SUIT BY A THIRD PARTY TO A CONTRACT

SUIT BY A THIRD PARTY TO A CONTRACT

Though under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third party, the third party cannot sue on contract. Only a person who is party to a contract can sue on it.
Thus, the concept of stranger to consideration is a valid and is diuerent from stranger to a contract.

Example: P who is indebted to Q, sells his property to R and R promises to pay ou the debt amount to Q. If R fails to pay, then in such situation Q has no right to sue, as R is a stranger to contract.

The aforesaid rule, that stranger to a contract cannot sue is known as a“doctrine of privity of contract”, is however, subject to certain exceptions. 

In other words, even a stranger to a contract may enforce a claim in the following cases:
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.

(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of family who originally had not been parties to the settlement may enforce the agreement.

(3) In the case of certain marriage contracts, a female member can enforce a provision for marriage expenses made on the partition of the Hindu Undivided Family.

(4) In the case of assignment of a contract / arrangements, a provision may be made for the benefit of a person. He may file the suit though he is not a party to the agreement.

(5) Acknowledgement or estoppel – where the promisor by his conduct acknowledges himself as an agent of the third party, it would result into a binding obligation towards third party. For example, if L gives to M `20,000 to be given to N, and M informs N that he is holding the money for him, but afterwards M refuses to pay the money. N will be entitled to recover the same from the former i.e. M.

(6) In the case of covenant running with the land, the person who purchases land with notice that the owner of land is bound by certain duties auecting land, the covenant auecting the land may be enforced by the successor of the seller.

(7) Contracts entered into through an agent: The principal can enforce the contracts entered by his agent where the agent has acted within the scope of his authority and in the name of the principal. 

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LEGAL RULES REGARDING CONSIDERATION

LEGAL RULES REGARDING CONSIDERATION

(i) Consideration must move at the desire of the promisor: Consideration must be ouered by the promisee or the third party at the desire or request of the promisor. This implies “return” element of consideration. Contract of marriage in consideration of promise of settlement is enforceable.

An act done at the desire of a third party is not a consideration.

In Durga Prasad v. Baldeo, D (defendant) promised to pay to P (plaintiu) a certain commission on
articles which would be sold through their agency in a market. Market was constructed by P at the desire of the C (Collector), and not at the desire of the D. D was not bound to pay as it was without consideration and hence void.

Example: R saves S’s goods from fire without being asked to do so. R cannot demand any reward for his services, as the act being done voluntary.

(ii) Consideration may move from promisee or any other person: In India, consideration may proceed from the promisee or any other person who is not a party to the contract. The definition of consideration as given in Section 2(d) makes that proposition clear. According to the definition, when at the desire of the promisor, the promisee or any other person does something such an act is consideration. In other words, there can be a stranger to a consideration but not stranger to a contract.

Example: An old lady made a gift of her property to her daughter with a direction to pay a certain sum of money to the maternal uncle by way of annuity. On the same day, the daughter executed a writing in favour of the brother agreeing to pay annuity. The daughter did not, however, pay the annuity and the uncle sued to recover it. It was held that there was suflcient consideration for the uncle to recover the money from the daughter. [Chinnayya vs. Ramayya (1882)]

(iii) Executed and executory consideration: A consideration which consists in the performance of an act is said to be executed. When it consists in a promise, it is said to be executory. The promise by one party may be the consideration for an act by some other party, and vice versa.

Example: A pays ` 5,000 to B and B promises to deliver to him a certain quantity of wheat within a month. In this case A pays the amount, whereas B merely makes a promise. Therefore, the consideration paid by A is executed, whereas the consideration promised by B is executory.

(iv) Consideration may be past, present or future: The words “has done or abstained from doing” [as contained in Section 2(d)] are a recognition of the doctrine of past consideration. In order to support a promise, a past consideration must move by a previous request. It is a general principle that consideration is given and accepted in exchange for the promise. The consideration, if past, may be the motive but cannot be the real consideration of a subsequent promise. But in the event of the services being rendered in the past at the request or the desire of the promisor, the subsequent promise is regarded as an admission that the past consideration was not gratuitous.

Example: ’A’ performed some services to‘B’ at his desire. After a week,‘B’ promises to compensate‘A’ for the work done by him. It is said to be present consideration and A can sue B for recovering the promised money.

(v) Consideration need not be adequate: Consideration need not to be of any particular value. It need not be approximately of equal value with the promise for which it is exchanged but it must be something which the law would regard as having some value. Something in return need not be equal to something given. It can be considered a bad bargain of the party.

