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MERCANTILE LAWS_32E

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Index

S.No. Name of the Chapter Page No.

0. Introduction 3-4

1. Meaning & Nature of Contract 5-18

2. Offer & Acceptance 19-34

3. Legal object & Consideration 35-49

4. Capacity to Contract 50-57

5. Free Consent 58-72

6. Void Agreements, Quasi Contracts & Contingent Contracts 73-86

7. Performance of Contract 87-99

8. Discharge of Contract 100-109

9. Remedies for breach of Contract 110-116

IPCC_32e_M.Law_Introduction______________________________________ 3

No.1 for CA/CWA & MEC/CEC MASTER MINDS

0. INTRODUCTION TO THE SUBJECT

1. INTRODUCTION: Law in a broader senseincludes rules, regulations, guidelines,principles, which seek to regulate relationsof citizens with the State. There are alsolaws, which regulate business as theyform an integral part of the society. Thelaws that govern and regulate trade andcommerce are commonly known as‘Mercantile Laws’. These laws deal withrights and obligations of parties to amercantile agreement. The law ofmerchant was originally developed out ofprocedures and progress of trade andcommerce in England. The MercantileLaws in India are mainly based upon theEnglish laws. The subject, MercantileLaws is vast and expansive and a numberof enactments were passed.

2. WHAT IS LAW? The word ‘Law’ is ageneral term and has differentconnotations for different people, E.g.,

• A citizen may think of law as a set ofrules which he must obey.

• A lawyer who practices law may thinkof law as a vocation.

• A legislator may think of law assomething created by him.

• A Judge may think of law as guidingprinciples to be applied in makingdecisions.

From the above, we can understand that different people think the law in different sense. It is therefore not possible to give a single and accurate definition of law. But, however, in the legal sense law includes all the rules and principles which regulate our relations with other individuals and with the state.

Law means set of rules and regulations. Broadly speaking, Law may be defined as the rules of conduct recognised and enforced by the state to control and regulate the conduct of people, to protect their property and contractual rights with a view to secure justice, peaceful living and social security.

3. WHY SHOULD ONE KNOW LAW? Oneshould know the law because ignoranceof law is no excuse.

Examples:

a) If Ramu is caught traveling in a trainwithout ticket, he cannot plead that hewas not aware of the rule regardingthe purchase of ticket and thereforehe cannot be excused.

b) If Venkat is caught driving bike withoutdriving license, he cannot plead thathe was not aware of the traffic ruleregarding obtaining of driving licenseand therefore, he cannot be excused.

4. WHAT IS THE NEED OF LAW? Theneed of law is to maintain peace in thesociety.

5. WHAT IS THE OBJECT OF LAW? Themain object of law is to establish socioeconomic justice and to remove the existingimbalance in the socio-economic structure.

6. WHY LAW IS AMENDING? Law is notstatic. Since the value system of societykeeps on changing, law also keeps onchanging according to the changingrequirements of the society.

7. WHAT ARE THE DIFFERENT BRANCHES OF LAW? There are several branches of law such as Civil law, Criminal law, Revenue law, Constitutional law, Industrial law, International law. Every branch of law regulates and controls a particular field of activity.

8. INTRODUCTION TO MERCANTILELAWS: As a social being, man comes intocontract with people in different capacities.For example, he comes into contract with alandlord as a tenant, with Government as atax payer, with customers as a seller andwith suppliers as a buyer. These contractsor associations are the inevitableconsequences of modern civilization. In allthese associations, he is expected toobserve a code of conduct or a set of rules.The object of these rules is to make humanassociations possible and conducive to thewelfare of the state and its people.

Indian Mercantile Laws or CommercialLaws or Business Laws are one and thesame terminologies except that businesslaw is taken in broader aspect coveringboth the Mercantile Laws and theCommercial Laws. Further, it iscategorised into particular fields asContracts, Sale, Agencies, Bailment,Negotiable Instruments, Partnership, etc.

IPCC_32e_M.Law_Introduction______________________________________ 4

Indian Mercantile Laws is an out come of the British Law with the modification as necessitated by the conditions remaining in India. This law regulates trade and commerce and form an integral part of the society.

The Mercantile Laws cover various Acts such as: • The Indian contract Act, 1872• The Indian partnership Act, 1932• The sale of goods Act, 1930• The Companies Act, 1956.

9. THE LAW OF CONTRACTS IN INDIABEFORE 1ST SEP 1872:

Prior to the enactment of the Indian ContractAct, 1872 there was no uniform law ofcontracts applicable to the whole of India. Inthe absence of specific law, courts wereguided by the principles of natural justice,equity & good conscience in their decisions.

The rules of English law were freelyapplied when they were thought not inconflict with these principles. This state ofaffairs caused many inconveniences.

To remedy this unsatisfactory state ofaffairs, in 1781 the Supreme Court ofCalcutta, and in 1797, the Supreme Courtof Bombay and Madras were empoweredto supersede English common law and toapply the Hindu law and theMohammedan law and their usage indeciding the cases. Therefore, Hindu lawwas applied where both the parties wereHindus and where both the parties wereMohammedans, Mohammedan law wasapplied to regulate their contracts.

But in case, where only one party wasHindu and the other was Mohammedan,the judges applied defendant’s law.

Where laws and usage of Hindus orMohammedans were silent, English lawwas applied.

In spite of all these efforts, the state ofaffairs still remained unsatisfactory. Inorder to improve this situation, the Indiancontract act, 1872 was enacted.

CONCLUSION: We hope that the introduction to mercantile laws will set a good foundation for understanding the nuances of trade and commerce.

THE END

IPCC_32e_M.Law_Meaning and nature of contract ______________________5

1. MEANING AND NATURE OF CONTRACT

THE LAW OF CONTRACT: GENERAL PRINCIPLES

As a result of increasing complexities of business environment, innumerable contracts are entered into by the parties in the usual course of carrying on their business.

‘Contract’ is the most usual method of defining the ‘give and take’ rights and duties in a business transaction. This branch of Private law is different from other branches of law in a very important respect. It does not prescribe so many rights and duties, which the law will protect or enforce; it contains a number of limiting principles subject to which the parties may create rights and duties for themselves.

In a sense, parties to a contract are the makers of law for themselves. They can frame any rules they desire to the subject matter of their agreements, and law takes cognizance of their decision unless they are not legally prohibited.

The law relating to contracts is contained in the Indian Contract Act, 1872. This module contains the general principles of the Law of Contracts. In broadest prospect, a contract is an exchange of promises by two or more persons that is an agreement creating an obligation to do or to refrain from doing a particular act, which is enforced by law.

Q.No.1. What is Mercantile Law or Commercial Law?

1. Mercantile Law is not a separate branch of law.

2. Basically, it is a part of Civil Law which deals with the rights and obligations of mercantilepersons arising out of mercantile transactions in respect of mercantile property.

3. It includes laws relating to various contracts, partnership, companies, negotiable instruments,insurance, carriage of goods, etc.

Q.No.2. Need and Importance of the Indian Contract Act, 1872.

a) The law of contract is the most important branch of Business / Mercantile / Commercial laws.

b) It is very important not only for the business world, but also for every one of us, because we allenter into contracts of one kind or the other in all walks of life.

c) The Indian Contract Act is so much infused in our daily lives that it affects all of us, for everypurchase that one does, or a loan of a book that one does with other, or a ride one takes in abus and many other transactions of daily life. We enter consciously or unconsciously intonumber of agreements conferring the rights and the duties on one and the other.

d) Bread, butter, home-appliances, clothes, books, stationery, journey-tickets,Newspaper, Milketc. are some of the goods and services we buy or borrow in our daily life.For that purpose weenter into contracts of different kinds.

e) The law of contracts seeks to regulate the behaviour of persons who make contracts.

f) It also determines the circumstances under which a promise or an agreement shall be legallybinding on the person making it.

g) It also provides remedies, available in the court of law against the person who fails to fulfill hiscontractual obligations.

h) Thus this law is ubi jus, ibi remedium i.e., where there is a right, there is a remedy.


i) The law relating to contracts is contained in the Indian Contract Act, 1872 based mainly onEnglish Common Law.

j) This Act shall not affect any usage or custom of trade. It lays down the general principles of thecontract law, thus it is not a complete and exhaustive law on all types of contracts.

Until now, a minor amendment in Section 28 of the Act was made by the Indian Contract (Amendment) Act, 1996.

Q.No.3. Define the terms Promise, Reciprocal promise, Agreement, Contract, Legal enforceability?

PROMISE – SEC.2(b):

• “When the person to whom the proposal is made signifies his assent thereto, the proposal issaid to be accepted.Proposal when accepted becomes a promise”.

• E.g.: X offers to sell his car for Rs.1,00,000 to Y. Y accepts this offer. Once accepted, this offerbecomes promise and this promise is treated as an agreement between X and Y.

RECIPROCAL PROMISE –SEC.2(f):

• Promises which form the consideration or part of the consideration for each other are calledreciprocal promises.

• E.g.: X promises Y to pay a monthly salary of Rs.1,000 in return for his promise to work as asalesman in his shop. Here X and Y are making reciprocal promises. Y is promising to work assalesman in consideration of a promise to pay a salary of Rs.1,000 by X.

AGREEMENT – SEC.2(e):

• Every promise and every set of promises, forming considerationfor each other is an agreement.

• In simple words, an agreement means a promise. It is createdwhen a person makes an offer to another person and that otherperson accepts it.

• Thus, Agreement = Offer + Acceptance.

• E.g.: X agrees with Y to go for a walk in the evening. This is anagreement. X agrees to sell his car to Y for Rs.50,000. This isalso an agreement.

CONTRACT:

1. The word contract was derived from a latin word ‘contractum’. The word ‘contractum’ meansdrawn together.

2. In ordinary sense, the term ‘contract’ means, any agreement between any two persons. Forbusiness persons, making of contracts with others is a very important process to put into effecttheir business plans.

3. According to Sec.2(h) of the Act, the term contract is defined as "an agreement enforceable bylaw". On analysing the definition we find that, the contract consists of two essential elements:

- an agreement, and

- enforceability by law.

4. For the formation of a contract, there must be an agreement and something in addition to it i.e.enforceability at law.


5. An agreement to become a contract must give rise to a legal obligation which means a dutyenforceable by law.

6. Thus from the above definitions it can be concluded that -

Contract = Accepted proposal + Enforceability by law.

Q.No.4. Write about Legal Enforceability?

ENFORCEABILITY BY LAW / LEGAL ENFORCEABILITY:

1. Legal Enforceability means creating a legally binding obligation between twoparties.

2. If any one party fails to fulfill his obligation, the other party can take the help of lawto enforce it.

3. Legal enforceability depends upon the intention of the parties i.e. whether theywant to enter into a legally binding agreement or not.(Since intention of partiesis supreme.)

4. If the intention of parties can’t be known then the following presumptions will apply.

a) No intention to create legal relations in case of domestic, social and political agreements.Hence, they do not become contracts.

Balfour Vs. Balfour: This is a well known illustration of a domestic agreement. In this case, ahusband (Mr.Balfour) was working in Ceylon. During holidays he and his wife (Mrs.Balfour)went to England to enjoy the leave. When Mr.Balfour was to return to Ceylon, his wife wasadvised to remain in England, due to ill health. Mr.Balfour agreed to send a sum of $30 permonth for expenses of maintenance. For sometime he sent the amount but afterwardsdifferences arose between them which resulted in their separation and he did not sendallowance. Mrs.Balfour’s suit for recovery was dismissed by Lord Atkin on the ground thatparties did not have intention to enter into a legally binding contract.

Any party may challenge the above presumption by proving that, at the time of entering intoagreement, they had intention to create legal relations.

Sometimes arrangements between husband and wife are also enforceable.Merritt Vs. Merritt: A husband left his wife. For the purpose of making future arrangement,they agreed that wife will pay charges in connection with mortgage of the house. It was inwriting. After its completion, husband will transfer the house to wife. The court held, theagreement is legally binding and the principle of Balfour v. Balfour will not apply herebecause the parties had intention to enter into a legally binding contract.

b) However, in business agreements, usual presumption is that parties intend to create legalobligations.

E.g.: ‘XYZ’ mobile company enters into contract with A to supply mobile phones regularly.Here the presumption is that both the parties had the intention to create legal obligations.

c) If the parties in a business transaction intend to rely on good faith and do not want to go tothe court of law, such transaction is not legally binding i.e. it is not legally enforceable.

Rose & Frank Co. Vs. J.R. Crompton & Bros. Ltd.: This is a very good example of abusiness deal in which parties did not intend to create legal relations. As per the facts of thecase, an agreement was drawn between the American and the English firms. Theagreement mentioned that “this agreement is not entered into as a formal legal agreementand shall not be subject to legal jurisdiction in the law courts.” The agreement wasterminated by one of the parties and other party brought an action for breach of contract.Held, the agreement was not binding contract as there was no intention to create legalrelations.


CONCLUSION: 1. A promise is the acceptance of a proposal giving rise to a binding contract, and Section 2(h)

requires an agreement to be worthy of being enforceable by law before it is called 'contract'.

2. Where parties have made a binding contract, they create rights and obligations betweenthemselves.

E.g.: A agrees with B to sell car for Rs.2 lakhs to him. Here A is under an obligation to give carto B and B has the right to receive the car on payment of Rs. 2 lakhs and also B is under anobligation to pay Rs.2 lakhs to A and A has a right to receive Rs. 2 lakhs.

3. So, Law of Contract deals with only such legal obligations which has resulted from agreements.Such obligation must be contractual in nature.

4. However, some obligations are outside the purview of the law of contract.

E.g.: An obligation to maintain wife and children, an order of the court of law etc. These arestatus obligations and so out of the scope of the Contract Act.

Q.No.5. All agreements are not contracts, but all contracts are agreements. Explain.

a) The term agreement is a wider term than the term contract.

b) It includes variety of agreements such as personal, social, domestic, lawful, unlawful, void,voidable, etc. Some of them are enforceable by law and others are not.

c) Agreements which are not enforecable by law are definitely not contracts as per Sec.2 (h).

d) Hence, it is generally said that all agreements are not contracts, but all contracts areagreements.

Q.No.6. Essential elements of a valid contract?

According to Section 10, "All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void." The following essential elements must co-exist in order to make a valid contract:

1. Proper offer and Proper acceptance with intention to create legal relationship.

2. Lawful Consideration and Lawful Object.

3. Capacity to contract.

4. Free Consent.

5. Agreements not declared void or illegal.

6. Certainty of meaning.

7. Possibility of performance of an agreement.

8. Necessary legal formalities.

Let us discuss each point in a detailed manner:

1. Intention to create legal relationship: The parties ought to have the intention to create legalobligation between them through the form of offer and acceptance. They should have intentionto impose duty on the promisor to fulfill the promise and bestow a right on the promisee to claimits fulfillment. It must not be merely a moral one but it must be legal. If such intention on the partof the parties is lacking at the time of making the contract, there will be no valid contractbetween them.


E.g.: A husband agreed to pay to his wife certain amount as maintenance every month while he was in abroad. Husband failed to pay the promised amount. Wife sued him for the recovery of the amount. Here in this case wife could not recover as it was a domestic agreement and the parties did no intend to create any legal relations. (Balfour v. Balfour)

2. "Lawful consideration" and “Lawful object”: It is an essential element of a validcontract.Consideration is a technical word meaning thereby quid pro quo i.e. something in return.It must result in benefit to one party and detriment to the other party or a detriment to both.

E.g.: A agrees to sell his books to B for Rs.100, B's promise to pay Rs.100 is the considerationfor A's promise to sell his books and A's promise to sell the books is the consideration for B'spromise to pay Rs.100.

Also, the object of the agreement must be lawful. It must not be illegal, immoral, or opposed topublic policy.

E.g.: ‘A’ promises to drop prosecution instituted against ‘B’ for robbery and ‘B’ promises torestore the value of the things taken. The agreement is void, as its object is unlawful.

If these two essential elements are there then we can say that there is a contract which prima-facie will hold good; or atleast we can say that there is an existence of contract, althoughsomemore necessary elements of validity may be wanting.

3. Competent parties: The parties to a contract must have capacity (legal ability) to make validcontract. In every case, there must be assent of the parties. If, therefore, either of the parties toan agreement is deprived of the use of his understanding or if he be deemed by law not to haveattained it, there can be no such agreement which shall bind him. Section 11 of the IndianContract Act specifies that every person is competent to contract, provided:

a) is of the age of majority according to the law to which he is subject, and

b) who is of sound mind, and

c) is not disqualified from contracting by any law to which he is subject.

In other words:

a) a minor,

b) a person of unsound mind (a person of unsound mind can enter into a contract during hislucid intervals) and

c) a person disqualified from contracting by any law to which he is subject, e.g. an alien enemy,foreign sovereigns and accredited representatives of a foreign state, insolvents and convictsare not competent to contract.

4. Free consent: The consent of the parties must be genuine. The term 'consent' means partiesto a contract must agree upon the same thing in the same sense i.e. there should be consensus-ad-idem. Consent is said to be not free when it is vitiated by coercion, undue influence, fraud,misrepresentation or mistake. In such cases, the contract becomes voidable at the option of theparty whose consent is not free.

E.g.: A threatened to shoot B if he (B) does not lend him Rs.2,000 and B agreed to it. Here theagreement is entered into under coercion and hence voidable at the option of B.

5. The agreement not expressly declared void: The agreement must not be one, which the lawdeclares to be either illegal or void. A void agreement is one, which is without any legal effects.

Illegal agreement is an agreement expressly or impliedly prohibited by law and hencepunishable in nature.

E.g.: Agreements in restraint of trade, restraint of marriage, restraint of legal proceedings etc.are void agreements.

Those agreements which are prohibited by the Indian Penal Code e.g. Threats to commitmurder or publishing defamatory statements or agreements which are opposed to public policyare illegal in nature.


6. Certainty of meaning: The agreement must be certain and not vague or indefinite.

E.g.: A agrees to sell to B a hundred tons of oil. There is nothing certain in this agreement inorder to show what kind of oil was intended for.

7. Possibility of performance of an agreement: The terms of agreement should be capable ofperformance. An agreement to do an act impossible in itself cannot be enforced.

E.g.: A agrees with B to discover treasure by magic. The agreement cannot be enforced as it isnot possible to perform the same.

8. Compliance of necessary legal formalities: Wherever a particular type of contract requiresby law to be in writing and registered, it must comply with the necessary formalities as towriting, attestation and registration, otherwise unenforceable.

E.g.: Where it requires an agreement to make a gift for natural love and affection, there it mustbe in writing and registered, to be valid.

CONCLUSION: When the parties to an agreement want to make legally enforceable agreement, the agreement should satisfy all the conditions stated in Sec.10 of the Indian Contract Act. If any of these conditions is not satisfied, an agreement is not enforceable at law.

Dear Students, Even if you don’t understand this question perfectly you need not worry. Each point in the above question will be dealt in a detailed manner in subsequent chapters. In simple words, each point in the above question will become one chapter subsequently.

Q.No.7. Meaning, Scope and applicability of Indian Contract Act, 1872

1. The Indian Law relating to contracts is now embodied in the Indian Contract Act, 1872.

2. Originally the Act contained 266 sections in 11 Chapters.

3. But in the year 1930, its provisions relating to “Sale of Goods” and in the year 1932, theprovisions relating to “Partnership” were repealed from this Act and separate Acts were enactedfor that purpose.

4. As on the date, the Contract Act contains the following provisions:

a) General Principles of the law of contracts and Quasi contracts [Secs.1 to 75]. Theseprinciples apply to all kinds of contracts irrespective of their nature.

b) Certain special kinds of contracts i.e.

• Indemnity & Guarantee [Sec.124 to 147];

• Bailment & Pledge [Secs.148 to 181]; & Contract of Agency [Secs.182 to 238]

5. Sections 1-75 of the Contract Act lays down general principles relating to contracts. It does notlay down the rights and duties of the parties to a contract.

6. The parties are free to make their own terms and conditions of a contract subject to theprovisions of the law of the land.

ENFORCEMENT OF THE ACT:

1. The Act came into force on 1st September, 1872.

2. The Act is not retrospective and does not apply to contracts entered into before it came intoforce.

3. Hence, the contracts entered into prior to 1st September, 1872 and to be performed afterpassing of this Act are not hit by this Act.


EXTENT OF THE ACT: It extends to the whole of India except the State of Jammu and Kashmir.

APPLICABILITY OF THE ACT:

1. The Act applies to all contracts in India. It does not deal with the place where contract is made.

2. The express provisions of the Act applied both to Hindus and Mohammedans and override theprovisions of the Hindu Law and of the Mohammadian Law.

THE ACT IS NOT COMPLETE AND EXHAUSTIVE:

1. The Contract Act is not a complete and exhaustive code dealing with the law of contracts.

2. For example, the laws relating to sale of goods, partnerships, negotiable instruments, transfer ofproperty, insurance etc., have not been incorporated in it. Separate Acts have been enacted todeal with such special contracts.

Q.No.8. Write about different types of contracts?

ON THE BASIS OF VALIDITY

VALID CONTRACT: An agreement which is binding and enforceable is a valid contract. It contains all the essential elements of a valid contract. Agreements which satisfy all the essential conditions of Sec.10 are enforceable at law. Such contracts are called valid contracts.

VOID AGREEMENT:

a) If an agreement fails to meet any of the conditions in Sec.10, it is termed as void agreement.

b) Such types of agreements are void-ab-initio which means void from the beginning.

c) Legal meaning of the term ‘void’ is - Null and ineffectual i.e. having no legal validity. A voidagreement has no legal effect in the eyes of law. It does not create any rights or obligations.Both the parties cannot enforce it in the court of law.

Types of Contracts on the basis of

Validity Formation Performance

Valid contract Express contract Executed contract

Void agreement Implied contract Executory contract

Void contract Tacit contract Unilateral contract

Voidable contract

Illegal / Unlawful contracts

Bilateral contract

Unenforceable contracts

Quasi contract


d) Thus a void agreement never matures into a contract.

e) E.g.: Agreements made by a minor or lunatic, agreements made without consideration are voidagreements.

VOID CONTRACT:

a) Sometimes it may happen that a valid contract is formed initially butsubsequently it may become void. Then it is called void contract.

b) A valid contract may become void due to supervening or subsequentimpossibility. Impossibility can be either legal impossibility or physicalimpossibility.

c) It is a contract without any legal effect and cannot be enforced in acourt of law.

d) Sec.2(j) defines a void contract as “a contract which ceases to be enforceable by law becomesvoid when it ceases to b*-e enforceable”.

e) Examples:

• A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before thesupply is effected, the fire caught in the factory and everything was destroyed. Here thecontract becomes void.

• A agrees to sell his house to B after two days. His house is burnt next day. Subject matter ofthe contract is destroyed. Thus the contract becomes void.

VOIDABLE CONTRACT:

a) As per Section 2(i), “an agreement which is enforceable by law at the option of one or more theparties but not at the option of the other or others is a voidable contract.”

b) The party entitled to avoid the contract may or may not avoid it.

c) If the parties decide to avoid it, it can’t be enforced in the court of law.

d) If the parties choose not to avoid the contract, it is a valid contract.

e) E.g.: A contract brought about as a result of Coercion, Undue influence, Fraud orMisrepresentation would be voidable at the option of the person whose consent was caused byany one of these factors.

ILLEGAL AGREEMENTS / UNLAWFUL CONTRACTS:

a) Illegal contract is a contract which the law forbids to be made. The court will not enforce suchcontract but also the connected contracts. All illegal agreements are void but all voidagreements or contracts are not necessarily illegal.

b) Generally speaking, an agreement which is expressly or impliedly prohibited or forbidden by lawis an illegal agreement.

c) Such an agreement may either be against the law of the land or opposed to public policy or becriminal or immoral in nature.

d) The court will not enforce such an agreement and also connected contracts.

e) The term “Illegal agreement” has not been defined in the Indian Contract Act. However, Sec.23of the Act states that the object or consideration of an agreement is unlawful in any of thefollowing cases:

• If it is forbidden by law,

• If it is of such a nature that, if permitted, it would defeat the provisions of any law,

• If it is fraudulent,


• If it involves or implies injury to the person or property of another,

• The court regards it as immoral,

• The court regards it as opposed to public policy.

f) The term unlawful agreement is wider in its scope than the term illegal agreement. Thus all theagreements covered under the above stated six heads are not illegal agreements.

g) Only the agreements forbidden by law, agreements opposed to public policy, agreements ofcriminal or immoral nature are included in illegal agreements.

h) Therefore, it is true that every illegal agreement is unlawful but every unlawful agreement neednot be illegal.

i) All Illegal agreements are void but all void agreements or contracts are not necessarily illegal.

j) The parties to an illegal agreement are punishable as per the law of the country.

k) Examples:

• Contract to commit crime.

• Contract that is immoral or opposed to public policy are illegal in nature.

• Similarly, R agrees with S, to purchase brown sugar is an illegal agreement.

• A agrees with B to commit a dacoity. The purpose of the agreement is illegal. This is anillegal agreement since its formation.

• A agrees to sell 100 Kgs of cement to B at a certain price. Subsequently law imposes a banon private sale of cement. Now the performance of contract has become illegal. This was avalid contract but subsequently it became illegal.

UNENFORCEABLE CONTRACTS:

a) Where a contract is good in substance but because of some technical defect i.e. absence inwriting, barred by limitation, non-registration, insufficient stamp duty, etc. one or both the partiescannot sue upon it, it is described as an unenforceable contract.

b) After the technical defect is removed, these contracts become enforceable.

ON THE BASIS OF FORMATION

EXPRESS CONTRACT:

a) A contract which is made by words either spoken or written is said to be an express contract.

b) According to Section 9 in so far as the proposal or acceptance of any promise is made in words,the promise is said to be express.

c) In such a contract, the terms and conditions depend on the words of the parties either face toface or with the help of letters, telegraph, phone, telex, fax, e-mail, etc.

d) Examples:

• A tells B on telephone that he offers to sell his house for Rs.2 lakhs and B in reply informs Athat he accepts the offer, this is an express contract.

• X says to Y “Will you buy my car for Rs.1,00,000?” Y says to X “I am ready to buy your carfor Rs.1,00,000.” It is an express contract made orally.

IMPLIED CONTRACT:

a) According to Section 9 in so far as such proposal or acceptance is made otherwise than inwords, the promise is said to be implied.


b) By implied contract means implied by law (i.e.) the law implies a contract though parties neverintended. (Note: Actually this explanation aptly suits for Quasi Contract but not for ImpliedContract. But as it is given in ICAI Study Material, we have to follow the same until ICAI amendsthe same.)

c) Implied contract is a contract made otherwise than by words spoken or written.

d) An implied contract is inferred from the acts or conduct of the parties or by their surroundingcircumstances but not by the written or spoken words of the parties.

e) An implied promise results in an implied contract.

f) Examples:

• A delivers goods by mistake at B’s warehouse instead of at C’s place. Here there is anobligation on the part of B to return the goods to A, because they never intended to enterinto a contract. (Note: This example is not actually related to implied contract. This exampleis related to Quasi Contract. But as it is given in Study Material, we have to follow the sameuntil Study Material is amended.)

• A went into a restaurant and took a cup of tea. In this case, there is an implied contract thathe will pay for the cup of tea.

TACIT CONTRACT:

a) Tacit Contract is said to be tacit when it has to be inferred from the conduct of the parties.

b) Law experts also use the term “Tacit Contract” which is almost synonymous with the termimplied contract.

c) It should be noted that the term “tacit contract” has not been used in the Indian Contract Act.

Examples:

• Obtaining cash through Automatic Teller Machine.

• Sale by fall of hammer at an auction sale.

QUASI CONTRACT:

a) A quasi-contract is not an actual contract but it resembles to acontract. It is created by law under certain circumstances thelaw creates and enforces legal rights and obligations when noreal contract exists. Such obligations are known as quasi-contracts.

b) It is not a real contract because it does not result from anyintentional agreement.

c) It is not created as a result of exchange of promises by the parties.

d) Therefore, it does not have all the essentials of a valid contract.

e) Thus, a quasi-contract is a contract implied by law. It is not made by the parties, but imposedupon the parties by the law on the ground of principle of equity.

f) The principle of equity states that nobody could be allowed to enrich himself at the cost of theother.

g) E.g.: Obligation of finder of lost goods to return them to the true owner or liability of person towhom money is paid under mistake to repay it, cannot be said to arise out of a contract even inits remotest sense, as there is neither offer and acceptance nor consent. These are said to bequasi-contracts.


ON THE BASIS OF PERFORMANCE

EXECUTED CONTRACT:

a) If the consideration for the promise in a contract (i.e., any act or forbearance) is given orexecuted, such type of contract is called contract with executed consideration.

b) Where all the parties to a contract have performed their obligations under the contract, it isknown as executed contract.

c) Nothing remains pending by any of the parties under such contract.

d) It is a completely performed contract.

e) Examples:

• When a grocer sells sugar on cash payment. It is an executed contract, because both theparties have done what they were to do under the contract.

• A sells his car to B for Rs. 50,000. B pays the price and A gives delivery of the car. It is anexecuted contract, since both the parties have fulfilled their respective obligations.

EXECUTORY CONTRACT:

a) It is so called because the reciprocal promises or obligations which serves as consideration is tobe performed in future.

b) Where all or some of the parties to a contract are still to perform their respective obligations inthe contract, the contract is known as executory contract.

c) Examples:

• Where G agrees to take the tuition for H, a pre-engineering student, from the next month andH in consideration promises to pay G Rs.1,000 per month, the contract is executory becauseit is yet to be carried out.

• A agrees to paint a picture for B for Rs.5,000. Here, A has not yet painted a picture and Bhas not made the payment. The contract is executory, since both the parties are yet toperform their respective obligations.

d) In a contract, if one party has already performed the contract but the other is yet to perform hispart of the contract, the contract will be known as Partly Executed and Partly Executory.

E.g.: Hari sells his car to Venkat and Hari has delivered the car but venkat is yet to pay theprice. For Hari it is executed contract, whereas it is executory contract on the part of Venkatsince the price is yet to be paid.

Executory contracts are further classified into:

1. Unilateral Contract:

a) A unilateral contract is a one-sided contract in which only one party has to perform hispromise or obligation to do or forbear.

b) Examples:

• M advertises of payment of a reward of Rs.500 to anyone who finds his missing boy andbrings him. As soon as B traces the boy, there comes into existence an executedcontract because B has performed his share of obligation and it remains for M to pay theamount of reward to B.

• M books a ticket with Indian railways from Hyderabad to Guntur on 19th July, date of travelbeing 16th August. Indian railways has to perform its part of contract on 16th August.


2. Bilateral Contract:

a) Where the obligation or promise in a contract is outstanding on the part of both the parties, itis known as bilateral contract.

b) These contracts are also known as contracts with executory consideration.

c) Examples:

• Where A promises to sell his plot to B for Rs.1 lakh cash down, but B pays only 25,000 asearnest money and promises to pay the balance on next Sunday. On the other hand Agives the possession of plot to B and promises to execute a sale deed on the receipt of thewhole amount. The contract between the A and B is executory because there remainssomething to be done on both sides. Executory contracts are also known as Bilateralcontracts.

• K agrees to sell his laptop to L promising to deliver it on the date of payment. L promises topay the amount two months hence.

Q.No.9. Classification of contracts as per English law?

The English Law classifies the contract into two types:

i. Formal contracts

ii. Simple contracts.

FORMAL CONTRACTS: Formal Contracts include

a) Contract of Record: A contract of record is either a judgment of a court or a recognizance. Ajudgment is an obligation imposed by a Court upon one or more persons in favour of another orothers. As a matter of fact it is not a contract in the real sense, since it is not based upon anyagreement between the two parties. A recognizance is a written acknowledgement of a debtdue to the State. It is usually met in connection with criminal proceedings. Contracts of recordderive their binding force from the authority of the Court.

b) Contract under Seal: A contract under seal is one which derives its binding force from its formalone. It is in writing and is signed, sealed and delivered by the parties. It is also called a deedor a specialty contract.

SIMPLE CONTRACTS: All contracts which are not made under seal are known as simple contracts. These contracts are made by words of mouth. All simple contracts must be supported by consideration. These contracts are also known by the older name - Parol contracts.

Q.No.10. Sources of Mercantile Law.

a) English Mercantile Law: English laws are the primary sources of Indian Mercantile Law.

b) Indian Statute: The various Acts passed by the Indian Legislature are the main sources ofMercantile law in India, e.g. Indian Contract Act, 1872, The Sale of Goods Act 1930, The IndianPartnership Act 1932, The Negotiable Instruments Act 1881, The companies Act, 1956.

c) Judicial Decisions: The past judicial decisions of English courts and Indian courts are also oneof the sources of law. Wherever the law is silent on a point, the judge has to decide the caseaccording to the principles of equity, justice and good conscience.

d) Customs and Usages of trade: The customs and usages of trade are also one of the sourcesof Mercantile law in India.


Q.No.11. Miscellaneous.

1. Jus-in-rem (Right against whole world): Jus-in-rem” implies a right available to a personagainst the whole world.

2. Jus-in-personam (Right against particular person or persons):“Jus-in-personam” means aright against a particular person or persons.

3. Contract creates right in personam: The right created by a contract is purely personal innature (i.e. right in personam) and only enforceable by action against the party in default.

4. Plaintiff: Plaintiff is a person who brings a suit against another person in the court.

5. Defendant: Defendant is a person who is sued in the court.

DIFFERENCES

Dear students, We have given these differences for better understanding of the concept. Students are advised to read these differences on their own and our faculty will not spend time on explaining these differences. This will apply for all chapters of this subject.

Q.No.12. Agreement Vs. Contract.

DIFFERENCE AGREEMENT CONTRACT

Definition Every promise and every set of promises forming consideration for each other is an agreement.

An agreement enforceable by law is a contract.

Creation An agreement is created by acceptance of an offer.

Agreement and its enforceability together create a contract.

Legal Rights &

Obligations

An agreement is created by acceptance of an offer. An agreement may not create legal rights and obligations of the parties.

A contract creates legal rights and obligations between the parties.

Necessary No contract is required to make an agreement.

Valid agreement is necessary for making a contract.

Legally Binding

An agreement is not a concluding or legally binding contract.

A contract is a concluding or legally binding on the parties.

Concept Agreement is a wider term. Contract is a narrow term.

One in other Every agreement need not necessarily be a contract.

All contracts are necessarily agreements.

Q.No.13. Void Contract Vs. Voidable contracts.

DIFFERENCE VOID CONTRACT VOIDABLE CONTRACT

Definition Contract ceases to be enforceable by law.

Contract is enforceable at the option of the aggrieved party.

Nature

Contract becomes void either because of sudden and unexpected events or of law changes, before the performance becomes due.

Contract becomes voidable when it is caused by coercion, undue influence, fraud and misrepresentation.

Rights Does not provide any legal remedy for the parties to the contract.

The aggrieved party gets a right to rescind the contract and to declare it void otherwise it remains valid.


Q.No.14. Void Agreement vs. Voidable Contract.

DIFFERENCE VOID AGREEMENT VOIDABLE CONTRACT

Definition An agreement not enforceable by law is said to be void.

A contract enforceable by law at the option of the aggrieved party, is a voidable contract.

Void-ab-initio It is void from the beginning. It is valid when made and continues to remain valid till it is repudiated by the aggrieved party.

Which essential element of contract is missing

Enforceability by law is missing Free Consent of a party is missing.

Enforceability It cannot be enforced by any party.

It continues to be enforceable if the aggrieved party does not repudiate the contract.

Right of Third Party

Third party does not acquire any rights.

A third party who purchases goods in good faith and for consideration before the contract is repudiated, acquires good title to those goods.

Effect of lapse of Reasonable Time

Even on the expiry of a reasonable time, it can never become a valid contract.

On the expiry of a reasonable time, it may become a valid contract if the aggrieved party does not repudiate the contract with in reasonable time.

Damages The question of damages does not arise. The aggrieved party can claim damages.

