Law of Contract-III 2015-16.pdf · -Law of Contract -Agreement and ... o Essential Elements o Their...

CONTENTS

UNIT – I - Law of Contract - Agreement and Contract

o Definition o Essential Elementso Their kinds

- Formation of contract o Proposal and Acceptanceo Communication and Revocation

- Important Questions

UNIT – II- Capacity to Contract- Consent- Consideration

o Its need, kindso Essential Elementso Exceptions of consideration

Important Questions

UNIT – III - Void Agreement- Unlawful Agreements- Voidable Contract- Effects of Void, voidable and Unlawful agreements

Important Questions

UNIT – IV - Contingent Contract- Quasi Contract- Discharge of Contract - Performance of Contract

Important Questions

UNIT – V - Breach of Contract and its remedies - Anticipatory breach and present breach - Impossibility of performance- Specific grounds of frustration

Important Questions

Suggested Readings

1

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Strictly for Internal Circulation - KCL

UNIT – ILAW OF CONTRACT

Introduction: Contract law is a very important part of commercial law. We enter into many contracts daily

knowingly or unknowingly; for example When we travel in a bus or in a rickshaw, when we give our dresses

to press or iron to laundryman, or when we purchase daily routine items from a shop, we enter into a

contract. This is an important aspect of human behaviour.

In India, Indian Contract Act, 1872 (Act IX of 1872) is in force today. This Act came into force on 151 day of

September, 1872. At beginning, it contained 11 (eleven) chapters out of which chapter VII (sale of goods)

having Section 76 - Section 123 and chapter XI (of Partnership) having 239 are repealed from this Act and

two new Legislations dealing with these topics came into existence, the Sale of goods Act, 1930 and Indian

Partnership Act, 1932.

Indian Contract Act, 1872 has genera! principles of contract (Section 1 to 75) and it deals with some specific

contract also such as contracts of Indemnity and contract of guarantee (Section 124-147), Bailment

(Section 148-181), Agency (Section 182-238).

This paper, contract-I, deals with general principles of contract (Section 1-75) only.

In Indian law, it is not necessary that every contract must be in writing. This means a contract may be-

(i) Oral contract

(ii) Contract in writing.

But if there is a law which requires the agreement in writing, then it must be in writing.

In Indian contract Act, 1872 no form has been prescribed for a valid contract. It is well settled that the court in

order to continue an agreement has to look to the substance or essence of it rather than its form but when

any law specifically provides a form of contract, then it must be entered into such form.

For example: According to Article 299 of the constitution of India, certain formalities are required when a

contract is entered into by or with the central or state government. When a contract entered is not in the form

required by Article 299(1) of the constitution, it is void.

AGREEMENT AND CONTRACT

Agreement: The word "Agreement" implies that there are two or more persons who commit each letter to

do a particular thing. A person alone cannot enter into an agreement or contract with himself.

Ordinarily two or more persons are required in the formation of an agreement. The first step in the

lI:Irr1ation of an agreement is the making of a proposal. One person makes the proposal and another

accepts it.

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Proposal Acceptance Promise

Promise Consideration Agreement

Agreement Enforceability by law Contract

The person who makes the proposal is known as proposer and the person who accepts the proposal is

known as acceptor. When a proposal is accepted, it becomes promise but to turn a promise into an

agreement, consideration is also required.

Definition: Section 2(e) of Indian Contract Act 1872 defines an Agreement as –

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

Essential Elements: According to the above mentioned definition, there are two essential elements of an

agreement –

1. There must be a promise or a set of promises

2. There must be consideration for both the parties.

Now the question arises, what is Promise? As explained earlier

Proposal + Acceptance? Promise.

Hence we can say that

Proposal + Acceptance + Consideration ? Agreement

The term "proposal" is defined in Sec. 2(a) of Indian Contract Act, 1872 as -

"When one person signifies to another his willingness to do or to abstain from doing anything, with a view to

obtaining the assent of that other to such act or abstinence, he is said to make a proposal."

When a proposal is accepted, it becomes promise. (Section 2(b) of Indian Contract Act 1872)

Kinds of Agreement

On the basis of Mode of Creation: 1) Express Agreement, 2) Implied Agreement On the basis of

Execution: 1) Unilateral Agreement 2) Bilateral Agreement

There are many other kinds of agreement which are not defined in Indian Contract Act. 1872 such as Illegal

Agreement, Unenforceable Contract etc.

1. Express agreement: When one person or party proposes to another party orally or in writing and

that the other party gives his acceptance accordingly this type of agreement is known as express

agreement.

For example: A proposes in writing to B to sell his horse for 500 rupees and B accepts the proposal

of A. This is express agreement.

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2. Implied agreement: When one person or a party does not put his proposal in words, whether oral

or in writing, then it is implied by his conduct or usage or custom of society or trade that he has made

the proposal by his conduct then it is called implied agreement.

3. Unilateral agreement: An agreement in which one party fulfills his obligation created under

agreement but the other party's obligations remain to be fulfilled in future, is known as unilateral

agreement.

4. Bilateral agreement: An agreement in which both parties are under obligation to fulfill their part in

future is known as bilateral agreement.

5. Illegal agreement: The term 'illegal agreement' is not defined in Indian Contract Act 1872. Illegal

agreement is one which is expressly declared illegal by law of the land or which defeats the

provisions of any law. All illegal agreements are void but all void agreement are not illegal. Hence

"Void agreement" is a wider term than "illegal agreement".

6. Unenforceable agreement: unenforceable agreements are those agreements in which lawful

rights and duties are created but due to some technical defect, the courts are unable to enforce

those rights and duties.

These agreements are not void or voidable. Under certain circumstances the law gives permission

to remove those defects and after such removal of defects the law enforces them.

For Example : Time barred-claim, insufficient stamps under stamps Act etc.

Contract: A contract is a bilateral transaction between two or more than two parties. Every contract has to

go through several stages starting from proposal.

Definition: Anson has defined the term "Contract" in his book LAW OF CONTRACT as - "A contract

consists in an actionable promise or promises. Every such promise involves two parties, a promisor and a

promisee, and an expression of a common intention and of expectation as to the act or forbearance

promised."

Essential Elements of Contract: According to the above mentioned definition of contract in Indian

Contract Act 1872, a contract has following essentials -

1. There must be a promise or a set of promises

2. There must be consideration for both the parties.

As we know agreement is a promise or set of promises forming consideration for each other. But the

question arises - what kinds of agreement are enforceable by law? An agreement to be enforceable by law

must fulfill the conditions laid down in Section 10 of the Indian Contract Act 1872.

According to Section 10 of Indian Contract Act, 1872-

'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."

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Nothing herein contained shall affect any law in force in India and not hererby expressly repealed, by which

any contract is required to be made in writing or in the presence of witness, or any law relating to tile

registration of documents.

At last, On the basis of Combined Analysis of Section 2(h) and Section 10 we can say that the following are

the elements of a valid contract -

1. Promise or a set of promises.

2. Consideration for both the parties.

3. Parties must be competent to contract.

4. Free consent of the parties to the agreement.

5. Consideration and object must be lawful.

6. The agreement must not have been expressly declared to be void under the contract Act or any

other Act.

7. Must be in writing or registered, if necessary.·

Kinds of Contract: There are two kinds of contract -

1) Voidable Contract [Section 2(i)]

2) Void Contract [Section 20)]

According to Section 2(i) of Indian Contract Act, 1872/ a voidable contract is -

"An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the

option of the others, is a voidable contract."

Section 20) defines "Void contract" as "A contract which ceases to be enforceable by law becomes void

when it ceases to be enforceable."

On the basis of both the definitions we may differentiate between two as :

Difference between void and voidable contract

1. An agreement which can not be enforced The agreement which is enforceable by law at the by

law. option of the aggrieved party but not on the

option of the other party.

2. It is void from the very beginning and It is lawful at the very beginning but

remains void till last. becomes void after declaration at the option of the

party aggrieved.

3. The parties of such contract can not make It the aggrieved party does not object to the

it valid by their consensus. contract then it remains valid and

enforceable.

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4. Under void contract, no party can claim The aggrieved party can claim damages.

damages.

5. Agreement which ceases to be Enforceable at the option of one or more

enforceable by law. No party can enforce parties.

it.

6. It has no contract of legality when it ceases It is enforceable till aggrieved party does not

get it declared void.

7. It can not become legal by consent of both The aggrieved party may make it void or the parties.

legal as he wishes.

There may be other different kinds of contract also -

On the basis of Parties - 1) Unilateral Contract 2) Bi-Iateral Contract

On the basis of Expression - 1) Express Contract 2) Implied Contract

On the basis of Execution - 1) Executed Contract 2) Executor Contract

FORMATION OF CONTRACT

Generally, two or more persons are required to make a contract. The first step in the formation of contract is

proposal. One person proposes to other and the other accepts that proposal. then promise occurs. And a

promise coupled with consideration and enforceability by law becomes contract.

PROPOSAL

In English Law, proposal is known as "Offer". In Indian Contract Act, 1872 Section 2(a) defines proposal as -

"When one person signifies to another hi~ willingness to do or to abstain from doing anything with a view to

obtaining the assent of that other to such act or abstinence, he is said to make a proposal."

Essentials of Proposal: According to the abovementioned definition, the essentials of a valid proposal are

–

1. The proposal must be communicated by the proposer to the acceptor.

2. It must be made with a view to take consent of acceptor and to create legal relations.

3. The proposal must be to do an act or to abstain from doing anything. This means it must be certain

and definite.

Communication of Proposal: A promise is the result of meeting of two minds. When the proposal comes

to the knowledge of the person to whom it is made, then he may give his assent to it. This means

communication of proposal to the person to whom it is made is compulsory. A proposal can be accepted

then.

Communication may be expressed or implied. This fact can be gathered from Sec. 9 of the Indian Contract

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Act 1872.

1. According to Section 9 of I.C. Act, 1872- "In so far as the proposal or acceptance of any promise

is made in words, the promise is said to be express. In so far as such proposal or acceptance is

made otherwise than in words, the promise is said to be implied."

Communication of Proposal completes when it comes to the knowledge of the person to whom it is

made.

In this case, the plaintiff filed the suit to claim the reward of RS.501 from defendant as he discovered

the defendant's nephew having absconded from home. Plaintiff was the servant of defendant. The

defendant announced the reward of RS.501 to anyone who discovered his nephew but this fact

came to the knowledge of plaintiff only after he had already handed over the boy to the defendant.

The court held that the proposal was not communicated to the servant and he came to know of it

after he had already discovered the boy hence he is not entitled to any reward. Suit dismissed

accordingly.

2. To Create Legal Relations: The intention in the proposal is very important. The proposal should be

made with intent to create legal relations.

In the case of Balfour vs. Balfour (1919) 2 K. B. 571

Lord Atkin held that the wife is not entitled to recover the arrears because there was no intention to

create legal relations.

The objective test is applied to judge whether the parties intended to create legal relations.

3. The Proposal must be certain and definite: The terms of the contract should not be vague. If

there is some ambiguity in the contract, the court has to interpret it but the court can not make

contract between the parties.

If the meaning of the agreement is uncertain or unable to make it certain, the Agreement is void

under Section 29 of Indian Contract Act, 1872.

Kinds of Proposal – The proposal may be – 1) Generla 2) Specific

General Proposal: A proposal that is not made to an ascertained person but it is made to the general public

is called general proposal. But it is necessary that it should be accepted by an ascertained person.

In this case, the court held that the plaintiff lady is entitled to claim the reward because the advertisement is

made to the whole world and it becomes a promise only when it is accepted by an ascertained person and

the court also held that the notification of acceptance in such cases is not necessary.

In India, the decision of this case is followed in the case of Hindustan Insurance Corporation Society vs.

Shyam Sunder AIR (1952) Cal. 691 and in the case of Union of India vs. M/s. Rameshwar Lal Bhagchand

AIR 1973 Gauhati 111.

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Specific Proposal: When a proposal is made to an ascertained person then it is called specific proposal.

This proposal can be accepted by that person only to whom it is made and none else.

Acceptance: When a proposal is made to the general public or to an ascertained person, it must be

accepted to convert it into promise.

Anson has said - "Acceptance is to offer what a lighted match is to a train of gunpowder."

According to Sec. 2 (b) of I.C. Act, 1872- "When the person to whom the proposal is made signifies his

assent thereto, the proposal is said to be accepted." A proposal when accepted becomes a promise.

Communication of Proposal: According to Sec. 2(a) of I.C. Act, 1872, the proposal must be signified to

another i.e. must be communicated to another it may be express or implied. A proposal can be accepted

only when it comes to the knowledge of the person to whom it is made. Hence communication of proposal is

complete when it comes to the knowledge of the person to whom it is made.

Communication of Proposal: When complete

A proposal is not converted into a promise until and unless it is accepted by the person to whom it is made

and the offeree can accept it when it comes to his knowledge.

