chapter-ii concept of contract in indian contract … · 2018-07-03 · contract.64 there are...
TRANSCRIPT
37
CHAPTER-II
CONCEPT OF CONTRACT
IN INDIAN CONTRACT
ACT, 1872
38
CHATPTER-II
CONCEPT OF CONTRACT IN INDIAN CONTRACT ACT, 1872
2.1 Historical Development of Contract Law in India
The history of the act brings to light the very origin of the economic processes and in
this regard, contract is important in order to conduct one‘s business in everyday life62
. The
prevalent system in the ancient times was barter, exchange and it was based on the mutual
principle of give and take. This was confined to commodities as there was no medium of
exchange as is seen in the form of money today and this system can be traced back in time to
the Indus Valley Civilization (the earliest human civilization). The system still finds
relevance in the contemporary world, where it can be found in commercially and
economically underdeveloped areas. However, the relevancy of such a system in modern
times is questioned as the complexity in the nature of the economic systems as well as the
increasing demand and supply systems due to the change in the wants and needs of the
human beings came to the fore. Also, money had evolved as the medium of exchange such
that the value of every commodity could now be quantified. Thus, in such an era of greater
economic transaction one finds the existence of Contract Laws and with it, their relevance.
The Indian Contract Act codifies the way we enter into a contract, execute a contract
and implement provisions of a contract and effects of breach of a contract63
. The contractual
capacity is restricted in certain situations otherwise it is the prerogative of the individual to
contract.64
There are specific areas which deal with property, movable goods and specific
performance such as the Transfer of Property Act, the Sale of Goods Act and the Specific
Relief Act. Some of these acts, were originally a part of the Indian Contract Act enacted in
1872 but were later codified as separate laws. Moreover the Act is not retrospective in nature.
Hence a contract entered into prior to 1st September 1872, even though to be performed after
passing of this Act is not hit by this Act.65
Hence, we arrive of the conclusion that the basic
framework of contracting is covered in the Indian Contract Act and it is an important area of
law, with roots deep in the history of civilization- and thus forms the subject matter of this
project of this course of legal.
62
www.slideshare.netassessed on 14.08.2014 63
www.sitenim on web.comassessed on 24.08.2014 64
Casheire and Fifoot and Furmston, Contract Law; (1986) Butterworth and Com. Id at p.19-26. 65
Id at p. 39.
39
2.1.1 Vedic and Medieval Period
During the entire ancient and medieval periods of human history in India, there was
no general code covering contracts. Principles were thus derived from numerous references-
the sources of Hindu law, namely the Vedas, the Dhramshatras, Smritis, and the Shrutis give
a vivid description of the law similar to contracts in those times. The rules governing
contracts form a part of the law called Vyavaharmayukha. Studies of the Smritis reveal that
the concept of contract originated in the Vedic period itself66
. The general rules of contract
bear a striking resemblance to the modern law of contract. For e.g. as mentioned in the
Manusmriti, the first and the foremost requirement for a contract process to start is the
competence of the persons who are willing to enter into a contract. This norm laid down for
competence corresponds with the provisions of the present law (Section 11, Indian Contract
Act), namely, dependents, minors, sanyasis, persons devoid of limbs, those addicted to vices
were incompetent to contract. The Naradsmriti categorizes competent persons into three, the
king, the Vedic teacher and the head of the household. The concept of liability in contract law
finds its birth in the Vedic period too. Spiritual debts were referred as ‗rina‘and it was
constantly reinforced by the Smritis that failure to pay back the debts meant re-birth as a
slave, servant, woman or beast in the house of creditor. So, the son was liable to pay of his
father‘s debts even if he did not inherit any property from him. Towards the end of the
medieval age, the law of contracts was pretty much being governed by two factors, the moral
factor and the economic factor. Activities like transfer of property, performance of services
etc. required rules for agreements and promises, which covered not just business and
commercial transactions, but also personal relationships in all walks of life. This takes us to
the next source, i.e. the Arthashastra by Kautilya, which is considered to be the only existing
secular treatise on politics and governments. During Chandragupta‘s reign, contract existed in
the form of ―bilateral transactions‖ between two individuals of group of individuals. The
essential elements of these transactions were free consent and consensus on all the terms and
conditions involved. It was an open contract openly arrived at. It was laid down that the
following contracts were void contracts formed during the night67
.Contracts entered into the
interior compartment of the house. Contracts made in a forest contracts made in any other
secret place .There were certain exceptions to clandestine contracts such as: Contracts made
toward off violence, attack and Contracts made in celebration of marriage Contracts made
under orders of government Contracts made by traders, hunters, spies and others who would
66
Id at p. 3, 4. 67
Ibid.
40
roam in the forest frequently. The contract would be rendered void if there was any undue
influence or if the contract was entered into a fit of anger or under influence of intoxication
etc. In general, women could not make contracts binding on their husbands or against family
properties. It was possible for a competent person to authorize a dependent to enter into
transactions. The dependents in such case included a son whose father was living, a father
whose son managed the affairs, a woman whose husband was alive, a slave or hired
servant. It has to be noted that money lending was seen as an occupation. Usury was a sin
only when the usurer cheated the debtor, for e.g., when he lent goods of a lower quality, but
received goods of a higher quality in return or if he extracted fourfold or eightfold return
from a distressed debtor68
. The interest would be fixed with reference to the article pledged or
surety given. Although, all commentaries are not in agreement with the amount of interest to
be charged, they all agree that it was sinful to take exorbitant interest and such interest would
not be enforceable in court. The Yajnavalkyasmriti provided that in case of cattle being
loaned; their progeny was to be taken as profit. , the rights and duties (of a bailee) in a
bailment, as we know it today in the form of sections 151 and 152 of the Indian Contract Act,
1872, has its root to the Katyaynasmriti containing a special provision called the ‗silpinyasa‘
dealing with the deposit of raw materials with an artisan- talking about the degree of care
attached. The text laid down that ―if an artisan does not return the things deposited with him
during the stipulated time, he should be made to pay its price even in the cases, where the loss
is due to acts of God or King. The artisan, however, is not responsible for the loss of an
article which was defective at the very time of bailment, unless the loss is due to his own
fault.‖
It is also interesting to note that there was no ‗limitation‘ for bringing a suit for money
lent. This was because of the rule of ‗damdupat‘ which laid down that ‗the amount of
principle and interest recoverable at one time in a lump sum cannot be more than double the
money lent.‘ It took into consideration the fact that debts were not necessarily recoverable
from a man himself, his descendents were also liable. Thus there was no concept of a
‗limitation period‘ for filing a suit. The rule of ‗damdupat‘ is still prevalent in Calcutta and
Bombay as it has been upheld to be a valid custom and thus enjoys enforceability under the
savings clause, section.69
68
Id at p.2. 69
Ibid.
41
2.1.2 Islamic Law
During the Muslim rule in India, all matters relating to contract were governed under
the Mohammedan Law of Contract. The word contract in Arabic is Aqd meaning a
conjunction. It connotes conjunction of proposal (Ijab) and acceptance which is Qabul. A
contract requires that there should be two parties to it one party should make a proposal and
the other accept it, the minds of both must agree that is there declaration must relate to the
same matter and the object of contract must be to produce a legal result. It also supplied rules
to govern specific contracts to commercial, mercantile and proprietary nature like agency
(vakalat), guarantee and indemnity (zamaanat and tamin), partnership (shirkat), one person‘s
money and another‘s work (muzarabat), bailment (kafalat). All transactions were treated as
secular contracts and rules were provided for settlement of all types of disputes even relating
to property and succession.
Another thing to be noted is that under Islamic Law even marriages (Nikah) were
treated as contracts and till date the situation remains the same. Either of the parties to the
marriage makes a proposal to the other party and if the other party accepts, it becomes a
contract and the husband either at the time of marriage or after it has to pay an amount to the
wife as a symbol of respect known as Mahr. Also the Mahommedans were the firsts to
recognize the concept of divorce. This way, a party to marriage could absolve itself of the
contractual obligations under marriage. Muslim marriages are thus considered contracts for
these reasons70
.
2.1.3 History in the Fifteen and Sixteenth Centuries
The challenge faced by the common law Courts in the fifteenth and sixteenth
centuries was to develop a general criterion for enforcing promises within the framework of
the forms of action. And by the end of the 15th century, two forms of action for enforcing
rights, which included some of those which we now call contractual, had taken a fairly
definite shape. These were action on ‗debt‘ and the action on ‗convenant‘71
.
70
Shivamlawworld.blogspot.com/.../history-of-indian-contract-act-1872.ht.assessed on
22.11.2014
8 Mulla, Law of Contract (2013 Lexis Nexis India; Fourteenth edition) id at p.272
42
Covenant: - The word ‘convenant’ is the nearest medieval equivalent to current
definition of ‘contract’. The action of convenant mainly concerned breaches of
agreement for services like building or for sales or leases of land. The primary claim was
for performance, and in royal courts the action was begun by the precise writ ordering
the defendant to keep the agreement; but judgments ceased to order specific
performance and damages were awarded instead. But the action of convenant soon fell
out of use, not because it was ineffective but because the other action of ‘debt’ proved
more effective72.
Debt: - The action on debt covered the claims for the price of goods sold and delivered. The
essential feature of it was that the claim was for money compensation for benefit received.
The defendant‘s liability in debt was not based on a mere promise but on the debtor‘s receipt
of what the debtor had asked for, called quid pro quo like the Romans in the form of loan. It
was therefore thought to be unjust to allow the debtor to retain it without paying for it. The
debtor‘s wrong was more in misfeasance than nonfeasance. Following this rationale the
courts finally broadened the action of debt to allow recovery by anyone who had conferred a
substantial benefit. However, the lacuna in this system was that the defendant might avoid
liability by a procedure known as ―wager of law‖, in which the defendant denied the debt
under oath accompanied by a number (usually 11) of oath-helpers, who swore that defendant
was telling the truth.73
2.1.4 The Sixteenth Century: Development of ‘Assumpsit’s’
Now, at this point the main question that confronted the courts as that how the
common law would break out of this mould of ―wager of law‖. The courts finally found
answer to this question in the law of torts. They had already developed a liability in tort,
where if a person undertook to perform a duty and while performing it he caused harm to the
obligee; the obligee could sue on the common law action of ―trespass on the case‖ and this
principle came to be known as ‗assumpsit‘.74
2.1.5 The Seventeenth and Eighteenth Centuries
The seventeenth and eighteenth centuries saw the recognition of the transferability of
contract rights as kind of property, the enactment of legislation requiring writing for some
72
Anson, Law of Contract (1975), Oxford University) id at p.11. 73
Ibid.
11Ibid.
43
kind of contracts, and the shaping of the concept of the dependency of promises. But the
movement was slow during this period. Towards the end of the eighteenth century, things had
dramatically changed. A modern legal historian wrote that in America years from 1800-1875
were, ―above all else, the years of contract.‖ Contract expressed, ―energetic self-interest,‖ and
the law it governed it expressed the nature of contract by insisting that men assert their
interests, push them, and fight for them, if they were to have the help of the state75
. It is also
generally supposed that it was during this period that Adam Smith had proclaimed that
freedom of contract, freedom to make enforceable bargains would encourage individual
entrepreneurial activity. Also from the utilitarian point of view, freedom to contract
maximizes the welfare of the parties and therefore works for the good76
of the society, which
is still in force, provided that the law to be observed in the trial of suits be the Acts of
Parliament and regulations of government applicable to the case, and in the absence of such
acts and regulations; the usage of the country in which suit arose; and if none such appeared-
the law of the defendant, and in the absence of specific law and usage, equity and good
conscience77
.The expression ‗justice, equity and good conscience‘ was interpreted to mean
the rules of English law so far as applicable to the Indian society and circumstances78
. It has
been observed that in practice, the application of English law did not raise difficulty because
on many points there were no differences between the English and the personal law, and there
was no rule of personal law in many cases, moreover because many Indian businessmen
acquired experience from their relations with Britons79
. The law of England, so far as
consistent with the principles of equity and good conscience, generally prevailed in the
country unless it came in conflict with Hindu or Mahommedans law.
2.2 Definition and Nature of Contract Law
An Agreement enforceable by law is a contract. Therefore in a contract there must be
(1) an agreement and (2) the agreement must be enforceable by law. An agreement comes
into existence whenever one or more persons promise to one or others, to do or not to do
something, ―Every promise and every set of promises, forming the consideration for each
other, is an agreement. Some agreements cannot be enforced thought he courts of law, e.g.,
75
www.uakron.eduassessed on 14.08.2014 76
Ilr.hellco.orgassessed on 14.08.2014 77
Id at p.9,10
13 P...S. Atiyah, The Law of Contract (2010), Vikas Publishing House Pvt Ltd. Id at p. 56. 78
archive.org assessed on 14.08.2014
44
an agreement to play cards or go to a cinema. An agreement, which can be enforced through
the courts of law, is called contract. The law of contract deals with agreements which can be
enforced through courts of law. The law of contract is the most important part of commercial
law because every commercial transaction starts from an agreement between two or more
persons.80
According to Salmond a contract is an ―agreement creating and defining
obligations between the parties.‖ According to Sir William Anson, ―A contract is an
agreement enforceable at law made between two or more persons, by which rights are
acquired by one or more to acts or forbearances on the part of the other or others. Sir William
Anson observes as follows: ―As the law relating to property had its origin in the attempt to
ensure that what a man has lawfully acquired he shall retain, so the law of contract is
intended to ensure that what a man has been led to expect shall come to pass; and that what
has been promised to him shall be performed.‖ The Indian Contract Act of 1872 (Act IX of
1872) lays down certain general rules regarding contracts. The Act is not exhaustive. There
are other Acts relating to particular types of contracts e.g. the Negotiable Instruments Act,
Transfer of Property Act, etc.81
The Contract Act does not affect nay usage or custom of trade,
or any incident of any contract not inconsistent with the provisions of the Act.82
The law of contract has in recent time to face a problem, which is assuming new
dimensions. The problem has arisen out of the modern large scale and widespread practice of
concluding contracts in standardized form. People upon whom such exemption clauses or
standard form contracts are imposed hardly have any choice or alternative but to adhere. This
gives a unique opportunity to the giant company to exploit the weakness of the individual by
imposing upon him terms, which may go to the extent of exempting the company from all
liability under contract. It is necessary and proper that their interests should be protected.83
The courts have therefore devised some rules to protect the interest of such persons. Indian
courts have consistently refused to enforce post-termination non-compete clauses in
employment contracts, viewing them as ―restraint of trade‖ impermissible under Section 27
of the Indian Contract Act, 1872 (the Act), and as void and against public policy because of
their potential to deprive an individual of his or her fundamental right to earn a livelihood.
The contract Act does not define a wagering agreement. Cotton, L.J. (Thacker v. Hardy) said:
―The essence of gaming and wagering is that one party is to win and other to lose upon a
80
G.H. Trietel, The law of contract (1983) London Stevens and Company id at p.1, 2. 81
Y. S. Sharma, law of contract (2012), University Book House (P) Ltd. Id at p.3. 82
Ibid. 83
R.K.Bangia, Indian Contract Act (2011) Allahabad Law Agency Id at p.45.
45
future event which at the time of contract is of an uncertain nature, i.e., that if the future event
turns out one way a will lose, but if it turns out the other way, he will win‖. Hawkins, J.
(Carlill v. Carbolic Smoke Ball Co.) said: ―It is essential to a wagering contract that each
party may under it either win or lose, whether he will win or lose being dependent on the
issue of the event and therefore remaining uncertain until, that issue is known. If either of the
parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract‖. In
this case the defendants promised to pay 100 pounds to anyone who caught influenza after
using the smoke ball manufactured by them. It was held not to be a wager because the user
could not lose anything if he failed to catch influenza. The important points to be noted here
is that there should be equal chances of gain or loss to the parties and it should be regarding
an uncertain event. The most striking feature of wager is that each party has the chance of
winning or losing. The subject of government contracts has assumed great importance in the
modern times. Today the state is a source of wealth. In the modern era of a welfare state,
government's economic activities are expanding and the government is increasingly assuming
the role of the dispenser of a large number of benefits. Today a large number of individuals
and business organizations enjoy largess in the form of government contracts, licenses,
quotas, mineral rights, jobs, etc. This raises the possibility of exercise of power by a
government to dispense largess in an arbitrary manner. It is axiomatic that the government or
any of its agencies ought not to be allowed to act arbitrarily and confer benefits on
whomsoever they want. Therefore there is a necessity to develop some norms to regulate and
protect individual interest in such wealth and thus structure and discipline the government
discretion to confer such benefits. The doctrine of privity of contract means that only those
involved in striking a bargain would have standing to enforce it. In general this is still the
case, only parties to a contract may sue for the breach of a contract, although in recent years
the rule of privity has eroded somewhat and third party beneficiaries have been allowed to
recover damages for breaches of contracts they were not party to. There are two times where
third party beneficiaries are allowed to fall under the contract.84
The duty owed test looks to
see if the third party was agreeing to pay a debt for the original party. The intent to benefit
test looks to see if circumstances indicate that the promisee intends to give the beneficiary the
benefit of the promised performance. Any defense allowed to parties of the original contract
84
Id at p.203.