Q.No.15. Void Agreement Vs. Illegal Agreements.

According to Section2(g) of the Indian Contract Act, an agreement not enforceable by law is void. The Act has specified various factors due to which an agreement may be considered as void agreement. One of these factors is unlawfulness of object and consideration of the contract i.e. illegality of the contract which makes it void. Despite the similarity between an illegal and a void agreement that in either case the agreement is void and cannot be enforced by law, the two differ from each other in the following two respects:

DIFFERENCE VOID AGREEMENT ILLEGAL AGREEMENT

Scope A void agreement is not necessarily illegal. An illegal agreement is always void.

Nature Not forbidden under law. Are forbidden under law.

Punishment Parties are not liable for any punishment under the law.

Parties to illegal agreements are liable for punishment.

Collateral agreement

It’s not necessary that agreements collateral to void agreements may also be void. It may be valid also.

Agreements collateral to illegal agreements are always void.

Effects Void agreement is void-ab-initio i.e., void from the beginning.

All illegal agreements are void from the very beginning.

THE END

IPCC_32e_M.Law_Offer & Acceptance________________________________19

2. OFFER & ACCEPTANCE

Q.No.1. Define the term Offer / Proposal. Explain the legal rules for valid offer.

INTRODUCTION:

1. An offer is a proposal by one party to another to enter into a legally binding agreement withhim.

2. An offer is the starting point of an agreement. An offer is also called ‘proposal’.

3. The person making the proposal or offer is called the ‘promisor’ or ‘offeror’, the person to whomthe offer is made is called the ‘offeree’ and the person accepting the offer is called the‘promisee’ or ‘acceptor ’.

DEFINITION [SEC.2(A)]:

1. The words proposal and offer are used interchangeably and it is defined under Sec.2(a) of theIndian Contract Act, 1872 as “When one person signifies to another, his willingness to do orabstain from doing anything, with a view to obtaining the assent of that other to such act orabstinence, he is said to make a proposal.”

2. Thus, for a valid offer, the party making it must express his willingness ‘to do’ or ‘not to do’something. But mere expression of willingness does not constitute an offer.

For instance, where ‘A’ tells ‘B’ that he desires to marry by the end of 2004, it does notconstitute an offer of marriage by ‘A’ to ‘B’.

3. Therefore, to constitute a valid offer expression of willingness must be made to obtain theassent (acceptance) of the other.

4. Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute an offer.Thus, “doing” is a positive act and “not doing”, or “abstinence” is a negative act; nonethelessboth these acts have the same effect in the eyes of law.

LEGAL RULES FOR VALID OFFER:

1. Offer consists of willingness to do some act or not to do any act: Offer may be in the formof doing or not doing (abstinence) or restraining from doing (self denial) any act. Simply, anoffer can be positive or negative.

E.g.: A offers not to file a suit against B if he pays the amount of Rs.50,000 outstanding. This isan offer where A is willing to stop doing something for consideration. This is an offer byabstinence or omission to do something.

2. Offer must be capable of creating legal relationship: If the offer does not intend to give riseto legal consequences and creating legal relations, it is not considered as a valid offer in theeyes of law. A social invitation, even if it is accepted, does not create legal relations because itis not so intended, an offer to one’s wife to purchase a saree is not a valid offer as there is nobinding agreement. An offer, therefore, must be such as would result in a valid contract when itis accepted.

3. An offer may be made either by words or by conduct.

E.g.: A boy starts cleaning the car as it stops on the traffic signal without being asked to do so,in such circumstances any reasonable man could guess that he expects to be paid for this.Here boy makes an implied offer. (Note: Students can get a detailed explanation on thistopic in Chapter 6)


4. The offer must be distinguished from an invitation to offer: An invitation to offer means theperson inviting the other party to make an offer. His object is only to circulate the informationthat he is willing to deal with any one who, on such information, is willing to have negotiationswith him.

E.g.: An advertisement for sale of goods by auction is an invitation to the offer. It merely invitesoffers / bids made at the auction. (Note: You will get detailed discussion on this in nextquestions of this chapter)

5. An offer may be specific or general. An offer can be made to either public at large or to anyspecific person or group of persons. (Note: You will get detailed discussion on this in nextquestions of this chapter)

6. An offer may be conditional:

a) An offer can be made subject to any terms and conditions by the Offeror. The Offeree willhave to accept all the terms of the offer, otherwise the contract will be treated as invalid.

b) Offeror may attach some terms and conditions to his offer. In such a case it can beaccepted only when such conditions are fulfilled.

c) If the offeree does not fulfill the conditions prescribed by the offeror, then the conditionaloffer will be lapsed.

7. The offer must be made to some other person, but not to himself.

8. Offer must be made with a view to obtain the assent of the other: The offer must be madewith a view to obtaining the consent/assent of the Offeree. Thus a casual enquiry or a merestatement of intention is not a proposal.

E.g.: A, jokingly said that he was willing to sell his horse for Rs.2,000. B knowing that A wasnot seriously making the offer, said that he has accepted the offer. In this case A’s offer is notthe real offer as he did not make it with a view to obtain the consent of B.

9. The terms and conditions of the offer must be clear, definite and unambiguous:

a) If the terms of an offer are vague or indefinite, its acceptance cannot create any contractualrelationship.

b) It should not be loose or vague. A vague offer does not convey the actual meaning of theoffer.

E.g.: Where A offers to sell B a 100 quintals of oil, there is nothing whatever to show whatkind of oil was intended. The offer is not capable of being accepted for want of certainty.

Taylor Vs. Portington: A offered to take a house on lease for 3 years at Rs.10,000 perannum if the house was “put into thorough repair and drawing rooms handsomelydecorated according to the present style.” Held, the offer was too vague and hence invalid.

c) If the agreement contains reference for ascertaining a vague term, the agreement is notvoid on the ground of its being vague.

If in the above example, A is a dealer in coconut oil only, it shall constitute a valid offersince the nature of A’s trade affords an indication as to which oil is being offered.

E.g. X is a dealer in coconut oil and Y is a regular customer. Y ordered 100 tons of coconutoil. In this contract, price is not clearly stated. Even then it is a valid contract because pricecan be ascertained from past dealings between X & Y.

10. The offer must be communicated: An offer, to be complete, must be communicated to theperson to whom it is made. Unless an offer is communicated, there can be no acceptance by it.An acceptance of an offer, in ignorance of the offer, is not acceptance and does not create anyright on the acceptor.


Lalman Shukla Vs. Gauri Dutt: G’s nephew was missing. L, who was servant of G, left his services to search for the missing boy. Meanwhile G issued an advertisement offering reward of Rs.501 to anyone who might trace the boy. L found the boy and brought him home. He did not get the reward and filed a suit against G. The court held that he acted in ignorance of the offer and so he is not entitled to reward.

11. Communication of complete offer or Standard form of contracts:

a) It is the duty of the offeror to communicate all the terms of the offer (i.e. complete offer) tothe offeree.

b) The special terms of the offer must also be communicated along with the offer otherwisethe offeree will not be bound by these terms.

c) Generally special terms arise in case of standard form of contracts with big companiessuch as insurance companies, railways, shipping companies, banking companies, hotelcompanies, dry cleaners, etc.

E.g.: A hotel put a notice in a bed room, that the proprietor is not liable for loss of client'sgoods. Held, the notice was not effective as it came to the knowledge of the client onlywhen the contract is already entered into.

d) Sometimes some conditions attached to the contract will be printed on the front side of theticket. In such a case communication is complete and offeree is bound by those conditions.Offeree can't say that he didn’t or could not read those conditions.

E.g.: T, a lady who could not read, took a ticket from a railway company. On the face of theticket conditions were written. One of the conditions absolved the railway company fromliability for personal injuries to passengers. T was injured by a railway accident. Held, shewas bound by the conditions and could not recover damages

e) If the conditions are printed in a language which the offeree doesn’t know then it is the dutyof the offeree to ask for the translation before accepting the offer. Otherwise, it will bepresumed that he knows them and he will be bound by them.

f) If those conditions are printed on the back side then it is the duty of the offeror to indicatesome mark that conditions are printed on the back side. For example, "For conditions seeback". Then only offeree will be bound by those conditions.

Henderson Vs. Stevenson: P bought a steamer ticket. On its back certain conditions wereprinted. One of the conditions excluded the liability of the company for loss, injury or delayto the passenger or his luggage. There was no indication on the face of the ticket thatcertain conditions were written on the back of it. P’s luggage lost on the way because of thenegligence of the company’s servants. The court held that P was entitled to recover hisloss from the company.

g) The special terms and conditions must be reasonable. What is reasonable is a question offact. If terms and conditions are unreasonable then the other party will not be bound bythem.

E.g.: A dry cleaner limits his liability to 25% of the market price of the article in case of lossof the article. The customer is not bound by this condition because this condition isunreasonable.

12. An offer must not put the burden of acceptance on the Offeree: An offer should notcontain a term the non compliance of which would amount to acceptance. Thus a man cannotsay that if acceptance is not communicated by a certain time the offer would be considered asaccepted.

E.g.: A proposes B to purchase his android mobile for Rs. 500 and if no reply by him in a week,it shall be assumed that B had accepted the proposal. This is not a contract.


13. Offer is different from:a. Invitation to offer.b. Cross offer.c. Counter offer.d. Declaration of intention or an announcement.

(Note: You will get detailed discussion on this concept in the next questions of this chapter itself)

Q.No.2. Related terms of the term offer.

Q.No.3. Write about Specific Offer & General Offer.

SPECIFIC / SPECIAL OFFER:

a) When offer is made to a definite person, it is known as specific offer and such offer can beaccepted only by that specified person.

b) Specific / Special offer can be made to a person or a group of persons.

c) Offer to one particular person: Where an offer is made to one particular person, it can beaccepted by that person only.

d) Offer to a group of persons: Where an offer is made to a particular group of persons, it maybe accepted by any member of that group.

e) Examples:

• ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a specific offer.

• J offered to purchase 50 feet of leather from Z. In the meantime Z sold his business to B.Therefore instead of Z, B supplied the leather to J. J refused to accept the leather on theplea that his offer was open to Z only and B’s acceptance does not carry any meaning. Itwas held that the offer had been directed to Z personally and it could not be accepted by B.(BOULTON Vs. JONES)

GENERAL OFFER:

a) It is an offer made to the public in general and hence anyone can accept and do the desiredact.

b) Section 8 of the Indian Contract Act, points out that performance of the conditions of a proposalis an acceptance of the proposal.

c) Where an offer is made to the whole world, it can be accepted by any one having itsknowledge.

RELATED TERMS OF THE TERM OFFER

SPECIAL OFFER COUNTER OFFER

GENERAL OFFER CROSS OFFER STANDING OFFER


When the offer is accepted by a particular person, there is a contract between the offeror and that particular person.

If a large number of persons accept the offer, there are as many contracts as the number of persons accepting the offer.

E.g.: A company advertised to give a reward to anyone who is contacted by influenza after using the medicine of the company for a certain period according to the printed directions. Mrs. ‘X’ purchased the advertised medicine and contacted influenza though using the medicine as per printed instructions. Mrs.’X’ claimed for the reward. The claim was denied by the company on the ground that offer was not made to Mrs.’X’ and also that she had not communicated her acceptance to an offer. It was decided that she could recover the reward as she had accepted the offer by complying with the terms of offer. (Carlill v. Carbolic Smoke Ball Co).

d) Where some reward is offered for giving some information, e.g. information about some lostproperty, information about some thief, etc. acceptance can be made only by the first personwho gives such information.

E.g.: An advertisement given in the newspaper announcing a reward for tracing out a missingperson. It can be accepted by any person who trace out the missing person and is entitled toclaim the reward. (Lalman Shukla v.Gauri Dat).

Q.No.4. Write about Cross Offers.

1. When two parties exchange identical offers in ignorance at the time ofeach other’s offer, the offers are called cross offers. There is no bindingcontract in such a case, as one’s offer cannot be construed asacceptance by the other.

2. Two offers meeting single purpose, made by two parties to each other,in ignorance of each other’s offer are termed as ‘cross offers’

3. Cross offers do not amount to acceptance of one’s offer by the other andcan’t be treated as a complete agreement.

4. E.g.: A offers by a letter to sell 100 tons of steel at Rs.1000 per ton. Onthe same day B also writes to A offering to buy 100 tons of steel at Rs.1000 per ton. The twoletters crossed each other in post. B brought an action against A for the supply of steel. Hecontended that a valid contract had been created with A. Held, that there were only two crossoffers and either of the parties has not accepted. Hence, no binding contract was created. [Tinnv. Hoffman]

Q.No.5. Write about Counter Offer.

COUNTER OFFER:

a) Counter offer means making a fresh offer instead of accepting the original offer. Acceptance ofan offer with a variation is not acceptance. It is simply a counter offer.

b) When the Offeree offers to qualified acceptance of the offer subject to modifications andvariations in the terms of the original offer, he is said to have made a counter offer.

EFFECTS OF COUNTER OFFER:

a) Counter-offer amounts to rejection of the original offer.

b) Once a counter offer is made, the original offer is lapsed. An offer once rejected is dead.

c) Counter offer results in a new offer.


d) Acceptance of counter offer by the original offeror amounts to acceptance and a contract isformed (on the basis of counter offer).

e) Sometimes offeree may change his mind and wants to accept the original offer. If the originalofferor wants to form a contract then he may accept this and a valid contract is formed on thebasis of fresh offer. But there is no rule that offeror must accept. This is so because when acounter offer is made original offer comes to an end.

f) Examples:

• ‘A’ offers to sell his plot to ‘B’ for Rs.10 lakhs. ’B’ agrees to buy it for 8 lakhs. It amounts tocounter offer. It may result in the termination of the offer of ’A’. And if later on ‘B’ agrees tobuy the plot for Rs. 10 lakhs, ’A’ may refuse.

• X offered to sell his car to Y for Rs.1,00,000. Y said that he will buy it for Rs.90,000. Xrefused to sell for Rs.90,000. Subsequently, Y offered to buy the car for Rs.1,00,000.

Here, Y’s offer to buy for Rs.90,000 is a counter offer which terminates the original offer. Y’ssecond offer to buy for Rs.1,00,000 is a fresh offer and not an acceptance of the originaloffer.

g) Mere statement of enquiry is not counter offer.

E.g.: M made an offer to sell iron to S at Rs.40,000 net cash per ton”. S replied asking whetherdelivery could be within two months. M thereupon sold the iron to X, a third party. S had noknowledge of the sale to X and informed M that he would accept on the proposed terms. Mcontended that enquiry made by S had the effect of canceling the original offer. It was held thatthe first reply by S was merely a request for information. It did not amount to counter offer.Therefore, original offer will not lapse and it will continue. Therefore, M has done breach ofcontract by selling iron to X.

Q.No.6. Invitation to Offer.

OFFER AND INVITATION TO OFFER:

1. An offer should be distinguished from an invitation to offer.

2. An offer is definite and capable of converting an intention into a contract. Where as aninvitation to an offer is only a circulation of an offer and it is an attempt to induce offers andprecedes a definite offer.

3. Acceptance of an invitation to an offer does not result in the contract and only an offer emergesin the process of negotiation.

When a person advertises that he has stock of books to sell or houses to let, there is no offerto be bound by any contract. Such advertisements are offers to negotiate i.e. offer to receiveoffers.

4. Does the person who made the statement intends to be bound by it as soon as it is acceptedby the other or he intends to do some further act, before he becomes bound by it? In theformer case, it amounts to an offer and in the latter case, it is an invitation to offer.

5. In order to ascertain whether a particular statement amounts to an ‘offer’ or an ‘invitation tooffer’, the test would be intention with which such statement is made.

6. When a person makes an invitation to offer, the purpose is not to obtain the assent of the otherperson, but merely to circulate the information that he is willing to deal with.

7. Acceptance to an invitation to offer cannot give rise to a contract.

8. E.g: The price list of goods does not constitute an offer for sale of certain goods on the listedprices. It is an invitation to offer.


POSSIBLE FORMS OF ‘INVITATION TO OFFER’:

1. Displaying goods for sale: Where goods, with a price tag attached, are displayed in a shopwindow, it is not an offer by the shop, but it is merely an invitation by the shop to the public tomake an offer for the goods.

2. Price lists, catalogues: The issue of a tradesman’s circular or catalogue advertising goods forsale is usually treated as mere attempt to induce offers and it is not an offer.

3. Advertisement: Generally, an advertisement on a hoarding, a newspaper ‘display’, or atelevision advertisement, etc. is not regarded as an offer. These are simply attempts to makethe public aware of what is available and cannot be treated as an offer. A recognised exceptionto this is a general offer of reward to the public.

4. Declaration of intention: A declaration of intention, such as an advertisement to hold anauction, does not amount to an offer. Likewise, an announcement of a beauty competition by abeauty parlour or a scholarship examination by some college is not an offer.

Harris v. Nickerson: An auctioneer, N, advertised that a sale of office furniture would takeplace at a particular place on a particular date. H saw the advertisement and traveled fromLondon to attend the sale. When he arrived, he came to know that the office furniture waswithdrawn from sale. He claimed the damages for loss of time and expenses incurred injourney. It was held that the advertisement was mere declaration of intention, not an offer. Hwas not entitled for compensation.

5. Auctions: At an auction sale, the auctioneer’s request for bids is invitation to offer. Bids placedby the bidders will be treated as offer. If the auctioneer accepts the offer, he will strike the tablewith his hammer. Thus an auctioneer can withdraw any item from auction, before the fall ofhammer.

6. Prospectus: A company which makes an offer to the public of new shares is treated asinvitation to offer. It invites members of the public to apply for the shares. The shareapplications put by the general public will be treated as offer. The allotment of shares by thecompany is treated as acceptance.

7. Tenders: If A asks number of tradesmen to put in tenders for supplying certain goods orservices, he is not making any offer. Consequently he is not bound to accept the lowest or anyother tender. The offer comes from the tradesmen in the form of tender or estimate.

When the tender is submitted that is in nature of proposal or offer and unless the highest bid oftender is accepted and communicated to him, there cannot be a concluded contract betweenthe parties. (Exclusive Engineer Vs. Mohan Prasad AIR, 1990 ori 26.)

8. Quotation of lowest price is not an offer.

Harvey Vs. Facie: H sent a telegram to F writing “will you sell yourhouse? Telegraph lowest cash price”. The defendant also replied by atelegram “Lowest price for the house, Rs.10,000”. The plaintiffimmediately sent a last telegram stating, “We agree to buy your housefor Rs.10,000 asked by you”. F refused to sell the property at theprice. H contended that F has quoted the minimum price, whichshould be treated as offer, and he has accepted the offer. The courtpointed out that in their first telegram H has asked two questions, firstabout the willingness to sell and second about the lowest price. Thedefendant answered only the second question and gave the lowestprice. They reserved their answer to first question. Thus, they hadmade no offer. The court was of the opinion that the mere statementof lowest price cannot be considered as offer. So, there is no contractat all.


SOME OTHER EXAMPLES OF INVITATION TO OFFER:

1. A Quotation of price in response to an enquiry is not an offer but it is only an invitation to receive anoffer.

2. Menu card of a restaurant showing the rates of food items.

3. Products displayed for sale with price tags attached to them.

4. Railway time table showing the timings of trains and their respective fares.

5. Issue of prospectus by a public company inviting the public to subscribe for shares ordebentures.

6. Employment advertisements.

Q.No.7. Define the term ‘Acceptance’. Discuss the legal provisions relating to its communication.

MEANING:

1. A proposal or offer is said to have been accepted when the person to whom the proposal ismade signifies his assent to the proposal to do or not to do something [Sec.2(b)].

2. Acceptance is an expression, by words or conduct, which clearly indicates that the personmaking it, agrees to be bound by the terms of offer.

3. An acceptance is the manifestation by the offeree of his willingness to be bound by the termsof the offer.

ESSENTIAL ELEMENTS OF VALID ACCEPTANCE OR RULES REGARDING ACCEPTANCE:

1. Acceptance must be given by the party to whom the offer is made. Acceptance can begiven by the offeree or his duly authorised agent.

2. Acceptance must be absolute and unqualified (Sec 7(1)): As per Sec.7 an acceptance isvalid when it is absolute and unqualified and is expressed in some usual and reasonablemanner, unless the proposal prescribed the manner in which it is to be accepted.

Thus, if A enquiries from B, “will you purchase my dog for Rs.100”? and B replies, “I shallpurchase your dog for Rs.100 provided you purchase my cat for Rs.60”. B in such a casewould not be said to have accepted the proposal of A.

Also an acceptance with a variation is no acceptance. It is simply a counter proposal whichshall have to be accepted by the original proposer before a contract can be deemed to havecome into existence.

A counter proposal is the offer by the offeree and can result in a contract only if it is acceptedby the other party.

3. The acceptance must be expressed in some usual or reasonable manner (Sec.7(2)):

a) Where the mode of acceptance is prescribed in the proposal, it must be accepted in thatmanner.

b) But if the proposer does not insist on the proposal being accepted in the mannerprescribed after it has been accepted otherwise, i.e., not in the prescribed manner, theproposer is presumed to have consented to the acceptance.

c) If acceptance is not communicated according to the mode prescribed, it is called deviatedacceptance. Even in such a case acceptance is not invalid.

d) Law imposes a duty on the offeror to reject such acceptance within a reasonable time. If hefails to do so, he becomes bound by the acceptance


e) E.g.: If the Offeror prescribes acceptance through messenger and offeree sendsacceptance by email, there is no acceptance of the offer if the offeror informs the offereethat the acceptance is not according to the mode prescribed. But if the offeror fails to do so,it will be presumed that he has accepted the acceptance and a valid contract will arise.

4. Time: Acceptance must be given within the specified time limit, if any, and if no time isstipulated, acceptance must be given within the reasonable time and before the offer lapses.

E.g.: X applied for certain shares in a company in June but the allotment was made inNovember. X refused to accept the allotted shares. It was held that the Offeror, X, could refuseto take shares as the offer stood withdrawn and could not be accepted because the reasonableperiod during which the offer could be accepted had elapsed

5. Acceptance cannot be made in ignorance of offer: An acceptance made by the intendedOfferee without the knowledge that an offer has been made to him cannot be deemed as anacceptance thereto. (Bhagwandas v.Girdharilal). The rule is that acceptance follows the offer.

6. Acceptance must be given before the offer lapses or revoked: Acceptance can be givenonly to an existing offer. When an offer terminates, it cannot be accepted.

7. An acceptance must be communicated to the offeror: It must further be remembered that anacceptance must be communicated to the person who made the offer. The Offeree should dosomething to signify his assent i.e. to communicate his acceptance.

Acceptance can be communicated in any of the following modes:

a) By words spoken, b) By words written, c) By conduct.

E.g.: At an auction sale, S is the highest bidder. The auctioneer accepts the offer by striking the hammer on the table. This is an implied acceptance.

8. A mere mental acceptance is not considered as acceptance in the eyes of law.

E.g.: A draft agreement relating to the supply of coal was sent to the manager of a Railwaycompany for his approval. The manager put the words ‘approved’ on the agreement but thedraft remained in his table. Held, there was no contract because there is no communication.

9. Acceptance by conduct: The assent means that acceptance has been signified either inwriting or by words of mouth or by performance of some act. Therefore, when, a personperforms the act intended by the proposer as the consideration for the promise offered by him,the performance of the act constitutes acceptance.

E.g.: When a tradesman receives an order from a customer and executes the order by sendingthe goods, the customer’s order for goods constitutes the offer, which has been accepted bythe tradesman subsequently by sending the goods. It is a case of acceptance by conduct.

10. Mere silence is not acceptance: The acceptance of an offer cannot be implied from thesilence of the Offeree or his failure to answer, unless the Offeree has in any previous conductindicated that his silence is the evidence of acceptance.

E.g.: ’A’ subscribed for the weekly magazine for one year. Even after expiry of his subscription,the magazine company continued to send him magazine for five years. And also ‘A’ continuedto use the magazine but denied to pay the bills sent to him. ’A’ would be liable to pay as hiscontinued use of the magazine was his acceptance of the offer.

11. Where the Offeree (having reasonable opportunity to reject the offered goods or services)enjoys or avails the benefits of goods or services, it will be regarded as acceptance.

E.g.: Govind a landlord served a notice to his tenant, informing enhancement of rent. Hari didnot protest against it and continued to occupy the house. Held, the conduct of Hari willamounts to acceptance of offer to pay at a higher rate.

12. Agreement to agree in future is not valid.


13. Acceptance subject to contract is no acceptance: If the acceptance has been given“subject to contract” or subject to approval by certain persons or by the use of similar words, ithas no effect at all. Such an acceptance will not create binding contract until a formal contractis prepared and signed by all the parties.

Q.No.8. How an Offer gets terminated?

An offer may terminate by the operation of law or by the act of the parties. The Act under section 6 states the circumstances when an offer comes to an end. But these are not exhaustive.

1. Revocation [Sec.6(1)]: A proposal is revoked by the communication of notice of revocation bythe proposer to the other party. A proposal may be revoked at any time before the proposal isaccepted.

E.g.: X of Agra offers by a letter dated 1st January sent by post to sell his car to Y of Delhi forRs.1,00,000. Y accepts the offer on 7th January at 1 p.m. by a letter sent by post. Here X mayrevoke his offer at any time before 1 p.m. on 7th Jan. but not afterwards.

2. Lapse of time (Sec 6(2)): A proposal is revoked by the lapse of time prescribed in suchproposal. If no time is prescribed in the offer, the offer comes to an end after the lapse ofreasonable time.

3. Failure of acceptor to fulfill the condition precedent to acceptance [Sec.6(3)]: A proposalis revoked when the acceptor fails to fulfill a condition precedent to the acceptance of theproposal.

E.g.: A, a seller agrees to sell his house subject to the condition that B, a buyer, pays theagreed price before a certain date. B fails to fulfill that condition. Hence the offer standsrevoked.

4. Death or insanity of the proposer [Sec.6(4)]:

a) A proposal is revoked by the death or insanity of the proposer, if the fact of his death orinsanity comes to the knowledge of the acceptor before acceptance.

b) If the offeree does not know that the offeror has died or gone insane and gives hisacceptance, it is a valid acceptance in the eyes of law. This will result in a valid contractand legal representatives of the deceased offeror shall be bound by the contract.

5. Death of Offeree before acceptance, terminates the offer.

OTHER INSTANCES:

1. Rejection: An offer comes to an end when the offeree rejects it. Once an offer has been refused,it ceases to exist and it cannot be accepted later. Rejection of proposal is entirely different fromrevocation

2. Counter offer: A counter offer proposing different terms terminates the original offer.

3. Failure to accept according to the mode prescribed: Offer is terminated if the offeree failsto accept it according to the mode prescribed by the offeror.

4. Subsequent illegality or destruction of the subject matter: An offer lapses if itsubsequently becomes illegal or when the subject matter of an offer gets destroyed.

Q.No.9. State the legal provisions relating to Tenders.

TENDER: A tender is an offer made in response to an invitation to offer (i.e. notice inviting tenders) for supply of goods or services or to execute certain work at a particular price. The persons filling up the tenders are called as tenderors or bidders or offerors. A tender can be:


SPECIFIC OR DEFINITE: Where the offer is to supply a definite quantity of goods it is called specific or definite tender. The party inviting the tenders may either accept or reject it. When a particular tender is accepted (generally the lowest one) it creates a contract between the parties.

E.g.: 'A' invites tenders for the supply of 10 quintals of cotton. 'B', 'C”, and 'D' submit their tenders. 'B's tender is accepted. The contract is formed immediately the moment when the tender is accepted.

STANDING OFFER OR TENDER:

1. An offer is allowed to remain open for acceptance over a period of time is known as a standing,open or continuing offer. Tender for supply of goods is a kind of standing offer.

2. Offer to supply goods periodically or in accordance with the requirements of the Offeree is astanding tender.

3. If such tender is approved, it becomes a standing or open or continuing offer.

4. As and when an order is placed (on the basis of standing offer), it amounts to acceptance.Each order creates a new binding contract between the parties.

5. Thus, there are as many contracts as number of orders.

E.g.: A Railway Co. invited tenders for the supply of stores. W made a tender to supply thecompany for 12 months with such quantities of specified articles as the company may orderfrom time to time. The company accepted the tender and placed the orders. W executed theorders as placed from time to time but later refused to execute a particular order.Held W was bound to supply the goods as per the terms of the tender.

6. It is to be noted that if the offeree gives no order or fails to order the full quantity of goods setout in a tender, there is no breach of contract.

REVOCATION OR WITHDRAWAL OF A TENDER: A tenderer can withdraw his tender before its final acceptance by a work or supply order. This right of withdrawal shall not be affected even if there is a clause in the tender restricting his right to withdraw.

But the tender is irrevocable:

- If the tenderer has promised not to withdraw it, on some consideration or

- Where there is a statutory prohibition against withdrawal.

Note: Tender = bid = offer Tenderer = bidder = offeror

Q.No.10. When is the communication of an offer and acceptance complete?

COMMUNICATION:

1. When the contracting parties are face to face, there is no problem of communication, becausethere is instantaneous communication of offer and acceptance. In such a case the question ofrevocation does not arise since the offer and its acceptance are made instantly.

2. Difficulty arises when the contracting parties are at a distance from one another and they utilisethe services of the post office or telephone. In such cases it is very much relevant for us toknow the exact time when the offer or acceptance is made or complete.


ACCEPTANCE OVER TELEPHONE OR TELEX OR FAX:

1. When an offer is made of instantaneous communication like telex, telephone, fax or through e-mail, the contract is only complete when the acceptance is received by the Offeror and thecontract is made at the place where the acceptance is received. (Entores Ltd. v. Miles Far EastCorporation)

In case of telephone/fax etc., it is presumed that there is instantaneous communication. So,there is no scope for revocation.

2. But while communicating, if the equipment goes out of order or some other disturbance occurs,due to which the message is not conveyed properly, the communication is not treated ascomplete.

3. Where the acceptance is given by post, the place where the letter is posted is the place ofcontract.

4. When the parties negotiate a contract through mail (i.e. post) or by telegram, there isconsiderable time lag between putting the message in the course of transmission by one partyand its receipt by the other party.

5. In such cases, it is very important to decide the precise moment when communication iscompleted.

COMMUNICATION OF OFFER - WHEN COMPLETE?

1. The communication of an offer is complete when it comes to the knowledge of the person towhom it is made (Sec.4).

2. An offer may be communicated either by words spoken or written or it may be inferred from theconduct of the parties.

3. When a proposal is made by post its communication will be complete when the lettercontaining the proposal reaches the persons to whom it is made.

E.g.: A makes proposal to B to sell his house for Rs.two lakhs. The letter is posted on 10th March. This letter reaches B on 12th instant. The offer is said to have been communicated on 12th, when B receives the letter.

REJECTION OF OFFER:

1. An offeree may reject the offer. Once he rejects, he cannot subsequently accept it.

2. Express rejection: The offeree may reject the offer expressly, i.e. by words written or spoken.Express rejection is effective only when notice of rejection reaches the offeror.

3. Implied rejection: Rejection of offer is implied by law:

a) Where the offeree makes a counter offer.

b) Where the offeree gives a conditional acceptance.

COMMUNICATION OF ACCEPTANCE WHEN COMPLETE?

1. Communication of an acceptance is complete:

• as against the proposer, when it is put in course of transmission to him so as to be out ofthe power of the acceptor to withdraw the same;

• as against the acceptor, when it comes to the knowledge of the proposer.

2. Communication of acceptance by post: When a proposal is accepted by a letter sent by thepost the communication of acceptance will be complete

• as against the proposer when the letter of acceptance is posted and

• as against the acceptor when the letter reaches the proposer.


3. Thus, the offeror becomes bound by the acceptance as soon as the letter of acceptance isposted by the acceptor.

For the acceptor, the communication of acceptance is complete, when it comes to the knowledgeof the offeror.

4. Acceptance is complete as against the offeror as soon as the letter of acceptance is posted.

The contract is complete even if the letter of acceptance goes away or is lost through an accident inthe post.

But in order to bind the offeror, it is important that the letter of acceptance is correctly addressed,sufficiently stamped and posted.

If it is not correctly addressed and sufficiently stamped, the communication of acceptance is notcomplete.

5. Examples:

a) A proposes, by a letter to sell his house to B at a certain price. The letter is posted on 1stJune at 10.00 a.m. It reaches to B on 3rd June at 3.00 p.m. B accepts A's proposal, by aletter sent by post on 13th instant. The letter reaches A on 15th instant. Thecommunication of the acceptance is complete as against A when the letter is posted i.e. on13th and as against B it is complete when the letter is received by A i.e. on 15th.

b) Continuing with the above example, on 5th June at 2.00 p.m. B hands over the letter ofacceptance to his peon for posting. Peon actually posted the letter at 2.30 p.m. The letterreaches A on 8th June at 11.00 a.m. Communication of acceptance is complete:

As against A, the offeror - when letter is actually posted at 2.30 p.m. on 5th June (not at2.00 p.m. when it was handed over to the peon, since the letter is said to be out of thepower of the acceptor only when the letter is actually posted).

As against B, the acceptor - On 8th June at 11.00 a.m. when letter is received by A.

c) A offers to sell his car to B by a letter dated 1st January. B receives the letter on 2ndJanuary at 1 p.m. B posts the letter of acceptance on 3rd January at 11 a.m. The letterreaches A on 4th January at 4 p.m. In this case:

Communication of offer is complete on 2nd January at 1 p.m., when the offeree receivesletter containing the offer.

Communication of acceptance is complete:

- As against A, the offeror - On 3rd January at 11 a.m., when the letter of acceptance isposted by B,

- As against B, the acceptor – On 4th January at 4 p.m., when the letter of acceptance isreceived by A.

6. Position in English Law: In English Law, communication of acceptance as against the offerorand offeree completes with the posting of letter of acceptance.

Q.No.11. Revocation of Offer.

Revocation means ‘taking back’ or ‘recalling’ or ‘withdrawal’.

WHEN AN OFFER MAY BE REVOKED?

1. A proposal may be revoked at any time before the communication of its acceptance iscomplete as against the proposer, but not afterwards. [Sec. 5]

2. In simple words it can be said that an offer can be revoked before its acceptance. But thecommunication of revocation of offer should reach offeree before he posts the letter ofacceptance.


3. If the Offeror has agreed to keep his offer open for a certain period he can revoke it before theexpiry of that period only:

• If the offer is not accepted in the mean time.

• If there is no consideration for keeping the offer open.

4. Examples:

a) Thus installation of a weighing machine at a public place is an offer, putting a coin in theslot of the machine is acceptance of offer and switching off the machine amounts torevocation of offer.

b) June 2 - X mails offer to Y.June 3 - Y receives offer at noon.June 3- X mails letter of revocation at 2 PMJune 3 - Y mails acceptance at 5 PM.June 4 - Y receives the revocation.June 5 - X receives Y’s acceptance.

Result: A contract was formed at 5 PM. on June 3, when Y mailed his acceptance (since arevocation is not effective until it is received, the letter that X mailed on June 3 could haveno effect until June 4, by which time the contract had already been formed).

c) T offered, by a letter on October 1, to sell goods to B in New York. B received the offer on11th and immediately telegraphed his acceptance. On 18th, T wrote a letter revoking hisoffer. The letter was received by B on 20th. Held, the revocation was of no effect until itreached B. A contract was made on 11th October when B accepted the offer.

COMMUNICATION OF REVOCATION OF OFFER WHEN COMPLETE?: Under Sec.4, the communication of revocation is complete:

a) As against the person who makes it, (Proposer) - when it is put into a course of transmissionto the person to whom it is made (Proposee) so as to be out of the power of the person whomakes it;

b) As against the person to whom it is made (Proposee/Acceptor) - when it comes to hisknowledge.

