Contract Act 1872 -Laws and Practice of Banking-JAIBB

BANKING DIPLOMA EXAMINATION
Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB)

 Laws and Practice of Banking-JAIBB

Meaning and Essentials of Contract

Q.1. “An agreement enforceable by law is a contract” Comment and explain the essentials of a valid contract in brief.

Ans.: Generally contract means a promise or agreement made by two or more persons enforceable by law. According to Indian Contract Act 1872 Section 2(h) defined. “An agreement enforceable by law is a contract.” Hence, agreement and legal enforceability creates an agreement as contract. Section 10 defines

“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 void. The contract to be made in writing by law of land or in the presence of witnesses or be registered, if required” On the basis of the above definitions and judgment given by judges, help us to mention the following essentials of a valid contract :

(1) Atleast two parties are required to enter into a contract that is promisor and romisee.

(2) Agreement : Proposal and acceptance must be absolute and unconditional.The two identical Cross-offers and successive counter offer are only offer and not agreement.

(3) The intention should be to create legal relations not the social, domestic, political relations.

(4) Contractual capacity among persons who is not minor, insane and disqualified by law of the land.

(5) Consent or Consensus ad idem. The parties are said to consent when they agree upon the same thing in the same sense. (Section13).

6) Free Consent : According to Section14, the consent is said to be free when it is not caused by

 i) coercion, or ii) undue influence, or iii) fraud, or iv) misrepresentation or  v) mistake.

(7) Consideration : Except some exceptions, an agreement without consideration is void. It means quid pro-quo. It must be lawful and real and not illusory.

(8) The lawful object and its consideration must be legal.

(9) The agreement must have certain meaning.

(10) An agreement to be valid must be possible to be performed.

(11) The agreements must not be declared void by the law of the land.

(12) Compliance of legal formalities is required.

Hence, every agreement to be enforceable by law must possess all these essential elements for a contract. If any of the element is missing in an agreement, such agreement is not enforceable by law.

Proposal and Acceptance

Q.1. Define offer and acceptance. Explain rules regarding valid acceptance.

Ans.: The term offer is also called proposal. It is defined under Indian Contract Act,1872 Section 2(a), “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.”

Acceptance is defined under section 2(b) of Contract Act, 1872 i.e. 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.

Rules regarding Valid Acceptance : A few important rules of acceptance are as follows in brief :

(1) Acceptance must be absolute and unqualified {Section 7(1)}.

(2) It must be in prescribed manner/reasonable manner {Section 7(2)}.

(3) Acceptance may be given by performance of condition or act required by an offeror {(Section8)}.

(4) It may be given by acceptance of consideration (Section 8).

(5) Acceptance may be express or implied.

(6) It must be given within specified or reasonable period of time.

(7) Acceptance must be given while the offer is in force.

(8) It must be given only after the communication of offer is complete.

(9) Acceptance must be given by the person to whom offer is made.

(10) Acceptance must be communicated, only mental determination or intention to give acceptance is not sufficient.

(11) It must be from competent person/authorized person otherwise it will not be binding. Powell V. Lee (1908)

(12) It should be communicated to the offeror himself, other than him will not create legal obligation.

(13) Acceptance subject to contract is no acceptance. It will not create legal binding.

Note :

(i) A rejected offer cannot be accepted.

(ii) Counter offer does not constitute acceptance.

(iii) Cross offer cannot be assumed as acceptance.

(iv) Silence does not generally amount to acceptance.

(v) Acceptance to offer means acceptance of all terms of offer.

(vi) Sometimes grumbling acceptance is a valid acceptance.

(vii) Enquiring/seeking clarification of offer is not to be assumed as acceptance.

(viii) Circumstances of the acceptance must show the ability and willingness to fulfill the terms of offer.

Capacity to Contract

Q.1. Who can make a valid contract? Discuss the validity of agreements made by a minor.

Ans.: According to Section 11, “Every person is competent to contract who is of the age of majority according to law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject.” Hence, the following persons can make valid contract :

(i) Who is major

(ii) Who is of sound mind or sane

(iii) Who is not disqualified from contracting by any law of the land to which he is subject.

Validity of Agreement made by a Minor :

(i) Agreements with or by a minor is absolutely void. Ruling was given in Mohri Bibee vs. Dharmodas Ghose.

(ii) No ratification of minor’s contract.

(iii) A minor can be a promisee or beneficiary.