46
extends to third party beneficiaries. A recent case is in England, where the Contract (Rights
of Third Parties) Act 1999 was introduced.85
There are certain situations wherein certain persons are required to perform an
obligation despite the fact that he hasn‘t broken any contract nor committed any tort. For
instance, a person is obligated to restore the goods left at his home, by mistake, and keep it in
good condition. Such obligations are called quasi-contracts. In this era of globalization where
a contract contains one or more foreign elements, the difficult and complicated question in
proceeding that arises is that of ascertaining its applicable law. Such difficulty stems from the
multiplicity and diversity of connecting factors and each of them may arise in a different
jurisdiction for instance the place where the contract was made; the place of performance; the
place of business of the parties; the place of payment; the of payment; domicile or nationality
o the parties and so on. So to avoid this situation parties are granted with the freedom to
select the law to govern their contract under the provisions of Rome convention. The
inclusion of a choice of law clause is such an everyday matter in international contracts that
its absence would be to ignore commercial realities86
.
2.3 Types of Contracts
Contracts may be classified in terms of their (1) validity or enforceability, (2) mode of
formation, or (3) performance.
2.3.1 Classification According to Validity or Enforceability87
Contracts may be classified according to their validity as (i) voidable (ii) void (iii)
valid, (iv) illegal, or (v) unenforceable:- A contract to constitute a valid contract must have
all the essential elements discussed earlier. If one or more of these elements is/are missing,
the contract is voidable, void, illegal or unenforceable.
(1) Voidable Contract as per Section 2:-
a) A voidable contract is one which may be repudiated at the will of one of the parties,
but until it is so repudiated it remains valid and binding. It is affected by a flaw (e.g.,
simple misrepresentation, fraud, coercion, undue influence), and the presence of
anyone of these defects enables the party aggrieved to take steps to repudiate the
contract. It shows that the consent of the party who has the discretion to repudiate it
was not free. An agreement which is not enforceable by either of the parties to it is
85
Id at p.205. 86
Available at http.//www.legalserviceindia.com/article/article assessed on 4.92013. 87
www.BMS.co.in. assessed on 4.92013.
47
void88
. Such an agreement is without any legal effect ab initio (from the very
beginning). Under the law, an agreement with a minor is void89
.
b) Void Contract: - A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable90
.In fact; in that case there is no contract at all. It
may be called a void agreement. However, a contract originally valid may become
void later. An illegal agreement is one the consideration or object of which (1) is
forbidden by law; or (2) defeats the provisions of any law; or (3) is fraudulent; or (4)
involves or implies injury to the person or property of another; or (5) the court regards
it as immoral, or opposed to public policy.
c) An Unenforceable Contract: - An unenforceable contract is neither void nor voidable,
but it cannot be enforced in the court because it lacks some item of evidence such as
writing, registration or stamping. An agreement which is required to be stamped will
be unenforceable if the same is not stamped at all or is under-stamped. In such a case,
if the stamp is required merely for revenue purposes, as in the case of a receipt for
payment of cash, the required stamp may be affixed on payment of penalty and the
defect is then cured and the contract becomes enforceable91
. If, however, the technical
defect cannot be cured the contract remains unenforceable, e.g., in the case of an
unstamped bill of exchange or promissory note.92
Contracts which must be in writing the following must be in writing, a requirement laid down
by statute in each case:
a) A negotiable instrument, such as a bill of exchange, cheque, promissory note (The
Negotiable Instruments Act, 1881).
b) A Memorandum and Articles of Association of a company, an application for shares
in a company; an application for transfer of shares in a company (The Companies Act,
1956).
c) A promise to pay a time-barred debt (Section 25 of the Indian Contract Act, 1872).
d) A lease, gift, sale or mortgage of immovable property (The Transfer of Property Act,
1882).
Some of the contracts and documents evidencing contracts are, in addition to be in writing,
required to be registered also. These are:
88
Section 2(i), Indian Contract Act, 1872. 89
Section 11, Indian Contract Act, 1872. 90
Section 2(i), Indian Contract Act, 1872. 91
M.C.Kuchhal , Mercantile law; (2010) Vikas Publishing House Pvt Ltd. Id at p.16. 92
Id at p.17,19.
48
1. Documents coming within the purview of Section 17 of the Registration Act, 1908.
2. Transfer of immovable property under the Transfer of Property Act, 1882.
3. Contracts without consideration but made on account of natural love and affection
between parties standing in a near relation to each other (Section 25, The Indian
Contract Act, 1872).
4. Memorandum of Association, and Articles of Association of a Company, Mortgages
and Charges (The Companies Act, 1956).
2.3.2 Classification According to Mode of Formation
There are different modes of formation of a contract. The terms of a contract may be
stated in words (written or spoken). This is an express contract. Also the terms of a contract
may be inferred from the conduct of the parties or from the circumstances of the case. This is
an implied contract (Section 9)93
. We have seen that the essence of a valid contract is that it is
based on agreement of the parties. Sometimes, however, obligations are created by law
(regardless of agreement) whereby an obligation is imposed on a party and an action is
allowed to be brought by another party. These obligations are known as quasi-contracts. The
Indian Contract Act, 1872 (Chapter V Sections 68–72) describes them as ―certain relations
resembling those created by contract‖.
2.3.3 Classification According to Performance
Another method of classifying contracts is in terms of the extent to which they have
been performed. Accordingly, contracts are: (1) executed, and (2) executory or (3) unilateral,
and (4) bilateral, (5) Contracts under Seal (6) Express Contracts
(7) Implied Contracts.94
Executory Contract and Executed Contract-An executed contract is one wholly
performed. Nothing remains to be done in terms of the contract. . Executed and Executory
Contracts -An executed contract is one in which nothing remains to be done by either party.
The phrase is, to a certain extent, a misnomer because the completion of performances by the
parties signifies that a contract no longer exists. An executory contract is one in which some
future act or obligation remains to be performed according to its terms95
An executory
contract is one which is wholly unperformed, or in which there remains something further to
93
www.newagepublication.comassessed on 14.08.2014 94
ibid 95
www.encyclopedia.comassessed on 24.08.2013
49
be done96
.An important corollary can be deduced from the distinction between Executed and
Executory Contracts .97
It is that a contract is a contract from the time it is made and not from
the time its performance is due. The performance of the contract can be made at the time
when the contract is made or it can be postponed also. See above cases under executory
contract.98
Bilateral and Unilateral Contracts:- The exchange of mutual, reciprocal promises between
entities that entails the performance of an act, or forbearance from the performance of an act,
with respect to each party, is a Bilateral Contract. A bilateral contract is sometimes called a
two-sided contract because of the two promises that constitute it. The promise that one party
makes constitutes sufficient consideration (see discussion below) for the promise made by the
other99
. A unilateral contract involves a promise that is made by only one party. The offeror
(i.e., a person who makes a proposal) promises to do a certain thing if the offeree performs a
requested act that he or she knows is the basis of a legally enforceable contract. The
performance constitutes an acceptance of the offer, and the contract then becomes executed.
Acceptance of the offer may be revoked, however, until the performance has been completed.
This is a one-sided type of contract because only the offeror, who makes the promise, will be
legally bound. The offeree may act as requested, or may refrain from acting, but may not be
sued for failing to perform, or even for abandoning performance once it has begun, because
he or she did not make any promises100
.
Contracts under Seal: - Traditionally, a contract was an enforceable legal document only if
it was stamped with a seal. The seal represented that the parties intended the agreement to
entail legal consequences. No legal benefit or detriment to any party was required, as the seal
was a symbol of the solemn acceptance of the legal effect and consequences of the
agreement. In the past, all contracts were required to be under seal in order to be valid, but
the seal has lost some or all of its effect by statute in many jurisdictions. Recognition by the
courts of informal contracts, such as implied contracts, has also diminished the importance
and employment of formal contracts under seal.
Express Contracts: - In an express contract, the parties state the terms, either orally or in
writing, at the time of its formation. There is a definite written or oral offer that is accepted
96
Supra note 27 id at p.16. 97
www.newagepublication.comassessed on 14.08.2014 98
S.K. Maheshwari, S.N. and S.K. Maheshwari; A Manual of Business Laws; 2003, First edition
Himalaya Publishing House, Bombay, India, id at p.1.11. 99
www.encyclopedia.comassessed on 14.08.2014 100
Lawjrank.orgassessed on 14.08.2014
50
by the offeree (i.e., the person to whom the offer is made) in a manner that explicitly
demonstrates consent to its terms.101
Implied Contracts: - Although contracts that are implied in fact and contracts implied in law
are both called implied contracts, a true implied contract consists of obligations arising from
a mutual agreement and intent to promise, which have not been expressed in words. It is
misleading to label as an implied contract one that is implied in law because a contract
implied in law lacks the requisites of a true contract. The term quasi-contract is a more
accurate designation of contracts implied in law. Implied contracts are as binding as express
contracts. An implied contract depends on substance for its existence; therefore, for an
implied contract to arise there must be some act or conduct of a party, in order for them to be
bound102
. A contract implied in fact is not expressed by the parties but, rather, suggested
from facts and circumstances that indicate a mutual intention to contract. Circumstances exist
that, according to the ordinary course of dealing and common understanding, demonstrate
such an intent that is sufficient to support a finding of an implied contract. Contracts implied
in fact do not arise contrary to either the law or the express declaration of the parties.
Contracts implied in law (quasi-contracts) are distinguishable in that they are not predicated
on the assent of the parties, but, rather, exist regardless of assent. The implication of a mutual
agreement must be a reasonable deduction from all of the circumstances and relations that
contemplate parties when they enter into the contract or which are necessary to effectuate
their intention. No implied promise will exist where the relations between the parties prevent
the inference of a contract. A contract will not be implied where it would result in inequity or
harm. Where doubt and divergence exist in the minds of the parties, the court may not infer a
contractual relation-ship. If, after an agreement expires, the parties continue to perform
according to its terms, an implication arises that they have mutually assented to a new
contract that contains the same provisions as the old agreement. A contract implied in fact,
which is inferred from the circumstances, is a true contract, whereas a contract implied in law
is actually an obligation imposed by law and treated as a contract only for the purposes of a
remedy. With respect to contracts implied in fact, the contract defines the duty; in the case of
quasi-contracts, the duty defines and imposes the agreement upon the parties.
Unconscionable Contracts: - An Unconscionable contract is one that is unjust or unduly
one-sided in favor of the party who has the superior bargaining power. The adjective
101
S.N. Maheshwari, S.K. Maheshwari, A manual of Business laws (2010) Himalaya Publishing House,
Bombay, India id at p.1.11. 102
Ibid.
51
unconscionable implies an affront to fairness and decency. An unconscionable contract is one
that no mentally competent person would accept and that no fair and honest person would
enter into. Courts find that unconscionable contracts usually result from the exploitation of
consumers who are poorly educated, impoverished, and unable to shop around for the best
price available in the competitive marketplace103
. The majority of unconscionable contracts
occur in consumer transactions. Contractual provisions that indicate gross one-sidedness in
favor of the seller include limiting damages or the rights of the purchaser to seek court relief
against the seller, or disclaiming a Warranty i.e., a statement of fact concerning the nature or
caliber of goods sold the seller, given in order to induce the sale, and relied upon by the
purchaser. Unconscionability is ascertained by examining the circumstances of the parties
when the contract was made. This doctrine is applied only where it would be an affront to the
integrity of the judicial system to enforce such a contract.
Adhesion Contracts :- Adhesion contracts are those that are drafted by the party who has the
greater bargaining advantage, providing the weaker party with only the opportunity to adhere
to (i.e., to accept) the contract or to reject it. These types of contract are often described by
the saying "take it or leave it." They are frequently employed because most businesses could
not transact business if it were necessary to negotiate all of the terms of every contract. Not
all adhesion contracts are unconscionable, as the terms of such contracts do not necessarily
exploit the party who assents to the contract. Courts, however, often refuse to enforce
contracts of adhesion on the grounds that a true meeting of the minds never existed, or that
there was no acceptance of the offer because the purchaser actually had no choice in the
bargain.
Aleatory Contracts: - An Aleatory contract is a mutual agreement the effects of which are
triggered by the occurrence of an uncertain event. In this type of contract, one or both parties
assume risk. A fire insurance policy is a form of aleatory contract, as an insured will not
receive the proceeds of the policy unless a fire occurs, an event that is uncertain to occur.
Void and Voidable Contracts104
- Contracts can be either void or voidable. A void contract
imposes no legal rights or obligations upon the parties and is not enforceable by a court. It is,
in effect, no contract at all105
. A voidable contract is a legally enforceable agreement, but it
may be treated as never having been binding on a party who was suffering from some legal
disability or who was a victim of fraud at the time of its execution. The contract is not void
103
Id at p.16. 104
En.wikipedia.org/wiki/Indian Contract Act, 1872 assessed on11 August 2014. 105
www.encyclopedia.orgassessed on 14.08.2014
52
unless or until the party chooses to treat it as such by opposing its enforcement. A voidable
contract may be ratified either expressly or impliedly by the party who has the right to avoid
it. An express ratification occurs when that party who has become legally competent to act
declares that he or she accepts the terms and obligations of the contract. An implied
ratification occurs when the party, by his or her conduct, manifests intent to ratify a contract,
such as by performing according to its terms. Ratification of a contract entails the same
elements as formation of a new contract. There must be intent and complete knowledge of all
material facts and circumstances. Oral acknowledgement of a contract and a promise to
perform constitute sufficient ratification. The party who was legally competent at the time
that a voidable contract was signed may not, however, assert its voidable nature to escape the
enforcement of its terms106
.
2.4 Essential Elements of a Valid Contract
"All agreements are contracts, if they are made by the free consent of the parties,
capacity of parties to contract, for a lawful consideration with a lawful object, and not hereby
expressly to be void."107
2.4.1 Offer: - It is an essential element for a valid contract; offer is called in India
proposal.
(i) Definition: - A proposal is defined as ―when one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the assent of
that other to such act or abstinence, he is said to make a proposal108
. An offer is synonymous
with proposal. The offeror or proposer expresses his willingness ―to do‖ or ―not to do‖ (i.e.,
abstain from doing) something with a view to obtain acceptance of the other party to such act
or abstinence. Thus, there may be ―positive‖ or ―negative‖ acts which the proposer is willing
to do.
(ii) Ways of Offer: - An offer can be made by an act in the following ways:
a) By words (whether written or oral). The written offer can be made by letters,
telegrams, telex messages, advertisements, etc. The oral offer can be made either in
person or over telephone.
106
Lawjraink.orgassessed on 14.08.2014 107
Section 10. 108
Section 2a of Indian Contract Act, 1872.
53
b) By conduct. The offer may be made by positive acts or signs so that the person acting
or making signs mean to say or convey. However silence of a party can in no case
amount to offer by conduct.
An offer can also be made by a party by omission (to do something). This includes
such conduct or forbearance on one‘s part that the other person takes it as his willingness or
assent. An offer implied from the conduct of the parties or from the circumstances of the case
is known as implied offer.109
(iii) Kinds of Offer
Specific and General Offer110
: - An offer can be made either:
1. to a definite person or a group of persons, or
2. to the public at large.
1. The first mode of making offer is known as specific offer and the second is known as
a general offer. In case of the specific offer, it may be accepted by that person or
group of persons to whom the same has been made. The general offer may be
accepted by any one by complying with the terms of the offer.111
The celebrated case
of Carlill v. Carbolic Smoke Ball Co112
is an excellent example of a general offer and
is explained below. [Boulton v. Jones113
].
