This article is written by Saloni Sharma, here she discusses enforcement of contract.
A contract or an agreement is made between two or more parties signifying their consent to perform their part of the consideration for the contract made. A contract may be formed between any two or more eligible persons or legal entities for consideration at the will of both (or more) the parties concerned. For the formation of a contract a party (promisor) has to propose to the other party (promisee) his willingness to do or abstain from doing an act so as to obtain the consent of the other party, if the other party assents to the proposal the other party is said to have accepted the offer (promise).
When the promisee agrees/promises/does/abstains from doing an act at the desire of the promisor, the act is called the consideration for the promisee, against a consideration from the promisor ultimately leads to the formation of an agreement between the two parties. Such agreement further leads to the formation of a contract.
After the formation of a contract by the parties, there are often disputes and discrepancies about enforcement of compensation the contract and the non-performance of the part of the consideration by one of the parties to the contract, in such a case the injured party can file a lawsuit against the other for or damages.
But before filing a suit against the other party, a few things should be considered regarding the contract.
Is your contract a valid contract?
An agreement enforceable by law is called a ‘contract’. For an agreement to be enforceable, it has to be a valid contract i.e. it has to contain the essentials for a valid contract which are mentioned in section 10 of the Indian Contract Act.
‘All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.’
According to Section 10 of the Indian Contract Act, 1872, a contract should contain the following elements to be enforceable by law:
Valid offer and acceptance
When a person signifies to the other his intention of doing or abstain from doing any act so as to obtain the assent of the other is called a promise or ‘offer’.
When the other party signifies his assent to the contract is said to have accepted the contract.
The offer/ acceptance/ revocation of the offer or acceptance must be properly communicated to the concerned parties as explained in section 3 of the Indian Contract Act, 1872.
The communication is said to be done or completed when the proposal/ acceptance/ revocation of the offer made or acceptance to the offer comes to the knowledge of the receiver.
For example, A proposes B to enter into a contract with him to purchase A’s car for 10 lac rupees. If B chooses to accept A’s offer he has to signify his consent by communicating A about the same. If B sends a letter signifying his consent to enter into the contract, the communication is considered to be complete only when B send the letter to A and is put in the course of transmission. If the acceptance of the proposal made is not conveyed to the offeror or put in his knowledge, there is no valid acceptance.
Similarly, the offeree needs to convey the proposal to the offeree or put it in the course of transmission.
For revocation of the proposal, the communication of the same must be made any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
Similarly, an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.
Intention to create a legal relationship
The parties entering into a contract must consent to create a legal relationship i.e. in case of any non-compliance with the terms or dispute among the parties, the parties should agree to seek legal remedy unless stated otherwise in the contract, or expressed while the formation of the contract. Also, the contract should contain a legal relationship should not be a social one.
For example, if A invites B to his birthday party and B doesn’t show up, he cannot be sued by A since there is no legal relationship and the contract is a social one.
In the case of Rose and Frank Co v JR Crompton and Bros Ltd, 1925
Two companies entered into a sole agency agreement in 1913 for the sale of paper goods in the USA. The written agreement contained a clause stating that it was not a legal agreement, but an ‘honourable pledge’ between business partners. Subsequently, the American company placed orders for papers which were accepted by the British company. Before the orders were fulfilled, the British company terminated the agency agreement and refused to send the goods. It was held that, since the agreement entered into stated that it will not be a legally binding contract, the agreement was not enforceable by law despite being a business agreement.
For a contract to be valid it is necessary that both the parties consent to the contract i.e. the parties should be on the same page. Further, the consent so obtained must be free that is the parties should consent on the subject willingly and not obtained by
Coercion (Section 15)
Committing or threatening to commit any act forbidden by the Indian Penal Code(IPC), 1860 or the unlawful detaining or threatening to detain, any property of the person with the intention of causing any person to enter into an agreement.
Undue influence (Section 16)
When the relation between the parties is such that one party holds a dominant position over the other uses the same to influence or obtain the consent of the other.
Fraud (Section 17)
When a party obtains the consent of the other by concealing facts/ suggesting facts that are not true/ making a promise without any intention of performing it/ deceiving/ performing a fraudulent act by the party or his agent is obtained by fraud.
Misrepresentation (Section 18)
The positive assertion of a fact which is not true by the party which is considered to be true by the consenting party amounts to be a misrepresentation in order to obtain consent.
Mistake (Section 20, 21, 22)
When both the parties are mistaken as to the fact of the contract, the contract is void.
Parties should be competent to Contract
Every person who is of
- Age of majority according to the law
- Sound mind- he is capable of understanding it and of forming a rational judgment about the effect on his interests.