According to Section 4 of I.C. Act, 1872- "The communication of a proposal is complete when it comes to

the knowledge of the person to whom it is made.

For Example: A proposes, by letter, to sell a house to B at a certain price. The communication of the

proposal is complete when B receives the letter.

Thus the first essential of a valid proposal is that it must be communicated. Revocation of Proposal

REVOCATION OF PROPOSAL

When a proposal is communicated by the offeror to the offeree, it becomes agreement as and when it is

accepted but a proposal can be taken back or revoked before its acceptance.

Section 4 of I.C. Act, 1872 deals with the communication of revocation of proposal.

According to Section 4 of I.C. Act, 1872 'The communication of a revocation is complete-

As against the person who makes it, when it is put into a course of transmission to the person to whom it is

made as to be out of the power of the person who makes it.

As against the person to whom it is made when it comes to his knowiedge.

Mode of Revocation: The proposal may be revoked by any mode given in Section 6 of IC Act, 1872.

According to Section 6 of I.C. Act, 1872- A proposal is revoked-

1. by the communication of notice of revocation by the proposer to the other party.

2. by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed,

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by the lapse of reasonable time, without communication of the acceptance;

3. by the failure of the acceptor to fulfil a condition precedent to acceptance; or

4. by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of

the acceptor before acceptance.

Acceptance:

When a proposal is given to a person, the other party must accept it in the mode and manner which is

prescribed by the proposer. An acceptance is necessary to convert a proposal into a contract. Acceptance

must be absolute; this means the person to whom the proposal is made can not put a condition in

acceptance. If he puts the condition or changes the terms and conditions of the proposal then he is said to

be making a counter proposal.

According to Section 7 of the Indian Contract Act, 1872 - "In order to convert a proposal into a promise, the

acceptance must -

1. be absolute and unqualified;

2. be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in

which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the

acceptance is not made in such manner, the proposer may within a reasonable time after the

acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed

manner, and not otherwise; but if he fails to do so, he accepts the acceptance.

A proposal will be accepted by performing conditions or by receiving consideration. This means the

acceptance may be by conduct it is not necessary to accept the proposal in words, whether oral or in writing.

According to Section 8 of Indian Contract Act, 1872 - Performance of the conditions of proposal, or the

acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an

acceptance of the proposal.

Communication of Acceptance: The first rule of acceptance is that the acceptance must be

communicated to the proposer or to his agent then it becomes binding on proposer. An intention to accept or

even a mental resolve to accept a proposal does not give rise to a contract. Expression of Acceptance is

necessary.

In the case of Felt house vs. Bindley (1863) 7 L.T. 835 the court held that communication of acceptance

must be made to the proposer himself or to his agent. The communication of acceptance to stranger will not

be a valid communication. In this case it is also held that the proposer can not impose upon the offeree the

obligation of refusal. The decision of this case is followed in India in the famous case of Bhagwan Das vs.

Girdhari Lal & Co. AIR 1966 SC 543.

The second rule is that the acceptance must be communicated by the offeree himself or by his authorized

agent.

In the case of Powell Vs. Lee (1908) 99 L.T. 284

The court held that communication of acceptance from an unauthorized person will not be valid.

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But the offerer may waive the communication of acceptance in his benefit as in the case of Carlill vs.

Carbolic Smoke Ball Co. (1893) 1 O.B. 256

The third rule of acceptance is that the acceptance must be absolute and unconditional.

According to Sec. 7(1) of Indian Contract Act 1872 "In order to convert a proposal into a promise, the

acceptance must be absolute and unqualified."

Revocation of Acceptance: When the acceptance of the offeree comes within the knowledge of the

proposer, it turns the whole transition into agreement but an acceptance may also be revoked.

According to Section 5 of I.C. Act 1872- "An acceptance may be revoked at any time before the

communication of the acceptance is complete as against the acceptor, but not afterwards.

For Example: A, proposes by letter sent by post to sell his house to B. B accepts the proposal by a letter

sent by post.

B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches

A, but not afterwards.

In the case of Baroda Oil Cakes Traders Vs Purushottam Narain Das Bagulia AI R 1954 Born. 491, the

Supreme Court held that so far as the making of the contract is concerned, the proposer is bound as soon

as the acceptance is posted subject to the right of the acceptor to revoke his acceptance.

The decision of this case is followed and approved later on by the Hon'ble Supreme Court in the case of

Bhagwan Das Vs Girdharilal AIR 1966 SC 543.

Till the offer was accepted, there was no contract between the parties and the proposer may withdraw his

offer. The proposer is not bound to keep the offer open indefinitely.

According to Section 5 I.C. Act, 1872 –

'A proposal may be revoked at any time before the communication of its acceptance is complete as against

the proposer but not afterwards."

Illustration: A proposer, by a letter sent by post proposes to sell his house to B. B accepts the proposal by a

letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of

acceptance, but not afterwards.

In the case of Payne Vs Cave (1789) 3 TR 148, the court held that in case of an auction, the bidder is entitled

to revoke his bid at any time before the fall of the hammer or before the property is finally knocked down.

In the case of MIs J.K. Enterprises Vs State of M.P. AIR 1997 MP 68, the M.P. High Court held that the

revocation of proposal must be communicated to the offeree, not to the' other person. Where the

communication of revocation is sent by fax message on wrong number, the revocation would not be

effective.

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IMPORTANT QUESTIONS

Q.1. When does an agreement become a contract?

Q.2. "Acceptance must be absolute and unqualified". Explain.

Q.3. Define 'Proposal'. Also explain the different legal rules relating to it with the help of case law.

Q.4. Define a Contract. Discuss the essential elements of a valid Contract.

Q.5. Distinguish between the following

i. Void and voidable Contracts.

ii. Illegal and unenforceable contracts.

Q.6. "All contracts are agreements but all agreements are not contracts." Explain.

Q.7. Define 'Proposal'. Discuss essential features of a valid proposal offer. What is the difference

between proposal and invitation to offer? Explain.

Q.8. Define Acceptance. Discuss the essentials of a valid acceptance. "Acceptance to an offer is what a

lighted match is to a train of gun powder." comments.

Q.9. How is a communication of an offer and acceptance complete? And how and when are their

revocation made? Explain.

Q.10. "An agreement enforceable by law is a contract." Comment. Discuss the essentials of a valid

contract in brief.

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UNIT - II

CAPACITY OF CONTRACT

According to Section 10 of I.C. Act, 1872, one of the essential requirements of a valid contract is that the

parties must be competent to contract.

Section 11 of I.C. Act, 1872, contains the provision regarding competency to contract. It states that "Every

person is competent to contract who is of the age of majority according to the law to which he is subject and

who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Hence, the following persons cannot enter into a valid contract-

1. Persons of unsound mind

2. Persons disqualified from contracting by any law to which they are subject.

3. Minors i.e. a person under the age of 18 years or if a guardian of a minor's person or property is

appointed by the court, then under the age of 21 years (according to Section 3 of Indian Majority Act,

1875).

Now the question arises- What will be the nature of contract if it is entered by an incompetent person. The

Indian contract Act 1872 is fully silent about the nature of contract entered by incompetent person.

Legal position (nature) of minor's contract: Before the year of 1903, there was a great controversy in

India whether a minor's contract is void or voidable but in the year of 1903,

In the case of Mohri Bibi Vs Dharmodas Ghose ILR (1903) 30 Cal. 539 PC, the Privy Council finally settled

the issue and held that a minor's contract is wholly void i.e. void-ab-initio.

But if the contract is in the intent of the minor, court may declare such a contract as valid.

In the case of Srikakulam Subramanyam Vs Kurra Sabha Rao (1949) 75 IA 115, the privy council held that if

the guardian transfers property inherited by minor in lieu of the payment of debt, the transfer shall be

binding.

This means that a guardian can enter into a contract on behalf of the minor and if it is in the interest of minor,

the contract is valid in the eyes of law.

Effect of Minor's Contract: It is clear from the above discussion that a minor's contract is void-abinitio and

has no existence in law. But a pertinent question arises-what will happen of the benefits which have been

derived by a minor under a void contract?

In Mohri Bibi's case, Section 64 and 65 of Indian Contract Act, 1872 and Section 41 of specific Relief Act,

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1877 was argued against minor.

The privy council did not apply Section 64 of I.C. Act, 1872, as it deals with the consequences of rescission

of voidable contracts. Hence P.C. held that Section 64 and Section 65 refer to contracts made by persons

competent to contract and therefore it did not apply to minor's contract.

As regards Section 41 of Specific Relief Act, 1877 the Privy Council held that this section gives discretion to

the court to make any compensation to the other which justice may require but the court did not order

restitution in this case because the appellant had advanced the loan to Dharmodas Ghose while knowing

that he was a minor.

But generally, if a minor obtains some property by misrepresenting his age, he can be ordered to restore the

property or goods thus obtained, but the minor may be compelled to restore the goods or property so long

as they are traceable.

In the case of Leslie Vs Shell (1914) 3 KB 607, the defendant minor induced the plaintiff to lend him two

sums of £ 200 each by fraudulently misrepresenting himself as major. The plaintiff filed the suit to recover

the amount with interest. The court dismissed the suit because the minor had spent the money received.

Since money was not traceable, the minor could not be asked to restore it.

But in the case of Khan Gul Vs. Lakha Singh (1928) 9 Lah. 701. A Lahore full Bench did not follow the rule

laid down in Leslie Vs Sheill.

Rut Later on in the case of Ajudhia Prasad Vs. Chandan Lal AIR 1937 All. 610 (FB)

The Allahabad High Courtfollowed the rule laid down in Leslie Vs. Shell. Then the controversy was finally

resolved in 1963 by the inclusion of Section 33 (2)(b) in the specific Relief Act, 1963.

According to Sec. 33(2) (b) of Specific Relief Act, 1963 - "the agreement sought to be enforced against him

in the suit is void by reason of his not having been competent to contract under section 11 of the Indian

Contract Act, 1872. The court may, if the defendant has received any benefit under the agreement from the

other party, require him to restore, so far as may be, such benefit to that party, to the extent to which he or his

estate has been benefited thereby."

Hence it is clear from the provision that the decision of Khan Gul Vs. Lakha Singh has been finally adopted.

Application of Principle of Estoppel, in case of a minor's contract

Now the question is whether the principle of estoppel applies if a minor fraudulently misrepresents himself

to be major and later on asserts that contract is void because he was a minor when he contracted.

In the case of Mohri Bibi Vs. Dharmodas Ghosh ILR (1903) 30 Cal. 539(PC), The PC held that there can be

no estoppel where the truth of the matter is known to both the parties. In this case the moneylender had

received the information through his agent Kedarnath about the defendent's minority.

In the case of Khan Gul Vs. Lakha Singh ILR (1928) 9 Lah. 701 and in case of Ajudhia Prasad Vs Chandan

Lal AIR 1937 All. 610 (FB) it was held that no estoppel can be pleaded against the statute and rule of

estoppel is not applied because a minor's contract is void-ab-initio.

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Rule of Ratification whether applicable to minor's contract?

A minor's contract can not be validated by ratification after attaining majority because it is void-ab-initio as

held in Mohri Bibi Vs. Dharmodas Ghosh ILR (1903) 30 Cal. 539(PC).

Legal position (Nature) of contract entered by a person of unsound mind: A person of unsound mind is

also incompetent to contract. Section 12 of the Indian Contract Act. 1872 provides as to what is a sound

mind for the purpose of contract.

According to section 12 of I.C. Act, 1872 - "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.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is

of sound mind.

A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he

is of unsound mind".

For example: (a) A patient in a lunatic asylum who is at intervals of sound mind, may contract during those

intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he can not understand the terms of a

contract or form a rational judgement as to its effect on his interests, can not contract whilst such delirium or

drunkenness lasts.

Under English Law, a contract by a person of unsound mind or a lunatic is not void but voidable. But in India,

however, a contract entered into by a person of unsound mind is absolutely void in the same way as a

contract entered into by a minor is void.

Persons disqualified from contracting by any law: Besides minors and persons of unsound mind, a

person may also be disqualified from contracting by any law to which he is subject. For example, a contract

entered by alien enemy or an adjudged insolvent will be void,

According to Section 10, free consent is one of the essential elements of a contract. Section 13 defines the

word 'consent' and Section 14 defines the word 'free consent'.

According to Section 13 of IC Act 1872 - "Two or more persons are said to consent when they agree upon

the same thing in the same sense."

Free consent: According to Section 14 of Indian Contract Act, 1872, consent is said to be free when it is not

caused by-

(i) Coercion, as defined in Section 15, or

(ii) Undue influence, as defined in Section 16, or

(iii) Fraud, as defined in Sec. 17, or

(iv) Misrepresentation, as defined in Section 18, or

(v) Mistake, subject to the provisions of sections 20, 21 and 22".

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This means that every consent is free Under Section 14 unless it has been obtained by coercion, undue

influence, mistake, fraud or misrepresentation.

