Consideration Rules

Define and explain the term Consideration and state its rules.
What are the contracts without consideration? Section 2 (d) of the Contract Act defines consideration as – ‘When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called consideration for the promise. ‘In the words of Pollock, “an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” In every contract, every party must stand to gain something in return of what it agrees to do or not to do. This something given or received is the consideration. Consideration is the essential element of contract. An agreement without consideration cannot be contract and hence is not enforceable by law. If the person who makes the promise gains nothing in return of the promise made, such promise cannot be enforced against him. Hence the principle – ‘No consideration – No contract’. 
Essential elements of Consideration: The analysis of the definition of consideration would show that following are the essential elements of valid consideration.1.Consideration must move at the desire of the promisor: The definition of consideration starts with the assertion that consideration must move at the desire of the promisor. Hence, an act done at the desire of any third party is not consideration. Similarly, acts done voluntarily or services rendered without any request cannot form consideration. Thus, where A sees B’s house on fire and helps him to put off the fire, A cannot ask for payment for his services since B never asked for his assistance.2.Consideration may be furnished by anyone: Consideration need not be from the promisee alone, but may proceed from third person also. Thus as long as there is consideration, it does not matter from whom it is given. It may move from the promisee or any other person.3.Consideration may be past, present or future: The words used in the definition clearly indicate that the consideration (either in the form of some act or abstinence) may have been given in the past, or being given in the present, or promised now but to be given at some future time. Therefore, it is not only the act or abstinence of the past or present (something done or not done in the past and something being done or not done in the present), but also a promise to do or not to do certain act in the future which constitutes consideration.4.Consideration must be ‘something of value’ in the eyes of law: The fourth essential element of consideration is that it must be something of value in the eyes of law. It should be noted that what is adequate consideration is to be decided by the parties and not by the law. The law insists on the presence of consideration and not on its adequacy. When no consideration is necessary Although as a general rule there cannot be any contract without consideration, there are some exceptions where an agreement is a valid contract even without consideration. These are the exceptions to the rule- No Consideration -No Contract. 
1.  Agreement made on account of natural love and affection: An agreement made without consideration is enforceable as valid contract, if it is, a) expressed in writing, b) registered under the law for the time being in force for the registration of documents, c) made on account of natural love and affection and is d) between the parties standing in a near relation to each other.2. Agreement to compensate for past voluntary services: If a promise is made to a person who has already voluntarily done something for the promisor in the past, such promise is a valid contract even though at the time of promise there is no consideration moving from that person to the promisor.However, this exception is not to be confused with past consideration. The contracts falling in the category of the exception are the contracts where the promisor is under no obligation to make any promise. But when he does promise, it becomes a contract. If the services are not rendered voluntarily, it would be covered under past consideration.3. Agreement to pay a time-barred debt: The law of limitation lays down the period during which a suit can be filed to recover a debt. If that time expires, no recovery can be made through law. A time-barred debt is the debt which cannot be legally recovered, as the remedy to recover the same is lost under the law of limitation. Section 25 (3) of the Contract Act provides that where there is an agreement, made in writing and signed by the debtor or by his authorized agent, to pay wholly or in part, a debt barred by law of limitation, the agreement is a valid contract even though it is not supported by any consideration. What is necessary for the contract to fall under this exception is that 1) the contract must be in writing, 2) it must be signed by the debtor or by his authorized agent and 3) there has to be an express promise to pay.4.Completed gift: An agreement whereby one person promises to give a gift to another is obviously not a contract, because there is no consideration. However, where the transaction of actually giving the gift is complete, it is a contract in the eyes of law. The gift so given cannot be demanded back on the ground that there was no contractual obligation to give the gift.5.Contract of agency: Section 185 of the Contract Act provides that in the contract of agency, there is no need of consideration for creating agency.6.Remission of promise: (waiver of rights) Remission of contractual rights takes place where the creditor agrees to accept less than what is outstanding. Thus, a banker, who fears that the total loan given to a borrower may turn out to be bad debt, may accept part of the loan amount in full settlement of the loan dues. No consideration is necessary for this contract. Similarly, under section 63, a contract whereby the time for performance of contract is extended, needs no consideration.Contribution to charity: A promise to contribute to the charity, though gratuitous, would be enforceable, if on the faith of the promised contribution, the promisee materially alters his position and incurs a liability. For example, where A promises to pay a certain sum by way of contribution for the purpose of extension of a hospital building and if the hospital authorities, on the faith of the promised contribution, undertake the construction activity, the promise can be enforced against A, though it is without consideration.

