An analysis on "Contracts"

Introduction

Contracts have become very common in today's enormous structures of corporations with a huge organization. The use of terms and conditions are not only limited to the contract in a petty, regular transaction but its with MNC’s, Banks, Insurance companies or even it can when you are installing a software on you PC.

A standard for of contract is made by one party and the other party who is in a weaker position who has almost no choice to negotiate the terms and condition. Usually its a customer who happens to be in a weaker position for example the users while installing any software we have absolute no right to negotiate the terms and the customer only has the option to take it or leave it. In this type of contract freedom of contract and meeting minds are significantly absent in the standard form of contract. A standard form of contract is also known as Contract of Adhesion.

Unjust Terms and Exemption Clauses

When the contract is being drafted by the one party who gets to decide the terms and conditions may out in some clauses which may provide an advantage compared to the drafting party.

The Unfair Contract Terms of 1977 which was enacted in the United Kingdom on February 1st, 1978 was the pioneer act which was supposed to improve the functioning of contracts by overruling certain types of clauses by subjecting them to the test of reasonableness.

Section 11 of the Unfair Contracts Terms Act, 1977 says that in respect of any loss caused by the breach of contract, any restricting or excluding clause shall be void unless it satisfies the requirement of reasonableness. A term will be regarded as reasonable if it is “a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been known to or in the contemplation of the parties when the contract was made[1].

The Act says that a person, who deals with a consumer on his own terms, will not be allowed to claim protection of any of the clauses restricting or excluding his liability, if he himself commits breach; nor can he claim specific performance. He can take the advantage of such terms only if such terms are reasonable[2].

The United States of America has also enacted a somewhat familiar law which was drafted by the lawmakers to protect the interest the weak parties. Article 2 of the Uniform Commercial Code  talks about the General Obligation and Construction of Contract.

(1) If the court as a matter of law finds the contractor any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contractor any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination [3].

Limitedness in the  Indian Contract Act

The key issue in the application of the Standard form of Contracts is the exemption clause, which provides to exclusion of the liability. There were a very few cases where the Courts have come to rescue the weak party but with very less legal basis.

The Supreme Court of India also emphasized on the same rule in B.V. Nagaraju v Oriental Insurance Co. Ltd. &; Every contract contains a & core; or fundamental obligation must be performed. If one party fails to perform this fundamental obligation, he will be guilty of a breach of contract whether or not any exempting clause has been inserted which purports to protect him.[4]

The 103 report of Law Commission of India was formed to look over the application of the standard form of contract. The relevant issues were analyzed in order to develop the Act, and suggestions were as follows [5].

To enact a provision in the Indian Contract Act, 1872, which will combine the advantages of the (English) Unfair Contract Terms Act, 1872 and Section 2.302 of the Uniform Commercial Code of the United States.

The Law Commission also recommended an amendment in the  Indian Contract Act, 1872 by adding a new chapter and a section.

CHAPTER IV-“A”

Section 67A:  (1) Where the Court on the terms of the contract or on the evidence provided by the parties come to the conclusion that the contract or any part of it is not reasonable.

(2) A part of the contract is deemed to be unconscionable (a)if it exempts any parties liability for a willful breach of the contract or (b) the consequences of negligence.

In the end the Commission felt that the only remedy for this problem will be to enact a provision which will have the essence of (English) Unfair Contract Terms Act of 1872 and the Section 2.302 of the Uniform Commercial Code of the United States.

Doctrine of Fundamental Breach

The origin of the doctrine of Fundamental Breach goes back to United Kingdom and its founder Lord Denning. He wanted the Doctrine to function like the Rule of Law where the intention is not taken into count. If a party breached the terms and conditions of the contract, that party should not have to rights to take cover behind the exemption clauses which enables the party to exclude its liability.

A contract is made between two parties have the common intention to bind themselves together in a legal responsibility to serve their interests. In order to protect themselves both the parties lay down certain terms and conditions and are accepted by both the parties, and when such terms and conditions are accepted by both the parties then the liability is formed on the parties to the contract to function according to the said terms and conditions laid down.

Even though the contracting parties function in accordance with the terms and condition of the contract but  there are some instances where one of the contracting parties fails to perform its duties which leads to the loss to the other party. This is knows as repudiation, According to the Section 39 of Indian Contract Act, Any intimation whether by words or conduct which fails to perform the contract is known as repudiation and if the result of such act deprives the innocent party the benefit of the contract. Thus when a contracting party having a duty to perform a contract and fails to act or refuses to perform the act there is said to be breach in the contract on the part of the defaulter, On the breach of contract by one party then the other party is completely discharged of his obligation.

