International business laws lesson 01

contracts involving personal skills, the heirs or legal representatives of a deceased promisor are not bound to perform the contract Such contracts come to an end on the death of the promisor The rule of law is: “a personal cause of action comes to an end with the death of the person concerned” In the case of contracts not involving personal considerations, the legal representatives are bound to perform the contract But their liability is limited to the estate of the deceased, which has come to their hands, in case of breach of contract They are not personally liable Performance by a third person: Section 41 lays down that if a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor Thus, where a promisee accepted lesser amount from a third 15 Law of Contract 16 International Business Law party in full satisfaction of his claim, it was held that he cannot enforce the promise against the promisor Notice that under this section performance of the promise by a stranger, once accepted by the promisee, discharges the promisor, although the latter has neither authorized not ratified the act of the third party 1.5.2 Performance of Joint Promises Joint promises may take any of the following shapes: Where several joint promisors make a promise with a single promise, e.g: A, B and C jointly promise to pay Rs 3000 to D, or Where a single promisor makes a promise with several joint promisees, e.g: P promises to pay Rs 3000 to Q and R jointly, or Where several joint promisors make a promise with several joint promisees e.g: A, B and C jointly promise to pay Rs 3000 to P, Q and R jointly Who can Demand Performance of Joint Promises? Section 45, which provides that when a promise is made to several persons jointly, then unless a contrary intention appears from the contract the right to claim performance rests with all the promisees jointly and a single promisee cannot demand performance When any one of the promisees dies, the right to claim performance rests with the legal representatives of such deceased person jointly with the surviving promisees When all the promisees are dead, the right to claim performance rests with the legal representatives of all jointly Ex: A, in consideration of Rs 5000 lent to him by B and C, promises B and C jointly to repay them that sum with interest on a day specified B dies The right to claim performance rests with B’s representative jointly with C during C’s life and after the death of C with the representatives of B and C jointly By whom Joint Promises must be Performed? The rules on the subject as contained in sections 42 and 44 of Indian Contract Act are as follows: All promisors must jointly fulfill the promise: When tow or more persons have made a joint promise then unless a contrary intention appears by the contract, all such persons must jointly fulfill the promise When any one of the joint promisors dies, his legal representatives must, jointly with the surviving promisors, fulfill the promise On the death of all the original promisors, the legal representatives of all of them jointly must fulfill the promise (sec 42) The above rule is of course subject to the following usual conditions: a) Contracts involving personal skill, e.g., to paint a picture, come to an end on the death of any of the joint promisors and the liability of performance does not fall on the legal representatives b) Wherever the legal representatives are made liable to perform the promise, they are not personally liable Their liability is limited to the assets inherited by them Any one of joint promisors may be compelled to perform: When two or more persons make a joint promise, the promisee is entitled, in the absence of express agreement to the contrary, to compel any one or more of such joint promisors to perform the whole of the promise Ex: A, B and C jointly promise to pay D Rs 3000, may compel either A or B or C or all or any two of them to pay him Rs 3000 In case of death of original debtor, if the debt falls upon a number of heirs, promisee must bring the suit against all heirs collectively, because the liability is only joint and not several in case of co-heirs It will be pertinent to discuss as to what is the effect of a decree obtained against only one or two of the joint promisors? The Calcutta High Court has held that a decree against some only of the joint promisors constitutes a bar to a second suit against other co-promisors, even if the promisee fails to realize the whole of the decretal amount, for, its claim merges in the decree Thus in the above example, if D sues only A and could recover only Rs 1500 from him on a decree of Rs 3000 he cannot as per the above verdict, sue for the balance other joint promisors later on But Madras High Court has dissented from the above decision It says that D can sue the remaining joint promisors later on for the unsatisfied portion of the decree The Madras High Court view seems logical In fact a decision of the Supreme Court is required to settle the law on the point in question Right of contribution inter-se between joint promisors: If one of several joint promisors is made to perform the whole contract, he may require equal contribution form the other joint promisors, unless a contrary intention appears from the contract If A is compelled to pay the entire amount of Rs 3000 he can realize from B and C Rs 1000 each Sharing of loss by default in contribution: If any one of the joint promisors makes a default in making contribution, if any, the remaining joint promisors must bear the loss arising from such default in equal shares Sec 43 If A is compelled to pay the whole and C is unable to pay anything, A is entitled to receive Rs 1500 from B If C’s estate is able to pay one half of his