Agent - Types, Right, Duties

Types of Agents

We have already seen that an Agent is a person appointed by Principal to do certain acts on behalf of the Principal. Depending on the extent of authority given by the Principal, the agents can be classified as follows:

a. General Agent: A general Agent is one who is employed to do all acts connected with a particular business or employment, e.g. a manager of firm. He can bind the Principal by doing any thing which falls within the ordinary scope of that business, whether he is actually authorised for any particular act or not, provided the third party acts bona fide.

b. Special Agent. A special Agent is one who is employed to do some particular act or represent his Principal in some particular transaction. For example, an Agent may be appointed to sell the car of the Principal. This is a particular act for which the Agent is appointed. Therefore, as soon as the act is done, the authority of the Agent comes to end. If a special Agent does any thing outside his authority, the Principal is not bound by it. c. Universal Agent. A Universal Agent is the one whose authority is unlimited i.e. who is authorised to do all the acts, which the Principal can lawfully do and delegate. He enjoys extensive powers to transact any kind of business on behalf of his Principal.

From the viewpoint of the nature of work performed by the Agents, they may be classified as under:

a. Mercantile agent.  A Mercantile agent is one who has authority either to sell goods or to buy goods or raise money on the security of goods. The various kinds of mercantile agents are – 1) Factor. A factor is a mercantile agent to whom goods are entrusted for sale. He enjoys wide discretionary powers in relation to the sale of goods. He sells the goods in his own name upon such terms as he thinks fit. He may also pledge the goods. 2) Commission agent. A commission agent is a mercantile agent who buys or sells goods for his Principal on the best possible terms in his own name and who receives commission for his labours. He may have possession of the goods or not. 3) Del credere agent. He is one who, in consideration of an extra commission, guarantees his Principal that the third persons with whom he enters into contracts on behalf of the Principal, shall perform their financial obligations, that is, if the buyer does not pay, he will pay. Thus, such agent occupies the position of a Surety as well as of an agent. 4) Broker. He is one who is employed to make contracts for the purchase and sale of goods. He is not entrusted with the possession of goods. He simply acts as a connecting link and brings the two parties together to bargain and if the transaction materializes, he is entitled to his commission called brokerage. He makes contracts in the name of the Principal. b. Sub agent. A sub agent is a person employed by, and acting under the control of, the original agent in the business of the agency. Thus, a person employed by an agent is called a sub-agent. A sub agent acts under the control of the original agent. The relation between the original agent and the sub-agent is that of Principal and agent. In other words, the original agent acts as Principal for the sub-agent. c. Substituted agent. When an agent has express or implied authority of his Principal to name another person to act for the Principal and the agent names another person accordingly, such person is not a sub-agent but a substituted agent of the Principal in respect of the business which is entrusted to him. Thus, an agent simply names or appoints a substituted agent at the request of the Principal and thereafter drops out altogether from the scene. The substituted agent is directly responsible to the Principal and a privity of contract is deemed between him and Principal. d. Non-mercantile agent. As the name suggests, they are the agents who are appointed for the purposes other than business purposes. They include advocates, insurance agents etc. 

Rights of Agent

An Agent has the following rights against his Principal:

1.  Right to receive remuneration. The Contract Act assumes that every agent is entitled to remuneration from the Principal, unless it is agreed otherwise in the contract of agency. In other words, an agent may agree to act without remuneration and such contract is a good contract. However, the agent is entitled to the remuneration which is agreed in the contract of agency and if nothing is mentioned in the contract, then to a reasonable remuneration. This right arises only when the work for which he is appointed is complete. It is not necessary that the contract, which he has entered into on behalf of the principal, should be actually acted upon. Thus, an agent shall be entitled to the agreed remuneration even if there is a breach of contract between the principal and the third party. An agent who is guilty of misconduct in the business of agency is not entitled to any remuneration. In addition, he is liable to compensate the Principal for any loss caused due to his misconduct. 2. Right of retainer. An agent has a right to retain that much portion of money, which is due to him as remuneration and other expenses, out of the sums received on account of the Principal. It is necessary that the agent retains only the agreed or reasonable remuneration and only those expenses which are properly incurred by him for carrying out his functions as agent. 3. Right of lien. An agent has the right to retain goods, papers and other property, whether moveable or immovable, of the Principal received by him until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. This right of an agent, however, is subject to contract to the contrary. 4. Right to be indemnified against consequences of lawful acts. An agent has also the right to be indemnified against the consequences of all lawful acts done by him in exercise of the authority conferred upon him. An agent acts for and on behalf of the Principal. He functions as per the directions and instructions given to him. If, as a result of the acts done by him in pursuance of such instructions, an agent has to incur any expenditure or suffer any loss, he has a right to be indemnified by his Principal for such expenditure or loss. However, it should be noted that this indemnity is not available when the act is apparently unlawful or criminal. 5. Right to be indemnified against consequences of acts done in good faith. An agent has a right to be indemnified against consequences of an act done in good faith though it turns out to be injurious to the rights of third persons. For the purpose of carrying out the instructions of the Principal, an agent may have to do certain acts, which may prove to be harmful to the rights of third persons. (not the acts which are apparently illegal) Under such circumstances, the liability incurred by the agent has to be indemnified by the Principal. 6. Right to compensation. The agent has a right to be compensated by his Principal for injuries sustained by him due to the Principal’s neglect or want of skill. 7. Right of stoppage of goods in transit. Just like an unpaid seller, an agent has a right to stop the goods in transit to the principal, if – 1) he has bought the goods either with his own money or by incurring a personal liability, and 2) the Principal has become insolvent.

Duties of Agent

An agent has the following duties and liabilities towards his Principal. 1. Duty to follow Principal’s direction or custom: The first duty of every agent is to follow the instructions of the Principal and act within the authority given by the Principal. In the absence of any instruction, an agent has to act as per the custom or practice, all the time giving paramount importance to the interests of the Principal. Any deviation by the agent from the clear instructions of the Principal will make the agent liable to pay the damages to the Principal for any loss sustained by him. For example, A appoints B as agent to carry on the business on behalf of A. It is a custom in the business that moneys in hand are invested from time to time at interest. B omits to make such investments. He is liable to make good to A the interest usually obtained by such investments. 2.  Duty to carry out work with reasonable skill and diligence. The agent must conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the Principal is aware that the agent does not possess the requisite skills. What is reasonable skill and diligence would depend on the facts of each case. If the agent does not work with reasonable care and diligence, he must make compensation to his Principal in respect of ‘direct consequences’ of his own neglect, want of skill or misconduct. However, he is not liable for any indirect or remote losses. 3. Duty to render accounts. It is the duty of an Agent to keep proper accounts of the Principal‘s money or property and submit the same to the Principal as and when demanded. If the agreement so provides, the Agent has to periodically render the accounts to the Principal. 4. Duty to communicate. It is the duty of an Agent, in cases of difficulty to use all reasonable diligence in communicating with the Principal and in seeking to obtain his instructions, before taking any steps in facing the difficulty or emergency. In other words, though it is the duty of an agent to use skill and diligence in cases of emergency, this discretion should not be contrary to the clear instructions of the Principal; and the absence of clear instructions exists when the Principal is not available to give clear instructions. Therefore, it is the duty of an Agent to use all reasonable diligence to communicate with the Principal to seek clear instructions. 5. Duty not to deal on his account. An Agent acts for the Principal. Therefore, he must not deal on his account in the business of agency, i.e. he must not himself buy from or sell to his Principal, goods, which he is asked to buy or sell on behalf of his Principal, without obtaining the consent of the Principal. If the agent violates this rule, the Principal may repudiate the transaction where it can be shown that any material fact has been knowingly concealed by the Agent or that the dealings of the Agent have been disadvantageous to the Principal. The Principal is also entitled to claim from the Agent any benefit, which he may have received from such transactions.6. Duty not to make any profit out of his agency except his remuneration.The relationship between the agent and his Principal is that of faith and trust. An Agent is therefore placed under a duty not to make any secret profits out of the agency. He must pay to his Principal all the moneys, including illegal gratifications, if any, received by him on Principal‘s account. If his acts are not bona fide, he will lose his remuneration and will have to account for the secret profits to his Principal.7. Duty on termination of agency due to Principal’s death or insanity. When the agency is terminated due to the death or insanity of the Principal, it is the duty of the Agent to take all the necessary steps to protect the interests of the legal representatives in relation to the assignments entrusted to him. 
Duty not to delegate authority. An Agent cannot delegate to another to perform acts, which he has expressly or impliedly undertaken to perform personally, unless according to the customs a sub-agent may be appointed. Therefore, it is the duty of an Agent not to further delegate his authority or appoint another person to do the acts for which he is engaged, unless he obtains the permission of the Principal in this behalf.