Examples:

• If you (proposer) revoke your proposal by a telegram, the revocation will be complete so far asyou are concerned, when you have dispatched the telegram. But in so far as I (acceptor) amconcerned, it will be complete when I actually receive the telegram. As regards the revocationof acceptance, I revoke my acceptance by a telegram my revocation of acceptance is completeas against myself, as soon as I have dispatched the telegram, and as against you when itreaches you.

• A proposes by a letter to sell a house to B at a certain price. The letter is posted on 15th may.It reaches B on 19th may. A revokes his offer by telegram on 18th may. The telegram reachesB on 20th may. The revocation is complete as against A when the telegram is dispatched i.e.on 18th. It is complete as against B when he receives it i.e. on 20th.

Notes:

a) Revocation must always be expressed.

b) Revocation must move from the offeror himself or a duly authorised agent.

c) Notice of revocation of a general offer must be given through the same channel by which theoriginal offer was made.

d) Offer cannot be revoked even if the letter of acceptance is lost or delayed in transit.


Q.No.12. Revocation of Acceptance.

WHEN AN ACCEPTANCE MAY BE REVOKED?

1. An acceptance may be revoked at any time before the communication of acceptance iscomplete as against the acceptor, but not afterwards. [Sec. 5]

2. Thus an acceptance can be revoked any time before the letter of acceptance reaches to theofferor. Once the acceptance comes to the knowledge of the offeror, it cannot be revoked.

3. Under Sec.5, a proposal may be revoked at any time, before the communication of itsacceptance is complete as against the proposer.

An acceptance may be revoked at any time before the communication of acceptance iscomplete as against the acceptor.

E.g.: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by aletter sent by post. A may revoke his proposal at any time before or at the moment when Bposts his letter of acceptance, but not afterwards. Whereas B may revoke his acceptance atany time before or at the moment when the letter communicating it reaches A, but notafterwards.

4. An acceptance to an offer must be made before that offer lapses or is revoked.

5. The law relating to the revocation of offer is the same in India as in England, but the lawrelating to the revocation of acceptance is different.

6. In English law, the moment a person express his acceptance of an offer, that moment thecontract is concluded, and such an acceptance becomes irrevocable, whether it is made orallyor through the post. In Indian law, the position is different as regards contract through post.

7. Contract through post – As acceptance, in English law, cannot be revoked, so that once theletter of acceptance is properly posted the contract is concluded. In Indian law, the acceptorcan revoke his acceptance any time before the letter of acceptance reaches the offeror, if therevocation telegram arrives between or at the same time with the letter of acceptance, therevocation is absolute.

8. Contract over Telephone – A contract can be made over telephone. The rules regarding offerand acceptance as well as their communication by telephone or telex are the same as for thecontract made by the mutual meeting of the parties. The contract is formed as soon as the offeris accepted but the offeree must make it sure that his acceptance is received by the offeror,otherwise there will be no contract, as communication of acceptance is not complete. Iftelephone unexpectedly goes dead during conversation, the acceptor must confirm again thatthe words of acceptance were duly heard by the offeror.

Example 1:

June 2 - X mails offer to Y.

June 3 - Y receives offer at noon.

June 3 - Y mails letter of rejection at 5 p.m.

June 4 – Y changes his mind and at 10 a.m. mailed a letter of acceptance which X received on June 6.

June 5 – X receives letter of rejection.

Result: No contract. The rejection has reached the offeror before the acceptance.

Example 2:

June 2 – X mails offer to Y.

June 3 – Y receives offer at noon


June 3 – Y mails letter of rejection at 5 p.m.

June 4 – Y changes his mind and at 10 a.m. calls X on the telephone accepts the offer, telling X to disregard his letter of rejection.

June 5 – X receives letter of rejection.

Result: A contract was formed at 10 a.m. June 4, when Y gave X actual notice of his acceptance. Y’s letter of rejection effective until June 5th by which time, the contract was already formed.

MISCELLANEOUS

Acceptance is "to an offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone". – William Anson

DIFFERENCES

Q.No.13. Specific offer Vs. General offer.

DIFFERENCE SPECIFIC OFFER GENERAL OFFER Meaning A specific offer is an offer made to a

particular or specific person. A general offer is an offer made to public at large.

Acceptance It can be accepted by the person to whom it has been made.

It can be accepted by any one from among the public who had the knowledge of it.

Mode of acceptance

It can be accepted by express or implied act. The acceptance may be given by performance of desired act.

It is accepted only by performance of conditions or by doing the desired act.

Continuation It continues upto a reasonable time or till it is accepted or revoked.

It continuous till it is accepted by any person by performance of conditions of it or till it is withdrawn.

Q.No.14. Offer Vs. Invitation to offer.

DIFFERENCE OFFER INVITATION TO OFFER Meaning A person, expresses his willingness

to be bound by the terms of his offer if the other party to whom it is made, accepts it.

A person, proposes certain terms on which he is willing to negotiate and invites the other party to make an offer on those terms.

Expression Expression of final willingness. Expression of initial intention.

Leads to Acceptance of offer. Offer.

Intention to bind oneself

Once the offer is accepted by the Offeree it shows intent to be bound by the offer.

Intends to do some other / further act, before becoming bound by his act.

Example Application filled in by a prospective applicant to the company for allotment of shares or by a student seeking admission in educational institution.

Issue of prospectus by a company or by an educational institution, advertisement related to auction sale.

THE END

IPCC_32e_ M.Law_Legal Object & Consideration________________________35

3. LEGAL OBJECT AND CONSIDERATION

INTRODUCTION:

• Consideration is a term used in the sense of quid pro quo i.e. ‘something in return’.

• Subject to certain exceptions, an agreement made without consideration is null and void. It is anude agreement (nudum pactum).

E.g.: X agrees to sell his car to Y for Rs.1,00,000. Car is the consideration for Y and price isthe consideration for X.

Q.No.1. Define the term consideration.

DEFINITION: As per Sec.2(d) of the Act, Consideration is defined 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 as consideration for promise.”

That is to say, consideration is the doing or not doing of something which the promisor desires to be done or not done.

Examples:

• A promises to maintain B’s child, and B promises to pay A Rs.1000 yearly for the purpose.Here, the promise of each party is the consideration for the promise of the other party.

• A agrees to sell his house to B for Rs.10,000. Here, B’s promise to pay the sum of Rs.10,000 is the consideration for A’s promise to sell the house and A’s promise to sell the house is the consideration for B’s promise to pay Rs.10,000.

IMPORTANT OBSERVATIONS IN THE DEFINITION:

a) Consideration is an essential element of a contract without which no single promise will beenforceable.

b) Having a double aspect of

- a benefit to the Promisor and

- a detriment to the Promisee,

it has to be really understood in the sense of some detriment as envisaged by English Law.

c) Thus, consideration must result in a benefit to the promisor, and a detriment or loss to thepromisee or a detriment to both.

DIFFERENT FORMS IN WHICH CONSIDERATION MAY EXIST:

a) Abstinence from doing: Abstinence from doing something at the desire of the promisor mayalso be a good consideration for the promisor. It is a negative form of consideration.

E.g.: ‘C’ promises his debtor ‘D’ not to file a suit against him if he agrees to pay Rs.10,000more on the Principal amount. Here the abstinence of ‘C’ is the consideration for ‘D’s promiseto pay.

b) Forbearance to sue: If a person who could sue another for the enforcement of a right agreesnot to sue him, this is a good consideration for a promise by the other person.

E.g.: A borrows from B Rs.1000 at 20% p.a. but fails to pay the amount. When B is about to filea suit, A agrees to pay a higher rate of interest. B, as a result, does not file the suit.Forbearance on the part of B to file a suit is a sufficient consideration and B can enforce thepromise made by A to pay higher rate of interest.


c) When there is detriment to Promisee, even though there is no benefit to Promisor, still it is validconsideration.

E.g.: A promises to carry B’s goods free of charge, and B allows A to carry the same. Here Awill be the Promisor and B will be the Promisee. The question that arises in this case is, does Boffer any consideration as against A’s promise to carry his goods?

The answer must be in the affirmative, because the detriment or the disadvantage which Bsuffers in parting with the goods so that goods may be carried by A is sufficient considerationas against A’s promise to carry. So, the essence of consideration is detriment suffered orburden taken by the promisor.

The promisor may or may not derive any benefit from the consideration given by the Promisee.But in most cases, the promisor derives some benefit from the consideration which may besaid to be quid pro quo from the promise of the promisor.

d) Compromise of a disputed claim: Compromise also amounts to forbearance. Therefore, thecompromise of a disputed or pending claim is a good consideration provided the person actsbona fide.

e) Compromise with creditors: Sometimes a debtor may call a meeting of his creditors andrequest them to accept a lesser amount in satisfaction of their debt. If the creditors agree to it, theagreement is binding upon both the debtor and the creditors.

f) Consideration is the price agreed to be paid by the Promisee for the obligation of the Promisor.

Q.No.2. What are the essential elements or legal requirements of consideration?

Essential elements or legal requirements regarding consideration:

1. Consideration must move at the desire of thepromisor: Consideration must be offered by thePromisee or the third party at the desire or request ofthe Promisor. An act done at the desire of a third partyor voluntarily is not consideration.

E.g.: R saves S’s goods from fire without being asked to do so. R cannot demand any rewardfor his services, as the act being done voluntary. So, the act of saving the goods cant betreated as valid consideration.

Durgaprasad Vs. Baldeo: D, on the order of the collector of the District, reconstructed certainshops in a market at his own expense. Subsequently, the shops are occupied by the shopkeepers.Since the money was spent for reconstruction of the shops by D, B (President of shopkeepersassociation) promised to pay him a commission on articles sold in the market. D’s action to recoverthe commission was rejected on the ground that nothing was done at the desire of the promisor B.The reconstruction of shops was done at the desire of the Collector of the District.

2. Consideration may move from the promisee or any other person: In India, considerationmay proceed from the Promisee or any other person who is not a party to the contract. Thedefinition of consideration as given is Sec.2 (d) makes that proposition clear. According to thedefinition, when at the desire of the Promisor, the Promisee or any other person doessomething, such an act is consideration. In other words, there can be a stranger to aconsideration but not stranger to a contract i.e. even a stranger to the contract can provideconsideration. Of course, under the English law, consideration must move from the promisee.

E.g.: ‘A’ by gift deed transferred certain property to her daughter with the direction that thedaughter should pay an annuity to ‘A’s brother as had been done by ‘A’. Whereas daughterexecuted a writing in favour of ‘A’s brother to pay the annuity. Afterwards she refused to fulfillher promise saying that no consideration had moved from A’s brother. The court held that ’A’sbrother was entitled to maintain the suit because consideration is already moving from A whichis a valid consideration. (Chinnayya v. Ramayya)


3. Consideration may be an act, abstinence (Self denial), forbearance (Foregoing one’slegal right) or detriment (Loss): Already covered in the previous question.

4. Consideration can be past, present or future:

a. Past consideration:

• The words “has done or abstained from doing” [as contained in Sec. 2(d)] are arecognition of the doctrine of past consideration.

• In order to support a promise, a past consideration must be moved by a previousrequest. It is the general principle that consideration is given and accepted in exchangefor the promise.

• The consideration, if past, may be the motive but cannot be the real consideration of asubsequent promise. But in the event of the services being rendered in the past at therequest or the desire of the promisor, the subsequent promise is regarded as anadmission that the past consideration was not gratuitous.

• When consideration by a party for a present promise was given in the past i.e. beforethe date of the promise it is called past consideration. Under the English Law, pastconsideration is no consideration.

• E.g.: A renders some service to B at the request of B. After a month B promises tocompensate A for the services rendered to him. It is past consideration. A can recoverthe promised amount.

b. Present or executed consideration: When consideration from one party to anothermoves simultaneously with the promise is called present consideration. It is also known asexecuted consideration as the act constituting consideration is wholly performed at time ofagreement. A contract of cash sale is the best example for present consideration.

E.g.: R buys a refrigerator from T’s shop and pays the price immediately. The act of both theparties constitutes present or executed consideration. If R promises to pay the price after amonth of delivery, but takes the delivery of refrigerator immediately then R receives presentconsideration whereas T receives future consideration in the form of promise to pay.

c. Future or executory consideration: When consideration from one party to the other is topass subsequently to the making of the contract, it is called future or executory consideration.

E.g.: D promises to deliver certain goods to P after a week; P promises to pay the priceafter 15 days. The promise of D is supported by the promise of P. In this caseconsideration is future or executory.

5. Executed and executory consideration: A consideration which consists in the performanceof an act is said to be executed. When it consists in a promise, it is said to be executory. Thepromise by one party may be the consideration for an act by some other party, and vice versa.

E.g.: A pays Rs.5,000 to B and B promises to deliver to him a certain quantity of wheat within amonth. In this case A pays the amount, whereas B merely makes a promise. Therefore, theconsideration paid by A is executed, whereas the consideration promised by B is executory.

6. Consideration need not be adequate: Consideration need not beof any particular value. It need not be approximately of equal valuewith the promise for which it is exchanged but it must be somethingwhich the law would regard as having some value.

In other words, consideration means “something in return”. This“something in return” need not be equal in value to “somethinggiven”. If consideration is inadequate, court may consider this fact to judge whether consent isfreely given or not. It may be noted in this context that Explanation 2 to Section 25 states thatan agreement to which the consent of the promisor is freely given is not void merely becausethe consideration is inadequate. (You will get detailed explanation about Section 25 in nextquestion. Until then you may not be able to understand this point clearly).


Examples:

• A agrees voluntarily, to sell his motorcycle cost of Rs.30,000 for Rs.2,000 only to B. It is avalid contract despite the inadequacy of consideration.

• A promises to B to sell land in Calcutta at Rs.10 per acre. The agreement is valid providedthe consent of A was freely given.

• X promises to sell a house worth Rs.6 lakhs for Rs.1 lakh only, the adequacy of the price initself shall not render the transaction void, unless the party pleads that transaction takesplace under coercion, undue influence or fraud.

7. Consideration should be real and competent: Consideration must be real and must also becompetent. It must be something to which the law attaches some value. Consideration shouldnot consist of impossible act or promise. It must be real and not illusory. A consideration whichdoes not have value in terms of money is illusory consideration.

E.g.: A man promises to discover treasure by magic. This transaction can be said to be void asconsideration is illusory.

8. Performance of what one is legally bound to perform:

a) The performance of an act by a person who is already legally bound to perform the samecannot be the consideration for a contract. Hence, a promise to pay money to a witness isvoid, for it is without consideration. Hence such a contract is void for want of consideration.

Collins Vs. Godfrey: B received summons to appear in a civil suit and A promised to paycertain sum of money as a compensation for loss of time. It was held that the promise waswithout consideration as B was already under a duty to appear and give evidence.

An agreement by a client to pay to his counsel after the latter has been engaged, a certain sum over and above the fee, in the event of success of the case would be void, since it is without consideration. (Ramachandra Chintaman Vs. Kaluraju)

b) But where a person promises to do more than what he is legally bound to do, such apromise is a good consideration (provided it is not opposed to public policy,).

E.g.: A student approached his lecturer for tuition after the class timings and promised togive Rs.5,000 if he passes in the exam. This is a good consideration.

9. Consideration must not be unlawful, immoral or opposed to public policy.

10. Consideration must be lawful: Sec.23 states that consideration is unlawful if:

a. It is forbidden (Prohibited) by law;

b. It is of such a nature that if allowed it would defeat some other law of the Country;

c. It is fraudulent;

d. It involves injury to the person or property of the other;

e. Court regards it as immoral or opposed to public policy.

There may be cases where one part of consideration is unlawful but the other is not. In such cases the whole agreement is void if the unlawful part can’t be separated from the lawful part.

Q.No.3. State the exceptions to the doctrine of Consideration.

• Sec.10 of the Indian Contract Act describes lawful consideration as one of the essentialelements of a valid contract. This means that an agreement without consideration is void. Thisis also called “Doctrine of consideration”.

• But there may be certain circumstances where it will not be reasonable to apply the doctrine ofconsideration. Sec.25 of the Indian Contract Act takes care of such circumstances.


• The general rule is that an agreement made without consideration is void (Sec.25). In everyvalid contract consideration is very important. A contract may only be enforceable when anadequate consideration is there (Note: In this sentence it is not correct to use the wordadequate. But as it is given by ICAI we have to follow the same). However, the IndianContract Act contains certain exceptions to this rule. In the following cases, the agreementthough made without consideration, will be valid and enforceable.

1. Natural Love and Affection: A written and registered agreement basedon natural love and affection between the parties standing in near relation(e.g., husband and wife) to each other is enforceable even withoutconsideration.

E.g.: A husband, by a registered agreement promised to pay his earningsto his wife. Held the agreement though without consideration, was valid.

In other words, an agreement is enforceable at law even withoutconsideration, if it is:

a. Expressed in writing,

b. Registered,

c. Is made on account of natural love and affection, and

d. Between parties standing in near relation to each other.

Note: The Act does not provide any guidance as to who is near relative. Therefore, the expression includes parties related by blood or marriage. Further, nearness of relationship does not necessarily imply natural love and affection Rajlukhy Vs. Bhoothnath Mookherjee: A Hindu husband, after referring to quarrels and disagreement between him and his wife executed a registered document in favour of his wife agreeing to pay her for maintenance. But no consideration is moving from the wife. Held, the agreement was void as there is no consideration. The essential element of natural love and affection was missing.

2. Compensation for past voluntary services: A promise to compensate, wholly or in part, aperson who has already voluntarily done something for the promisor, is enforceable under Sec.25(2). A promise to pay for past voluntary services is binding. In order that a promise to pay forthe past voluntary services be binding, the following essential factors must exist:

a. The services should have been rendered voluntarily

b. The services must have been rendered for the promisor.

c. The promisor must be in existence at the time when serviceswere rendered.

d. The promisor must have intended to compensate the promisee.

Examples:

• P finds R’s purse and gives it to him. R promises to give P Rs.1,000. This is a validcontract.

• A says to B’ “At the risk of your life you saved me from drowning. I promise to pay youRs.1,000. This is a legally binding contract between A and B.

3. Promise to pay time barred debt: A time barred debt is a debt which is not recoverablebecause of lapse of specified time (presently 3 years) under the Limitation Act. In the normalcourse, once a debt becomes time barred, the lender can’t get back his money. Therefore, adebtor is not legally bound to pay the debt if it becomes a time-barred debt.

Where a promise in writing, signed by the person making it or by his authorised agent, is madeto pay a debt barred by limitation it is valid without consideration [Sec.25(3)]. In other words,the contract is still enforceable, provided:


• It is made in writing,

• The promise must be signed by the debtor (promisor) or by his authorised agent.

• The promise may be to pay the whole or any part of the debt. [Sec.25(3)].

E.g.: A is indebted to C Rs.6,000 but the debt is barred by the Limitation Act. A signs a written promise now to pay Rs.5,000 in final settlement of the debt. This is a contract without consideration (No consideration to A), but enforceable.

4. Completed Gift: In case of completed gifts, the rule “No consideration, No contract” does notapply. Explanation (1) to Section 25 states that “nothing in this section shall affect the validityas between the donor and the donee, of any gift actually made”. Thus, gifts do not require anyconsideration. Thus transfer of property by one person to other is valid and the persontransferring the property cannot demand the property back on the ground that there is noconsideration.

E.g.: K transferred some property to N by a duly written and registered deed as a gift. This is avalid contract even though there is no consideration.

5. Remission: Consideration is not necessary for an agreement to receive less than what is due.This is known as remission in law.

E.g.: Creditor A agrees to accept Rs.500 from B in full satisfaction of the debt of Rs.1000. Asubsequently cannot claim the amount of Rs.500 which he has rescinded.

6. Charitable subscription: Generally promise made to give some charitable subscription is notenforceable in the court of law because it is not supported by some real consideration.

Abdul Aziz Vs. Masum Ali: The secretary of a MosqueCommittee filed a suit to enforce a promise to subscribeRs.500 to the re-construction of a mosque. Held, “the promisewas not enforceable because there was no consideration inthe sense of benefit”, as “the person who made the promisegained nothing in return for the promise made”.

If a promisee undertakes the liability on the promise of theperson to contribute to charity, there the contract shall bevalid. In such a case the person making the promise is boundto pay the amount to the extent of commitments made subject to the maximum limit ofpromised amount.

Kedar Nath Vs. Gauri Mohamed: The facts of this case were almost similar to those of theprevious case, but the secretary in this case incurred a liability on the strength of the promise.Held, the amount could be recovered. The promise could, however, be enforced only to theextent of the liability (detriment) incurred by the secretary. In this case the promise, eventhough it was gratuitous, became enforceable.

7. Agency: According to Sec.185 of the Indian Contract Act, consideration is not necessary tocreate contract of agency.

8. Gratuitous Bailment: No consideration is required to effect the gratuitous bailment (Section148).

9. Guarantee: A ‘contract of guarantee’ is a contract to perform the promise or discharge theliability of third person in case of his default. Consideration received by the principal debtor is asufficient consideration for the surety.

10. Contract under seal: A contract under seal is enforceable even without consideration.Contract under seal means a contract which is in writing, signed, sealed and delivered to theother party. (Formal Contracts under the English Law)


Q.No.4. State the circumstances in which a stranger to the contract can sue. (or) Write about the Doctrine of Privity of contract.

STRANGER TO THE CONTRACT I.E. DOCTRINE OF PRIVITY OF CONTRACT:

1. Under the law of contract, an agreement can be enforced only by the parties to it. A stranger tothe contract can’t sue and be sued. Since contract is a private relationship between parties, therights and obligations under such contract are strictly restricted to them. This is known asdoctrine of privity of contract. The consequences of this doctrine are:

a. A person who is not a party to the contract can’t sue upon it even though he has providedthe consideration.

b. A contract can’t create rights or impose obligations on any person other than the parties toit. Thus, if there is a contract between X and Y then Z can’t enforce it.

2. Though under the Indian Contract Act, 1872 the consideration for an agreement may proceedfrom a third party, the third party cannot sue on agreement. Only a person who is party to acontract can sue on it.

3. Thus, the concept of stranger to consideration is valid and is different from stranger to acontract which means contract by the person who is not a party to the contract.

4. Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge and Co. Ltd.: The doctrine of privity ofcontract can be best illustrated by an English case Dunlop Pneumatic Tyre Co. Ltd., V.Selfridge & Co., Ltd. As per the facts of the case, Dunlop & Co. sold some tyres to Dew & Co.,with an agreement that these tyres will not be sold below the listed price. Dew & co., in turn,sold some of the tyres to Selfridge & Co.,(S) with an agreement that they (S) will observeconditions as to price. They (S) also promised that they would pay to the Dunlop & Co., a sumof 5 Pounds for every tyre sold below the list price. S sold some tyres below the list price andthe Dunlop & Co., brought an action against S to recover damages for the same. House ofLords held that, Dunlop & Co., can’t bring an action against S because, there was no contractbetween the two.

5. A stranger to the contract cannot be Sued: A person who is not a party to the contractcannot be sued upon it.

E.g.: P who is indebted to Q, sells his property to R and R promises to pay off the debt amount to Q. If R fails to pay, then in such situation Q has no right to sue, as R is a stranger to the contract.

EXCEPTIONS TO DOCTRINE OF PRIVITY OF CONTRACT:

1. Beneficiary under some trust or charge:

a) The person creating the trust is known as author of the trust.

b) The person for whose benefit the trust is created is called as beneficiary. The person whois entrusted with the trust property and to execute the trust is called trustee.

c) The agreement creating the trust is entered into between the author of the trust (settler)and the trustee.

d) In the case of trust, a beneficiary can enforce his right under the trust, though he was not aparty to the contract between the settler and the trustee.

E.g.: A transfers some property in favour of B to be held by him in trust for the benefit of X.X can enforce the agreement even though he is a stranger to the contract.

2. Family arrangement for marriage expenses, maintenance of members, etc.: In the case ofa family settlement, if the terms of the settlement are reduced in to writing, the members offamily who originally had not been parties to the settlement may enforce the agreement. In thecase of certain marriage contracts, a female member can enforce a provision for marriageexpenses, made on the partition of the Hindu Undivided Family.


Sunder Raja Aiyengar Vs. Laxmi Ammal: On the partition of a joint Hindu family property, an agreement was entered among its male members to make provision for the marriage expenses of a female member. It was held that the female member can sue the parties to the partition deed to enforce such provisions.

Shuppu Ammal Vs. Subramanian: Two brothers, on the partition of family property agreed to pay Rs.300 in equal share to their mother for maintenance. It was held that the mother can enforce this contract even though she is a stranger to this contract.

3. Contracts made by the agent: The principal can enforce the contracts entered into by hisagent provided the agent acts within the scope of his authority and in the name of the principal.

E.g.: A appoints B as his agent for selling the goods. B sold the goods to a buyer C. C sued Afor defective goods. In this case, though there is no direct contract between A and C, yet A isliable because B has sold the goods to C as A’s agent.

4. Covenants running with land: In the case of covenant running with the land, the person whopurchases land with notice that the owner of land is bound by certain duties affecting land, thecovenant affecting the land may be enforced by the successor of the seller.

E.g.: Certain land owners adjoining a stream agreed with “Catchment Board” to improve thebanks of the stream and to maintain them in good condition. The land owners on their part paidthe proportionate cost to the Board. Subsequently, one of the land owners sold his land to Aand who, in turn, sold to B. Due to negligence on the part of the Board, banks of the streamburst and the land was flooded. Both A and B filed suit against the Board. The Court allowedthem to sue even though they were strangers to the agreement.

5. Acknowledgement or estoppel: In the case of an estoppel by acknowledgement of liability orpart performance thereof, that is, when one admits the liability. Where the promisor by hisconduct, acknowledges or otherwise behaves as an agent of a third party, a binding obligation isincurred by him towards third party.

Examples:

• If L gives to M Rs.2,000 to be given to N and M informs N that he is holding the money forhim, but afterwards M refuses to pay the money. N will be entitled to recover the same fromthe former.

• A receives some money from T to be paid over to P. A admits of this receipt to P. P canrecover the amount from A who shall be treated as the agent of P.

6. Assignment of a contract: In the case of assignment of a contract, when the benefit under acontract has been assigned, the assignee can enforce the contract. Where the rights under acontract are assigned i.e. transferred to a third party, the assignee can enforce the benefitsunder it even though he is not a party to the contract. The assignment may be either voluntarilyor by operation of law. Assignment of a life insurance policy or assignment of property toofficial assignee in case of insolvency of a person are few examples in which the assignee hasa right to sue on the contract even though he is not a party to it.

7. Minor’s marriage contract: Where the parents or guardians enter into a contract for marriageof their wards, the contract may be enforced by the wards even though they are not parties tothe contract.

E.g.: The father of a minor girl A, entered into an agreement for her marriage with B, a minorboy. But B refused to marry on attaining majority. A filed a suit against B for damages forbreach of contract. Held, A could recover the damages although she was not a party to thecontract.


LAWFUL OBJECT AND CONSIDERATION

1. We shall now discuss the next two ingredients of a valid contract, viz., lawful object and lawfulconsideration.

2. There are certain provisions of law which are general in character and are applicable to thecommunity as a whole. Subject thereto, an individual generally has the right to adjust his rightsand obligations as he may wish.

3. But this contractual freedom or the right of individuals to make by an agreement what in effectis law between themselves, is not absolute. In other words, there is a limitation on thecontractual freedom of an individual.

E.g.: Suppose, A agrees to pay Rs.100 to B on B’s stealing C’s purse. In this case, the Courtobviously cannot compel A to pay B, if B has stolen the purse because it will be encouragingtheft which is hit by the Indian Penal Code.

4. The term Object means purpose or design.

5. The term ‘consideration’ is defined in section 2(d) and the various forms it may take have beenconsidered earlier in this study module.

E.g.: A agrees to sell goods to B, and B, who is insolvent assigns the benefit of the contract forRs.100 with a view to defrauding his creditors. The consideration for the assignment; viz., thesum of Rs.100 is lawful but the object viz., defrauding the creditors, is unlawful as it is intendedto defeat the provisions of the insolvency law.

6. It should be noted that the words “Consideration” and “Object” used in Sec.23 are notsynonymous. The word object is used distinctly to mean “purpose or design” of the agreement.The word ‘consideration” is different from object.

7. Thus in an agreement both object and consideration may be lawful or unlawful. Sometimes,only one of them is unlawful and the other is lawful. But Sec.10 requires that in a contract, bothmust be lawful. Therefore, if both the object and consideration of an agreement is not lawful,the agreement is void.

Q.No.5. State some agreements that are expressly declared to be void.

1. Where the consideration or object is forbidden by law:

a) Acts forbidden by law are those which are punishable under any statute as well as thoseprohibited by regulations or orders made in exercise of the authority conferred by thelegislature.

E.g.: A license to cut grass is given to X by the Forest Department under the Forest Act.One of the terms of the license is that the licensee should not assign his interest under thelicense, without the permission of the Forest Officer, and a fine is prescribed for a breach ofthis condition. But the observance of the conditions of the license is not obligatory underthe Forest Act. If A in breach of the condition, agrees to assign his interest under thelicense to B, that agreement will be valid. Here, the assignment is not prohibited by law, thecondition against assignment has been imposed only for administrative purpose or solelyfor the protection of revenue.

b) The limits to contractual freedom are set out in Section 23 of the Act. An agreement, theobject or consideration of which is unlawful is void. “Consideration or object is unlawful if itis forbidden by law; or it would; if permitted defeat the provisions of any other law or isfraudulent; or involves injury to the person or property of another, or is immoral; or opposedto public policy.


c) An act is said to be forbidden by law in any of the following 3 cases:

• When an act is punishable by the criminal law of the land e.g. by Indian Penal Code,

• When an act is forbidden by any special legislation,

• When an act is forbidden by the regulations or orders made under the authority derivedfrom the legislation.

E.g.: A promises to obtain for B an employment in the public service and B promised to pay Rs.1,000 to A. The agreement is void as the consideration is unlawful.

2. If it defeats the Provisions of any Law:

a) The term ‘law’ includes any legislative enactment or rule of the Hindu and Muslim Laws orany other rule for the time being in force in India.

b) Legislative enactment would be defeated by an agreement by a debtor not to pleadlimitation, as the object is to defeat the provisions of the Limitation Act.

Rama Murthi Vs. Goppayya: X borrowed Rs.1,00,000 from Y and agreed not to raise anyobjection as to the limitation and that Y may recover the amount even after the expiry oflimitation period. This agreement is void. Because, it defeats the provisions of theLimitation Act.

c) The Hindu Law is defeated by an agreement to give the son in adoption in consideration ofannual allowance to the natural parents.

d) If the object or the consideration of an agreement is of such a nature that, if permitted, itwould defeat the provisions of any law, then such agreement is void.

3. Defeat of any rule for the time being in force in India:

E.g.: A Receiver being an officer of the Court, the Court has also the jurisdiction to determine his remuneration and the parties cannot by any of theirs add to or derogate from the functions of the Court without its authority.

a) A promise, therefore, to pay the salary of a receiver without the leave of the Court, even ifunconditional, being in contravention of law, is not binding on the promisor.

b) The object or consideration in all the agreements aforementioned being unlawful, are void.

4. Where the consideration or object is of such a nature that it is fraudulent: Whereagreement involves the commission of a wrong act or commission of a fraud against a thirdparty or commission of fraud against public, they are unlawful and unenforceable. Thefollowing are examples of agreements the object or consideration thereof is unlawful on theground of fraud.

Examples:

• A, an agent for a zamindar agrees for money without the knowledge of his principal, toobtain for B a lease of land belonging to his principal. The agreement between A and B isvoid, as the consideration is fraudulent.

• An agreement between A and B to defraud a department of Government by submitting atender in the name of one of them only, though they were both partners in the transaction isvoid, as the object is fraudulent.

• A, B and C entered into an agreement to divide gains acquired or to be acquired by them byfraud. This agreement is void.

5. Where the consideration or object of the agreement involves injury to other person orproperty: The word ‘injury’ means criminal or wrongful harm. An agreement to cause injury tothe person or property of another is void. In the following examples, the object or considerationis unlawful as it involves injury to the person or property of another.


Examples:

• An agreement to print a book in violation of another’s copyright is void, as the object is tocause injury to the property of another. It is also void as the object of the agreement isforbidden by the law relating to copyright.

• A promises to repay his debt by doing manual labour daily for a special period and agrees topay interest at an exorbitant rate in case of default. Here A’s promise to repay by manuallabour is the consideration for the loan, and this consideration is illegal as it imposes what, insubstance, amounts to slavery on the part of A. In other words, as the consideration involvesinjury to the person of A, the consideration is illegal. Here the object too is illegal, as it seeksto impose slavery which is opposed to public policy. Hence the agreement is void.

6. Where the consideration or object is regarded by the court as immoral: An agreement,the consideration or object of which is immoral, is void. An immoral agreement is one which isregarded by the court as immoral. The Apex Court has confined its meaning only to sexualimmorality. The following are the examples of agreements where the object or consideration isunlawful, being immoral.

Examples:

• A landlord cannot recover the rent of a house knowingly let to prostitute who carries on hervocation there. Here, the object being immoral, the agreement to pay rent is void

• Where P had advanced money to D, a married woman to enable her to obtain a divorcefrom her husband and D had agreed to marry him as soon as she could obtain the divorce,it was held that P was not entitled to recover the amount, since the agreement had for itsobject the divorce of D from her husband and the promise of marriage given under thesecircumstances was against good morals.

7. Where the consideration or object is regarded by the court as opposed to public policy:An agreement which is injurious to the public or against the interests of the society is said to beopposed to public policy. A contract may be against public policy either from the nature of actsto be performed or from the nature of consideration.

E.g.: A promises to obtain for B an employment in the public service and B promises, in return,to pay Rs.1,000 to A. The agreement is void, as the consideration thereof is unlawful. Here A’spromise to procure for B an employment in the public services is the consideration for B’spromise to pay Rs.1,000. The consideration, being opposed to public policy, is unlawful.

Q.No.6. State some agreements that are opposed to public policy.

INTRODUCTION:

1. The expression ‘public policy’ can be interpreted either in a wide or in a narrow sense. Thefreedom to contract may become illusory, unless the scope of ‘public policy’ is restricted. In thename of public policy, freedom of contract is restricted by law only for the good for thecommunity.

2. Public policy is a policy which should be followed by people so that they do not cause anyharm to the society. Public policy is not the policy of a particular Government.

3. The Indian Contract Act does not specifically identify the instances which are to be consideredas opposed to public policy. But it clearly states the intention that any contract opposed topublic policy is unlawful.

4. The expression Public policy varies from time to time. An attempt to enlarge the scope of thedoctrine is bound to result in the curtailment of individual freedom of contract. Public policy, onthis account, has been described as an unruly horse which, if not properly bridled, may carry itsrider he knows not where. It being an untrustworthy guide for regulating the relations betweenparties it should not be invoked except within the prescribed limits described below.


AGREEMENTS OPPOSED TO PUBLIC POLICY: Some well established instances of

agreements opposed to public policy are discussed below:

1. Trading with an Alien enemy: Any trade with person owing allegiance to a Government atwar with India without the licence of the Government of India is void, as the object is opposedto public policy. Here the agreement to trade offends against the public policy by tending toprejudice the interest of the State in times of war.

2. Agreements interfering with the course of justice:

a) An agreement whose object is to induce any judicial officer of the State to act partially orcorruptly is void, as it is opposed to public policy.

b) Similarly an agreement by A to reward B, who is an intended witness in a suit against A inconsideration of B’s absenting himself from the trial.

c) For the same reasons, an agreement which contemplates the use of under-hand means toinfluence legislation is void.

d) Similarly, an agreement to induce any executive officer of the State to act partially orcorruptly is void.

3. Stifling (confining) prosecution:

a) An agreement to stifle prosecution tends to be a perversion or an abuse of justice;therefore, such an agreement is void.

b) The principle is that one should not make a trade of felony.

c) The compromise of any public offence is generally illegal. Under the Indian CriminalProcedure Code, there is, however, a statutory list of compoundable offences and anagreement to drop proceeding relating to such offences with or without the permission ofthe Court, as the case may be, in consideration the accused promising to do something forthe complainant, is not opposed to public policy.