Coercion: Section 15 of Indian Contract Act. 1872 defines coercion as:

"Coercion" is the committing or threatening to commit any act. forbidden by the Indian Penal Code (Act XIV

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."

Explanation: "It is immaterial whether the Indian Penal Code (Act XLV of 1860) is or is not in force in the

place whose the coercion is employed."

In English Law the word "duress" is used which is equivalent to the word "coercion".

Hence, in India Under Section 15, coercion can be aimed not only against a person but also against his

property, and coercion may be caused by a third person or a person who is not a party to the contract. The

scope of the term coercion is far wider than the term duress under English Law.

Essential elements of Coercion: Following are the essential ingredients of coercion:

(i) Committing or threatening to commit any act forbidden by the IPC; or

(ii) The unlawful detaining or threatening to detain any property to the prejudice of

any person whatever; or

(iii) With the intention of causing any person to enter into an agreement.

In the case of Rangnayakamma vis Alwar Setti (1890), 13 Mad 214

The husband of a girl of 13 years died and she was forced to adopt a child of their choice [by her deceased

husband's relative].

The Madras H.C. held that consent was not free and the act was prohibited under the Indian Penal Code

1860.

A man gave a threat to commit suicide to his wife if they did not execute a release bond regarding some

properties which the wife and son claimed as their own.

The Madras High Court held that release deed was caused by coercion.

But an act done under the compulsion of law is no coercion within the meaning of Section 15 of the Indian

Contract Act 1872.

Effect of Coercion: According to Section 19 of Indian Contract Act 1872 "when consent to an agreement is

caused by coercion, fraud or misrepresentation the agreement is a contract voidable at the option of the

party whose consent was so caused."

Undue Influence: Undue influence is also a reason that vitiates free consent. Section 16 of Indian Contract

Act. 1872 has the provision of undue influence.

According to Section 16 (1) of the Indian Contract Act 1872- A contract is said to be influenced by “undue

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influence" where the relations subsisting between the parties are such that one of the parties is in position to

dominate the will of the other, and uses that position to obtain an unfair advantage over the other.

Essentials of undue influence

1. Relationship between the parties of such a nature that one of the parties is in a position to dominate

the will of the other.

2. Such party uses that position to obtain unfair advantage over the other.

In the case of Allcard Vs Skinner (1887) 36 Ch. D. 145

A woman (plaintiff) was induced by her spiritual advisor (defendant) to became a sister. She took the vow of

poverty, chastity and obedience and she surrendered all her individual property forever according to vow.

Later on she left the sister-hood. She filed the suit to recover a part of her property. The court of Appeal held

that the plaintiff could not recover the property because she had left the sister-hood in 1879 but filed the suit

in 1885 and her claim had become failed due to her neglect and acquiescence.

In the case of Mst. Sethani Vs Bhana AI R 1993 SC 956

A Registered sale deed was executed by an illiterate, old, blind tribal lady, Putlibai and the question was

whether she executed the sale deed under undue influence of the defendant respondent Bhana. The

Supreme Court held that in this case the onus lies on respondent to prove that the sale deed was executed

under no undue influence and no evidence was led by the respondent to discharge the onus. Hence appeal

was allowed accordingly.

Burden of Proof: According to Section 16(3) I.C. Act, 1872 the burden of proving that such a contract was

not induced by undue influence, shall lie upon the person who is in a position to dominate the will of the

other.

According to Section 16(2) a person is deemed to be in a position to dominate the will of the other where he

holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other, or

There he makes a contract with a person whose mental capacity is temporarily or permanently affected by

reason of age, illness or mental or bodily distress.

Effect of Undue Influence: As per Section 19-A of I.C. Act, 1872 when consent to an agreement is caused

by undue influence, the agreement is a contract voidable at the option of the party whose consent was so

caused.

Fraud: Section 17 of I.C. Act. 1872 defines fraud as-

Fraud' means and includes any of the following acts committed by the party to a contract, or with the

connivance or by his agent, with intent to deceive another party thereto or his agent or to induce him to enter

into the contract-

1. The suggestion as to a fact of that which is not true by one who does not believe it to be true;

2. The active concealment of a fact by one having knowledge or belief of the fact;

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3. A promise made without any intention of performing it;

4. Any other act fitted to deceive;

Explanation: "Mere silence as to facts likely to affect the willingness of a person to enter into contract is not

fraud, unless the circumstances of the case are such that regard being had to them, it is the duty of the

person keeping silence to speak, or unless his silence is, in itself, equivalent to speech."

In the case of Shri Krishna Vs the Kurukshetra University, Kurukshetra AIR 1976 SC 376

The Supreme Court held that where a person on whom fraud is committed is in a position to discover the

truth by due diligence, fraud is not proved.

In the leading case of Derry Vs Peek (1889) 14 AC 337 it was held that fraud is proved when it is shown that

a false representation has been made knowingly or without belief in its truth or recklessly careless whether

it be true or false.

Can mere silence be fraud?

According to explanation appended to Section 17 of I.C. Act, 1872

Mere silence is not fraud, unless, it is the duty of the person keeping silence to speak, or unless his silence

is, in itself equivalent to speech.

For example- If A says to B if you do not oppose it, I shall assume that the house is without any

encumbrances. The house is in fact under mortgage but B says nothing. Here B's silence is equivalent to

fraud.

Effect of Fraud: As per provisions of Section 19 of I.C. Act, 1872, when consent to an agreement is caused

by fraud, the agreement is a contract voidable at the option of the party whose consent was so caused by

fraud.

Misrepresentation: Section 18 of IC Act 1872 defines misrepresentation as-

The positive assertion in a matter not warranted by the information of the person making it, of that in which is

not true, though he believes it to be true; any breach of duty which, without an intent to deceive, gains an

advantage to the person committing it or anyone claiming under him, by misleading another to his prejudice

or to the prejudice of anyone claiming under him; causing, however innocently, a party to an agreement to

make a mistake as to the substances of the thing which is the subject of the agreement.

As per the above mentioned definition of misrepresentation, the followings are the essential elements of

misrepresentation -

1. Making of unwarranted statements which are not true although the person making it believes it to be

true.

2. Any breach of duty giving advantage to the person committing it and thereby misleading another to

his prejudice; and

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3. Causing a party to an agreement to make mistake as to the substance of the thing which is the

subject-matter of the agreement.

Misrepresentation generally means mis-statement of a fact material to the contract. This section includes

the following kinds of misrepresentation-

1. Unwarranted statements

2. Breach of duty

3. Inducing mistake about subject-matter.

In the case of R. Vs Kylsant (1932) 1 KB442

A company stated in its prospectus that the company had regularly paid dividends, which created the

impression that the company was making profits whereas the truth was that the company had been running

into losses for the last several years and dividends could only be paid out of working accumulated profits.

The court held that the suppression of this fact was held to be a misrepresentation. In the case of Haji

Ahmad Yarkhan Vs. Abdul Gani Khan AI R 1937 Nag. 270:

In the negotiations for a marriage contract, those speaking for the girl failed to disclose that she was

suffering from epileptic fits, the engagement was held to be voidable, a very material fact having been

suppressed. The suppression of this fact was held to be a misrepresentation.

Mistake: The term 'mistake' is not defined in I.C. Act, 1872; mistake may operate upon a contract in two

ways:

1. Defeat the consent altogether that the parties are supposed to have given;

2. The mistake may mislead the parties as to the purpose which they contemplated.

Where the mistake does not defeat consent, but only misleads the parties, Section 20 of I.C. Act, 1872 shall

apply.

Section 20 of I.C. Act, 1872 will come into play-

a. When both the parties to an agreement are mistaken.

b. Their mistake is as to a matter of fact, and

c. The fact about which they are mistaken is essential to the agreement. In this case the

agreement is void .

Mistake as to law: Section 21 of I. C. Act, 1872, applies where the mistake relates with law. According to l'1is

section - 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.

Where only one party is mistaken (unilateral mistake) section 22 of I.C. Act, 1872, applies.

According to Section 22 of I.C. Act, 1872, - 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.

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CONSIDERATION

As we have already discussed lawful consideration is one of the essential elements of a valid and legal

contract. Section 10 of I.C. Act, 1872, says that it is a "cardinal necessity of the formation of contract."

Section 25 of I.C. Act 1872, also states that an Agreement without consideration is void.

For Example- A enters into a contract with B that he will pay RS.1 0000 to B if his house is destroyed by fire.

B's house is destroyed by fire and A claims RS.10000. A is not entitled to get RS.10000 from B because

there is no consideration from the side of A.

Definition: Section 2(d) of I.C. Act 1872 defines consideration as- "When, at the desire of the promisor, the

promisee or any other person has done or abstained from doing, or does or abstain from doing, or promises

to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the

promise."

According to this definition consideration should be given by the promisee or any other person at the desire

of the promisor. An act done at the desire of a third person will not constitute a good consideration within the

meaning of Section 2(d) of the IC Act, 1872.

In the famous case of Durga Prasad Vs Baldeo ILR (1880) 2 All. 221 :

The plaintiff built a market at the desire of the district collector. The defendant occupied a shop in the market

and agreed to pay commission on sale to the plaintiff .. The court dismissed the plaintiff's suit on the ground

that the plaintiff built the market at the desire of the collector and not of the defendant and hence the promise

was without consideration.

In India, the consideration may be given by the promisee or any other person. But in English law,

consideration must move from the promisee only.

In the case of Dutton Vs Poole (1677) 2 Lev. 210:

The plaintiff's father decided to cut the family tree for the marriage of his daughter, the plaintiff. His son (the

defendant) promised to pay £1000 for plaintiff's, marriage and asked his father not to cut the family tree. The

plaintiff's father accepted the proposal. Later on the plaintiff sued the defendant to recover the money. It

was held that the plaintiff was entitled to recover the money from the defendant although the plaintiff was

not a party to the contract.

But this rule was not followed in the case of Tweddle Vs Atkinson (1861) 1 BS 393. In this case it was held

that no stranger to the consideration can take advantage of a contract although made for his benefit.

The Principle enunciated in Tweedle Vs Atkinson was affirmed by the House of Lords in the case of Dunlop

Pneumatic Tyre Co. Ltd. Vs. Selfiridge & Co. Ltd. (1915) AC 847.

Thus from the abovementioned cases, it is clear that under English law consideration must move from the

promisee. But under Indian Law, it may flow from promisee or any other person.

Consideration: its Need: According to Section 10 of Indian Contract Act, 1872, consideration is essential to

convert an agreement in to a contract. Without consideration an agreement is void, as given in Section 25 of

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the Indian Contract Act. But Section 25 has some exceptions also. Consideration should be for both the

parties of the contract. It may be past or present or future as given in Section 2(d) of Indian Contract Act,

1872. The consideration must flow at the desire of the promisor and it may be given by the promisee or any

other person.

Consideration or its Kinds: As given in section 2(d) of Indian Contract At, 1872, the consideration may be

present, past or future because the wording of Section 2(d) "has done or abstained from doing, or does or

abstains from doing or promises to do or to abstain from doing something" shows that unlike English Law, in

India past consideration is a also a good consideration.

Adequacy of Consideration: It is a well settled principle that the courts will not inquire into the 'inadequacy

of consideration'. The consideration need not be adequate to the promise although it must be of some value

in the eyes of the law.

In the case of Bolton Vs Madden (1873) LR 55 the court held that it was not for the courts but for the parties

while making the agreement to consider the adequacy of consideration. In India also the general rule is that

the consideration need not be adequate. This is clear from illustration (f) of Section 25 of the IC Act, 1872

which states as- A agrees to sell a horse worth Rs. 1000 for Rs. 10. A's consent to the agreement was freely

given. The agreement is contract, notwithstanding the inadequacy of the consideration.

Although the courts will not look to the adequacy of consideration it must be real and must have some value

in the eyes of law. Indian contract Act, 1872, does not have such provision but the courts in India generally

followed the English law on this point.

Exceptions to consideration: While Section 25 lays down a general rule that an agreement without

consideration is void, it also provides the exceptions to this general rule. Section 185 I.C. Act, 1872 is also

an exception to this rule which provides that "No consideration is necessary to create an agency". These

exceptions are -

1. Agreement made on account of natural love and affection between parties.

2. A promise to compensate for something done voluntarily.

3. Promise to pay a time-barred debt.

1. Natural love and affection: Written and registered agreement based on natural love and affection

between near relatives is enforceable without consideration.

An important case on this point is-

Raj Lukhy Devi Vs Bhootnath Mukhedee (1900) 4 Cal WN 488

The defendant promised to pay his wife a monthly fixed payment for her separate residence and

maintenance. They separated due to certain quarrels and disagreements that was in black and

white in a deed.

The Calcutta H.C. held that the agreement did not come within exception. There was no love and

affection between the parties whose quarrels had compelled them to separate.

