CHAPTER - I

LAW OF CONTRACTS
1.1- The Indian Contract Act Lesson

1.2 - Offer and Acceptance

1.3 - Consideration and Capacity of Parties Lesson
1.4 - Free Consent
1.5 - Discharge of Contracts and Void Agreements

CH – 1.1
THE INDIAN CONTRACT ACT
Introduction
The Indian Contract Act which was passed on 25 th April,1872, came into effect
from 1st Sep. 1872. It was passed with an object to define and amend certain portions of
the laws relating to contracts. It lays down general principles of law relating to contracts. It
applies to the whole of the country except the State of Jammu and Kashmir. It does not
affect the provisions of any Statue, Act or Regulation. Originally, the Act contained
provisions relating to sale of goods and partnership. In 1930, rules relating to sale of
goods were taken out from this Act and incorporated in a new Act, namely “Sale of Goods
Act”. Similarly in 1932, provisions relating to partnership were codified as a separate Act
and The Indian Partnership Act, 1932 was passed in the parliament. The Indian Contract
Act in its present status contains the general principles of contracts, (Section 1 to 75) and
special types of contract (Sec 124-238)

Object and Scope

Law of Contract constitutes the most important branch of mercantile law. It is the
nerve centre of trade and commerce. It is not only the business community which is
concerned with the law of contract, but it plays its role on every one’s walks of life. Every
one of us enters into a number of contracts from dawn to dusk. When a person brings
newspaper or rides a bus or goes to a hair-cutting saloon or purchases vegetables or
borrows a loan from a friend etc., he enters into a contract through he may not be
conscious of it. Such contracts create legal rights and obligations.

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 The object of the law of contracts is to introduce definiteness in commercial and
other transactions. How this is done can be illustrated by an example, X entered into a

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contract to deliver 10 tons of iron ore on a particular date. Since such a contract is
enforceable by the courts, Y can plan his activities on the basis of getting iron ore on the
fixed date. If the contract is broken, Y will get damages from the court and will not suffer
any loss.
Sir William Anson observes in this regard that the law of contract is intended “to
ensure that what a man has been led to except shall come to pass and what has been
promised to him shall be performed”.
Agreement and Contract
The Law deals with agreements which can be enforced through court of law. A
contract has been defined by Sir John Salmond as “an agreement creating and defining
obligations between the Parties”.
Sec.2(h) of the Indian Contract Act, provides that “An agreements enforceable by
law is a contract. “An agreement is thus regarded as a contract only when it is enforceable
by law. There are various social religious and moral obligations which are not enforceable
by law as contracts.
Example: A husband promised to pay his wife a household allowance of $30 every month.
Later, the parties separated and the husband stopped the payment. The wife sued for the
allowance, Held, agreements such as were termed, are mere social obligations and do not
create legal relationship. As such they are not contracts. (Balfour Vs Balfour- 1919 ; 2
K.B.571)
In the words of Lord Ackin, “the most usual forms of agreements which do not
constitute a contract are the agreements between husband and wife. They are not contracts
because the parties do not intend that they should be attended by legal consequences”.
A Contract must specify two conditions (1) there shall be an agreement and, (2)
such an agreement should be enforceable by law which creates legal obligation.

An agreement is defined under Sec.2(e) as “every promise and every set of

promises, forming consideration for each other”. A promise is defined under Sec.2(b)
thus: “When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal when accepted, becomes promise” In a
nutshell, an agreement is an accepted proposal. Therefore, to form an agreement, there
must be a proposal or offer by one party and acceptance by the other.

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Definitions
The word contract is derived from the Latin word contractum meaning “drawn
together”. It therefore denotes a drawing together of two or more minds to form a common
intention giving rise to an agreement.
According to Sir John Salmond, a contact means “An agreement creating and
defining obligations between parties”.
Sir William Anson defines a contract as “A Legal binding agreement between two or more
persons by which rights are acquired by one or more acts or forbearance on the part of the
other or others”.
According to Pollock, an “Every agreement and promise enforceable at law is
contract”. The Indian Contact Act 1872, Sec 2(h) defines a contract as follows:
“An agreement enforceable by law is a contract”.

ESSENTIALS OF A VALID CONTRACT

We have seen that all agreements are not contracts. The law of contract is the law
of those agreements which create legal relationships and not simply moral or social ones.
An agreement, which creates legal obligations in order to be valid and binding must
possess certain basic essentials.
Sec.10 of the Contracts Act has laid down certain basic essentials for a valid
contact. According to this Section, “All agreements are contracts if they are made by the
free consent of parties, competent to contract, for a lawful consideration and with a law
object and are not hereby expressly declared to be void”.

From the rule stated in Sec.10 the essential elements necessary constitute a valid
contract are the following:
(i.) Free consent of Parties (S.13)
(ii.) Competency of Parties (S.11,12)
(iii.) Lawful consideration (SS.23,24)
(iv.) Lawful object (SS.23,24)
(v.) Not declared to be void by any law(24,30)
(vi.) They should also fulfill legal formalities presented by another law if any,
viz., writing, registration etc.

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 According to English law, there is further requirement, namely “an intention to
create legal obligation. “This principle is followed in India also. This may be treated as the
seventh requisite element.
Now we shall discuss in detail the various essential elements of a valid contract.
1. Proposal or offer by one party and acceptance of the proposal or offer by another
party resulting in an agreement.
A contract is a legally binding agreement. This agreement results when one person, the
offeror or promisor, makes a proposal or offer and a person to whom the offer is made, the
offered or promise, accepts it. For an agreement to arise, there must be two or more parties
to the transaction. As it is imperative that there be a concurrence of at least two minds, it is
impossible for one person to make an agreement with himself.

Example: When a person in his official capacity as general manager of a company makes
a promise to himself as an individual, no agreement is formed by an acceptance in the
latter capacity. That there must be more than one person is an essential characteristic of an
agreement. These persons must come to an understanding with a view to creating a right
in one party and a corresponding duty on the other.
Consensus-Ad-Idem (or) Meeting of Minds: To constitute an agreement or a contract,
there must be a meeting of the minds of the parties and both must agree to the same thing
in the same sense. If in a particular agreement we find a meeting of minds or identity of
wills of the parties in full and final then we can conclude that there must be consensus-ad-
idem.

Example: Mr.Aravind who owns two Maruti cars of different colours namely red and
white intends to sell his red car. But Miss, Athiral thinks she is purchasing the white car. In
this situation, there is no consensus-ad-idem and consequently there is no contract.
The terms of the offer and acceptance must be legal which means that they should
conform to the rules laid down in the Contract Act regarding the valid offer and valid
acceptance i.e. the terms of the offer must be definite and the acceptance of the offer must
also be absolute and unconditional. The acceptance must also be according to the mode
prescribed and must be communication to the promisor.
2. Intention to create Legal Relationship:
The parties to the agreement must intend to create legal relations between them. Mere
social or domestic agreements are not contracts because they are not intended to be

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binding i.e., an agreement to have a cup of tea at a friend’s house is simply a social
obligation.
Example: “X” offers to play cards with “Y” for pleasure and “Y” accepts. If later on,
“X” refuses to do so,”Y” cannot go to the court for enforcing the promise.
3. Lawful Consideration:
Subject to certain exceptions an agreement legally enforceable only when each of the
parties to it gives something and gets something. An agreement to do something for
nothing is generally not enforceable at law. The something given or obtained is called
consideration. The Consideration may be an act (doing something) (or) forbearance (not
doing something) or a promise to do or not to do something. Consideration may be past,
present or future. But it must be real and lawful.
Example:
“X” agrees to sell his car to “Y” for Rs.1,00,000.
For “X”’s promise, the consideration is Rs.100,000.
For “Y”’s promise the consideration is the car.

4. Capacity of Parties:
The parties to an agreement must be legally capable entering into an agreement; otherwise
it cannot be enforced by a court. Want of capacity arises from minority, lunacy, idiocy,
drunkenness are similar other factors. If any of the parties to the agreements suffers from
any such disability, the agreement is not enforceable by law, except in some special cases.

5. Free Consent:
The two parties to a contract must have agreed as to the particular subject matter in the
same sense. By Section 13 “two or more sections are said to consent when they agree upon
the same thing in the same sense “Such a meeting of minds creating an identity of opinion
or will is carried to by using the term ‘Consensus-ad-idem’. The consent of parties not be
affected by any flaw. The consent is said to be free when it is not used by coercion, undue
influence, fraud, mistake or misrepresentation.
Example: ’A’ threatens to beat “B” if he does not sell his land for a low price agrees to do
so. The agreement has been brought about by coercion.

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6. Legality of Object:
An agreement is unlawful and therefore unenforceable when the object for which the
agreement is made is forbidden by law, or if permitted would defeat the provisions of any
of the existing law or is fraudulent or involves an injury to the property of another or in the
eyes of the court, is immoral, or opposed to public policy (Sec.23).
Thus an agreement will not become a contract or will remain unenforceable, if it is made
for an unlawful consideration and with an unlawful object.
Example: ‘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 void.

7. Certainty of the Terms of the contract:

The terms of the agreement must be definite and certain and it must not contain any
ambiguous information.
Example: ‘A’ agrees to sell to ‘B’ a hundred tons of oil”. There is nothing whatever to
show what kind of oil was intended. The agreement is void for want of certainty.

8. Possibility of Performance:
The terms of the agreement must also be such as are capable of performance. An
agreement to do an act which is impossible in practice cannot be enforced.
Example: When A agrees with B to find a treasure the agreement is void as it is
impossible of performance.

9. Void agreements:
The agreements must not have been expressly declared to be void. Following agreements
are expressly declared to be void under the Indian Contract Act:
a. Agreement in restraint to marriage (Sec.26)
b. Agreement in restraint to trade (Sec.27)
c. Agreement in restraint to legal proceedings (Sec.28)
d. Agreement having uncertain meaning (Sec.29)
e. Wagering agreement (Sec.30)

10. Legal formalities:

The agreement may either be oral or in writing. But there are certain agreements which are
required to be in writing e.g., lease, gift, sale, mortgage of immovable property, negotiable
instruments, certain matters under the Companies Act, 1956. Such agreements must be in

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writing, attested and registered, if so required by law. Registration of agreements or deeds
is compulsory in cases of documents falling within the scope of Sec. 17 of the Indian
Registration Act, 1980. If the agreement does not comply with these legal formalities it
cannot be enforced by law.

CONTRACTUAL RIGHTS AND OBLIGATIONS

The law of contract consists of a number of limiting factors subject to which the
parties may create rights and duties for themselves which the law will enforce.
It deals with two rights:
(1) Rights in Personam
(2) Rights in Rem

RIGHTS IN PERSONAM
Example: If ‘X’ has a right to get back a sum of Rs.5000 from ‘Y’ that right can be
exercised only by ‘X’ but not by others because the right ‘X’ has against ‘Y’ is a right in
personam. ‘X’ cannot enforce that right against anyone else except ‘Y’.