Examples:

• A agrees to sell certain land to B in consideration of B abstaining from taking criminalproceeding against A with respect to an offence which is compoundable, theagreement is not opposed to public policy. But, it is otherwise, if the offence is noncompoundable.

• A promises to B to abandon a prosecution which he had instituted against B for robberyand B promises in lieu thereof to restore the value of the property robbed. Theagreement is void as its object, namely, the stifling of prosecution, is unlawful.

• Krishna who knows that Ram has committed a murder, receives Rs.2,00,000 from Ramin consideration of not exposing Ram. This agreement is illegal.

4. Maintenance and Champerty:

a) Maintenance is the promotion of litigation in which one had no interest and champerty isbargain whereby one party agrees to assist the other in recovering property, with a view tosharing the profits of litigation.

b) Agreements tending to champerty and maintenance are void in England but in India theyare not necessarily void.

c) Thus, in India, an agreement to share the subject of litigation, if recovered in considerationof the party’s supplying the funds in good faith to carry it on, is not itself, opposed to publicpolicy.

d) But where such advances are made by way of gambling in litigation, the agreement toshare the subject of litigation is certainly opposed to public policy and therefore void.


e) Examples:

• A files a suit against B for the recovery of a house. A did not have money to pay theadvocate. X, a well-wisher lends the required money to A. This is a ‘Maintenance’agreement.

• A files a suit against B for the recovery of a house. X promises to advance Rs.1,000 toA for the costs of the litigation and A promises X to give a portion of his house if he issuccessful in the suit. This is a champerty agreement.

In simple words:

a) When a person agrees to help the other by money or otherwise in litigation in which he isnot interested, it is called ‘Maintenance’.

b) 'Champerty' is an agreement where by one party is to assist another to bring an action forrecovering money or property and is to share the proceeds of the action

According to Indian Law, a contract of ‘Champerty’ is absolutely void and maintenanceagreements are valid, provided the motive behind is purely charitable. But according toEnglish law both maintenance and champerty are void.

5. Traffic in public offices:

a) An agreement to traffic in public office is opposed to public policy, as it interferes with theappointment of a person best qualified for the service of the public.

b) Public policy requires that there should be no money consideration for the appointment toan office in which the public is interested.

c) An agreement of trafficking (i.e. to buy or sell or procure) in public office or title is againstpublic policy. The following are the examples of agreements that are void; since they aretantamount to sale of public offices.

• An agreement to pay money to a public servant in order to induce him to retire from hisoffice so that another person may secure the appointment is void.

• An agreement to provide money to a Member of Parliament or Assembly or Minister toinfluence his opinion and judgement.

• An agreement intended to induce a public officer to act corruptly.

• An agreement to procure a public title like "Bharat Ratna", "Padma Vibhushan", etc. forreward.

• An agreement for procuring votes in election for consideration.

6. Agreements creating interest opposed to duty: The public policy requires that a person mustperform his duties honestly. If a person agrees to do something which is against his public orprofessional duty, the agreement is void.

E.g.: A, an editor of a newspaper agreed not to publish reports about B for Rs.50,000 is void.

7. Agreements unduly restraining personal liberty: An agreement which restricts the personalliberty of an individual is void.

E.g.: An agreement by a debtor to work as a bonded labour for creditor is void.

8. Agreements interfering with parental duties: The father and the mother are the naturalguardians of a minor child. This right of guardianship can’t be taken away by any agreement.

Giddu Narayanan Vs. Mrs. Annie Besant: The father of two minor sons agreed to transfertheir guardianship to Mrs.A, permanently. Subsequently, G wanted to set aside the agreementand take back the custody of his children. The court held that the guardianship of G can’t bepermanently alienated. The agreement was void and G got back the custody of boys.


9. Marriage Brokerage agreements: An agreement to negotiate marriage for reward, which isknown as a marriage brokerage contract, is void, as it is opposed to public policy. For instance,an agreement to pay money to a person hired to procure a wife is opposed to public policy andtherefore void. An agreement to pay brokerage to a person for negotiating a marriage is void.An agreement of dowry cannot be enforced.

10. Interest against obligation: The following are examples of agreements that are void as theytend to create an interest against obligation. The object of such agreements is opposed topublic policy.

i. An agreement by an agent, to receive without his principal’s consent, compensation fromanother for the performance of his agency is invalid.

ii. A, who is the manager of a firm, agrees to pass a contract to X if X pays to A Rs.2,000privately; the agreement is void.

11. Agreement to form Monopoly: Agreements having for their object the establishment ofmonopolies are opposed to public policy and therefore void. It is also hit by the MRTP Act. Anagreement to form monopoly is void.

12. Agreements to defraud creditors or revenue authorities: Agreement, the object of which isto defraud the creditors or the revenue authorities is not enforceable.

E.g.: An agreement by which an executive draws his salary from a company in his as well as inhis son’s name while the son does not work for the company. This agreement is to defraud therevenue authorities.

13. Agreements not to bid against each other in an auction sale is void, if the bidders intention is todefraud the auctioneer.

14. Agreement to commit a crime: Where the consideration in an agreement is to commit acrime, the agreement is opposed to public policy. Likewise an agreement to indemnify a personagainst consequences of criminal act is opposed to public policy and hence unenforceable.

15. Agreements interfering with marital duties: Any agreement which interferes with theperformance of marital duties is void because it is opposed to public policy. Examples are:

• A promise by a married person to marry another lady during the life time or after the deathof spouse.

• Where the land is transferred in the name of the father as consideration for giving hismarried daughter, though there is no divorce to another person such giving is for immoralpurpose and against the public policy. (Kamala Bai v. Arjun Singh AIR 1991 MP 275).

Q.No.7. What is an illegal agreement and state its effect?

MEANING:

1. Illegal acts are those which involve the commission of a crime or contain an element of obviousmoral turpitude or contrary to public policy. As such illegal agreements include acts opposed topublic morals.

2. On the other hand, unlawful acts are those which are less rigorous in effect and involve a “non-criminal breach of law”. These acts do not affect public morals, nor do they result in thecommission of a crime. These are simply disapproved by law on some ground of public policy.These include agreements in restraint of trade, restraint of marriage or restraint of legalproceedings, etc.

3. "Every illegal agreement is unlawful, but every unlawful agreement is not illegal".


EFFECTS OF ILLEGALITY: The rule which is applicable to the matter is “ex turpi causa non

oritur actio” i.e. no cause of action can arise (i.e. no action is allowed on an illegal agreement.)

1. An illegal agreement is void-ab-initio.

2. Collateral transactions to an illegal agreement are also illegal and hence void. But a collateraltransaction entered into innocently is valid.

3. No action can be taken

• for the recovery of money paid or property transferred under an illegal agreement, and

• for the breach of an illegal agreement.

4. In cases of equal guilt in an illegal agreement, the position of the defendant is better than thatof plaintiff.

WHERE THE ILLEGALITY IS SEVERABLE: A contract may contain several distinct promises of which some are legal and others illegal. If the illegal promise or act is severable from the legal one, the court will enforce the legal promise or act and reject the illegal part.

E.g.: X promises Y to maintain accounts of his legal and illegal business for a total monthly remuneration of Rs.3,000, being Rs.1,000 for the legal and Rs.2,000 for illegal business. Here both the parts of consideration are severable, hence the former is enforceable whereas the latter is not.

WHERE THE ILLEGALITY IS NOT SEVERABLE: If the illegal promise or act can’t be separated from the legal one, the whole contract is declared illegal.

Examples:

• A appoints B to work as an agent to do legal and illegal things for a monthly salary ofRs.50,000. Here the legal part is not severable from illegal one, so the whole contract is illegal.

• A promises to superintend, on behalf of Y, a legal manufacturer of indigo and an illegal traffic inother articles. B promises to pay A a salary of 2,000 rupees per month. The agreement is void,the object of A’s promise and the consideration for B’s promise being in part unlawful.

RECIPROCAL PROMISE TO DO LEGAL THINGS AND ALSO ILLEGAL THINGS: Where persons reciprocally promise, firstly to do certain things which are legal and secondly, under specified circumstances, to do certain other things which are illegal then the first set of promise is a contract, but the second one is a void agreement. [Sec. 57]

E.g.: A and B agree that A shall sell B a house for Rs.10,000 but that, if B uses it as a gambling house, he shall pay A Rs.50,000 for it. The first set of reciprocal promises, namely, to sell the house and to pay Rs.10,000 for it is a contract. The second set is for an unlawful object, namely, that B may use the house as a gambling house, and hence it is void.

CONSIDERATION UNLAWFUL IN PART:

a) By virtue of Sec.24, “if any part of a single consideration for one or more objects, or any one or anypart of any one of several considerations for a single object, is unlawful, the agreement is void.”

b) This section is an obvious consequence of the general principle of Sec.23. There is no promise fora lawful consideration if there is anything illegal in a consideration which must be taken as a whole.

c) The general rule is that where the legal part of a contract can be severed from the illegal part,the bad part may be rejected and the good one can be retained. But where the illegal partcannot be severed, the contract is altogether void.

ALTERNATIVE PROMISE, ONE BRANCH BEING ILLEGAL: As per Sec.58 of the Act, in case of an alternative promise, one branch of which is legal and the other branch illegal, legal branch alone can be enforced.

E.g.: K and S agree that K shall pay S Rs.100, for which S shall deliver to K either sugar or smuggled opium. The contract to deliver sugar is valid and the agreement to deliver opium is void agreement.

THE END

IPCC_32e_M.Law_Capacity to Contract______________________________50

4. CAPACITY TO CONTRACT

Q.No.1. What is meant by Capacity to Contract?

MEANING:

• The legal capability of a person to enter into contract is known as capacity to contract.

• Capacity refers to the competence of the parties to make a contract. It is one of the essentialelements to form a valid contract.

• According to Sec.10, all agreements are contracts if they are made by the parties competent tocontract. Thus, the competence or capacity to contract is one of the essential elements of avalid contract.

WHO ARE COMPETENT TO CONTRACT?: According to Sec.11, “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 contracting by any law to which he is subject.”

Thus, the law ordinarily presumes that every person is legally competent to contract if he fulfils 3 conditions:

• He has attained the age of majority

• He is of sound mind; and

• He is not disqualified from contracting by any other law to which he is subject.

Q.No.2. State the legal provisions relating to contracts entered into by minors.

WHO IS A MINOR?

• A minor is a person who has not attained the age of majority.

• The age of majority is to be determined according to the law to which theminor is subject to.

• Age of majority in India: In India, the age of majority is regulated by theIndian Majority Act (Act IX of 1875). Every person domiciled in India attainsmajority on the completion of 18 years of age.

• Sec.3 of the Indian Majority Act, 1875 defines it as “A minor is a person who has not completed18 years of age”.

• A person is deemed to have attained majority as under:

Where a guardian of a minor’s person or property is appointed under the Guardian and Wards Act, 1890.

On completion of 21 years

Where minor’s property has passed under the superintendence of the court of wards

On completion of 21 years

In other cases On completion of 18 years

STATUS OF CONTRACTS ENTERED INTO BY A MINOR: According to Sec.10 of the Indian Contract Act, agreements entered into by a minor are void-ab-initio.


Mohiri Bibee Vs. Dharmodas Ghosh: In this landmark decision court declared that all contracts entered into by a minor are null and void. Dharmodas Ghosh, a minor, executed a mortgage deed of his house in favour of a money lender for Rs.20,000. Out of this he received cash worth Rs.8,000 from the money lender. Later on the money lender filed a suit for recovery of his money and sale of the mortgaged property. It was held that an agreement by a minor is absolutely void and therefore the money lender can’t recover the mortgage money, nor he could sell the minor’s mortgaged property.

LAW RELATING TO MINOR’S AGREEMENTS / POSITION OF MINOR’S AGREEMENTS:

1. Void-ab-initio: An agreement entered with minor is void-ab-initio. It is altogether void. A minoris not competent to contract and any agreement with or by a minor is void from the verybeginning. In the leading case of Mohiri Bibee v. Dharmodas Ghose held that in minor’scontracts are absolutely void.

2. No ratification on attaining the age of majority: When a person accepts obligation acquiredunder some previous agreement, ratification is said to be made. Ratification relates back to thedate of making the contract. A minor cannot ratify the agreement on attaining majority as theoriginal agreement is void-ab-initio. Once a minor reaches the age of majority, he or she can’t ratifyany contract made during his minority, because there is no consideration to the new contract.

Suraj Narayan Vs. Sukhu Aahir: A minor borrowed a sum of money, executing a simple bondfor it, and after attaining the majority executed a second bond in respect of the original loanplus interest. Held, the bond was not maintainable as it was without consideration.

If in addition to the consideration already given during minority, a further advance is made, or a freshconsideration is given after majority, a promise to pay the whole amount becomes binding contract.

Examples:

• X, a minor makes a promissory note in the name of Y. On attaining majority, he makes anew promissory note in place of old one. Here the new promissory note which he executedafter attaining majority is also void being without consideration.

• A, a minor, borrowed Rs.10,000 from B. After attaining majority, A requested B for anotherloan of Rs.15,000 which B gave to A. Now A gave a combined promissory note forRs.25,000 to B with a promise to repay the whole amount. It is a fresh contract based on afresh consideration. So, A is liable to pay Rs.25,000 to B.

3. No specific performance: Specific performance means implementation of a contract asagreed. A minor’s agreement can’t be specifically enforced.

E.g.: A, a minor agrees to sell his car to B for Rs.50,000. Later on, A refuses to give the car. Bcan’t enforce specific performance by A.

4. The doctrine of estoppel does not apply to a minor: The doctrine ofestoppel is that - when a person makes a false representation and theother person believes it to be true and acts accordingly, later on theperson who made such false representation is not allowed to deny thetruth of that representation.

E.g.: A told to B that C wants to buy 100 kgs. of rice from B for hisdaughter’s marriage. B said he will be sending the rice to C’s place in aday’s time. C, who was also present at that time did not utter a singleword. Next day, B sent 100 kgs. rice to C’s place. Now C said that he didnot want to take the rice and that he did not make any contract with B. Inthis case, the legal position is that C has to accept the rice and pay the respective pricebecause by keeping silent, he made B to believe that he wanted to make the said transaction.Now he is ‘estopped’ from denying the said transaction.


This doctrine is not applicable to a minor. When a minor misrepresents himself as major and makes the other party to enter into a contract, the minor can still take the plea of his minority and seek cancellation of agreement.

5. A minor can always plead minority: A minor can always plead minority and is not stopped todo so even where he has taken any loan or entered into any contract by falsely representingthat he was major.

E.g.: T, a minor by fraudulently representing himself to be of major, induced R, to lend himRs.20,000. T refused to repay it and R sued him for the money. Held, the contract was voidand T is not liable to repay the amount.

6. No restitution except in certain cases: The term ‘restitution’ may be defined as an act ofrestoring to the rightful owner, that which has been taken away or lost. If a minor obtains goodson credit, its payment cannot be enforced but the goods can be recovered if they are still in hispossession.

E.g.: If a minor misrepresents his age and gets a car on credit, the car can be recovered if it isstill in his possession. If he has sold the car but has received the money from its sale, he canbe stopped from parting with money and such money can be recovered. But if he has spent theamount, nothing can be recovered from him. In any case there is no personal liability on theminor.

This rule applies to a minor only when he enters into a contract by misrepresenting his age.

7. Agreements where minor is a beneficiary are enforceable: Though a minor is notcompetent to contract, nothing in the Contract Act prevents him from making the other partybound to the minor. Thus, a promissory note duly executed in favour of a minor is not void andcan be sued upon by him, because though he is incompetent to contract, may yet accept abenefit. A minor can enforce such agreements in which he is a beneficiary or promisee anddoes not create any obligation on his part. However, this right is subject to a condition that hemust have performed his promise under the agreement.

Raghva Chariar Vs. Srinivasa: A, a minor advanced certain sum of money to B for which Bexecuted a mortgage of his immovable property in favour of A. In this case, the mortgage canbe enforced by A, if B does not repay the money.

Thus, a minor is capable of purchasing an immovable property and can enforce the other partyto hand over its possession after making payment for it.

E.g.: A mortgage was executed in favour of a minor. Held, he can get a decree for theenforcement of the mortgage.

8. Validity of minor’s agreement jointly with a major person: A minor can be a joint promisorwith a major. But the minor cannot be held liable. The major person can be forced to performthe entire promise.

9. Minor as a partner in a firm: A minor can’t become a partner in a partnership firm. However,he may, with the consent of all the partners, be admitted to the benefits of partnership (Sec.30of the Indian Partnership Act, 1932). He can share the profits without incurring any personalliability.

10. Contract for supply of Necessaries: Minor is liable to pay out of his property for thenecessaries supplied to him by the other (Sec.68).

(Note: You will get detailed discussion of this topic in further questions of this chapteritself)

11. Minor as an agent: A minor can act as an agent and bind his principal by his acts withoutincurring any personal liability.


12. Minor as a shareholder or member of a company: A minor can't apply for allotment ofshares in a company in primary market. However, a minor can apply for transfer of fully paidshares in a company through his guardian.

In case a minor inherits certain shares the name of his lawful gaurdian will be entered as amember in the register of members of the company.

13. Minor as an insolvent: A minor can’t be declared as insolvent.

14. Liability for tort: A minor is liable for a tort i.e. civil wrong committed by him.

E.g.: Raju, A 15 years old boy drives a car carelessly and injures Krishna. Here Raju is liablefor the accident i.e. tort.

But where a tort arises out of a contract a minor is not liable because if it is allowed it is anindirect way of enforcing an invalid contract.

E.g.: X, a minor taken a car from a travel agency and met with an accident which results intodamage of a car. Here X is not liable to pay any damage to travel agency.

15. A Minor and Negotiable Instruments Act: A minor can draw, make, negotiate or endorse anynegotiable instruments i.e. cheque, promissory note, bill of exchange, etc. but he will not beliable under any such instruments. However any negotiable instruments executed or endorsedin favour of a minor can be enforced by him. (Sec.26 of the Negotiable Instruments Act 1881)

(Note: You can understand this concept perfectly only after completion of Bills ofExchange chapter in Accounts subject)

16. Contract by guardian – How far enforceable?

a) Though a minor’s agreement is void, his guardian can, under certain circumstances enterinto a valid contract on the minor’s behalf.

b) Where the guardian makes a contract for the minor, which is within his competence and which is for the benefit of the minor, there will be valid contract which the minor can enforce.

c) For instance a guardian can make an enforceable contract of marriage for a minor.Similarly, when the father of the bridegroom contracts with the father of the bride to pay thebride an allowance, there bride can sue her father-in-law to recover arrears of theallowance.

d) But all contracts made by guardian on behalf of a minor are not valid.

e) For instance, the guardian of a minor has no power to bind the minor by a contract forthe purchase of immovable Property.

f) But a contract entered into by a certified guardian (appointed by the Court) of a minor,with the sanction of the court for the sale of the minor’s property, may be enforced byeither party to the contract.

g) The parent or guardian of a minor cannot be held liable unless some goods / services aresupplied to a minor as the agent of the parent or guardian.

17. Membership in a Trade Union: Any person who attained the age of 15 years may be amember of a registered Trade Union provided the rules of the Trade Union allows so. In such acase the minor will enjoy all the rights of a member. (Sec.21 of the Trade Unions Act, 1926)

18. Contracts of Apprenticeship: A contract of apprenticeship, if it is beneficial for the minor canbe made and enforced by the minor's gaurdian under the Indian Apprenticeship Act, 1961.However, the minor must be at least 14 years of age and be physically fit.


Q.No.3. Who are persons of unsound mind? What are the various forms in which unsoundness may occur? State the legal effect of agreement entered into by a person of unsound mind?

POSITION OF UNSOUND MIND PERSON MAKING A CONTRACT: A contract by a person who is not of sound mind is void.

WHO IS CONSIDERED AS SOUND MIND? A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests [Sec.12]

Thus a person is of sound mind if he satisfies the following conditions:

• The person is capable of understanding the contract at the time of making it; and

• The person is capable of making a rational judgement as to the effect of the contract upon hisinterests.

WHO IS A PERSON OF UNSOUND MIND? A person who does not have sound mind is considered as a person of unsound mind.

DIFFERENT FORMS OF UNSOUNDNESS:

1. Idiot: An idiot is a person who doesn’t have mental ability of thinking.His incapacity is permanent and at any time he is unsound mind.

Inder Singh Vs. Parmeshwardhari Singh: A property worth aboutRs.25,000 was agreed to be sold by a person for Rs.7,000 only. Hismother proved that he was an idiot, incapable of understanding thetransaction and that he mostly wandered about. The sale was heldvoid.

2. Lunacy or insanity: A lunatic is a person whose mental thinking isdisordered due to some mental strain or disease. However, the mental capacity of such personsmay not be completely lost. He will have intervals of sanity (capable) and insanity (incapable).The period during which he is sane is called lucid intervals (i.e. capable to enter into contract).Contract entered into during lucid intervals is valid.

E.g.: A patient in a lunatic asylum, who is at intervals of sound mind, maycontract during those intervals.

3. Drunkard or intoxicant: A drunkard or intoxicated person loses his con-tractual capacity when he is intoxicated so excessively that he loses rea-soning power for the time being. Drunkenness is similarly treated as insanity.He can’t enter into a valid contract during drunkenness.

4. Delirious persons: A person delirious from fever is also not capable of understanding thenature and implications of an agreement. So, he can't enter into a contract when he is delirious.

E.g.: A sane man, who is delirious from fever, or who is so drunk that he cannot understand theterms of a contract or form a rational judgement as to its effect on his interests, cannot contractwhilst such delirium or drunkenness lasts.

5. Hypnotised persons: Hypnotism produces temporary incapability till a person is under theeffect of artificial induced sleep. Such a person cannot enter into a contract.

6. Mental decay: There may be mental decay due to old age or poor health. If such person is notcapable of understanding the contract and its effects upon his interest then he can't enter into acontract.


AT WHAT TIME SOUNDNESS OF MIND IS REQUIRED? The soundness of mind is required only at the time of entering into a contract. If a person becomes unsound mind after entering into a contract, the contract remains valid. Consider the following points:

a. Contract by a person usually of unsound mind: A person, who is usually of unsound mind,but occasionally of sound mind, may enter into a valid contract when he is of sound mind.

b. Contract by a person usually of sound mind but occasionally of unsound mind: A personwho is usually of sound mind, but occasionally of unsound mind can enter into a contract when hewas sound mind. He can't enter into a contract when he was unsound mind. [Sec.12 para 3].

BURDEN OF PROOF:

Case The burden of proof

Where a person is usually of sound mind.

The burden of proving that he was of unsound mind at the time of entering into contract lies on the person who challenges the validity of the contract.

Where a person is usually of unsound mind.

The burden of proving that he was of sound mind at the time of entering into contract lies on the person who wants to continue the contract.

In case of drunkenness or delirium from fever or

other causes

The burden of proving that he was delirious from fever or was excessively drunk at the time of entering into contract lies on the person who challenges the validity of the contract.

Q.No.4. Who are disqualified persons to enter into a contract?

Law specifically disqualifies some persons to enter into a contract in order to protect the public from the possible negative consequences. Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such persons are void. Incompetency to contract may arise from political status, corporate status, legal status, etc.

Following persons are specifically disqualified under Indian Contract Act.

a. Alien enemies: An alien is a person who is a foreigner to the land. If war is declared betweentwo countries then such other country is called alien enemy. Contract entered with an alienenemy during war time is void. If a contract is entered during peace times and a war breaks outlater, then the contract has to be suspended till the restoration of peace, or it should bedissolved by the parties or the parties can wait till the completion of war and after restoration ofpolitical relations, the contract can be executed.

b. Foreign Sovereigns, Diplomatic staff, etc.: Foreign sovereigns, Government, theirrepresentatives and diplomatic staff (e.g. ambassadors, envoys etc.) have full capacity tocontract in India but they have the privilege of not being sued. They can’t be sued unless theyvoluntarily submit to the jurisdiction of our Law Courts; or the Central Government permits tosue them.

c. Insolvent: On adjudication, insolvent’s property lies in the hands of ‘OfficialReceiver’, and he has no power to deal with that property. Thus he can’t enterinto any contract regarding the same. After getting the “Certificate ofDischarge” he can make all types of contracts just like an ordinary person.

d. Convicts: A convict during the period of his imprisonment becomesincompetent for two things:

• To enter into contract

• To sue on contracts made before conviction.


However, he may get a license i.e. ‘ticket of leave” from the government and perform the above acts while undergoing imprisonment. His disability comes to an end either on the expiry of the period of sentence or when he is pardoned. On regaining his contractual capacity, he can sue on his contracts as the provisions of Limitation Act also remain in abeyance for him during the period of the sentence.

e. Corporations & Companies: Corporations & companies are the artificial persons created bylaw. A corporation is formed under some special statute passed by the Legislature. Itscontractual capacity is determined by the statute creating it. It is competent to contract withinthe provisions of the statute creating it. A company is formed under the Companies Act. Itscontractual capacity is determined by the “Object Clause” of its Memorandum of Associationregistered under the Companies Act. It is competent to make contract within the scope of theMemorandum. Any contract made beyond the Memorandum is void.

f. Women: Indian law makes no difference between men and women with respect to contractualcapacity. A woman (whether married or not) can enter into a contract and sue and be sued inher own capacity with respect to her property (Stridhanam) provided she is otherwisecompetent to enter into a contract. Even husband and wife can enter into valid contracts. Theycan sue each other because they are independent persons and have separate legal identity.

A husband is not liable for the contracts made by his wife unless he allows her to act as hisagent either with express or implied authority.

However, a husband is liable for the contracts made by his wife for supply of pressingnecessaries of life. In such a case, she is an agent of her husband by necessity.

Q.No.5. State the legal provisions relating to the act of supply of necessaries to incapable persons?

Sec.68 of the Act provides that, “If a person incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition of life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.”

The liability to pay for necessaries is a quasi contractual liability.

CONDITIONS TO BE SATISFIED:

• The person incapable of entering into a contract may be a minor, or a person of unsound mind.

• The other person has supplied necessaries suited to his condition of life either to him or toanyone whom he is legally bound to support.

Examples:

• A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to bereimbursed from B’s property.

• A supplies the wife and children of B a lunatic, with necessaries suitable to his condition in life.A is entitled to be reimbursed from B’s property.

THE EFFECT OF THE PROVISION IS THAT:

1. The price of the goods or services so supplied can be recovered only out of the property of theincompetent person, if any. In other words, there is no personal liability to such incapableperson.

2. Incompetent person’s property is liable to pay only a reasonable price for such goods orservices supplied and not the price agreed by such incompetent person. (Because, anincompetent person cannot accept any contractual obligation).

3. It should be noted that if the incompetent person has no property, nothing can be recovered.


Meaning of Necessaries:

a. It may be noted that necessaries of life are those things without which an individual cannotreasonably exist.

b. What is necessary shall be decided on the basis of the status of the incompetent person andthe circumstances of the case.

c. Food, clothing, housing, education expenses, medical expenses, legal expenses for defendinga minor in some civil or criminal proceedings, funeral expenses of his deceased familymembers, marriage expenses of a dependent female member in the family, diwali poojaexpenses, etc. are the examples of necessaries.

d. A loan granted to an incompetent person for purchase of necessaries also comes under sec. 68.

E.g.: A advances Rs.10,000 to B, a lunatic, for the purchase of necessaries of life for him andfor his dependents. A is entitled to be reimbursed from the property of B. If B has a property ofRs.5,000 only, A will get a reimbursement of Rs.5,000 only. In case B has no property, A wouldget nothing.

e. The things must be suitable to the condition in life of the incompetent person: What isnecessary is a relative fact to be determined with reference to the circumstances of each case.

f. The incompetent person must be in need of such things: If the person is already havingsufficient supply of things and does not need them any more, further supply of them will not beconsidered as necessary.

E.g.: A, a minor purchased 11 fancy waist coats and other clothes while he was already havingsufficient clothes to wear. Held, the 11 waist coats and other clothes purchased were notnecessaries and the price was irrecoverable [Nash v. Inman (1908) 2 KB 1].

THE END

IPCC_32e_M.Law_Free Consent____________________________________58

5. FREE CONSENT

Q.No.1. Define the terms Consent and Free Consent.

1. Sec.13 of the Indian Contract act states: “Two or morepersons are said to consent when they agree upon the samething in the same sense”. (Consensus–ad-idem)

2. Consequently, when parties to a contract make somefundamental error as to the nature of the transaction, or as tothe person dealt with or as to the subject-matter of theagreement, it cannot be said that they have agreed upon thesame thing in the same sense and if they do not agree in thesame sense, there cannot be consent. A contract cannotarise in the absence of consent.

If two persons enter into an apparent contract concerning a particular person or ship and itturns out that each of them, misled by similarity of name, had a different person or ship in hismind, no contract would exist between them as they were not ad idem i.e. of the same mind.

3. Again, ambiguity in the terms of an agreement, or an error as to the nature of any transactionor as to the subject-matter of any agreement may prevent the formation of any contract on theground of absence of consent.

4. One of the essential elements of a contract is consent and there cannot be a contract withoutconsent. Consent may be free or not free. Only free consent is necessary for the validity of a contract.

5. Consent is said to be free when it is not caused by (a) Coercion, (b) Undue Influence, (c) Fraud,(d) Misrepresentation (Sec.14). When consent is not caused by any of these factors, it is said tohave been freely given.

6. In the case of fundamental error, there is really no consent whereas, in the case of mistake,there is no real consent.

7. In case of Mistake there is no consent at all. When consent is not free due to mistake, theagreement is void but in all other cases, the contract is voidable at the option of the partywhose consent was obtained by coercion, etc.

8. According to Salmond, when there is no consent it is error in consensus and when there is nofree consent it is error in causa.

(Note: You will get detailed discussion on this topic in further questions of this chapter itself. Don’t get confused at this stage)

Q.No.2. What is meant by Coercion? State some acts that amount to Coercion. State some features of Coercion.

Coercion means compelling a person to enter into a contract under some pressure or threat.

Sec.15 of the Indian Contract Act defines it as - “Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.”

ACTS AMOUNTING TO COERCION:

a. Coercion is the committing of any act forbidden by IPC with an intention ofcausing any person to enter into an agreement.

E.g.: X beats Y and compels him to sell his car for Rs.50,000. Here Y'sconsent has been obtained by coercion because beating someone is anoffence under IPC.


Ranganayakamma Vs. Alwar Setti: A Madrasi gentleman died leaving a young widow. The relatives of the deceased threatened the widow to adopt a boy otherwise they would not allow her to remove the dead body of her husband. The widow adopted the boy and subsequently, applied for cancellation of the adoption. The act of restraining a dead body from being removed for cremation is forbidden by IPC. Thus the adoption was not valid.

b. Threatening to commit any act forbidden by IPC alsoamounts to coercion.

c. Unlawful detaining of property also amounts to coercion.

E.g.: X detained the gold ring of Y and threatened Y not to giveback that ring unless he enters into some contract with him.

d. Threatening to detain any property also amounts to coercion.

ACTS THAT DO NOT AMOUNT TO COERCION:

a. Act done under statutory compulsion: Where the law requires that a contract be made bythe parties, the consent in such a contract will not be deemed to be caused by coercion orundue influence.

E.g.: Andhra Pradesh Government promulgated an Act namely The Andhra PradeshSugarcane (Regulation of Supply and Purchases) Act, 1961. The provisions of the Actcontained that if any cane-grower offered to sell his sugar-cane to a factory in a certain zone,the factory was bound to purchase the same on the prescribed terms and conditions.Accordingly, one party compelled the other party to buy his sugarcane. Held, the contract wasa valid contract of sale and there was no coercion.

b. Threat to strike: A threat to strike by employees in support of their demands is not regardedas coercion. This is so because the threat to strike is not an offence under the I.P.C. Rather, itis a right given under the Industrial Disputes Act, 1947.

E.g.: After a threat of strike by workers in support of their demand for bonus, the Indian TeaAssociation had to accept the demand. However, the Association later opposed theagreement, on the ground that the threat of strike amounted to coercion. Held, it did notamount to coercion and as such the agreement was valid.

c. Detaining the property under mortgage: Detention of property by a mortgagee until thepayment of loan does not amount to coercion. Similarly, the refusal by the mortgagee toreconvey the property, except on the terms of mortgage, is not treated as coercion.

E.g: Hari taken a loan of Rs.9,50,000 from Ramu and mortgaged his building with Ramu. NowHari is unable to pay back the loan taken from Ramu. In this case, if Ramu detains the propertyof Hari, until the repayment of loan, does not amount to coercion.

d. Threat to Sue: Where a person threatens another person to file a suit in case of non-fulfilmentof promise on due date or on refusing to renew a contract, will not amount to coercion.Similarly, a threat not to withdraw pending criminal proceedings unless a bond is executed,cannot be regarded as coercion.

E.g.: Gopal taken a loan of Rs.30,000 from a money lender. In this case if money lenderthreatens Gopal to file a suit if he does not pay the loan, does not amount to coercion.

However, a threat to sue on a false charge amounts to coercion because such an act isforbidden by the I.P.C.

E.g.: Ram threatens Shyam to file a suit regarding false charge if he does not enter intocontract with him. The act of Ram will amount to coercion.


IMPORTANT POINTS TO BE REMEMBERED:

1. It is immaterial whether IPC is in force or not in the place where coercion is employed.

E.g.: A and B were travelling in a ship in the England ocean where A threatened B to enter intoa contract with him. Afterwards, A sues B for breach of contract at Calcutta. It is held that A hasemployed coercion, even though it is not an offence at the place where ship was there.

2. Coercion may proceed from a third person also.

E.g.: A, threatens to kill B if he will not sell his house to C as per the terms decided by C. Thecontract of sale of house by B to C is induced by Coercion.

3. Coercion may be applied against any third person.

Examples:

• X says to Y: “I shall kill your son or I shall not return the documents of title relating to yourwife’s property, unless you agree to sell your house to me for Rs.5,000”. Y says, “All right, Ishall sell my house to you for Rs.5,000, do not kill my son or do not detain my wife’sdocuments of title”. X has employed coercion; he cannot therefore enforce the contract. ButY can enforce the contract if he finds the contract to his benefit. An agreement induced bycoercion is voidable but not void. That means, it can be enforced by the party coerced, butnot by the party using coercion.

• A threatens to shoot Ram, son of B, if he does not let out his house. B agrees to let out hishouse to A. B’s consent is caused by coercion.

4. Threat to commit suicide: It is deemed to be forbidden by IPC. Hence it amounts to coercion.

E.g.: Where husband obtained a release deed from his wife and son, under a threat ofcommitting suicide, the transaction was set aside on the ground of coercion, suicide beingforbidden by the Indian Penal Code. (Amirazu Vs. Sheshamma)

5. The intention must be to compel the other person to enter into a contract.

EFFECTS OF COERCION (SEC.19, 64, 72):

a) The contract is voidable at the option of the party whose consent was obtained by coercion.

b) When the aggrieved party decides to set aside the contract, he must restore any benefitreceived from the other party under the contract.

c) If the aggrieved party does not set aside the contract, it is a valid contract.

d) A person to whom money has been paid or anything delivered by mistake or under coercionmust repay or return it.

BURDEN OF PROOF: The burden of proof lies upon the aggrieved party who wants to set aside the contract. Aggrieved party has to prove that:

• Consent was obtained by coercion

• He would have not entered into the contract, if there was no coercion.

Duress: In the English law the near equivalent of the term "Coercion" is "Duress". Following are the differences between Coercion and Duress.

• Duress does not include detaining of property or threat to detain property.

• Duress can be employed only by a party to the contract or his agent.


Q.No.3. What is meant by Undue Influence? State some features of Undue Influence.

Sometimes the parties to the agreement are related to each other in such a way that one can dominate the will of the other. Such person may use his superior position to obtain the consent of the other party. Undue influence is a type of moral coercion.