2. Past Voluntary Service: A promise to pay for a past voluntary service is binding.

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In the case of Karam Chand Vs Basant Kaur (1911) Punjab records, No. 31 p. 91, the court held that

a promise made after attaining majority to pay for goods supplied to the promisor during minority

comes within this exception.

3. Time-barred debt: The promise to pay time-barred debt should be in writing and also be signed by

the promisor or "by his agent generally or specially authorised in that behalf."

4. No consideration necessary for the creation of agency: Section 185 of IC Act, 1872, recognises

one more exception for consideration in respect of the creation of agency. It provides, "No

consideration is necessary to create an agency".

IMPORTANT QUESTIONS

Q.1. Define consideration. Is the existence of consideration necessary for every valid contract? Write

exceptions also.

Q.2. "Minors are incapable to enter into contract." Discuss.

OR

“A contract with a minor is void in India. “ Explain

Q.3. What do you understand by coercion? What is its effect on a contract? Explain.

Q.4. Define fraud. Discuss its essential elements and explain, what is effect of fraud on a contract.

Differentiate between fraud and misrepresentation also.

Q.5. Define consideration. Under what circumstances the object and consideration of a contract is

deemed unlawful? Give examples.

Q.6. "No Consideration, no Contract." What are the exceptions to this rule?

Q.7. What do you understand by capacity to contract? Who are competent and who are not competent to

contract under the Indian contract Act, 1872? Explain.

Q.8. What do you understand by Consent? Is Consensus ad idem between parties necessary for a valid

contract? When a consent is free?

Q.9. What do you understand by mistake? What are the kinds of mistake? Discuss the mistake of Law

and its effect on Contract.

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UNIT - III

Introduction: When a proposal is made by a person to another, it gets converted into an agreement when it

is accepted by that person to whom it is made. An agreement may be void, voidable or a valid one.

VOID AGREEMENT

A void agreement is that agreement that does not fulfil all the legal requirements of a valid contract that are

provided in Section 10 of Indian Contract Act, 1872.

Section 2(g) of Indian Contract Act, 1872 defines "Void agreement" as- "An Agreement not enforceable by

law is said to be void."

A void agreement can not be enforced even when both the parties to a contract are agreed upon it because

it has no existence in the eyes of law.

Void agreements are also of two kinds-

1. Void-ab-initio

2. Void subsequent.

Void-ab-initio agreements are those agreements which are void from the very beginning. This means such

type of agreements never comes in existence.

Void-subsequent agreements are those agreements which are lawful/legal at the time of entering the

contract but later on due to some reasons beyond the control of the parties to a contract, their completion

becomes impossible. This kind of agreements is also known as frustrated agreements which are covered

under the topic "Doctrine of Frustration".

Agreements declared to be void by I.C. Act, 1872: Indian Contract Act, 1872 declares the following

agreements void-

·Unlawful agreements (Section 23)

·Agreements without consideration (Section 25)

·Agreements in restraint of marriage (Section 26)

·Agreements in restraint of Trade (Section 27)

·Agreements in restraint of legal proceedings (Section 28)

·Agreements void for uncertainty (Section 29)

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·Agreement by way of wager (Section 30)

·Agreement to do impossible acts (Section 56)

1) UNLAWFUL AGREEMENTS: According to Section 23 of Indian Contract Act, 1872- "The

consideration or object of an agreement is lawful unless -

it is forbidden by law; or

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

or is fraudulent; or

involves or implies injury to the person or property of another;

or the court regards it as immoral or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every

agreement of which the object or consideration is unlawful is void.

In a recent case of Central Inland Water Transport Co. Ltd. Vs Birjo Nath Ganguly and others AIR

1986 SC 1571

The Supreme Court observed that the term 'public policy' is not defined in the IC Act, 1872. From the

very nature of things 'public policy' is incapable of precise definition. Public policy connotes some

matter which concerns the public good and public interest. The concept of public good or public

interest has varied from time to time and place to place.

Some of the various agreements or. areas that are recognised by the courts against public policy are as

follows-

1. Agreements prejudicial to the state for example Trading with the enemy, sale of pUblic offices and

appointment etc.

2. Agreements interfere with administration of justice, for example maintenance and champerty

agreements, agreement to stifle prosecution etc.

3. Agreements against public decency for example marriage brokerage agreements, agreements

against marital relations etc.

Effect of Unlawful Agreements:

1. Contract, which is unlawful, is also void.

2. No recovery of money paid or goods delivered in pursuance of an illegal contract except:

a. Where one of the parties is innocent.

b. Where no more has been done than the payment of money and no part illegal purpose has

been carried out.

2) Agreements without consideration: Consideration is an essential part of an agreement. An

agreement is converted into a valid contract if it has lawful consideration as per the requirement of

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section 10 of I.C. Act, 1872.

But Section 25 and Section 185 of I.C. Act, 1872 are exception to it :

According to Section 25 of I.C. Act, 1872, an agreement made without consideration is void unless-

i) it is expressed in writing and registered under the law for the time being in force for the registration of

document and is made on account of natural love and affection between parties standing in a near

relation to each other, or unless;

ii) it is a promise to compensate, wholly or in part, a person who has already voluntarily done

something for the promiser, or something which the promisor was legally compellable to do; or

unless

iii) it is a promise made in writing and signed by the person to be charged therewith, or by his agent

generally or by specifically authorised in that behalf, to pay wholly or in part a debt of which the

creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

For Example

1. A, for natural love and affection, promises to give his son, S, Rs. 1000. A puts his promise to S, into

writing and registers it. This is a contract.

2. A find B's purse and gives it to him. B promises to give A Rs. 50. This is a contract.

Besides the section, another exception is recognized under section 185.

In the famous case of Raj Luckhy Vs Bhootnath (1900) 4 Call. W.N. 488

The husband and wife had strained relations. They entered into an agreement by which they started to live

apart and the husband voluntarily agreed to give a monthly amount to the wife. The agreement also

expressed their bitter relations. The court held that there was no consideration for that agreement from the

wife's side and the agreement was not entered due to love and affection as shown by the agreement. Hence

the court held that the present suit cannot be maintained.

3) Agreement in restraint of Marriage: According to Section 26 of IC Act, 1872- "Every agreement in

restraint of marriage of any person, other than a minor, is void.

A famous English case on this pont is Lawe Vs Peers (1768) 4 Burr. 2225.

In this case Mr. Peers made a promise to Mrs. Catherine Lowe in the following words- "I do truly promise

Mrs. Catherine Lowe that I will not marry with any person besides herself; I agree to pay the said

Catherine Lowe £ 2000 within 3 months next after I shall many anybody else".

The court held this contract is void because it unduly restricts or hampers the freedom to marry. This

contract is opposed to public policy also.

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Section 26 of I.C. Act, 1872, does not state about the kind of restraint, it tells us about restraint of

marriage but the court held that this section does not apply where the restriction is only against

marriage with a particular person or a person of particular religion.

The two widows of a person agreed that if either of them remarried, she would forfeit her share in the

property. The court held that the said restraint on marriage was not a direct or total prohibition to

remarry. Hence the restraint is valid.

A person wrote a clause in his will that the person who is entitled to get some benefit under the will would

forfeit his or her share if he or she married outside parsee community.

The court held that the restraint is valid and it can not be said that the testator is doing something which

is against morality or against law.

Hence partial restraint on marriage is legal whereas absolute restraint on marriage is void.

4) Agreement is restraint of trade: According to section 27 of IC Act, 1872- "Every agreement by

which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to the

extent void.

Exception: Saving of agreement not to carryon business of which goodwill is sold- one who sells the

goodwill of a business may agree with the buyer to refrain from carrying on a similar business within

specified local limits, so long as the buyer or any person deriving title to the goodwill from him, carries on

a like business therein:

Provided that such limits appear to the. court reasonable, regard being had to the nature of the

business.

Originally, all restraints of trade whether general or partial were regarded as totally void. But later on, a

distinction was made between general and partial restraints and general restraints were declared

invalid whereas partial restraints were held valid. But section 27 of I.C. Act, 1872 covers absolute as

well as partial restraint. The only exception to this section is the sale of goodwill.

The defendant agreed to pay a sum of money to the plaintiff if he stopped his business in that locality.

The plaintiff stopped the business but the defendant refused to pay the amount agreed to the plaintiff.

The court held that the agreement was void and therefore no part of it could be enforced.

5) Agreements in restraint of legal proceedings void: According to Section 28 of I.C. Act, 1872-

"Every agreement, by which any party thereto is restricted absolutely from enforcing his: rights under or

in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the

time within which he may thus enforce his rights is void to that extent".

Exception I : Saving of contract to refer to arbitration dispute that may arise· this section shall not

render illegal a contract by which two or more persons agree that any dispute which may arise between

them in respect of any subject or class of subjects shall be referred to arbitration, and that only the

amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception II : Saving of contract to refer questions that have already arisen- Nor shall this section

render illegal any contract in writing, by which two or more, persons agree to refer to arbitration any

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question between them which has already arisen, or affect any provision of any law in force for the time

being as to references to arbitration.

6) Agreements Void for Uncertainty: According to section 29 of IC Act, 1872- "Agreements, the

meaning of which is not certain, or capable of being made certain, are void."

For Example- A agrees to sell B "a hundred tons of oil".

The agreement is void due to uncertainty because there is nothing to show what kind of oil was

intended.

Section 29 of IC Act, 1872 lays down two main things-

i) The agreements are void of which the meaning is uncertain.

ii) Agreements which are incapable of being made certain are void.

This means if any agreement is apparently uncertain but is capable of being made certain, it is valid, not

void.

For example - A, a dealer in Kerosene Oil only, agrees to sell to B, 'one hundred tons of oil'. In this

case, although the agreement is uncertain on the face of it but it is clear that the intention of A is to

deal with kerosene oil. Hence the agreement is valid and enforceable.

7) Wager Agreements: Section 30 of IC Act, 1872 provides that- "An agreement by way of wager are

void", Now question arises- What is wager? Generally "Wagering" is staking something of value upon

the result of some future uncertain event.

In the case oc Carlill Vs Carbolic Smoke Ball Co. (1892) 2 Q.B. 484

Hawkins J. defined Wagering contract as one which two persons proforming to hold opposite views

touching the issue of a future uncertain event ".

Essential elements of a wagering contract: The essential elements of a wagering contract are as

follows-

i) Gain or loss.

ii) Uncertain event

iii) No other interest

iv) Neither party should have a proprietary interest in the event.

Lotteries are also wagering in nature. Lotteries are prohibited under the Indian Penal Code 1860

unless authorised by the government. Thus a Lottery which is authorised by the government is not

illegal. The only exception recognised is in case of horse-racing.

In the case of Lily White Vs. Munnuswami (1965) II MLJ

In a case the Privy Council made it clear that in a wagering contract, there has to be mutuality in the

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sense that gain of one party would be the loss of the other on the happening of the uncertain event

which is the subject matter of a wager.

The court remarked- "A term which is prima facie opposed both to public policy and to the

fundamental principle of the law of contract can not be enforced by a court merely because it is

printed on the reverse of a bill and there is a tacit acceptance of the term when the bill was received

by the customer."

Insurance policies bear a certain superficial resemblance to wagering contracts, but they are really

transactions of different character. They are not wagering agreements.

But an insurance policy is a wagering agreement if there is no insurable interest.

8) Agreements to do impossible act: According to Section 56 of IC Act, 1872- "A contract to do an

act which, after the contract is made, becomes impossible, or by reason of some event which the

promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

VOIDABLE CONTRACT

According to Section 2(i) of I.C. Act, 1872, "An agreement which is enforceable by law at the option of one or

more of the parties thereto, but not at the option of the others, is a voidable contract."

In Indian contract Act, 1872, there are certain provisions that declare voidability of agreements without free

consent.

According to Section 19 of IC Act, 1872- "When consent to an agreement is caused by coercion, fraud or

misrepresentation, agreement is a contract voidable at the option of the party whose consent was so

caused.

A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist

that the contract shall be performed, and that he shall be put in the position in which he would have been if

the representation made had been true.

Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning

of Section 17, the contract nevertheless is not voidable, if the party whose consent was so caused had the

means of discovering the truth by ordinary diligence.

Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on

whom such fraud was practised, or to whom such misrepresentation was made does not render a contract

voidable.

According to Section 19-A of IC Act, 1872- "When consent to an agreement is caused by undue influence,

the agreement is a contract voidable at the option of the party whose consent was so caused.

Any such contract may be set aside either absolutely, or if the party who was entitled to avoid it has received

any benefit thereunder, upon such terms and conditions as to the court may seem just.

Unlawful Agreements: Section 23 of I.e. Act, 1872 provide that - "the consideration or Object of an

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agreement is lawful unless -

1. It is forbidden by law, or

2. Is of such nature that, if permitted it would defeat the provision of any law; or

3. Is fraudulent; or

4. Involves injury to the person or property of another; or

5. The court regards it as immoral or opposed to public policy.

Hence this section deals with consideration or object of an agreement only.