Condition – warranty

Define and explain the terms ‘condition’ and ‘warranty’. 
Distinguish between the two. State the implied conditions and implied warranties.
Explain the implied conditions & warranty under the 'Sale of Good Act'?
A contract of sale of goods contains various terms regarding the quality of the goods, the price and mode of its payment etc. All these terms are not of equal importance. Some of these may be major terms which go to the very root of the contract and their breach may frustrate the very purpose of the contract, while other terms may be minor terms which are not so vital that their breach may seem to be breach of contract. These major terms are called conditions and the minor terms are called warranties.
Definition of Condition: A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the aggrieved party a right to repudiate the contract itself. (Section 12-2)
It can be seen from the definition that condition forms the very basis of the contract, the breach of which causes an irreparable damage to the aggrieved party and the aggrieved party can cancel the whole contract. He may additionally prosecute for damages also for the non-performance of the contract.
Definition of Warranty: A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives the aggrieved party a right to sue for damages only, and not to avoid the contract itself.
A warranty is therefore a stipulation in a contract of sale which is of secondary importance as compared to a condition. The definition makes it clear that effect of breach of warranty is not the same as the effect of breach of condition. In other words, breach of warranty causes only such harm to the transaction which can be compensated by payment of damages.
Example of condition: If A buys a horse from B, pointing out to B that he wants a horse which runs at a speed of 50 k.m. per hour. B offers to A a particular horse commending that the horse would serve his purpose. If the horse cannot run at the said speed, it is breach of condition because the ability of the horse to run at the specified speed was made essential stipulation of the contract.
Example of Warranty: If in the above example, A asks only for a good horse and B sells to him one saying that the horse is a good one and can run at a speed of 50 km per hour, then the speed of the horse is only a warranty and not a condition. B stated about the speed of the horse without being asked for the same and as such the speed of the horse was not essential for the contract.
Difference between Condition and Warranty
1. As to significance: A condition is a stipulation which is essential to the main purpose of the contract, whereas a warranty is stipulation which is collateral to the main purpose of the contract.
2. As to breach: The breach of a condition gives the aggrieved party the right to repudiate the contract and also to claim damages, whereas the breach of warranty gives the aggrieved party a right to claim damages only. 3. As to treatment: Breach of condition may be treated as breach of warranty, but breach of warranty cannot be treated as breach of condition. 
The Implied Conditions:
Conditions and warranties in a contract can be either expressly provided or they can be implied. The terms which are specifically incorporated in a contract are called Express stipulations whereas the stipulations which the law assumes to be there in the contract are called Implied stipulations. The stipulations which are essential to every contract though not expressly provided for in the contract are therefore called the implied conditions. Such implied conditions are as follows:
1. Condition as to title: In a contract of sale, there is an implied condition on the part of the seller that in case of outright sale, he has the title to the goods i.e. right to sell the goods and in case of an agreement to sell, he will have the right to sell the goods when the goods are to pass to the buyer. 2. Sale by Description: Where there is contract of sale of goods by giving the description, there is an implied condition that the goods shall correspond with the description. 3. Sale by Sample: When, under a contract of sale, goods are to be supplied according to a sample agreed upon, the implied conditions are:

a.       that the bulk shall correspond with the sample in quality;

b.      that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;

c.       that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample. In other words, there shall not be any latent or hidden defect in the goods.

4. Condition in sale by sample as well as by description: When the goods are sold by sample as well as by description, there is an implied condition that the bulk of the goods shall correspond both with the sample and with the description. If the goods supplied correspond with sample and not with the description or vice versa, the buyer is entitled to reject the goods.
5. Condition as to fitness or quality: Normally, it is for the buyer to satisfy himself that the goods which he is purchasing are of the quality required by him. In case he is buying the goods for a specific purpose, it is for him to ensure that the goods serve the purpose for which they are bought. This is the principle of Caveat Emptor. Even when it is so, there is an implied condition on the part of the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants them, if the following conditions are satisfied:

a.  the buyer, expressly or impliedly, should make known to the seller the particular purpose for which the goods are required; and

b. the buyer should rely on the seller’s skill or judgment; and

c.  the goods sold must be of a description which the seller deals in the ordinary course of his business, whether he is the manufacturer or not.

