Contract Management (Contract Act 1872).pptx

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1. Contract Management (Contract Act 1872) MS in Project Management Bahria University Karachi

2. Contract Management ( Contract Act 1872) Topics What is a Agreement and Contract? Valid Contract and its essential characteristics Classification for Contract Discharge of Contract Offer and acceptance Consideration

3. Agreement The contract is formed only on the basis of agreement. It is a combined effect of offer and acceptance. AGREEMENT = OFFER+ ACCEPTANCE According to section 2(e), Agreement is a promise or set of promises forming consideration for each other.

4. Contract According to sec.2(h), CONTRACT may be defined as “An Agreement enforceable by law ”. These agreements creates Rights and Obligations between the Parties which can be claimed in the Court of Law.(Legal Obligation)

5. Three Major Components of A Contract To form a contract the following steps are the basic steps those should be followed AGREEMENT: Firstly a proposal has to be accepted to be a promise OBLIGATION: Secondly then the promise is to be considered to form an agreement ENFORCEABILITY: Finally the agreement should have the enforceability of law to form a lawful contract Agreement + Legal Obligation Contract Agreement + Social Obligation Contract

6. Essentials of A Valid Contract An Agreement has to fulfill the following legal conditions to become a Contract – 1) Two or more parties (Offer and Acceptance) 2) Intension to create a Legal Relationship 3) Lawful Object 4) Capacity of parties (Major, Sound mind) 5) Free Consent (understanding of terms and conditions)

7. 6) Writing and Registration and Duly stamped (not Oral Contract) 7) Certainty (proper terms and conditions) 8) Possibility of the Performance (it should not be impossible) 9) Must not have been disqualified by any law Essentials of A Valid Contract

8. ON THE BASIS OF CREATION (FORMATION) - EXPRESS -IMPLIED - QUASI EXECUTION (PERFORMANCE) -EXECUTED -EXECUTORY -PARTLY ENFOECEABILITY (VALIDITY) VALID VOID VOIDABLE ILLEGAL Classification of Contracts

9. On the Basis of Formation EXPRESS CONTRACT- Express contract is one which is made by words spoken or written at the time of formation . Example1 X says to Y, will you buy a car for Rs. 100000? Y says to X, I am ready to buy you car for Rs. 100000. It is an express contract made orally.   Example 2   X writes a letter to Y, I offer to sell my car for Rs. 100000 to you. Y send a letter to Y, I am ready to buy you car for Rs. 100000. It is an express contract made in writing .

10. 2 . IMPLIED CONTRACT An implied contract is one which is inferred from the acts or conduct of the parties or from the circumstances of the cases. Example : X, a coolie in uniform picks up the bag of Y to carry it from railway platform to the taxi stand, without being told by Y to do so and Y allows him. In this case there is an implied offer by the coolie and an implied acceptance by the passenger. Now, there is an implied contract between the coolie and the passenger and he is is bound to pay for the services of the coolie.

11. 3. QUASI CONTRACTS These contacts are based on the principles of Justice and Equity . Quasi means ‘ as if ’ or ‘ similar to ’ Also called as ‘ Implied Contracts’ It is just like a Contract as it also creates legal obligations. But the legal obligation created by Quasi Contract do NOT rest on any Agreement, but are IMPOSED BY LAW. Example: Where certain  books are delivered to a wrong address then they are under an obligation to either pay for them or return them.

12. On the Basis of Performance EXECUTED CONTRACT- It is a contract where both the parties to the contract have fulfilled their respective obligations under the contract. Example: X offers to sell his car to Y for Rs. 1 lakh . Y accepts X’s offer. X delivers the car to Y and Y pays Rs. 1 lakh to X. It is an executed contract.

13. 2 . EXECUTORY CONTRACT- It is a contract where both the parties to the contract have still to perform their respective obligations. Example: X offers to sell his car to y for Rs. 1 lakh . Y accepts X’s offer. If the car has not yet been delivered by X and the price has not yet been paid by Y , it is an Executory contract

14. 3.  PARTLY EXECUTED AND PARTLY EXECUTORY CONTRACT:  It is a contract where one of the parties to the contract has fulfilled his obligation and the other party has still to perform his obligation . Example: X offers to sell his car to y for Rs. 1 lakh on a credit of 1 month . Y accepts X offer. X sells the car to Y. Here the contract is executed as to X and Executory as to Y.

