THE LAW OF CONTRACT : GENERAL PRINCIPLES

As a result of increasing complexities of business environment, innumerable contracts are entered into by
the parties in the usual course of carrying on their business. ‘Contract’ is the most usual method of
defining the ‘give and take’ rights and duties in a business transaction. This branch of Private law is
different from other branches of law in a very important respect. It does not prescribe so many rights and
duties, which the law will protect or enforce; it contains a number of limiting principles subject to which
the parties may create rights and duties for themselves.

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

All agreements are not studied under the CONTRACT ACT 2056 (2000), as some of those are not
contracts. Only those agreements, which are enforceable at law, are contracts. This unit refers to the
essentials of a legally enforceable agreement or contract. It sets out rules for the offer and acceptance and
revocation thereof. It states the circumstances when an agreement is voidable or enforceable by one party
only, and when the agreements are void, i.e. not enforceable at all.
1.1 WHAT IS CONTRACT?
Section 2(a) of the Act defines the term contract as “an agreement enforceable by law concluded between
two or more parties for performing or not performing any work.”

The Supreme Court of Nepal1 has defined the term contract as, “an agreement of two or more parties with
conditions”

From the above, it is obvious that an agreement is a promise or a set of reciprocal promises, that a
promise is the acceptance of a proposal. There must be an offer or a proposal which the other person
accepts and when he accepts he knows that the acceptance will give rise to a binding contract. But an
agreement to be worthy of being enforceable by law before it is called ‘contract’, there arises an
important question :
On what conditions does the Contract Act recognise the “agreement” of the parties (which contains a
promise) as a “contract”?
Basis of difference Agreeement Contract
1. Creation The union of offer and acceptance The union of agreement and its
creates agreement enforceability creates contract
2. Legal Obligation Agreement alone does not create Contract alone creates legal obligation
legal obligation to perform to perform
3. Binding nature Agreement is not binding on the Contract is binding on the parties to it
parties to it.
4. Scope Agreement is a vague term Contract is a limited term
5. Inclusion Agreement does not include Contract includes agreement
contract

Essential elements must co-exist in order to make a valid contract:

1. Proper offer and proper acceptance with intention to create legal relationship
2. Lawful consideration
3. Capacity to contract
4. Free consent
5. Lawful agreement (Lawful object)
6. Plurality of parties
7. Clarity and certainty
8. Possibility of performance
9. Formalities
1. Proper offer and proper acceptance with intention to create legal relationship

1
Bijaya Kumar Basnyat V. Mayor Keshav Sthapit of Kathmandu Metropolitan al, NKP (2059) p. 37
1
 In the first instance, the parties ought to have the intention to create a legal obligation between
them through the form of offer and acceptance.
They should have intention to impose duty on the promisor to fulfil the promise and bestow a
right on the promisee to claim its fulfilment.
It must not be merely a moral one but it must be legal.

There must be a lawful offer and a lawful acceptance of an offer in an agreement. Such offer and
acceptance must be also be definite. An acceptance to be valid must be absolute and
unconditional. Offer and acceptance must be consensus ad idem. It means that both the parties
must agree upon the same thing in the same sense.
Example
A husband agreed to pay £30 to his wife every month while he was abroad. As he failed to pay
the promised amount, his wife sued him for the recovery of the amount.
Held: She could not recover as it was a social agreement and the parties did not intend to create
any legal relations [Balfour v. Balfour (1919)2 K.B.571].

There was an agreement between Rose Company and Crompton Company, where of the former
were appointed selling agents in North America for the latter. One of the clauses included in the
agreement was: “This arrangement is not... a formal or legal agreement and shall not be subject
to legal jurisdiction in the law courts”.
Held that: This agreement was not a legally binding contract as the parties intended not to have
legal consequences [Rose and Frank Co. v. J.R. Crompton and Bros. Ltd. (1925) A.C. 445].

An agreement contained a clause that it “shall not give rise to any legal relationships, or be
legally enforceable, but binding in honour only”.
Held: The agreement did not give rise to legal relations and, therefore, was not a contract. [ Jones
v. Vernon’s Pools Ltd. (1938) 2 All E.R. 626].

An aged couple (C and his wife) held out a promise by correspondence to their niece and her
husband (Mrs. and Mr. P.) that C would leave them a portion of his estate in his will, if Mrs. and
Mr. P would sell their cottage and come to live with the aged couple and to share the household
and other expenses. The young couple sold their cottage and started living with the aged couple.
But the two couples subsequently quaralled and the aged couple repudiated the agreement by
requiring the young couple to stay somewhere else. The young couple filed a suit against the
aged couple for the breach of promise.
Held: That there was intention to create legal relations and the young couple could recover
damages [Parker v. Clark (1960) 1 W.L.R. 286].
It may be noted that if there is clear manifestation of intention to create legal relationship
between the parties, a social or domestic agreement also amount to a contract.

2. Lawful consideration

The second aspect to look for is the presence of “lawful consideration” which is an essential
element of a valid contract. Consideration is a technical word meaning thereby quid pro quo i.e.
something in return.
It must result in benefit to one party and detriment to the other party or a detriment to both.

Example : A agrees to sell his books to B for Rs. 100, B’s promise to pay Rs. 100 is the
consideration for A’s promise to sell his books and A’s promise to sell the books is the
consideration for B’s promise to pay Rs. 100.

If the two essential elements are there we can say that there is a contract which prima-facie will
hold good; or at least we can say that there is an existence of contract, although some more
necessary elements of validity may be wanting.
3. Capacity to contract
2
 Thirdly, the parties to a contract must have capacity (legal ability) to make valid contract. In
every case there must be assent of the parties. The assent presupposes a free, fair, and serious
exercise of the reasoning faculty. If, therefore, either of the parties to an agreement is deprived of
the use of his understanding or if he be deemed by law not to have attained it, there can be no
such agreement which shall bind him.

Section 3 of the Contract Act, 2056 states that any person who has not completed the age of 16
years, or who is not of sound mind, or who is declared disqualified by law to make contract is
incompetent to contract.

4. Free consent
5 INDIAN CONTRACT ACT, 1872
The consent of the parties must be genuine. The term ‘consent’ means parties to a contract must
agree upon the same thing in the same sense, i.e. there should be consensus-adidem.
Consent is said to be not free when it is vitiated by coercion, undue influence, fraud,
misrepresentation or mistake. In such cases, the contract becomes voidable at the option of the
party whose consent is not free.

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

5. Lawful agreement (Lawful object)

. The agreement must not be one, which the law declares to be either illegal or void. A void
agreement is one, which is without any legal effects. Illegal agreement is an agreement expressly
or impliedly prohibited by law.
Example: Agreements in restraint of trade, marriage, legal proceedings etc. are void agreements.
E.g. Threats to commit murder or publishing defamatory statements or agreements which are
opposed to public policy are illegal in nature.

6. Plurality of parties

7. Clarity and certainty

The meaning of the agreement must be certain or capable of being made certain otherwisethe
agreement will not be enforceable at law.
For instance, A agrees to sell 10 metres of cloth. There is nothing whatever to show what type of
cloth was intended. The agreement is not enforceable for want of certainty of meaning. If, on the
other hand, the special description of the cloth is expressly stated, say Terrycot (80 : 20), the
agreement would be enforceable as there is no uncertainly as to its meaning.
However, an agreement to agree is not a concluded contract [Punit Beriwala v. Suva Sanyal AIR
1998 Cal. 44].

It may be noted that if, however, the terms of the agreement could be made certain from the
circumstances of the case, it will not be void.
Example: A, dealer of mustard oil, agrees to sell 100 litres of oil to B. This agreement amount to
a contract because the meaning of the agreement could be easily ascertained from the
circumstances of the case.

8. Possibility of performance
The terms of the agreement should be capable of performance. An agreement to do an act
impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by
magic. The agreement cannot be enforced.

9. Formalities
3
 A contract may be oral or in writing. If, however, a particular type of contract is required by law
to be in writing, it must comply with the necessary formalities as to writing, registration and
attestation, if necessary. If these legal formalities are not carried out, then the contract is not
enforceable at law.

In Nepal, chapter on Registration on Civil Code, 2020 prescribes that a contract to transfer of
immovable property by a party to another must be made in writing and registered in the Land
Revenue Office. However, as per Sec 25 of Contract Act 2056, the bailment of goods worth less
than Rs. 5,000 or less is possible without writing as well.

Similarly, Sec 88 of the Act has provided that if any specific procedure must be followed for
executing a contract or if any contract must be registered at any Government Office, it must be
done accordingly. Moreover, the Stamp duty Act, 2019 has made provision to affix ticket in the
loan transaction contract at the rate of Rs. 4 for the loan amount of Rs. 1,000. If not affixed, a
suit cannot be filed in the Court unless the ticket duty at rate of 5 times more ( i.e., Rs. 20 for the
loan of Rs. 1,000) is deposited in the Court.

Classification of contract

A. Classification according to validity or enforceability

Contracts may be classified according to their validity as valid, voidable, void contracts or
agreements, illegal, or unenforceable

1. Valid Contract
A contract to constitute a valid contract must have all the essential elements discussed
earlier. If one or more of these elements is/are missing, the contract is voidable, void, illegal
or unenforceable.

2. Voidable contract is one which may be repudiated at the will of one of the parties, but until
it is so repudiated it remains valid and binding. It is affected by a flaw (e.g., simple
misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these
defects enables the party aggrieved to take steps to repudiate the contract.
It shows that the consent of the party who has the discretion to repudiate it was not free.
Example
A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical
attendant to agree to pay B an unreasonable sum for his professional services. B employs
undue influence. A’s consent is not free; he can take steps to set the contract aside.

3. Void Contract
A contract becomes void when it ceases to be enforceable. A contract which is valid at the
time of formation but becomes void or ceases to be enforceable subsequently is known as
void contract. Basically, the change in law or circumstance makes a genuine contract to be
void. It is not appropriate to avoid a void contract from the very beginning because it is valid
at the initial stage.

Examples
(1) A and B contract to marry each other. Before the time fixed for the marriage, A goes
mad. The contract becomes void.
(2) A contracts to take indigo for B to 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.
In the above two examples, the contracts were valid at the time of formation. They became
void afterwards.
In example (1) the contract became void by subsequent impossibility.
In example (2) the contract became void by subsequent illegality.*
4. Void Agreement
4
 An agreement which is not enforceable by either of the parties to it is void.
Such an agreement is without any legal effect ab initio (from the very beginning). Under the
law, an agreement with a minor is void.
It is misnomer to use ‘a void contract’ as originally entered into. In fact, in that case
there is no contract at all. It may be called a void agreement. However, a contract originally
valid may become void later.

Basis Voidable contract Void Agreement / Contract

Free consent It is void due to lacking of free consent It is void not because of inclusion or
exclusion of free consent, but by other
reasons

Validity It becomes void only when the Court It becomes void from the formation in case
declares it to be void of agreement and void subsequently in
case of contract

Third Party’s Third party gets right over the goods Third party cannot have rights over the
right under voidable contract if he has goods acquired under void agreement /
purchased goods before the contract contract
was avoided.

Enforceability It is enforceable if the affected party It is not enforceable at all in case of

does not take action agreement and enforceable if it is valid
contract before declaring void.

Damages Aggrieved party can have damages No recovery of damages is possible in

from another party. agreement by reason of illegality.
However, amount recovery may be
possible in a void contract

Lapse of Lapse of reasonable time to take action Lapse of reasonable time does not have
reasonable time makes the contract valid where no any significance because a void agreement
action is taken is void from the very beginning.

Nature A contract suffered by coercion,, undue An agreement in restraint of marriage or

influence, fraud etc is the nature of a possessing facility etc. could be the
voidable contract examples of void agreement

Basis Void Agreement Void Contract

Validity It is void ab-initio It becomes void later on due to illegality or
impossibility

Knowledge The parties to a void agreement may No knowledge of this contract is to either
of parties know the position of void agreement party at the formation of contract. Such
from the very beginning contract becomes void subsequently

5. Illegal Agreement

An illegal agreement is one the consideration or object of which

i. is forbidden by law; or
ii. defeats the provisions of any law; or
iii. is fraudulent; or
iv. involves or implies injury to the person or property of another; or

5
 v. the court regards it as immoral, or opposed to public policy.

Examples
1) A, B and C enter into an agreement for the division among them of gains acquired or to be
acquired, by them by fraud. The agreement is illegal.
2) A promises to obtain for B an employment in the public service, and B promises to pay Rs.
1,000 to A. The agreement is illegal.
Every agreement of which the object or consideration is unlawful is not only void as between
immediate parties but also taints the collateral transactions with illegality. In Bombay, the
wagering agreements have been declared unlawful by statute.
Example
A bets with B in Bombay and loses; makes a request to C for a loan, who pays B in settlement of
A’s losses. C cannot recover from A because this is money paid “under” or “in respect of a
wagering transaction which is illegal in Bombay.

Basis Illegal Agreement Void agreement

Area It is a component of void agreement. It is not a component of that illegal
This is why all illegal agreements are agreement. This is why it is said all void
also void agreements agreements are not illegal agreements

Collateral All the collateral agreements to an Collateral agreement of a void agreement

agreement illegal agreement are also void ( which is not void due to illegality) is not
void.

Punishment It is punishable by law It may or may not be punishable by law

Compensation Benefited party is not obliged to return The party taking benefit may be bound by
advantage or compensate for any Court to return such benefit or compensation
advantage taken from another party for it under void agreement
under illegal agreement because no
polluted hand can touch pure fountain
of justice

Legal help No legal help is made available in Legal help may be available
favour of party

6. Unenforceable contract
An unenforceable contract is neither void nor voidable, but it cannot be enforced in the court
because it lacks some item of evidence such as writing, registration or stamping.
For instance, an agreement which is required to be stamped will be unenforceable if the same is
not stamped at all or is under-stamped. In such a case, if the stamp is required merely for revenue
purposes, as in the case of a receipt for payment of cash, the required stamp may be affixed on
payment of penalty and the defect is then cured and the contract becomes enforceable. If,
however, the technical defect cannot be cured the contract remains unenforceable, e.g., in the
case of an unstamped bill of exchange or promissory note.