There are three ways in which a contract can be drafted they are explained as follows:

1. Material Breach of Contract

A material breach of contract is when the key elements of the contract are not being fulfilled as agreed. For example, if you were to purchase a computer online and you only receive the monitor upon delivery then that could be considered as Material Breach because the key element of the purchase is not fulfilled. The contract would be deemed to have ended and the party who suffered the loss will have the right to sue the defaulting party.

2. Anticipatory Breach of Contract

Anticipatory Breach is where one of the parties before the due to perform the contract sate they will not be performing the contract is known as Anticipatory Breach.

3.  Actual Breach

This is the most common breach where the party fails to perform their duties after the due time according the contract.

Factors determining the Fundamental Breach

There have been a number of debates from scholars of different legal systems and the result was. Determination must be made by analyzing the circumstances of each case. There is no established test to  determine the factors but there are some relevant factors generated by some learned scholars in determining if the injury alone is enough to amount to fundamental breach, some relevant factors: a) Gravity of the circumstance of the breach; b) Nature of the Contract; c) Inability to perform; d) Unwilling to fulfill  the promise.

Gravity of the circumstance of the breach

This factor is to determine the weather the consequences of the breach truly deprive the party its expectations of the contract. Any monetary loss sustained by the injured party or Frustration of the contract.

Nature of the contract

When the parties have expressly or implicitly agreed that when there is a breach in the contract by anyone of the party, the other party can terminate the contract. Incase any such provision is absent then the conditions of the surrounding or any custom will be looked.

Inability to perform

One of the determining factor is the inability of the party to perform the regardless of the due according the contract or non performance of the duty but if the performance is impossible or the whole object is destroyed.

Unwilling to fulfill the promise

Where one party refuses to deliver the goods or receive the goods, therefore leading it to a fundamental breach. Except were the promisor has to right to refuse the action.

Concept of Fundamental Breach according to the CISG

The U.N. Convention on Contracts for the International Sale of Goods was formulated in Vienna on April 11 1980 and it came into force on January 1, 1988. CISG gives the rules and regulation that govern the international sales, formation of the contract and the obligation of the seller and buyers in the international level.

Article 25 of the CISG defines Fundamental Breach as : A breach committed by one the contracting parties and the result of the actions of the defaulting party substantially deprives the other party what he had the expected from the contract, Unless the breach was unforeseeable of any kind.

Fundamental breach of the contract is one of the most important concepts in the CISG and the CISG has also laid down remedies if there is a breach in the contract.

i. Avoidance of the contract on the ground of non-performance by the other party.(Art.49(1)(a), 64(1)(a) and 73.

ii. The contract can be terminated on the grounds of partial delivery. Art 51.

The doctrine of fundamental breach has evolved drastically even though it has some flaws in it, the doctrine has evolved to to accommodate the needs of the changing society.

Breach of contract in Bailment

A  contract Bailment consists of delivery of good (moveable property) by one person who is the owner of the property, to another person for a specific purpose. The transferred goods are to be returned to the owner after the purpose of bailout id complete or disposed according to the instructions of the owner.

SECTION 148 of the Indian Contract Act defines who is the bailor and who is the bailee and gives a clear cut definition of bailment. The person delivering the goods is called the bailor and the person to whom the goods are being delivered is called the bailee.

Essentials of Bailmet

  • Delivery of goods for a specific purpose.
  • Return of the goods after the purpose of transfer is completed or disposal of the goods according to the instructions of the bailor.

Delivery of goods for a specific purpose

Transfer of possession of goods from one person to another but its not necessary for the delivery to be actual, sometimes the delivery can be constructive or even symbolic in nature. Section 149 provides: Any delivery made by the bailee which puts the possession of goods under the bailors possession is a valid bailment.

Rights of the Bailee

The bailee of the goods as the following rights under the Indian Contract of 1872:

  • Right to recover the compensation from the bailor
  • Right to have lien on the goods bailed.

Right to recover the compensation form the bailor

According to section 164, sometimes the bailor might not have the power to make the bailment or to receive the bailed goods which may result in causing some loss to the bailee, hence the bailee is entitled to recover the damage caused but the actions of the bailor.

Right to lien on the goods bailed

According to Section 170 and Section 171, Right to lien is when the bailee has the right to retain the goods of the bailor and he can refuse to complete the delivery to the bailor until his due enumerations are paid for the services. This Act recognizes two types of lies namely:

Particular Lien (Section 170):

Particular lien means the right of the bailee to retain the bailed goods which involves the exercise of labor and skills but the renumeration of which has not been paid.

General Lien (Section 171)

In general lien the bailee has the right to retain not only the goods for which the services have been rendered but also the goods in the passion of the bailee which belong to the bailor.