15. On The Basis of Validity VALID CONTRACT- contract which satisfies all the conditions prescribed by law is a valid contract. Eg . X offers to marry Y. Y accepts X offer. This is a valid contract. VOID CONTRACT- [sec 2 (g)] A void contract is a contract which is valid when entered into but which subsequently became void due to impossibility of performance, change of law or some other reason. Eg . X offers to marry Y, Y accepts X offer. Later on Y dies. This contract was valid at the time of its formation but became void at the death of Y.

16. 3. VOIDABLE CONTRACT: An arrangement which is enforceable by law at the option of one or more of the parties thereon but not at the option of other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right on the aggrieved party either to reject the contract or to accept it . However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party.

17. Eg . X threatens to kill Y, if the does not sell his house for Rs. 1 lakh to X. Y sells his house to X and receives payment. Here, Y consent has been obtained by coercion and hence this contract is voidable at the option of Y , the aggrieved party. If Y decides to avoid the contract he will have to return Rs. 1 lakh which he had received from X. If Y does not exercise his option to repudiate the contract within a reasonable time and in the meantime Z purchases that house from X for 1 lakh in good faith, Y cannot repudiate the contract.

18. 4. ILLEGAL CONTRACT: An illegal contract is unlawful. Such an agreement cannot be enforced by law. Thus, illegal agreements are always void - ab - initio (i.e. void from the very beginning) Eg . X agrees to Y Rs.1 lakh to kill Z . Y kills Z and claims Rs. 1 lakh . Y cannot recover the amount from X because the agreement between X and Y is illegal and also its object is unlawful.

19. Discharge of  C ontract Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate , i.e., when the rights and obligations created by it comes to an end . 1. By performance 2. By mutual agreement or consent 3. By impossibility of performance 4. By lapse of time 5. By operation of law 6. By breach of contract

20. Discharge by Performance Performance means the doing of that, which is required by the contract. Discharge by performance takes place when the parties of the contract perform within the time and in the manner prescribed. In such a case, the parties are discharged and the contract comes to an end . But if only one party performs the promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach.

21. Performance of a contract is the most usual mode of discharge. It may be by Actual performance and Attempted performance or tender.

22. Actual Performance When both the parties perform their promises , the contract is discharged. Performance should be complete, precise and according to the terms of the agreement . Most of the contract are discharged by performance in this manner.

23. Attempted Performance or Tender  Tender is not actual performance but is only an offer to perform the obligation, but the promisee refuses to accept  the performance.

24. Discharge by Mutual Agreement or Consent Since a contract is created by mutual agreement, it can be discharged by mutual agreement Types of discharge by agreement or consent: a) Novation b) Rescission c) Alteration d) Remission e) Waiver

25. Novation (sec. 62) Novation means the substitution of a new contract for the original contract. Such a new contract may be either between the same parties or between different parties The consideration of new contract is the discharge of the original contract. Example: A owes money to B under a contract. It is agreed between A,B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A and B no longer exists and a new debt from C to B has been contracted.

26. Rescission (sec. 62) Rescission of a contract takes place when the parties to a contract may decide that they will forget the contract and will not bring a new contract into existence to replace it. Cancellation of contract by any party or all the parties. Example: X promises Y to deliver goods on 1 st Oct at his go-down. And Y promises to pay for it on 1 st Nov. X does not supply the goods. Y may rescind the contract .

27. Alteration Alteration means a change in the terms of a contract with mutual consent of the parties . Alteration discharges the original contract and creates a new contract. However, parties to the new contract must NOT change . Example: X promises to sell and deliver 100 bags on 1 st Oct. And Y promises to pay on 1 st Nov. Afterwards X and Y mutually decide that the goods shall be delivered in 5 equal installments at Z’s godown .

28. Remission (sec.63) Remission means acceptance by the promisee of a lesser fulfilment of the promise made . In other words it may be defined as acceptance of a less than what was contracted . Example A owes to B Rs 5000. A pays to B Rs 2000. B accepts it in full satisfaction. The old debt is discharged.

29. Waiver A  waiver  is the voluntary  relinquishment  or  surrender  of some known  right  or  privilege . A contractual party might waive the performance of a contractual duty by another party. A waiver doesn't have to be written or even spoken -- a party may waive a contractual duty by conduct. Example A landlord fails to object to a tenant paying rent 10 days late every month, he may be considered to have voluntarily waived on-time payment by the tenant.

30. Discharge By impossibility of performance Section 56 , which deals with this question, mentions two kinds of impossibility. Firstly, impossibility existing at the time of the making of the contract. Secondly, a contract which is possible of performance and lawful when made, but the same becomes impossible or unlawful thereafter.