Basis Illegal Agreement Unenforceable Contract

Area All illegal agreements are also All unenforceable agreements do not
unenforceable necessarily be the illegal agreements
Defects It includes substantial kind of defect that It includes procedural or minor technical
violates law of the land defect making agreement unenforceable
Collateral A collateral agreement to illegal A collateral agreement to unenforceable
Agreement agreement is also void agreement is not void
Enforceability An illegal agreement never gets An enforceability agreement is enforceable

6
 enforceability as soon as the technical defect involved is
removed from it.
Punishment Parties to illegal agreement may get Parties to unenforceable agreement do not
punishment get punishment
B. Classification according to mode of formation

Express contract
The terms of a contract may be stated in words (written or spoken).

Implied contract
Terms of a contract may be inferred from the conduct of the parties or from the circumstances of the
case.
Example
If A enters into a bus for going to his destination and takes a seat, the law will imply a contract from the
very nature of the circumstances, and the commuter will be obliged to pay for the journey.

Quasi-contracts
We have seen that the essence of a valid contract is that it is based on agreement of the parties.
Sometimes, however, obligations are created by law (regardless of agreement) whereby an obligation is
imposed on a party and an action is allowed to be brought by another party.
These obligations are known as Quasi-contracts.

It does not consider general formalities of law like offer, acceptance, free consent etc. It is the creation of
law. Exceptionally, it is recognized by law without consideration and other essentials. In fact, a quasi-
contract on based on the principle of equity that “ a person shall not be allowed to enrich himself unjustly
at the expense of another.”

Examples
1) A supplies B, a minor, with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
2) A supplies the wife and children of B, a minor, with necessaries suitable to their condition in life.
A is entitled to be reimbursed from B’s property.
3) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. B is bound
to pay A for them.
In all the above cases, the law implies a contract and a person who has got benefit is under an obligation
to reimburse the other.

E-commerce Contract
A contract of two or more parties by using internet network is called E-commerce contract. Cross-
country trade is made easier by e-commerce contract.

C. Classification according to performance

Another method of classifying contracts is in terms of the extent to which they have been performed.
Accordingly, contracts are:
(1) executed, and (2) executory or
(1) unilateral, and (2) bilateral.
An executed contract is one wholly performed. Nothing remains to be done in terms of the contract.

Example
A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.
An executory contract is one which is wholly unperformed, or in which there remains something further
to be done.
Example
On June 1, A agrees to buy a bicycle from B. The contract is to be performed on June 15.

7
The executory contract becomes an executed one when completely performed. For instance, in the above
example, if both A and B perform their obligations on June 15, the contract becomes executed. However,
if in terms of the contract performance of promise by one party is to precede performance by another
party then the contract is still executory, though it has been performed by one party.

Example
On June 1, A agrees to buy a bicycle from B. B has to deliver the bicycle on June 15 and A has to pay
price on July 1. B delivers the bicycle on June 15. The contract is executory as something remains to be
done in terms of the contract.

Partly Executed and Partly Executory Contract

A contract where one of the parties to the contract has fulfilled his obligation and the other party has still
to perform his obligation
Example: A offers B to sell his car for Rs. 500,000 on credit of 2 months and B accepts A’s offer. A
delivers the car to B. The contract is executed as to A and executor as to B.

A Unilateral Contract is one wherein at the time the contract is concluded there is an obligation to
perform on the part of one party only.
Example
A makes payment for bus fare for his journey from Bombay to Pune. He has performed his promise. It is
now for the transport company to perform the promise.

A Bilateral Contract is one wherein there is an obligation on the part of both to do or to refrain from
doing a particular thing. In this sense, Bilateral contracts are similar to executory contracts.

An important corollary can be deduced from the distinction between Executed and Executory Contracts
and between Unilateral and Bilateral contracts.
It is that a contract is a contract from the time it is made and not from the time its performance is due.
The performance of the contract can be made at the time when the contract is made or it can be
postponed also. See examples above under Executory Contract.

Classification of Contracts on the basis of creation of obligation

General contract
A contract creating rights and obligations immediately to the parties of contract
This kind of contract is not subject to any future condition. By entering such contract the parties pursue
rights and duties from the very moment of accepting it.
Example: A promises to sell a house to B and B agrees to pay Rs. 1,000,000 to A. Duration to perform
contract is of 35 days. Both A & B are bound to comply with this contract from the moment of accepting
the contract.

Contingent contract
That kind of contractual obligation of which arises only when something happens or does not happen in
future. Hence, it is a contract, which does not give rights and obligations to the concerned parties from
the formation of contract but affects the parties afterwards.
Example: An insurance contract by which, A is assured by an insurance company to provide Rs. 50,000
if the motorcycle is lost by him. To loose motorcycle is a must to begin rights and duties of the parties.

Classification of Contracts in the English Law

In English Law, contracts are classified into (a) Formal Contracts and (b) Simple Contracts.
Formal contracts are those whose validity or legal force is based upon form alone.

Formal Contracts can be either (a) contracts of record or (b) contracts under seal or by (deed or speciality
contracts. No consideration is necessary in the case of Formal Contracts.

8
Contracts of Record are not contracts in the real sense as the consensus-ad-idem is lacking. They are
only obligations imposed by the court upon a party to do or refrain from doing something.

A Contract of Record is either (i) a judgement of a court or (ii) recognizance. An obligation imposed by
the judgement of a court and entered upon its records is often called a Contract of Record.

Example
A is indebted to B for Rs. 500 under a contract, A fails to pay. B sues A and gets a judgement in his
favour. The previous right of B to obtain Rs. 500 from A is replaced by the judgement in his favour and
execution may be levied upon A to enforce payment, if need be.
A Recognizance is a written acknowledgement to the crown by a criminal that on default by him to
appear in the court or to keep peace or to be of good conduct, he is bound to pay to the crown a certain
sum of money. This is also an obligation imposed upon him by the court.

A contract with the following characteristics is known as a contract under seal or by deed or a contract
of speciality;
(i) It is in writing,
(ii) It is signed,
(iii) It is sealed, and
(iv) It is delivered by the parties to the contract.

These contracts are used in English Law for various transactions such as conveyances of land, a lease of
property for more than 3 years, contracts made by corporations, contracts made without consideration.

All contracts other than the formal contracts are called simple or parol contracts. They may be made: (i)
orally, (ii) in writing, or (iii) implied by conduct.

9
Offer and acceptance

An offer is synonymous with proposal.

The offeror or proposer expresses his willingness “to do” or “not to do” (i.e., abstain from doing)
something with a view to obtain acceptance of the other party to such act or abstinence. Thus, there may
be “positive” or “negative” acts which the proposer is willing to do.

Examples
(1) A offers to sell his book to B. A is making an offer to do something, i.e., to sell his book. It is a
positive act on the part of the proposer.
(2) A offers not to file a suit against B, if the latter pays A the amount of Rs. 200 outstanding. Here
the act of A is a negative one, i.e., he is offering to abstain from filing a suit.

HOW AN OFFER IS MADE?

An offer can be made by an act in the following ways:
(a) by words (whether written or oral). The written offer can be made by letters, telegrams, telex
messages, advertisements, etc. The oral offer can be made either in person or over telephone.
(b) by conduct. The offer may be made by positive acts or signs so that the person acting or making
signs means to say or convey. However silence of a party can in no case amount to offer by
conduct.
An offer can also be made by a party by omission (to do something). This includes such conduct or
forbearance on one’s part that the other person takes it as his willingness or assent.

An offer implied from the conduct of the parties or from the circumstances of the case is known as
implied offer.
Examples
1) A proposes, by letter, to sell a house to B at a certain price. This is an offer by an act by written
words (i.e., letter). This is also an express offer.
2) A proposes, over telephone, to sell a house to B at a certain price. This is an offer by act (by oral
words). This is an express offer.
3) A owns a motor boat for taking people from Bombay to Goa. The boat is in the waters at the
Gateway of India. This is an offer by conduct to take passengers from Bombay to Goa. He need
not speak or call the passengers. The very fact that his motor boat is in the waters near Gateway
of India signifies his willingness to do an act with a view to obtaining the assent of the other.
This is an example of an implied offer.
4) A offers not to file a suit against B, if the latter pays A the amount of Rs. 200 outstanding. This is
an offer by abstinence or omission to do something.

Types of Offer

Positive and Negative Offer

If the offerer expresses his willingness to do something, it is called positive offer. E.g., A may offer to
construct a wall to provide privacy
If the offerer expresses his willingness not to do something, it is called negative offer. E.g., A may offer
not to construct a wall to allow free passage to light and air

Specific and General Offer

An offer can be made either:
1. to a definite person or a group of persons, or - Specific Offer
2. to the public at large - General Offer

In case of the specific offer, it may be accepted by that person or group of persons to whom the same has
been made. The general offer may be accepted by any one by complying with the terms of the offer.
The celebrated case of Carlill v. Carbolic Smoke Ball Co., (1813) 1 Q.B. 256 is an excellent example of
a general offer and is explained below.

10
Examples
(1) A offers to sell his house to B at a certain price. The offer has been made to a definite person, i.e.,
B. It is only B who can accept it [Boulton v. Jones (1857) 2H. and N. 564].*

(2) In Carbolic Smoke Ball Co.’s case (supra), the patent-medicine company advertised that it would
give a reward of £100 to anyone who contracted influenza after using the smoke balls of the
company for a certain period according to the printed directions. Mrs. Carlill purchased the
advertised smoke ball and contracted influenza in spite of using the smoke ball according to the
printed instructions. She claimed the reward of £100. The claim was resisted by the company on
the ground that offer was not made to her and that in any case she had not communicated her
acceptance of the offer. She filed a suit for the recovery of the reward.
Held: She could recover the reward as she had accepted the offer by complying with the terms of
the offer.

The general offer creates for the offeror liability in favour of any person who happens to fulfil the
conditions of the offer. It is not at all necessary for the offeree to be known to the offeror at the time
when the offer is made. He may be a stranger, but by complying with the conditions of the offer, he is
deemed to have accepted the offer.

When the offer at large is of continuing nature (as in the smoke ball case discussed above), it may be
accepted by a number of persons. When such an offer is accepted by a large number of persons, there
would be equal number of separate contracts.

Counter offer
An offer terminates by counter-offer by the offeree.
When in place of accepting the terms of an offer as they are, the offeree accepts the same subject to
certain condition or qualification, he is said to make a counter-offer. The following have been held to be
counter-offers:
(i) Where an offer to purchase a house with a condition that possession shall be given on a particular
day was accepted varying the date for possession [Routledge v. Grant (1828) 130 E.R. 920].
(ii) An offer to buy a property was accepted upon a condition that the buyer signed an agreement
which contained special terms as to payment of deposit, making out title completion date, the
agreement having been returned unsigned by the buyer [Jones v. Daniel (1894) 2 Ch. 332].
(iii) An offer to sell rice was accepted with an endorsement on the sold and bought note that yellow
and wet grain will not be accepted [All Shain v. Moothia Chetty, 2 Bom L.R. 556].
(iv) Where an acceptance of a proposal for insurance was accepted in all its terms subject to the
condition that there shall be no assurance till the first premium was paid [Sir Mohamed Yusuf v. S.
of S. for India 22 Bom. L.R. 872].

Cross Offers
Where two parties make identical offers to each other, in ignorance of each other’s offer, the offers are
known as cross-offers and neither of the two can be called an acceptance of the other and, therefore, there
is no contract.
Example
H wrote to T offering to sell him 800 tons of iron at 69s. per ton. On the same day T wrote to H offering
to buy 800 tons at 69s. Their letters crossed in the post. T contended that there was a good contract.
Held: that there was no contract. [Tinn v. Hoffman & Co. (1873) 29 L.T. Exa. 271.].

Standing, Open or Continuing offer

An offer is allowed to remain open for acceptance over a period of time is known as a standing, open or
continuing offer. Tender for supply of goods is a kind of standing offer.
A standing offer is in the nature of a tender. A Standing offer is the same thing as an invitation to an
offer. No contract is said to have been entered into unless and until an order is placed on the basis of
tender.

11
Example: A gives advertisement inviting tender on paper that a large quantity of certain goods during
2067-68 is required. B submits tender to supply those goods at a specific rate. After the tender is
approved it becomes a standing offer. Each order given by A amounts to an acceptance of the offer.

Essential requirements of a valid offer

An offer must have certain essentials in order to constitute it a valid offer. These are:
1. The offer must be made with a view to obtain acceptance.
2. The offer must be made with the intention of creating legal relations. [Balfour v. Balfour (1919)
2 K.B. 571.]**
3. The terms of offer must be definite, unambiguous and certain or capable of being made certain.
The terms of the offer must not be loose, vague or ambiguous.
Examples
(i) A offers to sell to B “a hundred quintals of oil”. There is nothing whatever to show what
kind of oil was intended. The offer is not capable of being accepted for want of certainty.
(ii) A who is a dealer in coconut oil only, offers to sell to B “one hundred quintals of oil”.
The nature of A’s trade affords an indication of the meaning of the words, and there is a
valid offer.
4. An offer must be distinguished from (a) a mere declaration of intention or (b) an invitation to
offer or to treat.

Offer vis-a-vis declaration of intention to offer

A person may make a statement without any intention of creating a binding obligation.
It may amount to a mere declaration of intention and not to a proposal.

Examples
(1) An auctioneer, N advertised that a sale of office furniture would take place at a particular
place. H travelled down about 100 Km to attend the sale but found the furniture was
withdrawn from the sale. H sued the auctioneer for his loss of time and expenses.
Held: N was not liable [Harris v. Lickerson. (1875) L.R.S. Q.B. 286.].

(2) A father wrote to his would-be son-in-law that his daughter would have a share of what
he would leave at the time of his death. At the time of death, the son-in-law staked his
claim in the property left by the deceased.
Held: The son-in-law’s claim must fail as there was no offer from his father-in-law
creating a binding obligation. It was just a declaration of intention and nothing more [Re
Ficus (1900) 1. Ch. 331.].