2. (2) In Carbolic Smoke Ball Co.‟s case (supra), the patent-medicine company
advertised that it would give a reward of £100 to anyone who contracted influenza
after using the smoke balls of the company for a certain period according to the
printed directions. Mrs. Carlill purchased the advertised smoke ball and contracted
influenza in spite of using the smoke ball according to the printed instructions. She
claimed the reward of £100. The claim was resisted by the company on the ground
that offer was not made to her and that in any case she had not communicated her
acceptance of the offer. She filed a suit for the recovery of the reward. It was held that
she could recover the reward as she had accepted the offer by complying with the
terms of the offer. The general offer creates for the offeror liability in favour of any
person who happens to fulfill the conditions of the offer. It is not at all necessary for
the offeree to be known to the offeror at the time when the offer is made. He may be a
109
Chawla, R C Garg K C Chawala, Industrial and Commercial Law (1989) New Delhi: Kalyani Publishers, id
at p.14,15. 110
Anson , Law of Contract (2010) Oxford Publishing House id at p. 35, 36 111
Supra note 33 id at p.1.11. 112
(1813) 1 Q.B. 256. 113
(1857) 2H. and N. 564.
54
stranger, but by complying with the conditions of the offer, he is deemed to have
accepted the offer.
(iv) Essential Requirements of a Valid Offer: - An offer must have certain essentials in
order to constitute it a valid offer. These are:
1. The offer must be made with a view to obtain acceptance114
.
2. The offer must be made with the intention of creating legal relations. [Balfour v.
Balfour115
]
3. The terms of offer must be definite, unambiguous and certain or capable of being
made certain116
. The terms of the offer must not be loose, vague or ambiguous. Held:
N was not liable [Harris v. Lickerson117
]. (2) A father wrote to his would-be son-in-
law that his daughter would have a share of what he would leave at the time of his
death. At the time of death, the son-in-law staked his claim in the property left by the
deceased. Held: The son-in-law‘s claim must fail as there was no offer from his
father-in-law creating a binding obligation. It was just a declaration of intention and
nothing more.118
Offer vis-à-vis invitation to offer. An offer must be distinguished from invitation to offer. A
prospectus issued by a college for admission to various courses is not an offer. It is only an
invitation to offer. A prospective student by filling up an application form attached to the
prospectus is making the offer. An auctioneer, at the time of auction, invites offers from the
would-be-bidders. He is not making a proposal. A display of goods with a price on them in a
shop window is construed an invitation to offer and not an offer to sell. In a departmental
store, there is a self-service. The customers picking up articles and take them to the cashier‘s
desk to pay. The customer‘s action in picking up particular goods is an offer to buy. As soon
as the cashier accepts the payment a contract is entered into.119
Likewise, prospectus issued by a company for subscription of its shares by the
members of the public, the price lists, catalogues and quotations are mere invitations to offer.
On the basis of the above, we may say that an offer is the final expression of
willingness by the offeror to be bound by his offer should the other party choose to accept it.
Where a party, without expressing his final willingness, proposes certain terms on which he is
114
Section 2(a), Indian Contract Act, 1872. 115
(1919) 2 K.B. 571. 116
Section 29, Indian Contract Act, 1872. 117
(1875) L.R.S. Q.B. 286. 118
Re Ficus (1900) 1. Ch. 331. 119
Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. (1953) 1 Q.B. 401
55
willing to negotiate, he does not make an offer; he only invites the other party to make an
offer on those terms. This is perhaps the basic distinction between an offer and an invitation
to offer. In Harvey v. Facie, the plaintiffs (Harvey) telegraphed to the defendants (Facie),
writing: ―Will you sell us Bumper Hall Pen? Telegraph lowest cash price.‖ The defendants
replied also by a telegram, ―Lowest price for Bumper Hall Pen £900‖. The plaintiffs
immediately sent their last telegram stating: ―We agree to buy Bumper Hall Pen for £900
asked by you‖. The defendants refused to sell the plot of land (Bumper Hall Pen) at that
price. The plaintiff‘s contention that by quoting their minimum price in response to the
inquiry, the defendants had made an offer to sell at that price was turned down by the Judicial
Committee. Their Lordship pointed out that in their first telegram, the plaintiffs had asked
two questions, first as to the willingness to sell and second, as to the lowest price. They
reserved their answer as to the willingness to sell. Thus, they had made no offer. The last
telegram of the plaintiffs was an offer to buy, but that was never accepted by the defendants.
The offer must be communicated to the offeree. An offer must be communicated to
the offeree before it can be accepted. This is true of specific as well as general offer. G sent S,
his servant, to trace his missing nephew. Subsequently, G announced a reward for
information relating to the boy. S traced the boy in ignorance of the announcement regarding
reward and informed G. Later, when S came to know of the reward, he claimed it. Held, he
was not entitled to the reward on the ground that he could not accept the offer unless he had
knowledge of it.120
The offer must not contain a term the non-compliance of which may be assumed to
amount to acceptance. Thus, the offeror cannot say that if the offeree does not accept the
offer within two days, the offer would be deemed to have been accepted121
. Tenders
commonly arise where; a hospital invites offers to supply eatables or medicines. The persons
filling up the tenders are giving offers. However, a tender may be either:
(a) Specific or definite; where the offer is to supply a definite quantity of goods, or
(b) Standing; where the offer is to supply goods periodically or in accordance with the
requirements of the offeree.
In the case of a definite tender, the suppliers submit their offers for the supply of
specified goods and services. The offeree may accept any tender (generally the lowest one).
This will result in a contract. In the case of standing offers, the offeror gives an open offer
whereby he offers to supply goods or services as required by the offeree. A separate
120
Lalman Shukla v. Gauri Dutt, II, A.L.J. 489. 121
Supra note 42 id at p.1.17,1.18.
56
acceptance is made each time an order is placed. Thus, there are as many contracts as are the
acts of acceptance. The G.N. Railway Co. invited tenders for the supply of stores. W made a
tender and the terms of the tender were as follows: ―To supply the company for 12 months
with such quantities of specified articles as the company may order from time to time. The
company accepted the tender and placed the orders. W executed the orders as placed from
time to time but later refused to execute a particular order. In this case, it was held that W
was bound to supply goods within the terms of the tender.122
The Supreme Court of India in
this regard has observed: As soon as an order was placed a contract arose and until then there
was no contract. Also each separate order and acceptance constituted a different and distinct
contract.123
It is to be noted that if the offeree gives no order or fails to order the full quantity
of goods set out in a tender there is no breach of contract.
Revocation or Withdrawal of a tender: - A tenderer can withdraw his tender before its final
acceptance by a work or supply order. This right of withdrawal shall not be affected even if
there is a clause in the tender restricting his right to withdraw. A tender will, however, be
irrevocable where the tenderer has, on some consideration, promised not to withdraw it or
where there is a statutory prohibition against withdrawal.124
Special terms in a contract: - The special terms, forming part of the offer, must be duly
brought to the notice of the offeree at the time the offer is made. If it is not done, then there is
no valid offer and if offer is accepted, and the contract is formed, the offeree is not bound by
the special terms which were not brought to his notice. The terms may be brought to his
notice either:125
a. By drawing his attention to them specifically, or
b. By inferring that a man of ordinary prudence could find them by exercising ordinary
intelligence.
a) First cases are where certain conditions are written on the back of a ticket for a
journey or deposit of luggage in a cloak room and the words. ―For conditions see
back‖ are printed on the face of it. In such a case, the person buying the ticket is
bound by whatever conditions are written on the back of the ticket whether he has
read them or not.
1) P, a passenger deposited a bag in the cloakroom at a Railway Station. The
acknowledgement receipt given to him bore, on the face of it, the words ―See back‖
122
Great Northern Railway v. Witham (1873) L.R. 9 C.P. 16. 123
Chatturbhuj Vithaldas v. Moreshover Parashram AIR 1954 SC 326. 124
The Secretary of State for India v. Bhaskar Krishnaji Samani AIR 1925 Bom 485. 125
The Secretary of State for India v. Bhaskar Krishnaji Samani AIR 1925 Bom 485.
57
One of the conditions printed on the back limited the liability of the Railways for any
package to £10. The bag was lost, and P claimed £24. 10s, its value, pleading that he
had not read the conditions on the back of the receipt. It was held that P was bound by
the conditions printed on the back as the company gave reasonable notice on the face
of the receipt as to the conditions at the back of the document.126
2) A lady, L, the owner of a cafe, agreed to purchase a machine and signed the
agreement without reading its terms. There was an exemption clause excluding
liability of the seller under certain circumstances. The machine proved faulty and she
purported to terminate the contract. It was held that she could not do so, as the
exemption clause protected the seller from the liability.127
3) T purchased a railway ticket, on the face of which the words: ―For conditions see
back‖ were written. One of the conditions excluded liability for injury, however
caused. T was illiterate and could not read. She was injured and sued for damages. It
was held that the railway company had properly communicated the conditions to her
who had constructive notice of the conditions whether she read them or not. The
company was not bound to pay any damages.128
(a) The same rule holds good even where the conditions forming part of the offer are printed
in a language not understood by the acceptor provided his attention has been drawn to them
in a reasonable manner. In such a situation, it is his duty to ask for the translation, of the
conditions and if he does not do so, he will be presumed to have a constructive notice of the
terms of the conditions.129
If conditions limiting or defining the rights of the acceptor are not
brought to his notice, then they will not become part of the offer and he is not bound by them.
A passenger was traveling with luggage from Dublin to Whitehaven on a ticket, on the back
of which there was a term which exempted the shipping company from liability for the loss of
luggage. He never looked at the back of the ticket and there was nothing on the face of it to
draw his attention to the terms on its back. He lost his luggage and sued for damages. It was
held that he was entitled to damages as he was not bound by something which was not
communicated to him.130
Also, if the conditions are contained in a document which is
delivered after the contract is complete, then the offeree is not bound by them. Such a
document is considered a noncontractual document as it is not supposed to contain the
126
Parker v. South Eastern Rly. Co. (1877) 2 C.P.D. 416. 127
L‟Estrange v. Grancob Ltd. (1934) 2 R.B. 394. 128
Thompson v. LM. and L. Rly. (1930) 1 KB. 417]. 129
Mackillingan v. Campagine de Massangeres Maritimes (1897) 6 Cal. 227 J. 130
Henderson v. Stevenson (1875) 2 H.L.S.C. 470.
58
conditions of the contract. For instance, if a tourist driving into Mussoorie, receives a ticket
upon paying toll-tax, he might reasonably assume that the object of the ticket was that by
producing it he might be free from paying toll at some other toll-tax barrier, and might put in
his pocket without reading the same. The ticket is just a receipt or a voucher. C hired a chair
from the Municipal Council in order to sit on the beach. He paid the rent and received a ticket
from an attendant. On the back of the ticket, there was a clause exempting the Council ―for
any accident or damage arising from hire of chairs.‖ C sustained personal injuries as the chair
broke down while he was sitting therein. He sued for damages. It was held that the Council
was liable.131
From the illustrations given it may be concluded that whether the offeree will be
bound by the special conditions or not will depend on whether or not he had or could have
had notice by exercising ordinary diligence. Detailed observations with respect to printed
conditions on a receipt were made by the Bombay High Court in R.S. Deboo v. M. V.
Hindlekar132
. These observations are:
1. Terms and conditions printed on the reverse of a receipt issued by the owner of the
laundry or any other bailee do not necessarily form part of the contract of bailment in
the absence of the signature of the bailor (customer) on the document relied upon. The
onus is on the bailee to prove that the attention of the bailor was drawn to the special
conditions before contract was concluded and the bailor had consented to them as
contractual terms.
2. It cannot be just assumed that the printed conditions appearing on the reverse of the
receipt automatically become contractual terms or part of the contract of bailment.
3. In certain situations, the receipt cannot be considered as a contractual document as
such, it is a mere acknowledgement of entrustment of certain articles.
(v) Cross Offers
Where two parties make identical offers to each other, in ignorance of each other‘s
offer, the offers are known as cross-offers and neither of the two can be called an acceptance
of the other and, therefore, there is no contract. H wrote to T offering to sell him 800 tons of
iron at 69s. per ton. On the same day T wrote to H offering to buy 800 tons at 69s. Their
letters crossed in the post. T contended that there was a good contract. It was held that there
was no contract133
. Termination or Lapse of an Offer An offer is made with a view to obtain
131
Chapleton v. Barry U.D.C. (1940) 1 K.B. 532. 132
AIR 1995 Bom. 68. 133
Tinn v. Hoffman & Co. (1873) 29 L.T. Exa. 271.
59
assent thereto. As soon as the offer is accepted it becomes a contract. But before it is
accepted, it may lapse, or may be revoked. Also, the offeree may reject the offer. In these
cases, the offer will come to an end134
. Essential Requirements of a Valid Offer135
1. Must be made with a view to obtain acceptance.
2. Must be made with the intention of creating legal relations.
3. Terms of offer must be definite, unambiguous and certain or capable of being made
certain.
4. It must be distinguished from mere declaration of intention or an invitation to offer.
5. It must be communicated to the offeree.
6. The offer must not contain a term the non-compliance of which may be assumed to
amount to acceptance.
7. A tender is an offer as it is in response to an invitation to offer.
8. The Special terms, forming part of the offer, must be duly brought to the notice of the
offeree at the time the offer is made.
9. Two identical cross-offers do not make a contract.
10. The offer lapses after stipulated or reasonable time. [Section 6(2)] The offer must be
accepted by the offeree within the time mentioned in the offer and if no time is
mentioned, then within a reasonable time. The offer lapses after the time stipulated in
the offer expires if by that time offer has not been accepted. If no time is specified,
then the offer lapses within a reasonable time. What is a reasonable time is a question
of fact and would depend upon the circumstances of each case136
.
1) M offered to purchase shares in a company by writing a letter on June 8. The
company allotted the shares on 23rd November. M refused the shares. It was held that
the offer lapsed as it was not accepted within a reasonable time.137
2) An offer lapses by the death or insanity of the offerer or the offeree before acceptance.
Section 6(4) provides that a proposal is revoked 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. Therefore, if the acceptance is made in ignorance of the death, or
insanity of offerer, there would be a valid contract. Similarly, in the case of the death
of offeree before acceptance, the offer is terminated.
134
Supra note 47 id at p.1.19. 135
S.K.Kapoor, Contract-1and Specific Relief Law (2010) Jain Book Agency id at p.19, 20. 136
Supra note 65 id at p.1.19. 137
Ramsgate Victoria Hotel Co. v. Montefiore (1860) L.R.I. Ex. 109.
60
3) An offer terminates when rejected by the offeree.
4) An offer terminates when revoked by the offerer before acceptance.
5) An offer terminates by not being accepted in the mode prescribed, or if no mode is
prescribed, in some usual and reasonable manner.
6) A conditional offer terminates when the condition is not accepted by the offeree.
7) A proposes to B ―I can sell my house to you for Rs.12, 000 provided you lease out
your land to me.‖ If B refuses to lease out the land, the offer would be terminated.
8) Counter offer138
. An offer terminates by counter-offer by the offeree.
When in place of accepting the terms of an offer as they are, the offeree accepts the same
subject to certain condition or qualification, he is said to make a counter-offer. The following
have been held to be counter-offers:
i. Where an offer to purchase a house with a condition that possession shall be given on
a particular day was accepted varying the date for possession.139
ii. An offer to buy a property was accepted upon a condition that the buyer signed an
agreement which contained special terms as to payment of deposit, making out title
completion date, the agreement having been returned unsigned by the buyer.140
iii. An offer to sell rice was accepted with an endorsement on the sold and bought note
that yellow and wet grain will not be accepted.141
iv. Where an acceptance of a proposal for insurance was accepted in all its terms subject
to the condition that there shall be no assurance till the first premium was paid.142
138
A.N.Chaturvedi ,Indian Contract Act, (2013) id at p.23. 139
Routledge v. Grant (1828) 130 E.R. 920. 140
Jones v. Daniel (1894) 2 Ch. 332. 141
All Shain v. Moothia Chetty, 2 BomL.R. 556. 142
Sir Mohamed Yusuf v. S. of S. for India 22 Bom. L.R. 872.
61
2.4.2 Acceptance: - it is the second important essential elements for a valid contract.
(i) Definition:-
Acceptance as follows: 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. A offer to sell his house to B for Rs.500, 000. B accepts the offer to
purchase the house for Rs. 500, 000. This is an acceptance.143
(ii) Essentials of a Valid Acceptance:-
It must be given by the Offeree- An offer can be accepted only by person to whom it
is made. It cannot be accepted by another person with the consent of offeror. Similarly
in case of offer to the particular class it can be accepted by any member of that class.