RIGHYTS IN REM
If ‘A’ owns a plot of land and ‘B’ is the adjacent owner, the right of ‘A’ to have
uninterrupted possession and employment of that land is available not only against ‘B’ but
against every member of the public. Similarly, everyone except ‘A’ is under an obligation
not to interfere with ‘A’s possession or enjoyment, because the rights of ‘A’ in respect of
that land are Rights in rem. The rights to property are all “Rights in Rem”.

CLASSIFICATION OF CONTRACTS

For the sake of convenience, we can classify contracts according to their (1)
Validity, (2) Formation and (3) Performance. Let us examine them in detail.

1. Classification according to validity: When we closely analyse the definition of a

contract, it is found that the contract is based on agreement. An agreement enforceable
at law is a contract. To make the agreement enforceable at law. The essentials
stipulated in Sec. 10 of the element is missing then the contract may either be void,
voidable, illegal, or unenforceable.

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 a. void agreements: “An agreement not enforceable by law is said to be void”- Sec.
2(g). A void agreement has no legal effect. It confers no rights on any person and
creates no obligations.
Examples: An agreement made by a minor, agreements without consideration (except
certain cases). Certain agreements against public policy; etc., are void from the beginning.

Void Contract: There are certain agreements which are valid in the beginning and
subsequently it becomes void due to impossibility of performance, change of law or other
reasons. When it becomes void the agreements ceases to have legal effect. This we call as
void contract as per Sec 2(j) Example: A contract to export coffee to USSR. It may
subsequently become void if the exporting country bans the product from being exported.

Illegal agreement: An illegal agreement is one which is against a law in force in India.
Example: An agreement to commit murder, theft or cheating.

Voidable contract: A voidable contract is one which can be avoided by some of the
parties to the agreement. Until it is avoided, it is a good contract. An agreement which is
enforceable by law at the option of one or more of the parties thereto, but not at the option
of the other or others, is a voidable contract as per Sec.2(i) Examples of voidable
contracts: Contracts brought about by coercion, under undue influence, misrepresentation
etc.
Illustration: ‘P’ threatens ‘Q’ to enter into a contact for the sale of ‘Q’s landed property
to ‘P’. This contract can be avoided by ‘Q’. ‘P’ cannot enforce the contract. But ‘Q’, if he
so desires, can enforce it against ‘P’.

Unenforceable agreement: The term unenforceable agreement is used in English law. It

means an agreement which cannot be forced in a court of law by one or both of the parties,
because of some technical defect. E.g. want of registration or non-payment to requisite
stamp duty or for want of written form.

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 Difference between void and voidable contract
Void Voidable
1 Not enforceable by law Enforceable by law at the option of
one of the parties to the contract.
2 It has no legally binding effect It continues to be legal unless avoided
by the party.
3 In a void contract, the defects are In a voidable contract, the defect is
incurable curable
4 A third party who purchased goods But in voidable contract third party will
which had been the subject of a void acquire good title.
contract will not acquire good title

Difference between void contract and illegal contract

Void Illegal
1 All void contracts are not necessarily All illegal contracts are void
Illegal
2 All collateral contracts to a void But all collateral contracts to a illegal
contract are not void contract are void
3 Ground for the voidness has to Court will, of its own motion, in be case
proved. of an illegal contract, refuse to enforce
it, even though the illegality has not been
pleaded.

Valid contract: An agreement enforceable at law is a valid contract. An agreement

becomes a contract when all the essentials of a valid contract stipulated in Sec. 10 are
complied with.

2. Classification on the basis of Formation: A contract may be created in three different

methods:
1. It may be in writing.
2. It may be made orally, and
3. It may be inferred from the circumstances of the case.

Contracts can be classified according to the mode of their formation as Express,

Implied and Quasi contracts

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 Express contracts are those in which the fact of the agreement can be proved by
words written or spoken which express the intention of the parties. Thus contracts in
writing and oral (by spoken words) can be collectively called “express contracts.”

In case of implied contracts or tacit or inferred contracts agreements would be

inferred from conduct of the parties and the general circumstances of each case.

Examples: Mr. A takes a public bus or enters into a restaurant for a cup of coffee or
obtains a ticket from an automatic machine.

Unlike other contracts, the quasi-contract does not fulfil such requirements and in
that strict sense, is not a contract at all. It rests on the ground of equity that,

“A person shall not be allowed to enrich himself unjustly at the expense of

another.” In such a contract, rights and obligations arise not by any agreement between the
parties but by operation of law.

Example: ‘A’ a shopkeeper supplied groceries to ‘B’ by mistake. ‘B’ used the items as his
own. ‘B’ is bound to pay.

In the above case there is no consensus, no offer, no acceptance; still the law
implies a contract. This is known as quasi-contract.

3. Classification according to performance: Contracts can again be classified

depending upon the extent to which it has been performed i.e. Executed and Executory
contracts.
An executed contract is one wherein both the parties have performed their obligations
under the contract.

Example: ‘A’ agrees to sell his motorbike to ‘B’ for Rs.20,000. In this situation ‘A’ has
given the motorbike and got the money from ‘B’. When both the parties perform their part
of the obligation under the contract the contract is said to be executed.

An executor contract is one where both the parties are yet to perform their
obligations. Thus, in the above example, if ‘A’ has not yet delivered his motorbike and
‘B’

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has not paid the price, the contract is executed as to ‘A’ and executory as to ‘B’. Another
classification of contracts on the basis of performance is as follows:

Unilateral or one-sided and Bilateral or two-sided contract: In case of a unilateral or

one-sided contract, one party to the contract has performed his part even at the time of its
formation and an obligation is outstanding only against the other.

Example: The promise to give a reward to the person who finds out a lost thing forms a
unilateral contract when the thing is actually found out. It creates an one-sided obligation.
In the Bilateral contract at the time of its formation, there are two outstanding
obligations.

Example: ‘A’ promises to paint a picture in one month in return for which ‘B’ promises to
pay Rs. 1000. Here there are two promises and each party is a promisor in respect of one
promise and a promisee in respect of the other and as such each can hold the other liable
for the breach of his promise.

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 CH– 1.2
OFFER (PROPOSAL) AND ACCEPTANCE
Introduction
As discussed earlier, a contract is defined as a promise or agreement enforceable by
law. So, two elements namely, agreement and enforceability are essential for a valid
contract. All contracts are made by the process of a lawful offer by one party and the
lawful acceptance of the offer by the other party.

Example: If ‘X’ says to ‘Y’ “will you buy my house for Rs. 5,00,000”? It is an offer. If
‘Y’ says “Yes”, the offer is accepted and a contract is formed.

An ‘offer’ involves the making of a proposal. The term proposal is defined under
Sec 2(a) in the Contract Act as follows: “when one person signifies to another his
willingness to do or to abstain from doing anything with a view to obtaining the assent of
that other to such act or abstinence, he is said to make a proposal”
A proposal is also called an offer. The promisor or the person making the offer is
called the offeror. The person to whom the offer is made is called the offeree.

Promise and Acceptance: Sec.2(b) of the Act defines promise as “when the person to
whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
A proposal when accepted becomes a promise” Promisor and promise are defined under
Sec 2(c) as “The person making the proposal is called the ‘promisor’ and the person
accepting the proposal is called the ‘promisee’ – Sec. 2(c).
A proposal or acceptance may be made in any of the following manners:
 By express words spoken,
 In writing.
 By conduct.
Examples:
1. When A says to B: “will you buy this building for Rs.20 lakhs”? It is an express
oral offer.
2. When A writes to B stating the above offer, then it is an express written offer.
3. When a transport company runs a bus on a particular route, it is termed as an
implied offer or an offer by conduct.

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RULES REGARDING VALID OFFER
1. An offer may be express or may be implied from the circumstances: In so far
as the proposal or acceptance of any promise is made in words, the promise is said
to be express. In so far as such proposal or acceptance is made otherwise in words,
the promise is said to be implied (Sec. 9).

2. An offer may be made to a definite person; to some definite class of persons;

or to the world at large: An offer made to a definite persons or a definite class of
person is called a specific offer. An offer sent to all persons (the world of public at
large) is called a General offer or Public offer.

Examples: Specific offer: ‘X’ offers to sell his motor cycle to ‘Y’ for Rs.10,000. This is a
specific proposal. This proposal is specifically given to ‘Y’. Only ‘Y’ can accept this
proposal.

General offer: Carlill Vs Carbolic Smoke Ball & Co (1893) The patent medicine
company advertises that it would give a reward of $100 to anyone who contacted influenza
after using the medicine namely smoke ball of the company for a certain period according
to the specifications. Mrs. Carlill purchased the smoke ball and contacted influenza in spite
of using it as per the specifications. She claimed the reward of $100. The claim was
refused by the company on the ground that the 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.
It was held that she could recover the reward as she had accepted the general offer
made by the company after complying with the terms of the offer.

3. Offer must be capable of creating legal relationship: The offer must be one which is
capable of creating a legal relationship. An invitation to a birthday party or an invitation to
play cards will not crate legal relationship. Therefore an offer for such social events will
not constitute a contract.

Example: Balfour Vs Balfour (1919): A husband promised to send money to his wife, so
long as she remained away from him. It was held that if the husband fails to pay, the wife

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could not sue for the amount on the ground that the promise made by the husband was
never intended to give rise to legal consequences.

4. The terms of the offer must be definite and certain: The terms of the offer must be
definite, unambiguous and certain and not loose and vague. To constitute a valid contract,
it is essential that the proposal must be so certain, that the rights and obligations of the
parties arising out of the contract can be exactly fixed. If the terms of an offer are
uncertain, its acceptance cannot create any contractual relationship. According to Sec. 29
of the Act, agreements, the meaning of which is not certain or capable of being made
certain are void.
Example: ‘X’ says to ‘Y’ “I will give you some money if you marry ‘Z’”. This is not an
offer which can be accepted because the amount of money to be paid is not certain.

5. A mere statement of intention is not an offer: Every expression of willingness to

enter into a contract may not amount to an offer in the legal sense. It may be only a first
and preliminary step in the formation of a contract. Thus it becomes necessary to
distinguish between the offer on the one hand and (i) a mere declaration of intention (ii) an
invitation to make an offer, and (iii) auction sale, on the other hand.

A distinction is usually made between an ‘offer’ and “a statement of intention”.