6.  Condition as to merchantability: This condition is implied only where the sale is by description. This implied condition is in addition to the condition which requires the goods to correspond to the description. The term merchantable quality means that the goods are of such quality and in such condition that a reasonable man, acting reasonably, would accept them under the circumstances of the case. For the implied condition of the goods being of merchantable quality, the following essentials must be present:

a.       the seller must be a dealer in goods of that description, whether he be the manufacturer or not; and

b.      the buyer must not have any opportunity of examining the goods or there must be some latent defect in the goods which would not be apparent on reasonable examination of the same.

7. Condition as to wholesomeness: This condition is applicable in the sale of eatables. In such case, the goods must not only answer the description and be of merchantable quality, but must also be wholesome, i.e. fit for human consumption.
The Implied Warranties
As already noted, implied warranties are those which are assumed to be present in every contract of sale even if they are not specifically mentioned by the parties. They are two:
1. Warranty of quiet possession: Unless otherwise agreed by the parties, there is an implied warranty that the buyer of goods shall enjoy quiet possession of the goods and this right shall not be disturbed either by the seller or any other person. If this right is disturbed, the buyer is entitled to claim damages from the seller.
For example, where one joint owner of goods sells the goods without the consent of the other, the buyer will not get a good title to the goods. The seller may subsequently pay off the joint owner and pass on a clear title to the buyer. Here, there is no breach of condition but breach of warranty because the buyer’s right of peaceful and quiet possession is violated. Hence, the buyer, though does not return the goods, yet can claim damages from the seller for disturbance in his quiet possession. 2. Warranty of freedom from encumbrance: It is the duty of the seller to bring to the notice of the buyer if a charge or claim in favour of any third person exists on the goods sold. If the seller does not disclose any such charge, there is an implied warranty that the goods are free from any charge or encumbrance. If there is any charge on the goods not disclosed to the buyer at the time of sale and the buyer has to incur expenses to meet the charge, he can recover the same from the seller.