31. 1. Initial impossibility An agreement to do an act impossible in itself is void . The object of making any contract is that the parties to it would perform their respective promises. If a contract is impossible of being performed, the parties to it will never be able to fulfil their object, and hence such an agreement is void. Example, A agrees with B to discover treasure by magic. The performance of the agreement being impossible, the agreement is void. Similarly, an agreement to bring a dead man to life is also void.

32. 2. Subsequent Impossibility The performance of the contract may be possible when the contract is entered into but because of some event, which the promisor could not prevent, the performance may become impossible or unlawful. Section 56 makes the following provision regarding the validity of such contracts : “A contract to do an act which after the contract is made, becomes impossible , or by reason of some event which the promisor could not prevent, becomes void when the act, becomes impossible or unlawful.”

33. 2. Subsequent Impossibility Examples: A and B contract to marry each other. Before the time fixed for marriage, A goes mad. The contract becomes void. A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.

34. Discharge by lapse of time The limitation act, 1963 lays down that a contract should be performed within a specified period , called period of limitation . If it is not performed, and if no action is taken by the promisee within the period of limitation , he is deprived of his remedy at law.( ie the contract is terminated) For example:  There is a contract of loan between A and B. Her limitation period is 3 years. After completion of 3rd year discharge of contract takes place and debtor – creditor relationship comes an end. Thus it becomes time bared debt which cannot be recovered by means of legal proceedings.

35. Discharge By operation of law A contract may be discharged independently of the wishes of the parties, i.e., by operation of law . This includes discharge– a)by death (in the case of contracts for personal service). b)By insolvency. c)By unauthorized alteration of the terms of a written agreement. d)By the identity of promissor and promisee . For example :  X has drawn a bill on Y. Here X has right to collect amount on the bill and Y has liability to pay. There after X has endorsed the bill to Z. Where Z has got the right and liability is with Y. Assume that Z has endorsed the bill to Y. Now right as well as liability are with Y. This situation discharges the contract

36. Discharge By Breach of Contract When a party having a duty to perform a contract fails to do that, or does an act whereby the performance of the contract by him becomes impossible, or he refuses to perform the contract, there is said to be a breach of contract on his part. On the breach of contract by one party, the other party is discharged from his obligation to perform his part of the obligation.

37. He also gets a right to sue the party making the breach of contract for damages for the loss occasioned to him due to the breach of contract . The breach of contract may be either ACTUAL , i.e., non-performance of the contract on the due date of performance, or ANTICIPATORY , i.e., before the due date of performance has come.

38. For example A is to supply certain goods to B on 1st January. On 1st January A does not supply the goods. He has made actual breach of contract. On the other hand, if A informs B on 1st December that he will not perform the contract on 1st January next, A has made anticipatory breach of contract

39. Offer and acceptance: Offer and Acceptance: 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 or offer. (Section 2 a).When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise (section 2b)

40. Elements of Contract (offer) The authoritative definition of an offer or proposal is given in the Contract Act 1872, while defining proposal it says that- “ where one person signifies to another his willingness to do or abstain from doing something with a view of obtaining the assent of that other to such act or abstinence he is said to said a proposal .”

41. Elements of offer: If the above mentioned definition is analyzed, the following elements of a proposal are found: (i) Signification of one‘s willingness (ii) Willingness is expressed to another person (iii)The willingness may be affirmative or negative (iv) It has a definite object with the intention to create a legal relation. Elements of Contract (offer)

42. Rules of a Proposal/offer 1. The proposer must intent to create legal relations: The proposal must be one which is capable of creating a legal relation. If there is no intention to create legal relation rather the offer prevail merely an intention to create social relation, that very offer will not be considered as lawful offer.

43. Rules of a Proposal/offer For example: A businessman residing in Ceylon, promised B, his wife who was living in England for reasons of health, to pay he, monthly allowance. It was promised also that the allowance will be continued till her comeback to Ceylon. The dispute arose when A denied subsequently giving her the promised allowance. It was held that B could not enforce the obligation as from the nature of the agreement it appeared that no intention existed to give rise to legal obligation and as such even there was no offer at all to be accepted and consequently there was no contract between A and B in respect of paying the said allowance.