In the case of Pyare Mohan vs. Narayani Devi AIR 1982 Raj 43 :

It was held that Under Section 23 only an object of the agreement and not the motives of the parties have to

be considered.

Agreements declared to be unlawful Under Section 23 may be considered under the following different

heads -

1) Forbidden by Law: Any agreement, the object or consideration of which is forbidden by law is

unlawful and therefore void.

In the case of Pearce vs. Broaks (1866) L. R.1. Ex. 213 the plaintiff agreed to supply the defendant a

horse carriage (brougham) on hire knowing the fact that the defendant was a prostitute and the horse

carriage was to be used for immoral vocation. The court held that the plaintiff could not recover the price

of the thing so supplied because he contributed to the performance of an illegal act by supplying horse

carriage with the knowledge that it is going to be used for that immoral purpose.

Similarly, if A promises to obtain for B an employment in the public service, and B promises t2 pay RS.1

000 to A. the agreement is void, as the consideration for it is unlawful.

2) Agreement which defeats the provision of any law: If an agreement is of such a nature that if

permitted, it would defeat the provisions of any law, the consideration or object of such agreement is

said to be unlawful, hence the agreement is void.

In the case of Fateh Singh vs. Sanwal Singh, ILR (1878) 1 All. 751

The accused was ordered to file a surety of RS.5000. Under Section 107 Cr.P.C. The accused

deposited RS.5000 with the defendant and agreed with him to become his surety. Later on, after the

period of surety-ship the accused filed this suit to recover the amount. The court held that the plaintiff

could not recover the amount because the agreement was void.

3) Fraudulent Agreement: If consideration or object of an agreement is fraudulent, the agreement

will be unlawful and void.

For example, A, Band C enter into an agreement for the division among them of gains acquired or to be

acquired by fraud. The agreement is void as its object is unlawful.

Injury to person or Property of another: As given in Section 23 of I.C. Act, 1872, the agreement

containing consideration or object which involves or implies injury to the person or property of another is

unlawful.

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4) For example - If two persons agree to purchase shares in a company with a view to mislead and

give an impression to others that these is a good market for shares, the agreement will be unlawful and

can not be enforced.

5) Immoral or Opposed to Public Policy: Immorality is a word that is not defined in Indian Contract

Act, 1872. What is immoral at a material time depends on the facts and circumstances of the case and

the prevailing standards of morality in the society. Hence what is moral and what immoral, changes from

time to time and place to place.

According to Section 23(v) of I.e. Act. 1872, the court has power to decide what is immoral or opposed to

public policy.

Tenancy created in favour of a prostitute to carryon her profession, money advanced to a dancing girl to

continue cohabitation are examples of immorality. A marriage brokerage contract where a third person

intervenes and wants to make money out of the marital relationship between the two partners is against

public policy and not enforceable by a court of law.

The term "opposed to public policy" is also undefined and it is very vague, uncertain and covers a wide

range of topics.

In the case of Richardson vs. Mellish (1831) Bing 229, Burrough J. Stated that - "Public policy is a very

unruly horse and once you get astride it. you never know where it will carry you."

In the case of Fender vs. St. John Mildmay (1983) AC 1.

The defendant told the plaintiff that he was unhappy with his wife and asked him to marry her if his wife

divorced him. She consented and entered into sexual relation. The wife filed petition for divorce on

ground of adultery and a decree was passed accordingly. Later on he retracted from his promise; the

court held that the promise was to do something contrary to public policy.

In India the Supreme Court followed this principle in the case of Gherulal Parikh vs. Mahadev Das

Maiyya AI R 1959 SC 781.

Effect of Void, Voidable and Unlawful agreements: Sec 23 of I.C. Act. 1872 deals with unlawful

agreements and Section 25 - Section 30 and Section 56 declares some agreements void. All the

unlawful agreements are void but all the void agreements are not unlawful agreements or illegal ones.

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IMPORTANT QUESTIONS

1. Under what circumstances the object and consideration of a contract is deemed unlawful? Explain.

2. Agreements in restraint of trade are void. Explain. Can a trade combination be treated as restraint of

trade? Explain.

3. What is an agreement by way of wager? What test would you apply to determine if or not an

agreement is by way of wager? Distinguish a wagering agreement from a good contract.

4. What agreements are void if consideration and objects are unlawful in part? Give examples.

5. 'Agreements, the meaning of which is not certain, are void'. Explain.

6. What agreements have been expressly declared to be void by Indian Contract Act?

7. Write a short note on 'Agreements to do Impossible Acts.'

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UNIT - IV

CONTINGENT CONTRACT

Chapter III (Section 31 - Section 36) of Indian Contract Act, 1872 has provision of "Contingent Contracts". In

English Law, the term "Contingent Contract" is not used, there is the phrase "Conditional Contract" is used.

Definition: Section 31 of the I.C. Act, 1872 defines contingent contract as –

"A contingent contract is a contract to do or not to do something, if some event, collateral to such contract

does or does not happen."

Illustrations: A contracts to pay B Rs.10,000 if B's house is burnt. This is a contingent contract.

This means that in a contingent contract, there is a conditional promise, the performance of which depends

on happening or non-happening of such condition or contingency. Performance of such contract does not

arise at the time of making contract.

Essential Elements of Contingent Contract: On the basis of definition of contingent contract given in

section 31, the following are the essential elements of a contingent contract -

1. It is a contract to do or not to do something.

2. If some event does or does not happen.

3. Such event must be collateral to such contract.

The above mentioned third element is not very clear in itself and it is clarified by the courts what the term

"Collateral" means.

In the case of Secretary of State for India vs. Arathoon ILR (1878) 8 Mad. 173:

The plaintiff contracted to supply timber to Government subject to the approval of supply of the Gun

Carriage Factory otherwise, it would be rejected. The quality of the timber supplied by the plaintiff was not

approved by the superintendent hence timber was rejected accordingly. The Madras H.C. held that the

contract was contingent contract subject to the condition or contingency of the approval by the

superintendent and therefore the plaintiff could not raise question on the reasonability of superintendent's

disapproval.

In the case of Aghore Nath Bannerjee vs. Calcutta Tramways Co. ILR (1885) 11 Cal. 232

The plaintiff, a conductor deposited a sum of money in defendant's company as security for getting

employment subject to condition that it would be forfeited if he committed any dereliction in duty which

would be decided by company's manager. It was held that the contract is contingent in nature; the decision

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of the manager regarding dereliction in duty for the forfeiture of amount constituted the contingency.

As we know that a contingent contract can not be enforced or performed at the time of making the contract,

it can be enforced -

1. On the happening of an event.

2. On the non-happening of an event.

3. On the non-happening of an event within fixed time.

1) Performance of Contingent Contract on the happening of an event : According to the provision

contained in Sec. 32 of I.C. Act. 1872 - Contingent contracts to do or not to do anything if an uncertain

future event happens cannot be enforced by law unless and until that event has happened.

If the event becomes impossible such contract becomes void; for example, A makes a contract with B to

buy B's horse if A survives C. This contract can not be enforced by law unless and until C dies in A's

lifetime.

The respondent contracted to purchase a book of medical prescriptions in order to start a company for

the manufacture of Unani Medicines. The respondent took the book by making part-payment. Later on

the company was not formed due to some reasons and the respondent did not pay the balance amount.

The Supreme Court held that the contract was not contingent in nature on the event of the formation of

the company.

2) Performance of Contingent contract on the non-happening of an event: According to Section

33 of I.C. Act 1872- "Contingent contracts to do or not to do anything if an uncertain future event does or

does not happen can be enforced when the happening of that event becomes impossible, and not

before."

For example· A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The

contract can be enforced when the ship sinks and not before.

3) Performance on the non-happening of an event within fixed time: According to Sec. 35 of I.C.

Act 1872- "Contingent contracts to do anything if a specified uncertain event does not happen within a

fixed time may be enforced by law when the time fixed has expired and such event has not happened, or

before the time fixed has expired, if it becomes contain that such event will not happen."

For example - A promise to pay a sum of money if a certain ship does not return within a year; the

contract may be enforced if the ship does not return within a year, or is burnt within a year.

When a contingent contract becomes void: A contingent contract becomes void in the following

conditions -

1. When the happening of the event becomes impossible.

2. When the event does not happen within a fixed time.

3. Agreement contingent on impossible events.

1. When the happening of the Event becomes Impossible: According to second Para of Section 32

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of I.C. Act, 1872 - "If the event becomes impossible such contract becomes void"

For example: A contracts to pay B a sum of money when B marries C. C dies without being married to

B. the contract becomes void. In Indian Contract Act, 1872 the law relating to the "Impossibility of

performance" is laid down in Section 32 and Section 56. In India, the law and principles relating to the

doctrine of frustration are not applicable.

2. Void, when the event does not happen within a Fixed Time: According to Section 35 of I.C. Act,

1872 "Contingent contracts to do or not to do anything if a specified uncertain event happens within a

fixed time, becomes void if at the expiration of the time fixed, such event has not happen, or if before the

time fixed, such event becomes impossible.

Example: A promises to pay B a sum of money if a certain ship does not return within a year. The contact

may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

3. Agreements Contingent on Impossible events: According to Section 36 of I.C. Act, 1872-

"Contingent agreements to do or not to do anything if an impossible event happens, are void, whether

the impossibility of the event is known or not to the parties to the agreement at the time when it is made."

Example:

a) A agrees to pay B RS.1000 if two straight lines should enclose a space. The agreement is void.

b) A agrees to pay B RS.1 000 if B will marry A's daughter C. C was dead at the time of making the

agreement. The agreement is void.

QUASI CONTRACT

The term "Quasi-Contract" is not used in Indian Contract Act, 1872. Chap V (Section 68-72) of Indian

Contract Act, 1872 deals with "Of certain relations resembling those created by contract.

These relationships which are not created by contract but resemble a contract are known as Quasi-

Contract generally. In quasi-contract, the liability of one person or party does not arise on the basis of

agreement but on the basis of relationship. When one person enriches himself unjustly, then the liability

arises by implication of law and not out of an agreement.

The term "Quasi-contract" is a misnomer. It has little or no affinity with contract Quasi contract means "Like

Contract".

Essential elements characteristics of quasi-contract: ANSON has given the following three

characteristics of quasi-contract-

1. Right to a sum of money: A right based on contractual relationship is always a right to money that

may be liquidated or sometimes unliquidated.

2. Imposed by law: There is no agreement between the parties concerned. It is an implication of law

hence a quasi-contract resembles a tort in this respect.

3. Right available only against a particular person or persons: Unlike tort, it is a right available

against a particular person or persons only, not against the whole world.

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4. Provisions of Quasi-Contract contained in I.e. Act, 1872: The following are the relationships

resembling those created by contracts :

a) Necessaries supplied to person incapable of contracting on his account (Sec. 68)

b) Reimbursement of person paying money due by another in payment of which he is

interested (Section 69)

c) Obligation of person enjoying benefit of non-gratuitous act (Sec. 70)

d) Responsibility of finder of goods (Sec. 71)

e) Liability of person to whom money is paid, or thing delivered by mistake or coercion (Sec.

72)

1) Necessaries supplied to a person incapable of contracting: According to Sec. 68 of I.C. Act,

1872 - 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 in life, the person who has furnished

such supplies is entitled to be reimbursed from the property of such incapable person.

Example - A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be

reimbursed from B's property.

A minor is also incapable of contracting hence he is also liable to payout of his property for necessaries

supplied to him or to anyone whom he is legally bound to support. A Minor is not personally liable, it is

only the property which is liable.

The term "necessaries" is not defined in I.C. Act, 1872 but it is clarified by the courts in judicial

pronouncements.

A minor bought eleven fancy waist coats from Nash. He was at that time adequately provided with the

clothes. The court held that the minor was not liable to pay for any of them because those waist coats

were not necessaries supplied to a minor.

Bramwell B. said that "Ear-rings for a male, spectacles for a blind man, a wild animal a daily

dinner of turtle and venison for a month for a clerk with a salary of 1 a week" could not be necessaries.

Certain services rendered to incapables also comes within the purview of necessaries, for example,

education, training for a trade, medical advice, legal advice, provision for a funeral for deceased

husband of a minor widow and a house given on rent to a minor for the purpose of living and continuing

his studies etc.

2) Payment by an Interested Person: According to Sec. 69 of I.C. Act, 1872 - "A person who is

interested in the payment of money, which another is bound by law to pay, and who therefore pays it, is

entitled to be reimbursed by the other."

The following are the essentials of this section:

a. The payment made should be bonafide for the protection of one's interest.

b. The payment should not be a voluntary one.

c. The payment must be such as the other party was bound by law to pay.

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In the case of Exall vs. Partrige (1799) 8 Term R 308 :

The Plaintiff left his carriage on defendant's premises. Defendant's Landlord seized the carriage as

distress for rent. Plaintiff paid the rent to obtain the release of his carriage. The court held that the

plaintiff could recover the amount from defendant.