Offer vis-a-vis invitation to offer

An offer must be distinguished from invitation to offer. A prospectus issued by a college for
admission to various courses is not an offer. It is only an invitation to offer. A prospective
student by filling up an application form attached to the prospectus is making the offer.
An auctioneer, at the time of auction, invites offers from the would-be-bidders. He is not making
a proposal.
A display of goods with a price on them in a shop window is construed an invitation to offer and
not an offer to sell.
Example
In a departmental store, there is a self-service. The customers picking up articles and take them to
the cashier’s desk to pay. The customers action in picking up particular goods is an offer to buy.
As soon as the cashier accepts the payment a contract is entered into [Pharmaceutical Society of
Great Britain v. Boots Cash Chemists (Southern) Ltd. (1953) 1 Q.B. 401].

Likewise, prospectus issued by a company for subscription of its shares by the members of the
public, the price lists, catalogues and quotations are mere invitations to offer.
On the basis of the above, we may say that an offer is the final expression of willingness by the
offeror to be bound by his offer should the other party choose to accept it.

12
 Where a party, without expressing his final willingness, proposes certain terms on which he is
willing to negotiate, he does not make an offer, he only invites the other party to make an offer
on those terms. This is perhaps the basic distinction between an offer and an invitation to offer.

Mere answer to question is not same thing as an offer

In Harvey v. Facie, the plaintiffs (Harvey) telegraphed to the defendants (Facie), writing:
“Will you sell us Bumper Hall Pen?* Telegraph lowest cash price.” The defendants replied also
by a telegram, “Lowest price for Bumper Hall Pen £900”. The plaintiffs immediately sent their
last telegram stating: “We agree to buy Bumper Hall Pen for £900 asked by you”. The
defendants refused to sell the plot of land (Bumper Hall Pen) at that price. The plaintiffs
contention that by quoting their minimum price in response to the inquiry, the defendants had
made an offer to sell at that price, was turned down by the Judicial Committee. Their Lordship
pointed out that in their first telegram, the plaintiffs had asked two questions, first as to the
willingness to sell and second, as to the lowest price. They reserved their answer as to the
willingness to sell. Thus, they had made no offer. The last telegram of the plaintiffs was an offer
to buy, but that was never accepted by the defendants.

5. The offer must be communicated to the offeree. An offer must be communicated

to the offeree before it can be accepted. This is true of specific as well as general offer.
Example
G sent S, his servant, to trace his missing nephew. Subsequently, G announced a reward for
information relating to the boy. S, traced the boy in ignorance of the announcement regarding
reward and informed G. Later, when S came to know of the reward, he claimed it. Held, he was
not entitled to the reward on the ground that he could not accept the offer unless he had
knowledge of it [Lalman Shukla v. Gauri Dutt, II, A.L.J. 489].

6. The offer must not contain a term the non-compliance of which may be assumed to amount to
acceptance. Thus, the offeror cannot say that if the offeree does not accept the offer within 2
days, the offer would be deemed to have been accepted.
Example
A tells B ‘I offer to sell my dog to you for Rs. 45. If you do not send in your reply, I shall assume
that you have accepted my offer’. The offer is not a valid one.

7. A tender is an offer as it is in response to an invitation to offer. Tenders commonly arise where,

for example, a hospital invites offers to supply eatables or medicines. The persons filling up the
tenders are giving offers. However, a tender may be either:
(a) specific or definite; where the offer is to supply a definite quantity of goods, or
(b) standing; where the offer is to supply goods periodically or in accordance with the
requirements of the offeree.

In the case of a definite tender, the suppliers submit their offers for the supply of specified goods
and services. The offeree may accept any tender (generally the lowest one).
This will result in a contract.
Example
A invites tenders for the supply of 10 quintals of sugar. B, C, and D submit their tenders. B’s
tender is accepted. The contract is formed immediately the tender is accepted.
In the case of standing offers, the offeror gives an open offer whereby he offers to supply goods
or services as required by the offeree. A separate acceptance is made each time an order is
placed. Thus, there are as many contracts as are the acts of acceptance.

Example
The G.N. Railway Co. invited tenders for the supply of stores. W made a tender and the terms of
the tender were as follows: “To supply the company for 12 months with such quantities of
specified articles as the company may order from time to time. The company accepted the tender
and placed the orders. W executed the orders as placed from time to time but later refused to
execute a particular order.
13
 Held: W was bound to supply goods within the terms of the tender [Great Northern Railway v.
Witham (1873) L.R. 9 C.P. 16].

The Supreme Court of India in this regard has observed: As soon as an order was placed a
contract arose and until then there was no contract. Also each separate order and acceptance
constituted a different and distinct contract [Chatturbhuj Vithaldas v. Moreshover Parashram
AIR 1954 SC 326].

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

Revocation or Withdrawal of a tender

A tenderer can withdraw his tender before its final acceptance by a work or supply order. This
right of withdrawal shall not be affected even if there is a clause in the tender restricting his right
to withdraw. A tender will, however, be irrevocable where the tenderer has, on some
consideration, promised not to withdraw it or where there is a statutory prohibition against
withdrawal [The Secretary of State for India v. Bhaskar Krishnaji Samani AIR 1925 Bom 485].

Special terms in a contract

The special terms, forming part of the offer, must be duly brought to the notice of the offeree at the time
the offer is made. If it is not done, then there is no valid offer and if offer is accepted, and the contract is
formed, the offeree is not bound by the special terms which were not brought to his notice. The terms
may be brought to his notice either:
(a) by drawing his attention to them specifically, or
(b) by inferring that a man of ordinary prudence could find them by exercising ordinary intelligence.

(a) the examples of the first case are where certain conditions are written on the back of a ticket for a
journey or deposit of luggage in a cloak room and the words. “For conditions see back” are printed on the
face of it. In such a case, the person buying the ticket is bound by whatever conditions are written on the
back of the ticket whether he has read them or not.

Examples
(1) P, a passenger deposited a bag in the cloakroom at a Railway Station. The acknowledgement
receipt given to him bore, on the face of it, the words “See back”.
One of the conditions printed on the back limited the liability of the Railways for any package to
£10. The bag was lost, and P claimed £24. 10s, its value, pleading that he had not read the
conditions on the back of the receipt.
Held : P was bound by the conditions printed on the back as the company gave reasonable notice
on the face of the receipt as to the conditions at the back of the document [ Parker v. South
Eastern Rly. Co. (1877) 2 C.P.D. 416].

(2) A lady, L, the owner of a cafe, agreed to purchase a machine and signed the agreement without
reading its terms. There was an exemption clause excluding liability of the seller under certain
circumstances. The machine proved faulty and she purported to terminate the contract.
Held : That she could not do so, as the exemption clause protected the seller from the liability
[L’Estrange v. Grancob Ltd. (1934) 2 R.B. 394].

(3) T purchased a railway ticket, on the face of which the words: “For conditions see back” were
written. One of the conditions excluded liability for injury, however caused. T was illiterate and
could not read. She was injured and sued for damages.
Held : That the railway company had properly communicated the conditions to her who had
constructive notice of the conditions whether she read them or not. The company was not bound
to pay any damages [Thompson v. LM. and L. Rly. (1930) 1 KB. 417].

14
(b) The same rule holds good even where the conditions forming part of the offer are printed in a
language not understood by the acceptor provided his attention has been drawn to them in a reasonable
manner. In such a situation, it is his duty to ask for the translation, of the conditions and if he does not do
so, he will be presumed to have a constructive notice of the terms of the conditions [Mackillingan v.
Campagine de Massangeres Maritimes (1897) 6 Cal. 227 J].
If conditions limiting or defining the rights of the acceptor are not brought to his notice, then they will
not become part of the offer and he is not bound by them.

Example
A passenger was travelling with luggage from Dublin to Whitehaven on a ticket, on the back of which
there was a term which exempted the shipping company from liability for the loss of luggage. He never
looked at the back of the ticket and there was nothing on the face of it to draw his attention to the terms
on its back. He lost his luggage and sued for damages.
Held : He was entitled to damages as he was not bound by something which was not communicated to
him [Henderson v. Stevenson (1875) 2 H.L.S.C. 470].
Also, if the conditions are contained in a document which is delivered after the contract is complete, then
the offeree is not bound by them. Such a document is considered a non-contractual document as it is not
supposed to contain the conditions of the contract. For instance, if a tourist driving into Mussoorie,
receives a ticket upon paying toll-tax, he might reasonably assume that the object of the ticket was that
by producing it he might be free from paying toll at some other toll-tax barrier, and might put in his
pocket without reading the same. The ticket is just a receipt or a voucher.

Example
C hired a chair from the Municipal Council in order to sit on the beach. He paid the rent and received a
ticket from an attendant. On the back of the ticket, there was a clause exempting the Council “for any
accident or damage arising from hire of chairs.”
C sustained personal injuries as the chair broke down while he was sitting therein. He sued for damages.
Held : That the Council was liable [Chapleton v. Barry U.D.C. (1940) 1 K.B. 532].

From the illustrations given it may be concluded that whether the offeree will be bound by the special
conditions or not will depend on whether or not he had or could have had notice by exercising ordinary
diligence.

Detailed observations with respect to printed conditions on a receipt were made by the Bombay High
Court in R.S. Deboo v. M. V. Hindlekar, AIR 1995 Bom. 68. These observations are:
1. Terms and conditions printed on the reverse of a receipt issued by the owner of the laundry or
any other bailee do not necessarily form part of the contract of bailment in the absence of the
signature of the bailor (customer) on the document relied upon. The onus is on the bailee to
prove that the attention of the bailor was drawn to the special conditions before contract was
concluded and the bailor had consented to them as contractual terms.

2. It cannot be just assumed that the printed conditions appearing on the reverse of the receipt
automatically become contractual terms or part of the contract of bailment.

3. In certain situations, the receipt cannot be considered as a contractual document as such, it is a

mere acknowledgement of entrustment of certain articles.

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION

As mentioned earlier that in order to be a valid offer and acceptance.
(i) the offer must be communicated to the offeree, and
(ii) the acceptance must be communicated to the offeror.

Similarly, revocation of offer by the offeror to the offeree and revocation of the acceptance by the offeree
to the offeror must be communicated.
According to Section 4 of Indian Contract Act, the communication of a proposal is complete when it
comes to the knowledge of the person to whom it is made.
15
Almost the same provision has been stipulated in Section 7 (1) of Nepalese Contract Act with words that
the communication of a proposal shall be deemed to be completed when it comes to the knowledge of the
person to whom it is made.

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.
As per Sec 7 (2) of Contract Act, an acceptance is said to be complete when the offerer gets information
about it.

The completion of communication of acceptance has two aspects, viz:

(i) as against the proposer, and
(ii) as against the acceptor.

The communication of acceptance is complete:

(i) as against the proposer, when it is put into a course of transmission to him, so as to be out of the
power of the acceptor;
(ii) as against the acceptor, when it comes to the knowledge of the proposer.

Example
A proposes, by letter, to sell a house to B at a certain price. B accepts A’s proposal by a letter sent by
post. The communication of acceptance is complete:
(i) as against A, when the letter is posted by B;
(ii) as against B, when the letter is received by A.

In case of unilateral contract or an offer made to the world at large (public in general), acceptance is not
necessary to be communicated. This is because the offerer may think that performance of the act is better
than the communication of it. In such cases, fulfillment of obligation without communication of
acceptance of the offer is an adequate ground to create legal relationship between the parties. Where an
offer of reward is made for finding a lost purse, the offer is accepted by finding the purse. It is not
necessary before search in the purse to give notice of acceptance to the offerer.

The communication of a revocation (of an offer or an acceptance) is complete:

(1) as against the person who makes it, when it is put into a course of transmission to the person to whom
it is made, so as to be out of the power of the person who makes it.
(2) as against the person to whom it is made when it comes to his knowledge.

Example
A proposes by letter, to sell a house to B at a certain price. B accepts the proposal by a letter sent by post.
A revokes his proposal by telegram. The revocation is complete as against A, when the telegram is
despatched. It is complete as against B, when B receives it.
B revokes his acceptance by telegram. B’s revocation is complete as against B, when the telegram is
despatched, and as against A, when it reaches him.

Revocation of Proposal and Acceptance

A proposal may be revoked at any time before the communication of its acceptance is complete as
against the proposer, but not afterwards.
Also an acceptance may be revoked at any time before the communication of the acceptance
is complete as against the acceptor, but not afterwards.
Example
A proposes, by a letter sent by post, 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.
B may revoke his acceptance at any time before or at the moment when the letter communicating it
reaches A, but not afterwards.

16
Acceptance gets terminated in 2 ways
i. Revocation
ii. Lapse of acceptance
Although the offeree has accepted the offer made to him, he can withdraw his acceptance, this is known
as revocation of acceptance. Sometimes, the acceptance may also automatically lapse. When the
acceptance is revoked or it lapses, such acceptance amounts to no contract.
An acceptance is revoked or gets terminated in following ways:

1. By notice of revocation
In some cases, an acceptance cannot be revoked because, after accepting the offer it amounts to a
contract. However, acceptance can be revoked by giving its notice if the offeree so intends. But
the notice of revocation of acceptance must reach first to the offerer other than the notice of
acceptance.
Example: A offers by a letter dated 5 th July sent by post to sell his house to B of Jhapa for Rs.
500,000. B accepts the offer on 11th July at 11 am by letter sent by post. A receives the letter of
acceptance on 16th July at 2 pm. Here, A may revoke his acceptance at any time before 2 pm on
16th but not afterwards

2. Effects of two notices

After the letter of acceptance is delivered to the offerer if the offeree again sends the letter of
revocation thereof and the offerer gets both letters (notice) of acceptance and its revocation at the
same time, the acceptance is generally deemed to have revoked. Hence no contract is formed

3. By death / insanity [Sec 9e]

Even if the acceptance has been communicated to the offerer, acceptance is deemed to be
revoked if the offeree dies or becomes insane before he receives the notice of revocation.
However, the acceptance is not revoked, if the offeree dies or becomes insane only after
receiving the notice of acceptance by the offerer, it amounts to a valid contract to which the heir
of the deceased or insane offeree must be liable.