share, A is entitled to receive Rs 500 from C’s estate and Rs 1250 from B Effect of release of one joint promisor: In case of joint promise, if one of the joint promisors is released from his liability by the promisee, his liability to the promisee ceases but this does not discharge the other joint promisors from their liability; neither does it free the joint promisor so released from his liability to contribute to the other joint promisors Sec 44 1.5.3 Assignment of Contracts Assignment of contract means transfer of contractual rights and liabilities to a third party with or without the concurrence of the other party to the contract The Indian Contract Act contains no specific provisions dealing with assignment of contracts But the law on the subject is well settled and the rules, which have been applied by courts in India in this regard, are as follows: Contracts involving personal skill, taste or credit e.g.: a contract to paint a picture, a contract to perform a service or to marry, cannot be assigned The obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in a substitution of liabilities Ex: if X owes Y Rs 200 he cannot transfer the liability to Z and force Y to collect his money from Z but if Y agrees to accept Z as his debtor in place of X, there is novation The rights and benefits under a contract are assignable unless the contract is of personal nature or the rights are incapable of assignment either under the law or under an agreement between the parties, and the assignee can demand performance against the other contracting party This is so because it makes no difference to the party bound by that obligation whether he is called upon to perform it in favor of the original party or in favor of the assignee But the assignee takes the assignment subject to all equities if any This means that the debtor may plead against the assignee all defenses that he could have pleaded 17 Law of Contract 18 International Business Law against the assignor Ex: if one of the parties induced to enter into a contract by fraud, and the fraudulent party assigns his interest in the contract to a bonafide third party for value, the defrauded party is entitled to rescind the contract in equity in spite of its assignment to an innocent party Assignment by operation of law takes place in cases of death and insolvency Upon the death of a party his rights and liabilities under a contract devolve upon his heirs and legal representatives In case of insolvency, all rights and liabilities of the insolvent pass to the official assignee or receiver as the case may be 1.5.4 Order of Performance of Reciprocal Promises Promises which form the consideration for each other are called reciprocal promises or mutual promise It is common knowledge that bilateral contracts, where both contracting parties have to perform their promises involve mutual promises amongst the parties E.g.: A promises to sell certain goods to B and B in return promises to pay the price to A, and there is an obligation on each party to perform his won promise and to accept performance of other’s promise Reciprocal promises may be classified into three categories (1) Mutual and Independent, (2) Mutual and Dependent, and (3) Mutual and concurrent Section 51 to 54 of Indian Contract Act lay down the rules regarding the order of performance of reciprocal promises, which are stated below: Mutual and Dependent: Where each party must perform his promise independently without waiting for the performance or the willingness to perform of the other, the promises are ‘mutual and dependent’ According to section 52, such promises must be performed in the order expressly fixed by the contract, and where the order is not expressly fixed, they must be performed in that order which the nature of the transaction requires For instance A and B contract that A shall build a house for B at a fixed price A’s promise to build the house must be performed before B’s promise to pay for it Whether the promises are such as are to be ‘independently performed is often a question of construction depending on the intention of the parties collected from the agreement as a whole or from what the nature of transaction requires’ Mutual and Dependant: Where the performance of the promise by one party depends on the prior performance of the promise by the other party, the promises are ‘mutual and dependent’ Section 54 provides for such promises and lays down that if the promisor who is required to perform his promise in the first place, fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract For instance A contracts with B to execute certain builders work for a fixed price, B supplying the scaffolding or timber, and the work cannot be executed A need not execute the work, and B is bound to make compensation to A for any loss caused to him by the non-performance of the contract Mutual and Concurrent: Where the two promises are to be performed simultaneously, they are to be ‘mutual and concurrent’ According to section 51, in the case of such promises the promisor need mot perform his promise unless the promisee is ready and willing to perform his reciprocal promise For instance A and B contract that A shall deliver foods to B at a price to be paid by installments, the first installment to be paid on delivery A need not deliver, unless B is ready and willing to pay the first installment on delivery B need not pay the first installment, unless A is ready to deliver the goods on payment of the first installment 4 Consequences where a party prevents performance: “When a contract contains reciprocal promises and one party to the contract prevents the other from performing his promise, the contracts become voidable at the option of the party so prevented; and go is entitled