In the case of Abid Hussain vs. Ganga Sahai (1928) 26 All L.J. 435 the goods belonging to Abid

Hussain were wrongfully attached in order to realise arrears of govt. revenue due by Ganga Sahai.

Abid Hussain paid the amount to save the goods from sale. It was held that he was entitled to

recover the amount from Ganga Sahai.

3) Obligation to pay for non-gratuitous acts: According to Sec. 70 of I.C. Act, 1872- where a person

lawfully does anything for another person, or delivers anything to him not intending to do so gratuitously

and such other person enjoys the benefit thereof, the latter is bound to make compensation to the

former in respect of, or to restore, the thing so done or delivered

For example - A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He

is bound to pay A for them.

1. The thing must have been done lawfully.

2. The person doing the act should not have intended to do it gratuitously.

3. The person for whom the act is done must have enjoyed the benefit of the act.

In the case of Damodar Mudaliar vs. Secretary of State for India (1894) 18 Mad. 88 a village was

irrigated by a tank. The government effected certain repairs to the tank for its preservation and had no

intention to do so gratuitously for the zamindars. The zamindars enjoyed the benefit thereof. It was held

that were liable to contribute.

The responsibility of finder of goods: According to Sec. 71 of I.C. Act, 1872 - A person who finds goods

belonging to another and takes them into his custody, is subject to the same responsibility as a bailee.

This means that finder of goods is bound to take as much care of the goods as a man of ordinary

produce would, under similar circumstances, take of his own goods. He must also take all necessary

measures to find the owner of the goods but the finder can sell the goods in the following cases:

1. When the owner can not, with reasonoable deligence, be found out.

2. When the owner is found out, but he refuses to pay the lawful charges of the finder, and

3. When the lawful charges of the finder, in respect of the thing found, amount to two thirds of the value

of the thing found.

4. Money paid under mistake or coercion: According to Sec. 72 of I.C. Act, 1872- A person to whom

money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

For example - A and B jointly owe RS.100 to C. A alone pays the amount to C and B not knowing this fact,

pays RS.100 over again to C. C is bound to repay the amount to B.

In the case of D Cawasji & Co. vs. State AIR (1969) Mys. 23 - The court held that Section 72 does not

draw any distinction between a mistake of fact and mistake of law.

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In the case of STO., Benaras vs. Kanhaiya Lal Mukundlal Saraf (1959) SCJ 53

The firm of Kanhaiya Lal Mukand Lal Saraf paid sales tax on his forward transactions of bullion.

Subsequently, this tax was declared ultra vires. It was held that the firm could recover the amount of

sales tax paid and that Sec. 72 is wide enough to cover not only mistake of fact but also a mistake of law.

Compensation for failure to discharge obligations created by Quasi-contract: According to Sec. 73

Para 3 of I.C. Act, 1872- when an obligation created by a quasi-contract is not discharged, the injured party

is entitled to receive the same compensation from the party in default, as if that person had contracted to

discharge it and had broken his contract.

DISCHARGE OF CONTRACT

A contract may be discharged in any of the following ways:

1. By performance

2. By Impossibility of Performance

3. By Agreement

4. By Breach of Contract; and

5. By Operation of Law

1) By Performance: when the parties of a contract fulfill their obligations arising out of a contract, it is

called performance of contract. It is the best way of discharge of contract because both of the parties'

desires got fulfilled by performance and both become satisfied.

2) By Impossibility of Performanceor by Frustration: A contract may be discharged on the basis of

impossibility of its performance which is also known as frustration of contract. In England, it is popularly

known as "Doctrine of Frustration". A contract is frustrated where, subsequent to its formation, a change

of circumstances renders the contract legally or physically impossible to perform.

In the case of Satyabrata Ghosh vs. Mugneeram Bangur, AI R 1954, Supreme Court 44, the Hon'ble

Supreme Court held that in "fact impossibility of performance and frustration are often used as

interchangeable expressions. The changed circumstances, it is said, make the performance of the

contract impossible and parties are absolved from the further performance of it as they did not promise

to perform an impossibility."

Some Important English Cases on Doctrine of Frustration

In the case of Taylor vs. Caldwell, (1863) 122 E.R. 309, which is popularly known as "Music Hall Case",

the defendants agreed to let the plaintiff have the use of their gardens and music hall for four days on

payment of £ 100 for each day. After the making of the agreement, the Hall was destroyed by fire without

the fault of either party. The court held the parties contracted on the basis of the continued existence of

the music hall at the time when the concerts were to be given, that being essential their performance,

and hence both the parties are excused.

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In the case of Krell vs. Henry (1903) 2 K. B. 740, which is popularly known as "Coronation case" the

defendant agreed to hire a flat in Pall Mall of the plaintiff to see the Coronation procession of the prince

but subsequently the coronation was postponed due to the illness of the prince. The defendant,

therefore, refused to pay the rent. The court held that the coronation procession and the relative

position of the rooms was the basis of the contract as much for the lessor as the hire; the object of the

contract having been frustrated, plaintiff could not recover the balance of the rent.

Indian Cases

The Indian law relating with the impossibility of performance or "Doctrine of Frustration" can be better

understood with the help of the following important cases.

In the case of Ganga Saran vs. Firm Ram Charan, AIR 1952, Supreme Court 9, the parties entered into

several contracts by which the respondent firm undertook to supply the appellant 184 bales of certain

specifications manufactured by the New Victoria Mills, Kanpur and Raza Textile Mills, Rampur. The

dispute was regarding 61 bales of cloth which were not supplied, The agreement provided that the

respondent firm shall go on supplying goods to the plaintiff on the Victoria Mills as they are supplied to

us by the said Mill. The Supreme Court held that in this case the doctrine of frustration of contract cannot

be invoked.

The Supreme Court further held that The words "Prepared by the Mill" are only description of the goods

to be supplied, and the expression "as soon as they are supplied to us by the said Mill" simply indicate

the process of delivery.

In the case of Satyabrata Ghosh vs. Mugneeram Bangur, AIR 1954, Supreme Court 44, The

respondent company was the owner of a large tract of land in Calcutta. It started a scheme for

development of this land for residential purposes and called it Lake Colony Scheme NO.1. The

Company entered into agreements with different purchasers for sale of plots and accepted from them

only a small portion of consideration money. It so happened that subsequently the land was

requisitioned by the District Collector under the Defence of India Rules for military purposes. In view of

those circumstances, the Company decided to treat agreement as cancelled. The Supreme Court held

that the performance of the contract had not become impossible.

Exception to the Doctrine of Frustration: Section 56(3) of I.C. Act, 1872 provides for an exception to

the "Doctrine of the impossibility of performance" or "Doctrine of frustration".

According to Sec. 56(3) of I.c. Act, 1872- "Where one person has promised to do something, which he

knew, or, with reasonable diligence, might have known, and which the promisee did not know to be

impossible or unlawful, such promisor must make compensation to such promisee for any loss which

such promisee sustains through the non-performance of the promise."

In the case of Satyabrata Ghosh vs. Mugneeram Bangur, AIR 1954, Supreme Court 44 - the Supreme

Court observed that para 3 of section 56 should be deemed to be an exception to the doctrine of

frustration for it.

3) Discharge of Contracts by Agreement: Another way of the discharge of the contracts is that the

parties may enter into an agreement for the same. What has been created by agreement may be

extinguished by agreement. In India sections 62 to 67 deal with the discharge of contracts by

agreement. Under the Act. those sections are under the heading "Contracts which need not be

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performed."

According to Sec. 62 of I.C. Act 1872: "If the parties to a contract agree to substitute a new contract for

it or to rescind or alter it. the original contract need not be performed."

Thus, if parties substitute a new agreement for the old, revoke it or alter it. the original contract is

discharged. In general terms, it is also called Novation of contract. Novation generally means new, this

means a new contract is entered into in place of the old one. Hence, Novation is a substitution of a new

contract for the existing contract. It may be done by the two methods -

1. By change of parties of the contract.

2. By changing the terms and conditions of the contract having the same parties.

a) Novation Involving Changing of Parties: A recent case of Rajasthan High Court, Jethamal vs.

Hiramal and others, AIR 1972 Raj. 22, is a glaring example of this kind of discharge in which the

court held that novation contemplated in Section 62 of the Contract Act involves an annulment of

one debt and the creation of another. In such cases the court has to consider not only whether the

new debtor has consented to assume liability but also whether the creditor has agreed to accept the

liability of the new debtor in substitution of the original debtor.

b) Novation Involving the Substitution of a New Contract for the Old Contract: As provided under

Sec. 62 of the I.C. Act. 1872- novation may also involve the substitution of a new contract for the old.

For example, A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of

his (A's) estate for 5,000 in place of the debt of 10,000 rupees. This is a new contract and

extinguishes the old.

But for complete novation it is necessary that all the terms, conditions, liabilities etc. of the first

agreement should be covered in the second agreement. If the earlier agreement is much wider in its

amplitude than the subsequent agreement there cannot be novation and the subsequent

agreement cannot be construed as wiping out the terms and conditions of the first agreement.

In the case of Mis. Gujarat Bottling Co. Ltd. vs. Coca Cola Company, AIR 1995 SC 2372 the

Supreme Court held that novation under Section 62 of the Contract Act requires a clear plea, issue

and evidence. Such a question cannot be raised or accepted under Section 100 of the Civil

Procedure Code for the first time in Second Appeal.

A Contract May also be discharged if the parties agree to alter or rescind the contract. Alteration or

rescission may also be implied, much will depend upon the facts and circumstances and the

intention of the parties.

In the case of Sardar vs. Ram Khilauna, AI R 1997, All. 268, the Allahabad High Court held that

where alterations were made by purchaser in the agreement for sale land to introduce two marginal

witnesses for making the agreement acceptable to court assacrosanct document witnessing

execution of agreement amounted to material alteration rendering the agreement void ab initio and

not binding on vendors.

c) The promisee of a contract may dispense with or remit performance promise:

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According to Sec. 63 of the Indian Contract Act 1872- "Every promisee may dispense with or remit

wholly or in part the performance or the promise made to him, or may extend the time for such

performance or may accept instead of it any satisfaction which he thinks fit".

Essential of Section 63-

1. The promisee may dispense with or remit, the performance; or

2. He may extend the time of performance, or

3. He may accept any satisfaction he thinks fit.

Illustration:

1. A Promises to paint a picture for B, B afterwards forbids him to do so A is no longer bound to perform

the promise.

2. A owes B, 5,000 rupees. C pays to B 1 ,000 rupees, and B accepts them, in satisfaction

of his claim on A. This payment is discharged of the whole claim.

Section 63 of I.C. Act 1872 lays down a rule different from that which prevails in the Common Law of

England.

In England in the case of Pinnel vs. Cote 1602 77 ER 237 it was held that payment by a debtor of a smaller

sum in satisfaction of a large sum is not a good discharge of the debt for the obvious reason that the debtor

was already bound to pay that sum.

In India, section 63 of I.C. Act, 1872, expressly provides that every promisee may dispense with or remit,

wholly or in part, the performance of the promise made to him, or may extend the time of performance or

may accept instead of any satisfaction which he thinks fit. It is obvious that no fresh consideration is needed

under section 63 of the Indian Contract Act.

4) Discharge of Contract by Breach: Another way by which a contract is discharged is by its breach

by one of the parties to a contract. If one of the parties to a contract breaks an obligation which the

contract imposes, a new obligation will in every case raise a right of action conferred upon the party

injured by the breach. Besides this, there are circumstances in which the breach not only gives rise to a

cause of action but will also discharge the injured party from such performance as may still be due from

him.

Breach may be of two types: (1) Anticipatory Breach; and (2) Breach during performance.

5) Discharge of Contracts by Operation of Law: A contract may be discharged by operation of aw in

which the parties have no say. It is beyond the control of the parties, as the law of the land or a decision

of the court changes the fulfillment of the contract becomes a matter of law. Some instances of the

discharge by operation of law are merger, discharge by judgment of a court, alteration or cancellation of

a written instrument, bankruptcy etc.

These grounds of discharge of contract by operation of law are merely illusory, not exhaustive. There

may be many other grounds for discharge of contract by operation of law.

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PERFORMANCE OF CONTRACT

General Rule: The parties of a contract are not absolved of their obligations until the contract has been

discharged and the best way of the discharge of contractual obligation is the performance of the contract by

the parties to it. Chapter IV (Section 37 -Section 67) of Indian Contract Act, 1872 deals with the performance

of contracts.

Thus the general rule is that the parties must perform their respective promises under the contract but in

exceptional cases the performance may be dispensed with or the parties may be excused from the

performance of their promises under Contract Act (for example- impossibility of performance) or under any

other law.