44. 2. Mere expression of Intention is not sufficient: Mere intentions are not sufficient to constitute an offer. Advertisements, price quotations of prices, catalogue, time-table of bus or train are not proposals, if someone makes any statement regarding his any intention during a conversation of course that will not suffice to constitute an offer, even though the person to whom such intention is expressed acts accordingly, there will be no offer, so no question of acceptance and as such of any contract. Rules of a Proposal/offer

45. 3. Offer may be made to definite Person or some definite class of person or to the world at large generally: An offer made to a definite person or a definite class of person is called a specific offer. And an offer dent to all persons or to the world at large is called a general offer. 4. The proposal must be a definite one: Any statement which is ambiguous, vague or not definite about the offeree or the subject matter, is incapable to constitute a proposal. Rules of a Proposal/offer

46. For example: There was a contract between A and B where, inter alia, promised that if he was satisfied with him as a customer would favorably consider an application for renewal of the17contract. It was held that there was nothing in these words which would create a legal obligation as the promise was a vague one since there is no criterion to determine the satisfaction as customer. Rules of a Proposal/offer

47. 5. Proposal may be expressed or implied: A proposal or an offer may be expressed or implied. When an offer is made stating in words or in writing, it is called an express offer. On the other hand, when an offer is implied from the conduct of a person, it is called an implied offer. Section9 of the Contract Act, 1872 says, in so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. Rules of a Proposal/offer

48. 6. The offer must be definite, certain and unambiguous: There must be a certainty, distinct and unambiguous to form a lawful offer. For example: A says to B, I will give you some money if you pass the exam‖. This is not a valid proposal because the amount of money to be paid is not certain. Rules of a Proposal/offer

49. 7. Offer must be communicated to the offeree: A person cannot accept an offer until he knows the subject of the offer. To complete an offer lawfully the proposal or offer must be communicated. Section 4 of the Contract Act says that, the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. For example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. Rules of a Proposal/offer

50. 8. An offer may be conditional: An offer may be made with some conditions. In such cases, the conditions must be communicated to the offeree. Without knowledge of the condition of an offer if a person accepts an offer, the offeror cannot claim the fulfillment of the condition. But if the conditions are clearly written or expressed and should have been known to the offeree he cannot pled the ignorance of the conditions. Rules of a Proposal/offer

51. Communication of offer (Acceptance) Communication of the offer, as also of the acceptance, is an essential element in a contract. Two persons may have a common intention but without communication there is no agreement. An offer is not; therefore, open to a person who is ignorant of it; nor an ignorant compliance with the terms of an offer means an acceptance of it. ‘’The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made".

52. Acceptance When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise. Communication of acceptance: There are several rules dealing with the communication of acceptance: i . The acceptance must be communicated ii. An offer can only be accepted by the offeree, that is, the person to whom the offer is made.

53. Communication of A cceptance iii. It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication - which is generally implied in unilateral contracts). iv. If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror's point of view than the method specified. v. However, acceptance may be inferred from conduct,

54. Consideration Section 2 of the Contract Act defines consideration thus: When at the desire of the promisor, the promise or any other person has done or abstained from doing, does or abstains from doing, promises to do or to abstain from doing something, such act, abstinence or promise is called a consideration for the promise"

55. Rules for Consideration (a) Real and not sham: Unreality of consideration arises from a number of causes, such as, legal impossibility, physical absurdity, uncertainty, and also when it involves doing of what one is bound to do. Thus:(i) A, a servant of B, in return for a promise of Rs . 100 promises to give C a discharge for a debt which C owes to B. A's promise is unreal because it is legally impossible for him to give a discharge for a debt owed to his master.

56. (b) Not be illegal: A consideration is said to be illegal when it is intended to defeat the provisions of any law, or is against public policy. Thus, a promise by A to pay B Rs . 100,000 inconsideration of B's promise to drop a prosecution for robbery instituted by him against A, is illegal as being aimed at defeating the provisions of Law. (c) Must not be past: A past consideration is that which is executed before the promise for which it is paid. Thus, if A promises B Rs . 5,000 for his having accompanied A to a shooting last week, the consideration is past. Rules for Consideration

57. (d) Move from the promise: This means that consideration ought to proceed from the party who is entitled to sue on the contract, for the rule is: "No stranger to the consideration can sue on the contract". Thus, if A promises to pay B Rs . 10 if C works for him in an election, the promise is not enforceable and B cannot sue on it, for, he has neither done nor forborne nor suffered anything nor made any promise in return for A's promise. (e) Need not be adequate: This means that it is fiat the business of the court to enquire whether the consideration in a particular case is substantial, Rules for Consideration

58. Q & A