Price lists and catalogues and enquiries from customers are merely statements of intention.
They are not regarded as offers but as invitation to others to make offers.
Harvey Vs Facey: Harvey telegraphed to Facey asking to inform him whether he would
sell Bumper Hall pen and if so at what price? Facey informed Harvey that the lowest price
was $900 but did not say that he was willing to sell at that price. Harvey telegraphed that
he would buy at that price. Facey gave no reply to the telegram. Held, there was no
contract because facey did not say that he was willing to sell or not. Mere mentioning of
price is not an offer.
Similarly, in an auction sale, articles displayed in auction sale are displayed with an
intention that the bidders present during the auction sale may bid for them. i.e. may make
an offer for them. In an auction sale, a bid is an offer. It can therefore, be taken back at any
time before acceptance is made by the auctioneer is effected by the fall of the hammer.

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6. An offer must be communicated to the offeree: A person cannot accept an offer
unless he knows of the existence of the offer.
Example: ‘P’ offers a reward to anyone who finds his lost dog. ‘Q’ on finding the dog
brings it to ‘P’ without having heard of the offer. Held he was not entitled to the reward.
Lalman Vs Gauri Dutt: ‘G’ sent his servant ‘L’ in search of his missing nephew,
subsequently ‘G’ announced a reward for information concerning the boy. ‘L’ brought
back the missing boy, without having the knowledge of the reward. Held, there was no
contract between L and G and the reward cannot be claimed.
7. An offer may have certain conditions: A proposer is at liberty to make an offer
subject to certain conditions. It is immaterial if the terms are hard or ridiculous. Conditions
attached to the offer must clearly be communicated to the offeree. The offeree must fulfil
all the conditions mentioned in the offer.
8. Offer must not thrust the burden of acceptance: Offer should not contain the term
“the non-compliance of which may be assumed to amount to acceptance”. Thus a man
cannot say that if he fails to hear from the other party within a week he would consider the
offer as being accepted. Similarly, if ‘A’ writes to ‘B’. “I will sell you my house for Rs.5
lakhs. If you do not reply. I shall assume that you have accepted the same. There is no
contract even if ‘B’ does not reply.

LEGAL RULES AS TO ACCEPTANCE

An offer unless accepted cannot become an agreement. Acceptance is essential to

convert an offer into an agreement. The acceptance of an offer to be legally effective must
satisfy the following requirements:

1. It must be absolute and unqualified: An acceptance to be effective must be absolute

and unqualified of all the terms of the offer. A conditional acceptance is not an
acceptance at all. If there is any variation, even of an unimportant point, there is no
contract. An acceptance with a variation is no acceptance but is a mere “counter offer”
which is for the original offeror to accept or not.

Example: Mr.’X’ informed ‘Y’ his willingness to buy ‘Y’s’car for Rs.75,000. On receipt
of the offer ‘Y’ informed ‘X’ that he is willing to sell his car for Rs.1,00,000. In this

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example, ‘Y’s’ acceptance is not unconditional or unqualified. This is not an acceptance. It
is only a counter offer. If ‘X’ accepts for Rs.1,00,000, then it will become a contract.

2. The mode of acceptance must be in some usual manner: Except where the offer
prescribed a particular mode of acceptance, the acceptance must be made in such
manner that it may come to the knowledge of the proposer. If the proposer prescribes a
mode of acceptance, the acceptance must be given accordingly.

Example: If the proposer says “Telephonic reply” and the reply was sent by post, then
there is no acceptance of the offer.

If the offeree fails to follow the prescribed mode of acceptance, the offeror may,
within a reasonable time alter the acceptance as communicated to him, insist that the
proposal be accepted in the prescribed manner. If he does not inform the offeree he is
deemed to have accepted the acceptance although it is not in the desired manner [Sec. 7.
(2)].

3. Acceptance must be by the party named in the offer: An offer made to a particular
person is to be accepted by him only. It cannot be assigned to anybody else. It cannot be
accepted by another without the consent of the offeror. However, in case of general
offer, any member of the public may accept it.

4. An acceptance must be communicated to the offeror: Just as the offer should be

communicated to the acceptor should do something to inform his intention to accept.
In certain cases the offeror may prescribe a particular mode of acceptance, then all that
the acceptor has to do is to follow that mode.

5. Acceptance must be within a reasonable time: The acceptance must be made while
offer is still in force. (i.e) before the offer lapses. Acceptance made after the offer has
been withdrawn is invalid. If any time limit is prescribed in the offer, it should be
accepted within that time. But if no time is prescribed it must be accepted within “a
reasonable time”. What is a ‘reasonable time’ depends upon the circumstances of each
case.

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 6. Acceptance cannot be made in ignorance of the offer: Acceptance cannot precede the
offer nor does an acceptance in total ignorance of an offer result in a contract.

7. Clarification: The seeking of clarification of offer neither amounts to the acceptance of

the offer nor to the making of a counter offer.

8. Mental acceptance or uncommunicated assent does not result in a contract: No

contract is formed if the offeree remains silent and does nothing to show that he has
accepted the offer.
Example: F offered to buy ‘B’s horse for $30 saying. “If I hear no more from you, I shall
consider the horse as mine at $30.” ‘B’ did not reply. Held there was no contract because
the other party was not informed (Felthouse Vs Bindley)

9. When acceptance is complete: Sec. 4 of the contract act lays down that the
communication of an acceptance is complete as against the proposer, when it is put in a
course of transmission to him; so as to be out of the power of the acceptor; and as against
the acceptor, when it comes to the knowledge of the proposer.
Examples
(i) ‘A’ proposes by letter to sell a house to ‘B’ at a certain prince. The
communication of the proposal is complete when ‘B’ receives the letter.
(ii) ‘B’ accepts ‘A’s proposal by a letter sent by post. The communication of
the acceptance is complete as against ‘A’. When the letter is posted, as
against ‘B’, when the letter is received by ‘A’.
COMMUNICATION OF OFFER AND ACCEPTANCE

An offer may be communicated to the offeree or offerees by word of mouth, by

writing or by conduct. A written offer may be contained in a letter or a telegram.

Sec. 4 states: “The communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made.”
The acceptance must be expressed in some usual or reasonable manner. The offeree
may express his acceptance by word of mouth, telephone, telegram or by post.

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 Mr. G applied for shares in a company. A letter of allotment was posted but the
letter did not reach ‘G’. held there was a binding contract and ‘G’ was shareholder of the
company (Household Fire Co. Vs. Grant)

REVOCATION OF OFFER AND ACCEPTANCE

Revocation of an offer: An offer comes to an end and is no longer open to acceptance
under the following cases-Sec.6
1. Lapse of time.
2. After expiry of reasonable time.
3. An offer lapses by the failure of the acceptor to fulfil a condition precedent to
acceptance, where such a condition has been prescribed.
4. An offer lapses by the death or insanity of the proposer, if the fact of his death or
insanity comes to the knowledge of the acceptor before acceptance.
5. When the counter-offer is given, the original offer lapses.
6. A proposal once refused is dead and cannot be revived by its subsequent
acceptance.

Example: ‘A’ offers to sell his farm to ‘B’ for Rs.1,00,000.’B’ replies offering to pay
Rs.90,000. ‘A’ refuses. Subsequently ‘B’ writes accepting the original offer. There is no
contract because the original offer has lapsed.

7. By notice: If the offeror gives notice of revocation to the other party, an offer may be
revoked anytime before acceptance but not afterwards. Once an offer is accepted there is a
binding contract.
The acceptance of an offer becomes binding on the offeror as soon as the
acceptance is put in course of communication to the offeror so as to be out of the power of
the acceptor. But anytime before this happens, the offer may be revoked.
Example: A proposal is sent by ‘X’ to ‘Y’ and accepted by ‘Y’ by letter. The proposal
might have been revoked anytime before the letter of acceptance was posted but it cannot
be revoked after the letter is posted.
The notice of revocation does not take effect until it comes within the knowledge
of the offeree.

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Revocation of Acceptance: 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 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.

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 CH- 1.3

CONSIDERATION AND CAPACITY OF PARTIES CONSIDERATION

Meaning
Consideration is an essential element in a contract. It is the sign and symbol of
every bargain subject to certain exceptions. An agreement made without consideration is
void. Consideration is the necessary evidence required by law of the intention of the
parties to effect their legal relations. All contracts require consideration to support them.
Consideration means the valuable considerations (i.e) the price paid for the other party’s
promise. Contract results where one party promises to do in exchange for something in
return. Consideration is otherwise known as “something in return.” In a nutshell,
consideration is the price paid by the promise for the obligation of the promisor.
Example
(i) ‘P’ agrees to sell his land for Rs.2,00,000 to ‘Q’. for ‘P’s promise, the
consideration is Rs.2,00,000. For ‘Q’s promise, the consideration is the house.
(ii) ‘X’ promises not to file a suit against ‘Y’ if ‘Y’ pays him Rs.10,000 on a
particular date. ‘X’s act of not filing a case against ‘Y’ is the consideration for ‘Y’
and Rs.10,000 is the consideration for ‘X’. if there is no consideration there is no
contract.

In an Allahabad case, a person subscribed Rs.500 to rebuild a mosque. It was held that the
promise was without consideration and the subscriber was not liable. (Abdul Aziz V.
Masum Ali)

Definitions
Sec. 2(d) of contract act defines consideration as follows:
“when at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing, or promises to do or to abstains from
doing, such act or abstinence or promise is called a consideration for the promise.”
In the English case Currie V. Misa (1875) consideration was defined as, “some
right, interest, profit or benefit accruing to one party for some forbearance, detriment, loss
or responsibility given, suffered or undertaken by the other.”
Example: ‘X’ engages ‘Y’ as a steno in his office for Rs.2000 per month. The monthly
wage is the consideration received by ‘Y’. the services of ‘Y’ is the consideration for ‘X’.

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 The consideration may consist of either:
(i) An act (which one is legally bound to perform)
(ii) An abstinence or forbearance from doing
(iii) A return promise.

TYPES OF CONSIDERATION
Consideration may be classified as
1. Past consideration
2. Present consideration, and
3. Future consideration.
Past consideration: When the consideration of one party was given before the date of the
promise, it is said to be past.
For Example, ‘X’ does some work for ‘Y’ in the month of January and ‘Y’
promised him to pay some money during February. The consideration of ‘X’ is past
consideration. Under English law past consideration will make the contract invalid. But
under Indian law a past consideration is good consideration because the definition of
consideration in Sec.2(d) includes the words “has done or abstained from doing.”
Present consideration: Consideration which moves simultaneously with the promise is
called present consideration or executed consideration.
Future Consideration: When the consideration is to move at a future date it is called
future consideration or executory consideration.

ESSENTIALS OF VALID CONSIDERATION

1. Consideration Must Move at the Desire of the Promisor: The act done or loss
suffered by the promise must have been done or suffered at the desire of the promisor. An
act done without any request is a voluntary act and does not come within the definition of
consideration.