For example: A promises to deliver goods to B on a certain day on payment of RS.1 ,000. A dies before that

day. A's representatives are bound to deliver the goods to Band B is bound to pay RS.1 ,000 to A's

representatives. But if A promises to paint a picture for B by a certain day at a certain price and if he dies

before that day the contract cannot be enforced either by A's representatives or by B, because in this case

the intention of the contract is that the picture is to be paid by A and A alone.

Under Section 37 of I.C. Act, 1872, a tender or offer of performance is equivalent to performance. This

means an offer of performance can be considered to be good discharge or equivalent to performance when

the conditions contained in section 38 are fulfilled.

Section 38 of I.C. Act, 1872 states that- "Where a promisor has made an offer of performance to the

promisee and the offer has not been accepted, the promisor is not responsible for non-performance, nor

does he thereby lose his rights under the contract".

Every such offer must fulfil the following conditions:

1. It must be unconditional.

2. It must be made at a proper time and place, and under such circumstances that the person to whom

it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is

able and willing there and then to do the whole of what he is bound by his promise to do.

3. If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable

opportunity of saying that the thing offered is the thing which the promisor is bound by his promise to

deliver.

An offer to one of several joint promisees has the same legal consequence as an offer to all of them.

For example - A contracts to deliver to B at his warehouse, on the 1st March, 1873, 100 bales of cotton of a

particular quality. In order to make an offer of a performance with the effect stated in this section, A must

bring the cotton to B's warehouse, on the appointed day, under such circumstances that B may have a

reasonable opportunity of satisfying himself that the thing offered is cotton of the quality contracted for and

there are 100 bales.

Who must perform the contract: According to Sec. 40 of I.C. Act, 1872 - "If it appears from the nature of

the case that it was the intention of the parties to any contract that any promise contained should be

performed by the promisor himself. such promise must be performed by the promisor.

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In other cases, the promisor or his representatives may employ a competent person to perform it."

This means that the promisor himself or his representative may perform the contract

For example - (a) A promises to pay a sum of money. A may perform this promise, either by personally

paying the money to B or by causing it to be paid to B by another; and, A dies before the time appointed for

payment, his representative must perform the promise, or employ some proper person to do so,

(b) A promises to paint a picture for B, A must perform this promise personally.

Effect of the Accepting performance from third person: According to Sec. 41 of I.C. Act, 1872- In case a

promisee accepts promise from the third person, the promisor is discharged from his responsibility and

hence the promisee cannot afterwards enforce the contract against the promisor.

1. Time and Place for Performance: Where no time is specified and no application is to be made -

According to Sec. 46 of the Indian Contract Act 1872- The reasonable time in each case will depend

on the facts and circumstances of the case as also on the nature of the transaction.

2. In a recent case of Hungerford Investment Trust Ltd. vs. Haridas Mundhra and others AI R 1972 SC

1826, while reaffirming the above rule the Supreme Court held that the obligations under the

contract should be performed within a reasonable time and the question 'what is reasonable time' is

in each particular case, a question of fact.

3. Time and Place of Performance where Time is specified but no application is to be made:

According to Sec. 47 of I.C. Act, 1872 - "When a promise is to be performed on a certain day, and the

promisor has undertaken to perform it without application by the promisee, the promisor may

perform it at any time during the usual hours of business on such day and at the place at which the

promise ought to be performed."

For example - A promises to deliver goods at B's warehouse on the 15t January. On that day A

brings to B's warehouse but after the usual hour from closing it and they are not received. A has not

performed his promise.

When Performance to be made on certain day at proper time and place - Duty of promisee to apply

for performance - According to Sec. 48 of I.C. Act, 1872

"When a promise is to be performed on a certain day, and the promisor has not undertaken to

perform it without application by the promisee, it is the duty of the promisee to apply for performance

at a proper place and within the usual "hours of business".

Explanation - the question, "What is a proper time and place" is in each particular case, a question

of fact.

Thus in a contract wherein time is essential, the contract becomes voidable at the option of the promisee in

case it has not been performed before the time specified. But whether time is the essence of the contract

depends upon the intention of the parties and also on the nature of the contract.

A leading case on this point is Bhudra Chand vs. Betts (1915) 22 Cal. L.J. 566.

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In this case the defendant undertook the responsibility to deliver an elephant to the plantiff for capturing the

wild elephants on October 1, 1910. Later on, the defendant requested for extension of date of delivery

which was allowed to be till 6th of October but he failed to deliver even by that time. He ultimately offered to th

deliver the elephant on 11 October, 1910. But the buyer now rejected to accept. It was held by the court

that in this case time was the essence of the contract and the plaintiff was therefore justified in refusing to

accept the delivery.

Simply a mention of specific date for completion of contract of including the default clause imposing penalty

in the agreement do not by themselves indicate the intention of parties to make time of the essence.

In the cases of sale of immovable property, the general presumption is that time is not the essence of the

contract.

In the case of Govind Prasad vs. Hari Dutt, AI R 1977 SC 1005 the Supreme Court held that -

"It is settled law that the fixation of the period within which the contract has to be performed does not make

he stipulation as to time the essence of the contract."

In the case of Smt. Indira Kaur vs. Shri Sheo Lal Kapoor, AI R 1988 SC 1074 the Supreme Court held:

"The law is well settled that in transactions of sale of immovable properties, time is not the essence of the

contract."

Performance of Reciprocal Promises: Sec. 51-54 of I.C. Act, 1872 - deals with the performance of the

Reciprocal Promises.

Reciprocal means in return or inversely correspondent. A contract comprising reciprocal promises is a

contract wherein there is an exchange of promises.

According to Sec. 51 of I.C. Act, 1872 - "When a contract consists of reciprocal promises to be

simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing

to perform his reciprocal promise."

This means that the promisor is bound to perform only when promisee is ready and willing to perform. For

example - (a) A and B contract that A shall deliver goods to B to be paid for by B 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 on payment.

(b) A and B contract that A shall deliver goods to B at a price to be paid by installments, the first installments

to be paid on delivery.

A need not deliver unless B is ready and willing to pay the first installment on delivery.

B need not pay the first installment unless A is ready and willing to deliver the goods on payment of the first

installment.

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According to Sec. 52 of I.C. Act, 1872 - "Where the order in which reciprocal promises are to be

performed is expressly fixed by the contract they shall be performed in that order; and where the order is not

expressly fixed by the contract, they shall be performed in that order which the nature of the transaction

requires".

For example: A and B contract that A shall build a house for B at a fixed price. A's promise to build the house

must be performed before B's promise to pay for it.

IMPORTANT QUESTIONS

Q.1. Define contingent contract and explain its essentials. Distinguish it from wagering contract.

Q.2. What do you understand by a contingent? How far the contingency may be dependent on the act of

the party? Discuss.

Q.3. What is an anticipatory breach of contract? What option has been given to an aggrieved party?

Q.4. Discuss briefly the different modes of discharging the contract.

Q.5. "An agreement to do act impossible in itself is void". Explain this statement with suitable

illustrations.

OR

Discuss the 'Doctrine of Frustration of Contract in the Indian Contract Act.

Q.6. Is the commercial impossibility a valid ground for the frustration of a contract? Explain.

Q.7. What do you understand by Quasi-Contracts? Explain some relations which are resembling those

created by contracts as incorporated under the Indian Contract Act.

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UNIT - V

BREACH OF CONTRACT AND ITS REMEDIES

It is a common maxim of Tort "Ubi Jus ibi remedium" which means "where there is right, there is remedy". A

right without remedy is nothing in itself. Hence whenever any right of a person is violated or infringed, the

victim or aggrieved person is provided with remedies to redress his grievance.

Whenever a contract is entered into between the parties, some contractual obligations arise for both the

parties to the contract and those contractual obligations must be fulfilled by them. If any party to the contract

does not perform his part of the contract or is do not willing to respect the contractual obligations of the

contract, then the breach of the contract happens. If one of the parties to a contract breaks an obligation

which the contract imposes it is known as breach of Contract.

Breach during performance of contract:

1. Anticipatory Breach

2. Breach during performance of contract

Anticipatory Breach: Anticipatory breach arises when one of the parties to a contrat repudiates the contract

before the time of performance.

In the case of Hochester vs. Dela Tour, (1853) 2 E & B 678, the plaintiff was engaged by the defendant to

enter into his service as a courier and go along with him on a tour. The service of the plaintiff was to start on th15t June. On 11 May he was informed by the defendant that his services were no longer required. The

plaintiff brought an action even before the time of performance had arrived. It was held that the plaintiff was

entitled to bring action even before the time of performance.

Section 39 of Indian Contract ,l\ct. contains this doctrine of anticipatory breach.

According to Section 39 of Indian Contract Act. 1872 - "When a party of contract has refused to perform, or

disabled himself from performing his promise in its entirely, the promisee may put an end to the contract.

unless he has signified, by words or conduct. his acquiescence in its continuance.

For example: (a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two

nights'in every week during the next two months, and B engages to pay her RS.100 for each night's

performance. On the sixth night, A wilfully absents herself from the theatre. B is at liberty to put an end to the

contract.

(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in

every week during the next two months, and B engages to pay her RS.1 00 for each night's performance.

On the sixth night, A wilfully absents herself. With the assent of B, A sings on seventh night. B has signified

his acquiescence of the continuance of the contract, and cannot now put an end to it, but is entitled to

compensation for the damage sustained by him through A's failure to sing on the sixth night.

Breach During Performance of Contract: If one of the parties to a contract refuses to perform his part of the

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contract during performance, the other party is discharged from any further performance of his obligations

under the contract and may also bring an action for the breach.

In the case of Frost vs. Knight, 41 L.J. Ex. 78, The court held that - "The promisee may treat the intention to

renounce as inoperative and await the time when the contract is to be performed and then hold the other

party responsible for all consequences of non-performance. But in that case he keeps the contract alive for

the benefit of the other party as well as his own he remains subject to all his own obligations and liabilities

under it, and enables the other party not only to complete the contract, if so advised notwithstanding his

previous repudiation of it, but also to take advantage of any supervening circumstances which would justify

him in declining to complete it.

Remedies for Breach of Contract: The following remedies are available to the party suffered by breach of

contract:

1. Damages

2. Specific performance of Contract

3. Injunctions

Damages: In order to make the erring party liable for damages, the plaintiff must establish that he has

sustained the loss due to breach of contract and the defendant is liable for such losses which the plaintiff

has suffered due to defendant's fault. But the defendant is not liable for all losses. He is liable for the loss as

which are the direct consequences of breach. For the 'remote' losses, the plaintiff is not entitled to

compensation. This theory is known as "theory of remoteness of damages". The law will not compel the

defendant to pay damages which are remote.

In Indian Contract Act, 1872, Sec. 73 to Sec. 75 relates with compensation or damages in case of breach of

contract.

According to Sec. 73 Para (1) of I.C. Act, 1872 - "When a contract has been broken, the party who suffers by

such breach is entitled to receive from the party who has broken the contract, compensation for any loss or

damage caused to him thereby, which naturally arose in the usual course of things from such breach, or

which the parties known, when they made the contract to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the

breach".

This section is based on the principle laid down in the case of Hadley vs. Baxendale (1854) 9 Exch. 341.

In this case, the plaintiff delivered to the defendant, a carrier to deliver his broken crank shaft to the maker at

Greenwich. The plaintiff's mill was stopped due to a breakage of the crankshaft. The delivery of the shaft

was delayed due to negligence on the part of defendant. Consequently the mill could not start in time. The

plaintiff filed this suit to recover loss of profit to the plaintiff which they would have earned. had the shaft

been received in time. In this case the court of Exchequer held that there are two kinds of damages:

Damages as fairly and reasonably be considered arising naturally which are generally known as "General

damages".

Damages as may reasonably be supposed to h1we been in contemplation of both parties, at the time they

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made the contract, as the probable result of the breach of it, which are generally known as "Special

damages".

The court held that the plaintiff in this case, is entitled to recover only the general damages.

Another leading case on this point is Horne vs Midland Railways Co. (1873) L.R. 8 C.P. 131, special

damages may be successfully claimed only when they may reasonably be supposed to have been in the

contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

The leading cases on this point are Simpson vs. London and North Railway Co. (1876) 1 O.B.D. 274 and

Victoria Laundry Ltd. vs. Newman Industries Ltd. (1949) 2 KB 548.

As in England, In India for special damages to be awarded it must be proved that the defendant had the

knowledge of the special circumstances involved in the case.

In the case of Dominion of India vs. AIR Ltd. AIR 1952 Nag. 32, three volumes of the books were lost by the

Railway. The court held that Railways were liable for the loss of three volumes only as they had no notice

about the fact that the loss of the volumes in question would render the whole set useless.

It is necessary to claim compensation under Section 73 that the contract must be valid and binding. The

remedies provided under section 73 are not available in the cases of invalid or void contract.

It is well settled law that the court for the first instance must decide whether the defendant is liable and then it

is to proceed to assess that liability.