Sec.16 of the Act defines the term ‘Undue Influence’ as: “A contract is said to be induced by ‘undue influence’, where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other”.

A person is deemed to be in a position to dominate the will of the other, when he holds authority, real or apparent over the other, or when he stands in a fiduciary relation to the other.

THE ESSENTIAL INGREDIENTS UNDER THIS PROVISION ARE:

1. Relation between the parties: A person can be influenced by the other when near relationexists between the two.

2. Position to dominate the will: Relation between the parties exist in such a manner that oneof them is in a position to dominate the will of the other.

3. The object must be to take undue advantage: Where the person is in a position to influencethe will of the other in getting consent, must have the object to take undue advantage over theother.

4. Thus, ‘Undue influence’ is said to be used when:

a) The relations between the parties are such that one of the parties is in a position todominate the will of the other, and

b) The dominant party uses his position to obtain an unfair advantage over the other.

A PERSON IS DEEMED TO BE IN DOMINATING POSITION IN THE FOLLOWING CIRCUMSTANCES:

a. Real or Apparent Authority: A person in real authority can dominate the will of other personover whom he has authority. The expression ‘apparent authority’ includes cases in which aperson has no real authority, but is able to influence others.

E.g. for Real Authority: Master & Servant, Parent &Child, Income Tax Officer & Assessee, Principal & atemporary teacher, Doctor & Patient.

E.g. for Apparent Authority: A, a police officer purchaseda property worth Rs.1 lac for Rs.5,000 from B, an accusedunder his custody. Later on, B wanted to cancel the saleon the ground of undue influence. Here, A, the policeofficer is in a position to dominate the will of B.

b. Fiduciary Relation: It is a relationship of trust and confidence. There is no exhaustive list ofsuch relationships. However, by common sense and on the basis of past decisions, somerelationships are considered as fiduciary like the relationship of parent and guardian.

E.g.: Trustee & Beneficiary, spiritual adviser and his disciples, solicitor and client, guardian andward, creditor and debtor, father and son, husband and wife etc.

Moody Vs. Cox: A, a solicitor, sold certain properties to one of his clients B. B filed a suit uponA claiming that the property was considerably over-valued and that his consent was caused byundue influence. Court held that since the relationship of solicitor and client is fiduciary, undueinfluence is presumed.


c. Mental Distress: An undue influence can be used against a person to get his consent on acontract where the mental capacity of the person is temporarily or permanently affected by thereason of mental or bodily distress, illness or of old age. Such a person may be easilyinfluenced to give consent.

E.g.: An illiterate old man who is physically ill and mentally distressed, executed a gift deed infavour of his relative who was taking care of him. Here relative is in position to dominate the willof an old man.

d. When a contract is made between two parties and one party is in a position to dominatethe will of the other and the transaction appears to be unreasonable, it is presumed thatthe stronger party has exercised undue influence over the weaker party.

Ranee Annapurni Vs. Swaminatha: A poor Hindu widow who was in great need of money,was influenced by a money lender to pay 100% rate of interest. Court held that this is a case ofusing undue influence and thus reduced the rate of interest to 24%.

RELATIONSHIPS WHICH RAISE PRESUMPTION OF UNDUE INFLUENCE: The following relationships usually raise a presumption of undue influence, viz., (i) parent & child, (ii) guardian & ward,(iii) trustee & beneficiary, (iv) religious adviser and disciple, (v) doctor and patient, (vi) solicitor and client, and (vii) fiance and fiancee.

RELATIONSHIPS WHICH DO NOT RAISE PRESUMPTION OF UNDUE INFLUENCE: (i) landlord and tenant, (ii) creditor & debtor, and (iii) husband and wife (other than pardanashin women). (iv) Principal and agent. In other words, in case of these relations undue influence shall be proved.

Examples:

• A father, by reason of his authority over the son, can dominate the will of the son.

• A advanced money to his son, B, during his minority. After B becoming major, A obtained aBond from B for a greater amount than the sum due in respect of the advance, by misusing theparental influence. Here A is said to employ Undue Influence.

• A, a spiritual adviser (guru), induced B, his devotee, to gift him the whole ofhis property to secure benefit to his (devotee’s) soul in the next world. Thecourt held that the gift was obtained by undue influence.

• A solicitor can dominate the will of his client.

• A trustee can dominate the will of the beneficiary.

• A person whose mental capacity is affected by age, illness or distress may bea prey to undue influence.

• A doctor is deemed to be in a position to dominate the will of his patient enfeebled by protractedillness.

• A student was induced by his teacher to sell his brand new car to the latter at less than thepurchase price to secure more marks in the examination. Accordingly, the car was sold.However, the father of the student persuaded him to sue his teacher.

Here, A can sue his teacher on the ground of undue influence under the provisions of the IndianContract Act, 1872. A contract brought as a result of Coercion, Undue influence, Fraud orMisrepresentation would be voidable at the option of the person whose consent was caused.

TRANSACTION WITH PARDANASHIN WOMAN:

• A woman who is completely secluded (isolated, separated) from socialintercourse is a pardanashin woman. These ladies are generally illiterate andare easily subject to undue influence. Thus law wants to protect them.

• Once it is established that a contract is made with a pardanashin woman, lawpresumes undue influence and the other party has to prove that undueinfluence is not exercised.


• When any agreement is made with such women the terms of the agreement should beexplained to them in the presence of atleast 2 adult male members of her family, otherwise theagreement becomes voidable at the option of such women.

• Examples for Pardanashin women in India - Brahmin families of U.P., Marwadi families inRajasthan, Parsi families in Mumbai and Muslim families.

EFFECT OF UNDUE INFLUENCE: (Sec.19A)

a. The agreement is voidable at the option of the party whose consent was caused by undueinfluence.

b. At the request of aggrieved party court may set aside such contract absolutely.

c. Other party may be required to refund the benefit received under the contract.

d. If the aggrieved party does not want to set aside the contract, it becomes a valid contract.

BURDEN OF PROOF:

a. In ordinary cases: The burden of proving undue influence rests on the person who wants toset aside the contract.

b. In case of unconscionable transactions: In these cases, the weaker party has to prove that

• The other party was in a position to dominate his will; and

• The transaction appears to be unreasonable.

c. The burden of proving the absence of the use of the dominant position to obtain the unfairadvantage will lie on the party who is in a position to dominate the will of the other (i.e. strongerparty)

Q.No.4. Define the term Fraud? State some acts which constitute fraud? State the effect of fraud on the contract.

Fraud can be defined as the intentional misleading of one person by another. The most common type of fraud occurs when one person lies to another about material fact, as a result of which contract is made.

DEFINITION (Sec.17): “‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance (involvement), by his agent, with an intent to deceive another party thereto or his agent, or to induce him to enter into the contract.

E.g.: A sells by auction his horse to B which A knows to be Unsound. A says to B that the horse is absolutely sound, but later came to know by B that the horse is unsound. This is a fraud.

ACTS WHICH CONSTITUTE FRAUD:

a. Giving a suggestion as to a fact by one person who does not believe it to be true: Astatement which is made with the knowledge that it is false or without belief in its truth, isconsidered as fraud. A false statement made recklessly without enquiring whether it is true orfalse, will also amounts to fraud.

E.g.: The Directors of a company issued a prospectus containing false statements. Ashareholder who had subscribed for the shares on the faith of the prospectus wanted to avoidthe contract. It was held that he could do so because the false statement made by the directorsamounted to fraud.

b. An active concealment of fact, by one, having knowledge or belief of the fact:Concealment is as bad as direct lie. If a person conceals a fact which is material to the contractand it is his duty to disclose it, it is considered as an act to defraud the other.


E.g.: On 1st January X correctly informed Y that the monthly sales of his business was Rs.1,00,000. In May, the contract of sale of business was signed. During this period the monthly sales decreased to Rs.50,000. It was held that Y was entitled to avoid the contract because the failure of X to disclose the fall in monthly sales amounted to fraud.

c. A promise made without any intention of performing it: When a person makes a promisewithout any intention to perform his part of promise, is considered as fraud.

d. Any other act fitted to deceive others: The expression ‘act fitted to deceive’ means any actwhich is done with an intention of committing fraud.

e. Any such act or omission which law specifically declares to be fraudulent: In some cases,the disclosure of certain kinds of facts is expressly required by the law and non-compliance withthe law is expressly declared to be fraudulent.

f. The fraud, which results into a contract, is only covered by this section. Any act committed by aparty which does not lead the other party to enter into a contract is not covered by this section.

E.g.: A tells some fraudulent statements to B in order to enter into contract. But B does not relyupon those statements and makes an own enquiry and enters into contract with A. Here, if anyproblem occurs in future regarding fraud, B cannot file a suit against A.

ESSENTIAL ELEMENTS OF FRAUD:

a. There should be some representation and it should be false.

b. The representation must relate to a material fact which exists now or existed in the past.

c. The representation must have been made before the conclusion of the contract with anintention of inducing the other party to enter into contract.

d. The representation must have been made with a knowledge of its falsity or without belief in itstruth or recklessly.

e. The other party must have relied upon the representation and must have been deceived.

f. The other party acting upon the representation must have suffered some loss. In other words,no damage no fraud.

EFFECTS OF FRAUD (SEC.19):

1. The party whose consent was caused by fraud can rescind (cancel) the contract. When a partyopts to rescind (i.e. set aside) the contract, he may claim restitution i.e. to be placed in the sameposition as if there was no contract at all. He can also claim compensation for damages.

2. The party whose consent was caused by fraud may, if he thinks fit, insist that the contract shallbe performed and that he shall be put in the position in which he would have been if therepresentation made was true.

E.g.: A fraudulently informs B that A’s estate is free from encumbrances. B thereupon buys theestate. The estate is subject to a mortgage. B may either avoid the contract or he may insistthat the contract should be performed and mortgage-debt should be redeemed.

3. The party whose consent was caused by fraud can claim damages, if he incurs some loss.

But he can’t do so in the following cases:

• Silence does not amount to fraud, where truth can be discovered with ordinary diligence.

E.g.: Before letting a house the landlord didn’t disclose that the house was in a badcondition. It was held that the landlord is not liable because the tenant can identify thedefects even by inspection.

• Where the aggrieved party gave the consent in ignorance of fraud.

• Where the aggrieved party after being aware of fraud takes a benefit under the contract.


But in the following two cases the aggrieved party can claim damages, if any.

• Before the contract is rescinded, an innocent third party acquires some interest in the property.

• Where the aggrieved party can’t be restored to his original position.

4. Person rescinding a voidable contract shall restore to the other party any benefit received underthe contract.

SILENCE AS TO FRAUD

GENERAL RULE: According to explanation to Sec.17, mere Silence is not fraud. “Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.”

E.g.: A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

EXCEPTIONS TO THE GENERAL RULE: (In other words, in the following cases silence is fraud)

a. Contracts of uberrimae fidei or contracts of utmost good faith: In these contracts there is alegal duty on the parties to disclose complete and full material facts. In such contracts,suppression of truth amounts to fraud.

b. Where the circumstances of the case are such that, regard being had to them, it is theduty of the person keeping silent to speak. Duty to speak arises when one contracting partyreposes trust and confidence in the other or where one party has to depend upon the goodsense of the other (e.g. Insurance Contract).

Examples:

a) Contracts of insurance

b) Contracts of sale of immovable property

c) Allotment of shares

d) Contracts of marriage

e) Contracts of family settlements.

E.g.: A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter. Here, the relation between the parties makes it compulsory to disclose that the horse is unsound.

c. Where the silence itself is equivalent to speech: Where it is the duty of a person to speak, orhis silence is equivalent to speech, silence amounts to fraud.

E.g.: B says to A, “If you do not deny it, I shall assume that the horse is sound.” A says nothing.Here A’s silence is equivalent to speech. If the horse is not good, A can be held liable for fraud.

d. Latent defects: If a seller fails to inform the buyer about the latent (inside) defects, his silenceamounts to fraud.

e. Half truth: Half truth is worse than a lie. Partial truthful disclosures may easily deceive the otherparty.

E.g.: Prospectus of a company disclosing only average dividend declared by the company inthe last 5 years. Actually the dividends are gradually declining over that period. This amounts tofraud.

BURDEN OF PROOF: Burden of proof lies upon the party who wants to get relief in the court of law.


Q.No.5. What is meant by Misrepresentation?

MISREPRESENTATION (SEC.18):

a) Where a person asserts something which is not true, though he believes it to be true, hisassertion amounts to misrepresentation. Misrepresentation may be either innocent or withoutreasonable ground. Misrepresentation is misstatement of facts by one, which misleads theother who, consequently, can avoid the contract.

b) ‘Misrepresentation’ is any untrue statement made by a party to the contract to another partywhich induces the other party to act upon the statement and enter into the contract.

c) This false representation must be related to some material fact to the contract.

d) If this false statement is made innocently, it is called misrepresentation. But if it is madeintentionally, with a view to deceive the other party, it is called fraud.

e) Where a party to a contract commits fraud or misrepresentation, but in fact, the other party isnot misled by such fraud or misrepresentation, the contract cannot be avoided by the latter onthe ground of Misrepresentation (Explanation to Sec.19).

E.g.: Ram makes a statement with Lakshman that his bike gives a mileage of 80 Kms per litre.Lakshman didn’t believe the words of Ram and made his own enquiry about the mileage of thebike and purchased the bike. Later on he came to know that the bike is giving mileage of only 50Kms per litre. In this case Lakshman cannot avoid the contract due to fraud or misrepresentation.

ACCORDING TO SECTION 18, THERE IS MISREPRESENTATION:

1. When a person positively states that a fact is true when his information does not warrant it tobe so;

2. When there is a breach of duty by a person, without any intention to deceive, which brings anadvantage to him and loss to the other;

3. When a party causes the other party to the agreement to make a mistake as to the subject matter.

ACTS THAT CONSTITUTE MISREPRESENTATION (Sec.18):

a. Unwarranted statement: An innocent false statement of material fact, not warranted byinformation (Trustworthy source), is considered as misrepresentation

Mohan Lal Vs. Shri Gungaji Cotton Mills Co.: A, on the strength of somebody’s information,(without reasonable grounds to believe it) positively stated to B that certain third party is goingto be the Director of a company which is yet to be incorporated. B bought the shares on thefaith of such statement. This is a case of misrepresentation by A.

E.g.: A makes a positive statement to B that C will be made the director of a company. A makesthe statement on information derived, not directly from C but from M. B applies for shares on thefaith of the statement which turns out to be false. The statement amounts to misrepresentation,because the information received (second-hand) did not warrant A to make the positivestatement to B [Sec.18 (1)].

b. Breach of duty: There are certain cases where the party is under duty to disclose certain factsand he does not disclose these facts and thereby misleads the other party. Under the Englishlaw this is called 'constructive fraud'.

E.g.: Under a contract of Insurance, the assured person had a duty to disclose his agecorrectly. If an assured person honestly states his age as 20 years whereas he is actually 25and thereby induces the LIC to charge a lower premium, it will be a case of misrepresentation. Ifhe makes this misstatement intentionally then it is Fraud.

c. Inducing mistake about subject matter: When one party misleads the other, however innocently,regarding the nature and quality of subject matter, a misrepresentation is said to be made.


ESSENTIAL CONDITIONS OF MISREPRESENTATION:

a. Misrepresentation must be or must have become a false statement, but the person making it musthonestly believe it to be true.

b. There was a misrepresentation of fact: Misrepresentation must relate to a fact and not to amere opinion. There is a lot of difference when a seller states that his property is worth Rs.1lakh and when he states that he has paid Rs.1 lakh for the property. The first one is a mereopinion which may or may not be accepted by the buyer. But the second one is a statement offact. If it is false, contract becomes voidable.

E.g.: A sells some spoons to B and makes the following statements.

a. The spoons are as good as that of brand X. This is a statement of opinion.

b. The spoons have as much silver in them as that of brand X. This is a statement of fact.

c. Misrepresentation should be made regarding material facts of the contract.

E.g.: Continuing above example, the statement, that the spoons are the best available in themarket for the price. This is a puffing statement (Opinion) and hence it is not amisrepresentation even though that statement turns to be wrong (of course made without anyintention to deceive).

d. Misrepresentation as to Law: It does not affect the validity of a contract. But a deliberatemisrepresentation in a matter of law is certainly a cause for avoiding a contract.

e. Misrepresentation must have been made without any intention to deceive the other party.

f. Misrepresentation should be made before or at the time of entering into a contract.

g. Misrepresentation must have been addressed to the party to the contract.

h. Misrepresentation must induce the other party to enter into a contract.

E.g.: X says to Y who intends to purchase his land, "My land produces 2 tons of paddy peracre". X believes the statement to be true although he has no sufficient ground for the belief. Ypurchases X's land believing X's statement. Later on, Y finds that the land produces only 1.5tons of paddy per acre. Here X's representation is misrepresentation.

EFFECT OF MISREPRESENTATION:

1. Right to rescind the contract: The party whose consent was caused by misrepresentation canrescind (cancel) the contract.

2. Right to insist upon performance: The party whose consent was caused bymisrepresentation may insist that the contract shall be performed and that he shall be put in theposition in which he would have been if the representation made was true.

E.g.: Gopi informs Hari that his estate is free from encumbrance. Hari there upon buys theestate. In fact, the estate is subject to mortgage, though unknown to Gopi also. Hari may eitheravoid the contract or may insist that the contract shall be performed and mortgage-debt beredeemed.

3. Further, law does not provide any remedy to the aggrieved party if the reality of misrepresentedfact can be discovered by ordinary observation.

Examples:

• A induced B to buy his lorry on the false representation that it was in excellent condition.When B used it, he came to know that it was in a very bad shape. So, he wanted to return itto A. However, A agreed to bear half of the cost of repairs to which B agreed. B went tosubsequent journey and the lorry completely had broken down. B wanted to rescind thecontract. Held, B could not do so as his acceptance of the offer of A to bear half the cost ofrepairs amounts to final acceptance of the sale.


• A by a misrepresentation leads B to believe erroneously that 750 tons of sugar is producedper annum at the factory of A. B examines the accounts of the factory, which should havedisclosed, if ordinary diligence had been exercised by B, that only 500 tons had beenproduced. Thereafter, B purchased the factory. In this circumstance, B cannot repudiate thecontract on the ground of A’s misrepresentation.

BURDEN OF PROOF: In case of misrepresentation, burden of proving the fact of misrepresentation lies upon the party who wants to get relief in the court of law.

Q.No.6. What is meant by Mistake? State the effects of mistake on the validity of contract.

MISTAKE: a. Mistake may be defined as an erroneous belief about something.b. Mistake in a contract may occur in any of the following ways:

Mistake of law - Indian law- Foreign law

Mistake of fact - Bilateral - Unilateral

MISTAKE OF LAW: 'Ignorantia juris non excusat' i.e. Ignorance of law is no excuse. It is a well settled rule of law. A person is presumed to know the ordinary law of land and he can’t take the plea of ignorance. But he is not supposed to have knowledge of the laws applicable in the entire world.

MISTAKE OF INDIAN LAW: Everyone is supposed to know the law of the country. If a person does not know the law of his country, then he must suffer the consequences. Thus, a mistake of Indian law will not affect the validity of the contract.

Sahiban Bibi Vs. Madho Lal: A, a widow was entitled to certain occupancy rights. She remarried and thought that she lost her occupancy rights due to her second marriage. Under this mistake, she agreed to take the lease of the same land from Z, the Zamindar. Later on, she came to know about her occupancy rights. Now, A wanted to revoke the lease agreement with Z. Court held that A could not revoke the lease agreement because there was a mistake of Indian law.

But, if a person enters into a contract by making a mistake of law through the inducement of another, whether innocent or otherwise, the contract may be avoided.

MISTAKE OF FOREIGN LAW: A mistake of foreign law is treated as a mistake of fact which is discussed below in detail.

MISTAKE OF FACT: A mistake of fact occurs when a party believes something to be true, but his belief is not in accordance with the real facts. If both the parties are mistaken it is called bilateral mistake. If only one of the parties is mistaken, then it is called unilateral mistake.

EFFECT OF MISTAKES AS TO LAW (Section 21): A contract is not voidable because it was caused by a mistake as to any law in force in India but a mistake as to a law not in force in India has the same effect as a mistake of fact.

Examples:

• A and B make a contract grounded on the erroneous belief that a particular debt is barred bythe Indian Law of Limitation, the contract is not voidable.

• X, a widow was entitled to certain occupancy rights. She remarried and thought that she lost heroccupancy rights due to her second marriage. Under this mistake, she agreed to take the leaseof the same land from Y. Later on, she came to know about her occupancy rights. Now, Xwanted to revoke the lease agreement with Y. Court held that X could not revoke the leaseagreement because there was a mistake of Indian law.

MISTAKE RENDERS THE AGREEMENT VOID: Neither party can enforce the contract against the other.


Q.No.7. Write about Bilateral mistake.

DEFINITION:

• According to Sec.20, "Where both the parties to an agreement are under a mistake as to amatter of fact essential to the agreement, the agreement is altogether void".

• The Court will enforce a voidable contract if not avoided, but will not recognise an agreementthat is void.

ESSENTIAL CONDITIONS OF BILATERAL MISTAKE: The following conditions must be satisfied before declaring an agreement to be void under this section:

a. Both the parties must be under a mistake.

Examples:

• A agreed to purchase B's motor cycle which was lying in a garage. But both the parties don'tknow that the motor cycle and garage were already destroyed in a fire accident. Thus theagreement is void.

• A, being entitled to an estate of the life of B, agrees to sell it to C. B was dead at the time ofthe agreement, but both the parties were ignorant of the fact. The agreement is void.

b. Mistake must be of fact but not of law. But an erroneous opinion as to the value of a thing whichforms the subject matter of an agreement should not be treated as mistake of fact.

E.g.: A buys an old painting for Rs.5,000 thinking that it is an excellent piece of art. Actually, thepainting was a new one and is worth only Rs.500. A can’t avoid the contract on the ground ofmistake.

c. Mistake must relate to an essential fact.

CASES WHICH FALL UNDER BILATERAL MISTAKE:

1. Mistake about subject matter: Where both the parties are under a mistake regarding thesubject matter, the agreement is void. Following cases fall under this sub-heading:

a. Mistake as to the existence of subject-matter: At the time of contract the subject-mattermay cease to exist or it may have never been in existence and the parties do not knowabout it. In such a case the agreement is void.

Examples:

• A agrees to buy from B a certain bike. Both the parties don't know that the bike wasalready destroyed in an accident. The agreement is void.

• A agrees to sell to B a specific cargo of goods supposed to be on its way from Englandto Bombay. It turns out that before the day of the bargain, the ship conveying the cargohad been cast away and the goods were lost. Neither of the parties was aware of thesefacts. The agreement was void. Both the parties are under mistake.

Couturier Vs. Hastie: A agreed to sell a cargo of corn. At the time of contract the cargo was supposed to be in transit from Salonica to United Kingdom. Both the parties don't know that the corn had already become fermented (damaged). Held, the agreement was void and the buyer was not liable for the price.

b. Mistake about the title of the subject-matter: Unknown to the parties, the buyer isalready the owner of the article which he wants to purchase. Such an agreement is void.

In Cooper vs. Phibbs: An uncle told to the nephew that he (uncle) was entitled to a fisheryand the nephew entered into an agreement with uncle’s daughter to rent the fishery. Unknownto both, the fishery actually belonged to the nephew. The agreement was held void.


c. Mistake as to the identity of subject-matter: Where both the parties are mistaken as tothe identity of subject-matter, the agreement is void. In this case one party thinks about onething and the other thinks about something else.

E.g.: A wants to sell one car to B. A has 3 cars and he wants to sell one particular car.However, B has some other car in mind. This is a mistake as to identity.

Raffles Vs. Wichelhaus: W agreed to buy from R a cargo of cotton. There were two shipsnamed “Peerless” sailing from Bombay, one sailing in October and the other in December.W thought about former ship but R thought about the latter ship. Held, there was a mutualor bilateral mistake and there was no contract.

d. Mistake as to the quantity of subject matter: If both the parties are under a mistakeabout the quantity of subject-matter, the contract is void. This is because the mistake isabout an essential fact of the agreement i.e. quantity. The result is the same even if themistake was caused by the negligence of a third party.

Henkel Vs. Pepe: ‘P’ wrote to ‘H’ enquiring about the price of rifles and suggested that hemight buy as many as 50 rifles. On receipt of reply, he sent a telegram ‘Send three rifles’.Due to mistake of telegraph office the message sent was ‘Send the rifles’. H dispatched 50rifles. Held there was no contract between the parties.

E.g.: A agreed to buy 100 sewing thread reels from B. Both believed that each reelcontains 500 metres of thread but, in fact, the length of thread was only 300 metres. Held,the agreement was void as there was a bilateral mistake as to quantity of subject-matter.

e. Mistake as to the price of subject matter: Sometimes there may be a genuine mistakeas to the price of the article for sale. In this case the agreement is void.

E.g.: A agreed with B to let out his house for a monthly rent of Rs.530. However, in thelease deed it was written as Rs.350. Held, the contract was void.

f. Mistake as to the quality of subject matter: If the subject matter is something essentiallydifferent from what the parties thought, the agreement is void.

Nicholson & Venn Vs. Smith Marriott: Table napkins were sold at an auction by thedescription “The authentic property of that monarch". In fact the napkins were Georgian.Held, the agreement was void as there was a mistake as to the quality of the subject-matter.

2. Mistake about possibility of performance: Sometimes both the parties may believe that thecontract can be performed but actually it is impossible to perform. In this case both the partieswere not aware that the contract is impossible to perform. In such a case the agreement isvoid. Impossibility may be:

• Physical impossibility or

• Legal impossibility

EFFECT OF BILATERAL MISTAKE: When there is a bilateral mistake of fact, no contract exists at all, i.e., the contract is void.

Q.No.8. Write about unilateral mistake.

A unilateral mistake, that is to say, mistake of one party, does not render the agreement voidable (Sec.22).

When only one party to an agreement is mistaken as to the contents of the agreement, it is termed as unilateral mistake. Generally, a unilateral mistake does not affect the validity of an agreement. However, in case of unilateral mistake, a contract can be avoided, if it can be proved that it was caused by fraud or misrepresentation on the part of the other party.

Sec.22 of the Indian Contract Act provides that, “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.”


Examples:

• A agrees to purchase from B, 18 carat gold thinking to be pure gold; B has not beeninstrumental to the creation of such an impression. It is a valid contract between A and B.

• H bought oats from S a sample of which had been shown to H. H erroneously thought that theoats were old. Actually the oats were new. It was held that H could not avoid the contract.

Tamplin Vs. James: J was the highest bidder at an auction sale of a public plot. At the time when he made his bid, he believed that certain field was a part of the plot offered for sale. There was no misdescription or ambiguity in the particulars of the plot. Here J was bound by the contract and he can't avoid it.

EFFECT OF UNILATERAL MISTAKE: In case of unilateral mistake the validity of the contract is not affected generally i.e. contract is valid.

DIFFERENCES

Q.No.9. Coercion Vs. Undue influence.

DIFFERENCE COERCION UNDUE INFLUENCE

Meaning It involves the physical force or threat. The aggrieved party is compelled to make the contract against his will.

It involves moral or mental pressure.

Nature

It involves committing or threatening to commit an act forbidden by Indian Penal Code or detaining or threatening to detain property unlawfully

No such illegal act is committed or a threat is given.

Relation between parties

It is not necessary that there must be some sort of relationship between the parties.

Some sort of relationship between the parties is absolutely necessary.

Who can apply & on whom it

can be applied?

Coercion need not proceed from the promisor nor need it be directed against the promisor.

Undue influence is always exercised between parties to the contract.

Effect on Contract

The contract is voidable at the option of the party whose consent has been obtained by coercion.

Where the consent is induced by undue influence, the contract is either voidable or the court may set it aside or enforce it in a modified form.

Restoration

In case of coercion where the contract is rescinded by the aggrieved party, as per Section 64, any benefit received has to be restored back to the other party.

The court has the discretion to direct the aggrieved party to return the benefit in whole or in part or not to give any such directions.

Q.No.10. Fraud Vs. Misrepresentation

DIFFERENCE FRAUD MISREPRESENTATION

Intention To deceive the other party by hiding the truth.

There is no such intention to deceive the other party.

Knowledge of truth

The person making the suggestion believes that the statement is untrue

The person making the statement believes it to be true, although it is not true.


Repudiation of contract

The injured party can repudiate the contract and can claim damages.

The injured party is entitled to repudiate the contract or sue for restitution but cannot claim damages.

Means to discover the

Truth

The party using the fraudulent act cannot secure or protect himself by saying that the injured party had means to discover the truth.

Party can always plead that the injured party had the means to discover the truth.

Q.No.11. Mistake of Fact Vs. Mistake of Law

DIFFERENCE MISTAKE OF FACT MISTAKE OF LAW Relevant section

Sec.20 of the Indian Contract Act defines “Mistake of Fact”

Sec.21 of the Indian Contract Act defines “Mistake of Law”

Will it vitiate the contract?

It vitiates a contract. It does not vitiate a contract, unless it relates to: i. Private rights of property;ii. Willful representation of lawiii. Mistake as to any foreign law in which

case it will vitiate the contract.

Effect on Contract

If it is a mutual mistake with respect to an existing fact which is material to the agreement, the contract is void.

The contract is not voidable, unless the mistake happens to be of foreign law.

THE END

IPCC_32e_M.Law_Void Agreements, Quasi Contracts & Contingent Contracts_73

6. VOID AGREEMENTS, QUASI CONTRACTS & CONTINGENT CONTRACTS

Q.No.1. What is meant by Void Agreement. And State the agreements that are expressly declared to be void.

DEFINITION: According to Sec.2(g) of the Indian Contract Act, 1872, a void agreement is an agreement which is not enforceable by law. These agreements are not enforceable by law, right from the beginning i.e. these agreements are void-ab-initio.

FOLLOWING TYPES OF AGREEMENTS ARE EXPRESSLY DECLARED AS VOID UNDER VARIOUS SECTIONS OF THE INDIAN CONTRACT ACT 1872:

a) Agreements by or with persons incompetent to contract (Sections 10 & 11).

b) Agreements entered into through a mutual mistake of fact between the parties (Section 20).

c) Agreement, the object or consideration of which is unlawful (Section 23).

d) Agreement, the consideration or object of which is partly unlawful (Section 24).

e) Agreement made without consideration (Section 25).

f) Agreements in restraint of marriage (Section 26).

g) Agreements in restraint of trade (Section 27)

h) Agreements in restraint of legal proceedings (Section 28).

i) Agreements the meaning of which is uncertain. (Sec.29)

j) Wagering agreements (Section 30).

k) Agreements contingent upon impossible events. (Sec.36)

l) Impossible agreements (Section 56).

m) An agreement to enter into an agreement in the future.

(Note: You will get detailed discussion of the above mentioned points in further questions of this chapter itself).

Q.No.2. State the legal provisions relating to agreements in Restraint of Marriage.

a) Sec.26 of the Act provides that, “Every agreement in restraint ofmarriage of any person, other than a minor, is void.”

b) Thus an agreement which prevents a major person from marrying(i.e. complete restraint) is void.

E.g.: A made a promise to his religious guru G that he will not marrythroughout his life if G would lend him Rs.2,00,000. The agreementis in the nature of complete restraint of marriage. It is void.

c) In other words, if a person, being a major, agrees for goodconsideration, not to marry then such promise is not binding.

d) Also, an agreement which puts any restriction on the freedom of marriage (i.e. partial restraint),like preventing somebody from marrying a particular person, or a particular class of persons, orduring a fixed period, etc. is also void.

E.g.: A agreed with B that he will not marry until he repays the loan of Rs.10,000 taken by himfrom B. The agreement is in the nature of partial restraint of marriage. It is also void.


e) An agreement which provides for a penalty upon remarriage may not be considered as arestraint of marriage.

E.g.: Two co-widows entered in to an agreement that if one of them remarried, she shouldforfeit her share in the property of deceased husband. This agreement is valid because norestraint was imposed upon either of the two widows from remarrying.

Q.No.3. State the legal provisions relating to agreements in Restraint of Trade.

An agreement in restraint of trade is one whereby one party seeks to prevent the other from carrying out a particular trade, business, or profession.

According to Sec.27 of the Indian Contract Act, 1872, “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."

THE RESTRAINT MAY BE COMPLETE OR PARTIAL:

a) A complete restraint is one which prevents any person from carrying onany kind of business at all.

E.g.: A purchased the business of B with the condition that B will not carry on any businessactivity throughout his life. This is a complete restraint on trade. This agreement is void.

b) Partial restraint prevents a person from carrying on a particular kind of business within aparticular locality or for a particular period of time, etc.

E.g.: A and B were rival shopkeepers in a locality in Kolkata. A agreed to pay a sum of moneyto B if he (B) would close his business in that locality. B closed his business in that locality, butA refused to pay the agreed amount of money. Held, though the restraint was merely a partialone, i.e. restriction on carrying on a particular business only in a certain locality was still voidbeing in restraint of trade. So B cannot recover the money from A.

c) But whether restraint is complete or partial, agreement is void.

Q.No.4. State the exceptions to the rule that agreements in restraint of trade are void.

In the following cases restraints on trade are considered as good and do not make the agreement void.

EXCEPTIONS UNDER THE INDIAN CONTRACT ACT:

1. Sale of goodwill: Where a person enters into a contract for the purchase of a business, it isusual to include a sum for ‘goodwill’ in the purchase price. An agreement which restricts theseller of the goodwill from carrying on a business is valid if the following conditions aresatisfied:

a) Such restriction must relate to a similar business.

b) Such restriction must be within specified local limits.

c) Such restriction must be for the time so long as the buyer or his successor in interestcarries on a like business therein, deriving title to the goodwill from him carries on similarbusiness in the specified local limits.

d) Such specified local limits must be reasonable depending on the nature of business.

(Note: Goodwill is the advantage enjoyed by a business on account of public patronage and encouragement from habitual customers)


2. Similarly, an agreement by a manufacturer, to sell during a certain period, his entire productionto a wholesale merchant, is not in restraint of trade.

3. Likewise, an agreement among the sellers of a particular commodity not to sell the commodityfor less than a fixed price is not an agreement in restraint of trade.

EXCEPTIONS UNDER THE PARTNERSHIP ACT, 1932:

1. Restraint on a continuing partner from carrying on any business: A continuing partnermay agree not to carry on any business other than that of partnership, so long as he remainsas a partner. [Sec.11(2) of the Partnership Act].

2. Restraint on outgoing partner from carrying on a similar business: Under Section 36 ofthe Indian Partnership Act, 1932 if an outgoing partner makes an agreement with thecontinuing partners that he will not carry on any business similar to that of the firm within aspecified period or within specified local limits, such an agreement, though in restraint of trade,will be valid, if the restrictions imposed are reasonable. Similarly, under Section 11 of that Actan agreement between partners not to carry on competing business during the continuance ofpartnership is valid.

3. Restraint in anticipation of dissolution: The partners of a firm may enter into an agreement,upon or in anticipation of the dissolution of the firm that some or all of them will not carry onsimilar business within a specified period or within the specified local limits, provided therestrictions imposed are reasonable.

4. Restraint when goodwill is sold, in case of Partnership: When a person buys goodwill of afirm, he may enter into an agreement restraining the partners of the firm from carrying onbusiness similar to that of the firm within a specified period or specified local limits, providedthe restrictions imposed are reasonable.

(Note: Students can get a detailed explanation on the above points in Chapter - 10)

EXCEPTIONS ESTABLISHED BY JUDICIAL DECISIONS:

1. Restraint upon employees: Agreements of service generally contain some negativeconditions preventing the employee from working elsewhere during the period of agreement. Ifthese conditions are reasonable then they are valid. Some important observations are -

a) A clause to serve the employer for a specified period - do not amount to restraint of trade.

b) A clause to prevent employee from accepting any other engagement during hisemployment is not considered as restraint of trade.

c) A clause to prevent the employee from accepting a similar engagement after thetermination of his services is generally void. But in some exceptional cases it may be valid.

d) An agreement of service by which an employee binds himself, during the term of hisagreement, not to compete with his employer is not in restraint of trade.