It may be noted in this context that Explanation 2 to Section 25 states that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.
But as an exception if it is shockingly less and the other party alleges that his consent was not free than this inadequate consideration can be taken as an evidence in support of this allegation.

Example: X promises to sell a house worth `6 lacs for `1 lacs only, the adequacy of the price in itself shall not render the transaction void, unless the party pleads that transaction takes place under coercion, undue influence or fraud.

(vi) Performance of what one is legally bound to perform: (consideration must not be performance of existing duty) The performance of an act by a person who is legally bound to perform the same cannot be consideration for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration. Hence such a contract is void for want of consideration. Similarly, an agreement by a client to pay to his counsel after the latter has been engaged, a certain sum over and above the fee, in the event of success of the case would be void, since it is without consideration.

But where a person promises to do more that he is legally bound to do, such a promise provided it is not opposed to public policy, is a good consideration. It should not be vague or uncertain.

(vii) Consideration must be real and not illusory: Consideration must be real and must not be illusory. It must be something to which the law attaches some value. If it is legally or physically impossible it is not considered valid consideration.

Examples: A man promises to discover treasure by magic. This transaction can be said to be void as it is illusory.

(viii) Consideration must not be unlawful, immoral, or opposed to public policy. Only presence of consideration is not suflcient it must be lawful. Anything which is immoral or opposed to public policy also cannot be valued as valid consideration.

Example: A agrees with B to sell car for `2 lacs to B. Here A is under an obligation to give car to B and B has the right to receive the car on payment of `2 lacs and also B is under an obligation to pay `2 lacs to A and A has a right to receive `2 lacs.

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WHAT IS CONSIDERATION?

WHAT IS CONSIDERATION?

Consideration is the price agreed to be paid by the promisee for the obligation of the promisor. The word consideration was described in a very popular English case of Misa v. Currie as:

“A valuable consideration in the sense of law may consist either in some right, interest, profit or benefit accruing to one party (i.e. promisor) or forbearance, detriment, loss or responsibility given, suuered or undertaken by the other (i.e., the promisee).” 

Section 2(d) defines consideration as follows:
“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 an act or abstinence or promise is called consideration for the promise”. 

Analysis of Definition of Consideration

(1) Consideration is an act- doing something.

Example- Ajay promises Bhuvan to guarantee payment of price of the goods which Bhuvan wanted to sell on one month credit to Chaitanya. Here selling of goods on credit by Bhuvan to Chaitanya is consideration for A’s promise. 

(2) Consideration is abstinence- abstain from doing something.

Example- Abhishek promises Bharti not to file a suit against him if he (Bharti) would pay him (Abhishek) Rs. 1,00,000. Here abstinence on the part of Abhishek would constitute consideration against Bharti’s payment of Rs. 1,00,000 in favor of Abhishek. 

(3) Consideration must be at the desire of the promisor.

(4) Consideration may move from promisee or any other person.

(5) Consideration may be past, present or future.

Thus from above it can be concluded that: 

Consideration = Promise / Performance that parties exchange with each other. 

Form of consideration = Some benefit, right or profit to one party / some detriment, loss, or forbearance to the other.

ACCEPTANCE

ACCEPTANCE

Definition of Acceptance: In terms of Section 2(b) of the Act, ‘the term acceptance’ is defined as follows: 

“When the person to whom the proposal is made signifies his assent thereto, proposal is said to be accepted. The proposal, when accepted, becomes a promise”.

Analysis of the above definition
1. When the person to whom proposal is made - for example if A ouers to sell his car to B for ` 200000. Here, proposal is made to B.

2. The person to whom proposal is made i.e. B in the above example and if B signifies his assent on that proposal. In other words if B grants his consent on A’s proposal, then we can say that B has signified his consent on the proposal made by A.

3. When B has signified his consent on that proposal, we can say that the proposal has been accepted.

4. Accepted proposal becomes promise.

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DEFINITION OF OFFER/PROPOSAL

Definition of Offer/Proposal:
According to Section 2(a) of the Indian Contract Act, 1872, “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”. 

Analysis of the above definition Essentials of a proposal/offer are-

1. The person making the proposal or ouer is called the ‘promisor’ or ‘oueror’: The person to whom the ouer is made is called the ‘oueree’ and the person accepting the ouer is called the ‘promisee’ or ‘acceptor’. 

2. For a valid ouer, the party making it must express his willingness‘to do’ or‘not to do’ something: Mere expression of willingness does not constitute an ouer.

Example: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2017, it does not constitute an ouer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid ouer expression of willingness must be made to obtain the assent (acceptance) of the other. Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute an ouer.

3. An ouer can be positive as well as negative: Thus “doing” is a positive act and “not doing”, or “abstinence” is a negative act; nonetheless both these acts have the same euect in the eyes of law.

