elected to do so. The remedy is not available to the party who break the contract even though he had performed it partly. The remedy is restitutory , it is a recompensate for the value of the work done by the plaintiff in order to restore him to the position which he would have been if the contract he had never been entered into. In this respect it is difficult to claim for damages which is a compensatory remedy. The court accordingly did not allow the claim to contractor on the ground that he had procure raw material from layer distant that represented in the tender document. Puran Lal Shah V. State of U.P