Whenever a suit for damages is filed based on contract the court first evaluate it in terms of money. There

are two principles for determination of amount of damages-

1. Compensatory nature of damages, and

2. Duty to mitigate the damages suffered

Compensatory Nature of Damages

Damages for breach of contract are given by way of compensation for loss suffered, and not by way of

punishment for wrong inflicted. In fact, the object of awarding damages for breach of contract is to put the

injured party into the position in which he would have been had the contract been performed.

In Devender Singh vs. State of U.P. AIR 1987 All. 306, The Allahabad High Court observed -"The measure

of damages in contract is compensation for the consequence which flows as a natural and capable

consequence of the breach or, in other words, which could be forseen."

Duty to Mitigate Damages Suffered

According to the explanation appended to Section 73 of I.e. Act, 1872: "In estimating the loss or

damage arising from a breach of contract, the means which existed or remedying the inconvenience

caused by the non-performance of the contract must be taken into account."

The plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss

consequent upon the breach and cannot claim as damages any sum which is due to his own neglect. But

the loss to be ascertained is the loss at the date of the breach. If at the date of the breach, the plaintiff could

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do something or did something which mitigated the damage, the defendant is entitled to the benefit of it."

In India, the Supreme Court has given the following principles in its various judgment regarding

construction of Section 73 read with explanation thereon-

a. As far as possible a party who has proved a breach of contract is to be placed, as far as money can

do it, in as good a situation as if the contract had been performed.

b. A statutory duty is cast on the plaintiff who has proved the breach of the contract of taking all

reasonable steps to mitigate the loss consequent on the breach of the contract.

c. If the plaintiff, who proves the breach of the contract but fails to prove that he took all reasonable

steps to mitigate the loss consequent on the breach of the contract, he will be debarred from

claiming damages to the extent he could have mitigated the same by taking such steps.

The Karnataka High Court in M. Nagappa vs. M. P. Muthuswamy, AI R 1975 Karnataka 146, held that "One

of the fundamental principles of law of damages is that the person entitled to claim damages must do all that

is within his power to mitigate damage.

In the case of Mis. Bismi Abdullah and Sons Merchants and Commission Agents vs. The Regional

Manager, FCI, Trivandrum, AIR 1987, Kerala 56. The Kerala High Court held that the measure of damages

must be with reference to the date of the breach of contract. More, so in the case here because time was the

essence of the contract. Therefore the plaintiff can claim only nominal damages on account of the breach

committed by the defendant.

In the case of M. Lachia Setty and Sons Ltd. vs. The Coffee Board, Bangalore, AIR 1981 SC 162, the

Supreme Court observed –

"At the outset it must be observed that the principle of mitigation of loss does not give any right to the party

who is in breach of the contract but it is concept that has to be borne in mind by the court while awarding

damages."

Liquidated Damages and Penalty

According to Section 74 of I.C. Act 1872 : "When a contract has been broken, if a sum is named in the

contract as the amount to be paid in case of such breach, or the contract contains any other stipulation by

way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is

proved to have been caused thereby, to receive from the party who has broken the contract reasonable

compensation not exceeding the amount so named or as the case may be, the penalty stipulated for."

Thus, "The parties to a contract may agree beforehand what sum shall be payable by way of damages in

the event of breach."

The essential elements of Section 74 of I.C. Act, 1872

1. When a contract has been broken.

2. If a sum is named in the contract payable on breach or any other stipulation by way of penalty.

3. Whether or not the actual loss is proved to have been caused thereby.

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4. The party complaining the breach is entitled to receive reasonable compensation from the party

who has broken the contract: and

5. The compensation should not exceed the amount named or the penalty stipulated for.

The distinction between the English law and Indian Law regarding liquidated damages and penalty is

considered by the Supreme Court in Fateh Chand vs. Balkishan Das, AI R 1963 SC 1405.

The Supreme Court observed that under the Common Law a genuine pre-estimate of damage by mutual

agreement is regarded as a stipulation naming liquidated damages and binding between the parties. The

Indian Legislature has sought to cut across the web of rules and presumptions under the English Common

Law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of

breach and stipulations by way of penalty.

The measure of damages in the case of breach of stipulation by way of penalty is by Section 74 reasonable

compensation not exceeding the penalty stipulated for.

Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed

upon the courts by Section 74. "In all cases, therefore, where there is stipulation in the nature of penalty for

forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture,

the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount

specified in the contract as liable to forfeiture."

The Court will award to the party aggrieved only reasonable compensation not exceeding the amount

named or penalty stipulated.

In the case of Maula Bux vs. Union of India, AIR 1970 SC 1955, the Supreme Court held that under Section

74 only reasonable amount can be forfeited if a contract is not performed.

This principle was re-affirmed in Union of India vs. Rampur Distillery and Chemicals Ltd., AIR 1973 SC

1098, where Supreme Court held that the party taking security deposit is not entitled to forfeit the security

deposit on the ground of default, when no loss is caused to him in consequence of such default.

Section 74 of I.C. Act, 1872, contemplates a valid and binding agreement between the parties. Since the

stipulation for forfeiture of the earnest money is part of the contract, it is necessary for the enforcement of

that stipulation, that the contract between the parties is valid. If the forfeiture clause is contained in an

agreement which is void, it can not be enforced.

Compensation of Rightful Rescission of the Contract

According to Section 75 of I.C. Act, 1872, "A person who rightfully rescinds a contract is entitled to

compensation for any damage which he has sustained through the non-fulfilment of the contract.

The Principle of Quantum Meruit: The Principle of Quantum Meruit is a very famous principle of English

Law according to which if a person who rightfully rescinds a contract is entitled to compensation for any

damage which he has sustained through the non-fulfilment of the contract."

Anson has defined the term 'Quantum Meruit' in the following words:

"If the injured party, when the breach occurs, has already done, part, though not all, of what he was bound to

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do under the contract, he may be entitled to claim the value of what he has done. In that case he has to sue

upon a Quantum Meruit", He however, adds, "Quantum Meruit is still a remedy which is alternative to rather

than a form of damages.

Conditions Required to Claim Quantum Meruit: If a person wants to claim the compensation on the basis of

this principle he must fulfill the following conditions:

a. It is available only "if the original contract has been discharged"

b. The claim must be brought by the party not in default.

In the case of Alopi Prasad & Sons Ltd. vs. Union of India, AIR 1960, SC 588, the Hon'ble Supreme Court of

India held that - "Compensation quantum meruit is awarded for work done or services rendered when the

price thereof is not fixed by a contract. For work done or services rendered pursuant to the contract

compensation quantum meruit cannot be awarded where the contract provides for consideration payable

in that behalf."

The rule laid down by the Supreme Court in this case is followed and applied by the Rajasthan High Court in

the case of State of Rajasthan vs. Motiram, AIR 1973, Raj. 233. In this case the defendant claimed payment

on the basis of quantum meruit. The court held that even if the work was materially changed outside the

contemplation of the parties due to alterations or subsequent change of circumstances, the payment on the

basis of quantum meruit cannot be claimed for the obvious reason that the express terms of the contract

cannot be ignored.

Payment on the basis of quantum meruit can be claimed only when the contract has been frustrated.

IMPOSSIBILITY OF PERFORMANCE - SPECIFIC GROUNDS OF FRUSTRATION

1. Destruction of the subject-matter of the Contract: Where the performance of the contract

becomes impossible by the destruction of the subject matter of the contract as in the case of Taylor

vs. Caldwell (1863) 122 E.R. 309 (where music hall was destroyed by fire the contract is

discharged.

2. Non-occurrence or Postponement of a particular state of things: When a particular event which is

essential for the performance of the contract is postponed or not occured as in the case of Krell vs

Henry, (1903) 2 K. B., 740, the contract is treated as discharged.

3. Death or Incapacity of the party: Where the performance of a contract depends upon the

personal services of a party, the death or incapacity of such a party may be treated to be a valid

ground for frustration of contract.

In the case of Robinson vs. Davison (1871) L.R. 6 Ed. 269. The defendant's wife was a famous

pianist (piano-player). She contracted for performing a concert but could not fulfill her promise

because of a serious illness. The court held that her serious illness was a valid ground on the basis

of which she was discharged from her obligation under the contract.

4. Change of Circumstances: If the change of circumstances make the performance of the contract

impossible, the contract will frustrate and parties will be discharged from their obligations under the

contract. If, however, despite the change of circumstances, the performance is still possible, the

contract will not be deemed to have been discharged.

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5. Building Contracts: Where the execution of the contract is delayed or otherwise becomes

impossible by the happening of an external event, the contract is discharged. But much will depend

upon the facts and circumstances and each case has to be judged on its own merits.

In the case of Metropolitan Water Board vs. Dick, Kerr & Co. Ltd., (1919) A.C. 119, the defendants

contracted with the plaintiffs to construct a reservoir within a period of six years. After the lapse of two

years, the Minister of Munitions, while exercising his statutory powers, ordered them to stop work and

remove their plant. The House of Lords held that the contract was discharged having been frustrated by

the said order.

6. Change in Law: The performance of a contract may also become legally impossible by the change

in law. If the performance becomes legally impossible, the contract will be discharged. But as

pointed out in Anson's Law of Contract 'The change in the law must be such as to strike at the root of

the agreement and not merely to suspend or hinder its operation in part."

Legislative or Government Intervention: Yet another ground for frustration of contract is

legislative or government intervention.

The case of Metropolitan Water Board vs. Dick Kers Co. Ltd., (1918), A.C. 119 referred to above is a

good illustration of frustration of contract by government or administration intervention.

In India, the courts are governed by the provisions of Section 32 and Section 56 of the Contract Act, 1872.

Section 32 of the Act is under Chapter !II relating to contingent contracts and lays down that a contingent

contract to do or not to do anything if an uncertain future event happens, becomes void if the event becomes

impossible.

But the main doctrine is contained in Section 56 of the Contract Act. "The doctrine of frustration is part of the

law of discharge of contract by reasons of supervening impossibility or illegality of the act agreed to be

done.

According to Sec. 56 (1) of I.C. Act: "An agreement to do an act impossible is in itself void." Illustration: A

agrees with B to discover treasure by magic. The agreement is void. So if the act is in itself impossible the

agreement will be void.

Part 2 of Section 56(2) deals with contracts to do an act which afterwards becomes impossible or unlawful.

According to Sec. 56(2) of I.C. Act - "A contract to do an act which, after the contract is made, becomes

impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void

when the act becomes impossible or unlawfuL" Illustration:

A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract

becomes void.

A contract to take in cargo for B at a foreign port. A's Government afterwards declares war against the

country in which the port is situated. The contract becomes void when war is declared.

Under English law, change in law is one of the grounds for frustration of contract. But the change in law must

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be such as to strike at the root of the agreement and not merely to suspend its operation. Under Indian law

also the position is same.

When the powers of contract fulfill their obligations arising out of contract, it is called performance of

contract, it is the best way of discharge of contract.

A contract may be discharged on the basis of impossibility of its performance.

In England, it is popularly known as the 'Doctrine of Frustration' where, subsequent to its formation, a

change of circumstances renders the contract legally or physically impossible to perform.

In Satyabrana vs. Mugneeram, in fact impossibility of performance and frustration are often used as

interchangeable expressions. The changed circumstances, it is said, make the performance of the contract

impossible and parties are absolved from the further performance of it as they did not promise to perform an

impossibility.

In the case of Taylor vs. Caldwell, in the instant case, the defendants agreed to let the plaintiff have the use

of their gardens and music Hall for four days on payment of $100 for each day. After the making of the

agreement the hall was destroyed by fire without the fault of either party. The court held "The parties

contracted on the basis of the continued existence of the music hall at the time when the concerts were to be

given; that being essential for their performance", "both the parties are excused."

IMPORTANT QUESTIONS

Q.1. What do you mean by the "Doctrine of frustration" of Contract? Explain its essentials and specific

grounds with reference to the decided cases.

Q.2. Explain the rules regarding the measure of damages in case of breach of a contract with reference

to Hadleyvs. Baxendale.

Q.3. Discuss with illustrations the principles governing compensation for loss or damages caused by

breach of contract.

Q.4. Explain briefly the Principles for the assessment of damages for breach of contract.

Q.5. Discuss the remedies available to the injured party in case of breach of contract.

Q.6. What do you understand by damages? What are the various kinds of damages? How do damages

differ from compensation?

Q.7. Distinguish between the liquidated damages and penalty. Does Indian law recognize this

distinction?

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SUGGESTED READINGS

a. Mulla D.F., Indian Contract Act

b. Dr. Avtar Singh, Indian Contract Act

c. S.K. Kapoor, Contract-I

a. V. D. Kulshrestha, Law of Contract

b. Anson, Principles of the English Law of Contract

c. R.K. Bangia, Indian Contract Act

d. Cheshire & Fifoot, Law of Contract

e. Bare Act, Indian Contract Act, 1872

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