The collector of a district asked ‘D’ to spend money on the improvement of a market and
he did so. ‘D’ cannot demand payment from the shopkeepers using the market for having
improved the market. (Durga Prasad Vs Baldeo)

2. It must be a real consideration: The consideration must have some value in the eyes
of law. It must not be illusory. The impossible acts or non-existing goods cannot

31
 support a contract. A contribution to charity is without consideration. A promise to pay
an existing debt within due date if the creditor gives a discount is without consideration
and the discount cannot be enforced.

3. Public Duty: “Where the promise is already under an existing public duty, an express
promise to perform or performance of that duty will not amount to consideration.
Example: A contract to pay a sum to a witness who has already received some
money to appear at a trial is invalid.

4. Promise to a stranger: 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.

‘X’ wrote to his nephew ‘B’, promising to pay him an annuity of 150 pounds in
consideration of his marrying ‘C’. ‘B’ was already engaged to marry ‘C’. Held that the
fulfilment of B’s contract with ‘C’ was consideration to support X’s promise to pay the
annuity. (Shadwell Vs Shadwell)

5. Consideration need not be adequate: Explanation 2 under Sec. 25 provides that “An
agreement to which the consent of the party is freely given is not void merely because
the consideration is inadequate.” Law requires the presence of consideration, but does
not inquire into the adequacy.
Example: ‘P’ agrees to sell a house worth Rs.5,00,000 for Rs.1,00,000. P’s consent to the
agreement was freely given. The agreement is valid in spite of inadequate consideration.

6. The consideration must not be illegal, immoral or opposed to public policy:

If the consideration of the object of the agreement is illegal, immoral or opposed to public
policy, the agreement to contract is invalid.
Example: ‘X’ agreed to pay Rs.50,000 to ‘Y’ if he kills ‘C’.

7. The consideration may be past, present and future

In the past promise, consideration has already been taken place. In the present
consideration, it simultaneously moves with promise. In the future consideration, it passes
subsequently.

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8. The consideration may move from the promise or from any other person:
A person has given some properties to his wife ‘C’ directing her at the same time to pay an
annual allowance to his brother ‘R’. ‘C’ also entered into an agreement with ‘R’ promising
him to pay the allowance. This agreement can be enforced by ‘R’ even though no part of
consideration received by ‘C’ moved from ‘R’

“NO CONSIDERATION NO CONTRAACT” – EXCEPTIONS TO THIS RULE

Consideration is essential for the validity of a contract. “A promise without
consideration is a gift; one made for a consideration is a bargain” (Salmond and
Windfield)
A promise without consideration is a gratuitous undertaking and cannot create a legal
obligation. Under Roman law an agreement without consideration was called a ‘nudum
pactum’ and was unenforceable. Under English law simple contracts must be supported by
consideration but special contracts require no consideration. Under Indian law, the
presence of consideration is a rule essential to the validity of contracts.
Exceptions:
1. Natural love and affection: An agreement without consideration is valid under
Section 25(1) only if the following requirements are complied with:
(i) The agreement is made by a written document
(ii) The demand is registered according to the law relating to registration in force at
that time.
(iii) The agreement is made on account of natural love and affection.
(iv) The parties to the agreement stand in a near relation to each other.

Examples: An agreement entered into by a husband with his wife during quarrels and
disagreement, whereby the husband promised to give some property to his wife. The
agreement is void because, under the circumstances, there is no natural love and affection
between the parties. (Rajlukhy Debee V.Bhootnath ;1900)

2. Voluntary Compensation: Sec.25(2) applies when there is a voluntary act by one

party and there is a subsequent promise (by the party benefited) to pay
compensation to the former. The term ‘voluntary’ signifies that the act was done,
“otherwise than at the desire of the promisor.” This kind of promise without any

33
 consideration is valid. Example: ‘D’ finds B’s baggage and gives it to him. ‘B’
promises to give ‘D’ Rs.100. this is a valid contract.

3. Time-barrred debt: ’A’s promise to pay, wholly or in part, a debt which is barred
by the law of limitation can be enforced if the promise is in writing and is signed
by the debtor or his authorised agent. [Sec. 25(3)] Example: ‘D’ owes ‘B’
Rs.10,000 but the debt is barred by the limitation act. ‘D’ signs a written promise to
pay ‘B’ Rs.5000 on account of the debt. This is contract.
4. Agency: No consideration is required to create an agency. (Sec. 185).
5. Completed Gift: According to Sec. 25 ‘No consideration no contract’ rule does
not apply to completed gifts.

If a person transfers certain property to another by a written and registered deed according
to the provisions of Transfer of property Act, he cannot subsequently claim back that
property on the ground of lack of consideration.

Can a person who is stranger to consideration sue upon it? Normally, the rule is that
the consideration must move from the promise and the party to a contract can sue. In other
words, a stranger to a consideration cannot sue. Under English law, a stranger to a
consideration cannot sue.

Examples: Suppose ‘A’, a doctor, agrees to treat ‘B’, but as ‘A’ will not accept payment,
‘B’ promises ‘C’ (A’s son) that he will pay him Rs.5,000, ‘C’ cannot maintain a suit on the
promise because he is a stranger to the consideration and the fact of C being the son of A
will not alter the position.
Under Indian law consideration may move from the “promisee or any other
person”. So it is clear that the consideration can move from any person.
There are certain differences between the rights of a stranger to a contract and stranger to
consideration. A stranger to contract i.e. one who is not a party to it, cannot file a suit to
enforce it. A contract between ‘P’ and ‘Q’ cannot be enforced by ‘R’.
But a stranger to consideration can sue to enforce it provided he is a party to the
contract. A contract between ‘P’, ‘Q’ and ‘R’ whereby ‘P’ pays money to ‘Q’ for
delivering goods to ‘R’ can be enforced by ‘R’ although he did not pay any part of the
consideration.

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 CAPACITY OF PARTIES

Capacity defined: According to

. 10, an agreement becomes a contract if it is entered into between the parties who are
competent to contract. ‘capacity’ referred to here, means competence of the parties to enter
into a valid contract. Capacity includes physical and mental capacity.

According to Sec.11: Every person is competent to contract who is of the age of majority,
according to the law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.

From this definition we come to the conclusion that the following are not
competent to contract:
1. A person who has not attained the age of majority.
2. A person who is of unsound mind, e.g. lunatic or an insane person.
3. Any other person who has been disqualified from contracting under any law, e.g. a
person who has been adjudicated an insolvent.
Minor: Under Section 3 of the Indian Majority Act, 1875, a minor is one who has not
completed eighteenth year of age. It may be stated here that a minor whose property has
been entrusted to a guardian by a court, attains the age of majority when he completes
twenty one years of life. In England, minority continues up to the completion of 21st year.

THE LEGAL RULES REGARDING MINOR’S AGREEMENT

1. Minor’s agreement is Void-ab-initio: (void from the very beginning):
Today an agreement with or by minor is void and inoperative. Formerly, the position was
not clear. The Indian Contract Act, does not expressly state whether a contract made by a
minor is void or voidable. Sec.11 of the Act simply states that a minor is not competent to
contract. Following the English law, it was held formerly that a minor’s contract was
voidable but not void. The issue came up again in the case of Mohori Bibee Vs Dharmadas
Ghose (1903)

In this case, a minor executed an agreement for Rs.20,000 and received Rs.8,000
from a mortgagee by way of earnest money. H sued for setting aside the mortgage. The
lender wanted refund of the sum which he had actually paid. Held an agreement by a

35
minor was absolutely void and therefore, the question of refunding the money did not
arise. Had the agreement been only voidable, the benefit received would have been
refunded under Sections 64 and 65 of the Act.

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 mortgage, or a promissory note. But he is capable 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 totally void from the beginning, and, therefore, validity cannot be given to it
later on.
Example: Indira Ramasamy V Anthiappa Chettiar. ‘A’ a minor makes a promissory note
in favour of ‘B’. on attaining majority, he makes out a fresh promissory note in place of
the old one. Neither the original nor the fresh promissory note is valid.
4. If a Minor has Received any Benefit Under a Void Contract he Cannot be Asked
to Refund the same: We have already mentioned the facts in Mohiri Bibee’s case. In
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
realisation of his loan.
5. A Minor is Always Allowed to plead Minority: He is not prevented from this right
even where he had procured a loan or entered into some other contract by falsely
representing that he was of full age. Thus, an 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 minor at the time he entered into agreement.

Examples: Leslie V Shiell (1914) In this case ‘S’, a minor, borrowed ₤ 400 from L, a
money lender, by fraudulently misrepresenting that he was of full age. On default by ‘S’,
‘L’ sued for return of ₤ 400 and damages for the crime. Held, ‘L’ could not recover ₤ 400,
and his claim for damages also failed. Even on equitable grounds, the minor could not be
asked to refund ₤ 400, as the money was not traceable as the minor had already spent it.

36
 In the case of a fraudulent misrepresentation of his age by the minor, inducing the
other party to enter into a contract, if money could be traced. The court may award
compensation to that other party under Sections 30 and 33 of the Specific Relief Act,1963.
6. A Minor Cannot be a Partner in a Partnership Firm: He cannot become a partner
but for the benefit of the partnership with the consent of all the partners he can be
admitted as a partner. Other partners cannot file a case against the minor partner if the
latter commits any offence.
7. A Minor’s Estate is Liable to a Person Who Supplies Necessaries of Life to a
Minor: 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. but 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”.

From the above definition it is very clear that in order to entitle the supplier to be
reimbursed from the minor’s estate, the following conditions must be fulfilled:

 The goods are necessaries for that particular minor having regard to his status. For
example, Purchase of a car may be a necessity for a particular minor and may not hold
good for the other person.
 The minor needs the goods both at the time of sale and delivery.

Example: Nash V Inman (1908): A minor, was studying B.C.S., in a college. He ordered
11 fancy coats for about ₤ 45 with N, the tailor. The tailor sued him for the price. His
father proved that his son had already 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, tailor cannot get the price.

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 decree is deemed to be a

37
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 minor
for the purpose of living and continuing his studies.
8. Minor’s parents or guardians are not liable to a minor’s creditors for the breach of
contract by the minor, whether the contract is for necessaries or not. But the parents are
liable where the minor is acting as an agent of the parents or the guardian.
9. A minor can act as an agent and bind his principal by his acts without incurring any
personal liability.
10. No specific performance: An agreement by a minor being void, the court can never
direct specific performance of such an agreement by him.
11. No Insolvency: A minor cannot be declared insolvent even though there are dues
payable from the properties of the minor.
12. Company’ shares to a minor: A minor cannot apply for and be a member of a
company. If a minor has, by mistake, been recorded as a member, the company can
rescind the transaction and remove the name from the register. But where a minor was
made a member and, after attaining majority, he received and accepted dividends, he
will be stopped from denying that he is a member. (Fazalbhoy V The Credit Bank of
India)

PERSONS OF UNSOUND MIND

Definition of “Sound Mind” for a valid agreement it is necessary that each party to it
should have a sound mind. What is sound mind for the purpose of contracting is laid down
in Sec. 12 of the Indian contract act.