Breach of contract under Pledge

According to Section 172 of the Indian Contract 1872:

Pledge is type of bailment of goods with a specific purpose. The goods pledged or pawned act as a security for the payment of debt or performance of a promise. The person pledging the goods is called as the pawnor and the person to whom the goods pledged is known as pawnee.

Pawnees rights if the pawnor makes the default

Section 176,  gives the pawnee the following rights on the pawnor default.

  • The pawnee can bring a suit against the pawnor if the debt is not payed in full and he can also retain the goods pledged as a collateral. Section 176 doesn't say anything about sending a notice to the pawnor before filling of the suit and further the pawnee will also have the right of lien on the goods pledged.
  • The pawnee can sell the pledged goods on giving a notice of the sale.

In State Bank of India v. Smt. Neil Ashok Naik[6]the court held that the bank cannot adjust the installment of the FD but it can retain the whole FD and file a suit in the court of law to recover the loan.

Breach under the Sales of Goods Act

Sales of Goods Act of 1930 lays down the rights and liabilities of Seller onto the Buyer and vice-versa.

i. Sections 55 and 56 gives remedies to Seller against the Buyer.

ii. Section 57,58 and 59 of the Act gives remedies to Buyer against the Seller.

Seller’s remedies against the Buyer.

1. Suit for Price

Section 55(1) where under a contract of sale the goods or property has passed to the buyer and the buyer wrongfully neglects or refuses to for the goods in accordance to the terms of the contract, then the seller has the right to sue the Buyer for the price of the goods.

Section 55 (2) Where in a contract of sale the price of the goods is to be paid on a certain day, irrespective of the transfer of goods, the seller has the right to sue the buyer for wrongfully neglecting to pay the price of the goods.

2. Damages for non-acceptance

We have previously seen that the buyer has a duty to accept and pay for the goods at the said time according to contract. According to Section 56, if the wrongfully neglects and doesn't pay or accept the goods then the Seller has the right to sue the Buyer for the damage caused by the action of the Buyer and the Seller who is still the owner of the goods also has the right to dispose of the goods  and recover damages from the Buyer. The damages will be decided after viewing the Section 73 of the Indian Contract Act.

Measures of the damages:

The contracting parties may fix the amount damages payable in case of a breach. In case no such clause is inserted in the contract while then Section 73 of the Indian Contract will be viewed  and the damages will be decided and according to this provision the injured party will receive the damages amount from the defaulting party for the breach of contract. The damages will be assessed on the basis of the difference between the contract price and the current market price on the date the breach was made.

Buyers remedies against the Seller

1. Damages for non-delivery

According to Section 57, Where the Seller wrongfully neglects or refuses to deliver the goods to the buyer then the Buyer has the right to sue the Seller for damages on the bases of non-delivery of the goods. The damages for the breach will be measured in accordance with Section 73and Section 74 of the Indian Contract Act.

2. Remedy for breach of warranty

A breach of warranty does not allow the buyer to reject the goods, his only remedy is as provided in Section 59 of the Act which is to deduct the price of the goods or to sue the seller for the damages. If the buyer the has exercised his right and accepted the goods then he cannot sue the seller for the breach.

3. Specific Performance

Section 58, This section provides a remedy to the buyer where he can sue the seller, while suing as the plaintiff the Seller must keep in mind that that this section can only be applied on contracts involving the sale of specific goods or ascertained goods.

Conclusion

As the world is getting more commercial day by day new forms of contracts emerging, Fundamental breach protects the weaker party of the contract and provides remedies if there is a breach in the contract.

Violations of the terms and condition of the signed agreement amount to the breach of the contract and providing remedies to the injured party but weather its a fundamental breach has to be decided after analyzing the facts for the case, there are no guideline to determine the breach.

The Indian Contract Act is not suitable for the present highly commercialized business environment, as new contracts emerging the Judges should use fictional interpretation and decide each case and a new flexible law is which enable to strike down the exemption clause which directly interfere with the basic obligation of the contract.

  • [1]http://www.legislation.gov.uk/ukpga/1977/50 last visited on 23/09/2016
  • [2] Adams, John N. "Sale or Return Contracts: Shedding a Little Light." The Modern Law Review 61.3 (1998): 432-37. Web.
  • [3] https://www.law.cornell.edu/ucc/2/2-302, last visited on 23/09/2016
  • [4] R.K. Bangia, Contract-I
  • [5] http://lawcommissionofindia.nic.in/101-169/Report103.pdf last visited on 23/09/2016
  • [6] A.I.R 2000 Bom. 151.

 

Lokpal Hangal 
on 10 January 2017
Published in Others
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