A sold his business to B without disclosing the fact to his customers. J send is an
order for the supply of good to A by name. B receives the order and executed the same.
It was held that there was no contract between B and J because J never made any offer
to B. It must be Absolute and Unconditional- In order to convert the offer into an
agreement, the acceptance must be an absolute and unconditional. If the offeree
imposes any condition in his acceptance, it is not a valid acceptance, but a counter offer.
1. A offer to sell his watch to B for Rs.200 and B replies that he can buy it only for
Rs. 100, there is a material variation in the acceptance. Therefore, there is no
agreement as the acceptance is not absolute and unconditional.
2. M offer to sell his piece of land to N for Rs. 12, 00, 000, N accepted and enclosed
Rs. 800, 000 with the promise to pay the balance by the monthly installments.
Held there was no contract between N & M, and the acceptance was unmodified.
143
Section 2(b).
62
It must be in Prescribed Manner144- If the offeror in his offer has prescribed any
particular manner of acceptance, it must be given according to that particular manner.
It must be communicated to the Offeror. In order to form a contract the acceptance
must be communicated to the offeror in a clear manner by the offeree or his authorize
agent. Here expression of intension to accept an offer is not a valid acceptance.
A proposes by letter to purchase B's house. B expresses his intension to sell it to A
but does not send a reply to him. The house is sold to C, despite B's intension. He has no
legal remedy to against Bit may Express or Implied- When an acceptance is given as
words spoken or written, it is called express acceptance. When it is given by conduct, it
is called implied acceptance. It must follow the Offer- Acceptance must be given after
receiving the offer. It should not precede the offer. Acceptance always follows the
offer.
It must be given within Reasonable Time. In order to be valid acceptance, it must be
given at specified time allowed by offeror. If no time is mentioned, then the acceptance
must be given in a reasonable time. M implied for certain shares in a company in June
but allotment was made in November. M refuse to accept the shares, it was held that M
could refuse to take shares offer has lapsed after the expiry a reasonable time. An
acceptance is a "final and unqualified expression of assent to the terms of an offer". The
idea of finality and meeting of minds is important. However, there are many situations
in which the meeting of minds will not be clear, e.g. what if:
The terms of the acceptance are not identical to those of the offer, Acceptance
hasn't been communicated,
There is a prescribed method of acceptance,
Silence is used to accept,
Can an offer be accepted if the offeree is unaware of it?
144
Ibid.
63
The terms of an offer and acceptance. The general rule is that the acceptance is an
unqualified expression of consent to the terms the offeror has offered. Thus an
acceptance which tries to vary the terms of the offer is not an acceptance. In fact it
will be a counter-offer, which implies a complete rejection of the terms in the
original offer. With counter-offers, the offeree then becomes the offeror. Thus in
Hyde v Wrench145, the D offered to sell his farm to C for 1000, C then offered? 950 but
D refused. C then wrote back agreeing to pay 1000 but D never replied. The court
held that no contract had been formed as the offer to pay 950 was a counter-offer
which completely rejected the earlier offer and thus the C could not go back and
later accept it. It is important to be careful, however, when construing statements as
counter-offers as they may in fact be requests for information. Thus if Claimant had
written back saying "are you willing to pay 950" rather than "I'll pay 950", this
would have been a request for information and the original offer would have
remained open for acceptance.
In modern business, many industries will adopt their own standardised terms and modes of
negotiating contracts. Thus it can be increasingly hard to tell whether there has been an
acceptance. In Butler Machine Tool v Ex-Cell-O Corporation146
, the C quoted D a price for
some machinery and stated delivery would be within 10 months. On the back of the quotation
was a set of terms, one of which provided for an increase in price if the cost of the machinery,
delivery etc. increased. By the time the machinery was delivered there had been a massive
increase in price and the D rejected the excess charge. They relied on a clause in their own
terms and conditions on the back of their order (which they sent after the quotation) which
did not contain any variation clause. The court held that the terms on the terms on the order
had been different enough to constitute a counter-offer and the acknowledgment of order by
C had been the acceptance. Thus the defendant's terms prevailed, notwithstanding that the
claimant had made reference to their own terms after the acknowledgement.
The court, however, has been criticised for adopting a strained view of the facts. The
acknowledgment was simply a tear-off slip which C signed. If there had been no such slip
what would the situation have been? The claimant proceeded to refer to their own terms
during the contract and the goods were produced and delivered. Would it have made sense to
say that there was no acceptance and thus no contract? It is clear though that the parties
145
[1840] 3 Beav. 334. 146
[1979] WLR 401.
64
thought there was a contract even though there was no meeting of minds as to the increased
payment clause. The courts will, however, hold that no contract existed in the absence of
proper acceptance, making and delivering the machinery is not sufficient: conduct alone does
not constitute acceptance. The reason for this is that the basis of contract is the agreement of
the parties and conduct by one party does not evidence that agreement. The court must
determine whether the intention was to perform task A or B, the fact that one party performs
A and not B does not prove that this was the agreement between the parties: he may simply
be acting in breach of contract.
(iii) Communication of an Acceptance
The general rule is that in order to be valid, an acceptance must be communicated to
the offeror. Otherwise, an offeree would be unaware that they were bound in a contract.
There are, however, exceptions to this. It is possible for a person making the offer to waive
the right to receiving an acceptance as in Carlill v Carbolic Smoke Ball. In cases of unilateral
offers the acceptance is performing the action specified by the offer and this need not be
communicated to the offeror147
.
The general rule doesn't apply when the reason for the lack of communication is the
offeror's fault. Thus in Entores v Miles Far East Corporation148
, the C in London made an
offer by telex (which is like a fax) to the D (who were in Amsterdam), who were acting as
agents for an American company. The D sent their acceptance by telex. The C later applied to
the court to be allowed to serve a claim form on the American company (where a party
wishes to serve a claim form against a non-English party they need the court's permission.
One of the questions the court will ask is whether the contract was concluded in England).
The court held that the contract had in fact been made in England when the acceptance was
received by the Claimants in London. The court distinguished between cases involving
instantaneous communication (like a fax or email) and communication by post. In cases
involving post the rules are different, as is considered below. In cases involving instant
communication, the contract will be concluded in whichever country the acceptance fax or
email is sent to. As the acceptance was sent to London, the contract was concluded there. A
more intricate question is whether acceptance is at the moment that the acceptance arrives or
only when it is read. It is likely that a court would hold that the moment of acceptance is the
moment the message arrives, as long as it is within office hours.
147
A.N.Chaturvedi , Indian Contract Act(2010), Allahabad Law Agency id at p.33, 34. 148
[1955] 2 QB 327.
65
(iv) Prescribed Method of Acceptance
An offeror is permitted to state how the acceptance must be communicated. If the
terms of the offer state that an acceptance must be in a certain format, then any deviation is
likely to render the acceptance invalid. Whereas, it is possible that if the terms do not
stipulate the mode of acceptance in a mandatory way, then any form of acceptance will be
valid as long as it is not more disadvantageous to the offeror (e.g. if the offeror says
acceptances by email or phone, but the offeree faxes and the offeror has no fax machine to
receive the fax). The answer will depend on an interpretation of the term.149
(v) Can Silence be an Acceptance
Generally, silence cannot be an acceptance as, obviously, there would be extreme
uncertainty as to whether a contract has been concluded or not. The rule seems less obvious
in a situation where an offeror makes and offer and says that they will consider it accepted
within 7 days unless the offeree rejects it. The offeree wants to accept the contract and so
says nothing, but the offeror later seeks to assert that there is no contract. Arguably it is unfair
to the offeree150
. In Felthouse v Bindley151
, the C claimed he had bought a horse from his
nephew. After negotiations C wrote to his nephew offering to buy the horse. He ended the
letter saying "if I hear no more about him, I consider the horse mine at 30 15s". The nephew
didn't reply. The horse was sold by accident by an auctioneer and the C brought an action for
conversion (the tort of taking a possession for which one doesn't have ownership). The court
held that there had been no valid contract.
(vi) Postal Rule
Acceptances mailed by post do not follow the general rule that an acceptance is only
valid when it is communicated to the offeror. An acceptance is valid at the moment when it is
put into the post box by the offeree in order to send it to the offeror: Adams v Lindsell.152
This validity upon posting is called the "postal rule". This rule is well settled but has been
frequently criticised.
Thus in Henthorn v Fraser153
the claimant was given a written offer in person. The
next day, however, the defendant tried to revoke their offer and the letter of revocation
reached the claimant's office at 5pm. However, earlier that day the claimant had mailed his
acceptance of the offer and it reached the defendant at 8.30pm. The defendant refused to
149
Id at p.38. 150
Supra note 47 id at p.1.21. 151
(1862) 11 CBNS 869. 152
[1818] 1 B&Ald 681. 153
[1974] 1 WLR 155.
66
honour the contract and argued that because he had given the claimant the offer in person, he
had indicated that the postal rule did not apply to this case. The court held against the
defendant saying that the use of the post had been contemplated and thus the postal rule
applied. The claimant's acceptance was valid when he posted it which was before the
revocation.
In Holwell Securities v Hughe154
, the C tried to exercise an option to purchase some
land by mailing a written declaration to that effect. The D never received the letter. C then
sought the remedy of specific performance (where the court forces the party at fault to
perform the action they contracted to do, in this case transfer land). The court rejected the
claim on the grounds that the claimant had failed to give notice. The reasoning for this was
that the postal rule did not apply. Had the postal rule applied then there would have been a
valid contract even if the letter had been lost in the post. The rationale of the court was that
the wording of the clause said that C must give "notice in writing to" the defendant which
required communication to the defendant and not just posting. Leaving the particular fact that
there was a clause in this case, the decision of the court is authority for the principle that
whether or whether not the postal rule applies depends on what the parties contemplated.
Thus if the parties contemplated that the acceptance might be by post, the postal rule applies.
If, however, as in this case, the parties say that the written acceptance must be "to" the
defendant, then the acceptance is only valid when it reaches him. It is still possible to send it
by post but the postal rule doesn't apply.
(vii) Acceptance in Unilateral Contracts155
As mentioned in the discussion of the Carlill case, above, the courts are prepared to
accept that in cases of unilateral contracts the offeror has waived their right to have an
acceptance communicated to them. Another general rule would be that the offeree must
perform the entire act specified by the offer before there has been acceptance. Thus a person
who finds a leaflet for a missing dog cannot spend 10 minutes looking for the dog and claim
that they accepted the offer of a reward upon finding the pet. A different question is when a
unilateral offer can be revoked. Arguably once someone has begun performance there should
be an implied term preventing them from withdrawing the offer. Thus if the performance is
long and arduous it would unfair for the offeror to withdraw it halfway through. In Errington
v Errington156
, the Court of Appeal considered the situation where a father bought a house
154
[1892] 2 Ch 27. 155
Supra note 27 at p.24. 156
(1952) 1 KB 290.
67
and was paying the mortgage on it. He allowed his son and daughter-in-law to live there if
they paid the mortgage. The father died and left the house to his widow in his will, she
wanted the house back. The court held that a unilateral contract had arisen between the father
and the son and his wife and the payment of the mortgage was performance of the contract. It
was not possible for the widow to claim the house anymore than it would have been for the
father to withdraw his offer once they had started. As long as they were performing the
obligation and did not stop until it was complete, it was not possible to revoke the offer.
(viii) Acceptance of an Offer in Ignorance
Is it possible to accept an offer you don't know exists? As a general rule, you must
have knowledge otherwise you may find yourself subject to contracts you didn't know
existed. But where the offeree performs the act in question unknowingly but then becomes
aware of the offer right before speaking with the offeror, it is arguable that they should be
allowed to assert a contract came into existence. A more likely situation is where a party
performs an action which would constitute acceptance but they did so without any intention
of accepting the offer. In an Australian case is where a man was arrested for murder, he was
aware that there was a reward for information leading to the arrest of the murderers and he
gave information to the police. The court did not allow him to recover the reward because
they held that he had given information to the police "exclusively to clear himself" and not
because he wanted the reward. It would seem, however, that as long as the offeree was aware
of the offer then they will be allowed to assert there was valid acceptance, unless their motive
was completely different. This would be hard for an offeror to prove.
(ix) Withdrawal or Termination of an Offer
When does an offer cease to be open for acceptance? As touched on above, the
general rule is that an offer is capable of being revoked until it has been accepted. The
revocation, however, must have been communicated to the offeree prior to their acceptance.
Thus, in Byrne v Van Tienhoven157
, the court held that an offer posted on 1 October was
validly accepted by the Claimants in America. There had been a massive leap around 3
October in the price of tin and the offeror immediately sent a revocation of their offer of
October 1 to sell tin at a low price. By the time the revocation reached America on 20
October the Claimants had already accepted. An offer will expire after a period of time stated
157
(1880) 5 CPD 344.
68
in the offer. However, a promise to keep an offer open for a certain period can only be
enforced by the offeree if consideration is provided for that promise: Dickinson v. Dodds.158
2.5 Consideration: it is the Essential Elements for a Valid Contract
(i) Meaning Consideration is one of the essential requisites to support a contract. Subject to
certain exceptions, an agreement made without consideration is void. Consideration is the
necessary evidence required by law for a valid contract. Thus, all contracts require
consideration to support them. Consideration means the valuable considerations, i.e. the price
paid for the other party‘s promise. Contract result where one party promises to do in
exchange for something in return. Consideration is (in other words); know as quid pro quo or
―something in return of something‖. Consideration, broadly speaking, is the price paid by the
promise for the obligation of the promisor.
(ii) Definitions:-
Consideration has been defined n various ways. According to Blackstone the simplest
definition is, ―Consideration is the recompense given by the party contracting to the other‖. In
the words of Pollock, ―Consideration is the price for which the promise of the other is bought
and the promise thus given for value is enforceable‖. Consideration is the cause of all
promises. Law supplies no means nor affords any remedy to compel the performance of an
agreement made without consideration. An agreement without consideration is a bare or a
naked promise and ex nudo pacto non oritio action i.e. cannot be held to be binding upon the
parties.
The best definition available so far is given in an English case of Currie v. Misa159
as
under:
Atiyah has suggested that consideration can simply be seen as ‗a reason for the
enforcement of promises‘, with that reason being ‗the justice of the case‘.
(iii) Promisor and Promisee
In most contracts two promises will be exchanged, so each party is both a promisor
and a promise. In a contract case, the claimant will often be arguing that the defendant has
broken the promise made to the claimant, arguing that the defendant has broken the promise
made to the claimant, and therefore the claimant will usually be the promise, and the
defendant will be the promisor. So if A contracts to paint B‘s promise to pay A £ 200. If A
fails to pant the bathroom, B can sue her, and if the issue of consideration arises, B will seek
158
(1876) 2 Ch D 473. 159
(1875) L.R. 10 Ex. 153.
69
to prove that her promise to pay £ 200 was consideration for A‘s promise to paint the
bathroom. In that action, A will be the promisor, and B the promise.
On the other hand, if a does the work but B does not pay the price, B can be sued by
A, and if consideration is at issue, A will have to prove that her promise to paint the bathroom
was consideration for B‘s promise to pay. In that action, A will be the prmosee and B the
promisor.
(iv) Kinds of Consideration
‗Executory‘ and ‗Executed‘ consideration
Consideration is often divided into two categories: executory and executed. Executed
consideration is the performance of an act in return for a promise – if I promise to give £ 20
to anyone who finds my lost handbag, returning the bag is both acceptance of my offer, and
executed consideration of my promise. Executed consideration usually occurs in unilateral
contracts160
.
Consideration is called executory when the defendant makes a promise, and the
plaintiff offers a counter-promise – you promise to deliver some goods to me and I promise to
pay for them when they arrive. The promise is executory because it is something to be done
in the future. A bilateral contract usually involves executory rather than executed
consideration161
.
Consideration must not be past consideration must be given in return for the promise or act of
the other party; something done, given or promised beforehand will not count as
consideration. So, if A looks after B‘s dog while b is on holiday, and when B returns she
promises to give A some money, A cannot enforce that promise because she did not look
after the dog in return for it – she had already looked after the dog.162
There are two exceptions to the rule that past consideration is no consideration. The
first is where the past consideration was provided at the promisor‘s request, and it was
understood that payment would be made. This exception can be traced back to the old case of
Lamplight v Brathwait 163
Thomas Brathwait had been connected of killing a man, and he
asked Anthony Lampleigh to obtain a pardon for him from the king. After considerable
trouble and expense, Lampleigh managed to do so. In the excitement of getting his pardon,
160
Cheshire Fifoot, Law of Contract (1986) and Furmston Butterworth and Com.Ltd.id at p. 97. 161
Id at p. 99, 100. 162
(1915) A.C. 847. 163
(1942)1 All ER 220.