Section 12: A person is said to be of sound mind for the purpose of making a contract if at
the time when he makes it, he is capable of understanding it and of forming a rational
judgement as to its effect upon his interests.

A person usually of sound mind, but occasionally of unsound mind, may not make
a contract when he is of unsound mind. However, when he is of sound mind he is capable
of becoming a party to a contract.

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Illustrations
(a) A patient in lunatic state of mind, who is at intervals of sound mind, may make
a contract during these intervals.
(b) 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 interests, cannot contract whilst such delirium or drunkenness lasts.
Unsoundness of mind may arise from insanity or lunacy, idiocy, drunkenness
and similar factors.

Idiocy: The term idiot is applied to a person whose mental powers are completely absent.
Idiocy is a congenital defect caused by lack of development of the brain.

Insanity or Lunacy: This is a disease of the brain. A lunatic is one whose mental powers
are so deranged that he cannot form a rational judgement on any subject. Lunacy can
sometimes be cured. Idiocy is incurable.

Drunkenness: Drunkenness produces temporary incapacity. The mental faculties are

clouded for sometime, so that no rational judgement can be formed.

Effects of Agreements Made by Persons of Unsound mind

Agreements by persons of unsound mind are void. But an Agreement entered into
by a lunatic or a person of unsound mind for the supply of necessaries for himself or for
persons whom he is bound to support (e.g. his wife, children) is valid as a quasi-contract
under Section 68 of the Act. Only the estate of such a person is liable. There is no personal
liability.
The guardian of a lunatic can bind the estate of the lunatic by contracts entered into
on his behalf. The mode of appointments of such a guardian and his powers are laid down
in the Lunacy Act.

Example: Inder Singh V Parmeshwardhari Singh (1957)

A person agreed to sell a property worth Rs.25,000 for Rs.7000. his mother proved
that he was a congenital idiot and she pleaded for cancellation of the contract. The court
held the agreement to be null and void.

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DISQUALIFIED PERSONS
Aliens: An alien means a citizen of a foreign state. Contracts with aliens are valid. An
alien living in India is free to enter into contracts which citizens of India. But the
government may impose certain restrictions. Certain types of transactions with aliens may
be prohibited. A contract with an alien becomes unenforceable if war breaks out with the
country of which the alien concerned is a citizen.

Foreign Sovereigns: Foreign sovereigns or governments cannot be sued unless they

voluntarily submit to the jurisdiction of the local court (Mighell V Sultan of Johore)

Professional Persons: in England, barristers and members of the Royal College of

Physicians are prohibited by the etiquette of their profession form suing for their fees. But
they can sue and be sued for all the claims other than their professional fees. In India, there
is no such restrictions on barristers and physicians.

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 CH – 1.4 FREE

CONSENT

Definition of free consent

An agreement is valid only when it is the result of free consent of all the parties to
it. Sec. 13 of the Act defines the meaning of the term ‘consent’ and Sec. 14 of the Act
specifies under what circumstances consent is “free”.
Sec. 13 “Two or more persons are said to consent when they agree upon the same thing in
the same sense”.
Consent involves a union of the wills and an accord in the minds of the parties.
When the parties agree upon the same thing in the same sense, they have consensus-ad-
idem. For a valid contract the parties must have “identity of mind”.
Sec. 14 lays down that consent is not free if it is caused by
1. Coercion.
2. Undue influence,
3. Fraud,
4. Misrepresentation and
5. Mistake.

COERCION

Definition: Coercion is defined by Sec. 15 of the Act as follows: “Coercion is (1) the
committing or threatening to commit, any act forbidden by the Indian penal code, or (2)
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.

Examples:
1. A Hindu widow is forced to adopt ‘X’ under threat that her husband’s dead body
would not be allowed to be removed unless she adopts ‘X’. the adoption is voidable
as having been induced by coercion. (Ranganayakamma Vs Alwar setti)
2. ‘A’ threatens to kill ‘B’ if he does not transfer all his property in ‘A’s favour for
a very low price. The agreement is voidable for being the result of coercion.
It is not necessary that coercion must have been exercised against the promisor only, it
may be directed at any person.

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Examples:
1. ‘A’ threatens to beat ‘B’ (C’s son) if ‘C’ does not let his house to ‘A’ the
agreement is caused by coercion.
2. ‘X’ threatens to kill ‘Y’ if he does not sell his house to ‘B’ at a very low price. The
agreement is caused by coercion though ‘X’ is a stranger to the transaction.
Further, it is immaterial whether the Indian penal code is or is not in force in the place
where the coercion is employed.
Example: ‘A’ on board an English ship on the high seas, causes ‘B’ to enter into an
agreement by an act amounting to criminal intimidation under the Indian penal code. ‘A’
afterwards sues ‘B’ for breach of contract at Calcutta. ‘A’ has employed coercion,
although his act is not an offence by the law of England, and although the Indian penal
code was not in force at the time or place where the act was done.

Threat to commit suicide – is it coercion?

As per Section 15 “committing or threatening to commit any act forbidden by the
Indian Penal Code is coercion.” As the act of suicide is forbidden by the IPC, a threat to
commit suicide must be treated as coercion.
Example: Ammiraju Vs Seshamma
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 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: Sec.19: When consent to an agreement is caused by coercion

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

42
obtained. In other words, the affected party can have the contract cancelled or if he so
desires to insist on its performance by the other party.

Sec. 72: 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 entitled to recover so much of the charge as was illegally
excessive.

UNDUE INFLUENCE
Definition: A contract is said to be induced by undue influence where,
(i) One of the parties is in a position to dominate the will of the other, and
(ii) He uses the position to obtain an unfair advantage over the other Sec. 16(1)
Sec. 16(2) provides that undue influence may be presumed to exist in the following
cases:
1. Where one party holds a real or apparent authority over the other or where he
stands in a fiduciary relationship to the other. Fiduciary relationship means a
relationship of mutual trust and confidence, such a relationship is supposed to
exist in the following cases – father and son; guardian and ward; solicitor and
client; doctor and patient; saint and disciple; trustee and beneficiary etc.
2. Where a party makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness or mental or
bodily distress.

Example: ‘F’ having advanced money to his son ‘B’ during his minority, upon B’s
coming of age obtains by misuse of parental influence, a bond from B for a greater amount
than the sum advanced. ‘F’ employs undue influence.

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 (Sec.
19-A).

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Example: 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 [Sec. 16(3)]: 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.
Undue Influence is suspected in the following cases.
1. Inadequacy of consideration.
2. Fiduciary relationship between the parties.
3. Inequality between the parties as regards age, intelligence, social status, etc.
4. Absence of independent advisors for the weaker party.
5. Unconscionable bargains: Unconscionable bargain is one which is against the
conscience of reasonable persons and what shocks the public. If excessive profit is
made it will also fall within this term.
High rates of Interest: It is usual for money lenders to charge ‘High rates of interest’
from needy borrowers can the court presume the existence of undue influence in such
cases?
Illustration: ‘A’ applies to a banker for a loan at a time when there is an acute shortage in
the money market. The banker declines to sanction the loan at the prevailing rate of
interest. ‘A’ accepts the loan for a very high interest rate Held, this is a transaction in the
ordinary course of business and the contract is not induced by undue influence.

So a transaction will not be set aside merely because the rate of interest is high. But
if the rate is so high that the court feels it is unconscionable, the burden of proving that
there was no undue influence lies on the creditor.
Pardanishin Women: Women, who observe the custom of Parda i.e. seclusion from
contact with people outside her own family, are peculiarly susceptible to undue influence.
Therefore, Indian courts have held that a contract made by or with a pardanish in lady may
be set aside by her unless the other party to the contract satisfied the court that the terms of
the contract were fully explained to her and that she understood their implications.

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Difference between Undue Influence and Coercion: In both undue influence and
coercion, one party is under the influence of another.
1. In coercion the influence arises from committing or threatening to commit an
offence punishable under the IPC or detaining or threatening to detain property
unlawfully. In undue influence, the influence arises from the domination of the
will of one person over another.
2. Cases of coercion are mostly cases of the use of physical forces. But in undue
influence it is a question of mental pressure.

MISREPRESENTATION
Representation is a statement or assertion, made by one party to the other, before or
at the time of the contract, regarding some fact relating to it. Misrepresentation arises when
the representation made is inaccurate but the inaccuracy is not due to any desire to defraud
the other party. There is no intention to deceive.
Sec.18 of the Contract Act classifies cases of misrepresentation into three groups as
follows:
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 truthiness 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.
Under this heading would fall cases where a party is under a duty to disclose
certain facts and does not do so and thereby misleads the other party. In English
law such cases are known as cases of “constructive fraud”.
3. Causing however, innocently, a party to an agreement to make a mistake as to
the substance of a thing which is the subject of the agreement.

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Consequence of Misrepresentation: In cases of misrepresentation the party aggrieved
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 unknown to ‘A’, the estate is subject to mortgage. ‘B’ may either avoid the
contract or may insist on its being carried out and the mortgage debt be redeemed.
In case of misrepresentation the aggrieved party cannot claim compensation or
damages from the other person. This however, is subject to certain exceptions.
These are:
1. Breach of Warranty of authority by 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 for damages even though he is only guilty of innocent
misrepresentation. (Collen V. Wright)
2. Misstatement in prospectus: The directors of a company are liable for damages
under Sec. 62 of the companies Act, 1956 for innocent misrepresentation made in
the prospectus.
3. Negligent representation made by one person to another between whom
confidential relationship exists. E.g. solicitor and client.

However, if the aggrieved party whose consent was caused by misrepresentation had the
means of discovering the truth with ordinary diligence, he has no remedy.

FRAUD
Definition: The term ‘fraud’ includes all acts committed by a person with a view to
deceive another person. To “deceive” means to “induce a man to believe that a thing is true
which is false”
Sec. 17 of the contract act states that ‘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 intent to deceive another party thereto or his agent; or to induce him to enter into a
contract.
1. False statement: “The suggestion as to a fact, of that which is not true by one who
does not believe it to be true.” If a false statement is intentionally made it is fraud.