E.g.: B, a physician and surgeon, employs A as an assistant for a term of three years andA agrees not to practice as a surgeon and physician during these three years. Theagreement is valid and A can be restrained by an injunction if he starts independentpractice during this period.

Charlesworth Vs. Mac Donald: C, a doctor practicing in Zanzibar employed M, an assistant for 3 years. M was restrained by the terms of the agreement from practicing on his own account during the term of the agreement. M left the service of C after one year and started practicing on his own account in the Zanzibar itself. The court held that M could not practice in Zanzibar on his own account for three years. The restraint was valid.

2. Restraint in trade combinations: Trade combinations are made by the traders ormanufacturers in the same line of business to carry on their trade in an organised way. Theprimary object of such associations is to regulate business and not to restrain it.


3. Restraint in sole trading agreements: Sole trading agreement is an agreement by which aperson agrees to sell only the products of/to a particular manufacturer, and not to sell or distributethe products of/to any other manufacturer. The negative conditions in such agreements are valid.

Q.No.5. State the legal provisions relating to agreements in restraint of Legal Proceedings.

Every person has freedom to enforce his legal rights. An agreement which interferes with the course of justice is void. Individuals by agreement can’t alter the provisions of any law. According to Sec.28, the following two agreements are in the nature of restraint of legal proceedings and thus, void to that extent.

1. Agreement restricting enforcement of rights: An agreement by which any party is restrictedabsolutely from enforcing his legal rights under or in respect of any contract through a Court orwhich abridges the usual period for starting legal proceedings is void to that extent. Such anagreement is also void under section 23 of the Indian Contract Act, because its object is todefeat the provisions of the Indian Limitation Act.

However, an agreement not to go in appeal to a higher court against the judgement of a lowercourt, does not amount to restraint of legal proceedings.

On the other hand, restrictions must be absolute. Partial restrictions does not render anagreement void.E.g.: K and S entered into an agreement whereby they agreed that neither of them wouldappeal against the trial court’s decision. Here the restriction is partial as the parties can go tothe court at the first instance. The only restriction is that that the losing party cannot file anappeal in higher court. The court held this agreement as valid because Sec.28 applies only toabsolute restrictions.

2. Agreements limiting the period of limitation: The Indian Limitation Act provides that anaction for the breach of contract may be brought within 3 years from the date of breach. Suchperiod of limitation cannot be curtailed by the parties to the contract.

EXCEPTIONS:

1. Sometimes the concerned parties agree that any existing or future disputes shall be referred toarbitration and that only the amount awarded in such arbitration shall be recoverable is a validcontract. But such contract must be in writing. Such an agreement is valid.

2. Sometimes, it may happen that a particular transaction falls under the jurisdiction of more thanone court. In such cases, the parties have the option to select the court where they would liketo refer their dispute. Sometimes the parties may restrict that the suit shall be filed in aparticular court only. Such restrictions are valid.

E.g.: A was a tradesman in Calcutta. B carried on a business in Delhi. They entered into abusiness transaction. In case of any dispute, they have an option to file a suit in the Court ofDelhi or in the Court of Calcutta. However, they entered into an agreement that they canenforce their respective rights in Delhi only and not in Calcutta. The agreement is valid.

Q.No.6. State the legal provisions relating to uncertain agreements.

An uncertain agreement means an agreement the meaning of which is not certain or capable of being made certain. Such agreements are void. The uncertainty may be as to (i) existence of (ii) quantity of (iii) quality of (iv) price of (v) title to the subject matter.

Examples:

• A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oilwas intended. The agreement is void for uncertainty. But the agreement would be valid if A wasdealer only in coconut oil, because in such a case its meaning would be capable of being madecertain.


• A agrees to sell to B “all the grain in my granary at Ramnagar.” There is no uncertainty here tomake the agreement void.

• X agreed to buy a horse from Y for Rs.5,000 and to pay Rs.100 more if the horse proved lucky.It was held that the agreement was void because we can’t define what good luck is.

Q.No.7. Write about Wagering Agreements.

WHAT IS A WAGER?

1. A wager occurs when the parties agree that a payment will take placebetween them depending upon the outcome of an uncertain event in whichthey have no interest other than their agreement. For instance, a bet on asporting event would be a wager.

2. An agreement by way of a wager is void. It is an agreement involvingpayment of a sum of money upon the determination of an uncertain event.

3. The essence of a wager is that each side should stand to win or lose, depending on the way anuncertain event takes place in reference to which the chance is taken and in the occurrence ofwhich neither of the parties has legitimate interest.

E.g.: A agrees to pay Rs.500 to B if it rains, and B promises to pay a like amount to A if it doesnot rain, the agreement will be by way of wager. But, if one of the parties has control over theevent, agreement is not a wager.

4. “Wagering agreement is a promise to give money or money’s worth upon the determination orascertainment of an uncertain event’. – Sir William Anson

ESSENTIALS OF A WAGER:

1. Uncertain event: It is either a future event the outcome of which is uncertain or it may be apast event, about which the parties to the agreement have no knowledge.

E.g.: A cricket match between India and Pakistan is scheduled to start next month. A and Bentered into an agreement that if India wins, A will pay Rs.5000 to B and if Pakistan wins, B willpay Rs.5000 to A. This is a wagering agreement.

Alternatively, it may happen that the match has already been concluded but A & B are notaware of the result of the match. They entered into an agreement that A will pay Rs.5000 to B ifIndia had won the match and B will pay Rs.5000 to A if Pakistan had won the match. It is also awagering agreement.

2. Win or lose situation: Each party must be in a situation where it may win or lose dependingupon the issue of the event. If either of the parties may win but can’t lose, or may lose but can’twin, it is not a wagering agreement.

E.g.: S and R deposited 200 pounds to abide by the results of a tennis match and the loser wasto forfeit this amount and the gainer was to recover it. In this case each party has the chance towin or lose. And the gain of one party will be the loss of the other. This is a wagering agreement.

3. No other interest: Neither party should have any interest in the happening of the event otherthan the stake money. This is the difference between a wagering agreement and a contract ofinsurance.

E.g.: A takes a fire insurance policy for his house. It is not a wagering agreement as he has aninsurable interest in the house. Alternatively, if A takes a life insurance policy on some otherperson, it will amount to a wagering agreement as he does not have any interest in the life ofsuch person.

4. No control over the event: Neither party should have any control over the event in one way orthe other.


E.g.: A and B agree with each other that if it rains tomorrow, A will pay Rs.100 to B and if it does not rain tomorrow, B will pay Rs.100 to A. Here ‘raining’ or ‘not raining’ is the event over which both the parties have no control. This is a wagering agreement.

5. The stake money should come out of the pockets of the parties themselves and not outsiders.Otherwise, the agreement does not amount to wager.

6. There must be a promise to pay money or money’s worth.

EFFECT OF WAGERING AGREEMENTS:

1. Main transaction: Sec.30 of the Act provides that, “Agreements by way of wager are void, andno suit shall be brought for recovering anything won. Thus, the agreements by way of wagerare void. The winner in wager cannot recover the stake money from the other party.

E.g.: A agreed to pay Rs.1000 to B if ‘X’ wins the election. B agreed to pay Rs.1000 to A if ‘X’doesn’t wins the election. Subsequently, ‘X’ wins the election but A refused to pay Rs.1000 toB. B cannot recover this money from A.

It may be noted that, though wagering agreements are void, they are not illegal. However, inGujarat and Maharashtra the wagering agreements have been declared as illegal by therespective States.

2. Collateral transaction: When a transaction is simply void but not illegal, the collateraltransaction would be valid. Wagering agreements are void, but not illegal (except in the Statesof Gujarat and Maharashtra). So, the transactions collateral / incidental to them are valid andhence enforceable. Thus, a broker in a wagering transaction can recover his brokerage.Similarly, a principal can recover from his agent the prize money received by him on account ofa wagering transaction.

E.g.: A contract by way of wager is void by statute and no action can be brought to recover anymoney alleged to have been won upon a wager but it is not illegal. Therefore, a promise madeby the loser of a wager to pay the amount lost in consideration of the winner’s forbearance topost him as defaulter, can be enforced as a fresh contract since it is separate and distinct fromthe original wagering contract, though collateral to it.

But, the position is different in respect of transactions collateral to illegal agreements. They areinvalid. For e.g., security given for the regular payment of the rent of a house let out for thepurposes of gambling cannot be recovered. The recovery of security being tainted with illegalityof the original transaction, cannot be enforced.

3. Suit to recover money deposited: Money deposited with a person (called stakeholder), to bepaid to the party winning upon a wager can’t be recovered by the winner. On the other hand,the loser can recover his deposit from the stakeholder. But where the stakeholder pays themoney to the winner, the loser can’t recover it from him.

E.g.: Cricket match is to be held between India and Pakistan. X agrees to pay Rs.1,00,000 to Y ifIndia wins the match and agrees to deposit the money with Z, a third person of confidence for thispurpose. X borrows Rs.1,00,000 from W. The implications of this case are summarised as under:

• The agreement between X and Y is a wagering agreement because the performance of anagreement depends upon the happening or non-happening of a future uncertain event andeach party stands to win or loose.

• If India wins the match, Y (winner) cannot recover the amount but X (loser) can recover, ifthe amount has not been paid to Y. Thus, a winner cannot recover the amount but a losercan, if the amount has not been paid to the winner.

• If India wins the match & Z (stakeholder) pays the money to Y (winner), X (loser) cannotrecover it from Z.

• The agreement between X and W which is collateral to wagering agreement is valid in India,except in the States of Maharashtra and Gujarat.


SOME IMPORTANT POINTS TO BE REMEMBERED:

1. Commercial transactions:

a) A commercial transaction is done with an intention of delivery of goods and payment ofprice.

b) Therefore, ready or future commercial transactions are valid agreements.

c) However, when a transaction is done with an intention to pay or get difference in price, theagreement is a wager.

d) Share market transactions in which delivery of stocks and shares is intended to be givenand taken are not wager.

2. Speculative transactions: Though wagering transactions are void, speculative transactionsare generally valid. It is, however, sometimes difficult to distinguish between a speculativetransaction and a wagering transaction.

Essentially, a speculative transaction must have two elements, namely, (1) mutual intention ofthe contracting parties to acquire or deliver, as the case may be, the commodities; and (2) theundertaking or risk arising from changes in prices.

On the other hand, a wagering agreement postulates only the incurring of risk. The essentialcharacter of a speculative transaction is stated below.

E.g.: A buys from B 100 bales of jute at Rs.150 per bale for forward delivery after six months.At the time of delivery, the price of jute is Rs.200. In these circumstances, at the end of sixmonths, A can either demand delivery of 100 bales or collect the difference in price at Rs.50per bale. On the other hand, if the price has gone down to Rs.125 per bale, A will be able tosettle the transaction by paying B at Rs.25 per bale. In this case, it will be observed that theoriginal intention of the parties was to purchase and sell the bales of jute. So, this is not aspeculative transaction. Merely because subsequently they transact by payment or receipt ofthe difference in price, the original character of the transaction is not thereby altered. If,however, the mutual intention was only to settle the transaction by payment or receipt of thedifference in price, the transaction would be wagering contract which would be void.

3. Lotteries (Including government authorised lotteries): A wagering contract amounting tolottery is not only Void but illegal. A lottery is a game of chance. Therefore an agreement to buya ticket of lottery is a wagering agreement; and all transactions in connection with a lotteryremain illegal even if government has authorized the holding of lottery. The only effect of suchpermission is that the persons conducting lottery will not be punished.

4. Crossword puzzles or literary competitions:

a) If skill plays an important role then such competitions are not wager.

b) However, if the crossword puzzle prizes depend upon the matching of the solution with thepreviously prepared solution kept with the organiser or newspaper editor, it is a lottery andhence wager.

5. Horse race (Sec.30): A subscription or contribution or an agreement to subscribe or contributetowards any plate, prize, or sum of money of Rs.500/- or more to be awarded to the winners ofthe horse race is not unlawful.

6. Contracts of insurance are not wager.

Q.No.8. State the legal provisions relating to agreements to do impossible acts.

Sec.56 of the Act provides that “an agreement to do an impossible act is void.”

E.g.: A agrees with B to discover treasure by magic. The agreement is void.

It may happen that an event becomes impossible after the contract is made. In such a case, the contract becomes void from the date of occurrence of such event.


Q.No.9. Explain the term Quasi Contract and State their Characteristics.

1. In the case of every contract, the Promisor voluntarily undertakes an obligation in favour of thePromisee. A similar obligation may be imposed by law upon a person for the benefit of another,even in the absence of a contract. In certain circumstances, the law presumes the existence ofcontract even though no agreement was made between the parties.

2. Such cases are known as Quasi contracts. The obligation created in either of the cases isidentical.

3. The Contract Act recognises certain cases in which an obligation is created without a contract. Suchobligations arise out of certain relations which cannot be called as contracts in the strict sense.

4. Quasi contracts are based on the principles of equity, justice and good conscience.

5. In such cases, Law creates legal relations on the ground of equity saying that the personreceiving the benefit must make compensation to the other. The maxim used is “no manmust grow rich out of another person’s cost / loss”. Quasi contracts are also called as'constructive contracts' under the English law and "certain relations resembling those createdby contracts" under the Indian law.

6. Law of Quasi contracts is also known as ‘Law of Restitution.' Sometimes, quasi contracts arealso called as ‘Contracts Implied in Law’.

7. In case of Quasi Contracts, there is no offer, no acceptance, no consensus ad idem and in factneither agreement nor promise and yet the law imposes an obligation on one party and confersa right in favour of the other.

8. When an obligation created by a Quasi-contract is not discharged, the injured party can claimdamages from the other party as if it is an ordinary contract.

E.g.: P supplies milk to his customer R who receives and consumes it. R is bound to pay the price. R’s acceptance of the milk constitutes an implied promise to pay. These relations are called as quasi contractual obligations.

FEATURES: The salient features of quasi contractual right, are as follows:

a) Firstly, it does not arise from any agreement of the parties concerned, but is imposed by thelaw; and

b) Secondly, it is a right which is available not against the entire world, but against a particularperson or persons only.

KINDS OF QUASI CONTRACTS:

a) Claim for necessaries supplied to a person incapable of contracting or on his behalf (Sec.68)

b) Reimbursement of money paid, due by another (Sec.69)

c) Obligation of persons enjoying benefits of non-gratuitous act (Sec.70)

d) Responsibility of finder of lost goods (Sec.71)

e) Liability for money paid or things delivered by mistake or under coercion (Sec.72)

In each of the above cases, contractual liability is the creation of law and does not depend upon any mutual agreement between the parties.

Q.No.10. Payment of Lawful Dues by Interested Persons.

Sec.69 of the Act provides that, “A person who is interested in the payment of money which another person is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.” Under this section, a person making the payment on behalf of someone else, to safeguard / protect his own interest, can claim it from such other person who was bound to pay.


CONDITIONS TO BE SATISFIED:

1. The person who made the payment should have interest in such payment.

Examples:

• X holds a land in Rajasthan on a lease granted by Y, the Zamindar. The revenue due on Ybeing in arrear to the government, advertised by the government for the sale. Under theRevenue Law such sale will be the annulment of X’s lease. X, to prevent the sale and theconsequent annulment of his own lease, pays the Government the sum due from Y. Y isbound to make good to X the amount so paid.

• A party had agreed to purchase certain mills. A large amount of municipal taxes was due onthe property of the mills. The purchaser paid these taxes in order to save the mills frombeing sold. The court held that, by agreeing to purchase the property, the purchaseracquired sufficient interest in the property. Thus this money could be recovered from theseller of the mills.

2. The person who made the payment can’t recover the same, if the payment is madevoluntarily.

E.g.: A pays arrears of rent of his neighbour B, just to avoid a struggle between B and hislandlord. Here, A cannot recover this rent from B as he acted voluntarily, without any interest insuch payment.

3. The payment must be such that the other party was bound by law to pay: The words‘bound by law’ do not mean that the liability should only be statutory. The person may bebound to make the payment by ‘law’ or by ‘contract’.

Brook’s Wharf Vs. Goodman Bros: A was the owner of a warehouse. B imported certaingoods and kept them in A’s warehouse without paying the customs duty. The customsauthorities made a demand on A, and he had to pay the duty on those goods. Here B wasbound by law to pay the customs duty. A is entitled to recover amount from B.

4. The person who made the payment was not himself legally bound to pay the amount.

E.g.: A held some land on a lease granted by B, a Zamindar. According to their agreement, thetenant is liable to pay the revenue charges on the land. Land revenue fell in arrears, and inorder to prevent the termination of the lease, A paid the arrears of revenue charges. In thiscase, A cannot recover the revenue charges from B as the payment of land revenue was hisown duty.

5. The payment must not be made to self.

E.g.: A, a Zamindar gave his land on lease to the Forest Department of Madras Government. Afailed to pay the land revenue to the Government. In order to save the property from beingsold, the Forest Department made payment of the land revenues. The Court held that paymentof money by one Government department to another will be treated as payment to self. Thus,the Forest Department could not recover this money from A under this section.

Q.No.11. State the legal obligations of a person enjoying the benefit of a Non-Gratuitous Act.

a) Sec.70 of the Indian Contract Act, provides that, “Where a person lawfully does anything foranother person, or delivers anything to him, not intending to do so gratuitously and such otherperson enjoys the benefit thereof, the latter is bound to make the compensation to the former inrespect of, or to restore, the thing so done or delivered.”

b) Non-gratuitous act means an act which is not intended to be done freely.

c) Thus, if a person enjoys benefit of a non-gratuitous act then he is liable to compensate theother person or restore the thing.


d) It thus follows that for a suit to succeed, the plaintiff must prove:

• that he had done the act or had delivered the thing lawfully;

• that he did not do so gratuitously; and

• that the other person enjoyed the benefit.

THE ABOVE PROVISION APPLIES, WHEN:

1. A person has lawfully done something, or delivered something to the other: Here ‘lawfullydone’ denotes that the act or service done for somebody is not imposed upon him or her.

E.g.: A ploughed a field of B, with a tractor. B’s son was present at the time of ploughing. Afterploughing, B sent an intimation to the District Development Officer stating that the field hasbeen ploughed satisfactorily. Now, A demanded payment for ploughing the field. The court heldthat the act done was not a voluntary act. It was done in pursuance of the wishes of the ownerin the presence of his son. Thus it must clearly be regarded as something ‘lawfully’ done forwhich B was liable to reimburse A.

2. It has been done by a person not intending to act gratuitously: The person providinggoods or services must plan for the payment from the very beginning. If his intention is not tocharge any money for goods or services then he can’t recover for his work or goods.

E.g.: A purchased a TV set for giving it as a gift to B, his nephew. He went to his house and leftthe TV set without saying anything. B installed the TV set in his house. Later on A changed hismind and demanded payment from B for the TV set. In this case, he can’t recover the price ofTV set as his original intention was not to charge for it.

3. The other person has enjoyed the benefits of goods or services so provided: The benefitmust be a direct benefit which is accepted voluntarily by the person to whom it is provided.

E.g.: ‘X’ a seller delivers goods to ‘Y’. ‘Y’ uses the goods. In this case ‘Y’ is bound to pay forthe goods to ‘X’.

Q.No.12. Discuss the position of a finder of lost goods.

SUCH RESPONSIBILITY ARISES UNDER SECTION 71 WHICH IS REPRODUCED BELOW:

a) “A person who finds goods belonging to another and takes them into his custody is subject tothe same responsibility of a Bailee.”

b) He is, therefore, required to take proper care of things found, not to appropriate it to his ownuse and, when the owner is traced, to restore it to the owner.

DUTIES OF FINDER:

1. A finder of lost goods has no legal duty to take charge of them (whatever their value is). Ifhowever, he takes charge of the lost goods, he is liable to:

a) try and find out the true owner,

b) not to appropriate the property to his own use, and

c) when the real owner is traced, he must restore the property to him.

2. Further, he must take as much care of the goods found as a man of ordinary prudence would,under similar circumstances, take care of his own goods of the same bulk, quantity and valueas those of the goods found. [Sec.151]

E.g.: P, a customer in D’s shop, puts down a broach with her coat and forgets to pick it up.One of D’s assistants found it and it was placed in a drawer over the weekend. On Monday, itwas discovered as missing. D was liable to P in view of the absence of that ordinary care whichin the circumstances, a prudent man would have taken in his own case.


RIGHTS OF THE FINDER:

1. The property in goods shall vest in the finder and he is entitled to retain it against the wholeworld, except the true owner.

Hollins Vs. Fowler: A picked up a diamond from the floor of B’s shop and handed it over to Bto keep it till the owner is found. Even after making best efforts, the true owner could not befound. After sometime, A tendered to B, all lawful expenses incurred in finding the true ownerand asked him to return the diamond. B refused to do so. The court held that A was finder ofdiamond, and if the true owner is not traceable, he is entitled to keep the diamond against thewhole world. Thus B had to return the diamond to A.

2. The finder can exercise lien right on goods for expenses incurred by him in preserving thegoods and finding the true owner.

3. Where the owner has offered a reward for recovery of lost goods, the finder may claim suchreward and may retain the goods until he gets it.

4. Finder of lost goods can sell the goods in any of the following cases:

a) When the goods are in danger of being perished.

b) When the owner can’t be found even after reasonable diligence.

c) When the owner is found out, but he refuses to pay the lawful charges of the finder.

d) When the lawful charges of the finder, in respect of the thing found, amount to two thirds ofthe value of the thing found.

Q.No.13. Explain the liability for money paid or thing delivered by mistake or under coercion.

LIABILITY FOR MONEY PAID OR THING DELIVERED BY MISTAKE OR UNDER COERCION: Such liability arises under Section 72 of the Contract Act which is reproduced below:

“A person to whom money has been paid, or anything delivered, by mistake or under coercion must repay or return it.”

Examples:

• A pays some money to B by mistake. It is really due to C. B must refund the money to A. C,however cannot recover the amount from B as there is no privity of contract between B and C.

• A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He isbound to pay A for them.

• A and B jointly owe Rs.100 to C, A alone pays the amount to C, and B, not knowing this fact,pays 100 rupees over again to C. C is bound to repay the amount of Rs.100 to B.

Q.No.14. State the legal provisions relating to Restitution.

When a contract becomes void, the party who has received any benefit under it must restore it to the other party or must compensate the other party by the value of the benefit. This restoration of the benefit is called restitution.

“CONSEQUENCES OF RESCISSION OF VOID OR VOIDABLE CONTRACTS": When an aggrieved party rescinds a void or voidable contract, the other party thereto need not perform his obligations. If such aggrieved party has already received any benefit under the contract, he must restore such benefits under the contract to the other person.

E.g.: A hired a godown from B for 12 months and paid the whole of the rent in advance. After seven months the godown was destroyed by fire without any fault or negligence on the part of A. A can claim refund of proportionate amount of rent.


Q.No.15. Supply of necessaries to incapable persons. This question is already covered in Chapter No.4. So no need to discuss here. Students are advised to read that question once again here.

Q.No.16. What is a Contingent Contract? And state the legal provisions relating to Contingent Contracts.

a) A contract may be absolute or contingent.

b) An Absolute contract is one where the promisor undertakes to perform the contract in anyevent without any condition.

c) Contingent contracts are the contracts which are conditional on some future event happeningor not happening and are enforceable when the future event occurs. (Sec.31)

d) Section 31 of the Act defines contingent contract as “a contract to do or not to do something, ifsome event collateral to such contract, does or does not happen”. Contracts of insurance areof this class.

e) Examples:

• A contracts to pay B Rs.1,00,000 if B’s house is destroyed by fire. This is a contingentcontract.

• When goods are sold on approval basis the contract is a contingent contract depending onthe act of the buyer to accept or reject the goods.

ESSENTIALS CHARACTERISTICS OF CONTINGENT CONTRACTS: There are three essential characteristics of a contingent contract.

1. Its performance depends upon the happening or non happening of some future event. Acontract may be subject to a condition precedent or subsequent. This is the main differencebetween contingent contracts and other contracts.

2. The event must be uncertain. If the event is bound to happen and the contract is bound to beperformed, it is not a contingent contract.

3. The event on which the performance is made to depend, is an event collateral to the contract,i.e. it does not form part of the reciprocal promises which constitute the contract.

E.g.: There was a contract for the sale of American parachute cloth by A to B. The goods were tobe delivered when they arrived. A failed to give delivery and B sued for damages for breach. Aargued that the contract was a conditional one and as the goods did not arrive he had noobligation to give delivery. Held, the contract was an absolute one and not a contingent contract.

4. Thus, the event should neither be a performance promised, nor the consideration for apromise.

E.g.: Thus, where A agrees to deliver 100 bags of wheat and B agrees to pay the priceafterwards, the contract is a conditional contract and not contingent; because the event onwhich B’s obligation is made to depend is part of the promise itself and not a collateral event.

5. The contingent event should not be the mere will of the promisor. For instance, if A promises topay B Rs.10,000, if he chooses so, it is not a contingent contract. (In fact, it is not a contract at all).

However, where the event is within the Promisor’s will but not merely his will, it may beContingent contract.

E.g.: If A promises to pay B Rs.10,000 if A left Delhi for Bombay on a particular day, it is acontingent contract, because going to Bombay is an event no doubt within A’s will, but is notmerely his will.


RULES REGARDING ENFORCEMENT OF CONTINGENT CONTRACTS:

1. Contracts contingent upon the happening of an uncertain future event. [Sec.32]: Wherea contingent contract is made to do or not to do anything if an uncertain future event happens,it cannot be enforced by law unless and until that event has happened. If the event becomesimpossible, such contracts become void.

Examples:

• A agrees to pay B a sum of money if a certain ship returns. The contract can be enforcedwhen the ship returns. It becomes void when the ship sinks.

• X entered into a contract with Y to purchase Y’s buffalo, if X survived Z. In view of the saidprinciple of law, the contract, in the instant case, could not be enforced by law unless anduntil Z dies during the life-time of X.

• A contract to pay B a sum of money when B marries C. C dies without being married to B.The contract becomes void.

2. Contracts contingent upon the non happening / not-happening of uncertain future event.[Sec.33]: Where a contingent contract is made to do or not do anything if an uncertain futureevent does not happen, it can be enforced only when the happening of that event becomesimpossible and not before.

E.g.: P agreed to pay Q a sum of money, if a certain ship does not return. The ship was sunk.The contract could be enforced as the ship would never return in the circumstances.

3. When shall an event on which contract is contingent be deemed impossible, if it is the future conduct of a living person [Sec.34]: Suppose, the future event on which a contract is contingent is the way in which a person will act at an unspecified time. In such a case, the event shall be considered to have become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies.E.g.: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to Cmust now be considered impossible although it is possible that D may die and that C mayafterwards marry B.

4. Contracts contingent upon the happening of an uncertain event / specified event with ina fixed time [Sec.35]: Contracts contingent upon the happening of an uncertain specifiedevent within the fixed time, becomes void, if, at the expiration of the time fixed, such event hasnot happened, or if, before the time fixed, such event becomes impossible.

E.g.: A promises to pay B a sum money if certain ship returns within a year. The contract maybe enforced if the ship returns within the year and becomes void if the ship does not return orburnt with in the year.

5. Contracts contingent upon the non-happening / not-happening of an uncertain event /specified event within a fixed time [Sec.35]: Contract contingent upon non-happening of aspecified event within a fixed time may be enforced, when the time fixed has expired and such eventhas not happened or before the time fixed, if it becomes certain that such event will not happen.

E.g.: A promises to pay B a sum of money if a certain ship does not return within a year. Thecontract may be enforced if the ship does not return within the year or is burnt within the year.

6. Agreements contingent upon impossible events. [Sec.36]: A contingent agreement to door not to do anything, if an impossible event happens, is void. The impossibility of the eventmay be or may not be known to the parties to the agreement at the time when they entered intoit. If the future event is impossible at the time of contract is made, the contract is void-ab-initio.

Examples:

• A agrees to pay Rs.1,000 to B, if B marries, C, A’s daughter. C was dead at the time of theagreement. The agreement is void because B’s marriage with C can never take place.

• X agrees to pay Y Rs.1,000 if two straight lines should enclose a space. The agreement is void.


.DIFFERENCES

Q.No.17. Contracts of insurance Vs. Wagering Agreement.

DISTINCTION CONTRACTS OF INSURANCE WAGERING AGREEMENT Insurable interest

Person having an insurable interest can insure his life or property.

Parties to a wagering agreement need not have insurable interest.

Actual amount payable

In case of contracts of insurance except life insurance, the actual amount payable need not necessary be the full amount for which the property is insured.

In case of wagering agreement, the actual amount payable is usually fixed.

Beneficial / against public

policy

These are regarded as beneficial to the public policy.

These can’t be considered to be beneficial to the public.

Gamble Such agreements do not tantamount to gambling as they involve the element of investment and protection.

Being chance oriented, these are closer to gambling.

Q.No.18. Wagering Agreement Vs. Contingent Contract

The points of distinction between the two may be noted as follows:

1. A wagering agreement is a promise to give money or money’s worth upon the determination orascertainment of an uncertain event.

A contingent contract, on the other hand, is a contract to do or not to do something if someevent, collateral to such contract does or does not happen.

2. In a wagering agreement, the uncertain event is the sole determining factor, while in acontingent contract the event is only collateral.

3. A wagering agreement is essentially of a contingent nature whereas a contingent contract maynot be of a wagering nature.

4. A wagering agreement is void whereas a contingent contract is valid.

5. In a wagering agreement, the parties have no other interest in the subject matter of theagreement except the winning or losing of the amount of the wager. In other words, a wageringagreement is a game of chance. This is not so in case of a contingent contract.

THE END

IPCC_32e_M.Law_Performance of Contract____________________________87

7. PERFORMANCE OF CONTRACT

Q.No.1. What is meant by Performance of Contract? (or) When a contract is said to be performed?

Introduction:

a) Performance of a contract means fulfillment of the legal obligations created by a contract.

b) A contract being an agreement enforceable by law, creates a legal obligation, which subsistsuntil discharge. Performance of the promise or promises remaining to be performed is theprincipal and most usual mode of discharge.

c) Thus, you should note that it is necessary for a party who wants to enforce the promise madeto him, to perform his promise for himself or offer to perform his promise. Only after that he canask the other party to carry out his promise. This is the principle which is enshrined in Section37. Thus, it is the primary duty of each party to a contract to either perform or offer to performhis promise. He is absolved from such a responsibility only when under a provision of law or anact of the other party to the contract, the performance can be dispensed with or excused.

d) Thus from above it can be draw that performance may be actual or offer to perform.

e) Promises bind the representatives of the promisor in case of death of such promisor beforeperformance, unless a contrary intention appears from the contract.

Types of Performance:

1. Actual performance: Where a party to a contract has done what he had undertaken to do oreither of the parties have fulfilled their obligations under the contract within the time and in themanner prescribed. When a promise is actually performed, the contract comes to an end.

E.g.: X borrows Rs.5,000 from Y with a promise to be paid after 1 month. X repays the amounton the due date. This is actual performance.

2. Offer to perform or attempted performance or tender of performance: It may happensometimes, when the performance becomes due, the promisor offers to perform his obligationbut the promisee refuses to accept the performance. In such a case, it is termed as ‘offer ofperformance’ or ‘attempted performance’ or ‘tender of performance’.

Thus a valid tender of performance is equivalent to performance of promise and thisdischarges a party from his obligations under a contract.

Examples:

• P promises to deliver certain goods to R. P takes the goods to the appointed place duringbusiness hours but R refuses to take the delivery of goods. This is an attempted performanceas P the promisor has done what he was required to do under the contract.

• A enters into a contract to sell his car to B. A offers to deliver his car to B but B refuses toaccept it. It is a tender of performance made by A. By offering the car, A has completed his partof promise.

Effects of Tender:

a. Promisor is not responsible for non-performance.

b. Promisor does not loose his rights under the contract.


Types of Tender: There can be 2 types of tender as follows

1. Tender of goods or services: Where promisor offers to deliver the goods or services butpromisee refuses to accept the delivery, then

a. Goods or services need not be offered again.

b. Promisor may sue the promisee for non performance.

c. Promisor is discharged from his liability.

2. Tender of money: Where promisor offers to pay the amount but promisee refuses to acceptthe same, then

a. Promisor is not discharged from his liability to pay the amount.

b. Promisor will not be liable pay interest from the date of valid tender.

Essentials of a valid tender:

a. Unconditional: A valid tender must be unconditional. Tender is said to be unconditional whenit is made in accordance with the exact terms of the contract.

E.g.: X offers to deliver 100 bales of cotton to Y, if Y sells his sewing machine to X. It is aconditional tender and hence invalid.

b. At Proper Time: Tender should be made in accordance with the time stated in the agreement.If there is no such agreement then tender must be made during business hours. Tender ofgoods or money, before due date, is not a valid tender.

E.g.: D owes C Rs.10,000 payable on the 1st of august with interest. D offers to pay theamount on the first of july along with interest upto the first of july. It is not a valid tender as it ismade before the due date.

c. At Proper Place: Tender should be made at proper place i.e. stipulated place (if there is anagreement with respect to place) or at promisee's place of business (if there is business) or atpromisee's residence (if there is no place of business).

d. Reasonable opportunity of inspection to promisee: Promisee should be given a reasonableopportunity for ascertaining whether goods delivered are, as per the agreement or not.

e. For whole obligation: A tender must be made for the whole obligation and not for a part of thewhole obligation. Even if there is some minor deviation from the terms of the contract, tender isstill valid.

E.g.: Delivery of 99.9 tons of wheat in a contract for 100 tons of wheat is a valid tender butdelivery of 90 tons of wheat is invalid tender.

f. To proper person: It must be made to the promisee or his duly authorised agent. In case ofseveral joint promisees, it is sufficient to offer to one of the several joint promisees.

Note: An offer to one of several joint promisees has the same legal consequences as an offerto all of them.

g. Of exact amount and in Legal Tender: In case of tender of money, it must be made for theexact amount and in legal tender money.

h. By an able and willing person: The tender must be made by a person who is able and willingthere and then to perform the whole promise. For example, a tender of goods withoutpossession of goods or title to goods or tender of payment without having sufficient funds isinvalid.

i. Proper form: Tender must be made in the proper form. The form may be decided by theparties while making the contract. For instance, parties may decide that goods must bedelivered in the packs of 100 grams or 1 kg. If the parties do not decide, the tender must bemade in usual form.


Effect of refusal of party to perform the promise wholly: When a party to a contract has refused to perform his promise entirely or became disabled, promisee may put an end to the contract, unless he signifies, by words or conduct, his acquiescence in its continuance (Section 39). From language of Section 39 it is clear that in the case under consideration, the following two rights accrue to the aggrieved party, namely, (a) to terminate the contract; (b) to indicate by words or by conduct that he is interested in its continuance.

In case the promisee decides to continue the contract, he would not be entitled to put an end to the contract on this ground immediately. In either case, the promisee would be able to claim damages that he suffers as a result on the breach.

Examples:

• A, singer, enters into a contract with B, the Manager of a theatre, to sing at his theatre twonights in every week during next two months, and B engages to pay her 100 rupees for eachnight’s performance. On the sixth night, A willfully absents herself from the threatre. B is atliberty to put an end to the contract.

• A, a singer enters into a contract with B, the manager of a theatre, to sing at his theatre twonights every week, during the next two months and B engages to pay her at the rate of Rs.100for each night. On the sixth night, A willfully absents herself. With the assent of B, A sings onthe seventh night. B agreed to continue the contract., and now he cannot put an end to it. But Bcan ask for damages sustained by him because of A's failure to sing on the sixth night.

Q.No.2. Who should perform the contract?