70
Brathwait promised to pay Lampleigh £ 100, but later refused to hand over the money, so
Lampleigh sued.
It might appear that Lampleigh‘s consideration was past, since he had secured the
pardon before the promise to pay was made. In fact, the court upheld Lampleigh‘s claim. It
reasoned that Lampleigh had obtained the pardon at Brathwait‘s own request, and this request
carried with it the unspoken understanding that the service would be paid for. Lampleigh
obtained the pardon after, and in return for, this implied promise to pay, and so obtaining the
pardon was good consideration of for the promise to pay. The later promise, specifying that
£100 would be paid, was said to be merely confirmation of the original, unspoken one.
This reasoning seems less odd when we consider that today there are many requests
which carry with them unsaid promises to pay – when we ask a taxi driver to take us
somewhere, or ask the milkman to leave an extra pint, we do not actually say that we will pay
for those goods and services, but clearly it is understood by both parties that we will. It may
well be that requests to secure royal pardons had the same well-understood effect in 1615.
Consideration must be sufficient although consideration must provide some benefit to the
promisor or determent to the promise; these do not have to amount to a great deal. This
principle is usually described in the rather confusing phrase ‗consideration must be sufficient
buy need not be adequate‘, which effectively means that the courts will not inquire into the
adequacy of consideration, so long as there is some. Providing something is given in return
for a promise, it does not matter that it is not much, or not what the promise would usually be
considered to be worth. It is often said that just one peppercorn can be good consideration –
even if the promise does not like pepper!
The same principle was applied in Chappell & Co. Ltd v Nestle Co Ltd.164
Nestle ran
a special offer involving a record of a song called ‗Rockin‘ Shoes‘ – customers could get a
copy of the record by sending in 1s 6d (about seven and a half pence), and three wrappers
from Nestle‘s bars of chocolate. The copyright holders for the record brought an action
against Nestle, which among other things claimed that royalties should be paid on the price of
the record.
To calculate the royalties due, it was necessary to establish what price Nestle were
charging for the record, and the copyright holder alleged that this price (which was the
consideration for the promise to send the record) included the three wrappers. Nestle, on the
other hand, contended that consideration was only the 18 6d, and that they threw away the
164
(1960) All ER 2232.
71
wrappers they received. The House of Lords held that the wrappers did form part of the
consideration – the fact that they were of no real worth no Nestle was irrelevant.
The interesting implication of this case is that if the fact that the wrappers were
useless to Nestle was irrelevant, presumably wrappers alone could have amounted to
consideration – if, Nestle had just asked for three wrapper, and not requested money in
addition.
Consideration must be of economic value it is sometimes said that consideration must have
some ‗economic‘ value, though as the Nestle case shows, this economic value may be
negligible. What this principle basically seems to mean is that there must be some physical
value, rather than just an emotional or sentimental one. In Thomas v Thomas (discussed
above) the plaintiff suggested that following her husband‘s wishes was part of the
consideration, but the court rejected this argument because they said the husband‘s wishes
had no economic value though in the even this did not alter the outcome of the case, as the
widow‘s own promise was consideration).
Similarly, in White v Bluett165
(1853) a father promised not to make his son repay
money he had borrowed, if the son promised was not sufficient consideration to make his
father‘s promise binding, because it had no economic value.
Consideration can be promise not to sue.166
If one party has a possible civil claim against the
other, a promise not to enforce that claim is good consideration for a promise given in return.
In Alliance Bank Ltd v Broom 167
Broom had an overdraft of £22,000 with the bank,
and they asked him to provide some security. Mr. Broom promised to do so, but never did, so
the bank sued him. Mr. Broom argued that there was o consideration for his promise to
provide security, but the court held that the consideration was provided by the bank‘s implied
promise not to sue for a while, giving Mr. Broom time to provide security, even though they
did sue fairly shortly afterwards.
Where forbearing to enforce a legal claim is offered as consideration, there must have
been some intention actually to bring proceedings. In Miles v New Zealand Alford Estate
Co168
a company had bought some land which it was dissatisfied with. The seller later
promised to make certain payments to the company, and the company alleged that it had
provided consideration for this promise by not taking legal proceedings to rescind the
165
(1853) 23 LJ Ex.36. 166
(1615) Hab 105: 15 MLC (13th
Edn) 148:80 ER 255. 167
(1864) 2 Dr. and Sm. 289. 168
Catherine Elliott Stevens & Frances Quinn, Contract Law , (1986) publication Longman; 6 edition at p. 60.
72
contract when they found the problems with the land. This argument was rejected by the
court of Appeal which held that there was no consideration for the vendor‘s promise, because
there was no evidence that the buyers ever usually intended to bring proceedings to rescind.
In the same case, it was pointed out that if the party who has the claim believes it to
be legally valid, but it turns our not to be, the promise will valid claim – so in the car accident
case above, even if it subsequently transpires that for some reason B could not have
successfully sued A anyway B‘s promise not to sue is still valid consideration, providing B
honestly believes he has a claim against A.
One party‘s promise not to enforce an existing claim can only provide consideration if
the promise given in return was actually induced by the promise not to enforce the claim. In
Combe v. Combe169
a husband and his wife were involved in divorce proceedings, during
which he promised to pay her an annual allowance. She later brought an action to enforce this
promise and argued, among other things, that she had given consideration for it by not
exercising her right to apply to the court for a maintenance order. It was held that this could
not be consideration because her husband had not asked her not to apply to the court, and
therefore his promise had not been made in return for her promising not to do so.
This principle can be a difficult one to apply. In Alliance Bank v. Broom13
the
defendant did not ask the bank not to sue, yet the bank‘s forbearance to do so was held to
constitute consideration. However, decision has been explained on the basis that by
promising to supply security, the debtor was by implication asking the bank not to sue.
Consideration must move from the promisee this means that the person who wants to
enforce the promise must have given consideration for it. In Tweddle v Atkinson170
Guy and
Tweddle agreed that they would each give a sum of money to Twaddle‘s son William, who
was about to marry Guy‘s daughter. When Guy died without paying, William sued his
executors for the money. His actions failed on the grounds that no consideration had moved
form him – he himself had given nothing in return for Guy‘s promise.
Consideration need not move to the promisor although consideration must move form
the promise, it does not need to move to the promisor – so there can be consideration where
the promise suffers some determined at the promisor‘s request, but this gives no particular
benefit to the promisor‘s request, but this gives no particular benefit to the promisor to the
promisor. In Jones v. padavatton171
the daughter‘s giving up her job would be consideration
169
(1842) 2 QB 851. 170
Supra note 99. 171
(1969) All E.R.616.
73
for the mother providing an allowance, even thought it did not directly benefit the mother
(though as we have seen, the mother‘s promise was not binding because there was no
intention to create legal relations).
Another way in which consideration can move form the promisee but not to the
promisor is where contracts are made for the benefit of a third party.
(v) Lawful Consideration
According to Section 2(d), Consideration is defined as: "When at the desire of the
promisor, the promisee has done or abstained from doing, or does or abstains from doing, or
promises to do or abstain something, such an act or abstinence or promise is called
consideration for the promise.‖Consideration" means to do something in return.
In short, Consideration means quid pro quo i.e. something in return. An agreement
must be supported by a lawful consideration on both sides. It must move at the desire of the
promisor. An act constituting consideration must have been done at the desire or request of
the promisor. If it is done at the instance of a third party or without the desire of the promisor,
it will not be good consideration.
Consideration may move from the promisee or any other person. Under Indian law,
consideration may be from the promisee of any other person i.e., even a stranger. This means
that as long as there is consideration for the promisee, it is immaterial, who has furnished it.
Consideration must be an act, abstinence or forbearance or a returned promise.
Consideration may be past, present or future. Past consideration is not consideration
according to English law. However it is consideration as per Indian law. When consideration
is given simultaneously with promise, it is said to be present consideration. When
consideration to one party to other is to pass subsequently to the maker of the contract, is said
to be future consideration.
Consideration must be real. Consideration must be real, competent and having some
value in the eyes of law.
Consideration must be something which the promisor is not already bound to do. A
promise to do something what one is already bound to do, either by law, is not a good
consideration, since it adds nothing to the previous existing legal consideration.
Consideration need not be adequate. Consideration need not be necessarily being
equal to value to something given. So long as consideration exists, the courts are not
concerned as to adequacy, provided it is for some value.
The consideration or object of an agreement is lawful, unless and until it is:
74
1. Forbidden by law: If the object or the consideration of an agreement is for doing an
act forbidden by law, such agreement are void. The agreement is void as the procuring
government job through unlawful means is prohibited.
2. If it involves injury to a person or property of another.
3. If courts regards it as immoral- An agreement in which consideration is object of
which is immoral is void. An agreement between husband and wife for future
separation is void.
4. Is of such nature that, if permitted, it would defeat the provisions of any law:
5. Is fraudulent, or involves or implies injury to the person or property of another, or
6. Is opposed to public policy. An agreement which tends to be injurious to the public or
against the public good is void. Agreements of trading with foreign enemy, agreement
to commit crime, agreements which interfere with the administration of justice,
agreements which interfere with the course of justice, stifling prosecution,
maintenance and champerty.
7. Agreements in restrained of legal proceedings: This deals with two category. One is,
agreements restraining enforcement of rights and the other deals with agreements
curtailing period of limitation.
8. Trafficking in public offices and titles: agreements for sale or transfer of public
offices and title or for procurement of a public recognition like padma vibhushanor
padma sree etc. for monetary consideration is unlawful, being opposed to public
policy.
9. Agreements restricting personal liberty: agreements which unduly restrict the personal
liberty of parties to it are void as being opposed by public policy.
10. Marriage brokerage contact: Agreements to procure marriages for rewards are void
under the ground that marriage ought to proceed with free and voluntary decisions of
parties.
11. Agreements interfering marital duties: Any agreement which interfere with
performance of marital duty is void being opposed to public policy. An agreement
between husband and wife that the wife will never leave her parental house.
12. Consideration may take in any form-money, goods, services, a promise to marry, a
promise to forbear etc.172
172
Ibid.
75
Contract Opposed to Public Policy can be Repudiated by the Court of law even if that
contract is beneficial for all of the parties to the contract- What considerations and objects are
lawful and what not-Newar Marble Industries Pvt. Ltd. Vs. Rajasthan State Electricity
Board, Jaipur173
. Agreement of which object or consideration was opposed to public policy,
unlawful and void- – What better and what more can be an admission of the fact that the
consideration or object of the compounding agreement was abstention by the board from
criminally prosecuting the petitioner-company from offence under Section 39 of the act and
that the Board has converted the crime into a source of profit or benefit to itself. This
consideration or object is clearly opposed to public policy and hence the compounding
agreement is unlawful and void under Section 23 of the Act. It is unenforceable as against the
Petitioner-Company.
2.5.1 Capacity to Contract
(i) Definition:-
It is one of the important essential requirements for a valid contract. Capacity is
defined as:
According to section 10, an agreement becomes a contract if it is entered into between
the parties who arc competent to contract.
Every person is competent to contract who is or 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.174
It may be seen from this definition that any and every person is not capable of
entering into a contract. It follows from the definition enunciated in Section 11, that a person
is incapable of entering into a contract under the following circumstances:
(i) Minor: Is a person who has not attained the age of majority according to the law to
which he is subject;
(ii) Insane: If he is of unsound mind, that is, if he is a lunatic or an idiot or suffering from
a similar disability; and
(iii) Disqualified: If he is disqualified from contracting by any law to which he is
subject175
.
Let us consider all these ingredients in detail.
173
1993 Cr. L.J. 1191 at 1197, 1198 [Raj]. 174
Supra note 52 at p.52, 53. 175
Section 11.
76
Minor’s:- Who is a Minor: Every person domiciled in India (whatever his personal law may
be) is deemed to have attained his majority when he has completed his age of 18 years and
not before. To this rule there are two exceptions:
i. When a guardian of the minor of whose person or property is appointed by a Court of
Law and
ii. when a minor's property is taken over by the Court of Wards for management. In
either of these cases, minority continues upto the completion of 21st year.
In England, it may be noted; minority continues upto the completion of 21st year in
all cases.176
(ii) The Law Regarding Agreements
The law regarding agreements made by minors under the Indian Law may be
summarized as follows:
1. Minor's agreement is void ab initial: Today an agreement with or by a minor is void
and inoperative ab initio. Formerly the position was not clear. The Indian Contract
Act docs not expressly slate whether a contract made by a minor is void or voidable.
S.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 again came up in the case of Mohori Bibi v. Dharmadas Ghose.177
2. A minor can be a promisee or beneficiary: Incapacity of a minor to enter into a
contract means incapacity to bind himself by a contract. There is nothing which
deprives a minor from becoming a beneficiary. Thus; an agreement under which a
minor in whose favour a mortgage has been executed can get a decree for the
enforcement of the agreement.178
So also a promissory note executed in favour of the
minor can be enforced. He can draw, negotiate or endorse a negotiable instrument so
as not to incur any liability upon him.
M aged 17 years, agreed to purchase a second hand bicycle for Rs. 200 from B.M. paid Rs.
50 as advance and agreed to pay the balance the next day and collect the bicycle. When M
returned with the balance next day, B refused to hand over the bicycle and tried to return the
advance. B cannot avoid the contract.
No ratification: A minor on attaining majority cannot ratify an agreement entered into while
he was a minor. The reason is that ratification 'relates back' to the date of the making of the
176
Section 3 of the Indian Majority Act of 1875. 177
(1903) 30 Cal. 539. 178
Raghavachariah v. Srinivas 40 Mad. 308.
77
contract and, therefore, a contract which was void at the time when it was entered into cannot
be made valid by subsequent ratification. Since minor's agreement is void ab initio, it cannot
be validated by any subsequent action.
A promissory note was given by a person on attaining majority as renewal of another
promissory note given by him during his minority in consideration of money then borrowed.
Held, as the consideration for the promissory note is only the note executed during minority,
the fresh promissory note was unenforceable.179
Where, however, a minor on becoming a major receives fresh consideration and
makes a promise in respect also of a debt contracted during infancy, it has been held that the
promise could be enforced to the extant to which it is .supported by consideration given
subsequent to his becoming a major.180
Claim for necessaries: If every contract of a minor is void, minor might find himself in
difficulties, for no one might lend him money. So, the law has consistently held that contracts
by minors are valid if for necessaries. The Privy Council pointed out in Mohori Bibi's case
that under Section 68 any-person would be entitled to reimbursement out of the minor's estate
for necessaries supplied to him or to his family. A minor is liable to pay out of his property
for 'necessaries' supplied to him or to anyone whom the minor is bound to support. The relief
contemplated under Section 68 is not dependent on any contract. Fletcher Moulton J. in
Nash v. Inman observed as follows:
"The basis of the action is hardly contract. Its real foundation' is an obligation
which the law imposes on the infant to make a fair payment in respect of
needs satisfied."
The tern 'necessaries' is not confined to goods. It can include other things such as good
teaching, medical and legal advice. An article, therefore, is a necessity depending upon the
status and the social position of the minor. The price in such cases, which the trader will
receive, is a reasonable price and not the agreed price. Only the property of a minor is liable.
The minor is not personally responsible.
No estoppel: the principle of estoppel: This rule is a rule of evidence. If a man has by words
or conduct induced others to believe in the existence of a certain fact, knowing that they
might act on this belief, then, by rule of estoppel he is prevented from denying the existence
of such facts. "Estoppel arises when you are precluded from denying the truth of anything
which you have represented as a fact, although it is not a fact (Lord Halsbury). This rule of
179
Arunugham v. Dara Singh (1914) 37. 180
Narendera Lal v. Hrishi Kesh (1918) 46 I.C. 765.
78
estoppel is based on sound principles of equity and good conscience.
A minor who falsely representing himself of age has induced a person to enter into a
contract with him, can nevertheless plead 'minority' as a defense in an action on the
agreement. There can be no estoppel against a minor.181
Thus, a contract entered into by a
minor is a complete nullity by the statutory provision contained in the Contract Act. There
cannot be any estoppel against a statute.