Methods of Discharging the Contract

What are the provisions of Contract Act relating to discharge of contract?
What are the methods of discharging the contract?
When the rights and obligations arising out of a contract cease to exist or are extinguished, the contract is said to be discharged or terminated. A contract may be discharged in any of the following ways:
1. By performance ;(actual or attempted)
2. By mutual consent or agreement;
3. By subsequent or supervening impossibility or illegality;
4. By lapse of time;
5. By operation of law; or
6. By breach of contract.
1.Discharge by performance: When both the parties to a contract discharge their respective obligations arising out of the contract, the contract is discharged by performance. In such an event, both the parties have performed their part in the contract and now there is nothing outstanding to be done by any of the parties. This is a pleasant end of the contract. Most of the contracts are discharged in this way. On the other hand, when only party performs his part under the contract, he alone is discharged. Such a party gets the right to proceed against the other party who has failed to perform his promise or part under the contract.
Performance may be – (a) Actual performance, or (b) Attempted performance or tender.
Actual performance takes place when each party to a contract fulfils his obligation arising under the contract to the satisfaction of the other and as per the terms of the contract.
Attempted performance or tender is where one party is ready and willing to perform his promise as per the contract, but the other party does not accept the performance. In such a case, the contract is discharged by the wrongful refusal to accept performance. Section 38 provides that – ‘where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance nor does he thereby lose his rights under the contract.’
Essential of valid tender 
1.It must be unconditional: Offer of performance must be unconditional.Conditional tender is no tender. It is only when the party willing to perform its part under the contract offers to perform without any condition that he can claim attempted performance and be discharged upon non-acceptance of such unconditional performance. If the terms of sale stipulate cash payment, payment by cheque is conditional performance.
2. Proper place and time: A tender of performance has to be at the place and time as agreed upon in the contract. If it is not so, it is not a valid tender and the party tendering performance cannot be discharged. Payment of fees sought to be made by a student at the residence of the college cashier is not a valid tender.
3.Whole obligation: The attempted performance must be with respect to the whole of the obligation and not the part of it. In a sale of goods, the buyer cannot decide on his own to pay the price by instalments and therefore the tendering of the first instalment is not a valid tender or performance in the eyes of law.
Effect of refusal to accept a valid tender is that the contract is deemed to have been performed by the promisor i.e. tenderer. A contract is, therefore, discharged by a valid tender of performance.
2.Discharge by mutual consent or agreement: As a contract can be created by an agreement, it can also be terminated or discharged by agreement between the same parties. The parties to a contract may, for whatever reasons decide and agree that the contract entered into by them earlier need not be performed and in such an event the contract is discharged. The Contract Act states the following methods of discharge of contract by mutual consent or agreement: a. Novation: Novation occurs when a new contract is substituted for an existing contract, either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. In Novation, a new contract comes into existence thereby discharging the obligations under the old contract. It is not merely an amendment to the old contract.
b. Alteration: Changing one or more terms of the existing contract and thereby giving rise to a new contract is alteration. In this way, the original contract is discharged and a new contract comes into existence in its place. Alteration has to be done with the consent of all the parties to the contract otherwise it will make the whole contract void. Further, mere correction of any clerical error is not alteration. Alteration must change the legal effect of the contract. For example, where the amount of debt is changed or the rate of interest is changed, there is alteration.c. Rescission: When the parties to the contract simply decide that the contract existing between them shall no longer be binding on them, it is rescission or cancellation of the contract. An agreement of rescission or cancellation discharges the parties from the liabilities arising from the earlier contract. Rescission can be express or implied. Express rescission takes place when the parties expressly agree that the contract shall no longer have any binding effect on them. In implied rescission, there is non-performance of a contract by both the parties for a long time without complaint.d. Remission: It means acceptance of lesser fulfillment of promise made under the contract. When one party gives up, wholly or in part, his right under the contract, there is remission and discharge of contract. Thus, where a banker accepts a lesser amount against a loan, as a complete satisfaction of loan dues, there is remission and the borrower is discharged from the contract. It should be noted that for such remission no consideration is necessary.
e. Waiver: It means the deliberate abandonment or giving up of a right, which a party has obtained under contract. The other party is therefore discharged from his corresponding obligation. Thus, where A saves B’s house from fire and whereupon B promises A a reward of Rs. 100/-, A may waive the right to receive the reward in which case B is discharged from his obligation to give the reward.
3. Discharge by subsequent or supervening impossibility or illegality: If the performance of the contract is impossible at the time when it is entered into, there is no question of discharge of contract because there is no contract in the eyes of law. An agreement to do an act impossible in itself is a void agreement. However, a contract to do an act, which subsequently becomes impossible or unlawful by reason of some event, which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.
This principle is also known as doctrine of frustration. The following conditions must be satisfied for the discharge of contract. (1) The act must have become impossible, (2) the impossibility must be due to reason which the promisor could not prevent, and (3) the impossibility must not be self-induced by the promisor or due to his negligence. It should be noted that if the promisor knows about the impossibility at the time when the contract is entered into, he is bound to compensate the other party for any loss caused due to non-performance.a.Destruction of the subject matter: When the subject matter of the contract is destroyed subsequent to the formation of the contract without any fault of the promisor or the promisee, the contract is discharged. Where a house is agreed to be let out on rent and if the house is destroyed by fire, the contract is discharged.b.Death or personal incapacity of the promisor: Where the performance of a contract depends on the personal skill of the promisor, the contract is discharged on the death or the personal incapacity of the promisor. Thus, where an artist undertakes to paint a picture for a certain price, but meets with an accident and loses his hand, he is discharged due to personal incapacity.c.Change of law: An act, which is agreed to be done under a contract, may become illegal due to change of law applicable to such performance. In such an event, the contract is deemed to be discharged. Thus, a contract for sale of onions from one State to another State is discharged when inter-state sale of onions is subsequently prohibited by law.d. Outbreak of war: All contracts entered into with an alien are automatically suspended when there is outbreak of war with that country. Such contract may be revived after the war is over subject to law of limitation and direction of the Government. It should be noted that in discharge of contracts under this method, the performance must have become absolutely impossible. Increased difficulties in performance which were not thought of at the time of formation of the contract, default of a third person, strikes and lock-outs etc. will not discharge the contract and the promisor will have to carry out his promise under the contract though he may incur heavy expenditure in doing so.
4. Discharge by lapse of time: The law of limitation provides that where there is a breach of contract, legal action must be taken within the specific period. This period is known as period of limitation. After the period of limitation expires, the promisee is debarred from initiating any legal proceedings against the promisor and the promisor is free from the obligations under the contract. For example, the period of limitation prescribed under the Limitation Act for the suits of money recovery is three years. Where the creditor fails to file a suit against the debtor for the recovery of his debt within the said period after the default, the debt becomes time-barred and the creditor loses his remedy to recover the debt. In effect, therefore, the debtor is free from his obligation to repay the debt and thus the contract stands discharged.Another way of discharge of contract due to lapse of time is when time is essence of the contract and if the contract is not performed within the fixed time, the contract comes to an end and the party not at fault need not perform his obligation under the contract. He, however, can sue the other party for compensation.
5. Discharge by operation of law: Upon the death or insolvency of the promisor, the contract is discharged. When the contract is of personal nature, the death of the promisor discharges the contract and in other cases rights and liabilities of the deceased pass on to his legal representatives. Merger is yet another mode of discharge of contract under this category where an inferior right is merged into a superior right. Thus, where a tenant purchases the rented property from the landlord, his inferior right of tenancy is merged into the rights of the owner. Unauthorized material alteration in the written contract (material alteration without the consent of the other party) will make the whole contract void and thus in effect the contract is discharged.
6. Discharge by breach of contract: Breach of contract puts an end to the contract and therefore it is also a mode of discharge of contract. The original obligations created under the contract for both the parties are brought to an end when there is breach of contract. Of course, the aggrieved party is entitled to sue the party at fault for damages, but the contract as such is discharged. Breach of contract may be of two kinds: (1) Anticipatory breach and (2) Actual breach When one party to the contract communicates to the other party, by words spoken or written, and before the due date of performance, his intention not to perform contract, there is express anticipatory breach of contract. When such intention is gathered from the conduct of the party, there is implied anticipatory breach of contract.Section 39 of the Contract Act provides that – “when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified his acquiescence in its continuance.”
It may be noted that in both the cases, the breach of the contract takes place before the date due for its performance for the simple reason that now the performance of the contract has become impossible due to the act of the promisor. Hence it is called anticipatory breach of contract.In actual breach of contract, a party to the contract fails to perform his obligation on the due date of performance.