The English Law on communication of proposal, acceptance and revocation through post office differs in
some respects from the Indian Law. In England, post office is the agent of the party making the proposal
to take the proposal to the offeror and to bring back the acceptance from the offeree. But in India post
office is the agent of both offeror and offeree. Therefore, acceptance cannot be revoked in the English
Law. In this context Sir William Anson observes that “Acceptance to an offer is what a lighted match is
to a train of gun-powder. It produces something which cannot be recalled or undone.”

CONTRACTS OVER TELEPHONE OR TELEX

Persons may enter into contracts either:

(1) when they are face to face, or
(2) over telephone or telex, or
(3) through post office.

When persons are face to face, one person making the offer and the other accepting it, the contract comes
into existence immediately.
Similarly, in the case of conversation over telephone, the contract is formed as soon as the offer is
accepted but the offeree must make it sure that his acceptance is received by the offeror, otherwise there
will be no contract, as communication of acceptance is not complete.

17
Termination or Lapse of an Offer
An offer is made with a view to obtain assent thereto. As soon as the offer is accepted it becomes a
contract. But before it is accepted, it may lapse, or may be revoked. Also, the offeree may reject the offer.
In these cases, the offer will come to an end.

1. The offer lapses after stipulated or reasonable time. [Section 9 (a) (b) ]
The offer must be accepted by the offeree within the time mentioned in the offer and if no time is
mentioned, then within a reasonable time. The offer lapses after the time stipulated in the offer
expires if by that time offer has not been accepted. If no time is specified, then the offer lapses
within a reasonable time. What is a reasonable time is a question of fact and would depend upon
the circumstances of each case.

Example
M offered to purchase shares in a company by writing a letter on June 8 but the acceptance was
communicated in 23rd November that shares were allotted to him. M refused to accept the
allotment..
Held : That the offer lapsed as it was not accepted within a reasonable time [Ramsgate
Victoria Hotel Co. v. Montefiore (1860) L.R.I. Ex. 109].

2. An offer lapses by the death or insanity of the offerer or the offeree before acceptance.
Section 9 (c) provides that if offerer dies or loses his senses before receiving consent after
presenting the proposal, offer is ipso facto terminated.

Example:
A offers to sell his house to B for Rs. 500,000. A dies or looses senses before acceptance notice
is given to him. Here, either death or insanity of A puts an end to the offer in context of Nepal.
But before the offer is accepted by B, notice of death of A must be communicated to B,
otherwise the acceptance by B is valid in the context of India.

3. An offer terminates when rejected by the offeree

An offer is rejected, if the offeree
 sends notice of his rejection to the offerer or
 makes a counter offer
 accepts the offer subject to conditions or after lapse of time

4. An offer terminates when revoked by the offerer before acceptance Sec 8 (1)
To make a revocation effective revocation of offer must be communicated to the offeree.
Revocation of a specific offer may be communicated through any effective mode of
communication. But a general offer may be revoked through the same medium by which the
offer was published. [Sec 10 (4) ]

5. An offer terminates by not being accepted in the mode prescribed, or if no mode is prescribed, in
some usual and reasonable manner

6. A conditional offer terminates when the condition is not accepted by the offeree [Sec 9g]

Example
A proposes to B “I can sell my house to you for Rs. 12,000 provided you lease out your land to
me.” If B refuses to lease out the land, the offer would be terminated.

7. Effect of two notices

After sending notice of offer to the offeree if the offerer sends a letter of withdrawing the offer
and the offeree gets both those letters at the same time the contract is not generally deemed to
have been formed. The withdrawing notice gets validity over the offer.

18
8. Counter offer [Sec 9 f]
If the offeree accepts the offer varying any terms and conditions of the offer, it becomes a
counter offer. In such a case, an offer is terminated, i.e., to say a counter offer terminates the
original offer.

9. Subsequent Illegality
After the offer is made but before it is accepted by the offeree if the offered thing becomes
subsequently illegal, it lapses.

10. Destruction of subject matter

Where the subject matter of the offer is destroyed (burnt by fire and the like0 before the offer is
accepted by the offeree, it lapses.
Example: A offers to B to sell his house for Rs. 500,000. Before the acceptance by B, the house
is destroyed by fire. Here, A’s offer comes to termination.

19
ACCEPTANCE

As per Sec 2 (c) “Acceptance” means the consent given by the person to whom a proposal has been
presented in the same meaning of that offer
Thus, acceptance is the act of giving consent to the proposal. A proposal when accepted becomes a
contract.

Acceptance How Made?

As mentioned above, the offeree is deemed to have given his acceptance when he gives his assent to the
proposal. The assent may be express or implied.
It is express when the acceptance has been signified either in writing, or by word of mouth, or by
performance of some required act. The first two kinds of acceptance are self-explanatory. Acceptance by
performing the required act is exemplified in the case of Carlill v. Carbolic Smoke Ball Co.

Examples
(1) A trader receives an order from a customer and executes the order by sending the goods. The
customer’s order for goods constitutes the offer which was accepted by the trader by sending the
goods. It is a case of acceptance by conduct. Here the trader is accepting the offer by the
performance of the act.

(2) A loses his dog and announces a reward of Rs. 50 to anyone who brings his dog to him. B need not
convey his acceptance of the general offer. If he finds the dog and gives it to A, he is entitled to the
reward as he accepted the offer by doing the required act.

Acceptance is implied when it is to be gathered from the surrounding circumstances or the conduct of the
parties.

Examples
(1) A enters into a bus for going to his destination and takes a seat. From the very nature of the
circumstance, the law will imply acceptance on the part of A.
(2) Parker v. Clark (1960) 1 W.L.R. 286.
(3) A’s scooter goes out of order and he was stranded on a lonely road. B, who was standing nearby,
starts correcting the fault. A allows B to do the same. From the nature of the circumstances, A has
given his acceptance to the offer by B.

Who can Accept?

In the case of a specific offer, it can be accepted only by that person to whom it is made.
The rule of law is that if A wants to enter into a contract with B, then C cannot substitute himself for B
without A’s consent.

Example
Boulton v. Jones. The facts of this case were as follows: B, who was a manager with X, purchased his
business. J, to whom, X owed a debt, placed an order with X for the supply of certain goods. B supplied
the goods even though the order was not addressed to him. J refused to pay B for the goods because he,
by entering into contract with X, intended to set-off his debt against X.
Held : The offer was made to X and it was not in the power of B to have accepted the same.
In the case of a general offer, it can be accepted by anyone by complying with the terms of the offer.
Example: Carlill v. Carbolic Smoke Ball Co.

20
ESSENTIALS OF A VALID ACCEPTANCE
There are some legal rules which make the acceptance effective so as to give rise to a valid contract.
These are:

(1) Acceptance must be absolute and unqualified

An acceptance to be valid must be absolute and unqualified and according to the exact terms of
the offer. An acceptance with a variation, however slight, is no acceptance, and may amount to a
mere counter offer which the original offeror may or may not accept.

Examples
(1) A offers to sell his house to B for Rs. 1,000. B replies, “I can pay Rs. 800 for it.”
The offer of A is rejected by B as the acceptance is not unqualified. However, B
subsequently changes his mind and is prepared to pay Rs. 1,000. This will also be treated
as a counter offer and it is up to A whether to accept the same or not
[Union of India v. Babulal, A.I.R. 1968 Bombay 294].

(2) M offered to sell land to N for £280. N replied purporting to accept and enclosed £80,
promising to pay the balance of £200 by monthly instalments of £50 each.
Held : That N could not enforce acceptance because his acceptance was not an
unqualified one [Neale v. Merrett (1930) W.N. 189].

(3) A offers to sell his house to B for Rs. 10,000. B replies, “I am prepared to buy your
house for Rs. 10,000 provided you purchase my 1980 model Ambassador Car for Rs.
60,000.” There is no acceptance on the part of B.
However, a mere variation in the language which does not involve any difference in
substance would not make the acceptance ineffective [Heyworth v. Knight (1864) 144
E.R. 120, 142 R.R. 855].

Also, if some conditions are implied as a part of the contract, and the offeree accepts the
offer subject to those conditions, the acceptance will be treated as valid.
Example
A offers to sell his house to B, and B agrees to purchase it subject to the title being
approved by B’s solicitor. The acceptance by B is absolute and unqualified as it is
presumed that A has a title to the property and it was not necessary for A to mention
anything about the title.

Further, an offeree may accept an offer “subject to contract” or “subject to formal contract” or “subject to
contract to be approved by solicitors.” The significance of these words is that the parties do not intend to
be bound, and are not bound, until a formal contract is prepared and signed by them. The acceptor may
agree to all the terms of a proposal and yet decline to be bound until a formal agreement is drawn up.

Examples

(1) C accepted E’s offer to sell nursery for £4,000, subject to a proper contract to be prepared by the
vendor’s solicitors. A contract was prepared by C’s solicitors and approved by E’s solicitors, but
E refused to sign it.
Held : That there was no contract as the agreement was only conditional. [Chillingworth v. Esche
(1924) 1 Ch. 97].

(2) E bought a house from B “subject to a contract.” The terms of the formal contract were agreed,
and each party signed his part. E posted his part but B did not post his part as he changed his
mind in the meantime.
Held : That there was no binding contract between the parties [Eccles v. Bryant (1948) Ch. 93].
In the first example, one of the parties did not sign the contract. In the second example, separate
parts duly signed by the parties were not exchanged. In both the cases, there was no binding
contract.
21
(2) Acceptance must be communicated to the offeror
The communication of acceptance may be express or implied. A mere mental acceptance
is no acceptance. A mere mental acceptance means that the offeree is assenting to an offer in his
mind only and has not communicated it to the offeror.
Example
B, a supplier, sent a draft agreement relating to the supply of Coal and Coke to the manager of a
railway company for his acceptance. The manager wrote the word “approved” on the same and
put the draft in the drawer of his table intending to send it to the company’s solicitors for a
formal contract to be drawn up. By an oversight, the draft agreement remained in the drawer.
Held : That there was no contract as the manager had not communicated his acceptance to the
proposer.
The acceptance of an offer cannot be implied from the silence of the offeree or his failure to answer.
Example
F offered by letter to buy his nephew’s horse for £30, saying: “If I hear no more about it, I shall consider
the horse is mine at £30.” The nephew did not reply at all, but he told an auctioneer who was selling his
horses not to sell that particular horse as he had sold it to his uncle. By mistake, the auctioneer sold the
horse. F sued the auctioneer for conversion. Held, F could not succeed as his nephew had not
communicated acceptance and there was no contract [Felthouse v. Bindley (1862) 11 C.B. (N.S.) 869].
However if the offeree has by his previous conduct indicated that his silence means that he accepts, then
the acceptance of the offer can be implied from the silence of the offeree.
Further, in the case of a general offer, it is not necessary to communicate the acceptance if it is made by
acting upon the terms or the offer [Carlill v. Carbolic Smoke Ball Co.*].

(3) Acceptance must be according to the mode prescribed

Where the offerer prescribes a particular mode of acceptance, then the acceptor should follow
that mode. In case no mode of acceptance is prescribed by the proposer, then the acceptance must
be according to some usual and reasonable mode.
If the proposer prescribed 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.
Examples
(1) A sends an offer to B through post in the usual course. B should make the acceptance in
the “usual and reasonable manner” as no mode of acceptance is prescribed. He may
accept the offer by sending a letter, through post, in the ordinary course, within a
reasonable time.
(2) A sends an offer to B through post in the usual course and asks for an acceptance by
wire. B should accept the order by wire. However, if B accepts the offer by a letter, then
A may insist that the acceptance should be in the prescribed mode. But if the proposer
does not insist within a reasonable time then the proposer is bound by the acceptance,
though not made in the prescribed mode.
(4) The acceptance must be given within the time specified, if any, otherwise it must be given within
a reasonable time. What is a reasonable time is a question of fact and would depend upon the
circumstances of each case.
Example Ramsgate Victoria Hotel Co., v. Montefiore (1866) L.R.I. Ex. 109**.
(5) The acceptance must be in response to offer. There can be no acceptance without offer.
Acceptance cannot precede offer. For instance, no allotment of shares in a company can be made
unless the allottee has applied for them beforehand.
(6) The acceptance must be made before the offer lapses or is terminated, revoked or withdrawn. If
the offer lapses, then there is nothing to accept.
(7) Acceptance can be given by the person to whom the offer is made. However, in the case of a
general offer, acceptance can be given by any member of the public.

22
Agreement to Agree in Future
Law does not allow making of an agreement to agree in the future. The parties must agree on terms of the
agreement. The terms of the agreement must be either definite or capable of being made definite without
further agreement of the parties.

Examples
(1) A, an actress was engaged for a provincial tour. The agreement provided that if the party went to
London, A would be engaged at a ‘salary to be mutually arranged between us’.
Held : That there was no contract as the terms were not definite and were incapable of being
made definite without further agreement of the parties.
[Lofus v. Roberts, (1902) 18 T.L.R. 532].

(2) F sold part of his land to a motor company subject to a condition that the company should buy all
their petrol from F ‘at a price to be agreed by the parties in writing and from time to time.’ The
agreement also provided that dispute, if any, was to be submitted to arbitration. The price was
never agreed and the company refused to buy the petrol.
Held : That there was a binding contract. The agreement provided the method by which the price
could be ascertained. The terms of the agreement were definite and the parties did not agree to
settle the terms in future by their mutual consent
[Foley v. Classique Coaches Ltd. (1934) 2 K.B.I].

Essentials of a Valid Acceptance

1. Acceptance must be absolute and unqualified.
2. It must be communicated.
3. It must be according to the mode prescribed.
4. It must be given within the time specified or within reasonable time.
5. It must be in response to offer.
6. It must be made before the offer lapses.
7. It must be given by the person to whom the offer is made.

23
Consideration

In simplest terms, consideration is what a promisor demands as the price for his promise. Sir Frederick
Pollock defines consideration as “an act or forbearance of one party or the promise thereof is the price for
which the promise of the other is bought and the promise thus given for value is enforceable.”
In Currie v. Misa (1875) L.R. 10 Ex. 162, consideration was termed as “A valuable consideration in the
sense of the law may consist either in some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”
From the foregoing definitions it is clearly brought out that the term ‘consideration’ is used in the sense
of ‘quid-pro-quo’ which means ‘something in return.’ This ‘something’ may be some benefit, right,
interest or profit or it may also be some forbearance, detriment, loss or responsibility upon the other
party.