Under English Law, therefore, the loan obtained by a minor by falsely representing
the age cannot be made to repay the amount of loan as damages for fraud, nor can be
compelled inequity to repay. But in India, it has been held, that the Court can instruct minor
to pay compensation to the other party in such cases.182
Whereas law gives protection to the
minors, it docs not give them a liberty. "to cheat men." No doubt, the rule of estoppel cannot
be applied against the minor but this does not mean that the minor shall be allowed to retain
and enjoy the fruits of his own fraud. Court will order, on equitable considerations, restitution
if the minor is still in possession of the money or the things purchased out of it. Law will not
allow a person to enrich himself at the expanse of another. The minor shall have no liability,
however, if the money or things cannot be traced out.
(iii) Restitution or Compensation:
A minor cannot, in a suit to avoid a contract which is void, be compelled to
compensate for or refund any benefit which he has received under such contract. Sections 64
and 65 of this Act do not apply to such cases. But equity requires a minor who seeks to avoid
a contract which he induces the opposite party to enter with him by fraudulent representation
as to his age, to return the consideration which he received in it. This rule of equity has been
embodied in Section 30 of the Specific Relief Act of 1963 which provides:
"On adjudging the rescission of a contract, the Court may require the party to
whom such relief is granted to restore, so far as may be, any benefit which he may
have received from the other party and to make any compensation to him which
justice may require."
But under the guise of restitution the contract itself cannot be enforced. If a minor seeks relief
on the ground that the contract is void, he must make restitution.183
Restitution stops where
repayment begins.
181
Sadiq Ali Khan v. Jai Kishore AIR 1928 (P.C.) 152. 182
Khan Gul v. Lakha Singh (1928) 9 Lah. 701. 183
Latcharao v. Bhimayya AIR 1956 AP 182.
79
The Court observed in Gokela Latcharao v. Viswanadham Bhimayya184
:
"Where the properly is not traceable and the only way to grant compensation would
be by granting a money decree against the minor, decreeing the claim would be almost
tantamount to enforcing the minor's pecuniary liability under the contract which is void ...
There is no rule of equity, equity and good conscience which entitles a court to enforce a void
contract of a minor against him under the cloak of restitution."
No specific performance: There can be no specific performance of the agreement entered
into by a minor as they arc void ab initio. A contract entered into by a minor though void is
not unlawful. If a person after attaining majority pays a debt incurred during his minority, he
cannot subsequently bring a suit for the refund of this amount.
No Insolvency: A minor cannot be adjudged insolvent. This is true even where there arc dues
payable from the properties of the minor. This is because he is incapable of contracting debts.
Minor as a Partner: A minor cannot become a partner in his own right since he is incapable
of contracting under Section 11 of the Contract Act. A partnership pre-supposes a contract.
Therefore, a minor admittedly cannot become a partner. But he can be admitted into the
benefits of a partnership in an existing firm with the consent of all the existing partners
(Section 30) of the Partnership Act).
Minor as an Agent: An agent is simply a 'connecting link' between the principal and the
third party. As soon as the Principal and the third party arc brought together the agent ceases
to function. Since the parties lo a contract, in such cases arc the principal and the third party,
they should be competent at law to contract. An agent, being not a party to such contract can
either be a major or a minor. It mailers little a minor binds the principal by his acts without
himself incurring any personal liability.
Minor along with a major: Where a contract is entered into by a minor and a major jointly
with another person, the minor is not liable under the contract. However, the contract can be
enforced against the major if his liability can be separately ascertained. Similarly, if an adult
stands surety for a minor, the adult is liable on the agreement although the minor is not.
Position of minor's guardian: An agreement by a minor is void, but an agreement by his
guardian on his behalf is valid provided the obligations undertaken are within the powers of
the guardian. The guardian can function only within the doctrine of legal necessity or benefit.
Where contracting party is a minor represented by a guardian and the contract is clearly for
the benefit of minor and was made at the request of the guardian for the benefit of minor, it
184
A.I.R. (1956) A.P. 282.
80
binds the minor. However, the minor personally incurs no contractual obligation in such
cases. Moreover, a minor may not be answerable for the fraud of his guardian185
. However,
note the following case:
A film producer entered into an agreement with a minor girl to act in a film and tile
same agreement was entered into by the father of the minor on her behalf with the producer.
On a breach of the agreement the minor such film producer through her father as the next
field. Held, the agreement with the father was equally void since the consideration moving
from the father being the minor's promise to act and as the minor could not in law promise
there was no consideration. However, if the consideration had moved from the father in the
shape of an undertaking by him that his daughter should act, the father could have sued and
recover only those damages which he had suffered.186
(iv) Persons of Unsound Mind
Insane Persons
Definition
One of the essential requisites of competency of parties to a contract is that they
should be of sound mind.)
A person is said to be of sound mind for the purpose of making a contract if, at the
time when he makes it, is capable of understanding It and of forming a' rational judgment as
to its effect upon his interests187
.
Unsoundness of mind may arise from (1) idiocy, (2) lunacy or insanity, (3)
drunkenness and similar other factors. Let us Lake one by one.
(1) Idiocy:-
Idiocy is an extreme form of mental unsoundness of mind. Idiocy is permanent and
incurable. An idiot or a natural fool is a person that has had no understanding from his
infancy. If he has any glimmering of reason so as to tell his age, his father's name or other
common matters, he is not an idiot. Contracts entered into by an idiot other than those for
necessaries arc void.
(2) Lunatics:-
A lunatic is such a person who is mentally deranged due to some mental strain or
other personal experience. A lunatic or non compos mentis is one who has had understanding
but, by disease, grief or other causes has lost the use of his reason. Lunacy can sometimes be
185
Ibid. 186
Raj Rani v. Prem Adib, AIR (1949) Bom. 215. 187
Section 12 (part I).
81
curable.
(3) Drunkenness:-
Drunkenness results from intoxication. A drunken person suffers from temporary
incapacity to contract i.e. at the time when he is so drunk that he is incapable of forming a
rational judgment. It is not ordinary drunkenness that would be a sufficient ground for a
person to avoid a contract. A person, who wants to avoid a contract on the ground of
drunkenness must be (i) in a state of complete intoxication so that it can be said that he had
not the reasoning mind about Him to give availed consent to the contract enters into; and (ii)
the other party to the contract must have known of his mental condition188
.
Contract in Lucid Interval:-
The second paragraph of the section provides that a person, who is usually of unsound
mind, but occasionally of sound mind-lucid interval, may make a contract when he is of
sound mind. Thus, even a patient in a lunatic asylum may contract during lucid intervals.
A person who is usually of unsound mind, but occasionally of sound mind may make
a contract when he is of sound mind.
A person, who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind189
.
2.5.2 Persons Disqualified by Law
Disqualified Persons:-
The section mentions only two cases of incapacity, namely, minority and lunacy, but
there are grounds as well.
Chart:
188
Supra note 33 id at p.1.32, 1.33. 189
Section 12 (paras 2 and 3).
Incapacity to contact. May arise out
of
(a) Status which may be
(b) Mental
deficiency
which may
be due to
1. Infancy
2. Idiocy
3. Lunacy
1. Political or Civic
2. Professional
3. Artificial or Corporate
4. Married
1. Foreign
Sovereign
2. Alien enemy
3. Felons or
Convicts
82
Section 11 of The Indian Contract Act specifies that every person is competent to contract
pro
1. He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18
years in normal case and 21 years if guardian is appointed by the Court.
2. He should be of sound mind while making a contract. A person, who is usually of unsound
mind, but occasionally of sound mind, can make a contract when he is of sound mind.
Similarly if a person is usually of sound mind, but occasionally of unsound mind, may not
make a valid contract when he is of unsound mind190
.
2.5.3 Free Consent
Free consent is the fourth essential condition, described in Sec. 10 Indian Contract
Act for a contract. Sec-I3 of the act defines consent and enact that, two or more persons are
said to consent when they agree upon the some thing in some sense. Some times, it may
happen, one party may have one thing in 'mind and other may, the other thing in his mind. In
such cares, though it seems to be parties agreed but actually this is not consent in eyes of law.
This flaw in consent may be the result of mistake in consenting mind called error in
consensus or fundamental error in consent. Then the question arises what consent or a free
consent is in the eyes of law.
Definition
Free consent, It says that, "Consent is said to be free when it is not caused by 191
(i) Coercion, as defined in Sec.15, or
(ii) Undue Influence, as defined in Sec.16, or
(iii)Fraud as defined in Sec.17, or
(iv) Misrepresentation as defined in Sec.18, or
(v) Mistake, subject to the provisions of Sec.20, 21 and 22.
190
Sec. 11of Indian Contract Act, 1872. 191
Section 14.
83
Consent is said to be caused when it would not have been given but for the existence of such
coercion, under influence, fraud, misrepresentation or mistake.
If the consent of one of the parties is not free consent, i.e. it has been caused by one or
other of the five enumerated elements, the contract is not valid one. A flow in the consent
which is a caused by anyone of the five elements shall vitiate the contract which shall be void
or voidable at the option of the other party whose consent was so caused. Sec.15 of the Act
says, "Coercion is the committing or threatening to commit, any act forbidden by the Indian
Penal Code CXL V of 1860 or the unlawful detaining or threatening to detain, any property
to the prejudice of any person whatever with the intention of causing any person to enter into
an agreement. It means coercion in a consent if the some conditions are to be fulfilled192
.
1. It is committing of any act forbidden by the Indian Penal Act, or
2. The threading to commit any act forbidden by the Indian Penal code, or
3. It is unlawful detaining of any property to the prejudice of any person, or
4. Threatening to detain any property wrongfully to the prejudice of any person. The
property may belong to the party of the contract or to any stranger.
5. With the intention of causing any person to enter into an agreement.
6. It is not necessary that the act of coercion must be committed at a place where the
Indian penal code is in force.193
The scope of coercion under this section is wider than its synonyms 'duress or menace
used under English Law. The act of coercion need not necessarily proceed from the party to
contract. It may be directed against the party or to the third person. Coercion includes menace
to the goods while menace is not duress. The consent on agreement caused by coercion
renders the contract voidable to option of the party whose consent was caused.194
Act Forbidden by Indian Penal Code: - It has been described that person commits or
threatens to com it an act forbidden by the Indian penal code with a view to obtaining the
consent of other person, the consent in such a case is deemed to have been obtained by
coercion.
Sec19, Indian Contract Act, 1872.
For coercion, it is not necessary that the Indian Penal "Code should be applicable at
the place where the consent has been so caused. 195
192
Supra note 33 id at p.1.32,1.33. 193
Id at p.1.41. 194
Sec. 19 Indian Contract Act. 1872. 195
Supra note 123. id at p.1-68.
84
In "Chikkan Amiraju v. Chikkam Seshama‖196
case A, a Hindu by a threat of suicide,
induced is wife. And son to erasure a release deed in favour of his brother in respect of
certain properties claimed their own by the wife and son. The question before the court was
whether. It was an act of coercion of act. The majority said that the cut was forbidden by
I.P.C. and also threat to kill oneself was out where a person acts to his own prejudice and also
to the prejudice of his wife and son and thus requirement of sec. 15 were satisfied. Oldfield I
dad different view from majority who said that suicide was not forbidden by I.P.C. ad a threat
to do that could not be considered to be threat to do a forbidden act with in the meaning of
Sec.15 of Indian contract act.
The majority view in this case appears to be convincing. Committing suicide is a
crime, which gives no chance to punish wrong doer so it is to be said that the thereafter to
suicide should amount to be coercion. But it creates a need for amendment of Sec. 15. Sec. 15
does not include that acts, which are punishable by other penal law, though they create
coercion. So the law commission of India in it report on the Indian contract act197
and
inclusion in the definition other penal laws also, which says that the function of I.P.C. is to
create offences and not merely to forbid. It forbids only what it declares punishable so the
word any act forbidden by I.P.C.' should be dated a wider expression should be substituted so
that the penal law other than the I.P.C. may be included.
Parties
The act of coercion may be committed by one party against other party or by a
stranger against the party or by the party against stranger or between strangers who may not
be the parties to the contract at all. The word ―cause‖ occurring Sec.15 or 16 is not a word of
art but is of science. Nothing can be said to be cause of a particular effect is the direct out
come of that particular cause. If the alleged cause is remote and not proximate, is distant, not,
immediate, such a cause can not be said to be the cause in legal pertinence.198
In case of ―Mathiah Chetiyan v. Karuppan Chetti"199
the plaintiff appointment agent
for a fixed term and at the end of term he appointed another person as his place. The
defendant refused to hand over account books bonds papers etc, of agency unless the
principle gave him release bond from all the liabilities in respect of his agency. Consequently,
the release was given and the new given agent got the account book and bonds etc. from the
196
ILR 191841 Mad. 33. 197
13th
Report 1954 p. 21. 198
Vijay Singh Mohan Singh v. Transport Manager ATM Service, A.T.C. 1982 Guj. 307. 199
ILR (1927) Mad. 786, AIR 1927 Mad. 852 ; 501 IC 5.
85
defendant. It was held at the plaintiff s consent was induced by coercion and so the contract
was voidable to his option.
Unlawful Detaining of Property: - Coercion could also be caused by the unlawful detaining
or threatening to detain, any property to the prejudice, to the prejudice of any person
whatever, the intention of causing any person to enter in an agreement. If an outgoing agent
refuses to land over the accounts to the new agent until the principal release executes release
in is favors, it is coercion. If the detention of property is not unlawful, there is no coercion. In
a case "Bengal stone co. Ltd. v. Joseph Hyam200
if a mortgage refuses to course the equity of
redemption except on the term dictated by him, there is nothing unlawful in it and, therefore
so coercion is caused in this case
(a) Forcible dispossession of property under threat is Coercion:
If a person is dispossessed of his property under illegal threat unless he parts with the
possession he would be detained under MISA (Maintenance of Internal security), parting
with the property under such threat amounts to coercion under Sec.15.
There are cases of persons affected by excesses of emergency period proclaimed in
1975. In this case it was held that a person is not bound by an act done under duress or
coercion. To the prejudice of a person.
Sec. 15 requires that there should be omitting or threatening to commit any act
forbidden by I.P.C. or the unlawful detaining or threatening to detain any property to the
rejoice of any person whatever, with the intention of causing any person to enter into
agreement.
It means that the act causing coercion should be necessarily be directed against the
contracting party, it is enough that the act to the prejudice of any person whatever, with the
intention of causing any person enter into an agreement in the case of ―Ranganayapamma v.
Alwar Setti”201
, it was that to course a widow to adopt a child, the relatives of the adopted
boy do not allow he dead body the Widow's husband to be taken out of the home until the
adoption is made, this is coercion.
Undue influence as: A contract is said to be induced by undue influence where the
relation subsisting between the parties are such that one of the party is in position to dominate
the will the other and uses that position to obtain an unfair advantage of over the other202
.
A person is deemed to be in position to dominate the will of another.
200
(1918) Col. 78. 201
LLR (1889) 13 Mod 214. 202
Section 16.
86
a) Where he holds a real or apparent authority over the other. The relationship between
master and servant, doctor and patient.
b) Where he stands in the fiduciary relation (that is relation of mutual fair and trust) to
the other. Relationship between rather and son, solicitor and client, trustee and
beneficiary promoter and company etc.
c) where he maps a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or bodily distress. Relationship
between a medical attendant and his patient.
In case of ―Ranee Annapurni v. Swaminath‖203
, a poor Hindu widow persuaded by a
money lender to agree pay 100 percent rate of interest on money lent by him to her she
needed the money to establish her right to maintenance. It was held this was a case of undue
influence and court reduced the rate of interest to 24 percent.
In case ―Mannu Singh v. Umadat Pandey‖,204
a spiritual guru induced his devotee to
give him gifts of whole his property in return of a promise of salvation of the devotee. It was
held that the consent of the devotee was under undue influence.
In case of ―Sher Singh v. Pirthi Singh‖,205
an literate villager aged about 90 yrs.
Physically infant and mentally in distress, executed a deed of gift under the influence of his
nearest relative (who at the time formed a joint family) who looked after his daily dominate
his well. Similarly in case of ―Inche Nariah v. Sheich Ali Bin Omar‖206
, an illiterate old
woman made a gift of deed of practically the whole of her property to her nephew who
managed her affair, it was hold the gift should be set aside in the grand of undue influence.
Where there is no domination of will.
If the contract gives advantages to one of the parties but the same has been made in
ordinary course of business, the presumption would not be raised.