The persons who should perform the contract are given below:

1. Promisor himself: Sec.40 of the Act provides that, if it appears from the nature of the casethat promise should be performed by the promisor himself, such promise must be performed bythe promisor. In such cases, death of the promisor puts an end to the contract.

Contracts which involve exercise of personal skill, or diligence, or which are founded onpersonal confidence between the parties must be performed by the promisor himself.

In case of other contracts, if it is clearly stated that contract should be performed by promisorhimself then it should be performed by him personally and can't be delegated.

Examples:

• A promises to paint a picture for B and this must be performed by the promisor himself.

• A promises to paint a picture for B for a certain price. A is bound to perform the promisehimself. He cannot say some other painter to paint the picture on his behalf. If A dies beforepainting the picture, the contract cannot be enforced either by A’s representative or by B.

• An agreement to sing a song, an agreement to marry etc.

2. Legal representatives of the promisor: A contract which involves the use of personal skill oris founded on personal consideration comes to an end on the death of the promisor. The ruleof law is "actio personalis moritur cum persona" i.e. a personal action dies with the person.

As regards any other contract the legal representatives of the deceased promisor are bound toperform it unless a contrary intention appears from the contract (Section 37, para 2). But theirliability under a contract is limited to the value of the property they inherit from the deceased.

Examples:

• A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies beforethat day. A’s representatives are bound to deliver the goods to B, and B is bound to pay theRs. 1,000 to A’s representative.


• A promises to pay B a sum of money. A may perform this promise, either by personallypaying the money to B, or by causing it to be paid to B by another; and, if A dies before thetime appointed for payment, his representatives must perform the promise, or employ someproper person to do so.

3. Agent: Where personal consideration is not the foundation of a contract, the promisor or hisrepresentative may employ a competent person to perform it.

4. Third persons: When a contract is performed by a stranger to the contract, promisee has anoption either to accept or to reject it. When a promisee accepts performance of the promisefrom a third person, he cannot afterwards enforce it against the promisor. That is, performanceby a stranger, if accepted by the promisee, this result of discharging the promisor, although thelatter has neither authorised nor ratified the act of the third party.

Examples:

• A received certain goods from B promising to pay Rs.10,000. Later on, A expressed hisinability to make payment. C, who is known to A, pays Rs.6,000 to B on behalf of A.However, A was not aware of the payment. Now B is intending to sue A for the amount ofRs.10,000 whether he can do so? Advice.

• As per Section 41 of the Indian Contract Act, 1872, when a promisee accepts performanceof the promise from a third person, he cannot afterwards enforce it against the promisor.That is, performance by a stranger, accepted by the promisee, produces the result ofdischarging the promisor, although the latter has neither authorised nor ratified the act ofthe third party. Therefore, in the present instance, B can sue only for the balance amounti.e., Rs.4000 and not for the whole amount.

• A delivered certain goods to B for a promise to Rs.5,000. Later on B expresses his inabilityto clear the dues. C, who is known to B, pays Rs.2,000 to A on behalf of B. Before makingthis payment C did not tell B about it. Now A can sue B only for the balance and not thewhole amount.

• A borrows Rs.10,000 from B and promises to repay the same within a month. After 15 daysC, the father of A, pays Rs.10,000 to B against A’s borrowal. B accepts the money. Here Ais discharged from his liability to repay Rs.10,000 to B.

5. Joint Promisors: In case of several promisors, unless a contrary intention appears, thefollowing persons must perform the promise:

a. If all the joint promisors are alive - all the promisors jointly.

b. In case of death of any of the joint promisors - Representatives of the deceased promisorjointly with the surviving promisor(s).

c. In case of death of all joint promisors - Representatives of all the original co-promisorsmust fulfill the promise (Sec.42)

Examples:

• X, Y and Z who had jointly borrowed money must, during their life-time jointly repay thedebt. Upon the death of X his representative, say, S along with Y and Z should jointly repaythe debt and so on. This rule is applicable only if the contract reveals no contrary intention.

• A promises to B to pay Rs.1,000 on delivery of certain goods. A may perform this promise eitherhimself or causing someone else to pay the money to B. If A dies before the time appointed forpayment, his representative must pay the money or employ some other person to pay themoney. If B dies before the time appointed for the delivery of goods, B’s representative shall bebound to deliver the goods to A and A is bound to pay Rs.1,000 to B’s representative.

• X & Y jointly promised to repay a loan of Rs.1,000 on a specified day. X dies before thatspecified day. X's representatives, jointly with Y, must perform the promise on that specified day.


Q.No.3. Who can demand performance of the contract?

The persons who can demand performance are given below:

a. Promisee: Promisee is the only person who demands the performance of the contract.

b. Legal Representative: In case of death of promisee, his legal representative can demandperformance unless a contrary intention appears from the contract or the contract is ofpersonal nature.

E.g.: X promises to marry Y on a specified day. Y dies before the specified day. The legalrepresentatives of Y cannot demand performance of the promise from X because the contractis of personal nature.

c. Third Party: A third party can also demand the performance of the contract in someexceptional cases. For example, a beneficiary in case of trust, the person for whose benefitsome provision is made in family arrangements.

d. Joint Promisees: In case of several promisees, unless a contrary intention appears, theperformance can be demanded by the following persons:

• If all the promisees are alive - All promisees can jointly demand the performance.

• In case of death of any of the joint promisees - Representatives of deceased promisee,along with the surviving promisee(s).

• In case of death of all the joint promisees - Representatives of all of them can jointlydemand the performance.

E.g.: X promises Y and Z jointly to repay the loan of Rs.1,000 on a specified day. Y dies before that specified day. Y’s representative, jointly with Z, can demand the performance from X on that specified day. If Y and Z die before that specified day, the representatives of Y and Z, jointly, can demand the performance from X on such specified day.

Q.No.4. State the rules regarding time and place of performance of a contract.

The rules regarding the time and place of performance of a promise are contained in sections 46 to 50, and section 55 of the Act. These are discussed below:

1. Where no time is specified and no application is to be made: Where a contract does notspecify any time for its performance and promisee is not required to ask for performance, thecontract must be performed within a reasonable time. The expression reasonable time is to beinterpreted having regard to the facts and circumstances of a particular case.

2. Where time is specified but no application is to be made: When the day for performance isspecified in the contract and the promisor himself has to perform the promise, without beingasked by the promisee, the promise may be performed during the usual hours of business onthat specified day.

E.g.: If the delivery of goods is offered say after sunset, the promisee may refuse to acceptdelivery, for the usual business hours are, between 10 a.m. and 5 p.m.

Moreover, the delivery must be made at the usual place of business.

3. Where day is specified and application is to be made: Sometimes, the day for performanceis specified in the contract and the promisor has to perform it only when asked by promisee. Insuch a case, promisee must demand the performance at proper time and place and withinusual hours of business. The term ‘proper time and place’ is a question of fact in each case.

E.g.: A promised to deliver 100 tins of ghee on a fixed date. B agreed to specify later on theplace and time for delivery of tins. In this case, it is the duty of B to inform A about the time andplace of delivery.


4. Where no place is specified and no application is to be made: When no place is fixed forthe performance and promisor himself has to perform the contract, he must first apply to thepromisee to appoint a reasonable place for performance. Thereafter he should perform at suchappointed place.

E.g.: A agreed to supply 100 bags of rice to B on a certain day, but no place was fixed for thedelivery. In this case, A must ask B for the place of delivery, and supply the rice at the place sodecided.

5. Where the manner and time for performance is prescribed by the promisee: Sec.50 of theAct provides that, “The performance of any promise may be made in any manner, or at anytime which the promisee prescribes or sanctions.’

E.g.: B owed A Rs.2000. A asked B to deposit this money directly to his bank account in ‘X’bank. B deposited money to the account of A. Before A came to know about the transfer, thebank failed. In this case, the payment made by B is a good payment, and A cannot demand thepayment again.

Q.No.5. What is the effect of failure to perform the contract in time?

The parties to a contract may specify that the contract is to be performed within certain period of time. If one party fails to perform his obligation within such specified time, the other party:

1. Can avoid the contract, if time is the essence of the contract.

2. If time is not the essence of contract, the other party can't avoid it.

When time is considered as essence of contract? Whether time is the essence of a contract or not depends upon:

1. The terms of the contract

2. The intention of the parties, which can be gathered from:• Surrounding circumstances,• Nature of subject matter of the contract• Construction of the contract.

3. The object of entering into the contract.

Some well settled presumptions:

a. In mercantile transactions, conditions of giving or taking delivery of goods are presumed to bethe essence but condition as to time of payment is not considered as the essence of thecontract.

In cases other than commercial or mercantile contracts, the presumption is that time is not theessence of the contract.

b. In contracts of sale of immovable property, generally, time is not an essence of contract. Butwhere circumstances show that time is essence of the contract, it is treated as essence of thecontract. (e.g., where the sale of immovable property specifically made for the purpose of amarriage, to take place on a certain date, then time is considered as essence of the contract).

Effect of failure to perform in the fixed time, when time is the essence of contract: In such cases, the contract becomes voidable at the option of promisee. If he chooses to rescind the contract, the contract comes to an end and he can sue for damages. If he chooses to accept the performance, there may be two possible alternatives:

a. He can accept the performance without any objection. In such a case he cannot claimcompensation for any loss caused to him by such non-performance in time.

b. He accepts the performance but at the time of such acceptance, he gives a notice to thepromisor that he is going to claim compensation for the damages.


Effect of failure to perform when time is not the essence of contract: In such cases, contract does not become voidable at the option of the promisee. However, he has a right to receive compensation from the other party for any loss caused to him by such delayed performance. But it must be remembered that even where time is not essential it must be performed within a reasonable time; otherwise it becomes voidable at the option of the promisee.

Bettini Vs. Gye: A singer agreed to perform at a theatre and to be present at least six days before this engagement. But he reported only two days before. The theatre owner wanted to put an end to the contract. Court held that this delay is not going to affect the substance of the contract. Hence the contract could not be put to an end. However, the theatre owner was allowed to recover compensation for any loss suffered by him due to such delay.

But ordinarily, from an examination of a contract, it is difficult to ascertain whether time is intended to be of essence by the parties at the time of its formation. In every case, the intention is to be gathered from the terms of the contract.

In a mercantile contract, the general rule in this regard is that stipulations as to time, except as to time for payment of money, are essential conditions, since punctuality is of the utmost importance in the business world. Thus, on a sale of goods that are notoriously subject to rapid fluctuation of market price, e.g. gold, silver, shares having a ready market the time of delivery is of the essence of the contract. But in mortgage bond, the time fixed for the repayment of the mortgage money can by no means be regarded as an essential condition; consequently, the mortgaged property can be regained even after the due date. Similarly, in a contract to sell land any clause limiting the time of completion is not strictly enforced. But even in a contract for the sale of land, time can be made the essence of the contract by express words.

Effect of acceptance of performance out of time: Even where time is essential the promisee may waive his right to repudiate the contract, when the promisor fails to perform the promise within the stipulated time. In that case, he may accept performance at any time other than that agreed. In such an event, he cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless at the time of acceptance of the performance he has given a notice to the promisor of his intention to claim compensation.

Q.No.6. State the legal provisions relating to appropriation of payments made by debtor.

When a debtor, owing several distinct debts to one person, makes a payment, which is not sufficient to discharge all the debts, the question arises to which particular debt the payment is to be applied. The Act in sections 59 to 61 lays down the underlying principles.

1. Where debtor expressly indicates the debts to be discharged: The law on the subject iscontained in Section 59 which says, “Where a debtor, owing several distinct debts to oneperson, makes a payment to him either with express intimation or under circumstancesimplying that the payment is to be applied to the discharge of some particular debt, thepayment, if accepted, must be applied accordingly”.

The Latin maxim is "quicquid solvitur, solvitur secundum modum solventis”. The meaning of themaxim is that whatever is paid, is paid according to the intention or manner of the party paying.According to this maxim, where a debtor owes several distinct debts to a creditor and makespayment it has been held in Clayton’s case that the former enjoys the right of appropriation,and he may, at his pleasure, appropriate it to any debt; the creditor will be bound by such anappropriation. If the debtor has not intimated at the time of payment creditor is entitled toappropriate it to the debt first in time.

Examples:

• A owed to B Rs.10,000 borrowed on 1st January, and Rs.5,000 borrowed on 1st March. Hepaid Rs.5,000 to B expressly intimating that he is repaying the second debt. In this casepayment must be appropriated towards the debt made on 1st March only.


• A owes several debts to B. Among them there is a debt for Rs.1,000 which falls due on 1stJune. There is no other debt of that amount. On 1st June A pays Rs.1,000 to B. Thepayment should be appropriated against the above stated debt of Rs.1,000 only. Here theintention of debtor can be gathered from the circumstances.

2. Where the debt to be discharged is not indicated and circumstances are not indicative:Sec.60 of the Indian Contract Act provides that, where debtor does not specify the debt to beappropriated, the right of appropriation is left to the creditor. The creditor can even adjust thepayment, which is not likely to be recovered. The law has given a privilege to him toappropriate the payment even against time barred debts. However, creditor can't apply thepayment against a disputed or unlawful debt.

E.g.: A owed several debts to B. Among them, there was a debt amounting to Rs.5,000 which became time barred (i.e., time limit to sue for recovery of debt was expired). A paid Rs.10,000 to B without specifying anything. B has a right to appropriate Rs.5,000 towards the time barred debt, and rest Rs.5,000 towards other debts as per his choice.

3. Where debtor does not intimate and creditor fails to appropriate: “Where neither partymakes any appropriation, the payment shall be applied in discharge of the debts in order oftime, whether they are or are not barred by the law in force for the time being as to thelimitation of suits. If the debts are of equal standing the payment shall be applied in dischargeof each proportionately.”

The aforesaid rule is to be applied when there is nothing to show the intention of the parties. Ifthe debts are of the same date the payment shall be applied in discharge of eachproportionately.

Examples:

• There are two debts one of Rs.500 and the other of Rs.700 that were incurred on the samedate the debtor pays Rs.600. Out of this sum, a sum of Rs.250 should be applied indischarge of the first debt and the balance of Rs.350 in discharge of the second debt.

• A owed three debts to B of Rs.1,000, Rs.2,000 and Rs.3,000 taken on 1st March, 1st Apriland 1st May, respectively. On 1st July A paid Rs.2,000 to B. In the absence of anyspecification, this payment will be adjusted as Rs.1,000 towards 1st debt of Rs.1,000, &Rs.1,000 towards second debt of Rs.2,000.

In case of current account, the appropriation of payment is made as per the provisions of Section 61 i.e. first debit entry is offset against first credit entry.

Principal and interest: Where there is a debt carrying interest and money is received without any definite appropriation then such money should be applied first for interest. If a debtor specifies that the money should be appropriated towards principal first, the creditor need not accept the payment on such terms. But once he accepts the payment, he should appropriate according to the debtor’s direction.

Rule in Clayton's case: This rule applies where parties have a running account between them. According to this rule in the absence of any contract to the contrary an item of receipt side must be appropriated against the items of payment side in the order of date.

Conclusion:

From the above discussion, following conclusions may be drawn:

a. First the debtor has the right to give instructions relating to appropriation of payment.

b. If he fails, then the option is given to the creditor to elect the appropriation.

c. But when both the parties fails to appropriate, law will appropriate in the order of time.


Q.No.7. State the legal provisions relating to devolution of joint rights and joint liabilities.

Devolution: Devolution means passing over from one person to another.

Devolution of Joint Liabilities [Section 42]: The liabilities of joint promisors pass to their legal representatives (in case of death). In case of several promisors, the persons who are liable to perform the promise were already covered in Q.No.2.

Rules Regarding performance of Joint Promises [Sec. 43 & 44]: The rules regarding performance of joint promises are as follows:

a. Joint and Several liability of Joint Promisors: When two or more persons make a jointpromise, in the absence of agreement to the contrary, the liability of joint promisors is joint andseveral. Thus promisee may compel any one or more of such joint promisors to perform thewhole promise.

E.g.: A, B & C jointly promise to pay Rs.3,000 to D. D may compel either A or B or C to payhim Rs.3,000.

b. Right to claim contribution: Every joint promisor may compel other joint promisors tocontribute equally to the performance of the promise, unless a contrary intention appears fromthe contract.

If a joint promisor is compelled to perform the whole promise then he may compel the otherjoint promisors to bear such amount equally, along with him, unless a contrary intentionappears from the contract.

E.g.: A, B and C jointly promise to pay Rs.3,000 to D. C is compelled to pay the whole amount.Now, C can recover Rs.1,000 from A and Rs.1,000 from B.

c. Sharing of loss by default in contribution: If any one of the joint promisors makes anydefault in such contribution then remaining joint promisors must bear such loss equally.

E.g.: A, B and C made a joint promise to pay Rs.3,000 to D. C became insolvent and is unable topay anything. A was compelled to pay the entire amount. A is entitled to receive Rs.1,500 from B.

d. Effect of Release of one Joint Promisor Sec(44): If a promisee discharges / releases oneamong several joint promisors, it does not discharge other joint promisors. In addition, the jointpromisor so discharged is still liable to other joint promisors.

E.g.: A, B and C jointly promise to pay D Rs.3,000. D releases A from his liability and sues Band C for payment. Here, B&C are still liable to D. On the other hand A is still liable to B & C.

However, under English law, the liability of joint promisors is only joint and not 'joint andseveral'. Thus, if one joint promisor is released then all other joint promisors will also bereleased from their liability.

Meaning of Devolution of Joint Rights [Sec. 45]: When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests with the following persons:

a. If all the joint promisees are alive - all of them can claim performance of contract.

b. If any one or some of the joint promisees die - representative of such deceased person/s canclaim performance of contract along with survivor/s.

c. If all the joint promisees die - representatives of all promisees can jointly claim performance ofthe contract.

E.g.: A, in consideration of Rs.5,000 lent to him by B and C, promises B and C jointly repay the sum with interest on a specified day but B dies. In such a case right to demand payment shall rest with B’s legal representatives, jointly with C during C’s life-time, and after the death of C, with the legal representatives of B and C jointly.


Q.No.8. State the legal provisions relating to reciprocal promises.

Meaning of Reciprocal Promises [Sec.2(f)]: Promises which form the consideration or part of the consideration for each other are called ‘reciprocal promises’.

E.g.: In a contract for sale, A promises to deliver the goods to B at a fixed price and B promises to pay the price. Such promises are called reciprocal Promises.

Types of Reciprocal Promises: Lord Mansfield in Jones v. Barkley case has classified the reciprocal promises as under:

a. Mutual and Independent: When promises are to be performed by each party independently,without waiting for the performance of other party then such promises are called mutual andindependent.

Examples:

• A contracts with B to deliver him, at a specified price, certain merchandise on board a shipwhich cannot arrive for a month, and B engages to pay for the merchandise with in a weekfrom the date of the contract. B does not paid within the week. A’s promise to deliver neednot be performed and B must make compensation.

• In a contract of sale, B agrees to pay the price of goods on 10th April. S promises to supplythe goods on 20th April. In this case each party has to perform their promise without waitingfor other.

b. Mutual & dependent: When the performance of one party depends on the prior performance ofthe other party then such promises are called mutual & dependent.

E.g.: A promises to paint the house of B and B is to supply the paints, brushes, etc. In return Bpromises to pay Rs.5,000. In this example, the promises made by A and B are mutual anddependent. The performance of A depends upon the performance of B i.e. to supply thenecessary raw material.

c. Mutual & Concurrent: When promises are to be performed simultaneously then suchpromises are called mutual and concurrent.

E.g.: Cash purchase.

Rules Regarding Performance of Reciprocal Promises: The law on the subject is contained in Sections 51 to 54. The provisions thereof are summarized below:

a. General observations: A contract may consist of an act and a promise, or it may consist oftwo promises, one being the consideration for the other. Thus, when A sells 500 quintals of riceto B who promises to pay the price after a month, the contract would consist of an actperformed by A and a promise made by B. On the other hand, if A promises to deliver 500quintals of rice and B promises to pay the price on delivery, the contract would consist of twopromises, one made by A to B and the other given by B to A. Such promises are calledreciprocal promises. Here, the promise of A is the consideration for the promise of B and viceversa.

b. Simultaneous performance of reciprocal promises [Sec.51]: Reciprocal promises mayhave to be performed simultaneously, or one after the other. Where A promises to deliverrice and B promises to pay the price on delivery, both the promises are to be performedsimultaneously, and both A and B must be ready and willing to perform their respectivepromises. Such promises constitute concurrent conditions and the performance of one of thepromises is conditional on the performance of the other. If one of the promises is notperformed the other too need not be performed.


Examples:

• If A, in the above-mentioned example, is unwilling to deliver the rice on payment, A will beguilty of breach of promise and the breach would relieve B of the obligation to perform hispromise and would enable B to treat the contract as at an end.

• A and B contract that A shall deliver goods to B and B shall pay for the goods on delivery.A need not deliver the goods unless B is ready and willing to pay for the goods on delivery.B need not pay for the goods, unless A is ready and willing to deliver them.

c. Performance of reciprocal promises when the order of performance is expressly fixed[Sec.52]: Where the order in which reciprocal promises are to be performed is expresslyagreed in the contract, they must be performed in that order.

E.g.: A and B agreed that A shall build a house for B at a fixed price. A’s promise to build thehouse must be performed before B’s promise to pay for it. The promise being dependent oneach other, any breach thereof by A would relieve B of the obligation to keep up his ownpromises, and would enable B to avoid the contract.

d. Performance of reciprocal promises when the order of performance is fixed byimplication: The order of performance may sometimes be indicated not expressly, but by thenature of the transaction.

E.g.: A and B contract that A shall make over his stock-in-trade to B at a fixed price, and Bpromises to give security for the payment of the price. A’s promise to make over his stock neednot be performed, until the security is given by B, for the nature of the transaction required thatA should have the security from B before he delivers his stock.

e. Effect of one party preventing another from performing promise: [Sec.53]: When acontract contains reciprocal promises, and one party prevents the other from performing hispromise, the contract becomes voidable at the option of the prevented party. The preventingparty can't claim compensation from the other party for non-performance of the contract. Thelatter becomes entitled to get compensation from the other party for any loss he sustains inconsequence of the nonperformance of the contract.

Examples:

• In a contract for the sale of standing timber, the seller is to cut and cord it, whereupon buyer isto take it away and pay for it. The seller cords only a part of the timber and neglects to cordthe rest. In that event the buyer may avoid the contract and claim compensation from theseller for any loss which he may have sustained for the non-performance of the contract.

• A and B agreed that B shall execute certain work for A, for Rs.1,000. B is ready and willingto execute the work accordingly, but A prevents him from doing so. The contract is voidableat the option of B. If he wants to rescind it, he can recover compensation from A for any lossincurred. But A can’t claim any compensation from B.

f. Effects of non-performance in case of Mutual and Dependent Reciprocal Promises [Sec54]: Where the performance of one party depends on the prior performance of the other partyand the party who is liable to perform first, fails to perform it then such party cannot claim theperformance from the other party and must pay compensation to the other party for any losswhich the other party may incur by the non-performance of the contract.

E.g.: A contracts with B to execute certain builder’s work for a fixed price. B agreed to supplythe required scaffolding and timber. B refuses to provide any scaffolding or timber. In such acase A need not execute the work and B is to pay compensation to A for any loss caused tohim by the non-performance of the contract.

g. Reciprocal promise to do certain things that are legal, and also some other things thatare illegal [Section 57]: When people make reciprocal promises firstly to do certain legalthings and secondly to do certain illegal things under specified circumstances then the first partis a contract, but the second part is a void agreement.


E.g.: A and B agree that A will sell a house to B for Rs.50,000 and also that if B uses it as a gambling house, he will pay a further sum of Rs.75,000. The first set of reciprocal promises, i.e. to sell the house and to pay Rs.50,000 for it, constitutes a valid contract. But the object of the second, being unlawful, is void.

h. ‘Alternative promise’ one branch being illegal [Section 58]: The law on this point iscontained in Section 58 which says that “In the case of the alternative promise, one branch ofwhich is legal and the other illegal, the legal branch alone can be enforced”.

E.g.: A agreed to pay Rs.1,000 to B. B agreed to deliver either rice or opium. The contractrelated to delivery of rice is valid and agreement related to delivery of opium is void.

Q.No.9. State the provisions relating to assignment of contract.

Assignment of Contract: Assignment of a contract means transfer of contractual rights and liabilities to a third party.

Modes of Assignment of contract: Assignment of a contract may take place in any of the following ways:

a) Assignment by act of parties

b) Assignment by operation of law.

Assignment by act of parties: Assignment by act of parties takes place when the parties to a contract themselves make the assignment. Such an assignment is subject to the following rules:

I. Assignment of contractual liabilities:

a. If the contract involves application of personal skill or taste or ability (e.g. contract to marry)- such obligation can't be assigned.

b. In other cases:

• If the contract expressly or impliedly provides that the contract should be performed bythe promisor only - such obligations can't be assigned.

• If the contract does not expressly or impliedly provide that the contract should beperformed by the promisor only – The promisor or his representative may employ acompetent person to perform such obligation [Sec.40] but promisor remains liable to thepromisee for proper performance

• By novation - Promisor may transfer his liability to a third party with the consent ofpromisee and transferee, by entering into a tripartite agreement.

II. Assignment of contractual rights:

a. In case of contractual rights involving personal skill – Such rights cannot be assigned.

b. In other cases-Such rights can be assigned subject to agreement between the original parties

c. Actionable claims – Such claims can always be assigned by an instrument in writing.Notice of such assignment must also be given to the debtor.

Examples:

• D owes Rs.500 to C (Creditor). Now C can transfer his right to T to recover the amount fromD. If D has already paid Rs.200 to C, T will be bound by this payment and can recoverRs.300 only from D.

• X owes Y Rs.10,000 and Z owes X Rs.10,000. Here X cannot compel Y to recover theamount from Z. However, he can transfer his liability to Z with the consent of Y and Z. Y canalso transfer his right to a third party to recover the amount from X.


Assignment by Operation of Law: Assignment by operation of law takes place when the law intervenes (=interfere). Such assignment takes place in the following cases:

I. In case of death of any party: The rights and obligations (other than those of personal nature) of the deceased person will pass on to his legal representatives.

II. In case of insolvency of any party: The rights and obligations (other than those of personalnature) of the insolvent person will pass on to the Official Receiver or Assignee.

E.g.: X promises to marry Y. Here, neither X can assign his obligation nor Y can assign hisright because the contract is of personal nature.

DIFFERENCES

Q.No.10. Succession Vs. Assignment

You should now note carefully the distinction between two legal concepts, viz., succession and assignment. When the benefits of a contract are succeeded to by process of law, then both burden and benefits attaching to the contract, may sometimes devolve on the legal heir. Suppose, a son succeeds to the estate of his father after his death, he will be liable to pay the debts and liabilities of his father owed during his life-time. But if the debts owed by his father exceed the value of the estate inherited by the son then he would not be called upon to pay the excess. In other words, the liability of the son will be limited to the extent of the property inherited by him. In the matter of assignment, however the benefit of a contract can only be assigned by not the liabilities thereunder. Why this is so? This is because when liability is assigned, a third party gets involved therein. Thus a debtor cannot relieve himself of his liability to creditor by assigning to someone else his obligation to repay the debt.

On the other hand, if a creditor assigns the benefit of a promise, he thereby entitles the assignee to realise the debt from the debtor but where the benefit is coupled with a liability or when a personal consideration has entered into the making of the contract then the benefit cannot be assigned.

Difference Succession Assignment

1. MeaningThe transfer of rights and liabilities of a deceased person to his legal representative is called as succession.

The transfer of rights by a person to another person is called as assignment.

2. TimeSuccession takes place on the death of a person

Assignment takes place during the lifetime of a person.

3. Voluntary actSuccession is not a voluntary act. It takes place automatically by operation of law.

Assignment is a voluntary act of the parties.

4. Writtendocument

Succession may take place even without may written document.

Assignment requires execution of an assignment deed

5. ScopeAll the rights and liabilities of a person are transferred by way of succession. Succession includes assignment.

Only rights can be assigned. liabilities under a contract, cannot be assigned unless there is novation. Assignment does not include succession.

6. Notice No notice of succession is required to be given to any person

Notice of assignment must be given to the Debtor.

7. ConsiderationNo consideration is necessary for succession

Consideration between assignor and assignee is a must for assignment.

8. GoverningLaw

Succession is governed by the succession law.

Assignment is governed by the law governing the benefit or interest to be assigned.

9. Persons Only successors succeed who are natural persons.

Assignment can be made to any person natural or artificial persons.

THE END

IPCC_32e_M.Law_Discharge of a Contract____________________________100

8. DISCHARGE OF A CONTRACT

Q.No.1. What is meant by Discharge of a Contract? State different modes of discharge of a contract.

Discharge of a contract means termination of the contractual relationship between the parties. A contract is discharged when rights and obligations created by it comes to an end.

Following are the different ways in which discharge or termination of a contract can take place:

a. Performance

b. Impossibility of Performance (Initial Impossibility, Supervening Impossibility)

c. Mutual Agreement

d. Lapse of Time

e. Operation of Law

f. Breach of Contract

Q.No.2. Explain how the Contract is discharged through Performance?

Discharge of contract through performance:

1. By Actual Performance: When performance by both the parties is actually performed thecontract comes to an end.

E.g.: A contracts to sell his car to B on the agreed price, as soon as the car is delivered to Band B pays the agreed price for it, the contract comes to an end by performance.

2. By Attempted Performance: Some times the promisor is ready to perform his promise andoffers to perform the same, but the promisee refuses to accept it. In such a case, the contractis discharged.

E.g.: X enters into contract to sell his bike to Y. X offers to deliver his bike to Y but Y refuses toaccept it. It is a tender of performance made by X. By offering the bike, X has completed hispart of promise.

Q.No.3. Explain how the Contract is discharged through Impossibility of Performance?

Discharge by impossibility of performance: The impossibility may exist from the very start. In that case, it would be impossibility ab initio. Alternatively, it may supervene. Supervening impossibility may take place owing to: (a) an unforeseen change in law, (b) the destruction of the subject-matter essential to that performance; (c) the non-existence or non-occurrence of particular state of things, which was naturally contemplated for performing the contract, as a result of some personal incapacity like dangerous malady; (e) the declaration of a war (Section 56).

E.g.: A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.

If an agreement contains an undertaking to perform an impossible thing then such agreement is void-abinitio. This rule is based on the following maxims:

a. “lex non cogit ad impossibilia” i.e. the law does not recognise what is impossible.

b. “Impossibilium nulla obligato est” i.e. what is impossible does not create any obligation.


Sec.56 deals with the question of Impossibility of Performance. According to this section, there are two kinds of Impossibilities:

a. Initial Impossibility: Where impossibility is existent at the time of entering into contract.

E.g.: A agrees with B to discover a treasure by magic. The agreement is void due to initialimpossibility.

b. Subsequent Impossibility: Where impossibility arises subsequently i.e. after the formation ofcontract (Supervening Impossibility).

E.g.: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad.The contract becomes void.

Initial Impossibility i.e. Where impossibility exists at the time of entering into contract: When the parties agree upon doing of something which is obviously impossible in itself the agreement would be void. Impossible in itself means impossible in the nature of things. The fact of impossibility may be and may not be known to the parties. This is known as pre-contractual impossibility or initial impossibility. Such agreement does not come into existence. Thus there is no question of discharge of a contract which never existed.

Following are various alternative situations in this context.

a. If known to the parties: This is also known as absolute impossibility. Such agreement is void-ab-initio. For example, ‘B’ promises to pay ‘A’ sum of Rs. 5,000 if he is able to swim across theIndian Ocean from Bombay to Aden within a week. In this case, there is no real agreement,since both the parties are quite certain in their mind that the act is impossible of achievement.Therefore, the agreement, being impossible in itself, is void.

b. If unknown to the parties: Where both the promisor and the promisee are ignorant of theimpossibility of performance, the contract is void.

c. If known to the promisor only: Where at the time of entering into a contract, the promisoralone knows about the impossibility of performance, or even if he does not know though heshould have known it with reasonable diligence, the promisee is entitled to claim compensationfor any loss he suffered on account of non-performance.

Subsequent Impossibility/Supervening Impossibility i.e. Where impossibility arises subsequent to the formation of contract: When performance of promise become impossible or illegal by occurrence of an unexpected event or a change of circumstances beyond the contemplation of parties, the contract becomes void.

E.g.: Change in law etc.

Thus a contract becomes void on the ground of subsequent impossibility only if the following conditions are satisfied:

a. The act became impossible or unlawful.

b. The impossibility is caused by circumstances which are beyond the control of the parties.

c. The impossibility should not be the result of some act or negligence of the promisor himself. Inother words, the impossibility should not be self-induced.

This is known as ‘Doctrine of Supervening Impossibility’ or 'Post - Contractual Impossibility'. English Law recognises it as ‘Doctrine of Frustration’.

Cases where contract is Discharged on the ground of Supervening Impossibility / Subsequent Impossibility:

1. Destruction of the subject matter: After the formation of the contract if the subject matter isdestroyed, the contract is discharged due to impossibility of performance.


Taylor Vs. Caldwell: C agreed to let out a music hall to T for a series of concerts. The hall was destroyed by fire before the date of first concert. Now T could not perform his concerts and sued C for breach of contract. The court held that both the parties were free from their contractual obligations because the contract became void due to impossibility of performance.

Where only a part of the subject matter of the contract is destroyed, the promisor is still liable, in respect of that part.

E.g.: A, a farmer promises to deliver B, 1 Lac Kg. of tomatoes that are to be grown on his farm. Part of the crop gets destroyed, and he could get only 10,000 Kg. of tomatoes from his farm. He sells these tomatoes to C at a higher price. Here A was bound to deliver 10,000 Kg. of tomatoes to B at contract price. B is entitled to sue A to claim damages for not selling him 10,000 kg of tomato crop.

2. Failure of the Ultimate Purpose: Where the ultimate purpose for which the contract isentered into fails, the contract becomes void. This kind of failure of the object of a contract isoften called as 'frustration of the contract'.

Krell Vs. Henry: H agreed to hire K’s flat for the purpose of watching the procession of EdwardVII. As a result of the king’s illness, the procession was cancelled. Now K filed a suit on H forthe recovery of rent. H said that the contract was discharged because of failure of very purposeof contract and he was not liable to pay the rent. The court supported the view of H.

3. Death or Personal Incapacity of the Promisor: If personal performance is required under thecontract, it is excused by the serious illness or death of the promisor.

Robinson Vs. Davison: An artist undertook to sing at a theatre on a particular day. But theartist being too ill and could not sing on the day fixed for performance. It was held that thecontract was discharged due to personal incapacity of the artist. Thus he was not liable to paydamages for non-performance.

4. A Change in Law or Government Policy: Another common situation in which performancebecomes impossible is, change in law or regulation that makes the performance illegal.

E.g.: A agreed to sell his land to B. Subsequently, that land was acquired by the Government,and A ceased to be the owner of the land. Court held that the contract was dischargedbecause it is impossible for A to sell that land.

5. Outbreak of War: A contract entered into with an alien enemy during war is void abinitio. Acontract entered into before the outbreak of war, gets suspended during the war, and can berevived after the war.

Effects of Doctrine of Supervening Impossibility:

a. The contract becomes void and stands discharged.

b. Where one contracting party has obtained a valuable benefit before the time of discharge ofcontract, the other party can recover certain sum, as the court considers just. (Restoring).

Cases where Contract is not discharged on the ground of Supervening Impossibility (Exceptions to the Doctrine of Supervening Impossibility):

a. Difficulty in Performance: If the event becomes difficult to perform, but not impossible, thenthe parties are not excused from performance.

b. Commercial Hardships: A party is not discharged from the performance of a contract simplybecause the performance has become burdensome or non-profitable. For example, abnormalrise or fall in prices of inputs (raw material) or increase in overhead costs (wages, transportcosts) etc.