(iv) Restitution/compensation is possible in case of minor under (section 33, specific Relief Act, 1963).

(v) The rule of estoppel does not apply for minor, he can plead his minority.

(vi) No specific performance is possible in case of minor because contract made by him is void {(Mirsarawarjan vs. Fakhruddin 1912) 3 Col. 232)}

(vii) Contract by parents/guardian/manager may be made on behalf of theminor, provided they had authority and benefit to minor

(viii) Minor may be given share in existing partnership business by theconsensus of the partners.

(ix) Minor may be appointed as Agent but principal will be personally liable for his acts.

(x) Acts done by minor is parents will not be liable.

(xi) Guarantee for and by the minor is valid.

(xii) Insolvency Act does not apply on minor; hence, minor cannot be adjudicated insolvent.

(xiii) Minor may be joint promisor under Law of contract.

(xiv) Minor cannot apply for allotment of shares in company, but he can apply for fully paid up share on behalf of his guardian.

(xv) Minor is allowed to make, draw and endorse negotiable instrument but he is not liable for dishonour.

(xvi) Minor cannot enter into service agreement but he can be beneficiary if he has performed his promise.

(xvii) Minor can enter into the contract of Apprenticeship at the age of 14 years if he is physically fit.

(xviii) Minor can become trade union member if he has attained the age of 15 years.

(xix) Marriage contract of minor on behalf of parents is allowed on the ground of the customs of the  community.

(xx) Minor is held responsible for torts or civil wrong committed by him

(xxi) Liability of necessaries of life supplied to him or his legal dependents. His property is liable; he is personally not liable.

Free Consent

Q.1. Define Free consent? When does consent become free? Explain rules regarding free consent.

Ans.: According to section 10 of the Indian Contract Act, 1872, “All agreements are contract if they are made by the free consent of the parties competent to contract for a lawful consideration and lawful object and are not hereby expressly declared to be void”. Therefore, free consent is the one of the essentials of valid contract. But free consent is composed of two words free + consent. The term free meant without any pressure. Consent means defined under Section 13.

Two or more persons are said to consent when they agree upon the same thing in the same sense.”

Free consent is defined under section 14 i.e. consent is said to be free when issues not caused by :

(1) Coercion, as defined in section 15, or

(2) Undue influence, as defined in section 16, or

(3) Fraud, as defined in section 17, or

(4) Misrepresentation, as defined in section 18, or

(5) Mistake subject to the provision of section 20, 21 and 22.

Therefore, consent is not free when it has been caused by coercion or undue influence or fraud or misrepresentation and mistake. But if the consent is caused by any one of the first four factors such as coercion, undue influence, fraud and misrepresentation. The agreement is a voidable at the option of the party whose consent was so caused. (Section 19 and 19A). Under such position, the aggrieved party has option to assume the agreement either valid or void. If the contract is caused by mistake of foreign law, the agreement is void under section 20 and 21. Hence, there are two situations i.e. no free consent that is earlier and no consent is as error in consensus. The rules regarding free consent are as follows one by one.

Coercion : Coercion means and includes the use or threatening to use the physical force against a person or property to compel him to enter him into a contract. According to section 15 of the Indian contract Act, 1872. 

 “Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code or the lawful detaining or threatening to detain, any property, to the  rejudice of any person whatever, with the intention of causing any person to enter into an agreement. “It is immaterial whether IPC is or not enforced in the place where the coercion is employed (Section 15).

Legal Rules relating to Coercion :

(1) Committing any act forbidden by the IPC i.e. killing or beating another person and interfering in the personal freedom of another person etc.

(2) Threatening to commit any act forbidden by the IPC.

(3) Threats to suicide amounts to coercion.

(4) Unlawful detaining of any property.

(5) Unlawful threatening to detain any property

(6) The act of coercion must have been performed with the intention of causing any person to enter into an agreement.

(7) Coercion may proceed either from the party or from a stranger.

(8) Coercion may be directed against the party or any person.

(9) It is not necessary that IPC should be in force at the place where the coercion is applied.

The effect of coercion is voidable at the desire of the aggrieved party.

Undue Influence : Instead of physical force ;when mental force is used for getting the consent of the another party, when a dominant party misuses his influence to dominate the will of the weaker party, to get unfair advantage, in a contract is said to be influenced by undue influence. It is defined under Section 16. The legal rules relating to undue influence :

(1) The relations subsisting between the parties to a contract are such that one of them is in a position to dominate the will of the other due to

(i) Real or apparent authority.