A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind, and a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
- Is not disqualified by the law of which he is subject i.e. a person who is declared to be insolvent.
Lawful consideration and object
The consideration of an agreement is lawful, unless—
- it is forbidden by law
- is of such a nature that, if permitted, it would nullify the provisions of any law
- is fraudulent
- Involves an injury to the person or property of another
- the Court consider it as immoral or opposed to public policy.
In each of these cases, the consideration i.e. object of an agreement is regarded to be unlawful. Every agreement in which the object or consideration is unlawful is said to be void.
The Agreement should not be expressly declared to be void
Sections 24-30 contain the information on when an agreement is considered to be void if without consideration, for restraint of marriage, restraint of trade, restraint of legal proceedings etc. A contract should not be void according to the provisions of The Indian Contract Act, 1872 in order to be valid.
Is the performance of the contract completed on your end?
In order to sue the other party for breach of contract on non-performance of the consideration, it is important to prove that the required performance for the contract was completed on your part and the other party failed to perform his/her part of the contract.
For example, A contracted with B to sell his car for 10 lakh rupees and delivered the car to B. B used the car as his own and refused to pay the money as consideration. In this case, A has performed his part of the contract whereas B has not performed his part of the contract and is liable to be sued and pay compensation to A.
Where a promisor is to perform his promise according to the contract and no time for performance is specified the engagement must be performed within a reasonable time. Failure in the performance of contract within a reasonable time allows the other party to file a suit for non-performance of the promise of the contract.
When a promise is to be performed on a certain day, and the promisor has given consent to perform it without application by the promisee in such a case, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. If the promisor fails to perform the contract on the same day within the business hours the promisee may sue him for non-performance or breach of contract.
Is your contract breached by the other party?
In case the other party fails to perform the contract within the given time or reasonable time, a suit can be filed against such party for the loss incurred, seeking damages and compensation for the same.
‘A breach of contract occurs when a party thereto renounces his liability under it, or by his own act makes it impossible that he should perform his obligations under it or totally or partially fails to perform such obligations’.
The non-performance of the part by the other party in consideration for a valid contract amounts to the breach of contract by the other party. In order to claim damages for the breach, you must be able to establish that the contract was breached by the other party.
Failure to perform renunciation may take place when the time for performance has arrived or before that. The breach of contract can be of two types –
- Anticipatory breach- Section 39 of the Indian Contract Act, 1872 talks about the refusal of a party to perform the promise wholly. ‘When a party to a contract has refused to perform his promise in its entirety, the promisee may end the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.’ When the promisor disables himself by signifying his intention or discontinuing from the performance of the contract, the promisee either can treat the contract as reputed or continue the contract by expressing the same to the promisor.
- General breach- The breach of a contract where the party does not fulfil the promise of the contract without any communication of the same to the other party.
What damages and compensation should be awarded?
Section 73, 74 and 75 of the Indian Contract Act, 1872 elaborate on when compensation is to be provided to the injured party.
Section 73 of the Indian Contract Act, 1872 states that ‘When a contract has been broken, the party who suffers by such breach is entitled to receive, compensation for any loss or damage caused to him which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.’
When a breach of contract occurs in the natural course of action and can be foreseen, the injured party is liable to be compensated for any loss or damage incurred by him because of non-performance/breach of contract by the other party. However, to be eligible to obtain compensation the damage caused to the injured party should be direct and not remote.
When an obligation has not been discharged by a person, having the same effect as that created under a contract, and some person incurs damages because of the same, the injured person is liable to be compensated in such a case.
Section 74, however, elaborates on the compensation stipulated in case of a breach of contract. The section states that while the formation of the contract if the parties agree and include an amount to be paid in case of a breach of contract by the parties, such breach of contract by the parties entitles for the compensation for the same as mentioned in the contract. Whereas, if such an amount for damages in case of a breach is not agreed upon at the time of formation of the contract, the court can penalize the defaulting party calculating the loss incurred and damages suffered by the injured party.
Section 39 of the Indian Contract Act, 1872 also mentions that if the party discharges itself from the performance of the contract the injured party can either take immediate action and sue the party for damages and compensation or wait and sue him/her after the time mentioned in the contract is over.
After determining the above-mentioned aspects of the contract, the injured party can approach the respective court claiming damages and compensation from the other party. In case of a breach where the amount for the damages is mentioned and pre-decided during the formation of a contract i.e. liquidated damages, the same amount of monetary compensation or damages have to be paid to the injured party. The court cannot interfere with or regulate the amount of monetary compensation to be paid in case of liquidated damages.
Whereas, in the case of unliquidated damages, the court decides upon considering the different aspects of the contract and injury occurred, the amount of money to be paid as compensation to the injured party.