As per Sec 2 (c) of Nepalese Contract Act, 2056 'Consideration' means the promise made to do or not to
do any work in return of doing or not doing of any work mentioned in the proposal.
Examples
(1) A agrees to sell his house to B for Rs. 10,000. Here B’s promise to pay the sum of Rs. 10,000 is
consideration for A’s promise to sell the house; and A’s promise to sell the house is the
consideration for B’s promise to pay Rs. 10,000.
(2) A promises to pay B Rs. 1,000 at the end of 6 months, if C, who owes that sum to B, fails to pay
it. B promises to grant time to C, accordingly. Here the promise of each party is the consideration
for the promise of the other party.
(3) A promises, for a certain sum paid to him by B to make good to B the value of his ship if it is
wrecked on a certain voyage. Here A’s promise is the consideration for B’s payment and B’s
payment is the consideration for A’s promise.
(4) A promises to maintain B’s child and B promises to pay A Rs. 1,000 yearly for the purpose. Here
the promise of each party is the consideration for the promise of the other party.

Importance of Consideration
A promise without consideration is purely gratuitous and, however sacred and binding in honour it may
be, cannot create a legal obligation. An analysis of any contract will show that it consists of two clearly
separable parts: (i) the promise and (ii) the consideration for the promise.
A person who makes a promise to do or abstain from doing something usually does so as a return or
equivalent of some loss, damage, or inconvenience that may have been occasioned to the other party in
respect of the promise. The benefit so received and the loss, damage or inconvenience so caused is
regarded in law as the consideration for the promise.

Thus, generally speaking, a contract cannot be thought of without consideration.* “No consideration, no
contract’’ is the rule of the law. The following two cases prove this point:
1. Abdul Aziz v. Mazum Ali (1914) 36 All. 268.
In this case a person verbally promised the secretary of the Mosque Committee to subscribe Rs.
500 for rebuilding of a mosque. Later, he declined to pay the said amount.
Held : There was no consideration and hence the agreement was void.
2. Kedarnath v. Gori Mohamed (1886) 14 Cal. 64.
In this case the defendant had agreed to subscribe Rs. 100 towards the construction of a Town
Hall at Howrah. The Secretary, on the faith of the promise, called for plans and entrusted the
work to contractors and undertook liability to pay them.
Held : The agreement was enforceable being one supported by consideration in the form of a
detriment to the secretary who had undertaken a liability to the contractors on the faith of the
promise made by the defendant.

Thus, in one sentence we may sum up the importance of consideration:

Except in certain cases, a contract without consideration cannot be thought of and if made, it is devoid of
any legal obligation.

24
Rules as to Consideration

(1) Consideration must move at the desire of the promisor

Accordingly, an act done at the desire of a third party is not a consideration.
Example
D constructed a market at the instance of the Collector of a District. The occupants of the shops
in the said market promised to pay D a commission on articles sold through their shops.
Held : There was no consideration because the money was not spent by the plaintiff at the
request of the defendants, but voluntarily for a third person and thus the contract was void
[Durga Prasad v. Baldeo (1881) 3 All. 211].
Notice that although the promisee must give consideration at the desire of the promisor, it is not
necessary that the promisor himself should benefit by the consideration. The promise would be
valid even if the benefit accrued to a third party.
Example
A owed Rs. 20,000 to B. He (A) persuaded C to sign a promissory note in favour of B. C
promised B that he would pay the amount. On the faith of promise by C, B credited the amount
to A’s account.
Held : The discharge of A’s account was consideration for C’s promise [National Bank of Upper
India v. Bansidhar (1930) 5 Luck I].

(2) Consideration may move from the promisee or any other person
Although it is necessary that consideration must move at the desire of the promisor, it may be
supplied either by the promisee or any other person.
The case of Chinnayya v. Ramayya, 4 Mad. 137 is a good illustration on the point.
In that case, A, a lady, by a deed of gift transferred certain property to her daughter, with a
direction that the daughter should pay an annuity to A’s brother, as had been done by A. On the
same day the daughter executed a writing in favour of the brother, agreeing to pay the annuity.
Afterwards, she declined to fulfil her promise saying that no consideration had moved from her
uncle (A’s brother). The Court, however, held that the words ‘the promise or any other person’ in
Section 2(d) clearly show that the consideration need not necessarily move from the promisee, it
may move from any other person. Hence, A’s brother was entitled to maintain the suit.
Thus, in India, stranger to the consideration may maintain a suit. In England, however, the
position is different. A stranger to the consideration, in England, cannot maintain a suit.
Thus, if A pays £100 to B and in consideration of that payment B promises to deliver a necklace
to C the promise of B to C, cannot be enforced.

Stranger to the Contract v. Stranger to Consideration

A stranger to the consideration must, however, be distinguished from a stranger to a contract. A
stranger to a contract cannot sue in England as well as in India.
Examples
(1) A who is indebted to B sells his property to C and C promises to pay off the debt to B. In
case C fails to pay, B has no right to sue; C being stranger to the contract.
(2) Upon A’s marriage his father and father-in-law entered into a contract to contribute a certain
sum of money to be given to A after his marriage. A’s father paid his contribution but his
father-in-law failed to pay.
Held : A could not sue his father-in-law since he (A) was a stranger to the contract
[Tweddle v. Atkinson (1861) 1 B. & S. 393].
Exceptions
To the above rule that a stranger to a contract cannot sue, there are the following exceptions:
1. In the case of trusts, the beneficiary may enforce the contract.
Thus, where a contract between X and Y is intended to secure benefit to Z as cestue que
trust. Z may sue in his own right to enforce the trust. In Khwaja Muhammad v. Hussaini
Begum (1910) 32 All 410, H sued her father-in-law K to recover Rs. 15,000 being the
arrears of allowance called Kharchi-i-Pan dan–Betel box expense, i.e., ‘Pinmoney’
payable to her by K under an agreement made between K and H’s father in
25
 consideration of H’s marriage to K’s son D. Both H and D were minors at the date of
marriage.
The Privy Council held the promise to be enforceable by H. Their Lordship observed
that in India where marriages are contracted for minors by parents and guardians, it
might occasion serious injustice if the Common Law doctrine of privity of contract was
applied.

2. On the same principle, the provision of marriage expenses of female members of a joint
Hindu family on a partition between male members entitles the female member to sue for
such expenses [Rakhmanbai v. Govind (1904), 6B.L.R.421].

3. In the case of an acknowledgement of liability or by past performance thereof; e.g. where

X receives money from Y for paying it to Z and X admits to Z the receipt of that amount
then X becomes the agent of Z and will be liable to pay the amount to him.

4. In the case of a family settlement the terms of the settlement are reduced into writing, the
members of the family who originally had not been parties to the settlement, may enforce
the agreement [Shuppu v. Subramaniam 33 Mad. 238].

5. In the case of assignment of a contract when the benefit under a contract has been
assigned, the assignee can enforce the contract [Kishan Lal Sadhu v. Prantila Bala Dasi
(1928,) Cal. 1315].

(3) Consideration need not be adequate

Adequacy of consideration is always the lookout of the promisor. Courts do not see whether
every person making the promise has recovered full return for the promise. Thus, if ‘A’ promises
to sell a house worth Rs. 80,000 for Rs. 20,000 only, the inadequacy of the price in itself shall
not render the transaction void. But where a party pleads coercion, undue influence or fraud,
inadequacy of consideration will also be a piece of evidence to be looked into.

A agrees to sell a horse worth Rs. 1,000 for Rs. 100. A denies that his consent to the agreement was
freely given. The inadequacy of consideration is a fact which the Court should take into account in
considering whether or not A’s consent was freely given.
Section 25 (Explanation 2) contains the above provisions. It reads,
“An agreement to which the consent of the party is freely given is not void merely because the
consideration is inadequate; but the inadequacy of the consideration may be taken into account by the
Court determining the question whether the consent of the promisor was freely given.’’

As per Sec 4 of Contract Act, 2056

The parties to contract, subject to this Act shall be free to choose the form and content of contract and to
determine consideration and its quantum, the terms and conditions of the contract and the nature of the
remedy in the event of its violation, as well as to determine the measures for resolving disputes under the
contract.

(4) Consideration must be real and competent

Consideration must be real. If it is illusory, e.g., if a man promises to discover treasure by magic,
the transaction is void.
The consideration must also be competent, that is, it must be something to which law attaches
some value. Thus, an agreement to do something which the promisor is already under a duty to
do, is void being without competent consideration.
Examples
(1) A promises to pay an existing debt punctually if, B, the creditor, gives him a discount.
The agreement is without consideration and the discount cannot be enforced.

(2) In Collins v. Godfrey (1831) 100 E.R. 1040, it was held that when a witness who has
received summons to appear at a trial, a promise to pay him anything beyond his
26
 expenses is void for want of consideration, because the witness was bound to appear and
give evidence.
But, a promise made to a stranger to perform an existing contract, is enforceable because the
promisor undertakes a new obligation upon himself which can be enforced by the stranger.

(5) Consideration must be legal

Illegal consideration renders a contract void.

Rules Regarding Consideration

1. Consideration must move at the desire of the promisor.
2. Consideration may move from the promisee or any other person, i.e., a stranger to consideration
may maintain a suit.
3. A stranger to the contract cannot maintain a suit.
4. Consideration need not be adequate.
5. Consideration must he real and competent.
6. Consideration must be legal.

Kinds of Consideration

1. Executed or Present
Consideration which moves simultaneously with the promise is called present consideration.
‘Cash Sales’ provide an excellent example of the present consideration.

2. Executory or Future
When the consideration is to move at a future date, it is called future or executory consideration.
It takes the form of a promise to be performed in the future.
Example
A promises B to deliver him 100 bags of wheat at the future date. B promises to pay for it on
delivery.

3. Past
A past consideration is something wholly done, forborne, or suffered before the making of the
agreement.
Example
A saves B’s life. B promises to pay A Rs. 1,000 out of gratitude. The consideration for B’s
promise is a past consideration, something done before making of the promise.
In India, past consideration is a good consideration.
The words “has done or abstained from doing’’ in Section 2 (d) are a recognition of the doctrine
of past consideration.
Example
‘A’, a minor was given the benefit of certain services by the plaintiff, who rendered those
services, not voluntarily but at the desire of ‘A’ and these services were continued even after
majority at the request of ‘A’ who subsequently promised to pay an annuity to the plaintiff, it
was held that the past consideration was a good consideration [Sindha v. Abraham (1895) 20
Bom. 755].
But under English Law past consideration is no consideration. Thus, if the above promise was made in
England, it could not have been enforceable.

Exceptions to the Rule “No Consideration No Contract”

The general rule of law is that an agreement without consideration is void. “A bargain without
consideration is a contradiction in terms and cannot exist.”* But there are a few exceptional cases where
a contract, even though without consideration, is enforceable. They are as follows:

1. An agreement made without consideration is valid if—

(a) it is expressed in writing, and
(b) it is registered (under the law for the time being in force for registration of documents), and
27
 (c) it is made on account of natural love and affection, and
(d) made between parties standing in a near relation to each other.
Examples
(1) An elder brother, on account of natural love and affection, promised to pay the debts of his
younger brother. The agreement was put to writing and was registered.
Held : The agreement was valid [Venkatswamy v. Rangaswamy (1903) 13 M.L.J. 428].
(2) A Mohammedan husband, by a registered agreement promised to pay his earnings to his
wife.
Held : The agreement, though without consideration, was valid [Poonoo Bibi v. Fyaz Buksh
(1874) Bom. L.R. 57].

Notice that for an agreement to be valid under this clause, the agreement must be the result of natural
love and affection and nearness of relation by itself does not necessarily import natural love and
affection.

Eg., A Hindu husband by a registered document, after referring to quarrels and disagreements
between himself and his wife, promised to pay his wife a sum of money for her maintenance and
separate residence, it was held that the promise was unenforceable [Raihikhy Dohee v. Bhootnath
(1900) 4. C.W.N. 488].

2. A promise made without consideration is valid if, “it is a promise to compensate wholly or in
part, a person who has already voluntarily done something for the promisor, or something which
the promisor was legally compellable to do” [Section 25 (2)].
Examples
1. A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a valid contract.
2. A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a valid
contract.

3. A promise to pay, wholly or in part a debt which is barred by the law of limitation can be
enforced if (a) it is in writing, and (b) is signed by the debtor or his authorised agent [Sec 25 (3)].

A debt barred by limitation cannot be recovered. Therefore, a promise to pay such a debt is,
strictly speaking, without any consideration. But as noted above, if a written promise is made to
repay, it is enforceable.
Example
A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written promise to
pay B Rs. 500 on account of the debt. This is a valid contract.
Notice that the above section [Section 25(3)] applies only when the promisor was liable himself
for the time-barred debt; the sub-section does not apply to the case of a promise to pay a time-
barred debt owing by a third party.
[Pestonji v. Meherbai, 30 Bom. L.R. 1407].

Further, Section 25 (3) would not apply unless the promise is to pay an ascertained sum. A
promise to pay what is due after taking accounts is not a promise within the meaning of Section
25(3) [Chowksi v. Chowksi, 8 Bom. 194].

4. Consideration is not necessary to effect bailment (Sec 148).

5. No consideration is required to create an agency (Sec 185). Notice, however, that if no

consideration has passed to the agent, he is only a gratuitous agent and is not bound to do the
work entrusted to him, although if he begins the work, he must do it to the satisfaction of his
principal.

6. The rule ‘no consideration no contract’ does not apply to gift actually made. [Explanation 1 to
Section 25].

28
 Even in Nepalese context, even though Nepalese Contract Act is silent, law of property on ‘Dan
basasko’ (i.e., of gift) of Civil code has recognized this rule under which a party can transfer his
property to other as a gift without any consideration. It means gift does not require any
consideration. Absence of consideration does not affect the validity of any gift already made.

