CAPACITY OF PARTIES

For a valid contract, the parties to a contract must have capacity i.e. competence to
enter into a contract. Every person is presumed to have capacity to contract but
there are certain persons whose age, condition or status renders them incapable of
binding themselves by a contract. Incapacity must be proved by the party claiming
the benefit of it and until proved the ordinary presumptions remains.
Section 11 of the Contract Act deals with the competency of parties and provides that
"every person is competent to contract who is of the age of majority according to the
law to which he is subject, and who is of sound mind and is not disqualified from
disqualified from contracting by any law to which he is subject."
It follow that the following person are incompetent to contract.
(a) Minor
(b) Person of unsound mind, and
(c) Person disqualified by any law to which they are subject.
Contract entered into by the persons mentioned above are void.

What is Free Consent?

Section 13 of the Contract Act defines the term ‘consent’ and lays down that “Two or
more persons are said to consent when they agree upon the same thing in the same
sense. “Thus, consent involves identity of minds or consensus ad-idem i.e., agreeing
upon the same thing in the same sense. If, for whatever reason, there is no consensus
ad item among the contracting parties, there is no real consent and hence no valid
contract. Now we come to free consent
‘Free Consent’ defined. Section 14 lays down that “Consent is said to be ‘free’ when
it is not caused by-
1. Coercion, as defined in Section 15, or
2. Undue influence as defined in Section 16, or
3. Misrepresentation as defined in Section 18, or
4. Fraud, as defined in Section 17, or
5. Mistake, subject to the provisions of Section, 20, 21 and 22.
Discharge of Contracts:
Contract creates relation between the parties and binds them over. Termination of
such contractual relations is called discharge of contract. The following are different
modes of discharge or termination of contract.
 Discharge by Performance.
 Discharge by Breach of Contract.
 Discharge by Impossibility.
 Discharge by Operation of Law.
 Discharge by Lapse of Time.
 Discharge by Mutual understanding or by Agreement.

