CLASSES BY CA RUCHIKA AGRAWAL

BUSINESS LAW :: INDIAN CONTRACT ACT, 1872 :: UNIT 3 :: OTHER ESSENTIAL ELEMENTS OF A CONTRACT

• Section 10 of the Indian Contract Act, 1872 provides that an agreement in order to be a contract, must satisfy the following
conditions:
(1) the parties must be competent to contract;
(2) it must be made by the free consent of the parties;
(3) it must be made for a lawful consideration and with a lawful object;
(4) it should not have been expressly declared as void by law.

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Capacity to Contract

• As per Section 11 of the Act, Every person is competent to contract who-

(A) has attained the age of majority,
(B) is of sound mind and
(C) is not disqualified from contracting by any law to which he is subject.

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A contract made with or by a minor is void ab-initio.

• As per Indian Majority Act, 1875, age of majority is 18 years and above. A person who is less than 18 years of age even by a day
would be minor for the purpose of contracting.
• A minor cannot ratify the agreement on attaining majority as the original agreement is void ab initio and a void agreement can
never be ratified.
• Minor can be a beneficiary to a contract. He can take benefit out of a contract.
• A minor can become partner in a partnership firm. However, he can be admitted with the consent of the other partners be admitted
to the benefits of partnership (Section 30 of the Indian Partnership Act, 1932).
• Rule of estoppel cannot be applied against a minor. He allowed to plea his minority in defense, even when he has entered into any
contract by falsely claiming that he was major.
• Minor’s estate is liable to pay for any necessaries provided to minor or any other person the minor is legally bound to support.
There is no personal liability of the minor, but only his property is liable.
• Necessaries mean those things that are essentially needed by a minor. They cannot include luxuries or costly or unnecessary
articles. Necessaries extend to all such things as reasonable persons would supply to an infant in that class of society to which the
infant belongs. Expenses on minor’s education, on funeral ceremonies come within the scope of the word ‘necessaries’.
• The guardian of a minor can enter into contracts on behalf of the minor.
• A minor cannot be declared insolvent as he is incapable of contracting debts.
• A minor can act as an agent. He will not be liable to the principal for his acts.
• A minor can draw, deliver and endorse negotiable instruments without himself being liable.
• A minor is not capable of binding his parent or guardian, even for necessaries. The parents will be held liable only when the child
is acting as an agent for parents.
• In case of joint contract by a minor and an adult, only the adult will be liable on the contract and not the minor.
• In a contract of guarantee / surety given by adult for a minor, the adult will be liable to the third party.
• A minor may, acting though his lawful guardian become a shareholder by transfer and transmission of fully paid shares to him.
• A tort is a civil wrong. A minor is liable in tort.

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 A contract by a person who is not of sound mind is void

• According to Section 12 of the Act, “a person is said to be of sound mind for the purposes of making a contract if, at the time
when he makes the contract, he is capable of understanding it and of forming a rational judgement as to its effect upon his
interests.”
• A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
• A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

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Contract by disqualified persons are void

• Incompetency to contract may arise from political status, corporate status, legal status, etc.
• Foreign Sovereigns and Ambassadors, Alien Enemy, Corporations, Convicts, Insolvent fall under the category of disqualified
persons.

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Free Consent

• According to Section 13 of the Act, “two or more persons are said to consent when they agree upon the same thing in the same
sense.”
• When parties to a contract make some fundamental error as to the nature of the transaction, or as to the person dealt with or as to
the subject-matter of the agreement, it cannot be said that they have agreed upon the same thing in the same sense. And if they do
not agree in the same sense, there cannot be consent. A contract cannot arise in the absence of consent.
• There should be presence of AD-IDEM (meeting of minds).
• As per Section 14 of the Act, Consent is said to be free when it is not caused by:
• Coercion, as defined in Section 15; or
• Undue Influence, as defined in Section 16; or
• Fraud, as defined in Section 17; or
• Misrepresentation, as defined in Section 18 or
• Mistake, subject to the provisions of Sections 20, 21, and 22.
• When consent to an agreement is caused by coercion, fraud, misrepresentation, or undue influence, the agreement is a contract
voidable at the option of the aggrieved party. When the consent is vitiated by mistake, the contract becomes void.

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Coercion (Section 15)

• “Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or
threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into
an agreement.”
• Coercion may proceed from third party. Also, coercion may be directed towards a third person.
• Contract induced by coercion is voidable at the option of the party whose consent was so obtained.
• A person to whom money has been paid or anything delivered under coercion must repay or return it. (Section 72)
• Threat to commit suicide will be regarded as coercion.

Coercion

Committing Threatening Any act Unlawfully Threatening With the

to commit forbidden to detain
by IPC detaining intention of
any property entering
into agreement

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• Section 15 does not require that coercion must proceed from a party to the contract; nor is it necessary that subject of the coercion
must be the other contracting party, it may be directed against any third person whatever.
• It is to be noted that is immaterial whether the India Penal Code is or is not in force at the place where the coercion is employed.