Company - Characteristics, Kinds

Define a Company. What are its characteristics? State the different kinds of companies which can be registered under the Companies Act, 1956.

According to Section 3 (1) (i) of the Companies Act, 1956, a company means, “A company formed and registered under this Act or an existing company.” An existing company means a company formed and registered under any of the previous Company laws. This definition does not throw much light on the nature of a company. For the purpose of understanding the features of a company, we have to take the assistance of other definitions. One of such definitions is given by Justice Lindley: According to him, a company is – ‘an association of many persons who contribute money or money’s worth to a common stock and employed for a common purpose. The common stock so contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted’.  

Characteristics of a company: 1. Separate legal entity. A company formed and registered under the Companies Act is a distinct legal entity. It is a creation of law and is therefore called an artificial person or a legal person. It has invisible and intangible existence. It therefore follows that since a company is brought into existence by aw, its existence can be terminated only b law. It has no natural death like other natural persons. It is an entity distinct from the members forming it. Hence, it makes no difference between a company having only two shareholders and a company having two hundred shareholders. In either case, the company is a separate legal entity. 2. Perpetual succession. A company registered under the Companies Act never dies. It has perpetual succession. It is not affected by the death or insolvency of the members. The members may join and leave, but the existence of the company goes on for ever. The corporate existence of a company is not affected by the departure of the members for any reason including death of members. 3. Artificial person, but not a citizen. Company is an artificial person, in the sense that it is created by law and has its existence only in the eyes of law. It can perform all the legal acts such entering into contracts, acquiring movable and immovable property etc. in its own name. But since it has no physical existence, it has to function through its board of directors. Similarly, it does not enjoy the rights conferred on the citizens under the Constitution. For example, a company does not have the right to cast vote nor does it have any of the fundamental rights. A company may have a domicile, but does not have the above rights which are enjoyed by a natural person who is a citizen of India. 4. Limited liability. Limited liability of members is another most important characteristic of a company. In other words, the members cannot be required to contribute more than what was agreed by them in the event of liquidation of the company. The liability of members is limited to the value of the shares undertaken by them and hence they are liable to pay only that amount which remains unpaid on the shares. If the shares held by the members are fully paid, no member can be asked to contribute any more in the event of winding up of the company. The personal property of the members is never liable for the payment of debts of the company. 5. Transferable shares. The shares of a company are freely transferable and can be sold and purchased in the share market. Unlike a partnership firm, (where the interest of a partner cannot be transferred to another person without the will and consent of other partners), a member of a company can easily transfer his interest in the company i.e. his shares to another. The shares are treated like movable property and can be sold and purchased in the manner prescribed under the Articles of Association of the company. 6. Common Seal. Since a company is an artificial person, it cannot sign its name on a contract. Common seal is used as a substitute for its signature. The company has a separate legal existence under its own common seal. It can enter into contracts with outsiders, its own directors and members under the common seal. The common seal of a company is identified with its separate existence, distinct from the members.7. Capacity to sue and be sued. Since a company is a legal personality, for the purpose of filing a suit against the company, one does not have to sue through a director or a member. A company can be sued in its own name. Similarly, a company registered under the Act can sue a third party in its own name. 8. Separate property. A company can acquire, hold and dispose of any movable and immovable property in its own name. It does not have to transact through any of its members or directors. All the contractual rights and obligations can be processed by a company owing it its separate existence. It should be, however, noted that a company, being an artificial person, cannot enter into contracts which are personal in nature. For example, a company cannot enter into a contract to marry.