Discharge of contract by Performance

As said by Salmond, contract creates obligations to parties. If both parties
perform their contractual obligations promptly, the contract is said to be discharged
by performance. It is the ideal method that number of contracts gets terminated in
this way.
Discharge of contract by Breach
Failure in performance of contractual obligation is called breach of contract.
Discharge of contract takes place by breach of contract also. Breach of contract is of
two types. Namely;
Actual breach and
Anticipatory breach.
In case where contract is breached by party on the date of performance, it is
called actual breach. If breach of Contract takes place before data of performance, it
is called anticipatory breach.
Discharge of contract by Impossibility
The element of impossibility terminates contractual relations. Impossibility is
of two types. Namely;
Pre Contractual impossibility and
Post Contractual impossibility.
 If impossibility has already come into force before the contract itself, it is
called Pre-Contractual impossibility. Here discharge of Contract takes place soon
after formation of Contract. The impossibility which comes into force after the
contract is called Post-Contractual Impossibility. Here contractual relations will exists
only up to occurrence of impossibility.
Discharge of contract by lapse of time
Limitation act has specified duration to perform different contracts. The
duration thus specified is called limitation period. Soon after expiry of limitation
period, the contract gets discharged.
Example: There is a contract of loan between A and B. Her limitation period is 3
years. After completion of 3rd year discharge of contract takes place and debtor –
creditor relationship comes an end. Thus it becomes time bared debt which cannot be
recovered by means of legal proceedings.
Discharge of contract by Operation of law
This can be as following;
By Death: Whenever one of the parties comes across death, contractual
relations will come to an end.
By Insolvency: When one of the parties to the contract becomes insolvent, he
forgoes capacity to contract and those contracts which were made by that person will
get discharge.
By lunacy: When one of the parties gets attached by lunacy discharge of
contract takes place.
Right and liability going into the hands of same party: Contract creates right to
one party and liability to the other when right and liability reach the same person,
the result is discharge of contract.
Example: X has drawn a bill on Y. Here X has right to collect amount on the bill and Y
has liability to pay. There after X has endorsed the bill to Z. Where Z has got the right
and liability is with Y. Assume that Z has endorsed the bill to Y. Now right as well as
liability is with Y. This situation discharges the contract.
Discharge of contract by Agreement
This can be as following;
 By Alterations: Whenever Material alterations in contract are made, then it is
said that old contract has got discharged and a new contract has come into force.
By Renewal: At times parties to the contracts may substitute completely new
contract in the place of old contract. Now the old contract has got discharged.
By Recession: In case of recession old contract gets discharged and there will
be no formation of new contract.
Example: There is a contract between A and B according to which A has to supply 100
pairs of readymade dresses to B on 10th January. Where date of formation of
contractee`s 1st January. On 2nd January A says to B that those dresses have become
out of fashion and hence not possible to assemble 100 pairs. Still B says that though
he (B) supplies 100 pairs by taking a lot of risk, B cannot sell them because they are
outdated. Thus by mutual understanding, they have terminated their contract.
Breach of Contract:-
Breach means violation of law. The breach of contract means to break the contract or
not to act upon the contract. When any party fails to perform its duties in a lawful
contract it is called breach of contract. The injured party has a right to take action
against the party who has failed to perform his part of contract.
REMEDIES or RIGHTS OF AGGRIEVED PARTY:-
On the breach of contract following remedies are available to an injured party.
1. Claim for Damages:-
If contract is broken, the injured party has a remedy to claim for damages and losses
suffered by him. Injured party is entitled to receive compensation of loss from the
party who has broken the contract. The aim of this remedy is to provide the injured
party the same benefits which it would receive in case of the performance of
contract.
Following are important types of damages:
I.:- Special Damage: - Under a special circumstances special damages takes place
from breach of contract.
Example: - If the machinery of any factory arrives late and due to this reason one
party suffers a loss or profits it is called special damage.
ii. General Damage: - If injured party suffers a loss due to nonperformance of the
contract it is called general damage. The injured party can recover from the guilty
party the ordinary damages suffered by him.
Example: - Mr. Robin contracts to pay 3 lac to Mr. Peter on 1st April. Mr. Robin does
not pay the money on that day. Mr. Peter is unable to pay her debts and suffer a loss.
Mr. Robin is liable to pay Mr. Peter principal amount and also interest on it.
iii. Exemplary Damages: - These damages are awarded in order to punish the guilty
party for the breach of contract and not to compensate the loss of the injured party.
These damages are awarded in dishonor of cheque and case of breach of contract to
marry.
IV: - Nominal Damages: - When the injured party suffers no loss the contract may
award him nominal damages to recognize his right.
2. Suit for Injunction:-
Injunction means the order of the court. It may be used to prevent any wrongful act.
In case of contract it is used to prevent that act which is involved in breach of
contract.
Example :- Suppose Mr. Yuvraj a film producer contracts with Miss. Neha to sign in his
movies for ten years and not to sign in any other film. After one year she contacts
with other film producer Mr. Sethy during the period of contract. The court may issue
injunction on a suit by Mr. Yuvraj to restrain Miss. Neha from signing in film of Mr.
Sethy.
3. Specific Performance:-
A degree of specific performance is an order of the court. It is usually granted in
those contracts related to house, land and plot. In some cases compensation to pay.
So court may issue the degree of specific performance and can compel to defaulter
party the performance of contract.
Example: - Mr. Tipu agrees to sell his house to Mr. Amir, who agrees to purchase. But
due to some reasons Mr. Tipu commits breach. At the suit of Mr. Amir Court may ask
Mr. Tipu to carry out the contract?
4. Recession of the Contract:-
For the breach of contract it is an equitable remedy. When one party of the contract
commits breach and other party may rescued the contract that he may get free from
all its obligations for the performance of contract. Due to such recession and non-
performance injured party is entitled to get compensation for the damages and loss.
Example: - Mr. Sanjay pledges the defence savings certificates to Mr. Pandya and get
loan. But Mr. Sunjay does not return the loan. Mr. Pandya may file a suit for recession
of the contract responsibility to return the defense savings certificates on payment.
5. Quantum Merit:-
It means “So much as deserves" we can explain it by the following example:
Example: - Suppose Mr. Ali entered into contract with Mr. Shawn that they will
construct one room jointly. Mr. Ali will construct the wall while Mr . . . . Shawn will
build the roof. Now Mr. Ali completes his job but Mr. Shawn fails to build the roof of
the room. Now in this case Mr. Ali is entitled to receive the award according to his
work done by him. This claim of Mr. Ali will be called a claim of "Quantum Merit." The
court will award to Mr. Ali keeping in view the work or services performed by him.