Example: A transferred some property to B by a duly written and registered deed as a gift. This is
a contract.

7. Charity
If a person promises to contribute to charity and on the faith of the promised subscription, the
promise undertakes liability (detriment) to the extent not exceeding such subscription, the
contract shall be enforceable

KedarNath V. Gauri Mohamed, (1886) 14 Cal. 64

Some opinions have been emerging about the state of consideration

Lord Mansfield [In Pillans V. Van Mierop, 1765] has expressed his opinion to remove the consideration
from the requirement of contract.
In 1937, the Law Revision committee of England has suggested the Government to cancel the
consideration from the requirement of contract.
On its 13th Report, Indian Law Commission has recommended the Government to abrogate the
consideration from the essential of a contract.
Hence, the present trend is not in favour of consideration. Despite this criticism, consideration has still
secured room in legal provision. So, a contract should be made with consideration to get legal validity.

CAPACITY OF CONTRACT
[Sec 3 & 11]

We have mentioned earlier that one of the essentials of a valid agreement is that the parties to the
contract must be competent to contract (Section 10).

WHO ARE COMPETENT TO CONTRACT?

Section 11 provides that “Every person is competent to contract who is of the age of majority according
to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by
any law to which he is subject.” Thus, incapacity to contract may arise from: (i) minority, (ii) mental
incompetence, and (iii) status.

MINORITY
According to Section 3 of the Indian Majority Act, 1875, a minor is a person who has not completed 18
years of age. However, in the following two cases, a minor attains majority after 21 years of age:
1. Where a guardian of minor’s person or property has been appointed under the Guardians and Wards
Act, 1890, or
2. Where the superintendence of minor’s property is assumed by a Court of Wards.

MINORS’ CONTRACTS
The position of minors’ contracts is summed up as follows:
1. A contract with or by a minor is void and a minor, therefore, cannot, bind himself by a contract.
A minor is not competent to contract. In English Law, a minor’s contract, subject to certain
exceptions, is only voidable at the option of the minor.
In 1903 the Privy Council in the leading case of Mohiri Bibi v. Dharmodas Ghose (190, 30 Ca.
539).

29
 Held : That in India minor’s contracts are absolutely void and not merely voidable. The facts of
the case were:
Example
Dharmodas Ghose, a minor, entered into a contract for borrowing a sum of Rs. 20,000 out of
which the lender paid the minor a sum of Rs. 8,000. The minor executed mortgage of property in
favour of the lender. Subsequently, the minor sued for setting aside the mortgage. The Privy
Council had to ascertain the validity of the mortgage.

Under Section 7 of the Transfer of Property Act, every person competent to contract is competent
to mortgage. The Privy Council decided that Sections 10 and 11 of the Indian Contract Act make
the minor’s contract void. The mortgagee prayed for refund of Rs. 8,000 by the minor. The Privy
Council further held that as a minor’s contract is void, any money advanced to a minor cannot be
recovered.

2. A minor can be a promisee or a beneficiary

During his minority, a minor cannot bind himself by a contract, but there is nothing in the
Contract Act which prevents him from making the other party to the contract to be bound to the
minor. Thus, a minor is incapable of making a mortgage, or a promissory note, but he is not
incapable of becoming a mortgagee, a payee or endorsee. He can derive benefit under the
contract.

3. A minor’s agreement cannot be ratified by the minor on his attaining majority.

A minor cannot ratify the agreement on attaining the age of majority as the original agreement is
void ab-initio and, therefore, validity cannot be given to it later on.
Example
A, a minor makes a promissory note in favour of B. On attaining majority, he makes out a fresh
promissory note in lieu of the old one. Neither the original, nor the fresh promissory note is valid.
[Indran Ramaswamy v. Anthiappa Chettiar (1906) 16 M.L.J. 422.].

4. If a minor has received any benefit under a void contract, he cannot be asked to refund the same.
We have mentioned the facts of Mohiri Bibi’s case. Under that case, the lender could not recover
the money paid to the minor. Also the property mortgaged by the minor in favour of the lender
could not be sold by the latter for the realization of his loan.

5. A minor is always allowed to plead minority, and is not estopped to do so even where he had
procured a loan or entered into some other contract by falsely representing, that he was of full
age. Thus, a minor who has deceived the other party to the agreement by representing himself as
of full age is not prevented, from later asserting that he was a minor at the time he entered into
agreement.
Example
S, a minor, borrowed £400 from L, a moneylender, by fraudulently misrepresenting that he was
of full age. On default by S, L sued for return of £400, and damages for the tort of deceit.
Held : L could not recover £400, and his claim for damages also failed. The court did not grant
the relief; otherwise, it would have been an indirect way of enforcing a void contract. Even on
equitable grounds, the minor could not be asked to refund £400, as the money was not traceable
and the minor had already spent the same [Leslie v. Shiell (1914) 3 K.B. 607].

It is to be noted that if money could be traced then the court would have, on equitable grounds,
asked the minor for restitution, as minor does not have a liberty to cheat. In the case of a
fraudulent misrepresentation of his age by the minor, inducing the other party to enter into a
contract the court may award compensation to that other party under sections 30 and 33 of the
Specific Relief Act 1963.

Example
A minor fraudulently mortgaged and sold certain properties. On the cancellation of the
agreement at the instance of the minor, the lender and purchaser were awarded compensation.
30
 The lender and purchaser did not know about the fact that the seller was a minor. In fact, the
minor fraudulently represented that he was of full age.
6. A minor cannot be a partner in a partnership firm
A minor cannot become a partner in the firm. But he may be admitted to the benefits of an
already existing firm with consent of the other partners and with the agreement executed through
his lawful guardian. In other words, the minor can share the profits but not share losses. He does
not become personally liable for any obligations of the firm. He is liable only to the extent of
money invested by him when he becomes a beneficiary of partner on behalf of it.

7. A minor’s estate is liable to a person who supplies necessaries of life to a minor, or to one whom
the minor is legally bound to support according to his station in life. This obligation is cast on the
minor not on the basis of any contract but on the basis of an obligation resembling a contract
[Section 11 (a) ]. However, there is no personal liability on a minor for the necessaries of life
supplied.

The term ‘necessaries’ is not defined in the Indian Contract Act, 1872. The English Sale of
Goods Act defines necessaries as “goods suitable to the condition in life of the minor and to his
actual requirements at the time of sale and delivery” (Section 2).

From the above definition, it is obvious that in order to entitle the supplier to be reimbursed from
the minor’s estate, the following must be satisfied:
i. the goods are ‘necessaries’, for that particular minor having regard to his station in life’
(or status or standard of living) and thus purchase or hire of a car may be a necessity for
a particular minor, and
ii. the minor needs the goods both at the time of sale and delivery. What is necessary to see
is the minor’s ‘actual requirements’ at the time of sale and at the time of delivery, where
these times are different.

Example
I, a minor, was studying in B.Com., in a college. He ordered 11 fancy coats for about £45 with
N, the tailor. The tailor sued I for the price. I’s father proved that his son had already a number
of coats and had clothes suitable to his condition in life when the clothes made by the tailor were
delivered.
Held : The coats supplied by the tailor were not necessaries and, therefore, the action failed
[Nash v. Inman (1908)].

The minor’s estate is liable not only for the necessary goods but also for the necessary services
rendered to him. The lending of money to a minor for the purpose of defending a suit on behalf
of a minor in which his property is in jeopardy, or for defending him in prosecution, or for saving
his property from sale in execution of a decree is deemed to be a service rendered to the minor.
Other examples of necessary services rendered to a minor are: provision of education, medical
and legal advice, provision of a house on rent to a minor for the purpose of living and continuing
his studies.
Example
G, a minor and a professional billiards player, agreed with R, a leading professional player, to go
on a world tour, competing against each other in matches. G was to pay a certain sum of money
to R for this purpose and also for the purpose of learning the game. R made all arrangements for
the matches and spent money, but G refused to go. R sued G and claimed damages for breach of
his contract.
Held : G was liable to pay as the agreement was for the minor’s benefit in that he would in effect
be receiving instruction [Roberts v. Gray (1913) 1 K.B. 520].

8. Minor’s parents/guardians are not liable to a minor’s creditor for the breach of contract by the
minor, whether the contract is for necessaries or not. However, the parents are liable where the
minor is acting as an agent of the parents or the guardian.

31
9. A minor can act as an agent and bind his principal by his acts without incurring any personal
liability.
Minor’s Position Under English Law
In England, one who has not attained full age is treated as an infant or a minor. Infancy, under the
English law, means the period of life which precedes the completion of 21 st year, and persons under that
age are regarded as infants. Contracts entered into by an infant are classified into the following
categories:
(i) Void contracts.
(ii) Voidable contracts.
(iii) Valid contracts.
(iv) Contracts enforceable at the option of the infant but not at the option of the other party.

(i) Void Contracts

Section 1 of the Infants Relief Act, 1874 provides that the following 3 types of contracts
(whether speciality or simple) are void:
(a) Any agreement for the repayment of money lent or to be lent,
(b) Any contract for goods supplied or to be supplied, other than ‘necessaries’,
(c) All accounts stated.
Example: Leslie v. Shiell

(ii) Voidable Contracts

In this category of contracts, the position is that they are binding upon a minor unless he
repudiates them before he reaches the age of majority or within a reasonable time thereafter.
However, the contract cannot be enforced against him during infancy. Some such types of
contracts are:
(a) Contracts of a continuing nature.
(b) Contracts under which a minor acquires an interest in property of a permanent kind, e.g., (i)
leases of property, (ii) partnership agreement*, and (iii) agreements to take shares (which are not
fully paid up).

(iii) Valid Contracts

An infant is bound by such contracts. These are of two types:
(a) Contracts for ‘necessaries’ and (b) Contracts for the minor’s benefit such as for his education,
training, etc.
Example
(1) Nash v. Inman (see page 28). Roberts v. Gray

(iv) Contracts enforceable at the option of the infant but not at the option of the other party.
All contracts other than (i), (ii) and (iii) discussed above are enforceable at the option of the
infant but not as against him, either during or after infancy.

Position of Minor’s Contracts

1. A contract with a minor is void ab-initio.
2. A minor’s agreement cannot be ratified by the minor on attaining majority.
3. A minor cannot be asked to refund any benefit received under a void agreement.
4. A minor is not estopped to plead minority even where he falsely represents himself to be of full
age.
5. A minor cannot be a partner in a partnership firm. He may, however, be admitted to the benefits
of an already existing partnership.
6. A minor can, however, be a promisee or beneficiary.
7. A minor’s estate is liable to a person who supplies necessaries of life to a minor.
8. Minor’s parents/guardians are not liable to a minor’s creditor for the breach of contract by a
minor.
9. A minor can act as agent.

32
MENTAL INCOMPETENCE

We have seen earlier that one of the essential elements of a valid contract is that the parties to the
contract must be competent to contract, and a person must be of sound mind so as to be competent to
contract (Section 10–11). Section 12 lays down a test of soundness of mind. It reads as follows:
“A person is said to be of unsound mind for the purpose of making a contract, if at the time when he
makes it, he is incapable 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.”

Examples
1. A patient, in a lunatic asylum, who is at intervals, of sound mind, may contract during those
intervals.
2. A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a
contract or form a rational judgement as to its effect on his interest, cannot contract whilst such
delirium or drunkenness lasts.

From the above examples given, it is obvious that Soundness of mind of a person depends on two facts:
(i) his capacity to understand the terms of the contract, and
(ii) his ability to form a rational judgement as to its effect upon his interests.

If a person is incapable of both, he suffers from unsoundness of mind. Idiots, lunatics and drunken
persons are examples of those having an unsound mind. But whether a party to a contract, at the time of
entering into the contract, is of sound mind or not is a question of fact to be decided by the court. There is
presumption that a person is sane but this presumption is rebuttable. The person interested in proving the
unsoundness of a person has to satisfy the court.

The liability for necessaries of life supplied to persons of unsound mind is the same as for minors
(Section 68).
The position of contracts by persons of unsound mind is given below.

Lunatics
A lunatic is a person who is mentally deranged due to some, mental strain or other personal experience.
However, he has some intervals of sound mind. He is not liable for contracts entered into while he is of
unsound mind. However, as regards contracts entered into during lucid intervals, he is bound. His
position in this regard is identical with minor, i.e., in general the contract is void but the same exceptions
as discussed above (under minor’s contracts) are relevant.

Idiots
An idiot is a person who is permanently of unsound mind. He does not have lucid intervals. He is
incapable of entering into a contract and, therefore, a contract with an idiot is void. However, like a
minor, his properties, if any, shall be liable for recoveries on account of necessaries of life supplied. Also
he can be a beneficiary.

Drunken or Intoxicated Persons

A person who is drunk, intoxicated or delirious from fever so as to be incapable of understanding the
nature and effect of an agreement or to form a rational judgment as to its effect on his interests cannot
enter into valid contracts whilst such drunkenness or delirium lasts.
Under the English Law, contracts made by persons of unsound mind are voidable and not void.

33
34
INCOMPETENCE THROUGH STATUS
Besides minors and persons of unsound mind, there are some other persons who are incompetent to
contract, partially or wholly, so that the contracts of such persons are void.
Incompetency to contract may arise from political status, corporate status, legal status, etc. Alien Enemy
(Political Status). An alien is a person who is the citizen of a foreign country. Thus, in the Indian context,
an alien is a person, who is not a subject of India. An alien may be (i) an alien friend, or (ii) an alien
enemy.

An alien friend (i.e., a foreigner) whose country is at peace with the Republic of India, has usually the
full contractual capacity of a natural born Indian subject. But he cannot acquire property in Indian ship,
and also cannot be employed as Master or any other Chief Officer of such a ship.

In the case of contracts with an alien enemy (i.e. an alien whose country is at war with India) the position
is studied under two heads: (i) contracts during the war; and (ii) contracts made before the war. During
the subsistence of the war, an alien can neither contract with an Indian subject nor can he sue in an Indian
court except by licence from the Central Government.