Example: A ouers to sell his car to B for ` 3 lacs is an act of doing. So in this case, A is making an ouer to B. On the other hand, when A ask B after his car meets with an accident with B’s scooter not to go to Court and he will pay the repair charges to B for the damage to B’s scooter; it is an act of not doing or abstinence.

4. The willingness must be expressed with a view to obtain the assent of the other party to whom the ouer is made.

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TYPES OF CONTRACT (ON THE BASIS OF THE PERFORMANCE OF THE CONTRACT)

TYPES OF CONTRACT

 On the basis of the performance of the contract
1. Executed Contract: The consideration in a given contract could be an act or forbearance. When the act is done or executed or the forbearance is brought on record, then the contract is an executed contract.

Example: When a grocer sells a sugar on cash payment it is an executed contract because both the parties have done what they were to do under the contract.

2. Executory Contract: In an executory contract the consideration is reciprocal promise or obligation. Such consideration is to be performed in future only and therefore these contracts are described as executory contracts.

Example: Where G agrees to take the tuition of H, a pre-engineering student, from the next month and H in consideration promises to pay G ` 1,000 per month, the contract is executory because it is yet to be carried out.

Unilateral or Bilateral are kinds of Executory Contracts and are not separate kinds.
(a) Unilateral Contract: Unilateral contract is a one sided contract in which one party has performed his duty or obligation and the other party’s obligation is outstanding.

Example: M advertises payment of are ward of ` 5000 to any one who finds his missing boy and brings him. As soon as B traces the boy, there comes into existence an executed contract because B has performed his share of obligation and it remains for M to pay the amount of reward to B. This type of Executory contract is also called unilateral contract.

(b) Bilateral Contract: A Bilateral contract is one where the obligation or promise is outstanding on the part of both the parties.

Example: A promises to sell his plot to B for `1 lacs cash down, but B pays only ` 25,000 as earnest money and promises to pay the balance on next Sunday. On the other hand A gives the possession of plot to B and promises to execute a sale deed on the receipt of the whole amount. The contract between the A and B is executory because there remains something to be done on both sides. Executory contracts are also known as Bilateral contracts. 

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DIFFERENCE BETWEEN VOID AGREEMENT AND ILLEGAL AGREEMENT

DIFFERENCE BETWEEN VOID AGREEMENT AND ILLEGAL AGREEMENT

Basis of difference	Void agreement	Illegal agreement
Scope	A void agreement is not necessarily illegal.	An illegal agreement is always void.
Nature	Not forbidden under law.	Are forbidden under law.
Punishment	Parties     are     not      liable      for     any punishment under the law.	Parties to illegal agreements are liable for punishment.
Collateral Agreement	It’s not necessary that agreements collateral to void agreements may also be void. It may be valid also.	Agreements      collateral       to      illegal agreements are always void.

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TYPES OF CONTRACT (ON THE BASIS OF THE VALIDITY)

TYPES OF CONTRACT

 On the basis of the validity

1. Valid Contract: An agreement which is binding and enforceable is a valid contract. It contains all the essential elements of a valid contract.

2. Void Contract: Section 2 (j) states as follows: “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. Thus a void contract is one which cannot be enforced by a court of law.

Example: Mr. X agrees to write a book with a publisher. After few days, X dies in an accident. Here the contract becomes void due to the impossibility of performance of the contract.

Example: A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the supply is euected, the fire caught in the factory and everything was destroyed. Here the contract becomes void.

It may be added by way of clarification here that when a contract is void, it is not a contract at all but for the purpose of identifying it, it has to be called a [void] contract.

3. Voidable Contract: Section 2(i) defines that “an agreement which is enforceable by law at the option of one or more parties thereto, but not at the option of the other or others is a voidable contract”.

This in fact means where one of the parties to the agreement is in a position or is legally entitled or authorized to avoid performing his part, then the agreement is treated and becomes voidable.
Such a right might arise from the fact that the contract may have been brought about by one of the parties by coercion, undue influence, fraud or misrepresentation and hence the other party has a right to treat it as a voidable contract.

At this juncture it would be desirable to know the distinction between a Void Contract and a Voidable Contract. The distinction lies in three aspects namely definition, nature and rights. These are elaborated here under:

(a) Definition: A void contract cannot be enforced at all. A voidable contract is an agreement which is enforceable only at the option of one of the parties but not at the option of the other. Therefore ‘enforceability’ or otherwise, divides the two types of contracts.