E.g.: There was a sharp increase in the prices of goods. In this case, A is not discharged fromhis liability to supply the goods at the price decided in the contract.


c. Impossibility due to failure of a Third Party: Impossibility created by the failure of a thirdperson, on whose work the promisor relied, cannot become a ground to excuse performance.

E.g.: A agreed to sell certain goods to B which are to be procured from C, a manufacturer ofthese goods. C did not manufacture the goods and A failed to supply the goods to B. In thiscase, A could not be discharged from his liability to perform and he was held liable fordamages to B.

d. Strikes and Lock-Outs: All such events do not discharge the contracts unless specificallyprovided by the parties.

e. Failure of one of the objects or Partial Impossibility: If a contract has several objects,failure of one of them does not discharge the contract.

HB Steamboat Co. Vs. Hutton: H agreed to hire from the H.B.S. Co. a boat for the purpose oftaking passengers from Herne Bay to watch the Royal Naval Review, and to cruise round thefleet. Owing to the King’s illness, the review was cancelled, and H decided not to continue withthe proposed trip. The court held that the contract was not discharged. The review was not thesole purpose of the contract. The fleet was still lying in the port and the cruise was stillpossible. The H.B.S. Co., was, therefore entitled to the hiring fee.

f. Self-induced Impossibility: A Contract is not discharged in case of self induced impossibilityby either of the party.

Q.No.4. Discuss the rules regarding the discharge of a Contract by Mutual Agreement.

A contract is created by the parties to it. Therefore, it can also come to an end by their mutual agreement. The parties may make a new agreement that will discharge or modify the obligations of one or both parties under the original contract.

Sec. 62 of the Act provides three different modes of discharging original contract: (i) Novation (ii) Alteration, and (iii) Recession.

Sec.63 of the Act provides another two modes: (i) Remission, and (ii) Waiver.

i. Novation: Novation means substitution of an existing contract with a new one. This newcontract may be between same parties with new terms, or between new parties with old or newterms. The consideration for new contract is the discharge of old contract. A valid novationdischarges the old contract.

Examples:

• A owes B Rs.10,000. A enters into an agreement with B and mortgage his (A’s), estates for5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishesthe old.

• A owes B Rs.100. A, B and C agree that C will pay B and he will accept Rs.100 from C inlieu of the sum due from A. A’s liability thereby shall come to an end, and the old contractbetween A and B will be substituted by the new contract between B and C.

• A owes B Rs.1,000. B owes C Rs.1000. B asks A to credit C with Rs.1000 in his books ofaccounts. Both A and C agree to it. A new contract between A and C is substituted in place ofold contract between A and B. This is a novation contract between new parties on old terms.

Rules for valid Novation:

a. Consent of all parties is necessary for novation.

b. Novation should take place before the breach or expiry of old contract.

c. To affect novation, new agreement must be valid and binding. If the new contract is notenforceable for any reasons, the old contract remains binding.


E.g.: A agrees to supply rice to B on a particular day. Before that date, A agreed to sell opium instead. Here new contract to sell opium is illegal and not enforceable. Thus novation will not be effective and old contract to sell rice would be valid and it will still continue.

ii. Alteration: Alteration means change in one or more of the terms of a contract. When acontract is altered by the mutual consent of the parties, parties to the contract remain same,but the contract is altered. A valid alteration discharges the original contract, and the partiesbecome bound by the new contract (i.e., contract with altered terms).

As in the case of novation and rescission so also in a case where the parties to a contractagree to alter it, the original contract is rescinded, with the result that it need not be performed.In other words, a contract is also discharged by alteration. The terms of contract may be soaltered by mutual agreement that the alteration may have the effect of substituting a newcontract for the old one. In other words, the distinction between novation and alteration is veryslender.

E.g.: A enters into a contract with B to supply 100 bales of cotton on 9th August, 1998. Lateron they mutually agreed to postpone the date of supply to 17th August, 1998. This changeamounts to alteration of contract.

iii. Rescission: Rescission means cancellation. When a contract is rescinded, the obligations ofboth the parties are thereby discharged. Rescission may be express or implied by thecircumstances or conduct of the parties. When the parties to a contract agree to rescind it, thecontract need not be performed. In case of rescission, only the old contract is cancelled and nonew contract comes to exist in its place. It is needless to point out that novation also involvesrescission. Both in novation and in rescission, the contract is discharged by mutual agreement.

Rescission may occur in any of the following manner:

a. When contracting parties mutually agree to rescind the contract.

E.g.: A agreed to teach painting to B. Subsequently he had to shift to another city. A and Bmutually agreed not to give affect to their contract of teaching painting. Both of them gotdischarged from the contract.

b. When one party fails to perform his obligations, the other party may rescind thecontract and can claim compensation for such breach of contract.

E.g.: A agreed to supply goods to B on 9th August, 1998, for which B agreed to pay priceon 17th august, after receipt of goods. A failed to supply the goods. B may opt to rescindthe contract and need not pay the price. On such recession, both the parties aredischarged from contract, where aggrieved party retains right to claim damages suffereddue to non-performance of the contract.

Note: A person breaking the contract cannot rescind it.

c. When a person at whose option a contract is voidable, rescinds it.

Following are the general rules of Rescission:

a. No partial rescission: A party may rescind the entire contract. Rescission of a part of thecontract is not possible.

b. Communication of rescission: The rescission of a contract may be communicated in thesame manner and subject to the same rules, as apply to the communication or revocationof a proposal (Sec.66). Rescission is communicated and revoked in the same way as apromise. The effect is to dispense with further performance and to render the partyrescinding liable to restore any benefit he may have received. (Sections 64 and 66).

c. Restitution: The party rescinding a voidable contract shall restore the benefits so far asmay be to the other party he has received under the contract from him. (Sec.64)


iv. Remission: Remission means acceptance of lesser amount, or lesser degree of performancethan what was contracted for in full discharge of the contract. This has to be done prior to thedate of performance.

v. Promisee may waive or remit performance of promise: “Every promisee may dispense withor remit, wholly or in part, the performance of the promise made to him, or may extend the timefor such performance or may accept instead of its any satisfaction which he thinks fit” (Section63). In other words, a contract may be discharged by remission. A promisee may dispense withor remit the performance of the promise made to him or may accept any satisfaction he thinksfit. In the first case, the contract will be discharged by remission and in the second by accordand satisfaction (Section 63).

Thus where A, a party to a contract, has done all that he was required to do under the contractand the time for the other party, X, to perform his promise has not yet arrived, a bare waiver ofhis claim by A would be an effectual discharge to X.

It should be noted that novation, rescission or alteration cannot take place withoutconsideration. But in the case of partial or complete remission, no consideration is required.The promisee can dispense with performance without consideration and without a newagreement.

The promisee under the Act can also extend the time for the performance of the promise. Timecan be extended only for the benefit of the promisor and not for the benefit of the promisee.

Similarly, a promisee can accept instead of the stipulated performance, any satisfaction whichhe thinks fit. For instance, A sells his horse to B who promises to pay Rs.500 for the horse. Amay accept, instead of Rs.500 a necklace as the price of the horse.

Examples:

• A owes B Rs.5,000. C pays to B Rs.1,000 and B accepts them, in satisfaction of his claimon A. This payment is a discharge of the whole claim.

• A owned large sums of money to B. C offered to pay a lesser sum in satisfaction of B’sclaim on A. B accepted it. Subsequently B went to the court to claim balance payment fromA. It was held that the acceptance by B was in full satisfaction and he cannot claim balancefrom A.

Important points to be remembered in Remission:

a. A remission need not be supported by consideration.

E.g.: A owes Rs.5,000 to B. B agreed to accept Rs.2,000 in full satisfaction of his claimagainst A. This promise is enforceable although it is without consideration, and B cannotdemand Rs.5,000 from A.

b. A remission once made is irrevocable.

c. Remission may be conditional: In such a case, the promisor is released only onfulfillment of the condition. If the condition is not fulfilled, the creditor may enforce all hisrights.

E.g.: A owed Rs.10,000 to B. B offered to remit liability of A by Rs.5,000 if A gives his house to C on rent. Here if A rents his house to C, then only the remission would be affected. Otherwise, the liability of A to repay will remain as before.

vi. Waiver: Waiver means intentional relinquishment of a right under the contract. Sec.63 saysthat a person can ‘dispense with’ the performance of the other. On waiver, the other party isdischarged from the liability. To constitute a waiver, neither an agreement nor consideration isnecessary.


Q.No.5. Discuss the rules regarding the discharge of a Contract by Lapse of Time?

i. A contract should be performed within a specified period as prescribed by the Limitation Act,1963. If it is not performed and if no action is taken by the promisee within the specified periodof limitation, he is deprived of remedy at law. For example, if a creditor does not file a suitagainst the buyer for recovery of the price within three years, the debt becomes time-barredand hence irrecoverable.

ii. Every contract must be performed within a stipulated period of time or within a reasonable timeaccording to the nature of contract. If such time is lapsed, the contract is discharged.

E.g.: On 1st July 2001 X sold goods to Y for Rs.1,00,000 and Y has made no payment tillAugust, 2004. State the legal position as on 1st August, 2004 if

a. No credit period was allowed.

b. Credit period of two months was allowed.

Sol:

a. The contract is discharged by lapse of time (i.e. 3 years) from 1st July 2001 because thedebt has become time barred and hence X can't exercise his right to recover this debt.

b. The contract is not discharged by lapse of time because the period of limitation is yet toexpire on 31st August 2004 (i.e. 3 years from the expiry of the credit period).

Q.No.6. When a contract gets discharged by Operation of Law?

A contract is discharged by operation of law in the following cases:

a. Death: In contracts of personal nature, death of the promisor discharges the contract.

b. Insolvency: When a person is declared as insolvent by law, he is discharged from all the liabilitiesincurred, prior to that date. Thus, an insolvent is discharged from performing his part of contract bylaw. His rights and liabilities are transferred to an ‘official assignee’ appointed by the court.

c. Merger: When an inferior right of a party under a contract merges into a superior right of thesame person, inferior right vanishes into the superior right. This is known as merger. In such acase, the obligation created by inferior right is discharged.

E.g.: A took a land on lease from B. Subsequently, A purchases that very land. Now, Abecomes the owner of the land and the ownership rights being superior to rights of a lessee,the earlier contract of lease stands terminated.

d. Unauthorised Material Alteration: When an alteration to a material term of contract is madeby a party to the contract, without the consent of the other party, both the parties aredischarged from the contract by operation of law. The effect of such alteration would be sameas cancellation of the document.

E.g.: A contracted to sell his plot of 500 sq. yards to B for Rs.1 Lac. The sale was executedaccordingly. Before registration, A altered the deed and made it a deed for 300 sq. yards inplace of 500 sq. yards. In this case, the contract is discharged.

An alteration which is not material or which is made to carry out the common intention ofparties does not affect the validity of the contract.

e. By identity of Promisor and Promisee i.e. Rights and Liabilities under a Contract vest inthe same person: When promisor becomes promisee then other parties are discharged.

E.g.: X draws a bill receivable on Y who accepts the same. X endorses the bill in favour of Zwho in turn endorses it in favour of Y. Here Y is both promisor and promisee and hence theother parties are discharged.


f. Loss of Evidence of Contract: Where the evidence of the existence of the contract is lost orvanished, the contract is discharged. For e.g. document of contract is lost or destroyed, and noother evidence is available, then the contract is discharged.

g. Order of the Court: Sometimes by an order of Court, the performance of contract may be stayed.In such a case, so long as the injunction or stay order is in force, the contract cannot be enforced.

h. When a promisee neglects or refuses to afford the promisor reasonable facilities for theperformance of the promise, the promisor is excused by such neglect or refusal (Section 67).

E.g.: A contracts with B to repair B’s house. B neglects or refuses to point out to A the placesin which his house requires repair. A is excused for the nonperformance of the contract, if it iscaused by such neglect or refusal.

Q.No.7. What do you mean by Breach of Contract? What is the difference between Actual Breach and Anticipatory Breach?

Breach of contract means failure of a party to perform his obligations. When one party commits breach, the aggrieved party can rescind the contract. If one of the parties to a contract breaks the promise the party injured thereby, has not only a right of action for damages but he is also discharged from performing his part of the contract (Section 64). Therefore, it operates as a mode of discharge of the contract.

A Breach of Contract occurs when a party to a Contract does any of the following things:

• Fails or refuses to perform his obligations under the contract,

• Disables himself from performing his part of the contract,

• Makes the performance of the contract impossible by his own acts.

Breach of contract can be classified in to two types:

1. Actual Breach of Contract

2. Anticipatory Breach of Contract

1. Actual Breach of Contract: In contrast to anticipatory breach, it is a case of refusal to performthe promise on the scheduled date or during the performance. The parties to a lawful contractare bound to perform their respective promises. But when one of the parties breaks thecontract by refusing to perform his promise, he is said to have committed a breach. In thatcase, the other party to the contract obtains a right of action against the one who has refusedto perform his promise.

E.g.: On May 1, a seller S contracts to deliver thousand gallons of crude oil to buyer B on August15, and on that date S delivers only 200 gallons with no indication that the balance will bedelivered shortly thereafter. Here S has defaulted during the performance. In this case S hascommitted actual breach of contract. This is actual breach of contract during performance byexpress refusing and B can claim damages for breach.

Actual breach of contract may be committed:

a. At the time when the performance of the contract is due.

E.g.: A agrees to deliver 100 bags of sugar to B on 1st Feb, 2012. On the said day, he failedto supply 100 bags of sugar to B. This is actual breach of contract. The breach has beencommitted by A at the time when the performance becomes due.

b. During the performance of the contract: Actual breach of contract also occurs whenduring the performance of the contract, one party fails or refuses to perform his obligationunder it by express or implied act.


Effect of Actual Breach:

a. When one party commits breach of contract, the aggrieved party can rescind the contractand can sue for damages.

b. When time is the essence of contract, the aggrieved party can rescind the contract and canclaim damages.

c. When time is not the essence of contract, the aggrieved party cannot rescind the contract,but he can claim damages caused by delayed performance.

2. Anticipatory Breach of Contract: It is an important concept under the law of contractualrelationship. When the promisor refuses altogether to perform his promise and signifies hisunwillingness even before the time for performance has arrived, it is called Anticipatory Breach.A promisee, instead of putting an end to the contract forthwith may keep the contract alive uptothe time when the contract is to be executed. But the amount of damages in one case may bedifferent from that in the other. Anticipatory breach of contract is also called as "constructivebreach of contract".

It may happen in any of the following two ways:

a. Express Breach by words spoken or written: Where a party to the contractcommunicates to other party, before the due date of performance, about his intention of notperforming contract.

Examples:

• A agrees to employ B from 1st of March and on 25th February, he writes to B that heneed not join the service. The contract has been expressly repudiated by A, before thedate of its performance. This is the anticipatory breach of contract.

• A agrees with B to sell his car on 1st January. Before this date he informs B that he willnot sell it. This is anticipatory breach of contract by express repudiation.

b. Implied Breach: Where a party, by his acts, communicates his intention of not performingthe contract.

Examples:

• In the above illustration if A sells his car to C before 1st January, it is a case ofanticipatory breach of contract by implied repudiation.

• A contracts to marry B. Before the agreed date of marriage, he marries C. In this case,A has committed anticipatory breach of contract. B is entitled to sue A for breach ofpromise.

Effect of Anticipatory Breach: Section 39 deals with the effects of anticipatory breach of contract which states, "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, by words or conduct his acquiescence in its continuance."

1. The aggrieved party may treat the anticipatory breach as actual breach. In this case, he isdischarged from performance of his promise under the contract, and can claim damages. Theparty can file a suit for breach of contract without waiting for the due date of performance.

E.g.: A engaged B, a courier, to accompany him on a tour to commence on 1st June. About amonth before the date, A wrote to B that he had changed his mind and does not require hisservices. B immediately sued him for damages, for breach of contract. A argued that that therecould not be breach of contract, before the due date of performance. It was held that B can suebefore the due date of performance. [Hochester Vs. De La Tour].


2. The aggrieved party may decide to ignore the anticipatory breach and can wait for the due dateof performance. If he elects this option, the effects are as under:

a. The contract will remain operative for both the parties. The promisor has a right to performthe contract on or before the agreed date and promisee will be bound to accept theperformance.

b. If any thing happens which make the performance of the contract impossible then thecontract will be discharged. In such a case, the party at default may take the advantage ofsuch discharge. Consequently, the promisee looses his right to sue for damages againstthe promisor for the breach of contract.

Examples:

• X agrees to sell to Y a certain quantity of say, wheat at Rs. 100/- per quintal to be delivered,say, on the 3rd March. On the 2nd February, X gives notice expressing his unwillingness tosell wheat; and the price of wheat on the date is Rs. 110/- per quintal. If Y repudiates thecontract forthwith (which he is entitled to do at his option), he would be able to recoverdamages @ Rs. 10/- per quintal, being the difference between market price on the 2ndFebruary and the contract price. If instead of taking the action forthwith, he keeps the contractalive till the 3rd March and in the mean time, the price increases to Rs. 125/- per quintal onthe date. Y would be able or recover damages @ Rs. 25/- per quintal. If, on the other hand,during the intervening period between 2nd February and 3rd March, private sale of wheat isprohibited by the Government, the contract would become void, and Y would not be able torecover any damages whatever. Thus you observe that if the promisee keeps the contractalive, he does so not only for his own benefit but also for the benefit of the promisor.

• A agreed to sell his horse to B on 1st March. On 15th February A informed B that he is notgoing to sell the horse. B elected to wait up to 1st March but the horse dies before the duedate. The contract is discharged due to impossibility of performance. B cannot sue fordamages after death.

3. Doctrine of anticipatory breach does not apply to promises to pay money debts, such as thosefound in promissory notes and bonds.

It may be noted that the amount of damages will be measured by the difference between theprice prevailing on the date of breach and the contract price.

The date of breach of contract in case of anticipatory breach will be the date on which thepromisee elects to treat the contract as discharged.

DIFFERENCES

Q.No.8. Novation Vs. Alteration.

Novation and Alteration: The law pertaining to novation and alteration is contained in Sections 62 to 67 of the Indian Contract Act. In both these cases the original contract need not be performed. Still there is a difference between these two.

1. Novation means substitution of an existing contract with a new one. Novation may be made bychanging in the terms of the contract or there may be a change in the contracting parties. Butin case of alteration the terms of the contract may be altered by mutual agreement by thecontracting parties but the parties to the contract will remain the same.

2. In case of novation there is altogether a substitution of new contract in place of the oldcontract. But in case of alteration it is not essential to substitute a new contract in place of theold contract. In alteration, there may be a change in some of the terms and conditions of theoriginal agreement.

THE END

IPCC_32e_M.Law_ Remedies for Breach of Contract____________________110

9. REMEDIES FOR BREACH OF CONTRACT

Q.No.1. What is meant by Remedy?

Meaning: A remedy is the course of action available to an aggrieved party (i.e. the party not at default) for the enforcement of a right under a contract.

Q.No.2. Discuss the remedies available for a Breach of Contract.

In case of breach of contract by one party, the other party need not perform his part of the contract and is entitled to compensation for the loss occurred to him. When one party fails or refuses to perform the obligations imposed upon him by the contract, this is known as Breach of Contract. In such a case law will try to protect the other party. Law provides various remedies to the aggrieved party, which can be used in different circumstances. They are:

a. Rescission,

b. Claim for Damages,

c. Demand for specific performance,

d. Injunction,

e. Restitution, and

f. Quantum Meruit.

The purpose of these remedies is to put the aggrieved party, in a position as if the contract is performed.

Q.No.3. What do you mean by Rescission of Contract? What are the consequences of Rescission?

Rescission means a right not to perform the contract. When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case he is absolved or discharged from all his obligations under the contract and is entitled to compensation for any damages that he might have suffered.

E.g.: A promises B to deliver 50 bags of cement on a certain day. B agrees to pay the amount on receipt of the goods. A failed to deliver the cement on the appointed day. B is discharged from his liability to pay the price.

Rescission may take place in any of the following manner:

1. Mutual agreement: When parties to a contract agree to rescind the contract, no legalconsequences will arise.

2. Breach: When one party fails to perform his promise properly, other party can rescind thecontract. In such a case parties are discharged and aggrieved party can claim damages.

3. Option given by law: When one party’s consent is not free, the contract becomes voidableand law gives an option to the aggrieved party to rescind the contract. In such a case, partiesare discharged from their liabilities.

Consequences of Rescission:

1. Both the parties are relieved from their contractual duties and the injured party can still claimdamages.

2. The person who is rescinding the contract can claim damages which he has suffered throughnon fulfillment of the contract. [Section 75].

E.g.: A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nightsevery week for next two months, and B engages to pay her Rs.100 for each night’s performance.On the sixth night, A wilfully absents, and B, rescinds the contract. B is entitled to claimcompensation for the damage which he has incurred through non - fulfillment of the contract.


3. The party rescinding voidable contract shall restore benefits (if any) received by him under thecontract.

E.g.: A induced B by undue influence to buy his car at a higher price and delivered his car to B.However, B decided to rescind the contract. In this case, B is bound to return back A’s car.

However, Court may refuse to rescind the contract in the following cases:

a. The plaintiff has expressly or impliedly ratified the contract ; or

b. Due to change of circumstances (not due to any act of the defendant), the parties cannotbe restored to their original position; or

c. Third parties have, during the subsistence of the contract, acquired rights in good faith andfor value; or

d. Only a part of the contract is required to be rescinded and such part is not severable fromthe rest of the contract.

Q.No.4. What Kind of damages may be awarded in case of Breach of Contract under the Law of Contract?

Damages may be defined as monetary compensation in respect of loss suffered as a result of breach. Breach of contract entitles the injured party to file a suit for damages, which are the monetary compensation awarded to a person by the court.

The Act, in Section 73, has laid down the rules as to how the amount of compensation is to be determined. On the breach of the contract, the party who suffers from such a breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him by breach. Compensation can be claimed for any loss or damage which naturally arises in the usual course of events.

Kinds of Damages:

1. Compensatory damages: These damages are compensatory in nature. These damages arenot allotted to punish the party who has breached the contract.

a. General damages / Liability for ordinary damages: These damages arise in the ordinarycourse of events from the breach of contract. These Damages constitute the direct losssuffered by the injured party. These damages are the natural outcome of breach ofcontract. The measure of ordinary damages is the difference between the contract priceand the market price on the date of the breach.

E.g.: If the subject matter of the contract is the sale of a car and the contract is breachedby the buyer, the seller has incurred damages by not collecting the purchase price. If sellerbreaches, buyer has sustained damages by not getting the car.

Thus general damages are related to the direct consequences and not to the indirectlosses or consequences of the breach of contract.

b. Special damages / Liability for special damages: Where a party to a contract receives anotice of special circumstances affecting the contract, he will be liable not only for damagesarising naturally and directly from the breach, but also for special damages. Such damagesare awarded by the court only when, at the time of making the contract, these specialcircumstances were communicated to the defaulted party. A compensation can also beclaimed for any loss or damage which the party knew when they entered into the contract,as likely to result from the breach. That is to say, special damage can be claimed only on aprevious notice.


E.g.: A contracted with B to buy 1000 tons of Iron @ Rs.80 per ton, and told him that he needs it by June 5 to deliver it to Z to make a profit out of it. B fails to deliver the same by June 5 and A claims loss of profits from B amounting to Rs.20,000 (which he would have earned by selling 1000 tons of Iron @ Rs.100 per ton to Z). Here B is liable to pay these damages to A.

Simpson Vs. London & North Western Railway Co.: S, a manufacturer used to exhibit samples of his equipment at agricultural exhibitions. He delivered his samples to Railway Company to be exhibited at New Castle. On the consignment he wrote “must reach at New Castle on Monday certain”. On account of negligence on the part of Railway Company, the samples reached only after the exhibition was over. S claimed damages from Railway Company for his loss of profits from exhibition. The court held that the railway company was liable to pay these damages as it had the knowledge of special circumstances.

If the special circumstances were already known to the other party then it is not necessary to communicate the same to such other party.

2. Nominal damages: Sometimes, a person brings a legal action for breach of contract andproves that breach has actually occurred but he has not in fact suffered any real damage andfails to prove that any actual damages have been suffered. In such a situation, injured party isawarded nominal damages. Such damages are awarded simply to recognise the right of theinjured party to claim damages, and are of very small amount. It is awarded just to establishthe right to decree for the breach of contract. The amount may be a rupee or even 10 paise.

E.g.: A contracted to purchase ‘LML Scooter’ from B, a dealer, for Rs.25,000. But A failed topurchase the Scooter. However, B could sell the Scooter to Z for Rs.25,000 i.e. without anyloss or profit. Here if B makes a claim upon A for breach of contract, he will be entitled tonominal damages only.

3. Liquidated damages and penalty: Sometimes the contracting parties may agree to pay certainsum of money in case of breach of contract by either party. It may be termed as either ‘liquidateddamages’ or ‘penalty’ depending upon the purpose to fix the sum.

The purpose of fixing a sum as ‘liquidated damages’ is to compensate the injured party for theloss to be incurred by the breach of the other party. Thus it is an estimate of the loss to becaused by non-performance of the contract.

The purpose of providing a ‘penalty’ in a contract is to discourage a party from breaching it andto provide a special punishment if the contract is breached any way. Thus it is a sum which hasno relation to the probable loss.

But the sum named in the contract is not awarded as damages. It is left to the court toascertain the actual loss. However it does not exceed the sum named in the contract.

The courts in India allow only reasonable compensation not exceeding the specified sum (Sec. 74).

Under English law, liquidated damages are enforceable but not penalty.

E.g.: A agreed to sell his house to B for Rs.1,05,000. It is further provided that on the breach ofcontract, the defaulting party will pay Rs.10,000 as damages to the other. B has broken thecontract and A resold the house for Rs.1,04,000. A sued B and claimed Rs.10,000. It was heldthat A cannot recover Rs.10,000 as liquidated damages or penalty. He could only get theactual loss suffered by him i.e. Rs.1000.

4. Stipulation for interest: The largest number of cases decided under Sec.74 are related tostipulations in a contract providing for payment of Interest. The following rules are observedwith regard to payment of interest:

a. Payment of interest in case of default: A stipulation for payment of interest in case ofdefault is not in the nature of a penalty, if the interest is reasonable. If the court finds thatthe rate of interest is exorbitant and is penal in nature, it may grant relief.


b. Payment of interest at higher rate:

• From the date of the bond: A stipulation for higher rate of interest from the date of thebond and not from the date of default is always in the nature of a penalty and hencerelief is granted against it.

• From the date of default: A stipulation for higher rate of interest from the date ofdefault may be a stipulation in the nature of penalty. When it is so, relief is grantedagainst it. Whether such a stipulation is a penalty or not depends upon the terms of thecontract and the circumstances of each case.

c. Payment of compound interest on default:

• At the same rate as simple interest: A stipulation in a bond for payment of compoundinterest on failure to pay simple interest at the same rate as payable upon the principalis not a penalty.

• At the rate higher than simple interest: A stipulation in a bond for payment ofcompound interest at a rate higher than that of simple interest is a penalty and relief willbe granted against it.

d. Payment of interest at a lower rate if interest is paid on due date: Where a bondprovides for payment of interest say, at 24% p.a., with a provision that if the debtor paysinterest punctually at the end of every year, the creditor would accept interest at a lower ratesay 18% p.a. Such a clause is not in the nature of penalty.

5. Vindictive or Exemplary damages / Liability to pay Vindictive or Exemplary damages:Sometimes breach of contract by one party not only results in monetary loss to the injuredparty but also subjects him to disappointment and mental tension. In such cases monetarycompensation alone cannot provide an appropriate remedy to the sufferings of the injuredparty. Thus the need for vindictive damages arises.

Vindictive damages are awarded as a punishment to the wrong doer. Such damages areunusual and quite heavy in amount. The concept is borrowed from the English Law. Generallyspeaking, these damages are not awarded in ordinary course of breach of contract.

However, in the following two kinds of contracts Indian courts award vindictivedamages / These damages may be awarded only in two cases, viz (i) for breach ofpromise to marry; and (ii) wrongful dishonour by a banker of his customer’s cheque:

a. Breach of promise to marry: In this case the amount of damages will depend upon theextent of injury to the party’s feelings.

b. Wrongful dishonour by a banker of his customer’s cheque: Where a banker refuses tohonour the cheque of a customer while having sufficient funds in the account and thecustomer thereby suffers loss of reputation. The amount of damages recoverable by thedrawer of cheque from his banker in case of wrongful dishonour of his cheque may bequite heavy, depending upon the loss of credit and reputation suffered on that account.

6. Damages for deterioration caused by delay: In the case of deterioration caused to goods bydelay, damages can be recovered from carrier even without notice. The word ‘deterioration’ notonly implies physical damages to the goods but it may also mean loss of special opportunity forsale.

7. Remote or Indirect Damages: The remote or indirect damages are not due to natural andprobable consequences of the breach of the contract, i.e., these are the damages which ariseindirectly from the breach. These damages are not in contemplation of the parties at the time ofmaking the contract, and are not recoverable. No compensation is payable for any remote orindirect loss.


Q.No.5. How to Calculate the Damage?

Under a contract for the sale of goods, the measure of damages, when the buyer breaks the contract, is the difference between the contract price and the market price at the date of breach. If the contract is broken by the seller, the buyer is entitled to recover from the seller the difference between the market price and the contract price at the date of breach.

Duty to mitigate the loss: You will perhaps recollect that the party who suffers in consequence of the breach of contract must take all reasonable steps to mitigate the loss/minimize the loss from such a breach. He cannot claim as damages any loss which he has suffered due to his own negligence.

Q.No.6. State the provisions relating to suit for specific performance.

Where damages are not an adequate remedy in the case of breach of contract, the court may in its discretion on a suit for specific performance direct party in breach, to carry out his promise according to the terms of the contract.

It gives the courts discretionary power to order specific performance instead of or in addition to damages.

E.g.: Things like valuable works of art, patents, and copyrights that are unique are generally subject to the remedy of specific performance.

Sec.14 of the Specific Relief Act, provides that in certain cases the specific performance of the contract shall not be allowed by the court, which are explained as follows.

a. Where compensation in terms of money is adequate for the non-performance of the contract

b. Where the contract is of personal nature e.g., a contract to sing a song etc.

c. Where the performance of the contract requires constant supervision and courts cannotsupervise the carrying out of the contract.

d. Where the contract is inequitable (i.e., not fair and just) to either party.

e. Where one of the parties to the contract is not competent to contract (e.g. minor).

Q.No.7. State the provisions relating to Suit for Injunction.

Where a party to a contract is negativating the terms of a contract, the court may by issuing an ‘injunction order’ restrain him from doing what he promised not to do.

E.g.: N, a film star, agreed to act exclusively for a particular producer, for one year. During the year she contracted to act for some other producer. Held, she could be restrained by an injunction.

Q.No.8. Write a short notes on Quantum Meruit and Restitution.

‘Quantum Meruit’: The phrase ‘quantum meruit’ literally means “as much as is earned” or “according to the quantity of work done”. When a person has begun the work and before he could complete it, the other party terminates the contract or does something which make it impossible for the other party to complete the contract, he can claim for the work done under the contract. He may also recover the value of the work done where the further performance of the contract becomes impossible. The claim on quantum meruit must be brought by a party who is not at default. However, in certain cases, the party in default may also sue for the work done if the contract is divisible.


Following are the cases in which a claim or quantum meruit may arise:

a. Where an agreement is discovered to be void: Where the work has been done andaccepted under a contract which is subsequently discovered to be void, in such a case, theperson who has performed the part of the contract is entitled to recover the amount for thework done and the party, who receives and accepts the benefit under such contract, mustmake compensation to the other party.

b. Where something is done or delivered without intention to do gratuitously: Where aperson does some act or delivers something to another person with the intention of receivingpayments for the same (i.e. non-gratuitous act), in such a case, the other person is bound tomake payment if he accepts such services or goods, or enjoys their benefit.

c. Where the contract is divisible: The compensation for the work done may be recovered onthe basis of quantum meruit, where the contract is divisible and a party performs part of thecontract and refuses to perform the remaining part. In such a case, the party in default may suethe other party who has enjoyed the benefits of the part performance.

Examples:

• X wrongfully revoked Y‘s (his agent) authority before Y could complete his duties. Held, Ycould recover, as a quantum meruit, for the work he had done and the expenses he hadincurred in the course of his duties as an agent.

• A agrees to deliver 100 bales of cottons to B at a price of Rs. 100 per bale. The cotton baleswere to be delivered in two installments of 50 each. A delivered the first installment butfailed to supply the second. B must pay for 50 bags.

Restitution: Then term ‘restitution’ may be defined as an act of restoring back to the rightful owner, that which has been taken away or lost.

Generalisations based upon the doctrine of ‘Quantum Meruit’ & ‘Restitution’: Considering the doctrine of ‘Quantum Meruit’ and ‘Restitution’ under different circumstances, following generalisations can be made:

1. Breach of contract: When there is a breach of contract, not only the injured party, but thedefaulting party is also entitled to claim reasonable compensation for what he has done underthe contract.

2. Suit by a party who has not breached: When a person has begun the work and before hecould complete it, the other party terminates the contract or does something which make itimpossible for the other party to complete the contract, he can claim for the work done underthe contract.

E.g.: P was engaged by C to write a book to be published by installments in a weeklymagazine owned by C. After a few installments were published, the magazine was abandoned.The court held that P could recover for the installments already published on the basis ofQuantum Meruit.

3. Void contract: ‘When an agreement is discovered to be void or when a contract becomes void,any person who has received any advantage under such agreement or contract is bound torestore it, to the person from whom he received it.”

4. No contract: Sec.70 of the Contract Act says that when services are rendered or goods aresupplied to a person without any intention to do so gratuitously, and benefit of the same isenjoyed by the other person, the latter must compensate the former. This compensation maybe by way of ‘Quantum Meruit’ or ‘Restitution’ or both.

E.g.: A doctor provides emergency medical attention to someone who is unconscious. There isno express contract at all. But doctor would be able to recover in quasi-contract, a reasonablevalue of his services. The essence of a legal action based on quasi contract and the remedy of‘Quantum Meruit’ and ‘Restitution’ is to prevent the enrichment of one party at the cost of theother.


DIFFERENCES

Q.No.9. Liquidated Damages Vs. Penalty

Basis Liquidated Damages Penalty

1. Meaning It represents a sum fixed or ascertainedby the parties to the Contract, being a fair and genuine estimate of the probable loss that may arise due to breach.

It is the sum mentioned in the contract at the time of its making, being disproportionate to, i.e. very high than the loss that might arise as a result of breach. It is usually a very high sum, to ensure performance of the contract.

2. Intention The intention for liquidated damages isthe recovery of damages that might arise due to breach.

The intention for the penalty is to ensure performance of a Contract. Performance is better than paying penalty. It acts as a deterrent to avoid performance.

3. Example A contracts with B to deliver possessionof a house under construction within a period of 6 months, failing which he would pay the monthly rental of B. The monthly rental payable by B for A partakes the character of liquidated damages.

P contracts to deliver 50 Units of a Petrol Engine to Q on a stipulated day, failing which he shall pay Rs.5 Lakhs. Neither the price of Engine nor loss on failure of delivery would amount to Rs.5 Lakhs. Hence it is a penalty.

Q.No.10. Ordinary Damages Vs. Liquidated Damages

Basis of distinction Ordinary Damages Liquidated Damages

1. Meaning Ordinary damages means the damages which are fairly and reasonably considered as arising naturally from breach of a contract.

Liquidated damages are the amount of fair and genuine pre-estimate of probable damages which are likely to result from breach of a contract

2. Nature of loss Ordinary damages arise only on actual breach of contract.

Liquidated damages are the amount of probable loss in the opinion of the parties that may result from the breach of contract.

3. Time ofcalculation

These are calculated only when actual damages are suffered.

It is calculated before actual damages are suffered.

4. Amount These are actual amount of damages which injured party is entitled to claim.

These are estimated maximum amount of damages with in which actual damages may be claimed.

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