As regards contracts entered into before the war breaks out, they are either dissolved or merely
suspended. Those contracts, which are against the public policy or are such which would benefit the
enemy, stand dissolved. Other contracts (i.e., not against the public policy) are merely suspended for the
duration of the war and revived after the war is over, provided they have not already become time-barred
under the law of limitation.
It may be observed that an Indian, who resides voluntarily, or who is carrying on business, in a hostile
territory would be treated as an alien enemy.

Foreign Sovereigns and Ambassadors (Political status)

Foreign sovereigns and accredited representatives of a foreign State or Ambassadors enjoy some special
privileges. They cannot be sued in our courts unless they choose to submit themselves to the jurisdiction
of our courts. They can enter into contracts and enforce those contracts in our courts. However, they
cannot be proceeded against in Indian courts without the sanction of the Central Government.

Company under the Companies Act or Statutory Corporation by passing Special Act of Parliament
(Corporate status)
A company cannot enter into a contract which is ultra vires its Memorandum of Association. A statutory
corporation cannot go beyond the objects mentioned in the Act, passed by the Parliament. Similarly,
Municipal Corporations (Local bodies) are disqualified from entering into contracts which are not within
their statutory powers.

Married Women (Marital status)

A married woman has full contractual capacity and can sue and be sued in her own name. She is not
incompetent to contract.

Insolvent Persons (Legal status)

Insolvent persons are incompetent to contract until they obtain a certificate of discharge.

35
FREE CONSENT
[Sections 13g, 14, 84]
Consent Defined

It is essential to the creation of a contract that both parties agree to the same thing in the same sense.
When two or more persons agree upon the same thing in the same sense, they are said to consent.
Examples
(1) A agrees to sell his Fiat Car 1983 model for Rs. 80,000. B agrees to buy the same. There is a valid
contract since A and B have consented to the same subject matter.
(2) A, who owns three Fiat Cars, offers to sell one, say, ‘car x’ to B for Rs. 80,000. B agrees to buy
the car for the price thinking that A is selling ‘car y’. There is no consent and hence no contract. A
and B have agreed not to the same thing but to different things.
(3) In Foster v. Mackinnon (1869) L.R. 4 C.P. 704, the defendant had purported to endorse a bill of
exchange which he was told was a guarantee. The Court held that his signature, not being
intended as an endorsement of a bill of exchange, there was no consent and consequently no
agreement entered into by him, and therefore he was not liable on the Bill.

Free Consent Defined (Section 14)

Consent is said to be free when it is not caused by—
(a) Coercion.
(b) Undue influence.
(c) Fraud.
(d) Misrepresentation.
(e) Mistake.
For a contract to be valid it is not only necessary that parties consent but also that they consent freely.
Where there is a consent, but no free consent, there is generally a contract voidable at the option of the
party whose consent was not free.

COERCION [ Sec 14 (1) (a) ]

A person shall be deemed to have indulged in coercion if he/she, with the objective of compelling any
person, to accept any contract against his/her will,
i. withholds or threatens to withhold property belonging to him/her, or
ii. threatens to defame him/her, or takes or threatens to take any other action in contravention of
prevailing law.

Examples
(1) A Hindu widow is forced to adopt X under threat that her husband’s corpse (dead body) would not
be allowed to be removed unless she adopts X. The adoption is voidable as having been induced
by coercion [Ranganayakamma v. Alwar Setti, 13 Mad. 24.].
(2) A threatens to kill B if he doesn’t transfer his house in A’s favour for a very low price. The
agreement is voidable for being the result of coercion.
(3) An agent refused to hand over the books of accounts of the principal unless he (principal) released
him from all liabilities concerning past transactions.
Held : The release so given was not binding, being the outcome of coercion [Muthia v. Karuppan
50 Mad. 780].

Note that, it is not necessary that coercion must have been exercised against the promisor only, it may be
directed at any person.
Examples
(1) A threatens to kill B (C’s son) if C does not let out his house to A. The agreement is caused by
coercion.
(2) X threatens to kill A if he does not sell his house to B at a very low price. The agreement is
caused by coercion though X is stranger to the transaction.

36
Threat to Commit Suicide—Is it Coercion ?
Ammiraju v. Seshamma (1917) 41 Mad. 33. In this case, ‘A’ obtained a release deed from his wife and
son under a threat of committing suicide. The transaction was set aside on the ground of coercion.

DURESS
The English equal of coercion is Duress. Duress has been defined as causing, or threatening to cause,
bodily violence or imprisonment, with a view to obtain the consent of the other party to the contract.
Duress differs from coercion on the following points:
1. ‘Coercion’ can be employed against any person, whereas ‘duress’ can be employed only against
the other party to the contract or the members of his family.
2. ‘Coercion’ may be employed by any person, and not necessarily by the promisee. ‘Duress’ can be
employed only by the party to the contract or his agent.
3. ‘Coercion’ is wider in its scope and includes unlawful detention of goods also. ‘Duress’ on the
other hand does not include unlawful detention of goods. Only bodily violence or imprisonment is
duress.

CONSEQUENCES OF COERCION
When consent to an agreement is caused by coercion, the agreement is a contract voidable at the option
of the party whose consent was so obtained. In other words, the aggrieved party can have the contract set
aside or if he so desires to insist on its performance by the other party.

Liability of Person to Whom Money is Paid or Thing Delivered Under Coercion

A person to whom money has been paid, or anything delivered under coercion must repay or return it.
Example
A railway company refuses to deliver certain goods to the consignee, except upon the payment of an
illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is

UNDUE INFLUENCE [ Sec 14 (1) (b) ]

Undue influence consists in the improper exercise of a power over the mind of one of the contracting
parties by the other. Undue influence means influence exercised by a person upon another person who is
under his/her influence and is amenable to his/her personal benefit or interest.

Examples
(1) A having advanced money to his son B during his minority, upon B coming of age, obtains, by
misuse of parental influence, a bond from B for greater amount than the sum due in respect of the
advance. A employs undue influence.
(2) A, a man enfeebled by disease or age is induced by B’s influence over him as his medical
attendant to agree to pay B an unreasonable sum for his professional service. B employs undue
influence.
(3) A, a spendthrift and a weak-minded just come of age, conveys a share of his family estate to his
father-in-law for nominal consideration. Undue influence is presumed to have been exercised
[Ram Krishan v. Parmeshwara (1931) M.W.N. 215].

Undue Influence When Presumed

After reciting the general principle as above, Section 16 lays down rules of presumptions as regards
persons in particular relations. It reads:
A person is deemed to be in a position to dominate the will of another:
(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary
relation to the other; or
(b) where 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.

Thus, the following relationships are said to raise a presumption of undue influence:
(i) Parent and child; (ii) guardian and ward; (iii) doctor and patient; (iv) spiritual guru and disciple; (v)
lawyer and client; (vi) trustee and beneficiary and other similar relationships.

37
Example
A Hindu, well advanced in age, with the object of securing benefits to his soul in the next world, gave
away his whole property to his ‘guru’, or spiritual adviser. Undue influence was presumed.
The presumption of undue influence can be rebutted by showing that the party said to have been
influence had independent legal advice of one who had full knowledge of the relevant facts [Inche Noria
v. Shaik Allie Bin Omar (1929) A.C. 127].

Consequences of Undue Influence

An agreement caused by undue influence is a contract voidable at the option of the party whose consent
was obtained by undue influence. However, 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
the court deems fit.
Example
A, a money-lender, advances Rs. 100 to B, an agriculturist, and by undue influence, induces B to execute
a bond for Rs. 200 with interest at 6 percent per month. The Court may set the bond aside, ordering B to
repay Rs. 100 with such interest as may seem just.

Burden of Proof
If a party is proved to be in a position to dominate the will of another and the transaction appears, on the
face of it or on the evidence adduced, to be unconscionable, the burden of proving that the contract was
not induced by undue influence, lies on the party who was in a position to dominate the will of the other.
The power to dominate the will of another is presumed in circumstances mentioned in Section 16 (2) and
discussed above.
The presumption of undue influence has not been accepted in the following relationships: Husband and
wife [Howes v. Bishop (1909) 2 KB 390]; master and servant [Daulat v. Gulabrao (1925) Nag. 369);
creditor and debtor; landlord and tenant; Lakshmi Chand v. Pt. Niader Mal, AIR (1961) All 295].
In these relationships undue influence cannot be presumed and the party alleging undue influence must
prove that it existed.

CONTRACTS WITH A PARDANASHIN WOMAN

Pardanashin woman is one who according to the custom of her community observes complete seclusion.
The Courts in India regard such women as being especially open to undue influence. When, therefore, an
illiterate pardanashin woman is alleged to have dealt with her properties and to have executed a deed, the
burden of proving that there was no undue influence lies on the party setting up the deed. The law
demands that the person who deals with a pardanashin lady must show affirmatively and conclusively
that the deed was not only executed by, but was explained to, and was really understood by the lady.
Notice that, a lady who claims to be pardanashin must prove complete seclusion; some degree of
seclusion is not sufficient to entitle her to get special protection.

UNDUE INFLUENCE IN MONEY LENDING TRANSACTIONS

The mere fact of the rate of interest being high is not evidence of undue influence. ‘A’ who is in urgent
need of money borrows from a lender who charges him very high rate of interest. The transaction, on the
face of it, is not one induced by undue influence.

Example
A applies to a banker for a loan at a time when there is stringency in the money market. The banker
declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms.
This is a transaction in the ordinary course of business, and the contract is not induced by undue
influence

Thus, a transaction will not be set aside merely because the rate of interest is high. The observation of
Judicial Committee in Aziz Khan v. Duli Chand may be noted here with advantage. The transaction, it
observed, may undoubtedly be improvident, but in the absence of any evidence to show that the money-
lender had actually taken advantage of his position, it is difficult for a Court of justice to give relief on
the grounds of simple hardship.
38
It must be proved that the lender was in a position to dominate the will of the other but the urgent need of
money on the part of the borrower does not by itself place the lender in a position to dominate his will.
However, if the rate of interest is so high that the Court considers it unconscionable, the burden of
proving that there was no undue influence lies on the creditor. In other words, undue influence is
presumed in such cases.

Example
A, being in debt to B, the money-lender of his village, contracts, for a fresh loan on terms which appear
to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.
Similarly, where a debtor was an old and illiterate person and was much involved in litigation and had
agreed to pay to the creditor compound interest at 25 per cent, the Court held the transaction as
unconscionable and allowed only 12 per cent simple interest [Ruknisa v. Mohib Ali Khan (1931), I.A.
938]. Still in another case, a poor Hindu widow wanted to bring a suit for maintenance and had to borrow
Rs. 1,500. The rate of interest payable was 100 per cent per annum. The Court allowed interest at 24 per
cent per annum [Annapurani v. Swaminathan, 1910, 34 Mad. 7].

FRAUD [Sec 14 (1) (c) ]

A party to the contract or his/her agent shall be deemed to have committed fraud if he/she,
 leads the other party or his/her agent to believe or takes any action to believe the particular
matter is true, although he/she knows that it is false, or
 suppresses any information in his/her possession, or
 indulges in any other fraudulent act punishable under prevailing law,
with the intention of deceiving the opposite party or his/her agent.

From the analysis of the above, it follows that for fraud to exist there must be:

(A) A representation or assertion, and it must be false

To constitute fraud there must be an assertion of something false within the knowledge of the
party asserting it. Mere silence as to facts likely to affect the willingness of a person to enter into
a contract is not fraud.
Examples
(1) H sold to W certain pigs. The pigs were suffering from some fever and H knew it. The pigs
were sold “with all faults.” H did not disclose the fever to W.
Held : There was no fraud [Ward v. Hobbs (1878) A.C. 13].

(2) A sells by auction to B, a horse which A knows to be unsound. A says nothing to B about
the horse’s unsoundness. This is not fraud by A.
However,
(i) Silence is fraudulent, if the circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak. The duty to speak exists
where the parties stand in a fiduciary relationship, e.g., father and son, guardian and
ward, etc.; or where the contract is a contract uberimae fidei (requiring utmost good
faith), e.g., contracts of insurance. The duty to disclose may also be an obligation
imposed by statute.

Example
A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter and has
just come of age. Here the relation between the parties would make it A’s duty to tell B
if the horse is unsound.

(ii) Silence is fraudulent where the circumstances are such that, “silence is in itself
equivalent to speech” [Explanation to Section 17].
Example
B says to A — “If you do not deny it, I shall assume that the horse is sound.” A says
nothing. Here A’s silence is equivalent to speech.
39
 Thus, we may say that to constitute fraud, ordinarily, there must be active misstatement of fact or
such a partial and fragmentary statement of fact as that the witholding of that which is not stated
makes that which is stated absolutely false.

In Peek v. Gurney (1873) 6 H.L. 377, the prospectus issued by a company did not refer to the
existence of a document disclosing liabilities. The impression thereby created was that the
company was a prosperous one, which actually was not the case.
Held : The suppression of truth amounted to fraud.

(B) The representation or assertion must be of a fact

The representation or assertion alleged to be false must be of a fact. A mere expression of
opinion, puffery or flourishing description does not constitute fraud.
Example
A, a seller of a horse, says that the horse is a ‘Beauty’ and is worth Rs. 5,000. It is merely A’s
opinion. But if in fact A paid only Rs. 2,000 for it, then he has misstated a fact.

(C) The representation or statement must have been made with a knowledge of its falsity or
without belief in its truth or recklessly.
Example
A company issued a prospectus giving false information about the unbounded wealth of Nevada.
A share broker who took shares on the faith of such an information wanted to avoid the contract.
Held : He could do so since the false representation in the prospectus amounted to fraud
[Reese River Silver Mining Co. v. Smith (1869) L.R. 4 H.L. 64].

With regard to cases of above kind, there seems to be no difficulty since fraud is proved when it
is shown that a false representation has been made knowingly or without belief in its truth.

However, with regard to reckless misstatement it may appear difficult to say whether it amounts
to fraud because the person making such misstatement does not himself definitely know that the
statement is false. But, if we carefully look into it, we find that it does amount to fraud because
though the person making it is not sure of the truth of the statement, yet he represents to the other
party as if he is absolutely certain about its truth.
A person shall be liable in fraud where the false statement he has made was
i. made knowingly,
ii. without belief in its truth, or
iii. recklessly, carelessly whether it be true or false.

