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Contract Notes - 3


Object and Consideration in Contract Act, 1872

Object of a Contract

The object of a contract is the purpose or intention behind the agreement between parties. For an agreement to be enforceable as a contract, its object must be lawful and not opposed to public policy or morality. The lawful object is a necessary element of a valid contract. If the object of the contract is illegal or immoral, the agreement is void.

Section 23 of the Indian Contract Act states that the consideration or object of an agreement is lawful unless it is forbidden by law, or is opposed to public policy, or is fraudulent, or involves injury to the person or property of another, or the court regards it as immoral or opposed to public policy.

Significance

The object ensures that contracts are not made for purposes harmful to society or contrary to law. This protects public interest and maintains ethical standards in contractual relations.

Landmark Case: Gherulal Parakh v. Mahadeodas Maiya (1959) AIR 781

In this case, a contract for sale of goods was challenged on grounds of resale price maintenance. The Supreme Court held that such contracts were void as they had an unlawful object — to restrict trade and control prices, which is against public policy.

Consideration

Consideration is the price paid for a promise and is an essential element to create a valid contract. It may be in the form of an act, forbearance, or promise given by one party to another.

Section 2(d) defines consideration as something in return for which a promise is made. It must be lawful, real, and not illusory or past.

Importance of Consideration

Consideration distinguishes contracts from gifts and ensures that both parties incur some obligation or benefit, making agreement legally binding.

Landmark Case: Chinnaya vs. Ramayya (1882) 7 Mad 164

Here, it was held that "No consideration, no contract," establishing that a valid contract cannot exist without consideration, except in certain exceptional cases like contracts made on account of natural love and affection.

Distinction Between Void Contract and Voidable Contract

Understanding the difference between void contracts and voidable contracts is crucial in contract law.

Void Contract

A void contract is an agreement that is not enforceable by law from the beginning. It lacks one or more essential elements needed for a valid contract.

  • It creates no legal rights or obligations.

  • No party can enforce the contract.

  • Example: Agreement with an illegal object or agreement without consideration.

Section 2(g) defines a void contract.

Voidable Contract

A voidable contract is valid and enforceable but can be rescinded or avoided at the option of one party due to certain defects like coercion, fraud, misrepresentation, undue influence.

  • It creates legal rights but also confers the option to cancel it.

  • The party whose consent was obtained improperly may choose to affirm or rescind.

Section 2(i) defines a voidable contract.

Key Differences:

FeatureVoid ContractVoidable Contract
ValidityNot valid from the beginningValid until cancelled by the aggrieved party
EnforceabilityNot enforceable in courtEnforceable unless avoided
Effect on partiesNo rights or obligations createdRights and obligations until avoidance
ExamplesContract with illegal objectContract induced by fraud or coercion

Landmark Case: Raja Babu v. M.C. Chockalingam (1956) AIR 999

The court held that a contract made under coercion is voidable and the party coerced can rescind it, reinforcing the distinction between void and voidable contracts.

Performance of Contracts

Definition and Importance

Performance refers to the execution of the promise or obligations contained in a contract by the parties as agreed.

Section 37 states that parties to a contract must either perform or offer to perform their respective promises unless excused.

Modes of Performance

  • Actual Performance: Rendering the exact promise, e.g., transferring goods.

  • Tender of Performance: Offering to perform when actual performance is not possible.

  • Reciprocal Contracts: Performance of one party is conditional on the other’s performance.

Time and Place of Performance

Time and place of performance are critical elements and are governed by agreement or, in their absence, relevant rules under the Contract Act.

Section 46-50 elaborate on when and where performance should be done.

Consequences of Non-Performance

Failure to perform constitutes breach, giving the aggrieved party remedies like damages or rescission.

Landmark Case: Poussard v. Spiers and Pond (1876) 1 QBD 410

It was held that time is of the essence in contracts. Failure to perform on time entitled the other party to terminate the contract.

Breach of Contract

Meaning

Breach of contract happens when any party to the contract fails to perform their promise as agreed, without lawful excuse.

Types of breaches:

  • Actual Breach: When performance is not made when due.

  • Anticipatory Breach: When a party indicates in advance they will not perform.

Legal Effects

The non-breaching party can:

  • Affirm the contract and sue for damages, or

  • Rescind the contract and seek restitution.

Section 73-75 govern consequences and remedies available on breach.

Landmark Case: Hadley v. Baxendale (1854) 9 Exch 341

Established the rule for consequential damages - damages must be such that may reasonably be supposed to arise naturally from breach or special circumstances should have been within contemplation of parties.

Damages

Purpose

Damages are monetary compensation awarded to the injured party to place them in the position they would have been had the contract been performed.

Section 73 of the Contract Act says compensation is payable for the loss or damage caused by breach, which naturally arises or was in contemplation.

Types of Damages

  • Compensatory Damages: To cover actual loss suffered.

  • Nominal Damages: Small sum where breach occurred but no loss proven.

  • Punitive Damages: Awarded to punish willful or malicious breach (rare in contract law).

  • Liquidated Damages: Pre-determined damages specified in contract.

Landmark Case: K4 Builders Ltd vs. National Highway Authority of India (2012) 13 SCC 666

The Supreme Court laid down principles regarding the award of damages including the need for causation and foreseeability.

Measurement of Damages

General Principles

Damages should be:

  • Direct and natural consequences of breach.

  • Within parties’ reasonable contemplation at contract formation.

Losses Considered

  • Actual loss or damage to person or property.

  • Loss of anticipated profits where foreseeable.

Mitigation

The injured party is expected to mitigate the loss, i.e., take reasonable steps to reduce damage.

Limitation

Claims must be made within the limitation period prescribed by Limitation Act, 1963.

Landmark Case: Ruxley Electronics & Construction Ltd v. Forsyth (1996) AC 344

Held that damages based on reasonable cost of cure are not always appropriate; court may award loss of amenity damages reflecting loss suffered.

Conclusion

The Indian Contract Act, 1872, provides a comprehensive legal framework governing contracts through clear definitions and classifications, such as object and consideration, and distinctions between void and voidable contracts. The law meticulously regulates the processes of performance, consequences of breach, and remedies via damages with fairness and justice as guiding principles.

Landmark cases have elaborated and refined these concepts, embedding principles of foreseeability, mitigation, and proportionality in remedies, thus ensuring the contract law evolves with societal needs while balancing the interests of contracting parties.


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