When the person taking the advantage in a transaction was not in a dominant position
over the other the presumption of undue influence will not be erased transaction appears
uncontainable. In case of ―Shrimati v. Sudhakar R. Bhatkar‖,207
the plaintiff was an illiterate
lady managing her properties. The defendant was thing in a part of the house owned by the
plaintiffs as a tenant. He treated the plaintiff as his mother. He persuaded her to gift him her
property, which she did. The gift deed was registered in his favors. It was held mere
203
(1910) 34 Mad. 7. 204
(1890) 12 All 523. 205
AIR (1975) All 259. 206
(1929) AC 127. 207
AIR (1198) Bom. 122.
87
persuasion by the plaintiff to the defendant to gift her property did not mean the undue
influence. There was nothing to show that he was able to dominate her will. The transaction
was held to be valid as there was no undue influence in this case.
Contracts with Pardanashin Lady
A contract with Pardanashin is presumed to have seen undue influence. A pardanashin
woman is one who observes complete reclusion because of the custom of the particular
community to which she belongs she can avoid a contract unless the other party shows it was
her intelligent and voluntary Act.208
"Ismaile Mussajee v. Hajiz Boo‖209
, it was held that a woman who goes to the court
and gives evidence, settles rents with her tenants and collects rents and communicates in
matter of business with men other than the member of the family is not a pardanashin
woman.
―Kalibaksh Singh v. Ram Gopal Singh‖210
, it was held by Privy Council that the prove
must go so far as to allow show affirmatively and conclusively that the deed was not only
executed by, but also explained to, and was really understood by grantor. In such cases, it
must also be established that the deed was not signed under duress and also arose from the
free and independent will of the grantor.
"Wazid Khan v. Raja Ewaz Ali Khan‖211
an old illiterate pardanashin lady, who was
herself incapable of transacting any business, conferred a grant of her substantial property
without any valuable consideration in favors of her confidential managing agent. The Privy
Council held that it was incumbent in the grantee to show that he had made proper use of
confidence reposed by the lady in him and there was no undue influence.
"Chidambaram Pillas v. Muthammas,‖212
it was held that a pardanashin lady may not
be illiterate. If she is fractionally, excluded from social inter course and communication
outside void, she will fall in this category.
Relation which Raise Presumption of Undue Influence
The following relationship usually raises the presumption of undue influence:
1) Parent and child
2) Guardian and ward
3) Trustee and beneficiary
208
A.N.Chaturvedi ,Indian Contractact, (1984) Allahabad Law Agency id at p.114. 209
(1906) 33 Cal. 773. 210
(1913) 41 IA 223. 211
ILR (1891) IA 144. 212
(1993) ILW 466.
88
4) Religious advisor and disciple
5) Doctor and Patient
6) Solicitor and client
7) Financer and finance
The presumption of undue influence usually applies whether the relationship between
the parties is such one of them is by reason of confidence reposed in him by the other, able to
lake unfair advantage on other.
However, no presumption of undue influence is made in relationship of:
1. Land Lord and Tenant
2. Creditor and Debtor
3. Husband and wife provided wife should not be pardanashin woman otherwise the
presumption will rise.
Effects of Undue Influence
An agreement is caused by undue influence, the agreement is a contract avoidable at
the option if the party whose consent was so causes.
The second Para to Sec.19 (a) incorporates the following provision as:
"any such contract may be set aside absolutely, or the party, who was entitled
to avoid it, has received any benefit thereafter, upon such terms and condition
as the court seems just213
."
Thus because of the undue influence one party to contract may have taken an un due
advantage under the contract or the party entitled to avoid the contract may have already
received some benefit under the contract, the contract in such cases has been empowered to
set aside the contract either or upon such terms and conditions as the court may deem just.
This is so because if a party who seeks rescission of the contract must also do equity and if
we have received any benefit under the contract, he should compensate the other party.
In such a case, it is for dominant party to rebut the presumption of undue influence. If
the party has got exorbitant gain at the cost of the other party, it is for him to prove that this
advantage had not been gained by undue influence.
In case of ―Sethani v. Bhanna‖214
, a sale deed of her property was executed by an old,
blind, illiterate and a blind woman in favours of respondent, on whom she was totally
dependant. There was not evidence of consideration having passed at the time of sale, or the
respondent having proved absence of undue influence. The respondent was held to be bound
213
Sec.19(a) a of Contract Act, 1872. 214
AIR (1993) SC 956.
89
to return the obtained advantages by him in this case.
In case of ―Kirpa Ram v. Sami-id-Din Ahmad Khan‖215
, respondent borrowed from
the appellants a sum of Rs. 900 executing a fond to pay compound interest at 2% menace,
with monthly rent. At the time of execution of bond, the respondent was 18 yrs. Old and was
a known thrift and drunkard. It was held to be unconscionable bargain and a court allowed
only simple interest on the set amount instead of compound interest.
In ―Vinayakappa v. Dulli Chand‖216
, case, there was a sale deed of a multithread
building situated on the main road wishing the municipal area. Looking to the commercial
property of the area, the consideration was extremely inadequate. Moreover, seller's brother
continued to occupy a portion of the property without paying any rent. The buyer of the
property did not pay any taxes on the same for a number of years. It was also found that the
seller and the buyer were having the relationship of borrower and money lender and thus had
influence there, and the transaction was a loan transaction rather than the sale. No title
therefore passed to the buyer of the property.
―Rukmani v. C.B. Krishan Nair‖217
, an old lady seventy who had a paralytic attack
was made to execute a gift deed without the contents of the deed, being made known to her. It
was held that the burden of proof was on the donee to show there was no undue influence.
Fraud and Misrepresentation
When a false statement is made with knowledge that it is false and also with the
intention to deceive the other party and make him enter into contract on the-basis is known as
fraud. When the person making false statement believe the statement to be true and does not
interest to mislead the other party to the contract, is known as misrepresentation.
Fraud (Sec.17)
Fraud exits when it is shown that:
1) A false representation has been made:
(a) Knowingly, or
(b) Without believe in its truth, or
(c) Recklessly, not caring whether it is true or false and the maker intended to out
upon it. or
2) There is a concealment of a material fact or that there is a partial statement of fact in
such a manner that the withholding of what is not stated makes that which stated false.
215
ILR (1903) 25 All 284. 216
AIR (1986) Bom. 193. 217
AIR (1985) noc 101 Ker.
90
The intention of party making fraudulent misrepresentation must be to deceive the
other party to contract or induce him to enter in a contract. 'Fraud' means and includes any
of the following acts omitted by a party to contract or with his connivance C intention active
or passive acquiesce, or by his agent with intent to deceive or induce a present enter into
contract.
1. The suggestion, a fact is true when it is not true and the person making suggestion
does not believe it to be true.
2. Active concealment of a fact by a person leaving knowledge or belief if the fact.
3. A promise made without intention of performing it.
4. Any act fitted to deceive.
5. Any such act or omission as the law specially declares to be fraudulent.218
A. Essential Elements of Fraud
1) To be a representation or ascertain which is false (suggestion false)
Without the representation or ascertain, there can be no fraud except in those cases
where silence may itself amount to fraud or where there is an effective concealment of facts.
If a representation is true when it is made, but to the knowledge of party making it,
but becomes the untrue before entering into contract, it must be corrected. If it is not correct,
the other party may rescind the contract.
In ―Peek v. Gurney‖219
, case, the prospectus of a company did not refer to the
document existing there which discloses liability. This gave impression that the company was
prosperous. If the existence of document had been disclosed, the impression would have been
Quito different. It was held that non-disclosure amount to fraud and anyone who purchased
shares on the faith of this prosperous could avoid contract.
In ―With v. O'Flangan‖220
case, the negotiation for the sole of a medical practice
started in January taking receipts fine of 2000. In May, when the contract was concluded the
taking had dwindled to of 5 a week. It was held that the contract would be rescinded as there
was failure to disclose the fall in takings.
The representation must rebate to material fact which exists now or existed in past.
A mere opinion, commendatory or puffing expression or hearsay or flourishing
description is not regarded as representation of fact.
218
Sec.17 of Indian Contract Act, 1872. 219
(1873) LR 6 GHL 377: (1874) 43 LJ Ch. 19. 220
(1936) All ER 727 : 1936 Ch. 525.
91
In case of ―Bisset v. Wilkinson‖221
, the vender of a price of a land told a prospective
purchaser then, in his opinion, the land would carry 2000 sheep. In fact the land could carry a
number less then this. It was held it was no misrepresentation us the statement was one of
opinion which was honestly held.
The representation must have been made before the conclusion of the contract with the
intention of inducing the other party to act open it.
Not only must the representation to be false and made with the knowledge of its
falsity, but it also be made with an intent to deceive the other party.
The representation or must have been made with a knowledge of its falsity or without
belief in its truth or recklessly, not carrying whether it is true or false.
Further the representation amounting to fraud must have been made either by a party
to contract or with his agent or connivance.
In case of ―Resse River Silver Mining Co. v. Smith‖222
, a company issued a prospectus
giving false information about the unfound worth of Neveda. A share holder, who had taken
shares on the faith of the prospectus wanted to avoid the contract. It was held that he could
not do so as the false representation in the prospectus amounted to the fraud.
The other party must have been induced to act upon representation or ascertain.
A mere false hood is not enough to give a right of action. It must have induced the
other party to act upon it. The other party cannot sheet his eyes to the obvious dejects or
flows which he could have easily an ascertained by reasonable investigation or inspection.
In case of ―Smith v. Chad Wick‖223
, 'A' bought shares of company on the faith of a
prospectus which contained an untrue statement that one '8' was a director of the company. A
had never beart of be and. Therefore, the statement was immaterial from his point of view. 'A'
is claim for damages in this case was dismissed because the untrue statement had not induced
'A' to buy shares.
The other party must have relied upon the representation and must have been
deceived.
A mere attempt at deceit by one party is not fraud unless the other party is actually
deceived. If a representation does not come to the notice of a party, it cannot say to have
misted that party because it does not lead the party at all.
221
(1927) AC 177: (1926) All ER Rep. 343. 222
(1896) LR 4 HL 64. 223
(1884) 9 AP B. as 187.
92
In ―Horsefull v. Thomas‖224
, case, I bought canon from it. The canon was defective.
But it had plugged it. T did not examine the canon, but when he used it, it burst. It was held
that as the play had not deceived T, he was liable to pay.
The other party, acting on representation or ascertain must have subsequently suffered
some loss.
It is a common role of law that there is no fraud without damage. As such fraud
without damage or damaged without fraud does not give right to an action of deceit. Mere
silence is no fraud
Active concealment has also been considered to be equivalent to a statement because
in that case, there is a positive effort to conceal the truth and create untrue impression on the
Mindy other. Mere silence, however as to fact is no fraud. Explanation to Sec.17, in this
connection incorporates the following provision:
―Mere silence as to fact likely to affect the willingness of a person to enter into
a contract is us fraud, unless the circumstances of the case are such that, regard
being had to them it is the duty of the person keeping silence to speak or his
silence is, in itself is equivalent to speech.‖
In a case before Supreme Court, a candidate, who had full knowledge of the fact that
he was short of attendance, did not mention this fact in his examination form. This was held
to be no fraud, it being the duty of University to scrutinize the forms and to call for
verification or information in case of doubts. The university having failed to do so, it was
stopped from canceling the examination of candidate.
In case of ―Keates v. Lord Cadogan‖225
a let his house to B which he knows was in
ruinous condition. He also knows that the house was to be occupied by ‗B‘ immediately. A
did not disclose the condition of the house to B. it was held that being the duty of 'B' to check
and inspect the house, a had not committed any fraud.
A contracting party is not obliged to disclose each and everything to the other party. If
a person is selling his goods, he is under no duty to disclose the defect in his goods. If he
makes false statement as to the quality of the goods, it would be fraud, but if he merely keeps
silence as regard the defects in them, there is no fraud. In case of sole of goods the rule is
‗Caveat Emptor‘ i.e. buyer beware, which means that it is a duty of buyer to be careful white
purchasing the goods and there is no implied condition or warrants by the seller as to the
224
(1862) IHL 90. 225
(1851) 10 CB 591.
93
quality or fitness of goods for any particular purpose.226
Exceptions
Where silence is fraud
General rule is that mere silence is no fraud. But there are come cases which are
exception to it when keeping silence may be deemed taken act of deception. Explanation to
Sec. 17 mentions the two following exception.
1. Where there is duty to speak, keeping silence is fraud.
2. When silence, is in itself, equivalent to speech, such silence is a fraud.
Misrepresentation (Sec.18)
A contract the consent to which is induced by misrepresentation is the contract in
which false statement is made with the knowledge that it is true and also without the
intention to deceive the other party and make him enter into a contract that basis, it is known
as misrepresentation. Misrepresentation is defined in Sec.18, which says misrepresentation
means and includes:
1. The positive ascertain, 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.
2. Any breach of duty, without an intent to deceive again, an advantage to the person
committing it, or anyone claiming under him, by misleading another to his prejudice,
or to the prejudice of anyone claiming under him.
3. Causing, however, innocently a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
4. Unwarranted Statements: When a person positively asserts that a fact is true when his
information does not warrant it to be so, though he believes it to be true, this to
misrepresentation. The Calcutta High Court has held that a statement cannot be said to
be warranted for the purpose of Sub Sec(l) of Sec.18 of the Act where it is based upon
mere hear say held in ―Mohan Lal v. Sri Gangaji Cotton Mills Co.‖227
In a case of
―Bombay Oceanic Steam Navigation Co. v. Soonderdas Dharmsay”.228
The defendant
chartered a ship from plaintiff, who stated the ship was certain not more than 2800
tonnage register. As a matter of fact the ship had never been in Bombay and was
wholly known to plaintiff. She turned out to be of the registered tonnage of more than
3000 tones. It was held that the defendants were entitled to avoid the charter party.
226
Sec. 16 of Indian Sales of Goods Act. 1930. 227
(1899) 4 C.W.N. 369. 228
(1980) 14 ILR Bom. 241.
94
Where a representation acquires the status of being a term of contract and it turn out to be
untrue, the due advantaged party may not only avoid the contract but also sees for damages
for breach. Where in the course of negotiable for the sale of lamb, the seller stated the whole
of the lot was fully serviced, whereas this was not so, the buyer was allowed damages for the
breach of warranty.229
Breach of Duty:-
Any breach of duty which brings an advantage to the person committing it by
misleading the other to his prejudice is a misrepresentation. This clause is probably intended
to all those cases who are called in the court of equity cases of 'constructive fraud' in which
there is no intention to deceive, but where the circumstances an such as to make the party
who derives a benefit from the transaction equally answerable in effect as if he had been
activated by motives of fraud or deceit. 230
In case ―Oriental Banking Corporation v. John
Flemings.‖231
The plaintiff having no time to read the contents of a deed signed it as he was given
the impression by the defendant that it contained nothing but formal matter already settled
between them. The deed, however, contained a release in favour of the defendants.
Accordingly, the plaintiff was allowed to set aside the deed.
Inducing Mistake about subject matter:-
Causing, however innocently, a parts to an agreement to make a mistake as to the
substances of the thing which is subject of the agreement is also misrepresentation. The
subject matter of every agreement is supposed by the parties to possess certain value or
quality. If one of the parties leads the other, however innocently, to make a mistake as to the
nature or quality of the subject matte, there is misrepresentation.
Suppression of vital facts
Cases of concealment or suppression will fall either under Sub Section (2) when
amounts to breach a duty or under Sub Section (3) when it leads the other party to make a
mistake about subject matter of the agreement. It is misrepresentation.
Misrepresentation should be of facts 'Commendatory Expressions' such as men of
business will habitually make about their goods and not sufficient to avoid the contract.
Change of Circumstances
There is often a gap of time between the representation and the ultimate conclusion of
229
(1975) 19 377. 230
Kiran Gupta S.P. Babuta Mercantile Law,1st Edition , Kalyani p.72,73 231
(1879) 3 Bom. 242.
95
the contract. Any change of circumstances in the mean time affecting the fact represented
must be bought to the knowledge of the other party232
. Which was held by court of appeal in
'With V. O. Flangan' Inducement
It is further necessary that misrepresentation must be cause of the consent, in the
sense, that but for the misrepresentation the consent would not have been given. Sec.19
explains this clearly.
Sec.19 says about the visibility of agreement without free consent. When consent to
an agreement is caused by coercion, fraud or misrepresentation the agreement is a contract
voidable at the option of the party whose consent was so caused.
A party to contracts whose consent was so caused, may fit insist that he shall perform
the contract, or rescind at and refused to be bound by it. The expression is justified by him.
They would be in position where they were before entering into contract.