to compensation form the other party for any loss which may sustain in consequences of the non-performance of the contract” For instance A and B contract that B shall execute certain work for A for Rs 1000, B is ready and willing to the work accordingly, but A prevents him from doing so The contract becomes voidable at the option of B, and if he elects to rescind it, he is entitled to recover from a compensation for any loss which he has incurred by its non-performance 1.5.5 Time and Place for Performance Sections 46 to 50 and 55 of the Contract Act lay down the rules regarding the time and place for performance of a contract, which are summarized below: z Where prescribed by the promisee: where the time and place are prescribed by the promisee, the performance of the contract must be at the specified time and place z Where not prescribed by the promisee: If no time and place are prescribed by the promisee, then the contract must be performed: ™ Within a reasonable tine, on a working day and within the usual hours of business The question, “what is a reasonable time” is, in each particular case, a question of fact It depends either on special circumstances of each particular case or the usage of trade or the intention of parties at the time of entering into contract For instance, A promises to deliver goods at B’s warehouse on 1st January On that day A brings the goods to B’s warehouse, but after the usual hour for closing it, and they are not received A has not performed his promise ™ At proper place e.g., godown or shop, and not at a public meeting or a fair “What is a proper place” is, in each particular case, a question of fact Generally speaking the promisor must ask the promisee where he would like the contract to be performed, and to perform it at such place (sec 49) For instance A undertakes to deliver a thousand maunds of jute to B on a fixed day A must apply to B to appoint a reasonable place for the purpose of receiving it and must deliver it to him at such place 1.5.6 Effects of Failure to Perform a Contract within the Stipulated Time Section 55 deals with the subject and lays down the following rules: Where “time is of the essence of the contract” and there is failure to perform within the fixed time, the contract becomes voidable at the option of the promisee He may rescind the contract and sue for the breach Where “time is not of the essence of the contract,” failure to perform within the specified time does not make the contract voidable It means that in such a case the promisee cannot rescind the contract and he will have to accept the delayed performance But he would be entitled to claim compensation from the promisor for any loss caused to him by the delay This rule is however, subject to the condition that the promisor should not delay the performance beyond a reasonable time, otherwise the contract will become voidable at the option of the promisee In case of a contract voidable on account of the promisor’s failure to perform his promise within the agreed time or within a reasonable time, as the case may be, if the promisee, instead of rescinding the contract, accepts the delayed performance, he cannot afterwards claim compensation for any loss caused by the delay, unless, 19 Law of Contract 20 International Business Law at the time of accepting the delayed performance, he gives notice to the promisor of his intention to so When is the time the essence of the contract? “Time is of the essence of the contract”, z If the parties to the contract have expressly agreed to treat it as such, or z If the nature pf transaction and the intention of parties were such that the performance within a limited time was necessary Even where a time is specified for the performance of a certain promise, “time may not be of the essence of the contract” and one has to look at the nature and construction of the contract and the intention of the parties in order to ascertain whether “time is of the essence of the contract” or not It is well settled that unless a different intention appears from the terms of the contract, ordinarily in commercial contracts the time of delivery of goods is of the essence of the contract but not the time of payment of the price This is because there are great chances of rapid market fluctuations and also because after entering into a contract the businessman, on that basis may enter into other contracts with other persons which cannot be fulfilled unless he receives the delivery of goods under the contract In contracts for the purchase of land, usually time is not of the essence of the contract because land values not frequently fluctuate 1.5.7 Mode or Manner of Performance “The performance of any promise may be made in any manner in which the promisee prescribes or sanctions” (sec 50) The promisor must perform the promise in strict accordance with the terms of the contract or instructions form the promisee He has no right to substitute, for what he has been directed, something else, even if the substitute may be more beneficial to the promisee For instance A desires B, who owes him Rs100, to send him a note for Rs 100 by post The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A Check Your Progress Fill in the blanks: “Performance of contract” means fulfilling of their respective ………………… created under the contract by both the promisor and the promise Free consent of all the parties to an agreement another essential element of a valid ………………… A promise is an ………………… 1.5.8 Appropriation of Payments When a debtor, who owes several debts to the same creditor, makes a payment which is insufficient to satisfy the whole indebtedness, the question arises, “as to which of the debts the payment is to be applied?” sections 59 to 61 of the Indian Contract