46
2. Active concealment: “The active concealment of a fact by one having knowledge or
belief of the fact.” Mere non-disclosure is not fraud where the party is not under any
duty to disclose all facts. But active concealment is fraud.
Examples
(i) ‘B’ having discovered a vein of ore on the estate of ‘A’ decided to conceal the
existence of ore from ‘A’ with ‘A’s ignorance, ‘B’ contracted with ‘A’ to buy the
estate at an under value. The contract is voidable at the option of ‘A’.
(ii) ‘A’ sells by auction to ‘B’ a horse which ‘A’ knows to be unsound. ‘A’ says
nothing to ‘B’ about the horses’ unsoundness. This is not because ‘A’ is under no
duty to disclose the fact to ‘B’ but if between ‘A’ and ‘B’ there exists a fiduciary
relationship (if ‘B’ is ‘A’daughter) here arises the duty to disclose and non-
disclosure amounts to fraud.
3. Intentional non-performance: “A promise made without any intention of performing
it” (e.g. purchase of goods without any intention of paying for them) is fraud.
4. Any other act fitted to deceive
5. Fraudulent act or omission: “Any such act or omission as the law specially declares
to be fraudulent”. This clause refers to provisions in certain acts which make it
obligatory to disclose relevant facts. E.g. under Sec. 55 of the Transfer of Property Act,
the seller of immovable property is bound to disclose to the buyer all material defects.
Failure to do so amounts to fraud.

From the analysis of the above we can say that for fraud to exist there must be:
(a) A representation or assertion, and it must be false.
(b) The representation or assertion must be of a fact.
Example: ‘A’ a seller of a horse says that the horse is a ‘Beauty’ and is worth Rs.5000. it
is merely ‘A’s opinion. It is not a matter of 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: Reese River silver Mining Co., Vs Smith
A company issued a prospectus giving false information about the unbounded
wealth of Neveda. A share broker who took shares on the faith of such information wanted
to avoid the contract. Held he could do so since the false representation in the prospectus
amounted to fraud.

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 (d) The representation must have been made with the intention of including the
other party to act upon it.
(c) The representation must in fact be to deceive.
Example: ‘A’ by misrepresentation leads ‘B’ erroneously to believe that 500 kilos of
indigo are made annually at ‘A’s factory. ‘B’ examines the accounts of the factory, which
shows that only 400 kilos have been made. After this ‘B’ buys the factory. The contrast is
not voidable on account of ‘A’s misrepresentation.
(d) The party subjected to fraud must have suffered some loss.
Can Silence be Fraudulent?
1. The general rule is that mere silence is not fraud.
Example: Ward Vs Hobbs
‘H’ sold to ‘W’ some pigs which were to his knowledge suffering from swine
fever. The pigs were sold “With all faults” and ‘H’ did not disclose the fever to ‘W’ held,
there was no fraud.
2. 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.” Whenever there
is a duty to disclose, silence amounts to fraud.
3. Silence if fraudulent where the circumstances are such. Silence is in itself
equivalent to speech.
Consequences of fraud
A party who has been induced to enter into an agreement by fraud has the following
remedies open to him: (Section 19)
i. He can avoid the performance of the contract.
ii. He can insist that the contract shall be performed and that he shall by put in the
position in which he would have been if the representation made had been true.
iii. The aggrieved party can sue for damages.
Distinction between Fraud and Misrepresentation
1. In case of fraud the party making a false representation makes it with the
intention to deceive the other party to enter into a contract. Misrepresentation
on the other hand is innocent i.e., without any intention to deceive or to gain an
advantage.
2. In case of fraud, the aggrieved party can sue the person who made the false
statement, for damages. But in case of misrepresentation except in certain
cases, the only remedy is recession and restitution.

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 3. In case of fraud the person who made the false statement cannot argue that the
aggrieved person had the means of discovering the truth or could have done so
with ordinary diligence.
MISTAKE
Definition: Mistake may be defined as an erroneous belief concerning something.
Consent cannot be said to be ‘free’ when an agreement is entered into under a mistake.
Mistake is of two kinds:
1. Mistake of law
2. Mistake of Fact

Mistake of law: Mistake on a point of Indian law does not affect the contract. Mistake on
a point of law in force in a foreign country is to be treated as mistake of fact
Example: ‘A’ and ‘B’ make a contract based on the erroneous belief that a particular debt
is barred by the Indian law of limitation. This is a valid contract. The reason is that every
man is presumed to know the law of his own country and if he does not he must suffer the
consequence of such lack of knowledge. But if in the above case, the mistake is related to
the law of limitation of a foreign country, the agreement could have been avoided (Sec. 20)

Mistake of Fact: An agreement induced by mistake of fact is void. Mistake of fact may be
1. a bilateral mistake
2. a unilateral mistake
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 (Sec. 20). For the application of Sec. 20 the following two conditions
are to be fulfilled.
(i) The mistake must be mutual
(ii) The mistake must relate to a matter of fact essential to the agreement.
Example: (1) and example (2)
1. ‘A’ agrees to buy from ‘B’ a horse. It turns out that, the horse was dead at the
time of 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

49
 ship carrying the cargo has been washed away and the goods lost. Neither party
was aware of the fact. 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:

1. Mistake as to the subject matter:

(a) Mistake as to the Existence of Subject-matter: If both the parties believe that the
subject-matter of the contract to be in existence, which in fact at the time of the
contract is non-existent, the contract is void.
Example: ‘A’ agreed to purchase ‘B’s car which was lying in ‘B’s garage. Unknown to
either party the car and the garage were completely destroyed by fire a day earlier. The
agreement is void.
(b) Mistake as to identity of the subject-matter: where the parties agree upon different
things, i.e. one party intends to deal in one thing and the other intends to deal in
another.
Example: ‘A’ who owns three maruti cars of different colours, other to sell his white
colour car Rs.1,00,000. ‘B’ accepts the other thinking ‘A’ is selling his green colour car.
There is a mistake as to the identity of the subject-matter and hence no contract.
(c) Mistake as to Tile 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: A person took a lease of a fishery which, unknown to either party already
belonged to him. Held, the lease was void [Cooper V. Phibbs.(1861)]
(d) Mistake as to the quality of the Subject-matter: If the subject matter is something
different from what the parties thought it to be, the agreement is void.
Example: Table napkins were sold at an auction by a description, “with the crest of
Charles I and the authentic property of that monarch.” In fact napkins were Georgian.
Held, the agreement was void as there was a mistake as to the quality of the subject-matter
[Nicholson Venn V. Smith Marriott].
(e) Mistake as to the quantity of the subject-matter
Example: Henkel V. Pape (1870)
‘P’ wrote to ‘H’ enquiring 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

50
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.
(f) Mistake as to the price of subject-matter: Where a contract of lease of a house was
agreed to at a lease of $230 but in written agreement, the figure $130 was inserted by
mistake, the contract was held to be void.
But an erroneous opinion as to the value of the subject matter of the agreement is not to be
deemed a mistake as to a matter of fact.
Example: ‘A’ buys an article thinking it is worth Rs.10,000 while it is actually worth
Rs.500 only. The agreement cannot be avoided on the ground of mistake
2. Mistake as to the possibility of performing the contract :
If both the parties believe that an agreement is capable of being performed when in fact
this is not the case. The agreement, in such a case is void on the ground of impossibility.
Impossibility may be
(i) Physical impossibility: Example: A contract for the hire of a room for witnessing the
coronation procession of Edward VII was held to be void because, unknown to the
parties the procession had already been cancelled [Griffith V. Braymer(1903)].

(ii) Legal Impossibility: A contract is void if it provides that something share be done
which cannot, as matter of law, be done.

Unilateral Mistake: In case of unilateral mistake i.e where only one party to a contract is
under a mistake, the contract, generally speaking is not invalid. Sec. 22 reads, “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.”
Exception: To the above rule, there are certain 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. Example: Foster Vs V. Mackinnon (1869) 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.
(b) Mistake as to quality of the promise: In Scriuen Vs Hindley case an auction was
held for the sale of some lots of hemp (quality natural fibre) and some lots of tow

51
 (broken inferior fibre). Mr. B thinking that hemp was being sold, bid for a lot of tow
for an amount which was not of propertied to it, and was only fair price for hemp.
Held, 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 grounds of mistake. Example: Cundy Vs Lindsay &
Co (1878): Mr. ‘X’ of Blenkarn, by imitating the signature of a reputed firm called
Blenkiron and Co, induced another firm ‘Y’ to supply goods to him on credit. The
goods were then sold to ‘X’ of Blenkarn. Held, there was no contract between ‘X’ of
Blenkarn and ‘Y’ because ‘Y’ never intended to supply to Blenkarn. Therefore ‘X’ of
Blenkarn obtained no title to the goods. But if the goods are sold for cash then that is a
valid contract.

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 avoid 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.

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 CH– 1.5
VOID AGREEMENTS AND DISCHARGE OF CONTRACTS
VOID AGREEMENTS
The contract act specifically declares certain agreements to be void. A void
agreement is one which is not enforceable by law [Sec.2 (g)]. Such an agreements does not
give rise to any legal consequences and is totally void from the very inception.

The different kinds of void agreements under the Indian Contract Act, 1872 are given
below:
1. Agreements made by incompetent persons.(Sec. 11)
2. Agreements made where there is a mutual mistake as to a matter of fact (Sec.20)
3. Agreements made where there is a mistake as to any law in force in India(Sec.21)
4. Agreements of which consideration or object is unlawful (Sec.23)
5. Agreements of which consideration or object is partly unlawful (Sec. 24)
6. Agreements without consideration (Sec. 25)
7. Agreements in restraint of marriage (Sec. 26)
8. Agreements in restraint of trade (Sec. 27)
9. Agreements in restraint of legal proceedings (Sec. 28)
10. Agreements the meanings of which are uncertain or not capable of being made certain
(Sec. 29)
11. Agreements by way of wager (Sec. 30)
12. Agreements contingent on the happening of an event (Sec. 32)
13. Agreements contingent on the impossible events (Sec.36)
14. Agreements to do an impossible Act (Sec. 56)
15. In case of reciprocal promises to do things legal and also to do other things illegal, the
first set of promises is a contract, but the second set of reciprocal promises is a void
agreement (Sec. 57)

It may be stated here that the agreement from 1 to 13 are void ab-initio. i.e., from the very
inception while the remaining 14 to 15 become void by subsequent events.