(b) Nature: By nature, a void contract is valid at the time when it is made but becomes unenforceable and thus void on account of subsequent developments or events like supervening impossibility, subsequent illegality etc., Repudiation of a voidable contract also renders the contract void. Similarly a contingent contract might become void when the occurrence of the event on which it is contingent becomes impossible.

On the other hand voidable contract would remain valid until it is rescinded by the person who has the option to treat it as voidable. The right to treat it as voidable does not invalidate the contract until such right is exercised. All contracts caused by coercion, undue influence, fraud, misrepresentation are voidable. Generally, a contract caused by mistake is void.

(c) Rights: As regards rights of the parties, in the case of a void contract there is no legal remedy for the parties as the contract cannot be performed in any way. In the case of voidable contract the aggrieved party has a right to rescind it within a reasonable time. If it is so rescinded, it becomes void. If it is not rescinded, it is a valid contract.

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ESSENTIALS OF A VALID CONTRACT

ESSENTIALS OF A VALID CONTRACT
                                                    
                         Essentials of a valid contract

	As given by Section 10 of Indian Contract Act, 1872		Not given by Section 10 but are also considered essential
1	Agreement	1	Two parties
2	Free consent	2	Intention to create legal relationship
3	Competency of the parties	3	Fulfillment of legal formalities
4	Lawful consideration	4	Certainty of meaning
5	Legal object	5	Possibility of performance
6	Not expressly declared to be void	6	-

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DIFFERENCE BETWEEN AGREEMENT AND CONTRACT

Difference between Agreement and Contract

Basis of differences	Agreement	Contract
Meaning	Every promise and every set of promises, forming the consideration for each other. Ouer + Acceptance	Agreement enforceable by law. Agreement + Legal enforceability
Scope	It’s a wider term including both legal and social agreement.	It is used in a narrow sense with the specification that contract is only legally enforceable agreement.
Legal obligation	It may not create legal obligation. An agreement does not always grant rights to the parties	Necessarily creates a legal obligation. A contract always grants certain rights to every party.
Nature	All agreement are not contracts.	All contracts are agreements.

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WHAT IS CONTRACT?

WHAT IS A CONTRACT?

The term contract is defined under section 2(h) of the Indian Contract Act, 1872 as-
“an agreement enforceable by law”.

The contract consists of two essential elements:

(i) an agreement, and

(ii) its enforceability by law.

(i) Agreement - The term ‘agreement’ given in Section 2(e) of the Act is defined as- “every promise and every set of promises, forming the consideration for each other”.

To have an insight into the definition of agreement, we need to understand promise.
Section 2 (b) defines promise as-
“when the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted. Proposal when accepted, becomes a promise”.

The following points emerge from the above definition :
1. when the person to whom the proposal is made

2. signifies his assent on that proposal which is made to him

3. the proposal becomes accepted

4. accepted proposal becomes promise

Thus we say that an agreement is the result of the proposal made by one party to the other party and that other party gives his acceptance thereto of course for mutual consideration. 

Agreement = Ouer/Proposal + Acceptance

(ii) Enforceability by law – An agreement to become a contract must give rise to a legal obligation which means a duly enforceable by law.

Thus from above definitions it can be concluded that –

Contract = Accepted proposal/Agreement + Enforceability by law

On elaborating the above two concepts, it is obvious that contract comprises of an agreement which is a promise or a set of reciprocal promises, that a promise is the acceptance of a proposal giving rise to a binding contract. Further, section 2(h) requires an agreement to be worthy of being enforceable by law before it is called‘contract’. Where parties have made a binding contract, they created rights and obligations between themselves.

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THE LAW OF CONTRACT (INTRODUCTION)

The Law of contract: Introduction

As a result of increasing complexities of business environment, innumerable contracts are entered into by the parties in the usual course of carrying on their business. ‘Contract’ is the most usual method of defining the rights and duties in a business transaction. This branch of law is diuerent from other branches of law in a very important respect. It does not prescribe so many rights and duties, which the law will protect or enforce; it contains a number of limiting principles subject to which the parties may create rights and duties for themselves. The Indian Contract Act, 1872 codifies the legal principles that govern ‘contracts’. The Act basically identifies the ingredients of a legally enforceable valid contract in addition to dealing with certain special type of  like indemnity, guarantee, bailment, pledge, quasi contracts, contingent contracts etc.

All agreements are not studied under the Indian Contract Act, 1872, as some of those are not contracts. Only those agreements, which are enforceable by law, are contracts.

This unit refers to the essentials of a legally enforceable agreement or contract. It sets out rules for the ouer and acceptance and revocation thereof. It states the circumstances when an agreement is voidable or enforceable by one party only, and when the agreements are void, i.e. not enforceable at all.

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