Act answer this question and lay down the following rules: Debtor’s express instructions must be followed: Appropriation is a right given to the debtor for his benefit This if the debtor expressly states that the payment made by him is to be applied to the discharge of some particular debt, the creditor must act accordingly otherwise he should not accept the payment Debtor’s implied intention must be followed: If there are no express instructions, then debtor’s implied intention should be gathered from the circumstances attending the payment and appropriation must be done accordingly 3 Appropriation by Creditor: If there is no express or implied direction by the debtor regarding appropriation, then the creditor has got the option to apply the payment to any debt lawfully due from the debtor, including a debt which is barred by the Limitation Act Appropriation by Law: Where neither the debtor not the creditor has made any appropriation, then according to law, the payment is to be applied in discharge of the debts in order of time, whether of not they are time-barred If the debts are of equal standing, the payment shall be applied in discharge of each proportionately Where principal and interest both due: If a payment has been made without expressly stating whether it is towards interest or principal, payment is to be applied towards interest first, and then the balance to principal It may be emphasized that if the creditor accepts the payment, he must follow the above rules of appropriation otherwise he must refuse to accept the payment 1.5.9 Contracts which need not be Performed The circumstances under which contracts need not be performed are as follows: If parties to a contract agree to ‘notation’, ‘rescission’ or ‘alteration’, the original contract need not be performed In such cases the original contract disappears and is substituted by a new contract If parties to a contract agree to dispense with or remit performance of promise either wholly or in part, the original contract stands discharged This is technically called as “remission” When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform his promise If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused for the non-performance of the contract For instance, A contracts with B to repair B’s house B neglects or refuses to point out to A the places in which his house requires repair A is excused for the non-performance of the contract, if it is caused by such neglect or refusal 1.6 LET US SUM UP “The law of contract is intended to ensure that what a man has been led to expect shall come to pass; that what has been promised to him shall be performed” According to section 2(h) of the Indian Contract Act: “An agreement enforceable by law is a contract.” A contract therefore is an agreement the object which is to create a legal obligation i.e., a duty enforceable by law “Performance of contract” means fulfilling of their respective legal obligations created under the contract by both the promisor and the promisee When a contract is duly performed by both the parties, the contract comes to a happy ending and nothing more remains 1.7 LESSON END ACTIVITY Discuss the following: Agreement Valid and voidable contract Quasi contract Express and Executed contract 21 Law of Contract 22 International Business Law 1.8 KEYWORDS Contract: According to section 2(h) of the Indian Contract Act: “An agreement enforceable by law is a contract.” Consideration: Consideration has been defined as the price paid by one party for the promise to it gives something and gets something Consent: Consent means that the parties must have agreed upon the same thing in the same sense 1.9 QUESTIONS FOR DISCUSSION Explain the term contract and what are the various types of contracts? What are the essentials of a valid contract? What is meant by performance of contract? Check Your Progress: Model Answers CYP 1 Void Agreement: An agreement not enforceable by law is said to be void sec 2(g) A void agreement does not give rise to any legal consequences and is void ab-initio An agreement with a minor is void ab-initio as against, because a minor lacks the capacity to contract Illegal or Unlawful Contract: An agreement is illegal and void if its object or consideration is forbidden by law, is of such a nature that if permitted, it would defeat the provisions of any law or is fraudulent or involves or implies injury to the person or property of another or the court regards it as immoral, or opposed to public policy CYP Legal obligations Contract Agreement 1.10 SUGGESTED READINGS Herbert M Bohlman & Mary Jane Dundas, The Legal Ethical, and International Law Environment of Business, 4th Edition, South-Western College Publishing, 1999 Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical, Regulatory & International Law Krishnaveni Muttai, Logistics Management Kapoor S K, International Law, Central Law Agency, 13th ed., Motilal Nehru Road, Allahabad, 2000 Kapoor N D, Elements of Mercantile Law, 26th ed., Sultan Chand & Sons, New Delhi, 2002 Gulshan S S, Business Law, Excel Books, New Delhi, 2002 Mithani, D M, International Economics, 3rd ed., Himalaya Publishing House, Mumbai, 2000 ... more remains 1.7 LESSON END ACTIVITY Discuss the following: Agreement Valid and voidable contract Quasi contract Express and Executed contract 21 Law of Contract 22 International Business Law 1.8... Legal Ethical, and International Law Environment of Business, 4th Edition, South-Western College Publishing, 1999 Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical,... afterwards claim compensation for any loss caused by the delay, unless, 19 Law of Contract 20 International Business Law at the time of accepting the delayed performance, he gives notice to the promisor