Limits to the right of rescission
1. If the party whose consent is caused by misrepresentation affirms the contract besides
the rescind it. It will be valid and a binding contract on them.
2. A person having right to avoid the contract must do so in reasonable time. If he does
not do so it will amount to affirmation of the contract.
3. If the contract creates an interest of in favour of third time after some time, it would
be amount to affirmation not avoidance.
4. If a contract has been made in such way, to and some steps has been taken like
exchange of goods and the party is unable to restore goods then it amounts to
affirmation because the goods cannot be kept in its former position.
5. If the contract has been done and some steps has been taken, and this can't be taken
into former position. And the other party gives damages in lieu of rescission of
contract. The contract would amount affirmation.
Mistake
When the consent of the parties to the contract is caused mistake, it is not free consent
which is needed for validity of a contract. One or both of the parties may be working under
some misunderstanding or misapprehension of some fact relating to the agreement. If such a
misunderstanding had not been there, probably they would have not been caused by
mistake233
.
232
S.N. Maheshwari, S.K. Maheshwari; Amanual of Business laws; (2010) Himalaya Publishing House,
Bombay, India id at p.1.51 233
Chawala and Garg, Industrial and Commercial law ) New Delhi Kalyani Publication id at p. 68, 69, 70.
96
"An agreement is void where both the parties are under mistake of fact, where both
the parties to an agreement are under a mistake of fact essential to an agreement, the
agreement is void.234
"
Explanation: An erroneous opinion as to value of the thing which forms the subject
matter of the agreement is not to be deemed a mistake as a matter of fact. Agrees to by from
B a certain horse. It turns out that the horse was dead at the time of Bargain; though neither
the party was aware of the fact the agreement is void.
When the type of mistake contemplated in Sec.20 is present in an agreement, the
agreement is void. Sec.20 requires that:
1. Both the parties to the contract should be under a mistake, and
2. Mistake should be regards a matter of fact.
3. The fact regarding which the mistake is made should be essential to the agreement.
1. Mistake of both the Parties:-
Sec.20 makes the agreement void if there is mistake on the part of both the parties.
But it requires that the mistake should be bilateral. If the mistake is unilateral and having
some misimpression, the validity of the agreement is not affected thereby. Sec.22 of the Act
clears it which says, "Contract caused by mistake of one party as to matter of fact."
A contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as the mistake of fact.
In ―Ayekam Angahal Singh v. Union of India‖235
, there was an auction for sales of
fisheries rights which was for highest bidding of some amount per year for 3 years. But the
plaintiff by mistake understood, the amount for all three years. But it was unilateral mistake
and was not avoided by court.
3.Mistake of fact:-
There should be mistake of fact and not to law. The validity of the contract is not
affected by mistake of law. Regarding mistake of law the provision contained in Sec.21 is as
follows:
Effect of mistake as to law - A contract is not voidable because it was caused by a
mistake as to any law in force in India. But a mistake as to law in force in India has the some
effect as a mistake of fact.
For instance a owe 'B' Rs. 1000/- Both A and B mistakenly think that the debt is time
barred and agreed that a may pay only Rs. 500/. to clear the debt. It is a mistake of law and
234
Sec. 20 of Indian Contract Act, 1872. 235
AIR (1970) Manipur 16.
97
the contract to pay Rs. 500/. is valid236
.
3. Mistake essential to the contract: - It is also necessary that the fact regarding which the
mistake is made should be essential to the agreement. Whether the mistake is regarding a fact
essential to the agreement or not depends on a particular contract. In this view, a question
arises that what constitutes essential facts. Speaking broadly, certain facts are essential to
every agreement. They are:
i) Mistake as to existence of the subject matter
If both the parties to contract believe in the existence of any subject matter, which in
fact does not exist, the agreement would be void. The reason is that if the subject matter of
the contract has already perished, there is nothing regarding which the contract is being made.
Such agreement is void for reason that the performance of the agreement is impossible.
Sec.56 declares that an agreement to do an act impossible in itself is void.
Sec.7 of Indian Sales of Goods Act, 1930 also declares that if there is a contract of
sale of specific goods but they are non-existent at the time of contract, the contract is void.
When there is a contract for sale of specific goods i.e. the goods identified and agreed upon at
the time of making of the goods are in existence. If in fact is not so the agreement is void.
―Courturier v. Hastle”237
a man and a woman executed a separation deed, both of
them working under a common mistaken impression that they are married to each other.
Since fact of marriage was no existent, the deed was held void.
If the parties to the contract are not mistaken as to the subject matter, but not only
regarding its quality i.e. when the subject matter has been clearly identified although its
quality has not been, the arrangement would be valid.
In case of ―Smith v. Hughis”238
, a delivered some oats. B, who returned it to A on
thinking that they were old which were in fact new. This was held the mistake was of age not
the subject matter. So it was held to be a valid contract.
Mistake as to possibility of performance of the contract
If the performance of any contract is not legally possible, then the contract would be
void. For instance, a agrees to take a lease of a Jishari from B. If it turns out that himself
already the tenant for life and B has not interest which could be transferred A. It is not legally
possible for B to perform the contract. The agreement having been entered into 'under
236
Section 21 of Indian Contract Act, 1872. 237
(1856) HLC 673 appeal from (1858) 9 Ex 102. 238
(1871) LR 6 Q.B. 597.
98
mistake, to void.239
In ―Sheikh Brothers Ltd. v. Ochsner”240
case, a contracted with B to grant him to
license to cut, process and manufacture sisal growing on A's land. 'B' agreed that he would
process sisal and deliver to 'A' minimum 50 tons of sisal fiber. But the leaf potential of the
land was insufficient for fulfilling the contractual requirement. The contract could not be
fulfilled due to Physical Impossibilities. So the contract was void because of mutual mistake.
i) Mistake as to Title
Sometimes the parties may be labouring under a mutual mistake as to the title to the
goods sold. The buyer may already be the owner of what the seller purports to sell. In fact
there is nothing which the seller has to transfer. The transfer of ownership is intended but the
same is impossible as the buyer is already the owner. Such an agreement is void due to
mutual mistake. The case of ―Cooper v. Phibbs”241
a good example of this rule.
Mistake as to Promise
If there is a mistake because of which the promise does not reflect the real initiation
which was there in proposed agreement, such contract would be void. In case of ―Hartog v.
Collins & Shieds‖242
, it was held that there had arisen no contract in this case, because there
could be have noticed the mistake by the seller contained in their offer and because of their
mistake the seller's intention was not property reflected in the offer. Mistake as to Identity of
the parties
If I intend to enter into contract with A for the purchase of goods for him and I place
the order accordingly, 'B' cannot accept this offer and if 'B' supplies me the goods. I have no
obligation to pay to him because I never wanted to make any contract with him.
―Boulton v. Jones”243
, it was observed by C.B. that it was rule of law that a person
had intended to contract with A, B cannot give himself was given to Broclehurst. Possibility
Broclehurst might have adopted the act of plaintiff in supplying goods and maintained an
action for their price. But since the plaintiff has chosen to see, the only course the defendant
could take was to plead that there was no contract with him.
In ―Said v. Butt‖244
, the plaintiff wanted the first night performance of a certain play
239
Cooper v. Phibbs (1867) 2 HL 149. 240
(1957) AC 136. 241
(1867) LR 2 HL 141. 242
(1939) 3 All Ex. 566. 243
(1857) 2 H & N 564 , 115 R.R. 595. 244
(1920) 3 KB 497.
99
in defendant theatre. But he knew respondent would refuse him as he has done it before so he
contracted with him through his friend. Which was refused by respondent again. It was held
no liability arises of respondent.
Mistake as to existence of a material fact
If the mistake is regarding a fact essential to the agreement, the agreement is void. But
if the mistake does not relax to the existence of a material fact concerning the subject matter
of the contract, the validity of the contract may not be affected thereby. An another question
also arises that what will be the position if contract by parties are inter presents. The answer
is quite difficult as it is different in different cases.
―Philips v. Brook Ltd.‖245
, the respondent by mistake purchased a goods by a person
who himself as a known person of that city. Who was infact a cheater. The real owner filed a
suit. It was held that the defendant had acquired the good titles in this case.
It appears that the decision is correctly taken. When the parties are face to face, there
is no mistake as to the identity. The contract in such cases is voidable on the ground of fact
which was in respect of payment only.
The situation in case of ―Lewis v. Averay”246
was like the above case and decision
was also some.
A distinction may so drawn between the identity of a person and his attribute. If a
lady enters in a contract saying that she is Mrs. A, if she in fact is not A's wife, through whom
the seller wanted to deliver the goods on A's, credit, the agreement would be a mere nullity.
Limitations
Mistake operates to avoid agreement subject to following limitation:
Mistake of Both Parties:-
Under Sec.20 an agreement is void by reason of mistake, when both the parties are
mistaken as to a matter of fact essential to the agreement. This is further supplemented by
Sec.22 that a contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to matter of fact. There is no real consent where mistake prevents
the parties from coming to an agreement upon the same thing in the same sense.
The mistake of both the parties of which Sec.20 speaks may be either common or
mutual. Common mistake will definitely render. The agreement void if the parties are
mistaken about the existence of the subject matter.
245
(1919) 2 KB 243. 246
(1972) Q.B : 1971 3 All ER, 907.
100
In ―Leaf v. International Gallaries‖247
, a picture was sold, the seller representing that
it was by John Constable, when it turned out to be different. The picture was the essentially
different from what it was supposed to be, yet the contract was to be only voidable.
Erroneous Opinion:-
The explanation of Sec.20 provides that, "an erroneous opinion as to the value, which
forms the subject matter of the agreement is not to be deemed a mistake as to a matter of
fact. In a case before the Travancore Cochin High Court named ―Kochuvareed V.
Mariappa‖248
, a property which was subject to a subsisting lease was sold. The lesser had
the right to receive value of improvements. But the arrangement of sale was silent about this.
The court held that there was no mistake. It could only be an erroneous opinion which the
parties had formed as to the real value of subject matter."
Mistake of fact not of law:-
Mistake should be of fact and not of law, for, Sec. 21 declares that 'a contract is not
voidable because it is caused by a mistake as to any law in force in India. This section carries
an illustration. Other legal Formalities Part II of section 10 provides:
Nothing herein contained shall affect nay law in force in India, and not hereby
expressly repealed, by which any contract is required to be made in writing or in the presence
of witnesses, or any law relating to the registration of documents.
As seen earlier, a contract may be in writing, or made orally. Both carry the same
legal effect. But in some specified cases, the particular law may require a contract to be
writing. While in still other cases, the document may further be required to be stamped and
registered. The effect of such provisions in those laws is an agreement which is otherwise
enforceable as contract as per Section 10 will create rights and liabilities only when they
fulfill the additional requirements stipulated therein, viz., stamp, registration, etc.
A and B make a contract grounded on erroneous belief that a particular to debt is
barred by the Indian law of Limitation, the contract is not voidable.
A mistake as to the effect of registration upon the validity of a document has been
regarded by the Supreme Court as a mistake of Law.249
2.5.4 Contracts Required to be Writing
Some of the contracts which have to be registered are as follows:
247
(1950) 2 KB 86: (1950) All ER 693. 248
(1950) Tra-Co. 10. 249
Kalyanpur Line Works v. State of Bihar AIR (1954) SC 165.
101
(1) Document of which registration is compulsory under Sec. 17 of the Registration Act
of 1908.
(2) Contracts made out of natural love and affection between the parties standing in near
relation to each other, and made without any consideration. [SC {25 (1)]
(3) Transfer of any immovable property viz. Land, House, etc. (Transfer of Property Act).
(4) Memo and Articles of a Company (Sections 15 and 30 of the Companies Act
2.6 Conclusion
Law of contract is a peculiar branch of substantive law. It does not enumerate the
rights and duties of the parties. It provides only the circumstances in which promise made by
a person is legally binding on him. Anson on English law says contract cannot be defined
exclusively on the basis of objectivity or subjectivity rather it is a mixture of both. In India,
under Section 10 of Indian Contract Act, 1872, only consent is a subjective concept otherwise
whole is objective. Hence contract is an objective concept. According to Section 2(h) of
Indian Contract Act, 1872,
“An agreement enforceable by law is a contract.”
It means there are two things needed for a contract viz.
1. There should be an agreement.
2. Agreement should be enforceable by law.
Section 2(e) of Indian Contract Act, 1872, defines agreement. It says,
“Every promise and every set of promises, forming the consideration for each other, is an
agreement.”
Hence it means that, even a single promise can be an agreement and a set of promises,
forming consideration for each other can also be an agreement. Promise. It says, hence,
proposal and acceptance are necessary for making a promise250
. And since promise is an
agreement, we can conclude that proposal and acceptance are also necessary for making an
agreement. In Section 2(a) words ‗signifies to another‘ and in Section 2(b) words ‗signifies
there to‘ clearly declares that two parties are necessary for acceptance and consequently for
agreement. Assent of both i.e. consent is also necessary for acceptance. It is clear from the
mere plain reading for the Section 2(a), (b). Hence there should be consensus ad idem i.e.,
meeting of minds. There is a universal rule that as everything has a price similarly promise
should also has a price. Section 25 of Indian Contract act, 1872 says, agreement without
consideration is void. It means it will not be a contract hence consideration is necessary for a
250
Section 2(b) of Indian Contract Act, 1872,
102
contract. Since proposer has given consideration to promisee by way of a promise he should
also get a consideration in back. If promisee also delivers a promise in lieu of consideration,
these two promises will form a set of promises which will form consideration for each other.
Hence an agreement will be formed. So consideration in this way is also necessary for
formation of an agreement. Section 10 of Indian Contract Act, 1872 lays down what
agreements are contracts. It says,
“All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and
are not hereby expressly declared to be void. Nothing herein contained shall
affect any law in force in [India], and not hereby expressly repealed, by which
any contract is required to be made in writing or in the presence of witnesses,
or any law relating to the registration of documents.”
There should be two parties. Parties have no role in making contract, they have role in
making agreement. Contract is made between them if parties are competent. Hence it is law
which makes the contract not the parties. Competency is necessary. If they are not competent
to contract than agreement will not be contract u/S-10. Further in case of Mohri Bibi v.
Dharmodash Ghosh, it was held that, if parties are not competent to contract then it will be
void. Consent of both the parties should be free. There should be free consent. If the consent
is not free or is caused by coercion, fraud, undue influence or misrepresentation then
according to section 19 read with section 19A the contract will be voidable. But if consent is
caused by mistake then it will be void under section 20-22. Agreement should have a lawful
consideration and it should be for a lawful object. If agreement is supported with unlawful
consideration or unlawful object then the agreement will not be a contract. According to
Section 23 of Indian Contract Ac, 1872 it will be void. Agreement should not be expressly
declared to be void. If the agreement is expressly declared to be void means that if it is falling
under Section 25-30 or s/56 or s/20 then also agreement will not be a contract. On appraisal
of English law we can state one more essential of contract i.e. Intention to create legal
relationship. Famous English Jurist Anson had said that Law of contract is a child of
commerce. Commerce is the reason for origin of Law of Contract. Social engagements,
domestic agreements are not contract. Although inconvenience, hardship, liability suffered is
also a consideration, these agreements are not a contract. It means no intention to create legal
relationship. It is for a friendly relationship or social engagements. In Balfour v. Balfour,
Lord Atkin said, ―There must be an intention to be attended legal consequences i.e. party
have in mind at the time of making agreement that they will follow legal consequences.‖
103
further in Darlymple v. Darly mple, Lord Stowell held that Contract is not a sport of idle
time. It is not every loose conversation that is to turn into contract although parties may seem
to agree. In India point of authority on intention to contract is Commissioner Wealth Tax v.
Abdul Hussain which cited Carlill v. Carbolic Smoke Ball Company case. The law of
contract is nothing but the law relating to promises-their formation, performance and
enforceability. The law relating to contract is scattered over many statutory enactments and
judicial decisions. Law of contract is concerned with promises created by the free mutual
consent of the parties this is called agreement. Offer + Acceptance is an Agreement,
Agreemrnt+section10 is a contract. All agreements are not contract only those agreements are
contract which fulfills the conditions of section10. This chapter of this study discusses the
essential elements of a valid contract and kinds of contract. This means: the law can neither
can make a contract for the parties nor unmake one which the parties have made. A contract
of relationship is entered into by mutual consent and the law recognizes the freedom of
parties to enter into contracts and thereby regulate their mutual rights and obligations.
---- o ----