Kinds of companies: 1.Chartered companies. These companies are treated as foreign companies in India. They are incorporated under special Royal Charter issued by the King or Queen. East India Company, Bank of England, Peninsular and Oriental Steam Navigation Company etc. are the examples of chartered companies. The powers and nature of such companies are defined by the Charter which creates them.

2. Statutory companies. A company may be incorporated under a special enactment of the Parliament or any State legislature. Such company is called a statutory company. It is creation of a stature i.e. an Act. Such companies are generally formed to carry out some special public undertaking. Reserve Bank of India, Life Insurance Corporation of India, food Corporation of India etc. are the examples of statutory companies. These companies are mostly for giving service to the society and not for monetary profits. The nature and functions of such statutory companies are regulated by the special Act which creates them.3. Registered companies. Companies registered under the Companies Act, 1956 or other earlier Acts are called registered companies. Such companies come into existence when they are registered under the Act and a certificate of incorporation is granted to them by the Registrar. All companies are now regulated by the Companies Act, 1956. These companies have Memorandum of Association and Articles of Association for their external and internal management. The companies registered under the Companies Act are (a) companies limited by shares, (b) companies limited by guarantee, or (c) unlimited companies.

a) Companies limited by shares. Companies limited by shares are the most common type of companies. These companies have a share capital and the liability of each member is limited by the Memorandum of Association to the extent of face value of shares subscribed by that member. During the existence of the company or in the event of winding up of the company, a member can be asked to pay the amount, if any, unpaid on the shares held by him. If a share fully paid up, there is no further liability on the member.

A company limited by shares may be either a Public Limited company or a Private limited company. There are seven persons required to form a public limited company and there is no maximum limit as to the number of members. The essence of a public company is that its Articles of Association do not restrict the transferability of shares. There is no limit to the maximum number of members and it can invite public to subscribe to its share capital. In case of a private company, there are restrictions as regards the maximum number of members (which is fifty) and transfer of shares is restricted. Further, a private company cannot invite the public at large to contribute to its share capital. b) Companies limited by guarantee. These types of companies may or may not have share capital. Each member promises or guarantees to pay a fixed sum of money in the event of liquidation of the company for payment of debts and liabilities of the company. The amount promised to be paid by a member is called the Guarantee. The liability of each member is restricted to the extent of guarantee given by him. In case the company has a share capital, the liability of the members is twofold; (a) liability to pay the share amount, and (b) liability to pay the amount of guarantee. If it has a share capital, it can be either a private limited company or a public limited company. Such companies are not suitable for ordinary business purposes. They are more suitable for promoting various non-profit objects and therefore the organizations such clubs, trade associations, societies, research associations etc. choose to be incorporated as companies limited by guarantee. c) Unlimited companies. It is a company where the liability of the members is not at all limited. It is unlimited just like a partnership firm. Every member is liable for the whole amount of company’s debts. Of course, every member is entitled to claim contributions from other members.