Undue influence (Section 16)

• “A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and he uses that position to obtain an unfair advantage over the other”.
• A person can be influenced by the other when a near relation between the two exists.
• Relation between the parties exist in such a manner that one of them is in a position to dominate the will of the other.
• A person is deemed to be in a position to dominate the will of the other in case of real or apparent authority (doctor-patient,
master-servant, etc); fiduciary relationships (father and son, solicitor and client, husband and wife, creditor and debtor, etc);
mental distress; Unconscionable bargains (mostly in money lending transactions).
• The object must be to take undue advantage.
• When a party to contract decides to avoid the contract on the ground of undue influence, he has to prove that the other party was in
a position to dominate his will and the other party used his position to obtain his consent and that the transaction is unfair.
• The burden of proving the absence of the use of the dominant position to obtain the unfair advantage will lie on the party who is in
a position to dominate the will of the other.
• When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose
consent was so caused.
• The aggrieved party needs to return any benefit received under the contract.

Fraud (Section 17)

• As per Section 17 of the Act, ‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his
connivance, or by his agent, with an intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.

Following are the essential elements of fraud:

• There must be a representation or assertion and it must be false. However, silence may amount to fraud or an active concealment
may amount to fraud.
• As per explanation of section 17, silence amounts to fraud in case there is duty to speak and in case where silence is equal to
speech.

The general rule is silence does not amount to fraud. There are 2 exceptions to this rule:

When Silence = Speech, and

When It is the duty of the person to speak (this includes fiduciary relationships, family settlements, contracts, share
allotment contracts, insurance contracts and marriage contracts.)

• The representation must be related to a fact (and not just an opinion).

• The representation should be made before the conclusion of the contract with the intention to induce the other party to act upon it.
• The representation or statement should be made with a knowledge of its falsity or without belief in its truth or recklessly not caring
whether it is true or false.
• The representation should be made before the conclusion of the contract with the intention to induce the other party to act upon it.
• The other party must have been induced to act upon the representation or assertion.
• The other party acting on the representation must have consequently suffered a loss.

Following is the effect of Fraud upon validity of a contract:

• The contract is voidable at option of the party defrauded.

• The defrauded / aggrieved party can:
(1) He can rescind the contract within a reasonable time.

Classes by CA Ruchika Agrawal I HNo 1212, Sector 6, Jhajjar I Contact 92157-56300

 (2) He can sue for damages.
(3) He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have
been had the representation made been true.

In the following exceptional cases, the contract is not voidable:

(1) If the party whose consent was caused by silence which amounting to fraud, had the means of discovering the truth with
ordinary diligence.
(2) A fraud which did not cause the consent of the party to agreement.

Misrepresentation (Section 18)

• As per Section 18 of the Act, Misrepresentation means:

(1) Statement of fact, which of false, would constitute misrepresentation if the maker believes it to be true but which is not
justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which brings an advantage to him;
(3) When a party causes, even though done innocently, the other party to the agreement to make a mistake as to the subject
matter.
• Statement of fact, which of false, would constitute misrepresentation if the maker believes it to be true but which is not justified by
the information he possesses.
• When there is a breach of duty by a person without any intention to deceive which brings an advantage to him
• When a party causes, even though done innocently, the other party to the agreement to make a mistake as to the subject matter.
• If such consent was caused by misrepresentation, the contract is not voidable, if the party whose consent was so caused had the
means of discovering the truth with ordinary diligence

Mistake

• Mistake may be defined as innocent or erroneous belief which leads the party to misunderstand the others. Mistake may be either
mistake of law or mistake of fact.
• Mistake of Indian Law: A person cannot be allowed to get any relief on the ground that it had done a particular act in ignorance of
law.
• Mistake of foreign law: Such a mistake is treated as mistake of fact and the agreement in such a case is void.
• Mistake of fact: Mistake of fact are of two types – (i) Bilateral Mistake, (ii) Unilateral Mistake
• Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral
mistake. In such a case, the agreement is void (Section 20).
• According to Section 22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake
as to a matter of fact.

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 Legality of Object and Consideration

• Under Section 23 of the Indian Contract Act, in each of the following cases the consideration or object of an agreement is said to
be unlawful:
(i) When consideration or object is forbidden by law
(ii) When consideration or object are of such a nature that if permitted it would defeats the provisions of law
(iii) When it is fraudulent
(iv) When the object or consideration involves injury to the person or property of another
(v) When consideration is immoral
(vi) When consideration is opposed to public policy

• Agreements opposed to public policy include:

(1) Trading with enemy
(2) Stifling prosecution (valid in case of compoundable offences)
(3) Maintenance and Champerty (Maintenance is an agreement in which a person promises to maintain suit in which he has no
interest. Maintenance contracts are ordinarily valid. Champerty is an agreement in which a person agrees to assist another in
litigation in exchange of a promise to hand over a portion of the proceeds of the legal action. Champerty is opposed to public
policy.)
(4) Trafficking relating to Public Offices and Titles (an agreement to pay money to a public servant in order to induce him to
retire from his office so that another person may secure the appointment is void. Also, an agreement to procure a public
recognition like Padma Vibhushan for reward is also void.)
(5) Agreements tending to create monopolies
(6) Marriage brokerage agreements (Marriage bureaus only provides information and doesn’t negotiate marriage for reward,
therefore, they are not covered under this point)
(7) Interference with the course of justice (An agreement whose object is to induce my judicial officer of the State to act partially
or corruptly is void, as it s opposed to public policy.)
(8) Interest against obligation (An agreement by an agent to receive without his principal’s consent, compensation from another
for the performance of his agency is invalid.)
(9) Consideration Unlawful in Part (If the lawful and unlawful consideration can be severed, the part which is lawful will be
valid and the part which is unlawful will be void. If the lawful and unlawful consideration cannot be severed, the entire
agreement will be illegal and void)

Note: Agreements opposed to public policy are agreements where consideration and object are unlawful and are hence, void.

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Void Agreements

1. Made by Incompetent parties 6. Agreement in restraint of marriage

(Section 11) (Section 26)
2. Agreements made under Bilateral 7. Agreements in restraint of trade
mistake of fact (Section 20) (Section 27)
3. Agreements the consideration or 8. Agreement in restraint of legal
object of which is unlawful (Section 23) proceedings (Section 28)
4. Agreement the consideration or object of 9. Agreement the meaning of which is uncertain
which is unlawful in parts (Section 24) (Section 29)
5. Agreements made without 10. Wagering Agreement (Section 30)
consideration (Section 25)
11. Agreements to do impossible Acts
(Section 56)

• Agreement in restraint of marriage (Section 26) is void. Every agreement in restraint of marriage of any person other than a minor,
is void. If a person, being a major, agrees for good consideration not to marry, the promise is not binding and considered as void
agreement.
• Agreement in restraint of trade (Section 27) is void. An agreement by which any person is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void. Exceptions include sale of goodwill and retirement of partner.

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 Also, an agreement of service by which an employee binds himself, during the term of his employment, not to compete with his
employer is not in restraint of trade. Restrictions as to time and area should be reasonable.
• Agreement in restraint of legal proceedings (Section 28) is void. An agreement in restraint of legal proceedings is the one by
which any party thereto is restricted absolutely from enforcing his rights under a contract through a Court is void. However,
agreements of arbitration are valid.
• Agreement, the meaning of which is uncertain (Section 29) is void, but where the meaning thereof is capable of being made
certain, the agreement is valid.
• Agreement to do impossible act (Section 56). If the act is impossible from the start, it will be regarded as void agreement. If the
act becomes impossible after entering into a contract, it will be regarded as void contract.

• Wagering agreements (Section 30) are void. Wager is an agreement involving payment of a sum of money upon the determination
of an uncertain event. Essentials of a Wager include:
• There must be a promise to pay money or money’s worth.
• Promise must be conditional on an event happening or not happening.
• There must be uncertainty of event.
• There must be two parties, each party must stand to win or lose.
• There must be common intention to bet at the timing of making such agreement.
• Parties should have no interest in the event except for stake.
• Wagering agreements are void and not illegal. An agreement collateral to wagering agreements are thus considered valid.
• Transactions similar to wager (gambling) include lottery transactions, crossword puzzles and competitions, speculative
transactions and horse race transactions.
• Lottery is a game of chance and not of skill or knowledge. When the prime motive of the participant is gambling, the transactions
amounts to wager. Even if the lottery is sanctioned by the Government of India, it will be a wagering transaction. The only effect
of such a sanction is that the person responsible for running the lottery will not be punished under the Indian Penal Code.
• Speculative transactions are also void. An agreement or a share market transaction where the parties intend to settle the difference
between contract price and the market price of certain goods or shares on a specified day, it is gambling and hence void.
• A horse race competition where prize payable to the bet winner is less than Rs. 500 is a wager and hence, void. Where the prize
money is Rs. 500 or more, it will not considered as wager.
• Games / Crossword Puzzles / Skills based on luck / chance are considered wager and hence, void. Such games based on skill will
be regarded as wager if the prize money exceeds Rs. 1,000.
• Transactions resembling wager but are not void include chit funds, commercial transactions or share market transactions, game of
skill and athletic competitions and contracts of insurance.
• Chit fund does not come within the scope of wager. In case of chit fund, a certain number of persons decide to contribute a fixed
sum for a specified period and at the end of the month, the amount so contributed is paid to the lucky winner of the lucky draw.
Such contracts are valid.
• Commercial transaction or share market transactions in which delivery of goods or shares is intended to be given or taken, do not
amount to wager. Such contracts are valid.
• An insurance contract is a type of contingent contract are valid under the law as these contracts are different from wagering
contracts.

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