WAGERING AGREEMENTS OR WAGER (Sec. 30)

Definition of Wager: “A contract between two parties to the effect that if a given event is
determined in one way, one of them shall pay a sum of money to the other, and in the
contrary event the later shall pay to the former.” It is a promise to give money or money’s
worth upon the determination or ascertainment of an uncertain event. (Sir William Anson)
Example: ‘A’ and ‘B’ may wager regarding an uncertain event as to whether it would rain
or not on a particular day. ‘A’ promising to pay ‘B’ Rs.100 if it rains and ‘B’ promising

53
Rs.100 if it does not rain. Such agreements are void and are not enforceable at law. No suit
can be initiated for recovering anything alleged to be won on any wager (Sec. 30)
Essential Elements of a Wager:
1. Intention of both the parties to the wagering contract is to gamble.
2. The gain of one party is the loss of the other party.
3. Neither party should have any interest in the happening or non-happening of the
event other than the sum he will win or lose.
4. The event on the happening of which the amount is to be paid is uncertain.
5. The mind of the parties to the agreement may be uncertain in regard to the fact.
6. The event on which the betting is placed should not necessarily be unlawful.
The following contracts are not wager:
1. A cross word competition involving a good measure of skill for its successful
solution.
2. Games of skill e.g. picture puzzles or athletic competitions.
3. A subscription towards any prize or sum of money of the value of Rs. 500 or above
to be awarded to any winner of a horse race.
4. Share market transactions
5. Contracts of insurance is not a contract of wager because of the following reasons:
a. In case of Insurance the assured has an insurable interest in the subject-
matter.
b. Both the parties are interested in protection of the subject matter.
c. Except life insurance, the other contracts of insurance is a contact of
indemnity.
d. It is beneficial to the public.
e. It is based on scientific and actual calculation of risks.
Effects of Wagering Agreements: Wagering agreements have been expressly declared to
be void in India. In certain States in India, they have been declared to be illegal. No suit
can be initiated for recovering anything alleged to be won on any wager.
Since the wagering agreements are void, transaction are void, transactions
collateral to them are not affected. So excepting in the states of Maharashtra and Gujarat
collateral transactions are valid.

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CONTINGENT CONTRACTS
Definition: [Sec.31]: A Contingent Contract is a contract to do or not to do something, if
some event, collateral to such contract does or does not happen.
Example: ‘A’ contracts to pay ‘B’ Rs. 10,000 if B’s house is burnt. This is a contingent
contract.
Essentials of a Contingent Contract:
1. The performance of a contingent contract is made dependent upon the happening or
non-happening of some event.
2. The event on which the performance is made to depends is an event collateral to
the contract. i.e it does not form part of the reciprocal promises which constitute
the contract.
3. The contingency is uncertain. If the contingency is bound to happen, the contract is
due to be performed in any case and is not therefore a contingent contract.
Examples
i. Life insurance, indemnity and guarantee are examples of contingent contract.
ii. Where ‘A’ agrees to deliver 100 bags of rice and ‘B’ agrees to pay the price
only afterwards, the contract is a conditional contract and not contingent,
because the event on which B’s obligation is made to depend is a part of the
promise itself and not a collateral event.

4. The contingent event should not be the mere will of the promisor.
Example: ‘A’ promises to pay ‘B’ Rs.1000. if he so choose, it is not a contingent contract.
If the event is within the promisor’s will but not merely his will, it may be a contingent
contract.
Example: ‘A’ promises to pay ‘B’ Rs.10,000, if ‘A’ left Delhi or Bombay; it is a
contingent contract, because going to Bombay is an event, no doubt within A’s will but is
not merely his will.
Rules Regarding Enforcement of Contingent Contracts:
1. Contracts contingent upon the happening of a future uncertain event cannot be
enforced by law unless and until that event has happened. And if the event becomes
impossible such contract becomes void (Sec. 32)

Examples
(i) ‘A’ makes a contract with ‘B’ to buy ‘B’s house if ‘A’ survives ‘C’. This
contract cannot be enforced by law unless ‘C’ dies in A’s life-time.
(ii) ‘A’ contracts to pay ‘B’ a sum of money when ‘B’ marries ‘C’ ‘C’ dies without
being married to ‘B’. the contract becomes void.

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2. Contracts contingent upon the non-happening of an uncertain future event can be
enforced when the happening of that event becomes impossible, and not before (Sec.
33)
Example: ’A’ agrees to pay ‘B’ a sum of money if a certain ship does not return. The ship
is sunk. The contract can be enforced when the ship sinks.
3. When the event to be deemed is impossible
Examples: ‘A’ agrees to pay ‘B’ a sum of money if ‘B’ marries ‘C’. ‘C’ marries ‘D’. the
marriage of ‘B’ to ‘C’ must now be considered impossible although it is possible that ‘D’
may die and that ‘C’ may afterwards marry ‘B’.

4. a. The happening of an event within a fixed time: Contracts contingent upon the
happening of an event within a fixed time become void if, at the expiration of the fixed
time, such event has not happened or if before the fixed time, such event becomes
impossible. Example: ‘A’ promises to pay ‘B’ a sum at a certain ship returns within a
year. The contract may be enforced if the ship returns within a year, and becomes void
if the ship is burnt within the year.
b. The non-happening of an event within a fixed time example: ‘A’ promises to
pay ‘B’ a sum of money if a certain ship does not return within a year. The contract
may be enforced if the ship does not return within the yea, or is burnt within the year.
5. Impossible event: Contingent agreements to do or not to do anything if an impossible
event happens, are void, whether the impossibility of the event is known or not to the
parties to the agreements at the time when it is made (Sec. 36)
Example: ‘A’ agrees to pay ‘B’ Rs.10,000 if two straight lines should enclose a space.
The agreement is void.
Difference between Contingent Contract and Wagering Agreements
1. A contingent contract is valid, a wagering agreement is void.
2. When a contingent contract depends on the happening or non-happening of an
event, the contract is valid, but the wagering agreement is void.
3. Contingent contract may not contain reciprocal promises; wagering agreement
consists of reciprocal promises.
4. In contingent contract both parties may have an interest in the subject matter; in a
wagering agreement the parties have no interest except getting or paying money.
5. In a contingent contract the future event is only collateral and valid; a wagering
agreement is void.

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QUASI-CONTRACTS
‘Quasi’ is a Latin word which means “to resemble”. Contracts which are not full-
fledged contracts are called quasi contracts. i.e., when all the essentials of a valid contract
are not there they are called quasi-contracts.
According to Dr. Jenks, quasi-contract is “a situation in which law imposes upon
one person, on grounds of natural justice, an obligation similar to that which arises from a
true contract, although no contract express or implied has in fact been entered into by
them”.
Example: ‘X’ supplies goods to his customer ‘Y’ who receives and consumes them. ‘Y’ is
bound to pay the price. ‘Y’s acceptance of the goods constitutes an implied promise to pay.
This kind of contract is called a tacit contract.
In the above example, if the goods are delivered by the servant of ‘X’ to ‘Z’
mistaking ‘Z’ for ‘Y’, then ‘Z’ will be bound to pay compensation to ‘X’ for the value.
This is Quasi-contract (or) Implied contract (or) Constructive contract.
The principle underlying a quasi-contract is that no one shall be allowed unjustly to
enrich himself at the expense of another, and the claim based on a quasi-contract is
generally for money.
Sec. 68-72 of the Contract Act describes the cases which are to be deemed Quasi-
contracts.
1. Claim for necessaries supplied to a person incapable of contracting on his own
account. Example: ‘A’ supplies ‘B’ a lunatic (or) to his family with necessaries
suitable to his condition in life. ‘A’ is entitled to be reimbursed from B’s property.
2. Reimbursement of person paying money due by another in payment of which he is
interested. Example: ‘B’ holds land in Bengal on a lease granted by ‘A’ the
Zamindar. The revenue payable by ‘A’ to the government being in arrear, his land is
advertised for sale by the government. Under the revenue law, the consequence of
such sale will be the cancellation of B’s lease. ‘B’, to prevent the sale and the
consequent cancellation of lease, pays the government the sum due from ‘A’. ‘A’ is
bound to make good to ‘B’ the amount so paid.

3. Obligation of a person enjoying benefits of non-gratuitous act: Example: ‘A’ a

tradesman, leaves goods at B’s house by mistake. ‘B’ treats the goods as his own. ‘B’
is bound to pay for them.

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4. Responsibility of Finder of goods: Generally, a person is not bound to take care of
goods of others, left on a road or other public places by accident or negligence, but if
he takes them into his custody, an agreements is implied by law. The finder is for
certain purposes, deemed in law to be a bailed and must take care of the goods. As per
Sec. 71. “A person who finds the goods belonging to another and takes them into his
custody, or anything delivered by mistake or under coercion, must pay for it.”
Example: ‘A’ and ‘B’ jointly owe Rs.10,000 to ‘C’. ‘A’ alone pays the amount to ‘C’
and ‘B’ not knowing this fact pays Rs.10,000 again to ‘C’. ‘C’ is bound to repay the
amount to ‘B’.

DISCHARAGE OF CONTRACT
When the obligation created by a contract comes to an end, the contract is said to be
discharged or terminated.
A contract may be discharged in any of the following ways:
1. By performance of the promise or tender: The common mode of discharge of a
contract is by performance i.e. where the parties have done whatever was expected under
the contract, the contract comes to an end. Thus where ‘A’ contracts to sell his car to ‘B’
for Rs.75, 000 as soon as the car is delivered to ‘B’. As soon as he delivered the car he
received the price from ‘B’. The contract comes to an end by performance.
The offer of performance or tender has the same effect as performance. If a
promisor tenders performance of his promise but the other party refuses to accept, the
promisor stands discharged of his obligations.

2. By Mutual Consent cancelling the agreement or substituting a new agreement in

place of the old: By agreement of all parties, a contract may be cancelled or its terms
altered or a new agreement substituted for it. Whenever any of these things happen, the old
contract is terminated.
“If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed” (Sec. 62)
Termination by mutual agreement may occur in an one of the following ways:
a. Novation: Novation occurs when a new contract is substituted for an existing contract,
either between the same parties or between different parties. Novation may occur by two
ways, i.e., change of parties and a substitution of a new contract in place of the existing
one.

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Example
1) ‘A’ is indebted to ‘B’ and ‘B’ is indebted to ‘C’. by mutual agreement B’s
debt to ‘C’ and A’s debt to ‘B’ are cancelled and ‘C’ accepts ‘A’ as his
debtor. It is Novation.
2) ‘P’ lent ‘D’ Rs.20,000. afterwards the parties agreed that ‘D’ will repay to
‘P’ Rs.10,000 and certain grams of gold at a particular date. The former
agreement is replaced by the latter. There is Novation.

b. Recission: Recission means cancellation of all or some of the terms of the contract.
Where parties mutually decide to cancel the terms of the contract. The obligations of the
parties there under terminates.

c. Alteration: If the parties mutually agree to change certain terms of the contract, it has
the effect of terminating the original contract. There is, however, no change in the
parties.

d. Remission Sec. 63 deals with remission: Remission is the acceptance of a lesser sum
than what was contracted for or a lesser fulfilment of the promise made. Example: ‘A’
owes ‘B’ Rs.5000. ‘A’ pays to ‘B’ who accepts in satisfaction of the whole debt Rs.2000
paid at the time and place at which the Rs.5000 were payable. The whole debt is
discharged.

e. Waiver: Waiver means relinquishment or abandonment of a right. Where a party waives

his right under the contract, the other party is released of his obligations. Example: ‘A’
promises to paint a picture for ‘B’. ‘B’ afterwards forbids him to do so. ‘A’ is no longer
bound to perform the promise.

f. Merger: A contract is said to have been discharged by way of ‘Merger’ where an

inferior right possessed by a person coincides with a superior right of the same person.
Example: A man, who is holding certain property under a lease, buys it. His rights as a
lessee vanish.