(ii) In case of fiduciary relation.

(iii) In case of persons under mental or bodily stress.

(2) The dominating party uses his position to obtain an unfair or undue advantage over the other party.

Legal effect : Due to undue influence, the agreement becomes voidable at the option of the party whose consent was so caused. The court may set aside any such act under undue influence. A pardanashin woman is also given protection from undue influence.

Fraud : Fraud is intentional misrepresentation or concealment of material facts of an agreement by any party to or by his agent with an intention to deceive and induce the other party to enter into an agreement. According to Section 17, “fraud means and includes any of the following acts committed to a contract or with his connivance, or by his agent, with an intention to deceive another party thereto or his agent, or to induce him to enter into contract.”

(i) The suggestion as a fact of that which is not true by one who does not believe it to be true.

(ii) The active concealment of a fact by one having knowledge or belief of the fact.

(iii) A promise made without any intention of performing it,

(iv) Any other act fitted to deceive, and

(v) Any such act or omission as the law specially declares to be fraudulent.

Essential Elements of Fraud :

(1) There must be a false representation either by words or by spoken words, induce the other party to enter into contract by active concealment of material fact.

(2) It must be done by the party or his agent.

(3) The representation must relate to a fact, the other party has been attracted to act upon the representation leading to fraud.

(4) The representation intentionally done to commit a fraud must have been done before the conclusion of the contract.

(5) The other party must have been deceived by fraud.

Legal Effects :

(1) Contract becomes voidable at the option of the party defrauded,

(2) The defrauded party can sue for damages suffered or ask for restitution, and

(3) The party can insist for the performance of the contract.

Misrepresentation : It is innocent and unintentional false statement of fact told by one party to the other during the course of negotiation is called misrepresentation. According to section 18 misrepresentation means and includes :

(i) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it is not true.

(ii) Any breach of duty which, without an intention to deceive, gains an advantage to the person committing it or any one claiming under him, by misleading another to his prejudice or to the prejudice any one claiming under him.

(iii) Causing, however, innocently, a party to an agreement to make a mistake as to the substance of the thing which is subject of the agreement.

Essential Elements of Misrepresentation :

(i) It must be a misrepresentation of some material fact;

(ii) It must be made before the concerned party enters into a contract.

(iii) It must be innocent or unintentional statement.

(iv) Misrepresentation may be committed by any of the following ways : (a) By positive statement.

      (b) By breach of duty.  (c) By causing a mistake by innocent misrepresentation.

Legal Effect of Misrepresentation : An aggrieved party suffering any loss as a result of misrepresentation can either rescind or avoid the contract altogether or can accept the contract but insist that he will be placed in such position in which he should have been, if the misrepresentation made had been true (section 19).

Mistake : Mistake is one of the causes because of which the consent is said not to be free. It is a misconception or misimpression or misunderstanding or erroneous belief about something. According to Section 20, “Where both the parties to an agreement are under a mistake as to a matter of fact essential to an agreement, the agreement is void.”

Mistake may be of two types viz –

(i) Mistake of Law, and

(ii) Mistake of Fact

Mistake of law may be two types :

(i) Mistake of law of the land will be enforceable but mistake of foreign law is void.

(ii) Mistake of fact: is as to material fact of the contract.

Mistake of fact may be of two types :

(1) Bilateral Mistake, and

(2) Unilateral Mistake

(1) Bilateral Mistake : Bilateral mistake is mutual mistake by both the parties to agreement and relating to

(i) Mistake as to subject matter, and

(ii) Mistake as to possibility of performance of the contract.

(i) Mistake as the subject matter may be as to identity of subject matter, as to existence of subject matter, quality of the subject matter, quantity of product, as to price, mistake as to title, mistake as to existence of State of affairs and (ii) mistake is to possibility of performance. It may be of two types viz Physical and Legal impossibility.

(2) Unilateral Mistake : The unilateral mistake means where one of the parties to a contract is under a mistake. As to the matter of fact, it is unilateral mistake. Such  ontract is not voidable. But under such following conditions, contract of unilateral mistake also becomes void :

(i) Mistake as to the identity of the party contracted with,

(ii) Mistake as to identity of attributes of contracting party, and

(iii) Mistake as to the nature of the contract.