Special Types of Contracts

Contracts of Indemnity and Guarantee
A contract of indemnity is one whereby a person promises to save the other
from loss caused to him by the conduct of the promisor himself or of any third person.
For example, a shareholder executes an indemnity bond favoring the company
thereby agreeing to indemnify the company for any loss caused as a consequence of
his own act. The person who gives the indemnity is called the 'indemnifier' and the
person for whose protection it is given is called the 'indemnity-holder' or 'indemnified'.
A contract of indemnity is restricted to cover the loss caused by the promisor himself
or by a third person. The loss must be caused by some human agency. Loss arising
from accidents like fire or perils of the sea is not covered by a contract of indemnity.
A contract of 'guarantee' is a contract, whether oral or written, to perform the
promise, or discharge the liability, of a third person in case of his default. A contract
of guarantee involves three persons, viz. a person who gives the guarantee is called
the 'surety'; the person in respect of whose default the guarantee is given called the
'principal debtor'; and the person to whom the guarantee is given is called the
'creditor'. A contract of guarantee is a conditional promise by the surety that if the
principal debtor defaults he shall be liable to the creditor.
Difference between Indemnity and Guarantee:-
In a contract of indemnity there are two parties i.e. indemnifier and indemnified. A
contract of guarantee involves three parties i.e. creditor, principal debtor and surety.
An indemnity is for reimbursement of a loss, while a guarantee is for security of
the creditor.
In a contract of indemnity the liability of the indemnifier is primary and arises when
the contingent event occurs. In case of contract of guarantee the liability of surety is
secondary and arises when the principal debtor defaults.
The indemnifier after performing his part of the promise has no rights against
the third party and he can sue the third party only if there is an assignment in his
favor. Whereas in a contract of guarantee, the surety steps into the shoes of the
creditor on discharge of his liability, and may sue the principal debtor.
Contracts of Bailment and Pledge
A 'bailment' is the delivery of goods by one person to another for some purpose upon a
contract that they shall, when the purpose is accomplished, be returned or disposed
of according to the directions of the person delivering them. The person delivering
the goods is called the 'bailor' and the person to whom the goods are delivered is
called the 'Bailee'. The examples of a contract of bailment are:- delivering a watch or
radio for repair; leaving a car or scooter at a parking stand; leaving luggage in a cloak
room; delivering gold to a goldsmith for making ornaments; leaving garments with a
dry cleaner,etc. The essence of bailment is the transfer of possession. The ownership
remains with the owner. There cannot be a bailment of immovable property.
A 'pledge' is a bailment of goods wherein the goods are delivered as a security for
payment of a debt or performance of a promise. The bailor is called the 'pledgor' or
'pawnor' and the Bailee is called the 'pledgee' or 'Pawnee'. Thus, pledge is a special
kind of bailment. Pledge can be made only of movable properties. In order to make
the pledge legally valid it is essential that the pledgor has the legal right or title to
retain the goods.
Difference between Bailment and Pledge:-
Purpose: - A pledge is made for a specific purpose, while bailment can be made for
any purpose.
Property: - In bailment, the Bailee gets only the possession of goods bailed. The
ownership remains with the bailor. In the case of pledge, the pledgee acquires a
special property in the goods pledged whereby he gets possession coupled with the
power of sale, on default.
Right of sale: - Bailee can exercise a lien on the goods bailed. He has no right
of sale. But in case of a pledge, the pledge can sell the goods after due notice to
pawner.
Contracts of Agency
An 'Agent' is a person employed to do any act or to represent another in dealings with
third persons. The person who employs the agent and for whom such act is done, or
who is so represented, is called the 'principal'. The relation between the agent and
the principal is called 'Agency'. It is only when a person acts as a representative of the
other in the creation, modification or termination of contractual obligations; between
that order and third persons that he is an agent. The essence of a contract of agency
is the agent's representative capacity coupled with a power to affect the legal
relations of the principal with third persons.
Contracts of agency are based on two important principles:-
Whatever a person can do personally shall also be allowed to be done through an
agent except in case of contracts involving personal services such as painting,
marriage, singing, etc.
He who does an act through a duly authorized agent does it by himself i.e. the
acts of the agent are considered the acts of the principal.