[Derry v. Peek (1889) 14 A.C. 337].

The directors of a Tramway Co. issued a prospectus stating that they had the right to run tramcars
with steam power instead of with horses as before. In fact, the Act incorporating the company
provided that such power might be used with the sanction of the Board of Trade.

But, the Board of Trade refused to give permission and the company had to be wound up. P, a
shareholder sued the directors for damages for fraud. The House of Lords held that the directors
were not liable in fraud because they honestly believed what they said in the prospectus to be
true.

(D) The representation must have been made with the intention of inducing the other party to
act upon it.
For fraud to exist, the intention of misstating the facts must be to cause the other party to enter
into an agreement.

(E) The representation must in fact deceive

It has been said that deceit which does not deceive is not fraud. A fraud or misrepresentation
which did not cause the consent to a contract of the party on whom such fraud was practiced or
to whom such misrepresentation was made does not render a contract voidable.*
40
 Example
A bought a cannon of B. B knew the cannon had a defect, which rendered it worthless, and so put
a metal plug to conceal the defect. A accepted the cannon without examining it. The cannon
burst, when used.
Held : There was no fraud because A would have bought it even if no deceptive plug had been
put. He was not in fact deceived by it [Horsefall v. Thomas, (1862) 158 E.R. 813].

(F) The Party subjected to fraud must have suffered some loss
It is a common rule of law that “there is no fraud without damages”. As such, fraud without
damage does not give rise to an action of deceit.

Requisites of Fraud
1. A representation or assertion, and it must be false.
2. The representation or assertion must be of a fact.
3. The representation or assertion must have been made with a knowledge of its falsity or without belief
in its truth or recklessly.
4. The representation must have been made with the intention of inducing the other party to act upon it.
5. The representation must in fact deceive.
6. The party subjected to fraud must have suffered some loss.

Consequences of Fraud
The party defrauded has the following remedies:
1. He can avoid the performance of the contract.
2. He can 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.

Example
A fraudulently informs B that A’s estate is free from encumbrance. B, therefore, buys the estate. The
estate is subject to mortgage. B may either avoid the contract, or may insist on its being carried out
and the mortgage deed redeemed.
3. He can sue for damages.
Exceptions, i.e., where the contract is not voidable.
(1) When the party whose consent was caused by misrepresentation or fraud had the means of
discovering the truth with ordinary diligence (Exception to Section 19).
(2) Where a party, after becoming aware of the misrepresentation or fraud, takes a benefit under
the contract or in some other way affirms it.

MISREPRESENTATION
Like fraud, misrepresentation is incorrect or false statement but the falsity or inaccuracy is not due to any
desire to deceive or defraud the other party. It is innocent. The party making it believes it to be true.
Types of misrepresentation:
(1) The positive assertion, in a manner not warranted by the information of the person making it, of
that which is not true, though he believes it to be true.
Example
X learns from A that Y would be director of a company to be formed. X tells this to B in order to
induce him to purchase shares of that company and B does so. This is misrepresentation by X,
though he believed in the truthness of the statement and there was no intent to deceive, as the
information was derived not from Y but from A and was mere hearsay.

(2) Any breach of duty which, without an intent to deceive, gives 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.

(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance of
thing which is the subject of the agreement.

41
 Examples
(1) X entered into contract with C for the sale of hops. X told Y that no sulphur had been
used in their growth. Y agreed to buy only if no sulphur had been used for their growth.
As a matter of fact, sulphur had been used in 5 out of 300 acres which fact was evidently
forgotten by X when he represented that no sulphur was used.
Held : That the representation that no sulphur had been used was in the nature of a
primary stipulation and in a sense a condition, without which the contract would not have
been proceeded with and, therefore, the contract could be avoided, though the
representation was not fraudulent [Bonnerman v. White (1861) 142 E.R. 658.]

(2) A chartered a ship from B which was described in the ‘charter party’ and was represented
to him as being not more than 2,800 registered tonnage. It turned out that the registered
tonnage was 3,045 tons. A refused to accept the ship in fulfillment of the charter party,
and it was held that he was entitled to avoid the charter party by reason of the erroneous
statement as to tonnage
[Oceanic Steam Navigation Co. v. Soonderdas Dhurumsey (1890) 14 Bom. 241].

Consequences of Misrepresentation
In cases of misrepresentation the party aggrieved or wronged can:
(1) avoid the agreement, or
(2) insist that the contract be performed and that he be put in the position in which he would have
been if the representation made had been true.

Example
A informs B that his estate is free from encumbrance. B thereupon buys the estate. In fact, the
estate is subject to mortgage, though unknown to A also. B may either avoid the contract or may
insist on its being carried out and the mortgage debt redeemed.
Notice that, unlike fraud, misrepresentation by a party does not entitle the other to claim damages.
This, however, is subject to certain exceptions (mentioned below), the right to claim damages
arises even in case of misrepresentation.
These are:
(a) Breach of warranty of authority of an agent
Where an agent believes that he has the authority to represent his principal while in fact he has
no such authority, the agent is liable in damages, even though he is only guilty of innocent
misrepresentation. [Collen v. Wright (1857) E. and B. 647].
(b) Negligent representation made by one person to another between whom a confidential
relationship exists, e.g., solicitor and client.
However, if the party whose consent was caused by misrepresentation had the means of
discovering the truth with ordinary diligence, he has no remedy.

MISREPRESENTATION FRAUD
Misrepresentation on the other hand, is innocent, the party making a false or untrue representation
i.e., without any intention to deceive or to gain an makes it with the intention to deceive the other
advantage. party to enter into a contract.

In case of misrepresentation, except in certain Both misrepresentation and fraud make a contract
cases*, the only remedies are rescission and voidable at the option of the party wronged.
restitution. But in case of fraud, the party defrauded, gets the
additional remedy of suing for damages caused by
such fraud.

Although in both the cases, the contract can be avoided; in case of misrepresentation the contract cannot
be avoided if the party whose consent was so caused had the means of discovering—the truth with

42
ordinary diligence.

MISTAKE
Mistake may be defined as an erroneous belief concerning something. Mistake is of two kinds:
(1) Mistake of fact, and (2) Mistake of law.

MISTAKE OF FACT
A mistake of fact may either be: (a) bilateral or (b) unilateral.

Bilateral Mistake
When both the parties to the agreement are under a mistake of fact essential to the agreement, the mistake
is called a bilateral mistake of fact and the agreement is void.
Examples
(1) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the
bargain, though neither party was aware of the fact. The agreement is void.
(2) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Bombay. It turns out that before the day of the bargain, the ship conveying the cargo had been cast
away and the goods lost. Neither party was aware of the facts. The agreement is void.

Mistake, so as to render the agreement void, must relate to some essential matter. Some typical cases of
mistake invalidating the agreement are given below.

(A) Mistake as to the existence of subject-matter

Examples
(1) A being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of
the agreement but both parties were ignorant of the fact. The agreement is void.
(2) A agreed to assign to B a policy of assurance upon the life of X. X had died before the
contract was made.
Held : There was no contract [Scott v. Coulson (1903) 2 Ch. 249].
(3) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the
bargain, though neither party was aware of the fact. The agreement is void.
(4) A and B entered into a contract for the sale and purchase of Indian corn supposed to be on
board a particular ship bound for England. Unknown to both parties the corn was damaged
and discharged at an intermediate port, some days prior to the contract.
Held : The contract was void on the ground of mistake [Courturier v. Hastic (1856) 10 E.R. 1065].

(B) Mistake as to identity of the subject-matter

Where the parties agree upon different things, i.e., one meaning one thing and the other meaning
another, the contract is void.

Examples
1. A contract was entered into for the purchase of certain bales of cotton to arrive by a ship
called “Peerless” from Bombay. Two ships of the same name (Peerless) were to sail from
Bombay. The buyer intended to buy the cargo of one ship but the seller was selling the cargo
of the other. The contract was held to be void.
2. A, who owns four Fiat cars, offers to sell his ‘car x’ for Rs. 80,000. B accepts the offer
thinking A is selling his ‘car y’. There is a mistake as to the identity of the subject-matter and
hence no contract.

(C) Mistake as to title to the subject-matter

Where the parties believe that the seller is the owner of the thing which he purports to sell, but in
fact, he has no title to it, the contract is void on the ground of mistake.

Example

43
 A agreed to take a lease of a fishery from B though contrary to the belief of both parties at the
time A was tenant of the fishery and B never had any title to it. The contract was void [Cooper v.
Phibbs (1867) 159 E.R. 375].

(D) Mistake as to quantity of subject-matter

P wrote to H inquiring the price of rifles and suggested that he might buy as many as 50. On
receipt of the information, he telegraphed “Send three rifles.” But because of the mistake of the
telegraph authorities, the message transmitted was “Send the rifles.” H despatched 50 rifles.
Held : There was no contract between the parties. However, P could be held liable to pay for
three rifles on the basis of an implied contract [Henkel v. Pape (1870) 6 Ex. 7].

(E) Mistake as to price of the subject-matter

Where a contract of lease of a house was agreed to at a lease of £230 but in the written
agreement, the figure £130 was inserted by mistake, the contract was held to be void.
However, an erroneous opinion as to the value of the thing which forms the subject matter of the
agreement is not to be deemed a mistake as to a matter of fact [Explanation to Section 20].
Example
A buys an article thinking it is worth Rs. 10,000 while it is actually worth Rs. 5,000 only. The
agreement cannot be avoided on the ground of mistake.

Unilateral Mistake
In the case of unilateral mistake, i.e., where only one party to a contract is under a mistake, the contract,
generally speaking is not invalid. Section 22 reads, ‘‘A contact 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.’’
Exceptions. To the above rule, however, there are the following exceptions:

(A) Where the unilateral mistake is as to the nature of the contract

A contract is void when one of the parties to it does not intend to enter into it, but through the
fault of another and without any fault of his own, makes a mistake as to the nature of the
contract. Thus, in Foster v. Mackinnon (1869) L.R. 4 C.P. 704, an old illiterate man was made to
sign a bill of exchange, by means of a false representation that it was a guarantee.
Held : The contract was void.
It should be noted that the plea of mistake will be available only when it relates to the nature of
the contract, and not to the terms of the contract [Bay v. Polla and Morris (1930) 1 K.B. 628].

(B) Mistake as to quality of the promise

In Scriven v. Hindley (1913) 3 K.B. 564, A held an auction for the sale of some lots of hemp and
some lots of tow. ‘B’ thinking that hemp was being sold, bid for a lot of tow for an amount which
was out of proportion to it, and was only a fair price for hemp.
Held : The contract could be avoided.

(C) Mistake as to the identity of the person contracted with

Where A intends to contract with B but by mistake enters into a contract with C believing him to
be B, the contract is void on the ground of mistake.

1. In Cundy v. Lindsay & Co., (1878) 3 App. Cas. 459., one Blenkarn, knowing that Blenkiron &
Co., were the reputed customers of Lindsay & Co., ordered some goods from Lindsay & Co., by
imitating the signature of Blenkiron. These goods were then sold to Cundy, an innocent
purchaser. In a suit by Lindsay against Cundy for recovery of goods, it was held that as Lindsay
never intended to contract with Blenkarn, there was no contract between them and as such even
an innocent purchaser of the goods from Blenkarn did not get a good title, and must return them
or pay their price.

44
2. Similarly, in Lake v. Simmons (1927) A.C. 487, a lady X induced Y to deliver possession of two
pearl necklaces falsely representing that she was the wife of baron Z and that she wanted them
for showing them to her husband for his approval.
Held : Y intended to contract only with the wife of the baron, and not with X herself. Hence, the
contract was void and X could not convey any title even to bonafide buyers.
3. Philips v. Brooks (1919) 2 K.B. 243. The facts of this case should, however, be contrasted with
Lake v. Simmons. In this case a man, N, called in person at a jeweller’s shop and chose some
jewels, which the jeweller was prepared to sell him as a casual customer. He tendered in payment
a cheque which he signed in the name G, a person with credit. Thereupon N was allowed to take
away the jewels which N pledged with B who took them in good faith.

Held : The pledgee, B, had a good title since the contract between N and the jeweller could not
be declared void on the ground of mistake but was only voidable on the ground of fraud.
Horridge, J. held that although the jeweller believed the person to whom he was handing the
jewels was G, he in fact contracted to sell and deliver to the person who came into his shop. The
contract, therefore, was not void on the ground of mistake but only voidable on the ground of
fraud. The Learned Judge cited with approval an American case of Edmunds v. Merchant
Despatch Co., 135 Mass. 283 in which Moorton, C.J. said,’ ‘The minds of the parties met and
agreed upon all the terms of the sale, the thing sold, the price & terms of payment, the person
selling and the person buying..... The plaintiff could not have supposed that he was selling to
another person: his intention was to sell to the person present and identified by sight and hearing,
it does not affect the sale because the buyer assumed a false name and practised any other deceit
to induce the vendor to sell.”

MISTAKE OF LAW
Mistake of law may be (a) Mistake of Law of the Land, and (b) Mistake of Foreign Law.

Mistake of Law of the Land

In this regard, the rule is “Ignorantia juris non excusat,” i.e., ignorance of law is no excuse. Following
this principle, Section 21 declares that “A contract is not voidable because it was caused by a mistake as
to any law in force in India.”
Thus, where, ‘A’ and ‘B’ make a contract grounded on the erroneous belief that a particular debt is
barred by the Indian Law of Limitation; the contract is not voidable.

Mistake of Foreign Law

The above maxim that ‘ignorance of law is no excuse’ applies only to the law of the country and not to
foreign law. The mistake of foreign law is to be treated as a mistake of fact. Section 21 reads, ‘‘A
mistake as to a law not in force in India has the same effect as a mistake of fact.”

Consequences of Mistake
Mistake renders a contract void and as such in case of a contract which is yet to be performed the party
complaining of the mistake may repudiate it, i.e., need not perform it.
If the contract is executed, the party who received any advantage must restore it or make compensation
for it, as soon as the contract is discovered to be void.

45