3. By subsequent impossibility (Sec. 56): Impossibility in a contract may either be

inherent in the transaction or it may happen later by the change of certain circumstances

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material to the contract. If it happens at a later stage we call it subsequent impossibility. In
England this is referred to as ‘Doctrine of Frustration’. A contract is deemed to have
become impossible of performance and thus void under the following circumstances:
i.Destruction of subject-matter of the contract.
ii.By death or disablement of the parties.
iii.Subsequent illegality (e.g.) ‘A’ contracts to supply ‘B’ 100 bottles of wine.
Before the contract is executed, dealings in all sorts of liquor are declared
prohibited by the Government; the contract becomes void.
iv. Declaration of war.
v. Non-existence or Non-occurrence of particular state of things. When certain
things necessary for performance cease to exist, the contract becomes void on
the grounds of impossibility.
Example: ‘A’ and ‘B’ contract to marry each other. Before the marriage, ‘A’ goes mad.
The contract gets discharged.
Exceptions:
a) difficulty of performance does not amount to impossibility.
b) Commercial impossibility does not render a contract void.
c) Strikes, lock-outs and civil disturbances do not terminate contracts unless
provided for in the contract.
d) Failure of one of the objects does not terminate the contract.
e) Non-performance of third party does not exonerate the promisor from his
liability.

4. By Operation of Law: Discharge under this head may take place as follows:
a) The death of the promisor results in termination of the contract in cases involving
personal skill and ability.
b) The insolvency Act provides for discharge of contracts whenever the promisor
becomes insolvent.
c) By merger.
d) By material alteration without seeking the consent of the other party

BY BREACH OF CONTRACT
A contract terminates by breach of contract. Breach of contract may arise in two
ways:

a) Anticipatory Breach
b) Actual Breach.

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 Anticipatory breach of contract occurs when a party repudiates it before the time
fixed for performance has happened or when a party by his own act disables himself from
performing the contract. Example: ‘A’ Contracts to marry ‘B’. Before the agreed date of
marriage he marries ‘C’. ‘B’ is entitled to sue ‘A’ for breach of promise.
Consequences of Anticipatory Breach: In case of anticipatory breach, the promisee may
either;
a) rescind the contract and treat the contract as at an end, and at once sue for damages,
or
b) he may elect not to rescind but to treat the contract operative and wait for the time of
performance and then hold the other party liable for the consequences of non-
performance.
Example:
‘A’ agreed to load a cargo of wheat on ‘B’s ship at Odessa by a particular date but
when the ship arrived ‘A’ refused to load the cargo. ‘B’ did not accept the refusal and
continued to demand the cargo. Before the last date of the loading had expired the Crimean
war broke out, rendering the performance of contract illegal. Held, the contract was
discharged and ‘B’ cannot sue for damages. [Avery V. Bowen]

b) Actual Breach of Contract: Actual breach of contract occurs when during the
performance of the contract or at the time when the performance of the contract is due; one
party either fails or refuses to perform his obligations under the contract. The refusal of
performance may be express or implied. Example: ‘D’ agrees to deliver to ‘B’ 50 kilos of
Ghee on 1st June. He fails to do so on 1st June.
Cort V. Ambergate Railway Co. (1851)
‘A’ contracted with a Railway Co., to supply it certain quantity of railway chairs at
a certain price. The delivery was to be made in instalments. After four instalments had
been supplied, the railway company asked ‘A’ to deliver no more. Held, A could sue for
breach of contract.

REMEDIES FOR BREACH OF CONTRACT

When a breach of contract occurs, the aggrieved party or the injured party becomes
entitled to the following remedies or reliefs:
1. Rescission of the Contract: When a breach of contract is committed by one party, the
aggrieved party is relieved from all his obligations under the contract. Example: ‘A’
promises ‘B’ to supply 10 bags of sugar on a certain date and ‘B’ promises to pay the price

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on receipt of the goods. ‘A’ does not deliver the goods on the appointed day. ‘B’ needs not
pay the price.
Party Rightfully Rescinding the Contract Entitled to Compensation (Sec. 75): A
person who rightfully rescinds the contract is entitled to compensation for any damage
which he has sustained through the non-fulfilment of the contract.

2. Damages for the Loss Suffered: Damages, generally speaking, are of four kinds.
i. Ordinary damages: Ordinary damages are those which naturally arose in
the usual course of things from such breach. The measure of ordinary
damages is the difference between the contract price and the market price on
the date of breach. Example: ‘A’ contracts to deliver 100 bags of wheat at
Rs.800 a bag on a future date. On the due date he refuses to deliver; the price
on that day is Rs.900 per bag. The measure of damages is the difference
between the market price on the date of breach and the contract price i.e
Rs.10,000.
The ordinary damages shall be available for any loss or damage which arises naturally in
the usual course of things from the breach and as such compensation cannot be claimed for
any indirect loss by reason of breach.
Example: A railway passenger’s wife caught cold and fell ill due to her being asked to get
down at a place other than the railway station. In a suit by the plaintiff or affected person
against the railway company, held, that damages for the personal inconvenience of the
plaintiff alone could be granted, but not for the sickness of the plaintiff’s wife, because it
was a very indirect consequence.
ii. Special Damages: Special damages are claimed in case of loss of profit etc.
when there are certain special or extraordinary circumstances present and
their existence is communicated to the promisor, the non-performance of the
promise entitles the promisee to not only the ordinary damages but also
damages that may result from it.
Example: ‘A’ a builder, contracts to erect and finish a house by the 1 st of January so that
‘B’ may give possession of it at that time to ‘C’. to whom ‘B’ has contracted to let it. ‘A’
is informed of the contract between ‘B’ and ‘C’. ‘A’ builds the house so badly that, before
the 1st January, it falls down and has too be rebuilt by ‘B’ who in consequence loses rent
which he was to have received from ‘C’, and is obliged to make compensation to ‘C’ for

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the breach of his contract. ‘A’ must make compensation to ‘B’ for the cost of rebuilding
the house, for the rent lost, and for the compensation made to ‘C’.
Notice of the Communication of the Special Circumstances is a Pre-requisite to the
Claim for Special Damages.
Example: Hadley V. Baxendale (1854)
‘X’s Mill was stopped due to the breakdown of a shaft. He delivered the shaft to
‘Y’ a common carrier, to be taken to a manufacturer to copy it and make a new one. ‘X’
did not make known to ‘Y’ that delay would result in a loss of profits. By some negligence
on the part of ‘Y’ the delivery of the shaft was delayed in transit beyond a reasonable time.
As a result the mill remained idle for a longer time than otherwise would have been, had
the shaft been delivered in time.
Held: ‘Y’ was not liable for loss of profits during the period of delay as the circumstances
communicated to ‘Y’ did not show that a delay in the delivery of shaft would entail loss of
profit to the mill.

c) Vindictive (or) Punitive or Exemplary Damages: These damages are awarded

to punish the defaulter than to really compensate the plaintiff and have no place in the law
of contracts. But in the following cases vindictive damages are awarded.
i) Breach of a contract to marry and
ii) Wrongful dishonour of a cheque by a banker.

d) Nominal Damages: This kind of damages is awarded when the injured party does not
suffer any damages. Yet this damage consisting of a very small amount, say, a rupee or
two, is awarded for violation of a legal right.

3. Specific Performance: Where damages are not an adequate remedy, the court may
direct the party in breach to carry out his promise according to the terms of the contract.
This is called ‘Specific performance’ of the contract some of the instances where court can
direct specific performance are: a contract for the sale of a particular house or some rare
article or another thing for which monetary compensation is not enough because the
injured party will not be able to get an exact substitute in the market.
Specific performance will not be granted where:
a. Monetary compensation is an adequate relief.
b. The contract is of personal nature, e.g. a contract to marry

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 c. Where it is not possible for the court to supervise the performance of the
contract, e.g. a building contract.
d. The contract is made by a company beyond its objective as laid down in its
Memorandum of Association.

4. Injunction: Injunction means an order of the court. Where a party is in breach of a

negative term of a contract (i.e. where he does something which he promised not to do) the
court may, by issuing an order, prohibit him from doing.

Example: (i) Metropolitan Electric Supply Company V.Ginder (1901)

G agreed to buy the whole of the electricity required for his house from a certain
company. He was therefore, restrained by an injunction from buying electricity from any
other person.
(ii) N, a film star, agreed to act exclusively for a particular producer, for one year.
During the year she contracted to act for some other producers. Held, she could be
restrained by an injunction.

5. Quantum Meruit: The phrase ‘Quantum Meruit’ means as much as merited’ or ‘as
much as earned’. The general rule of law is that unless a person has performed his
obligations in full, he cannot claim performance from the other. But in certain cases, when
a person has done some work under a contract, and the other party repudiated the contract,
or some event happened which makes the further performance of the contract impossible,
then the party who has performed the work can claim remuneration for the work he has
already done.

Example: ‘A’ contracts with ‘B’ to deliver to him 500 kilos of butter before 1 st May. ‘A’
delivers 200 kilos only before that date and none after. ‘B’ retains the 200 kilos after the 1st
May. ‘B’ is bound to pay ‘A’ for them

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QUESTIONS

1. When is an offer completed? How and when may an offer be revoked?

2. Define offer and acceptance. When are the offer and acceptance deemed to be
complete if made through post?
3. Define consideration. Critically discuss the essential elements of consideration.
4. “A stranger to the consideration may sue on a contract but not a stranger to the
contract”- Explain.
5. State the circumstances in which a contract without consideration may be treated as
valid.
6. Who are competent to contract under the Indian law of Contract?
7. Explain the legal rules regarding contracts with a Minor.
8. When a consent is said to be free? Distinguish between coercion and undue
influence.
9. Define and distinguish between misrepresentation and fraud. What remedies are
available to the aggrieved party?
10. Explain the different types of mistake and give the relevant rules regarding contract
with mistake.
11. When is an agreement said to be against public policy? Give examples of
agreements which are against public policy.
12. Explain contingent contract and their rules.
13. State the circumstances under which a contract is said to be discharged.
14. What do you understand by Novation? What is the difference between Novation
and Alteration?
15. Define Special damages; Exemplary damages and Nominal damages.
16. What are the consequences of breach of contract?
17. State the remedies allowed to the aggrieved person in case of breach of contract.
18. What is a quasi-contract? Give some examples of quasi-contract.

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